2000
----------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
March 30, 2001
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[No Fee Required]
For the fiscal year ended December 31, 2000 Commission file number 1--1196
[ARCO LOGO]
a part of BP
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.)
333 South Hope Street, Los Angeles, California 90071
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (213) 486-3511
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
$3.00 Cumulative Convertible Preference Stock New York Stock Exchange
($1 par value) Pacific Exchange, Inc.
$2.80 Cumulative Convertible Preference Stock New York Stock Exchange
($1 par value) Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
The aggregate market value of the preference stock (which vote as a single
class with the indirect holder of all of the ARCO Common Stock, BP Amoco
p.l.c.) held by nonaffiliates of the registrant on December 31, 2000, based on
the closing price on the New York Stock Exchange composite tape on that date,
was $187,760,402. ARCO's Common Stock was delisted on April 18, 2000,
following the merger with BP Amoco p.l.c.
Number of shares of $3.00 Preference Stock, $1 par value, outstanding as of
December 31, 2000: 35,437.
Number of shares of $2.80 Preference Stock, $1 par value, outstanding as of
December 31, 2000: 402,665.
TABLE OF CONTENTS
PART I
Item Page
---- ----
1. and 2. Business and Properties....................................... 1
The Company................................................. 1
ARCO's New Structure following Acquisition by BP............ 1
BP Combination; Change of Control of ARCO................... 1
Sale of ARCO's Businesses Pursuant to FTC Mandate........... 2
Delisting and Retirement of ARCO Debt Securities............ 3
Merger Agreement between ARCO and Vastar.................... 3
Redemption of ARCO Preference Stocks........................ 3
Exploration and Production Operations....................... 4
Refining and Marketing Operations........................... 6
All Other Operations........................................ 7
Capital Program............................................. 7
Patents..................................................... 7
Competition................................................. 7
Human Resources............................................. 7
Research and Development.................................... 8
Environmental Matters....................................... 8
3. Legal Proceedings............................................. 13
The Company................................................. 13
Environmental Proceedings................................... 18
Other Litigation............................................ 18
4. Submission of Matters to a Vote of Security Holders........... 19
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 20
6. Selected Financial Data....................................... 21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 22
Introduction................................................ 22
Results of Segment Operations............................... 22
Results of Consolidated Operations.......................... 28
Analysis of Cash Flows and Financial Condition.............. 31
Market-Sensitive Instruments and Risk Management............ 32
Statements of Financial Accounting Standards Not Yet
Adopted.................................................... 33
Safe Harbor for Forward-Looking Statements.................. 34
8. Financial Statements and Supplementary Data................... 35
Notes to Consolidated Financial Statements.................. 42
Supplemental Information (Unaudited)........................ 69
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 73
(i)
TABLE OF CONTENTS--(Continued)
Item Page
---- ----
PART III
10. Directors and Executive Officers of the Registrant................. 74
Executive Officers of ARCO...................................... 74
Directors of ARCO............................................... 75
Compliance with Section 16(a) of the Securities Exchange Act of
1934.......................................................... 76
11. Executive Compensation............................................. 77
Pre-Merger and Change of Control Compensation of Certain of
ARCO's Former Executive Officers............................ 77
Change of Control Benefits Received by Certain Former ARCO
Executive Officers................................................. 77
Pre-Merger and Change of Control Summary Compensation Table... 79
Aggregated ARCO Option Exercises in 2000 and ARCO Option
Values As of April 17, 2000.............................. 82
Estimated Regular Retirement Benefits......................... 83
Post-Merger Compensation of Current Executive Officers.......... 84
Post-Merger Summary Compensation Table........................ 84
Compensation of Directors..................................... 84
12. Security Ownership of Certain Beneficial Owners and Management..... 85
Voting Stock of ARCO Owned by "Beneficial Owner"................. 85
Stock of BP Amoco Owned by Directors and Executive Officers...... 85
13. Certain Relationships and Related Transactions..................... 86
Controlling Shareholder.......................................... 86
Related Party Transactions....................................... 86
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 87
Exhibits......................................................... 87
Reports on Form 8-K.............................................. 91
Signatures....................................................... 92
Schedule II--Valuation and Qualifying Accounts................... 93
(ii)
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
The Company
The company began operations in 1866 as the Atlantic Petroleum Storage
Company. The company's present name, Atlantic Richfield Company (ARCO), was
adopted in 1966 after Richfield Oil Corporation was merged into the company.
Sinclair Oil Corporation was merged into ARCO in 1969. ARCO acquired The
Anaconda Company in 1977. ARCO became a Delaware corporation in 1985. ARCO
acquired Union Texas Petroleum Holdings, Inc. (UTP) in 1998. On April 18,
2000, ARCO merged with a subsidiary of BP Amoco p.l.c. (BP), which indirectly
holds all of the outstanding common stock of ARCO. In September 2000,
following ARCO's purchase of the publicly held shares of Vastar Resources,
Inc. (Vastar), Vastar merged with a subsidiary of ARCO, bringing ARCO's
ownership in Vastar to 100%.
ARCO's principal executive offices are currently at the ARCO Center, 333
South Hope Street, Los Angeles, California 90071 (Telephone 213-486-3511).
ARCO is a global oil and gas enterprise operating in two segments,
exploration and production and refining and marketing. Its upstream
exploration and production operations are focused primarily in the Gulf of
Mexico and the Midcontinent in the United States, the United Kingdom North
Sea, Indonesia, China and Algeria. ARCO's downstream refining and marketing
operations are located primarily in the western United States. These include
two refineries, branded consumer marketing outlets in six western states and
British Columbia, Canada, and supporting pipelines and terminals.
ARCO's New Structure following Acquisition by BP
As discussed in the following section, as of April 18, 2000, ARCO became
part of the BP Group, a worldwide integrated oil and gas and chemical
business. As part of the BP Group, the ARCO businesses have been structured
into business units, some of which were combined with other businesses from
the BP Group. The operations within the BP Group are managed through four main
businesses, Exploration and Production, Gas and Power, Refining and Marketing
and Chemicals. Gas and Power and Chemical operations are not material for
ARCO.
The financial position and results of operations of ARCO should be
understood in the context of this relationship.
The financial statements of ARCO reflect the historical costs to the
previous shareholder group and accordingly, do not reflect any purchase
accounting adjustments related to the acquisition of ARCO by BP.
BP Combination; Change of Control of ARCO
On April 18, 2000, the combination of BP and ARCO was completed by the
merger of Prairie Holdings, Inc (a subsidiary of BP) with and into ARCO,
pursuant to the terms of the merger agreement dated March 31, 1999, as amended
through March 27, 2000 (Merger Agreement). Pursuant to the Merger Agreement,
each share of outstanding common stock of ARCO (except for any such shares
owned by BP, ARCO or any subsidiary of BP or ARCO) was converted into the
right to receive 1.64 BP American Depositary Shares (ADSs) or, subject to the
timely receipt of elections therefor, 9.84 BP Ordinary Shares. In addition,
the outstanding ARCO common stock was delisted from the New York Stock
Exchange and other exchanges on which it had been listed. In connection with
the merger, on April 18, 2000, ARCO issued 324,711,290 new shares of common
stock to BP. Later on April 18, 2000, BP transferred all such shares to
BP America Inc., a wholly owned subsidiary of BP, so that BP owns indirectly
all of the currently outstanding common stock of ARCO. As the holder of all
the outstanding common stock of ARCO, none of which is publicly traded, BP is
the controlling shareholder of ARCO.
1
On April 18, 2000, in connection with the combination of ARCO and BP,
PricewaterhouseCoopers LLP (PwC) resigned as ARCO's independent accountants.
Ernst & Young, L.L.P., who also act as independent auditors for BP, were
appointed as ARCO's independent auditors on April 27, 2000.
ARCO's outstanding shares of $2.80 and $3.00 Preference Stock remained
listed on the New York Stock Exchange. Pursuant to the Merger Agreement, each
share of $2.80 Preference Stock became convertible into 7.872 ADSs and each
share of $3.00 Preference Stock became convertible into 22.304 ADSs. BP has
fully and unconditionally guaranteed the payment of dividends on, the
redemption price and the liquidation preference that may become payable in
respect of shares of both classes of Preference Stock.
Following the merger, as a result of the number of holders of the Preference
Stocks, ARCO remained a reporting company within the meaning of the Securities
and Exchange Act of 1934 (1934 Act). As disclosed below, on March 28, 2001
ARCO issued a notice of redemption for all of the outstanding shares of these
two classes of Preference Stock. Following the redemption date, ARCO will
cease to be a reporting company under the 1934 Act.
Holders of the Preference Stocks and others may obtain copies of the BP
Report on Form 20-F for the year ended December 31, 2000 by telephone from BP
Group Shareholder Services, toll free at 1-800-638-5672.
Included in the merger agreement was a provision requiring BP to keep in
place for two years following the merger ARCO's change of control severance
programs. The benefits associated with those programs resulted in ARCO
recording a charge of $560 million for the year ended December 31, 2000 for
ARCO executives and employees who have been or will be terminated prior to
April 18, 2002 as a result of the merger and related asset sales.
Other merger costs related to facilities closures with no future economic
benefit, payments to legal and investment consultants in connection with
negotiation and consummations of merger, and shutdown costs related to UK and
certain other overseas locations.
Sale of ARCO's Businesses Pursuant to FTC Mandate
On March 15, 2000, pursuant to an understanding with the Federal Trade
Commission (FTC) in conjunction with its review of the acquisition of ARCO by
BP, ARCO entered into an agreement to sell its Alaskan businesses to Phillips
Petroleum Company (Phillips) for approximately $6.5 billion cash, subject to
purchase price adjustments (plus up to an additional $500 million based on the
price realized on post-closing production). Under the purchase and sale
agreement, which was amended on April 6, 2000, ARCO agreed to sell all of the
outstanding shares of ARCO Alaska, Inc., together with certain other
subsidiaries of ARCO engaged principally in the operation of ARCO's Alaskan
businesses, along with certain pipeline and marine assets associated with the
transport of Alaskan crude oil.
In the second quarter of 2000 ARCO completed the sale of its Alaskan
operations, comprising oil and gas production, crude oil marine transportation
and related crude oil inventory, for proceeds totaling approximately
$6.2 billion and realized an after-tax gain of approximately $1.8 billion. The
net book value of those assets at the time of the sale was approximately $3.2
billion.
In the third quarter of 2000 ARCO completed the sale of its Alaskan pipeline
operations, thereby completing the sale of all Alaskan operations mandated by
the FTC in obtaining approval for the combination of ARCO and BP. ARCO
received proceeds of $308 million and recorded an after-tax loss of
$34 million. See Note 4 of Notes to Consolidated Financial Statements.
In the third quarter of 2000 ARCO also completed the sale of the remaining
pipeline assets mandated by the FTC. On July 20, 2000, ARCO sold certain
Midcontinent pipeline assets for $314 million. See Note 5 of Notes to
Consolidated Financial Statements.
2
Delisting and Retirement of ARCO Debt Securities
On August 13, 2000, ARCO terminated the registration under the Securities
Act of 1933 of all of its outstanding publicly traded debt securities. In
connection with the deregistration, the three classes of debt securities that
had been listed on the New York Stock Exchange were delisted.
On November 29, 2000, ARCO made a cash tender offer for up to $1,045,790,000
of its outstanding noncallable debt securities having interest rates ranging
from 8 1/4% to 9 7/8% and maturity dates ranging from March 1, 2016 to March
1, 2032. Through the expiration date of December 8, 2000, ARCO purchased a
total of $1,045,790,000 of debt securities pursuant to the cash tender offer.
Subsequent to the closing of the tender offer, ARCO repurchased an additional
$14 million of outstanding debt securities on the open market.
Merger Agreement between ARCO and Vastar
ARCO and Vastar (a subsidiary of which ARCO owned 81.9%) entered into a
merger agreement, dated May 24, 2000. The agreement provided for the
acquisition by ARCO of Vastar's publicly held minority stockholding at a price
of $83 per share. On September 15, 2000, Vastar's common stock minority
shareholders approved the merger agreement between ARCO and Vastar. Following
the approval, 18,252,609 shares were purchased by ARCO at a price of $83 per
share for a total purchase price of $1,618 million, including costs related to
the transaction. Vastar became a 100% owned subsidiary of ARCO.
Redemption of ARCO Preference Stocks
On March 28, 2001, ARCO called for the redemption of all of the outstanding
shares of its $3.00 Preference Stock and its $2.80 Preference Stock on April
27, 2001 (Redemption Date). As of December 31, 2000, there were 35,437 shares
of $3.00 Preference Stock and 402,665 shares of $2.80 Preference Stock
outstanding.
Upon redemption, for each share of $2.80 Preference Stock redeemed, the
Company will pay to the holder, as required by the Company's Certificate of
Incorporation, the stated redemption price of $70.00 per share, together with
the amount of accrued and unpaid dividends on each such share (whether or not
earned or declared) to the Redemption Date, plus a voluntary supplemental cash
payment in the amount, if any, required to cause the total per share cash
payment to be received by such holder ($2.80 Redemption Payment), to equal the
market value of 7.872 BP ADSs. On or prior to April 20, 2001 (Conversion
Deadline), each share of $2.80 Preference Stock is convertible into 7.872 BP
ADSs.
Upon redemption, for each share of $3.00 Preference Stock redeemed, the
Company will pay to the holder, as required by the Company's Certificate of
Incorporation, the stated redemption price of $82.00 per share, together with
the amount of accrued and unpaid dividends on each such share (whether or not
earned or declared) to the Redemption Date, plus a voluntary supplemental cash
payment in the amount, if any, required to cause the total per share cash
payment to be received by such holder ($3.00 Redemption Payment), to equal the
market value of 22.304 BP ADSs. On or prior to the Conversion Deadline, each
share of $3.00 Preference Stock will be convertible into 22.304 BP ADSs.
The market value of the BP ADSs will be determined by the average of the
last sale prices for a BP ADS on the New York Stock Exchange over the four
trading days ending on the last trading day prior to the Redemption Date.
In accordance with the Company's Certificate of Incorporation, upon
redemption of both classes of Preference Stocks, the holders thereof will have
no interest in or claim against the Company or its agents other than the right
to receive the $2.80 or $3.00 Redemption Payment, as applicable, upon the
proper surrender of the shares of Preference Stock, subject to the conversion
right described above.
No commission or other remuneration will be paid or given, directly or
indirectly, in connection with the conversion of Preference Stock into BP
ADSs.
3
Exploration and Production Operations
General
ARCO conducts its oil and gas exploration and production operations primarily
in the Midcontinent and offshore Gulf of Mexico in the United States, and
internationally in the United Kingdom North Sea, Indonesia, China and Algeria.
Reserves
Proved oil and gas reserves as of December 31, 2000
- -------------------------------------------------------------------------------
Petroleum Liquids Natural Gas
(Million barrels) (Billion cubic feet)
--------------------- ----------------------
U.S. International(a) U.S. International(b)
---- ---------------- ----- ----------------
Proved reserves.................. 451 646 2,841 3,705
Proved developed reserves........ 311 365 2,464 2,201
--------
(a) Includes 75 MMB proved and 43 MMB developed attributable to equity
interests.
(b) Includes 754 BCF proved and 220 BCF developed attributable to equity
interests.
Additional information concerning oil and gas producing activities and
estimates of proved oil and gas reserves can be found under the caption
Supplemental Information, Oil and Gas Producing Activities.
Production
Production volumes
- -------------------------------------------------------------------------------
Natural Gas
Petroleum Liquids (Million cubic feet
(Barrels per day) per day)
--------------------- -------------------
Years Ended
December 31 U.S. International U.S. International
----------- ------- ------------- ----- -------------
2000............................... 232,900 121,100 1,247 1,044
1999............................... 464,300 159,100 1,259 1,119
1998............................... 527,600 130,400 1,175 929
--------
Sales Prices and Production Costs
Average sales prices and production costs
- -------------------------------------------------------------------------------
Years Ended December 31
-------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
U.S. International U.S. International U.S. International
------ ------------- ------ ------------- ----- -------------
Average sales price
(including transfers)
per barrel of petroleum
liquids produced....... $23.31 $22.00 $12.83 $14.39 $9.43 $11.07
Average lifting cost per
equivalent barrel of
production............. 3.67 4.20 3.14 3.73 3.34 3.89
Average sales price per
thousand cubic feet
(MCF) of natural gas
produced............... 3.45 2.61 1.99 2.48 1.82 2.53
4
Exploration and Drilling Activity
Wells drilled to completion
- -------------------------------------------------------------------------------
Years Ended December 31
--------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
U.S. International U.S. International U.S. International
---- ------------- ---- ------------- ---- -------------
Net productive
exploratory wells
drilled................ 28 5 29 5 32 10
Net dry exploratory
wells drilled.......... 12 3 16 4 29 10
Net productive
development wells
drilled................ 348 40 309 11 573 27
Net dry development
wells drilled.......... 66 1 33 -- 37 --
Current drilling activities as of December 31, 2000
- -------------------------------------------------------------------------------
U.S. International
---- -------------
Gross wells in process of drilling (including wells
temporarily suspended).................................. 27 18
Net wells in process of drilling (including wells
temporarily suspended).................................. 20 7
Waterflood projects in process........................... 1 4
Enhanced oil recovery operations......................... 7 1
Number of productive wells as of December 31, 2000
- -------------------------------------------------------------------------------
Oil Gas
------------------------ -------------------
U.S.(a) International(b) U.S. International
------- ---------------- ----- -------------
Total gross productive wells.... 5,803 875 4,240 616
Total net productive wells...... 2,025 389 2,059 221
--------
(a) Includes approximately 1,425 gross and 274 net multiple completions.
(b) Includes approximately 84 gross and 25 net multiple completions.
Petroleum Rights Acreage
Petroleum rights acreage as of December 31, 2000(a)
- -------------------------------------------------------------------------------
Developed Undeveloped
Acreage Acreage
----------- -------------
Net Gross Net Gross
----- ----- ------ ------
(thousands)
U.S................................................. 1,954 3,231 2,515 3,911
International....................................... 299 741 20,961 37,014
----- ----- ------ ------
Total........................................... 2,253 3,972 23,476 40,925
===== ===== ====== ======
--------
(a) Includes options and exploration rights.
Delivery Commitments
ARCO has various long-term natural gas sales contracts covering the majority
of its production in Indonesia, the United Kingdom North Sea, and China.
ARCO's various annual delivery obligations under these contracts are
substantially limited to producible reserves from specific fields.
In the Lower 48, Vastar has various long-term natural gas sales commitments
under certain long-term gas marketing contracts with cogeneration facilities
pursuant to which Vastar delivered an average of 79 MMCFD in 2000. These long-
term contracts have an average remaining contract term of approximately
10 years. In 2000, the average price of
5
gas sold under these contracts was approximately $2.74 per MCF. There have
been no instances in the last three years in which Vastar was unable to meet
any significant natural gas delivery commitment.
Refining and Marketing Operations
ARCO's downstream operations primarily include its two refineries on the
West Coast and branded retail gasoline outlets in six western states and
British Columbia, Canada.
ARCO's two U.S. petroleum refineries are the Los Angeles Refinery in Carson,
California and the Cherry Point Refinery near Ferndale, Washington. Both of
these refineries have easy access to major supply sources and major markets
through ocean-going tankers, pipelines and other transportation facilities.
ARCO currently markets its gasoline under the ARCO(R) trademark. ARCO sells
its gasoline at ARCO branded retail outlets located in Arizona, California,
Nevada, Oregon, Utah and Washington, and in British Columbia, Canada. The
company currently has more than 1,700 branded retail outlets, which include
franchisee and company-operated am/pm(R) convenience stores and SmogPros(R)
Service Centers, along with traditional service stations. ARCO's am/pm
franchises, full scale convenience stores that also sell gasoline, make up
about 60% of the retail outlets. ARCO also sells gasoline to dealers and
resellers who do not use the ARCO brand in connection with retail sales.
Refinery capacity
- -------------------------------------------------------------------------------
Annual Average Operable
Crude Distillation
Capacity(a)
(Barrels per day)
-----------------------
2000 1999 1998
------- ------- -------
Los Angeles Refinery.................................. 260,000 260,000 260,000
Cherry Point Refinery................................. 223,000 222,700 202,000
------- ------- -------
Total............................................... 483,000 482,700 462,000
======= ======= =======
--------
(a) Measured pursuant to standards of the American Petroleum Institute.
Refinery runs and petroleum products manufactured
- -------------------------------------------------------------------------------
Years Ended December 31
-----------------------
2000 1999 1998
------- ------- -------
(Equivalent barrels per
day)
Crude oil refinery runs............................... 415,900 423,800 449,600
======= ======= =======
Petroleum products manufactured:
Gasoline............................................ 227,300 239,100 225,800
Jet fuels........................................... 79,300 82,700 92,000
Distillate fuels.................................... 74,700 68,100 76,600
Other(a)............................................ 74,000 82,100 93,400
------- ------- -------
Total(b).......................................... 455,300 472,000 487,800
======= ======= =======
--------
(a) Includes chemical products, natural gas liquids (NGLs), petroleum coke
(green and calcined) and feedstocks, sulfur, middle-of-barrel
specialties and changes in unfinished stocks.
(b) Total manufactured petroleum products volumes exceed total crude oil
runs as a result of the expansion of petroleum product through
rearrangement of molecular structure and refinery blending of
oxygenates.
6
Refined petroleum product sales
- -------------------------------------------------------------------------------
Years Ended December 31
-----------------------
2000 1999 1998
------- ------- -------
(Equivalent barrels per
day)
Petroleum product sales:
Gasoline............................................ 349,200 314,500 308,700
Jet fuels........................................... 100,000 102,300 102,800
Distillate fuels.................................... 86,400 82,900 80,600
Other(a)............................................ 73,500 71,000 72,700
------- ------- -------
Total(b).......................................... 609,100 570,700 564,800
======= ======= =======
--------
(a)Includes heavy fuel oils, NGLs, calcined and green coke.
(b) The total of petroleum product sales differs from the total of
petroleum products manufactured because of a number of factors: the
consumption of some products as refinery fuel, the exchange of
products with other refiners, changes in levels of product inventory,
and the purchase and sale of petroleum products not manufactured by
ARCO.
All Other Operations
ARCO's other operations during 2000 comprised its pipeline operations in the
Lower 48 and its aluminum operations.
Capital Program
ARCO's capital program includes spending for additions to fixed assets and
other capital expenditures. During 2000, the company spent approximately
$2.1 billion for additions to fixed assets.
Future capital expenditures remain subject to business conditions affecting
the industry, as well as changes in environmental rules and regulations and
the tax laws.
Patents
ARCO owns numerous patents, many of which it makes generally available for
license to others in the petroleum industry. ARCO itself is a licensee under
certain patents that are available generally to the industry. ARCO's opera-
tions are not dependent upon any particular patent or patents or upon any ex-
clusive patent rights.
Competition
ARCO faces intense competition from a number of companies in all of its op-
erations. Many of its competitors are large and have substantial resources. No
single competitor dominates either of ARCO's operating segments.
Human Resources
As of December 31, 2000, ARCO had approximately 11,200 full-time-equivalent
employees, of whom approximately 10% were represented by collective bargaining
agents.
7
Research and Development
Total research and development expenses were $9 million, $28 million and $45
million in 2000, 1999 and 1998, respectively.
Environmental Matters
Site Remediation
ARCO is subject to federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (CERCLA or Superfund), and the Superfund
Amendments and Reauthorization Act of 1986 and the Resource Conservation
Recovery Act of 1976 (RCRA). These regulations require ARCO to do some or all
of the following:
. Remove or mitigate the effects on the environment at various sites from
the disposal or release of certain substances;
. Perform restoration work at such sites; and
. Pay damages for loss of use and non-use values.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in environmental assessments and cleanups under
these laws at federal- and state- managed sites, as well as other clean-up
sites, including service stations, refineries, terminals, third party
landfills, former nuclear processing facilities, sites associated with
discontinued operations and sites that were formerly owned by ARCO or its
predecessors. This comprises 148 sites for which ARCO has been named a
potentially responsible party (PRP), along with other sites for which no
claims have been asserted. 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 responsibility varies from sole
responsibility to very little responsibility. Future costs depend on numerous
unknown factors such as:
. Nature and extent of contamination;
. Timing, extent and method of remedial action;
. ARCO's proportional share of costs; and
. Financial condition of other responsible parties.
The environmental remediation accrual is updated at least annually, and at
December 31, 2000, was $1,098 million.
The amount accrued represents the estimated undiscounted costs that ARCO
will incur to complete the remediation of sites with known contamination. In
view of the uncertainties associated with estimating these costs (such as
differences of opinion between ARCO and various regulatory agencies with
respect to the appropriate method for remediating contaminated sites,
uncertainty as to the extent of contamination at various sites, and
uncertainty regarding ARCO's ultimate share of costs at various sites), it is
possible that actual costs could be significant. Although these costs might be
material to the results of operations in the period in which they are
recognized, ARCO does not expect that such costs will have a material effect
on ARCO's financial position or equity. See Note 19 of Notes to Consolidated
Financial Statements regarding environmental matters.
Approximately 85% of the reserve relates to sites associated with ARCO's
discontinued operations. Another significant component relates to currently
and formerly owned or operated nuclear processing, and refining and marketing
facilities, and other sites that received wastes from these facilities. One
site represented 13% of the total accrual. No other site represented more than
8% of the total accrual. Substantially all amounts reserved are expected
8
to be paid out over the next 10 years. ARCO is also the subject of certain
material legal proceedings described below under the caption
"Material Environmental Litigation."
Clean Air
The Federal Clean Air Act Amendments of 1990 (the 1990 Clean Air Act
Amendments) and various state and local laws and regulations impose certain
air quality requirements. Among other things, the 1990 Clean Air Act
Amendments effectively require the manufacture and sale of reformulated and
oxygenated gasolines in areas not meeting specified air quality standards. The
Environmental Protection Agency (EPA) wintertime oxygenate gasoline program
became effective in the fall of 1993. The EPA reformulated gasoline
requirements became effective January 1, 1995, for the nine U.S. cities,
including Los Angeles and San Diego, and other areas with the worst ozone
pollution. The specifications for reformulated gasoline of the California Air
Resources Board (CARB), which are stricter than the EPA requirements, became
effective for retail sales on and after June 1, 1996. To comply with the EPA
air quality requirements and CARB standards, in 1995 ARCO completed major
modifications at its Los Angeles Refinery. To comply with federal EPA
standards for gasoline, the company has used the oxygenate methyl tertiary
butyl ether (MTBE) in making its reformulated gasoline. However, effective
January 1, 2003, the State of California has mandated that gasoline in
California may no longer include MTBE as the oxygenate component.
In 1993 the South Coast Air Quality Management District (AQMD), which sets
air quality standards for a five-county area of Southern California, including
Los Angeles County, adopted regulations requiring phased reductions of certain
pollutants. By 2003 the Los Angeles Refinery will be required to achieve
cumulative reductions from 1992 levels of oxides of nitrogen (NOx) of 63% and
oxides of sulfur (SOx) of 83%. As part of the regulations, AQMD created a
Regional Clean Air Incentives Market (RECLAIM) program under which regulated
firms can earn credits for achieving emission reductions below targeted
levels. Those credits may then be bought and sold. The Los Angeles Refinery
plans to achieve the requisite levels of emission reductions by a combination
of reductions and acquisitions of credits, substantial amounts of which have
already been purchased. The AQMD is currently considering modifications to the
RECLAIM program, but nothing has yet been finalized.
Environment-Related Expenditures
For the past three years, the company's environment-related expenditures have
been comprised of both capital expenditures and operating expenses.
Environment-related capital expenditures include the cost of projects to
reduce and/or eliminate pollution and contamination in the future and the cost
of modifications to the company's manufacturing facilities necessary to comply
with the aforementioned federal, state and local air quality laws and
regulations. Environment-related operating costs include both costs to
eliminate, control or dispose of pollutants, as well as costs to remediate
previously contaminated sites. Sites are remediated using a variety of
techniques, including on-site stabilization, bioremediation, soil removal,
pump-and-treat and other methods as deemed appropriate for each specific site.
For the past three years, the company's environment-related capital
expenditures have averaged $191 million per year. The company anticipates
environment-related capital expenditures of approximately $100 million and
$30 million for 2001 and 2002, respectively. For the past three years, the
company's operating expenses for the remediation of previously contaminated
properties either compelled or likely to be compelled in the foreseeable
future by government or third parties have averaged approximately $150 million
per year. Cash payments for site remediation have averaged $145 million per
year over the same period. The company's operating expenses also include
ongoing costs of controlling or disposing of pollutants. For the past three
years, the company estimates that its operating expenses related to these
ongoing costs have averaged approximately $170 million per year.
9
In addition to the reserve for environmental remediation costs, the company
has also accrued, as of December 31, 2000, $312 million for the estimated
cost, net of salvage value, of dismantling facilities as required by contract,
regulation or law, and the estimated costs of restoration and reclamation of
land associated with such facilities.
Material Environmental Litigation
Pursuant to the authority provided under Superfund, the State of Montana
asserted claims against ARCO for compensation for damage to natural
resources allegedly arising out of ARCO's or its predecessors' mining and
mineral processing activities. In addition, two tribes (Tribes) were granted a
limited form of intervention in Montana v. ARCO. The Tribes, as alleged
trustees, asserted claims against ARCO for alleged injury to and loss of
natural resources located in the Clark Fork River Basin in southwest Montana.
The United States Department of Interior also stated an intention to make a
claim for natural resource damages in the Clark Fork River Basin. These
matters were settled in part in 1999. Remaining for disposition are the
State's claims for $206 million of restoration damages at three sites.
On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO,
styled U.S. v. ARCO, et al. (Case No. CV-89-039-BU-PGH), in the United States
District Court for the District of Montana, for oversight costs at several of
the Upper Clark Fork River Basin Superfund sites. Litigation is proceeding on
both the EPA's claims and ARCO's counterclaims against various federal
agencies. In the counterclaims, ARCO seeks contributions from the federal
agencies for remediation costs and for any natural resource damage liability
ARCO might incur in Montana v. ARCO. The settlements in Montana v. ARCO,
described above, resolved the claims and counterclaims in U.S. v. ARCO
pertaining to one significant site and may provide a framework for possible
future settlement of the remaining claims. As part of U.S. v. ARCO, settlement
has been negotiated for claims and counterclaims concerning past and future
costs associated with the Rocker site, by which ARCO is to pay $3.4 million.
This is in settlement of federal government claims of $3.9 million for past
remediation and oversight costs, and an additional $0.9 million for future
costs. The settlement was filed with the court during August 2000.
On April 26, 2000 the United States District Court for the Central District
of California issued a subpoena for production of records to the grand jury
regarding the Company's compliance with underground storage tank regulations
at retail gasoline facilities. On May 8, 2000, the United States District
Court for the Eastern District of California issued a similar subpoena. On May
8, 2000 the District Attorney of Stanislaus County, California informed the
Company that the California Regional Water Quality Control Board, Central
Valley Region and the Stanislaus County Department of Environmental Resources
had alleged that the Company had violated California statutes regarding
underground storage tanks, hazardous materials and unlawful business
practices. The Stanislaus District Attorney further advised, however, that no
decision had been made as to the filing of charges, pending discussions with
the Company. On May 17, 2000, the Los Angeles County Department of Public
Works informed the Company that it was investigating the Company's compliance
with underground storage tank regulations at certain of the Company's retail
gasoline facilities in Los Angeles County. On June 6, 2000, the California
Attorney General, pursuant to his statutory investigative powers, issued a
subpoena for the Company's records regarding underground storage tanks.
Moreover, the Company is in the process of conducting a comprehensive audit of
all of its underground storage tank facilities in California, Arizona, Nevada,
Oregon, Utah and Washington.
ARCO and its subsidiary, Atlantic Richfield Hanford Company (ARHCO), and
several other companies who have served as government contractors at the
Hanford Nuclear Reservation in south central Washington State are named as
defendants in a consolidated complaint in the United States District Court for
the Eastern District of Washington, titled In re Hanford Nuclear Reservation
Litigation (CY-91-3015-AAM). In October 1994, the Department of Energy (DOE)
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. On
April 4, 1997, ARCO was served with a new complaint making allegations
10
similar to those already pending in the litigation, filed by six individual
Native Americans in the United States District Court for the Western District
of Washington, purportedly on behalf of classes of Native Americans living
near the Hanford Nuclear Reservation. The DOE has indicated that it will
indemnify ARCO and ARHCO with respect to this new action as well. This action
has been transferred to the United States District Court for the Eastern
District of Washington. On August 21, 1998, the court issued a ruling that, if
upheld on appeal, should result in the dismissal of ARHCO and ARCO from the
case.
Approximately 200 lawsuits were filed in state and federal courts in Alaska
seeking compensatory and punitive damages arising out of the Exxon Valdez oil
spill in Prince William Sound in March 1989. Most of those suits named Exxon
(now ExxonMobil), Alyeska Pipeline Service Company (Alyeska), which operates
the oil terminal at Valdez, and the other oil companies which own Alyeska
(including ARCO Transportation Alaska, Inc., owned by ARCO until the FTC-
mandated sale to Phillips Petroleum in April 2000). Alyeska initially
responded to the spill until the response was taken over by Exxon. Alyeska and
its owners have settled all of the claims against them under these lawsuits.
Exxon has indicated that it may file a claim for contribution against Alyeska
(and its owner companies) for a portion of the costs and damages which it has
incurred.
ARCO has been named as a defendant in a number of lawsuits involving the
manufacture and use of MTBE as a fuel additive and oxygenate. Several other
refiners of gasoline in the United States are defendants in some or all of
these cases. Lyondell Chemical Company, f/k/a ARCO Chemical Company, is a
defendant in many of these matters. There are potential issues regarding
indemnification between ARCO and Lyondell, which are unresolved. Generally,
these cases allege product liability, negligence and fraud. Plaintiffs allege
that MTBE is unreasonably dangerous and has contaminated groundwater,
potentially leading to contamination of private and public drinking water
supplies. They further allege that ARCO knew, or should have known, that MTBE
made gasoline more dangerous, fraudulently concealed this hazard, and promoted
the use of MTBE in spite of this risk. The cases are:
South Lake Tahoe Public Utility District (STPUD) vs. ARCO, et al. (Superior
Court of the State of California In and For the County of San Francisco, Case
No. 999128, filed April 16, 1999) STPUD alleges that MTBE contamination in its
drinking water wells was caused by leakage from underground MTBE storage tanks
belonging to ARCO and the other defendants.
Communities for a Better Environment (CBE) vs. ARCO, et al. (Superior Court
of the State of California In and For the County of San Francisco, Case No.
997103, Second Amended Complaint, filed June 29, 2000) CBE alleges that the
environment in California has been damaged by the introduction of MTBE into
gasoline. In addition to the legal theories outlined above, CBE includes an
action for violation of California's Unfair Business and Professional Code,
Section 17-200.
City of Santa Monica vs. ARCO, et. al. (Superior Court of the State of
California In and For the County of San Francisco, Case No. 313004, filed June
19, 2000) Santa Monica alleges contamination of its water supply by a number
of leaking underground storage tanks, including one owned by ARCO.
Millet vs. ARCO, et. al. (Superior Court of Cumberland County, Maine, Case
No. CV-98-367-P-H, filed October 7, 1998) A class action lawsuit brought by a
purported class of private well owners in the State of Maine alleging
potential or actual damage to their wells. Class certification was denied by
the trial court and that denial has been affirmed on appeal. The remaining
claims have been resolved for a nominal payment.
Berisha vs. ARCO, et al. (United States District Court for the Southern
District of New York, Case No. 00 CIV 1898 [SAS], filed January 14, 2000) A
class action lawsuit brought by a purported class of private well owners in
the State of New York alleging potential or actual damage to their wells.
Multidistrict litigation (MDL) has been established in this court.
Sutton Farms vs. ARCO, et. al. (United States District Court for the
Southern District of Florida, Case No. 00-3544, filed September 21, 2000) A
class action lawsuit brought in Miami, Florida by a purported class of
11
private and commercial well owners in 34 states alleging potential or actual
damage to their wells. This matter has been transferred to the Berisha court
in New York for consolidated handling as part of the MDL.
England v. ARCO, et al. (In the Circuit of the Third Judicial Circuit,
Madison County, Illinois, Case No. 00 L 000331, filed April 11, 2000) A class
action lawsuit brought in Madison County, Illinois by a purported class of
private well owners in 16 states alleging potential or actual damage to their
wells. This matter has been transferred to the Berisha court in New York for
consolidated handling as part of the MDL.
No class has been certified in any of these cases.
In January 1998, The Pinal Creek Group, consisting of Cyprus Miami Mining
Corporation, Inspiration Consolidated Copper Company ("Inspiration") and BHP
Copper Inc., f/k/a Magna Copper Company, filed an action for declaratory
relief, breach of contract and breach of the covenant of good faith and fair
dealing against their insurers for failure to provide defense and indemnity
coverage for environmental liabilities arising out of the Pinal Creek Site in
Arizona. The complaint estimates the cost to remediate the Pinal Creek site to
exceed $100 million. The action, CV-98-00530, is pending in the Superior Court
for the State of Arizona in and for the County of Maricopa. In February 1998,
that action was tendered to Atlantic Richfield Company ("ARCO") on behalf of
several insurers whom ARCO had agreed to defend, indemnify and hold harmless
in connection with such environmental liabilities as part of its settlements
with those insurers in the ARCO v. Aetna, et al., omnibus environmental
coverage action. The insurers with whom ARCO made such an agreement are
Travelers, Century Indemnity Company, successor to CCI Insurance Company,
successor to Insurance Company of North America, successor to Indemnity
Insurance Company of North America, and Continental Casualty Company. These
policies were issued to Anaconda, which merged with ARCO, and included
Inspiration as a named insured.
Environmental Matters Relating to International Operations
ARCO's international operations, which are primarily located in the
United Kingdom North Sea, Indonesia, China, and Algeria, are conducted in
accordance with internationally acceptable environmental standards and are
also subject to foreign laws covering environmental matters, as well as to
contractual obligations relating to dismantlement and abandonment. To date,
ARCO has not incurred any significant expenditures for environmental
remediation, is not involved in any environmental cleanup, and has not
reserved any amount for environmental remediation, relating to its operations
in the United Kingdom North Sea, Indonesia, China, and Algeria. The foreign
environmental laws and regulations have not had, and are not presently
expected to have, a material adverse effect on ARCO's financial results or
position.
Conclusion
Environmental concerns, including the minimization and prevention of
environmental contamination from ongoing operations, and the cost-effective
remediations of existing contaminated sites, continue to be vital factors in
the company's future planning. See Note 19 of Notes to Consolidated Financial
Statements and "Environmental Matters."
12
ITEM 3. LEGAL PROCEEDINGS
The Company
On June 7, 1989, the City of New York, the New York City Housing Authority,
and the New York City Health and Hospitals Corporation brought suit in the
Supreme Court of the State of New York for the County of New York, City of New
York, et al. v. Lead Industries Association, et al. (Case No. 14365/89)
against six alleged former lead pigment manufacturers or their successors
(including ARCO as successor to International Smelting and Refining Company
(IS&R), a former subsidiary of The Anaconda Company), and the Lead Industries
Association (LIA), a trade association. Plaintiffs sought to recover damages
in excess of $50 million including (i) past and future costs of abating lead-
based paint from housing owned by New York City and the New York City Housing
Authority (Housing Authority); (ii) other costs associated with dealing with
the presence of lead-based paint in that housing and privately-owned housing;
and (iii) any amounts paid by the City or the Housing Authority to tenants
because of injuries caused by the ingestion of lead-based paint. Plaintiffs
also sought punitive damages and attorney's fees. As a result of various court
rulings, the plaintiffs' only remaining claims are for fraud and restitution
and indemnity. Two stipulated dismissals have further narrowed the case. The
City of New York and the New York City Health and Hospitals Corporation
entered into a stipulated order dismissing with prejudice all of their pending
claims against ARCO and the other defendants. The remaining plaintiff, the
Housing Authority, then entered into another stipulated order dismissing its
claims as to all the Housing Authority properties except for two housing
projects.
On November 25, 1998, ARCO (as successor to IS&R) was named as a defendant
in a purported class action suit, Sabater, et al. v. Lead Industries
Association, et al. (Case No. 25533/98), filed in the Supreme Court of the
State of New York for the County of Bronx by the mothers of four minor
plaintiffs. The complaint also names the LIA and eight former lead
pigment/paint manufacturers. The plaintiffs seek, on behalf of themselves and
a purported class of children age six and under residing in dwellings in the
City of New York containing or presumed to contain lead paint, unspecified
compensatory damages and injunctive relief from all defendants, including
orders requiring defendants to contribute to a court-administered fund to pay
for (i) notification to class members of the dangers of lead-based paint, (ii)
abatement of properties where class members reside and to pay for temporary
relocation during abatement, (iii) medical monitoring, including screening,
testing, diagnosing, and treating of class members, and (iv) attorney's fees.
The complaint alleges causes of action against the defendants for strict
product liability, conspiracy, concert of action, and enterprise and market
share liability.
On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to
a purported class action suit pending in the Court of Common Pleas in Cuyahoga
County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case
No. 236835), which seeks on behalf of the three named plaintiffs, and all
other persons similarly situated in the state of Ohio, unspecified money
damages for injuries allegedly suffered from exposure to lead paint, punitive
damages, and an order requiring defendants to remove and abate all lead paint
applied to any building in Ohio. The suit names as defendants, in addition to
ARCO, the LIA and 16 companies alleged to have participated in the manufacture
and sale of lead pigments and paints and includes causes of action for strict
product liability, negligence, breach of warranty, fraud, nuisance,
restitution, negligent infliction of emotional distress, and enterprise,
market share and alternative liability.
On September 20, 1999, ARCO (as successor to IS&R) was named by 11
homeowners as defendants in a purported class action suit filed in the Circuit
Court for Baltimore City, Maryland, Earl Cofield, et al. v. Lead Industries
Association, et al. (Case No. 24-C-99-004491). The amended complaint, which
also names 13 alleged former manufacturers of lead products, the LIA, and the
National Paint and Coatings Association, alleges causes of action for
negligent product design and failure to warn, supplier negligence, fraud and
deceit, conspiracy, concert of action, aiding and abetting, and strict product
liability. The plaintiffs seek, on behalf of themselves and a purported class
of
13
over 10,000 people living in the State of Maryland whose pre-1978 residences
allegedly were contaminated with lead-based paint, unspecified compensatory and
punitive damages and injunctive relief, including orders requiring defendants
to pay for (i) notification to class members about the hazards of lead
pigments, (ii) abatement of residences where class members reside, (iii) a
public education campaign concerning the hazards of lead pigments, lead paint,
and lead poisoning, and (iv) attorney's fees.
On October 12, 1999, ARCO (as successor to IS&R) was named as a defendant in
a lawsuit filed in Rhode Island Superior Court, Providence County by Rhode
Island Attorney General Sheldon Whitehouse, State of Rhode Island v. Lead
Industries Association, et al. (Case No. 99-5226). The complaint, which also
names seven former lead pigment manufacturers and the LIA, alleges causes of
action for public nuisance, violation of Rhode Island's Unfair Trade Practice
and Consumer Protection Act, strict liability, negligence, negligent and
fraudulent misrepresentations, civil conspiracy, unjust enrichment, indemnity
and equitable relief to protect children. The State of Rhode Island seeks
unspecified compensatory and punitive damages, funding for a public education
campaign concerning the dangers of lead poisoning and injunctive relief that
includes an order requiring defendants to pay for the detection and abatement
of lead paint in all public and private buildings within the State that are
accessible to children.
On January 26, 2000, ARCO (as successor to IS&R) was named as a defendant in
a lawsuit, City of St. Louis v. Lead Industries Association, et al. (Cause No.
002-245), filed in the Circuit Court for the City of St. Louis, Missouri by the
City of St. Louis. The complaint, which also names the LIA and seven former
lead pigment/paint manufacturers, alleges causes of action for public nuisance,
product liability, negligence, negligent and fraudulent misrepresentations,
civil conspiracy, unjust enrichment, and indemnity. The City of St. Louis
alleges that it was obligated to pay, has paid, and in the future will have to
pay for the care of lead poisoned children and adults in the form of medical
care, education programs, abatement, and other costs associated with the
hazards created by the defendants, and is seeking unspecified compensatory and
punitive damages.
On March 23, 2000, ARCO (as successor to IS&R) was named as a defendant in a
purported class action suit filed in California Superior Court by the County of
Santa Clara, County of Santa Clara v. ARCO, et al. (Case No. CV788657). Amended
complaints added the Counties of Alameda, Solano, Santa Cruz, Kern, the City
and County of San Francisco, the City of Oakland, the San Francisco Housing
Authority, the San Francisco Unified School District, the Oakland Housing
Authority, the Oakland Redevelopment Agency and the Oakland Unified School
District as plaintiffs and seek certification of a class of all public entities
in California who expend or have expended any funds for medical treatment,
educational expenses, abatement, property damage or other costs and expenses
due to exposure to or potential exposure to lead, with the exception of the
State of California and its agencies, offices, commissions, programs, bureaus,
authorities, departments, committees and boards. The second amended complaint,
which also names seven former lead pigment manufacturers or their alleged
successors and the LIA, alleges causes of action for fraud and concealment,
strict product liability, negligence, negligent breach of special duty,
nuisance, and violation of the California Business and Professions Code and
asserts a market share theory of liability and conspiracy allegations.
Plaintiffs seek unspecified compensatory, general, special, incidental and
punitive damages, disgorgement of profits from defendants' wrongful conduct,
abatement, civil penalties, an order enjoining defendants' wrongful conduct,
interest, costs and attorney's fees.
On June 20 and 30, 2000, ARCO (as successor to IS&R) was named as a defendant
in lawsuits filed in the District Court of Harris County, Texas by the Spring
Branch Independent School District, Spring Branch ISD v. Lead Industries
Association, et al. (Case No. 2000-31175), and by the Houston Independent
School District, Houston ISD v. Lead Industries Association, et al. (Case No.
2000-33725). The petitions, which also name seven former lead pigment or lead
paint manufacturers or their alleged successors and the LIA, allege causes of
action for strict liability, negligence, fraud and negligent misrepresentation,
concert of action, conspiracy and indemnity. The petitions assert that
defendants are liable for costs that have been incurred and will be incurred as
lead paint is abated or remedied
14
from the school districts' buildings and facilities. The petitions seek
unspecified compensatory and punitive damages, costs, interest and attorney's
fees.
On July 1, 2000, ARCO (as successor to IS&R) was named as a defendant in a
purported class action suit filed in the Circuit Court of Cook County,
Illinois by Mary Lewis and Tashswan Banks, Lewis v. Lead Industries
Association, et al. (Case No. 00CH09800). The amended complaint, which also
names five former lead pigment/lead paint manufacturers and the LIA, alleges
causes of action for intentional failure to warn, supplier liability, fraud on
the public and civil conspiracy. Plaintiffs seek certification of a class of
parents or legal guardians of all minors residing in Illinois who have
undergone since January 1, 1992, or will undergo in the future, medical
screening or assessment for lead poisoning, and who have undergone, or will
undergo, continued medical monitoring to detect the onset of latent disease
associated with lead poisoning. The amended complaint seeks an order requiring
defendants to reimburse plaintiffs and class members for unspecified costs of
medical screenings, assessments and monitoring, a court-supervised medical
evaluation and monitoring program funded by defendants, costs and attorney's
fees.
In addition, ARCO (as successor to IS&R) is a defendant in several lawsuits
brought on behalf of individual children allegedly injured from exposure to
lead paint, Brenner v. American Cyanamid Co., et al. (Supreme Court, Erie
County, New York), Thomas v. Lead Industries Association, et al. (Superior
Court, Milwaukee County, Wisconsin) and Smith, et al. v. Lead Industries
Association, et al. (Circuit Court of Baltimore City, Maryland). Summary
judgment was entered for defendants in Brenner, and the case now is on appeal.
Such cases, in the aggregate, are not material to the financial condition of
the company.
On June 7, 1994, a purported class action was filed by several individuals
in United States District Court in Pittsburgh, Pennsylvania against ARCO and
Babcock & Wilcox Company (B & W) on behalf of persons "estimated to be in the
thousands" who lived or worked in Apollo and Parks Township, Pennsylvania, and
areas downwind of those places, from 1957 to the present. The suit, Hall, et
al. v. Babcock & Wilcox Company, et al. (Case No. 94-0951), claims that the
plaintiffs and alleged class members were exposed to releases of radioactive
and other toxic substances from two nuclear materials processing facilities
that have contaminated the air, soil, and surface and ground water in those
communities. The suit seeks damages for death and personal injury, diminution
in property values, costs of decontamination of property, injunctive relief
requiring defendants to establish a fund for medical monitoring, and punitive
damages. ARCO has been sued as the former owner of Nuclear Materials and
Equipment Corporation (NUMEC), the original owner and operator of the Apollo
and Parks Township facilities from March 1967 to November 1971. On
September 17, 1998, the jury in a trial of eight "test-case" plaintiffs'
claims returned a verdict of $33.7 million jointly and severally against ARCO
and B & W and another $2.8 million just against B & W. On September 24, 1998,
these eight test-case plaintiffs withdrew their claim for punitive damages
against ARCO. On June 29, 1999, the court granted ARCO's and B & W's motions
for a new trial. On November 15, 1999, as part of amending its responsive
pleading in the Hall action, B & W filed a crossclaim against ARCO for
contractual indemnity, common law indemnity, and contribution, seeking to be
indemnified by ARCO for any liability arising out of the Hall action. ARCO has
moved to strike the crossclaim, but the court has not yet ruled on ARCO's
motion. The claims of the eight test-case plaintiffs and of other plaintiffs
remain for trial or other disposition.
On February 22, 2000, B & W filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Louisiana. On April 4, 2000, B & W filed an adversary
complaint in the Bankruptcy Court against the plaintiffs in the Hall v. B & W
action, seeing to confirm that the automatic stay applicable to actions
against the debtor operates to stay the Hall case in its entirety, including
any claims against ARCO. On October 6, 2000, the Bankruptcy Court denied to
confirm that the automatic stay applicable to stay the claims against ARCO in
the Hall case. B & W and ARCO are appealing this ruling to the District Court.
"On February 22, 2001, B&W filed a plan of reorganization that provides for
treatment of the Hall plaintiffs' claims against all defendants, including
ARCO, by means of a channeling trust. That plan has not been approved by the
bankruptcy court."
15
On April 13, 1995, a lawsuit was filed in United States District Court for
the Central District of California titled ARCO, et al. v. UNOCAL (Case No. 95-
2379-KMW-JRx). ARCO and five other refiners sought a declaration that UNOCAL's
U.S. Patent No. 5,288,393 (the '393 patent) is invalid and unenforceable. The
'393 patent purports to cover a substantial portion of the reformulated
gasoline compositions that were required by the State of California when the
Phase II regulations of the California Air Resources Board (CARB) went into
effect in March 1996. In the same lawsuit, UNOCAL filed a claim for
infringement of the '393 patent against ARCO and the five other refiners. On
July 15, 1997, the first phase of trial commenced and on October 14, 1997, the
jury found in UNOCAL's favor on the issues of whether ARCO and the other
refiners had infringed the '393 patent and whether that patent is valid. The
jury also found that ARCO had produced approximately 149 million gallons of
infringing gasoline during the first five months of production. On November 3,
1997, the jury found that each refiner owed UNOCAL $.0575 for each gallon of
gasoline that infringed on UNOCAL's patent. On September 29, 1998, the court
issued a judgment in favor of UNOCAL for $10.3 million (including prejudgment
interest) against ARCO for infringing gallons during the first five months of
production and for $1.5 million joint and several against ARCO and the other
five refiners for UNOCAL's attorneys fees. On March 29, 2000, the Court of
Appeals for the Federal Circuit affirmed the judgment. A petition for
certiorari to the United States Supreme Court was denied on February 20, 2001.
The case has been returned to the District Court for an accounting of the
amount of infringement which has occurred since the 5 month period for which
evidence was heard in the trial. Additionally, the defendants have advised the
court (and the plaintiff as required by local rule) that they intend to
request a new trial on the damage royalty rate subsequent to the 5 month
period.
On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et al.
(Case No. 700810) was brought in the Superior Court of California for the
County of San Diego against ARCO and eight other refiner-marketers of CARB
reformulated gasoline. The plaintiffs allege that the defendants conspired to
restrict the supply, and thereby to raise the price, of CARB gasoline in
violation of California state antitrust and unfair competition law. The
plaintiffs seek to recover treble damages, restitution, attorneys fees, and
injunctive relief. The court has certified a class of California residents who
bought CARB gasoline after March 1, 1996 other than for resale. On October 17,
1997, the court granted the defendants' motion for summary judgment. On
January 23, 1998, the court granted the plaintiffs' motion for a new trial. On
January 31, 2000, the Court of Appeal for the Fourth Appellate District
reversed the order granting a new trial and ordered the Superior Court to
grant summary judgment in favor of each defendant. On May 17, 2000, the
California Supreme Court granted a petition for review of this decision. On
January 23, 1998, the case of Gilley v. Atlantic Richfield, et al., [Case No.
CV UU132BTM (RBB)] was filed in the United States District Court for the
Southern District of California. The case, which is brought on behalf of a
purported class of wholesale purchasers of CARB gasoline including lessee and
contract gasoline dealers, claims violations of federal antitrust laws based
upon factual allegations that are essentially the same as those contained in
the Aguilar complaint. On October 22, 1998, ARCO was served with a complaint
filed in the Superior Court of California for the County of Sacramento
entitled Cal-Tex Citrus Juice, et al. v. Atlantic Richfield Company, et al.
(Case No. 98AS05227). The complaint is purportedly on behalf of a class of all
direct or indirect purchasers of California diesel fuel between March 19, 1996
and December 31, 1997 against all California refiners of California diesel
fuel. The complaint alleges violations of various state statutes by the
defendants' alleged conspiracy to fix prices of California diesel fuel and
seeks treble damages and restitution. The Gilley and Cal-Tex matters have been
stayed by their respective courts pending the outcome of the Supreme Court's
review of Aguilar.
On June 26, 1998, a purported class action was filed in the Court of
Chancery of the State of Delaware in New Castle County, McMullin v. Beran, et
al. (Case No. 16493NC) against ARCO, Lyondell Petrochemical Company, ARCO
Chemical Company, and the individual directors of ARCO Chemical relating to
the acquisition of ARCO Chemical by Lyondell. The suit is brought by an
individual shareholder of ARCO Chemical on behalf of all common stockholders,
other than defendants, and seeks rescission of the transaction, damages for
the allegedly inadequate
16
consideration being paid by Lyondell for the shares, and attorneys' fees and
costs. The plaintiff alleges that ARCO and the individual directors of ARCO
Chemical, who are alleged to be dominated and controlled by ARCO, breached
fiduciary duties to the minority shareholders. On December 1, 1999, the Court
of Chancery issued an order dismissing the action on the grounds that the
complaint did not state a valid claim under Delaware law. The plaintiff has
appealed the order of dismissal and that court heard arguments on the appeal
on July 25, 2000. On November 20, 2000, the Delaware Supreme Court reversed
and remanded to the Chancery Court for further proceedings.
ARCO is defendant in an action pending in District Court in and for Potter
County, Texas styled TUCO, Inc. v. Thunder Basin Coal Company and Atlantic
Richfield Company (Case No. 79,483-C). Plaintiff, the corporate purchasing
agent for a public utility, alleges that defendants consistently charged in
excess of the proper contract price for coal used in the utility's power
plants, and fraudulently induced plaintiff to enter into the contract to
purchase the coal.
17
Environmental Proceedings
As discussed under the caption "Environmental Matters," ARCO is currently
participating in environmental assessments and cleanups at numerous operating
and non-operating sites under Superfund and comparable state laws, RCRA, and
other state and local laws and regulations, and pursuant to third party
indemnification requests, and is the subject of material legal proceedings
relating to certain of these sites. See "Environmental Matters--Material
Environmental Litigation."
In addition to the matters reported herein, from time to time, certain of
ARCO's operating divisions and subsidiaries receive notices from federal,
state or local governmental entities of alleged violations of environmental
laws and regulations pertaining to, among other things, the release,
discharge, disposal, emission, storage and handling of chemical and petroleum
substances, including hazardous wastes. Such alleged violations may become the
subject of enforcement actions or other legal proceedings and may involve
monetary sanctions of $100,000 or more (exclusive of interest and costs).
In February 2001 ARCO entered into a consent decree in the lawsuit U.S. v.
ARCO Pipeline Company (Case No. 99-2161-GTV), filed in the U.S. District
Court, District of Kansas. Pursuant to the consent decree, settling a
petroleum products spill from a pipeline in Oswatomie, Kansas that impacted a
drinking water source, ARCO agreed to pay a civil penalty of $804,700.
In response to a U.S. EPA program to enforce against alleged widespread air
pollution violations at petroleum refineries, BP negotiated with the U.S. EPA
and with several states a consent decree in respect of potential violations at
all of the eight U.S. refineries operated by BP subsidiaries, including those
operated by ARCO. ARCO and other BP subsidiaries entered into a consent decree
resolving the matter, which was lodged January 18, 2001 with the federal
district court for the Northern District of Indiana, Hammond Division, in the
case of United States, et al v. BP Exploration & Oil, Inc., et al (Civil
Action No. 2:96 CV 095 RL). That decree, if entered by the court, would
require payment of penalties totalling $10 million, and installation of
controls and procedural improvements in all of the refineries, including those
operated by ARCO.
Other Litigation
The company and its subsidiaries are defendants in numerous suits in which
they are not covered by insurance which involve smaller amounts than the
matters described above. Although the legal responsibility and financial
impact in respect to such litigation cannot be ascertained, it is not
anticipated that these suits will result in the payment by the company or its
subsidiaries of monetary damages which in the aggregate would be material in
relation to the net assets of the company and its subsidiaries.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
----------------
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ARCO's common stock ceased to be publicly traded on April 18, 2000. The only
publicly traded equity securities of ARCO after that date were the $3.00 and
$2.80 Preference Stocks. Following the merger, each share of $3.00 Preference
Stock is convertible into 22.304 BP ADSs and each share of $2.80 Preference
Stock is convertible into 7.872 BP ADSs.
On March 28, 2001, ARCO called for the redemption of all outstanding shares
of Preference Stocks on April 27, 2001. See discussion under caption
"Redemption of ARCO Preference Stocks."
2000 1999
-------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------ ------ ------ ----- ---------- ---------- ------ --------
$3.00 Cumulative
Convertible Preference
Stock:
Market price per share
High................. $1,026 $1,260 $1,260 $999 $1,200 $1,200 $1,152 $857
Low.................. $1,026 $1,220 $1,100 $999 $1,198 3/4 $1,199 1/4 $1,095 $734
Cash dividends per
share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75
$2.80 Cumulative
Convertible Preference
Stock:
Market price per share
High................. $438 $450 $450 $415 $460 $450 $413 $351 1/2
Low.................. $360 $403 $390 $304 $407 $399 1/2 $350 $259
Cash dividends per
share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for ARCO:
Years Ended December 31
-------------------------------------------
2000(1)(3) 1999(2) 1998(4) 1997(3) 1996
---------- ------- ------- ------- -------
(Millions except per share amounts)
Sales and other operating
revenues (including sales to
related parties)............... $17,500 $12,501 $10,303 $14,340 $14,094
Income (loss) from continuing
operations before extraordinary
item........................... 3,089 1,345 (655) 1,331 1,261
Earnings (loss) per share from
continuing operations before
extraordinary item
(basic)(5)(6).................. -- 4.17 (2.05) 4.14 3.92
Earnings (loss) per share from
continuing operations before
extraordinary item
(diluted)(5)(6)(7)............. -- 4.09 (2.05) 4.07 3.86
Net income...................... 3,026 1,422 452 1,771 1,663
Cash dividends per common
share(6)(8).................... 2.1375 2.85 2.85 2.825 2.75
Total assets.................... 24,950 26,272 25,199 22,425 22,703
Long-term debt and capital lease
obligations.................... 4,090 5,698 4,332 3,619 4,745
--------
(1) See Notes 4,5,11 and 14 of Notes to Consolidated Financial Statements
regarding sale of Alaskan operations and certain Lower 48 pipeline
assets, restructuring costs and impairment of oil and gas properties.
(2) Includes $161 million after-tax loss on disposition of Algeria assets.
(3) Includes extraordinary loss on extinguishment of debt of $152 million
after tax in 2000 and $118 million after tax in 1997.
(4) Includes $925 million after-tax impairment of oil and gas properties.
(5) Earnings per share has been omitted for 2000 because ARCO had no
publicly held common stock after ARCO's acquisition by BP on April 18,
2000.
(6) Restated for the effect of 100% stock dividend issued June 13, 1997.
(7) No dilution assumed for 1998 due to antidilutive effect on loss from
continuing operations.
(8) The Company declared and paid its fourth quarter 2000 dividend of
$.7125 to common stock shareholders in January 2001.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
On April 18, 2000 ARCO was acquired by BP and became a part of the BP Group,
a worldwide integrated oil and gas and chemical business. BP, indirectly, now
owns all the common stock of ARCO. As part of the BP Group, the ARCO
businesses have been structured into business units, some of which were
combined with other businesses from the BP Group. The operations within the BP
Group are managed through four main businesses, Exploration and Production,
Gas and Power, Refining and Marketing and Chemicals. Gas and Power and
Chemicals businesses are not material to ARCO. The financial position and
results of operations of heritage ARCO entities should be understood in the
context of this relationship. See Note 1 of Notes to Consolidated Financial
Statements for a further discussion of the acquisition. The financial
statements of ARCO reflect the historical costs to the previous shareholder
group and, accordingly, do not reflect any purchase accounting adjustments
related to the acquisition of ARCO by BP.
The Operating Review that follows explains the major changes in ARCO's key
businesses as related to prices, production volumes, sales, and expenses for
the years 2000 and 1999. The consolidated results of these operations are
examined in relation to the Consolidated Statement of Income on page 38.
Results of Segment Operations
Exploration & Production
Millions 2000 1999 1998
- -----------------------------------------------
Net income (loss) $ 1,591 $ 938 $ (616)
Special items charge 240 190 1,002
-------------------------
Operating results $ 1,831 $ 1,128 $ 386
=========================
The increase in ARCO's 2000 operating results from worldwide oil and gas
exploration and production operations primarily resulted from higher crude oil
and natural gas prices and lower exploration expenses, partially offset by the
absence of income from Alaskan oil producing properties following their sale
in the second quarter of 2000. Exploration expense associated with
international operations declined $97 million before tax primarily as a result
of lower writeoffs for dry holes.
The 2000 special items included charges of $512 million after tax primarily
for the impairment of oil and gas properties in Latin America and additional
severance and vacant space reserves, partially offset by a gain of
$131 million after tax on the sale of Vastar's interest in a joint venture and
a net gain on other asset sales.
Average Petroleum Liquids Sales Prices
per barrel 2000 1999 1998
- ------------------------------------------------
U.S., including Vastar $ 23.31 $ 12.83 $ 9.43
International composite $ 22.00 $ 14.39 $ 11.07
Venezuela $ 13.19 $ 7.42 $ 4.05
Average Natural Gas Sales Prices
per thousand cubic feet 2000 1999 1998
- ---------------------------------------------------------
U.S. $ 3.45 $ 1.99 $ 1.82
International (excluding LNG) $ 2.34 $ 2.24 $ 2.54
Indonesian LNG $ 5.36 $ 3.29 $ 2.49
In 1999, ARCO's operating results from worldwide oil and gas exploration and
production operations were significantly impacted by higher crude oil prices
and, to a lesser extent, higher natural gas volumes and domestic natural gas
prices.
22
Results of Segment Operations
In addition, as a result of the company's cost reduction program, combined
operating, exploration, and selling, general and administrative (SG&A)
expenses before tax were more than $500 million lower, compared to 1998.
In 1999, special items included a net charge of $190 million after tax,
primarily for the loss on the disposition of a portion of ARCO's interest in
the Rhourde El Baguel field in Algeria and for the anticipated loss on the
sale of office space in Plano, Texas. Charges for impairment in 1999 were
insignificant.
In 1998, special items included after-tax charges of $925 million for the
impairment of oil and gas properties, including $507 million related to former
UTP properties. Special items also included after-tax charges of $107 million
primarily for employee termination costs associated with restructuring. These
charges were partially offset by tax-related benefits of approximately
$30 million.
Petroleum Liquids Production
Barrels/day -
net 2000 1999 1998
- ------------------------------------------------
Alaska 101,800 319,100 346,700
Vastar 72,000 60,000 50,100
Other Lower 48 59,100 85,200 130,800
International 121,100 159,100 130,400
-----------------------------
Total 354,000 623,400 658,000
=============================
The significant decline in 2000 U.S. petroleum liquids production resulted
from the sale of Alaskan producing properties in the second quarter of 2000.
The increase in Vastar's petroleum liquids production in 2000 resulted from
the startup of production from the Mississippi Canyon 764 block in the Gulf of
Mexico deepwater in the second quarter of 2000. The decline in other Lower 48
petroleum liquids production primarily reflected the sale of ARCO Long Beach,
Inc. in the second quarter of 2000. ARCO Long Beach, Inc. produced
approximately 30,200 barrels per day (BPD) in 1999.
The decline in international petroleum liquids production primarily
reflected lower United Kingdom and Indonesian volumes. The decrease in United
Kingdom volumes of nearly 20,000 BPD primarily resulted from the sale of oil
fields in the second quarter of 2000. The decrease in Indonesian volumes of
approximately 9,000 BPD resulted from the impact of higher crude oil prices on
production sharing contracts.
The 1999 decrease in U.S. petroleum liquids production primarily resulted
from natural field declines in Alaska and the absence of production from
California heavy crude oil properties (other Lower 48) that produced
approximately 32,000 BPD in 1998. The California properties were exchanged in
October 1998 for Gulf of Mexico exploration acreage and properties producing
both crude oil and natural gas that were ultimately transferred to Vastar. The
lower Alaska petroleum liquids production primarily reflected natural field
decline at the Prudhoe Bay, Kuparuk River and Greater Point McIntyre fields
partially offset by increases in satellite field production.
The 1999 increase in international petroleum liquids production primarily
reflected the impact of a full year of production contributed by former UTP
properties in 1999 versus only six months of production in 1998.
Natural Gas Production
Million cubic
feet/day - net 2000 1999 1998
- --------------------------------------------------------
U.S., including Vastar 1,247 1,259 1,175
International
United Kingdom 427 451 369
Indonesia 237 247 293
Indonesia LNG 222 251 98
China 106 114 133
Other 52 56 36
---------------------------
Total International 1,044 1,119 929
===========================
23
Results of Segment Operations
All geographic areas experienced lower natural gas production in 2000,
primarily due to property sales and natural field declines.
In 1999, the growth in international natural gas production reflected
increased production from the United Kingdom North Sea, primarily a full year
of production from UTP properties acquired in June 1998. The growth was
partially offset by a decrease in Indonesian natural gas production as a
result of the impact of higher natural gas prices on production sharing
contracts. The increase in U.S. natural gas production primarily resulted from
Vastar's 9% growth in production. Vastar's increased production reflected the
production from the Gulf of Mexico properties transferred to Vastar late in
1998, and production increases achieved from new field startups and
operational improvements at West Cameron 645, Mississippi Canyon 148, the San
Juan Basin and other fields.
Refining & Marketing
Millions 2000 1999 1998
- ---------------------------------------------
Net income $ 277 $ 593 $ 281
Special items charge 151 3 -
-----------------------
Operating results $ 428 $ 596 $ 281
=======================
The decline in 2000 earnings primarily resulted from lower margins. Higher
product prices were more than offset by higher crude oil costs, higher
purchased finished product prices and volumes, and higher utility and fuel
costs. Margins on the sale of purchased products are lower than on products
produced. As in prior years, an increase in gasoline sales volume in 2000
required the company to buy refined product on the spot market, as the
company's two refineries were operating near capacity during the year.
Improved operating results in 1999, compared to 1998, primarily resulted
from higher light product margins. The effect of West Coast refinery outages
in the second quarter of 1999 impacted supply in the second and third quarters
resulting in higher product realizations. The higher product sales prices were
partially offset by higher crude oil costs.
The amortization and recognition of imputed interest associated with the
deferral of part of the pretax gain on the sale of the ARCO Chemical interest
in 1998 had a net favorable impact of approximately $42 million, $44 million
and $17 million after tax on refining and marketing earnings in 2000, 1999 and
1998, respectively. See "Gain on Disposition of Discontinued Operations" on
page 26.
Special items in 2000 primarily included charges for future environmental
remediation, additional severance and legal reserves.
In 1998, a special items charge of $13 million for personnel reductions as-
sociated with ARCO's cost reduction programs was offset by favorable legal
settlements.
Petroleum Products Sales
Thousand barrels/day 2000 1999 1998
- -----------------------------------------------
Gasoline 349.2 314.5 308.7
Jet 100.0 102.3 102.8
Distillate 86.4 82.9 80.6
Other 73.5 71.0 72.7
-------------------------
Total 609.1 570.7 564.8
=========================
In order to support the growth in petroleum product sales volumes in 2000,
refined products were purchased from third parties to supplement ARCO's
refinery production.
24
Results of Segment Operations
Other Operations
Millions 2000 1999 1998
- -------------------------------------------------------
Net income $ 39 $ 87 $ 111
Special items (benefit) charge 15 (6) (8)
----------------------
Operating results $ 54 $ 81 $ 103
======================
Results from ARCO's other operations comprise earnings from Lower 48 pipeline
operations and an aluminum rolling facility. The decline in operating results
in 2000 primarily resulted from the absence of income from certain pipeline
assets sold to comply with the FTC-mandated sale of assets required for
approval of the acquisition of ARCO by BP, as well as lower margins for
aluminum operations.
Excluding the special items, the decline in operating results in 1999
reflected decreased earnings from the pipeline operations, primarily as a
result of the transfer of certain pipeline operations to the refining and
marketing segment. This decline was partially offset by a $3 million increase
in equity earnings from the 50% owned Seaway pipeline joint venture in the
Midcontinent.
Operating results from the aluminum operations were relatively flat for the
two years ended December 31, 1999.
The 2000 and 1999 special items primarily consisted of charges for severance
reserves in 2000 and gains from asset sales in 1999. The 1998 special items
included gains from pipeline asset sales, partially offset by pipeline
restructuring charges.
Unallocated Items
Millions 2000 1999 1998
- ---------------------------------------------------------------------------
Unallocated net income (expense) $ (266) $ 12 $ (228)
Interest expense (363) (285) (203)
Income from discontinued operations - - 179
Gain on disposition of discontinued operations 89 77 928
Extraordinary loss on extinguishment of debt (152) - -
--------------------------
Total $ (692) $ (196) $ 676
==========================
Unallocated expenses in 2000 included after-tax charges incurred in connection
with the BP acquisition of ARCO, future environmental remediation and
restructuring costs of $97 million, $237 million and $134 million,
respectively. The increase in these amounts, compared to 1999, was partially
offset by interest earned on the receivable from BP and further reductions in
corporate staff and general expenses.
After-tax charges for future environmental remediation and restructuring
costs were $24 million and $8 million in 1999, compared to $143 million and
$48 million, respectively, in 1998. These decreases, along with a reduction in
corporate staff and general expenses of approximately $90 million after tax,
was only partially offset by lower tax benefits and decreased interest income
on short-term investments, resulting in unallocated net income in 1999.
In 1998, unallocated net expense primarily included charges of $143 million
after tax for future environmental remediation, charges of $48 million after
tax for restructurings, corporate staff and general expenses, and interest
revenue.
The environmental charges in 1998 related both to current operations and
natural resource damage liabilities in the state of Montana associated with
previously discontinued mining operations.
The increase in interest expense in 2000 primarily reflected lower
capitalized interest and interest paid to BP for funds advanced to certain
subsidiaries of ARCO following the acquisition of ARCO by BP. Gross after-tax
interest expense declined in 1999 after taking into account the effect on 1998
interest expense of a $94 million after-tax interest credit associated with a
tax refund received in 1998. The decrease in 1999 was due primarily to higher
capitalized interest. The impact of increased interest capitalization more
than offset the increase in combined short- and long-term debt outstanding
during 1999.
25
Results of Segment Operations
Extraordinary Loss on Extinguishment of Debt
The company incurred a loss of $243 million before tax, or $152 million after
tax, on early retirement of long-term debt during 2000. The early retirements
will result in a pre-tax reduction in interest expense on long-term debt of
approximately $75 million in 2001.
Gain on Disposition of Discontinued Operations
ARCO Chemical
In July 1998, ARCO sold its entire interest in ARCO Chemical to Lyondell
Chemical Company (Lyondell) for cash proceeds of $4.6 billion. After deferral
of $313 million of the pre-tax gain as discussed below, ARCO recorded a net
after-tax gain of $1.053 billion. In 1999, adjustments for tax benefits
resulted in the recording of an additional after-tax gain on disposition of
$59 million.
In 1992 the company entered into a 10-year purchase agreement with ARCO
Chemical providing for the delivery of fixed quantities of methyl tertiary
butyl ether (MTBE) at a formula-based price. At the inception of the contract,
a liquid spot market for MTBE did not exist. As the spot market has developed,
the formula-based prices have historically been above spot market prices.
Provision for loss on the contract was not necessary prior to the sale to
Lyondell because ARCO Chemical was a consolidated, majority-owned subsidiary
of the company. ARCO believes that, at the date of sale of ARCO Chemical to
Lyondell, the pricing terms were above-market as compared to similar toll-
based contracts.
The above-market MTBE contract value was reflected in the sale price of the
company's interest in ARCO Chemical. As a result, ARCO deferred $313 million
of the pre-tax gain on sale of the ARCO Chemical interest. This deferral
represents the estimated discounted present value of the difference over the
remaining term of the contract (which terminates in 2002) between the contract
price and the spot market price for MTBE. ARCO does not expect that the above-
market differential will decrease over the remaining term.
The deferral is being amortized over the remaining term of the contract on
the basis of annual volume over total contracted volume. The amortization and
recognition of imputed interest had a net favorable impact of approximately
$42 million, $44 million and $17 million after tax on earnings of the refining
and marketing segment in 2000, 1999 and 1998, respectively.
Coal
In the second quarter of 2000, ARCO disposed of its remaining coal assets in
Australia. Upon the sale of those assets, a provision originally established
in 1998 for the estimated loss on sale of U.S. and Australian coal assets was
reduced, resulting in an after-tax gain of $89 million.
In 1998, ARCO recorded a $92 million provision for the estimated loss on the
disposal of the U.S. and Australian coal assets. In 1999, upon the sale of
ARCO's 80% interest in the Gordonstone coal mine and its 31.4% interest in the
Blair Athol Joint Venture the provision was reduced resulting in an after-tax
gain of $22 million.
In June 1998, for cash consideration of approximately $1.1 billion, ARCO
disposed of its U.S. coal operations in a transaction with Arch Coal (Arch).
Operations disposed of included the Black Thunder and Coal Creek mines in
Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest in three mines
in Utah. The Colorado and Utah mines were sold outright. ARCO contributed its
Wyoming coal operations and Arch transferred various of its coal operations
into a new joint venture that is 99% owned by Arch and 1% owned by ARCO.
26
Results of Segment Operations
UTP Petrochemical
At the time of the UTP acquisition, ARCO determined the UTP petrochemical
operations would be divested. In March 1999, ARCO sold the UTP petrochemical
business and recorded a small loss.
See Note 9 of Notes to Consolidated Financial Statements regarding
discontinued operations.
27
Results of Consolidated Operations
Income from Continuing Operations
In 2000, the increased operating results were the result of higher crude oil
and natural gas prices and lower exploration expenses, partially offset by
lower refined products margins.
The improvement in ARCO's income from continuing operations in 1999
primarily reflected higher crude oil prices, increased refined products
margins, lower operating, exploration and SG&A expenses and higher natural gas
volumes.
Earnings from Consolidated Operations
Millions 2000 1999 1998
-----------------------------------------------------------------------------
Income (loss) from continuing operations $ 3,089 $ 1,345 $ (655)
Special items charge (benefit) $ (977) 181 1,055
-------------------------------
Operating results $ 2,112 $ 1,526 $ 400
===============================
Special items after tax
Millions 2000 1999 1998
-----------------------------------------------------------------------------
Gain on FTC mandated asset sales $(1,811) $ - $ -
Net gain on other asset sales (256) (9) (24)
Loss on disposition of Algeria assets - 161 -
Impairment of oil and gas properties 240 9 925
Restructuring charges 407 13 172
Environmental charges 300 27 145
BP merger costs 97 - -
Tax-related (benefits) charges 12 (33) (153)
Other, net 34 13 (10)
------------------------------
Total charge (benefit) $ (977) $ 181 $ 1,055
==============================
Revenues
The increase in exploration and production sales revenues resulted primarily
from higher crude oil and natural gas prices being offset to a large extent by
significantly lower petroleum liquids production, which resulted from the sale
of the company's Alaskan oil and gas operations, and the cessation of the
domestic crude oil marketing activity following ARCO's acquisition by BP.
Refining and marketing sales revenues increased primarily because of higher
light product prices, which reflected the increased crude oil prices and, to a
lesser extent, higher gasoline sales volumes compared to the prior year.
In 1999, the increase in exploration and production sales revenues resulted
from higher petroleum liquids prices and natural gas production volumes,
partially offset by lower petroleum liquids volumes.
Sales and Other Operating Revenues
Millions 2000 1999 1998
----------------------------------------------------------
Exploration & production $ 7,612 $ 7,022 $ 5,936
Refining & marketing 10,231 7,000 5,484
Other operations 515 56 170
Intersegment eliminations (858) (1,577) (1,287)
-----------------------------
Total $ 17,500 $ 12,501 $ 10,303
=============================
In 1999, refining and marketing revenue primarily increased as a result of
higher refined products prices.
28
Results of Consolidated Operations
Other Revenues
Other revenues increased in 2000 reflecting a $202 million pre-tax gain from
sale of Vastar's interest in SCEM and a $77 million pre-tax gain from the sale
of stock to the public by an insurance company in which ARCO was a mutual
participant.
In 1999, higher other revenues, compared to 1998, reflected one-time legal
settlements and increased interest and rental income.
Related party interest in 2000 relates to an intercompany receivable from BP
that has been outstanding since the sale of Alaskan operations in the second
quarter 2000.
Expenses
The increased trade purchases and trade purchases from related parties in 2000
reflected the purchases of Alaskan crude oil by the refining and marketing
operations following the sale of ARCO's Alaskan oil and gas operations to
Phillips Petroleum. Prior to the sale of the Alaskan operations those
purchases were eliminated as intercompany transactions in the consolidated
financial statements. In addition, trade purchases reflected the effect of
increased crude oil prices and higher gasoline purchases by the company's
refining and marketing operations.
In 1999 trade purchases were higher primarily as a result of increased
purchases of finished and unfinished refined product from third parties and
higher crude oil prices associated with crude oil marketing activity.
Operating expenses were higher in 2000 primarily as a result of $521 million
in before-tax charges for future environmental remediation, compared to $57
million in 1999.
In 1999 operating expenses declined as a result of a decrease in exploration
and production operating costs of approximately $190 million before tax,
compared to 1998. This decline was due to the 1998 exchange of higher cost
California heavy crude oil properties for Gulf of Mexico crude oil and natural
gas properties, as well as the impact of the company's cost reduction program.
In addition, charges for future remediation and reclamation were $57 million
in 1999, compared to $234 million in 1998. The 1998 charges related to both
current operations and to natural resource damage liabilities in the state of
Montana associated with previously discontinued mining operations.
SG&A expenses in 2000 primarily reflected lower expenses associated with
international exploration and production operations and lower corporate
administrative expenses.
In 1999, SG&A expense declined primarily as a result of lower personnel
costs and a favorable adjustment to self-insurance reserves for estimated
claims incurred but not yet reported.
DD&A expense in 2000 declined primarily as a result of the sale of the
Alaskan oil and gas producing operations in April 2000 and also the sale of
oil and gas properties associated with the Company's international exploration
and production operations.
In 1999 DD&A expense, compared to 1998, was higher as a result of a full
year of DD&A associated with the former UTP operations, which became a part of
ARCO's operations in the third quarter of 1998. In addition, DD&A expense also
increased as a result of increased natural gas production and higher average
depletive writeoff rates associated with Vastar's operations.
In each of the last 3 years ARCO has performed an impairment review of
certain oil and gas properties. The review in 2000 resulted in an impairment
charge of $286 million before tax primarily related to several Latin American
oil fields along with smaller impairments of properties in the United States
and Europe. The 1999 impairment review resulted in insignificant charges
related to a few isolated properties.
The review in 1998 resulted in an impairment charge of $1,447 million. The
impaired properties included former UTP properties in Pakistan, Latin America
and the U.K. North Sea, as well as other ARCO properties in California, the
U.K. North Sea, North Africa and the Middle East.
29
Results of Consolidated Operations
The decline in 2000 exploration expense reflected lower writeoffs for dry
holes and lower other exploration expenses associated with ARCO's
international oil and gas operations, partially offset by the writeoff of two
domestic deepwater offshore wells in the first quarter of 2000.
In 1999 lower exploration expense reflected a decline in geological and
geophysical and dry-hole expense in ARCO's international oil and gas
operations and a decline in Vastar's dry-hole expense.
Taxes other than income taxes in 2000 did not reflect the increase in crude
oil prices, as the crude oil price increase was offset by lower production
volumes resulting primarily from the sale of the company's Alaskan oil and gas
producing operations.
In 1999, taxes other than income taxes declined as lower production volumes
on which certain production taxes are based more than offset the increase in
crude oil prices.
The higher interest expense (other than that paid to related parties) in
2000 primarily resulted from lower capitalized interest as a result of the
sale of ARCO's interest in an oil field in Algeria in the second quarter of
2000 and the completion of projects in the U.K. and Latin America that were
ongoing in 1999.
Related party interest expense is associated with the net amount of funds
advanced by BP primarily for ARCO's United Kingdom oil and gas producing
operations.
In 1999 interest expense was slightly lower, compared to 1998, after taking
into account the effect on 1998 interest expense of an interest credit
associated with a tax refund received in 1998. The decline resulted from the
impact of increased interest capitalization more than offsetting the increase
in combined short and long-term debt outstanding during 1999.
The restructuring costs in 2000 represented charges for the costs associated
with the acquisition of ARCO by BP, primarily employee terminations. The $20
million of restructuring charges in 1999 relates to an adjustment of a 1998
accrual for employee terminations, primarily due to the elimination of
additional positions. In 1998, $229 million of the restructuring charges
related to costs of eliminating approximately 1,200 positions specifically
identified as of December 31, 1998. See Note 11 of Notes to Consolidated
Financial Statements on page 51 regarding restructuring costs.
Income Taxes
The company had an effective tax rate of 34.0% and 27.8% in 2000 and 1999,
respectively. An effective tax rate lower than the statutory rate in both 2000
and 1999 primarily reflected various tax credits and other benefits, partially
offset by taxes on foreign income in excess of statutory rate.
30
Analysis of Cash Flows and Financial Condition
2000 Cash Inflows - (millions)
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
$6,803 Sale of Alaskan oil and gas businesses and pipelines
$2,311 Operations
$1,494 Other asset sales
$ 94 Long-term debt issuance
$ 81 Other
Capital expeditures for additions to fixed assets totaled $2.1 billion in
2000. Future capital expenditures remain subject to business conditions
affecting the industry, as well as changes in environmental rules and
regulations and the tax laws.
Following the acquisition of ARCO by BP on April 18, 2000, ARCO became part
of the BP Group, a worldwide integrated oil and gas and chemical business. As
part of the BP Group, ARCO participates in BP's cash management system, where
the bank sends daily notification of checks presented for payment. BP
transfers funds from other sources to cover the checks presented for payment.
This program generally results in book overdrafts as a result of checks
outstanding. At December 31, 2000, these book overdrafts have been
reclassified to accounts payable.
As a participant in BP's cash management system, ARCO must look to BP for
the funding of its future cash requirements for working capital, capital
expenditures and debt repayments.
Cash and cash equivalents and short-term investments totaled $294 million at
year-end 2000. ARCO had no short-term borrowings at December 31, 2000 and
long-term debt due within one year was $304 million.
The company was in a working capital deficit position of $893 million at
December 31, 2000.
2000 Cash Outflows - (millions)
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
$2,078 Additions to fixed assets
$1,618 Acquisition of Vastar's minority interest
$1,416 Repayment of long-term debt
$ 697 Dividends
$1,674 Repayment of short-term debt
$3,597 Receivable from BP
$ 307 Investments and long-term receivables
$ 253 Other
Following the acquisition of ARCO by BP, ARCO's $3.0 billion unused
committed bank credit facility was terminated.
During 2000, Vastar's $1.1 billion revolving credit facility was terminated.
The Company declared and paid its fourth quarter 2000 dividend to common
shareholders in January 2001.
31
Market-Sensitive Instruments and Risk Management
The following discussion of the company's risk-management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the forward-
looking statements.
Prior to its acquisition by BP, ARCO managed the effects of foreign currency
and interest rate fluctuations through the use of foreign currency forward,
option and swap contracts, interest rate swaps and financial futures
contracts.
Following the acquisition, ARCO stopped engaging in hedging activity and by
December 31, 2000, all hedging contracts in place prior to the acquisition had
expired, except for some immaterial commodity hedging principally associated
with the aluminum operations.
At December 31, 2000, the company held a variety of financial instruments
and a small number of derivative instruments that are sensitive to changes in
interest rates and commodity prices.
In the normal course of business, the company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk and legal risk and are not discussed or quantified in the
following analyses.
Interest Rate Risk
The fair value of the company's cash and short-term investment portfolio
December 31, 2000, approximated carrying value. Given the short-term nature of
these instruments, market risk, as measured by the change in fair value
resulting from a hypothetical 1% change in interest rates, is not material.
The fair value of the company's long-term debt, including current maturi-
ties, was estimated to be $4.7 billion at December 31, 2000, and exceeded the
carrying value by $260 million. Market risk was estimated at $260 million,
representing potential increase in fair value resulting from a hypothetical 1%
decrease in the company's weighted average long-term borrowing rate at Decem-
ber 31, 2000. Interest rate risk is mitigated by the use of floating rate in-
struments, which comprise approximately $200 million of the company's long-
term debt.
Foreign Exchange Rate Risk
At December 31, 2000, ARCO had no significant financial instruments
denominated in a foreign currency or foreign currency derivatives outstanding.
Commodity Price Risk
Prior to the acquisition of ARCO by BP, the company used various hedging ar-
rangements, predominantly natural gas swaps and crude oil futures and options,
to manage the company's exposure to price risk from its natural gas and petro-
leum liquids production. These hedging arrangements had the effect of locking
in for specified periods (at predetermined prices or ranges of prices) the
prices the company will receive for the volumes to which the hedge relates. As
a result, while these hedging arrangements are structured to reduce the
company's exposure to decreases in price associated with the hedging commodi-
ty, they also limit the benefit the company might otherwise have received from
any price increases associated with the hedged commodity.
Following the acquisition, ARCO stopped engaging in the hedging of its
natural gas and petroleum liquids production.
Equity Price Risk
Other investments at December 31, 2000, included marketable equity securities
which are recorded at fair value of $712 million, including net unrealized
gains of $219 million. Those securities have exposure to price risk. The
estimated potential loss in fair value resulting from a hypothetical 10%
decrease in prices quoted by stock exchanges is $71 million.
32
Market-Sensitive Instruments and Risk Management
Environmental Matters
ARCO is subject to federal, state and local environmental laws and regulations
that require the company to remove or mitigate the effect on the environment
of the disposal or release of certain chemical, mineral and petroleum
substances at various sites. ARCO is currently participating in environmental
assessments and cleanups at numerous sites under these laws and may in the
future be involved in additional environmental assessments and cleanups.
During 2000, management of the Company assessed the estimated future costs to
remediate all of the Company's environmental sites and concluded that its best
estimate of the cost to remediate such sites was greater than previously
recorded. As a result the environmental reserve was increased by $521 million
during 2000, of which $274 million was recognized during the fourth quarter.
Environmental Reserves*
Millions 2000 1999 1998
- -----------------------------------------------------
Beginning balance $ 686 $ 870 $ 722
Charges 521 57 234
Payments (109) (241) (86)
Ending balance $ 1,098 $ 686 $ 870
* Total long-term and short-term liabilities
The amount accrued represents the estimated undiscounted costs that ARCO
will incur to complete the remediation of sites with known contamination. In
view of the uncertainties associated with estimating these costs, such as
uncertainty regarding the appropriate method for remediation of various sites
and regarding ARCO's ultimate share of costs, it is possible that actual costs
could be significant. Although these costs might be material to the results of
operations in the period in which they are recognized, ARCO does not expect
that such costs will have a material effect on ARCO's financial position or
equity. See Note 19 of Notes to Consolidated Financial Statements regarding
environmental matters.
The increased payments against the environmental reserves in 1999 reflected
a payment of $160 million in settlement of a majority of the State of
Montana's claims in a lawsuit resulting from mining and mineral processing
businesses formerly operated by Anaconda.
In addition to the provision for environmental remediation costs, $312
million has been accrued for the estimated cost, net of salvage value, of
dismantling facilities as required by contract, regulation or law, and for the
estimated costs of restoration and reclamation of land associated with such
facilities.
Statements of Financial Accounting Standards
Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to adopt its provisions for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (as deferred by SFAS No. 137).
Earlier application of all of the provisions of SFAS No. 133 is permitted, but
the provisions cannot be applied retroactively to financial statements of
prior periods. SFAS No. 133 standardizes the accounting for derivative
instruments by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value.
Following the acquisition of ARCO by BP, ARCO no longer engages in
significant hedging activity using derivative instruments. Accordingly, the
impact of SFAS No. 133 will not be material to stand-alone ARCO financial
statements.
33
Safe Harbor for Forward-Looking Statements
ARCO desires to take advantage of the "safe harbor" provisions for forward-
looking statements contained in Section 27A of the Securities Act and Section
21B of the Exchange Act and is including this statement in order to do so.
Such statements are generally accompanied by words such as estimate, project,
predict or expect, that convey the uncertainty of future events or outcomes.
These statements may include projections and estimates concerning the timing
and success of specific projects, the size and timing of cost reductions, the
level of future income, production volumes, size of hydrocarbon resources,
ability to replace reserves and levels of capital spending. Actual results
could differ materially based on numerous factors, including those described
below. Unless otherwise noted in the statements, ARCO does not intend to
update any forward-looking statements.
Price Volatility, Political, Economic and Regulatory Instability
Volatility in prices and margins affects all of the company's businesses.
Volatility is caused by a number of factors, including changes in market
supply and demand balances and fluctuations in political, regulatory and
economic climates throughout the world.
The ability to operate ARCO's businesses is dependent on the politics and
regulations in the U.S. and in the particular geographic regions where the
company operates. The ability to negotiate and implement specific projects in
a timely and favorable manner may be impacted by political considerations
unrelated to or beyond the control of the company.
Decline in Oil and Gas Prices
Any substantial or extended decline in oil and gas prices could have a
material adverse effect on ARCO's financial position and results of
operations, on the quantities of crude oil and natural gas reserves that
economically may be produced and on the quantity of proved reserves that may
be attributed to our properties.
Production Rates and Reserve Replacement
Projecting future rates of oil and gas production is inherently imprecise.
Production rates of oil and gas reservoirs generally decline. Future
production rates can be affected by price volatility and the company's ability
to replace depleting reserves. There can be no assurances: (a) as to the level
or timing of success, if any that the company will have in acquiring or
finding and developing economically recoverable reserves; (b) that estimates
of proved reserves will not be revised in the future; or (c) that the actual
quantities of oil and gas ultimately recovered will not differ from the
reserve estimates.
Refining & Marketing
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. Volumes
produced and margins historically have been volatile and are impacted by
market demand, regulatory changes (particularly environmental regulations
regarding gasoline), the price of crude oil, and the ability of regional
refiners and the company to provide a sufficient supply of refined products.
Operating Hazards
Operations are subject to various hazards common to the industry, including
explosions, fires, uncontrollable spills, and damage from severe weather
conditions.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedule
Schedule
No. Page
--- ----
Report of Independent Auditors................................ 36
Report of Independent Accountants............................. 37
Financial Statements:
Consolidated Statement of Income............................ 38
Consolidated Balance Sheet.................................. 39
Consolidated Statement of Cash Flows........................ 40
Consolidated Statement of Changes in Stockholders' Equity... 41
Notes to Consolidated Financial Statements.................. 42
Supplemental Information (Unaudited)........................ 69
Supporting Financial Statement Schedule Covered by the
Foregoing Report of Independent Auditors':
II Valuation and Qualifying Accounts........................... 93
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown
in the financial statements or related notes.
Financial statements with respect to unconsolidated subsidiaries and 50%
owned companies are omitted per Rule 3-09(a) of Regulation S-X.
35
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Atlantic Richfield Company
We have audited the accompanying consolidated balance sheet of Atlantic
Richfield Company as of December 31, 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. Our audits also included the financial statement schedule for year
ended December 31, 2000 listed in Item 8. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Richfield Company
at December 31, 2000 and the consolidated results of operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information for the year ended December 31, 2000 set forth
therein.
Ernst & Young L.L.P.
Los Angeles, CA
March 14, 2001
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Atlantic Richfield Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Atlantic Richfield Company and its subsidiaries at December 31, 1999, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the related financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
January 31, 2000
37
Consolidated Statement of Income
Millions, except per share
amounts 2000 1999 1998
- ------------------------------------------------------------------------------
REVENUES
Sales and other operating
revenues $ 14,993 $ 11,694 $ 9,595
Sales to related parties 2,507 807 708
Other revenues 893 554 506
Interest from related party 305 - -
--------------------------------------
Total revenues 18,698 13,055 10,809
--------------------------------------
EXPENSES
Trade purchases 6,725 4,816 3,875
Trade purchases from related
parties 2,667 77 84
Operating expenses 2,685 2,386 2,794
Selling, general and
administrative expenses 513 607 713
Exploration expenses
(including undeveloped
leasehold amortization) 303 386 629
Depreciation, depletion and
amortization 1,617 1,785 1,535
Impairment of oil and gas
properties 286 14 1,447
Taxes other than income taxes 471 475 506
Interest 426 398 259
Interest - related party 53 - -
Loss on disposition of Algeria
assets - 175 -
Restructuring costs 742 20 249
--------------------------------------
Total expenses 16,488 11,139 12,091
--------------------------------------
Income (loss) before items
below 2,210 1,916 (1,282)
Gain on sale of Alaska oil and
gas businesses and pipelines 2,588 - -
--------------------------------------
Income (loss) from continuing
operations before income
taxes,
minority interest and
extraordinary item 4,798 1,916 (1,282)
Provision (benefit) for taxes
on income 1,629 533 (651)
Minority interest in earnings
of subsidiaries 80 38 24
--------------------------------------
Income (loss) from continuing
operations before
extraordinary item 3,089 1,345 (655)
Income from discontinued
operations, net of income
taxes of $113 (1998) - - 179
Gain on disposition of
discontinued operations, net
of income taxes (benefit) of
$(1) (2000), $58 (1999) and
$1,620 (1998) 89 77 928
--------------------------------------
Income before extraordinary
item 3,178 1,422 452
Extraordinary loss on
extinguishment of debt, net
of income taxes of $91 152 - -
--------------------------------------
Net income $ 3,026 $ 1,422 $ 452
--------------------------------------
Earnings per share:
Continuing operations
Basic $4.17 $(2.05)
Dilutive $4.09 $(2.05)
Net income
Basic $4.41 $ 1.40
Dilutive $4.33 $ 1.40
Weighted average equivalent
shares outstanding:
Basic 322.3 321.0
Dilutive 328.8 321.0
See Notes on pages 42 through 68.
38
Consolidated Balance Sheet
Millions 2000 1999
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 92 $ 879
Short-term investments 202 264
Accounts receivable 1,185 1,167
Accounts receivable from related parties 90 134
Inventories 374 430
Prepaid expenses and other current assets 125 184
------------------
Total current assets 2,068 3,058
------------------
Investments and long-term receivables:
Receivable from BP 3,597 -
Investments accounted for on the equity method 1,484 1,508
Other investments and long-term receivables 1,660 1,660
------------------
Total investments and long-term receivables 6,741 3,168
------------------
Net property, plant and equipment 14,721 18,466
Net assets of discontinued operations - 67
Deferred charges and other assets 1,420 1,513
------------------
Total assets $ 24,950 $ 26,272
------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 1,672
Accounts payable 1,073 830
Taxes payable 522 420
Long-term debt due within one year 304 11
Other 1,062 1,090
------------------
Total current liabilities 2,961 4,023
------------------
Long-term debt 4,090 5,698
Deferred income taxes 3,376 3,644
Dismantlement, restoration and reclamation 312 1,154
Environmental reserves 943 574
Other deferred liabilities and credits 2,186 2,196
Minority interest 150 297
------------------
Total liabilities 14,018 17,586
------------------
Stockholders' equity:
Preference stocks 1 1
Common stock, $2.50 par value; shares issued 327,436,320
(2000), 326,713,278 (1999),
shares outstanding 324,711,290 (2000), 323,048,817
(1999) 818 817
Capital in excess of par value of stock 959 889
Retained earnings 9,420 7,091
Treasury stock (217) (279)
Accumulated other comprehensive income (loss) (49) 167
------------------
Total stockholders' equity 10,932 8,686
------------------
Total liabilities and stockholders' equity $ 24,950 $ 26,272
------------------
See Notes on pages 42 through 68.
39
Consolidated Statement of Cash Flows
Millions 2000 1999 1998
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations and
extraordinary item $ 2,937 $ 1,345 $ (655)
Adjustments to reconcile income to net cash
provided by operating activities:
Gain on sale of Alaskan oil and gas businesses and
pipelines (2,588) - -
Net gain on other asset sales (466) (70) (61)
Depreciation, depletion and amortization 1,617 1,785 1,535
Impairment of oil and gas properties 286 14 1,447
Dry-hole expense and undeveloped leasehold
amortization 133 235 303
Loss on Algeria asset disposal - 175 -
Income from equity investments (47) (56) (78)
Dividends from equity investments 78 65 37
Noncash provisions greater (less) than cash
payments 618 (422) 184
Minority interest in earnings of subsidiaries 80 38 24
Deferred income taxes (977) 264 (539)
Extraordinary loss on extinguishment of debt 152 - -
Changes in working capital accounts 644 (654) 307
Other (156) 83 58
---------------------------
Net cash provided by operating activities 2,311 2,802 2,562
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Alaskan oil and gas
businesses and pipelines 6,803 - -
Proceeds from other asset sales 1,494 913 207
Receivable from BP (3,597) - -
Additions to fixed assets, including dry-hole costs (2,078) (2,727) (3,551)
Acquisition of Vastar's minority interest (1,618) - -
Net proceeds from sale of ARCO Chemical and U.S.
coal assets - - 3,988
Union Texas Petroleum acquisition - - (2,707)
Net cash provided (used) by short-term investments 68 (22) (33)
Investment in/advances to LUKARCO (246) (144) (59)
Investments and long-term receivables (307) (13) (242)
Other - (4) (73)
---------------------------
Net cash provided (used) by investing activities 519 (1,997) (2,470)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,416) (1,019) (503)
Proceeds from issuance of long-term debt 94 1,999 536
Net cash provided (used) by notes payable (1,674) (695) 912
Dividends paid (697) (920) (917)
Treasury stock purchases (7) (2) (32)
Other 13 52 50
---------------------------
Net cash provided (used) by financing activities (3,687) (585) 46
---------------------------
Cash flows from discontinued operations 52 13 85
Effect of exchange rate changes on cash 18 (11) -
---------------------------
Net increase (decrease) in cash and cash
equivalents (787) 222 223
Cash and cash equivalents at beginning of year 879 657 434
---------------------------
Cash and cash equivalents at end of year $ 92 $ 879 $ 657
---------------------------
See Notes on pages 42 through 68.
40
Consolidated Statement of Changes in Stockholders' Equity
Accumulated
Other
Common Stock Preference Capital in Treasury Stock Comprehensive Retained
Millions Shares Dollars Stock Excess of Par Shares Dollars* Income (loss) Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1998 322.7 $ 807 $ 1 $ 640 2.3 $ (170) $ 348 $ 7,054 $ 8,680
-----------------------------------------------------------------------------------------------------
Net income 452 452
Other comprehensive
income:
Unrealized loss on secu-
rities (681) (681)
Foreign currency trans-
lation (18) (18)
Minimum pension liabil-
ity 7 7
-----------------------------------------------------------------------------------------------------
Total comprehensive
income (loss) (240)
Common stock dividends (915) (915)
Preference stock
dividends (2) (2)
Common stock issued 3.2 8 226 234
Treasury stock purchases 3.2 (249) (249)
Treasury stock issued (3) (0.9) 75 72
-----------------------------------------------------------------------------------------------------
Balance December 31,
1998 325.9 $ 815 $ 1 $ 863 4.6 $ (344) $(344) $ 6,589 $ 7,580
-----------------------------------------------------------------------------------------------------
Net income 1,422 1,422
Other comprehensive
income:
Unrealized gain on secu-
rities 303 303
Foreign currency trans-
lation 192 192
Minimum pension liabil-
ity 16 16
-----------------------------------------------------------------------------------------------------
Total comprehensive
income 1,933
Common stock dividends (918) (918)
Preference stock
dividends (2) (2)
Common stock issued 0.8 2 21 23
Treasury stock purchases - (2) (2)
Treasury stock issued 5 (0.9) 67 72
-----------------------------------------------------------------------------------------------------
Balance December 31,
1999 326.7 $ 817 $ 1 $ 889 3.7 $ (279) $ 167 $ 7,091 $ 8,686
-----------------------------------------------------------------------------------------------------
Net income 3,026 3,026
Other comprehensive
income:
Unrealized loss on
securities (88) (88)
Foreign currency
translation (158) (158)
Minimum pension
liability 30 30
-----------------------------------------------------------------------------------------------------
Total comprehensive
income 2,810
Common stock dividends (696) (696)
Preference stock
dividends (1) (1)
Common stock issued 0.5 1 52 53
Treasury stock purchases 0.1 (7) (7)
Treasury stock issued 28 (0.9) 59 87
Cancellation of common
stock shares (324.5) (812) (10) (0.2) 10 (812)
Issuance of common stock
shares to BP 324.7 812 812
-----------------------------------------------------------------------------------------------------
Balance December 31,
2000 327.4 $ 818 $ 1 $ 959 2.7 $ (217) $ (49) $ 9,420 $ 10,932
=====================================================================================================
*At cost
See Notes on pages 42 through 68.
41
Notes to Consolidated Financial Statements
Note 1 Acquisition of ARCO by BP
On April 18, 2000, BP completed the acquisition of ARCO pursuant to the
terms of the merger agreement dated March 31, 1999, as amended through March
27, 2000 (Merger Agreement). The Merger Agreement, approved by the boards of
both BP and ARCO, provided for all common shareholders of ARCO, with the
exception of BP, ARCO or any of their subsidiaries, to receive 9.84 BP
ordinary shares, each in the form of BP American Depositary Shares (ADSs) or,
at the election of the shareholder, BP ordinary shares, in return for the
cancellation of each of their shares (other than the shares held by CH-Twenty
Holdings, LLC, a subsidiary of ARCO) (the Cancelled ARCO Shares). It also
provided for the issue to BP of new common shares equal in number to the
Cancelled ARCO Shares. Any right to a fraction of a BP ADS or an odd lot of
less than six BP ordinary shares was satisfied by a cash payment. In addition,
the outstanding ARCO common stock was delisted from the New York Stock
Exchange (NYSE) and other exchanges on which it had been listed.
Following the acquisition, ARCO's outstanding shares of $2.80 and $3.00
Preference Stock remained listed on the NYSE. Pursuant to the Merger
Agreement, each share of $2.80 Preference Stock was converted into the right
to receive 7.872 ADSs and each share of $3.00 Preference Stock was converted
into the right to receive 22.304 ADSs.
Following the acquisition of ARCO by BP, ARCO became part of the BP Group,
and the ARCO businesses have been structured into business units, some of
which were combined with other businesses of the BP Group. The operations
within the BP Group are managed through four main businesses, Exploration and
Production, Gas and Power, Refining and Marketing and Chemicals. Gas and Power
and Chemical operations are not material for ARCO.
The financial position and results of operations of ARCO should be
understood in the context of this relationship. The financial statements of
ARCO reflect the historical costs to the previous shareholder group and,
accordingly, do not reflect any purchase accounting adjustments related to the
acquisition of ARCO by BP. Significant intercompany accounts and transactions
between BP and its affiliates and ARCO are disclosed as related party
transactions in Note 3.
Note 2 Accounting Policies
ARCO's accounting policies conform to accounting principles generally accepted
in the United States, including the "successful efforts" method of accounting
for oil and gas producing activities. Unless otherwise stated, the Notes to
Consolidated Financial Statements exclude discontinued operations.
Principles of Consolidation
The consolidated financial statements include the accounts of all subsidiar-
ies, ventures and partnerships in which a controlling interest is held. ARCO
also consolidates its interests in undivided interest pipeline companies and
in oil and gas joint ventures. ARCO uses the equity method of accounting for
companies where its effective ownership is between 20% and 50% and for other
ventures and partnerships in which a controlling interest is not held.
Revenue Recognition
Revenues are generally recognized upon the passage of title, net of royalties,
if applicable.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as time deposits,
certificates of deposit and marketable securities other than equity securi-
ties, maturing within three months of purchase. Cash equivalents are stated at
cost, which approximates fair value.
42
Notes to Consolidated Financial Statements
Oil and Gas Unproved Property Costs
Unproved property costs are initially capitalized. Significant unproved prop-
erties are not amortized but are periodically assessed for impairment. Other
unproved properties are amortized on a composite basis, considering past suc-
cess experience and average property life. In general, costs of properties
surrendered or otherwise disposed of are charged to accumulated amortization.
Costs of successful properties are transferred to developed properties. Ex-
ploratory wells that find oil and gas reserves which cannot be classified as
proved within one year of discovery and do not continue to qualify as capital-
ized costs are charged to expense as dry-hole costs.
Fixed Assets
Fixed assets are recorded at cost and are written off on either the unit-of-
production or straight-line method based on the expected lives of individual
assets or groups of assets.
Upon disposal of assets depreciated on an individual basis, residual cost
less salvage value is included in current income. Upon disposal of assets
depreciated on a group basis, unless unusual in nature or amount, residual
cost less salvage value is charged against accumulated depreciation.
Impairment of Long-lived Assets
Long-lived assets are assessed for possible impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," whenever changes in economic or operating conditions indicate the
carrying amount may not be recoverable. If undiscounted future cash flows are
less than the carrying amount, an impairment loss is recognized to the extent
the carrying amount exceeds future discounted cash flows. For proved oil and
gas properties, the assessment is performed on an individual field basis and
is based on the company's price forecast used for economic decision making.
Dismantlement, Restoration and Reclamation Costs
The estimated costs, net of salvage value, of dismantling facilities or
projects with limited lives or that are required to be dismantled by contract,
regulation or law, and the estimated costs of restoration and reclamation
associated with oil and gas operations are accrued during production and
classified as a long-term liability. Such costs are taken into account in
determining depreciation, depletion and amortization.
Environmental Remediation
Environmental remediation costs are accrued as operating expenses based on the
estimated timing and extent of remedial actions required by applicable
governmental authorities and the amount of ARCO's liability in consideration
of the liability and financial wherewithal of other responsible parties.
Estimated liabilities are not discounted to present value.
Stock-based Compensation
Employee stock options are accounted for under the intrinsic value method pre-
scribed by Accounting Principles Board Opinion (APB) No. 25.
Earnings per Share
Earnings per share for 2000 has been omitted from ARCO's financial statements
because ARCO had no publicly held common stock after ARCO's acquisition by BP
on April 18, 2000.
43
Notes to Consolidated Financial Statements
Basic earnings per share was based on the average number of common shares
outstanding during each period. Diluted earnings per share included as out-
standing certain contingently issuable shares, primarily stock options and
convertible preference stock.
Use of Estimates
The preparation of financial statements in conformity with accounting princi-
ples generally accepted in the United States requires management to make esti-
mates and assumptions that affect the reported amounts of assets and liabili-
ties and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Derivative Instruments
Prior to the acquisition of ARCO by BP, the company used a variety of
derivative instruments, both financial and commodity based, to minimize the
market risks of commodity price, interest rate and foreign currency
fluctuations. The company did not hold or issue derivative instruments for
trading purposes and was not a party to leveraged instruments. All derivative
instruments were off-balance sheet instruments; however, net receivable or
payable positions related to derivative instruments were carried on the
balance sheet. The nature of the transaction underlying a risk management
strategy, primarily whether or not the instrument qualified as a hedge,
determined which accounting method was used.
In order to qualify for hedge accounting, the derivative instrument must be
effective as a hedge and designated as such.
Deferral accounting was used for the following types of transactions (if the
instrument qualified as a hedge): future crude oil and natural gas production;
fixed-price crude oil and natural gas purchase and sale commitments; U.S. dol-
lar-denominated debt issued by a foreign subsidiary; debt denominated in a
foreign currency; and anticipated foreign currency commitments. Under this
method, deferred gains and losses were included in other assets or accrued li-
abilities until the designated underlying item was recognized in income. Rec-
ognized gains and losses were recorded in sales and other operating revenues,
other revenues or trade purchases depending on the underlying item associated
with the derivative. Instruments typically used in these transactions were
crude oil and natural gas swap and price collar contracts and some foreign
currency swap, forward and option contracts.
The accrual method of accounting was used for interest rate swap agreements
entered into by the company which convert the interest rate on fixed-rate debt
to a variable rate. Under the accrual method, each net payment or receipt due
or owed under the derivative was recognized in income in the period to which
the payment or receipt relates. Amounts to be paid/received under these
agreements were recognized as an adjustment to interest expense. The related
amounts payable to/receivable from the counterparties were included in other
accrued liabilities.
The fair value method of accounting was used for any derivative instrument
that did not qualify as a hedge. The fair value method, whereby gains and
losses associated with changes in fair value of a derivative instrument were
recognized currently in income or in accumulated other comprehensive income,
was used for the following derivative instruments: foreign currency forward
and option contracts associated with anticipated future cash flows related to
overseas operations, and foreign currency swap contracts associated with
foreign-denominated intercompany debt with maturities exceeding one year.
Changes in fair value of all transactions accounted for under this method were
recognized currently in income and reported as other revenues.
Under all methods of accounting, the cash flows related to any recognized
gains or losses associated with derivative instruments were reported as cash
flows from operations.
44
Notes to Consolidated Financial Statements
If a derivative instrument designated as a hedge was terminated prior to
expected maturity, gains or losses were deferred and included in income when
the underlying hedged item was recognized in income.
When the designated item associated with a derivative instrument matured,
was sold, extinguished or terminated, gains or losses were recognized as part
of the gain or loss on sale or settlement of the underlying item. When a
derivative instrument was associated with an anticipated transaction that was
no longer expected to occur, the gain or loss on the derivative was recognized
immediately in income.
Reclassifications
Certain previously reported amounts have been restated to conform to
classifications adopted in 2000.
Note 3 Relationship with BP and Other Related Party Transactions
Following the acquisition of ARCO by BP on April 18, 2000, BP and certain of
its affiliates began providing certain senior management services, legal
services, tax services, risk management and various other corporate services
to ARCO. The incremental cost of these services is not material and is not
included in the financial statements of ARCO.
ARCO participates in BP's cash management system, where the bank sends daily
notification of checks presented for payment. BP transfers funds from other
sources to cover the checks presented for payment. This program generally
results in book overdrafts as a result of checks outstanding. At December 31,
2000, these book overdrafts have been reclassified to accounts payable.
Sales to and purchases from BP or its subsidiaries consisted primarily of
the sale or purchase of petroleum liquids and natural gas. The sales to other
related parties primarily included sales to Southern Company Energy Marketing
(SCEM), an equity affiliate of Vastar Resources, Inc. (Vastar) and consisted
of sales of natural gas produced by Vastar. Vastar sold its interest in SCEM
in September, 2000.
Sales to related parties were as follows:
Year Ended December
31,
(millions) 2000 1999 1998
- --------------------------------------------------------
BP $ 1,600 $ -- $ --
Southern Company Energy Marketing 820 807 708
Other 87 -- --
---------------------
$ 2,507 $ 807 $ 708
=====================
Purchases from related parties were as follows:
Year Ended December
31,
(millions) 2000 1999 1998
- -------------------------------------------------------
BP $ 2,586 $ -- $ --
Southern Company Energy Marketing 71 77 84
Other 10 -- --
--------------------
$ 2,667 $ 77 $ 84
====================
ARCO and its subsidiaries will join with BP America Inc. (BP America), a
subsidiary of BP, in filing a consolidated federal income tax return for
periods subsequent to the acquisition of ARCO by BP. ARCO and BP America are
parties to a tax sharing agreement which requires ARCO as a member of BP
America's consolidated tax group to pay its share of the group's federal
income taxes and certain state and local taxes to BP America. ARCO's share of
these taxes is generally the amount of federal income tax it would have to pay
if ARCO and its subsidiaries filed tax returns as a separate tax group.
45
Notes to Consolidated Financial Statements
ARCO entered into a long-term deposit agreement with BP America in which the
initial deposit consisted of the proceeds from the sale of the Alaskan oil and
gas businesses. Subject to the provisions of early termination the funds will
continue to be on deposit until January 1, 2002. In September 2000, ARCO
withdrew $1.5 billion to purchase Vastar's publicly held minority
stockholding. The interest rate is tied to the LIBOR rate or such other rate
as may be agreed between the parties.
Note 4 Sale of Alaskan Operations
In the second quarter of 2000 ARCO completed the sale of its Alaskan
operations, comprising oil and gas production, crude oil marine transportation
and related crude oil inventory, for proceeds totaling approximately
$6.2 billion and realized an after-tax gain of approximately $1.8 billion. The
net book value of those assets at the time of the sale was approximately $3.2
billion. The gain on the inventory portion of the sale included a $69 million
after-tax gain from LIFO inventory liquidation. The results of the Alaskan oil
and gas producing and marine transportation operations through the dates of
sale are included in ARCO's twelve-month results ended December 31, 2000.
In the third quarter of 2000 ARCO sold its Alaskan pipeline operations,
thereby completing the sale of all Alaskan operations mandated by the Federal
Trade Commission in obtaining approval for the acquisition of ARCO by BP. ARCO
received proceeds of $308 million and recorded an after-tax loss of $34
million. The results of the Alaskan pipeline operations through the date of
sale are included in ARCO's twelve-month results ended December 31, 2000.
The following table sets forth the operating results for the Alaskan oil and
gas producing, pipeline and marine transportation businesses included in
ARCO's financial statements for the periods indicated.
Year Ended December 31,
(millions) 2000 1999 1998
- ------------------------------------------------------------------------------
Revenues
Sales and other operating revenues* $ 1,209 $ 1,822 $ 1,538
-----------------------
Total revenues 1,034 1,881 1,595
-----------------------
Expenses
Operating expenses 146 372 447
Depreciation, depletion and amortization 135 363 352
Exploration expenses 23 50 46
Taxes other than income taxes 110 239 211
Interest 38 9 10
-----------------------
Total expenses 452 1,033 1,066
-----------------------
Income from continuing operations before income taxes
and minority interest $ 582 $ 848 $ 529
=======================
* Before elimination of intercompany transfers $ 861 $ 1,713 $ 1,334
=======================
Note 5 Sale of Certain Lower 48 Pipeline Assets
In order to obtain approval for the acquisition of ARCO by BP, the Federal
Trade Commission also required that ARCO sell certain Lower 48 pipeline
assets. The sale of those assets was completed in August 2000 for net proceeds
totaling approximately $314 million and ARCO recorded an after-tax gain on the
sale of approximately $8 million in the third quarter of 2000. The net book
value of the Lower 48 pipeline assets sold was approximately $304 million.
46
Notes to Consolidated Financial Statements
Note 6 Merger Agreement between ARCO and Vastar
On September 15, 2000, Vastar's common stock minority shareholders approved
the merger agreement between ARCO and Vastar. Following the approval,
18,252,609 shares of Vaster common stock were purchased by ARCO at a price of
$83 per share for a total purchase price of $1,618 million (including $103
million primarily for the buyout of employee stock options then outstanding).
Vastar is now a 100% owned subsidiary of ARCO.
Note 7 Segment Information
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." ARCO has
two reportable segments: exploration and production (E&P) and refining and
marketing (R&M). The segments were determined based upon types of products
produced/sold by each segment. Segment performance is evaluated based upon net
income, excluding interest expense.
The E&P segment is an aggregation of several business units engaged in one
or more of the following: the worldwide exploration, development and
production of petroleum liquids (crude oil, condensate and natural gas
liquids) and natural gas; the purchase and sale of petroleum liquids and
natural gas, and prior to the sale discussed in Note 4, the transportation via
pipeline of petroleum liquids within the State of Alaska. The company's
investments in the LUKARCO joint venture and LUKOIL common stock are included
in the E&P segment as well.
The R&M segment comprises the refining of crude oil, primarily from the
North Slope of Alaska; the marketing of petroleum products, primarily in the
West Coast region of the U.S.; and, prior to the sale discussed in Note 4, the
transportation of petroleum liquids and petroleum products via ocean-going
tankers, primarily between Alaska and the West Coast. The company's equity
investment in Zhenhai Refining and Chemical Company is included in the R&M
segment as well.
Revenue from other operating segments is attributable to the pipeline
transportation and storage of petroleum liquids and petroleum products in the
48 contiguous United States and operations of an aluminum business.
47
Notes to Consolidated Financial Statements
Intersegment sales were made at prices approximating current market value.
Segment Information
2000
-----------------------------------------------------------
Exploration Refining & Unallocated
Millions & Production Marketing All Other Items Totals
- ----------------------------------------------------------------------------------------
Sales and other
operating revenue:
U.S. $ 5,480 $ 10,157 $ 510 $ - $ 16,147
International 2,132 74 - 5 2,211
Intersegment revenues (853) - - (5) (858)
-----------------------------------------------------------
Total 6,759 10,231 510 - 17,500
Income from equity
affiliates 41 (4) 10 - 47
Interest revenue 70 40 5 365 480
Interest expense - - - 479 479
Depreciation, depletion
and amortization 1,331 260 19 7 1,617
Income tax expense
(benefit) 1,660 156 33 (220) 1,629
Net income (loss) (b) 3,400 271 47 (692)(a) 3,026
Investment in equity
affiliates 1,233 206 60 (15) 1,484
Property, plant and
equipment (net):
U.S. 5,525 2,725 424 53 8,727
International 5,968 26 - - 5,994
Additions to fixed
assets 1,714 334 30 - 2,078
Segment assets 14,367 4,427 836 5,320 24,950
1999
- ----------------------------------------------------------------------------------------
Sales and other
operating revenue:
U.S. $ 5,045 $ 6,941 $ 46 $ - $ 12,032
International 1,977 59 - 10 2,046
Intersegment revenues (1,563) - (4) (10) (1,577)
-----------------------------------------------------------
Total 5,459 7,000 42 - 12,501
Income from equity
affiliates 20 - 36 - 56
Interest revenue 30 25 - 71 126
Interest expense - - - 398 398
Depreciation, depletion
and amortization 1,501 268 9 7 1,785
Income tax expense
(benefit) 366 334 52 (219) 533
Net income (loss) 938 593 87 (196)(a) 1,422
Investment in equity
affiliates 972 190 342 4 1,508
Property, plant and
equipment (net):
U.S. 7,735 3,225 170 101 11,231
International 7,212 23 - - 7,235
Additions to fixed
assets 2,225 481 5 16 2,727
Segment assets 18,752 4,695 916 1,909(c) 26,272
1998
- ----------------------------------------------------------------------------------------
Sales and other
operating revenue:
U.S. $ 4,374 $ 5,457 $ 156 $ - $ 9,987
International 1,562 27 - 14 1,603
Intersegment revenues (1,179) (14) (80) (14) (1,287)
-----------------------------------------------------------
Total 4,757 5,470 76 - 10,303
Income from equity
affiliates 25 19 34 - 78
Interest revenue 18 5 - 96 119
Interest expense - - - 259 259
Depreciation, depletion
and amortization 1,239 252 18 26 1,535
Income tax expense
(benefit) (563) 145 65 (298) (651)
Net income (loss) (616) 281 111 676(a) 452
Investment in equity
affiliates 661 219 344 11 1,235
Property, plant and
equipment (net):
U.S. 7,420 2,939 432 132 10,923
International 7,824 15 - - 7,839
Additions to fixed
assets 3,020 488 38 5 3,551
Segment assets 18,203 3,826 1,119 2,051(c) 25,199
- --------
(a) Includes: income from discontinued operations of $179 in 1998;
gain on disposition of discontinued operations of $89, $77 and
$928 in 2000, 1999 and 1998, respectively; and extraordinary
loss of $152 in 2000.
(b) Includes gain/(loss) on sale of Alaska oil and gas businesses and pipelines
of $1,809, $(6), and $8, allocated to E&P, R&M and other, respectively.
(c) Includes assets of discontinued operations of $67 (1999) and
$339 (1998).
48
Notes to Consolidated Financial Statements
Note 8 Acquisition of Union Texas Petroleum Holdings, Inc.
In June 1998, ARCO completed its tender offer for all outstanding common
shares of Union Texas Petroleum Holdings, Inc. (UTP) for approximately $2.5
billion, or $29 per share in cash. ARCO also purchased in a tender offer
1,649,500 shares of UTP's 7.14% Series A Cumulative Preferred Stock for
approximately $200 million, or $122 per share in cash. UTP was a U.S.-based,
non-integrated oil and gas company with substantially all of its oil and gas
producing operations conducted outside of the U.S. in the United Kingdom
sector of the North Sea, Indonesia, Venezuela and Pakistan.
The acquisition was accounted for as a purchase. The results of operations
of UTP are included in the consolidated financial statements of ARCO as of
July 1, 1998. The cost of the acquisition was allocated on the basis of the
estimated fair value of the assets acquired and liabilities assumed and there
are no contingencies or other matters that could affect the allocation of the
purchase cost.
Liabilities assumed included employee termination costs of $90 million and
other costs associated with the merging of UTP's businesses into ARCO's
operations, such as lease and other contract cancellation costs, totalling
$18 million, of which $7 million were non-cash charges. All cash costs were
paid by December 31, 2000.
The following unaudited pro forma summary presents information as if UTP had
been acquired as of the beginning of ARCO's fiscal year 1998. The pro forma
amounts include certain adjustments, primarily to recognize depreciation,
depletion and amortization based on the allocated purchase price of UTP
assets, and do not reflect any benefits from economies which might be achieved
from combining operations. The pro forma information does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations of the combined companies:
Millions, except per share amounts 1998
- -----------------------------------------------------------------------------
Sales and other operating revenues $ 10,570
--------
Income (loss) from continuing operations before extraordinary item $ (702)
Income from and gains on discontinued operations 1,107
Extraordinary loss -
--------
Net income $ 405
--------
Earnings (loss) per share
Basic
Continuing operations $ (2.19)
Discontinued operations 3.45
Extraordinary loss -
--------
Net income $ 1.26
--------
Diluted
Continuing operations $ (2.19)
Discontinued operations 3.45
Extraordinary loss -
--------
Net income $ 1.26
--------
Note 9 Discontinued Operations
Coal
In the second quarter of 2000, ARCO disposed of its remaining coal assets in
Australia. Upon the sale of those assets, a provision originally established
in 1998 for the estimated loss on sale of U.S. and Australian coal assets was
reduced resulting in an after-tax gain of $89 million.
49
Notes to Consolidated Financial Statements
In the first quarter of 1999, ARCO disposed of its interests in two
Australian coal mines. ARCO disposed of its 80% interest in the Gordonstone
coal mine and its 31.4% interest in the Blair Athol Joint Venture. At
December 31, 1999, the carrying value of the remaining Australian coal assets
was $67 million and was included as net assets of discontinued operations on
the balance sheet.
In June 1998, ARCO disposed of its U.S. coal operations in a transaction
with Arch Coal. Operations disposed of included the Black Thunder and Coal
Creek mines in Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest
in three mines in Utah. The Colorado and Utah mines were sold outright. ARCO
contributed its Wyoming coal operations and Arch Coal transferred various of
its coal operations into a new joint venture that is 99% owned by Arch Coal
and 1% owned by ARCO.
In 1998, ARCO recorded a $92 million provision for the estimated loss on the
disposal of the U.S. and Australian coal assets. In 1999, upon completion of
the Australian sales noted above, the provision was reduced, resulting in an
after-tax gain of $22 million.
Chemicals
In July 1998, ARCO tendered its entire interest of 80 million shares of ARCO
Chemical Company common stock to Lyondell Chemical Company (Lyondell) for
$57.75 per share, or total cash proceeds of approximately $4.6 billion. After
deferral of $313 million of the pre-tax gain, ARCO recorded an after-tax gain
of approximately $1.1 billion in 1998 from the sale of the shares.
The $313 million deferral represents the estimated discounted present value
of the difference, over the remaining term of an above-market MTBE contract
between ARCO and ARCO Chemical, between the contract price and the spot market
price for MTBE. The deferral is being amortized over the remaining term of the
contract, ending in 2002, on the basis of annual volume over total contracted
volume.
In 1999, adjustments for tax benefits resulted in the recording of an addi-
tional after-tax gain of $59 million on the disposition of ARCO Chemical.
At the time of the acquisition of UTP, ARCO determined it would sell UTP's
petrochemical business. Accordingly, in 1998, ARCO recorded a $33 million af-
ter-tax provision for loss on the sale of the assets. If depreciation had not
been suspended for the last six months of 1998, the petrochemical business
would have had a loss of $5 million for 1998. In March 1999, ARCO sold the UTP
petrochemical business and recorded an additional loss of $4 million.
Revenues and net income from discontinued operations were as follows:
Millions 2000 1999 1998
- --------------------------------------------
Revenues:
ARCO Chemical $ - $ - $ 1,990
Coal operations $ 56 $ 97 $ 338
UTP petrochemical $ - $ 25 $ 58
Net income:
ARCO Chemical $ - $ - $ 170
Coal operations - - 9
UTP petrochemical - - -
--------------------
$ - $ - $ 179
====================
Gain on disposition:
ARCO Chemical $ - $ 59 $ 1,053
Coal operations 89 22 (92)
UTP - (4) (33)
--------------------
$ 89 $ 77 $ 928
====================
50
Notes to Consolidated Financial Statements
Note 10 Accounting Changes
Effective January 1, 1999, ARCO adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and SOP 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 states that costs of start-up activities should be expensed as
incurred. The implementation of SOP 98-5 did not have a material cumulative
effect on ARCO's results of operations (less than $0.01 per share). SOP 98-1
establishes criteria for determining how the costs of developing or obtaining
internal-use computer software should be accounted for. SOP 98-1 was adopted
prospectively and therefore there was no cumulative effect of adoption.
Note 11 Restructuring Costs
During 2000 the company recorded restructuring costs of $742 million before
tax in conjunction with the merger into BP (See Note 1), comprised of the
following:
Personnel terminations................................................. $366
Facilities closure..................................................... 88
Stock-related compensation............................................. 98
Merger costs........................................................... 101
UK shutdown costs...................................................... 58
Other shutdown costs................................................... 31
----
$742
====
Personnel termination costs relate to the severance of approximately 2,050
employees, primarily at the corporate headquarters and Vastar, a technical
support center in Texas, and various operating units worldwide. This did not
include costs related to the termination of foreign national employees. This
represents specific employee terminations identified as of December 2000;
further charges may be necessary in future periods if additional terminations
become known.
Additionally, approximately 700 terminations were identified related to
Alaskan oil and gas and lower 48 pipeline operations sold during 2000. These
costs were included as part of the net gain on sale of those operations.
The following table summarizes the charges related to the terminations that
resulted from ARCO's merger into BP:
Funded Unfunded
Short-term Long-term Long-term
($ millions) Terminations Benefits(a)Benefits(b) Benefits(c)Total
- -------------------------------------------------------------------------------
Reported as
restructuring costs.... 2,050 $118 $199 $49 $366
Reported with gain on
sale of assets......... 700 30 66 -- 96
----- ---- ---- --- ----
Total.................. 2,750 $148 $265 $49 $462
===== ==== ==== === ====
- --------
(a) Severance payments and ancillary benefits such as relocation and
outplacement.
(b) Net increase in pension benefits to be paid from assets of qualified
plans.
(c) Net increase in non-qualified pension benefits and other postretirement
benefits to be paid from Company funds.
Through December 31, 2000, approximately 1,530 employees have been terminated
and approximately $84 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. The remaining severance and ancillary
benefits are expected to be paid by the second quarter 2002.
A reserve of $88 million was established for office space and facilities,
primarily in Los Angeles and Houston, that will be vacated with no future
economic benefit. Cash payments will be made through the remaining terms of
the leases, the longest (and largest) of which extends to 2012.
51
Notes to Consolidated Financial Statements
The charge of $98 million for stock-related compensation related to
compensation benefits from contingent restricted stock and dividend share
credits on stock options granted to executives and key employees. The
benefits, which ordinarily would have been reported as compensation expense in
future periods, were accelerated upon the change of control of the company.
Merger costs represent costs directly related to the consummation of the
merger, primarily for investment and legal consultants, which have been paid.
The remainder of the unusual items charge is comprised of shutdown costs
(such as foreign national terminations and other location-specific costs) for
offices in the United Kingdom and other worldwide locations.
Through December 31, 1999, the company had previously established reserves
totaling $251 million for the costs of terminating 1,250 employees. $103
million related to short-term benefits such as severance payments and
ancillary benefits such as relocation and outplacement; $148 million related
to pension and other postretirement benefits. Through December 31, 2000,
approximately 1,200 employees have been terminated and approximately $97
million of severance and ancillary benefits have been paid and charged against
the short-term benefit accrual. The remaining employees will terminate under
the 2000 merger change of control severance program with the previously
established reserves deemed adequate.
Union Texas Petroleum Holdings, Inc. (UTP) Restructure.
Through December 31, 2000, the company established a $90 million provision for
the termination of 357 employees from the integration of UTP into ARCO's
operations. As of December 31, 2000, ARCO had terminated 355 of the employees
and had paid out a total of $85 million in severance benefits.
Note 12 Inventories
Inventories are recorded when purchased, produced or manufactured and are
stated at the lower of cost or market. In 2000, approximately 75% of
inventories, excluding materials and supplies, were determined by the last-in,
first-out (LIFO) method. Materials and supplies and other non-LIFO inventories
are determined predominantly on an average cost basis.
Total inventories at December 31 comprised the following:
Millions 2000 1999
- ---------------------------------------------------
Crude oil and petroleum products $ 147 $ 199
Other products 113 26
Materials and supplies 114 205
-----------------
Total $ 374 $ 430
=================
The excess of the current cost of inventories over book value was
approximately $236 million and $246 million at December 31, 2000 and 1999,
respectively.
Note 13 Investments
At December 31, 2000 and 1999, investments in debt securities were primarily
composed of U.S. Treasury securities and corporate debt instruments.
Maturities generally ranged from one month to ten years. These investments are
classified as short or long term depending on maturity. ARCO's investments in
LUKOIL common stock and Zhenhai Refining and Chemical Company convertible
bonds were included in other investments and long-term receivables. At
December 31, 2000 and 1999, all investments were classified as available-for-
sale and were reported at fair value, with unrealized holding gains and
losses, net of tax, reported in accumulated other comprehensive income.
52
Notes to Consolidated Financial Statements
The following summarizes investments at December 31:
Millions 2000 1999
- --------------------------------------------------------
Aggregate fair value $ 1,395 $ 1,501
Gross unrealized holding losses 2 7
Gross unrealized holding gains (218) (376)
----------------------
Amortized cost $ 1,179 $ 1,132
======================
Investment activity for the years ended December 31 was as follows:
Millions 2000 1999
- ------------------------------------
Gross purchases $ 6,805 $ 20,269
Gross sales 848 746
Gross maturities 5,910 19,439
Gross realized gains and losses were insignificant and were determined by the
specific identification method.
[LOGO OF ARCO]
Note 14 Fixed Assets
Property, plant and equipment at December 31 was as follows:
2000 1999
Millions Gross Net Gross Net
- ---------------------------------------------------------
Exploration & production $22,383 $11,493 $33,490 $14,947
Refining & marketing 5,362 2,751 6,024 3,248
Other operations 618 424 279 170
Unallocated 160 53 264 101
-------------------------------
Total $28,523 $14,721 $40,057 $18,466
===============================
Expenses for maintenance and repairs for 2000, 1999 and 1998 were $244
million, $292 million and $387 million, respectively.
In 2000, ARCO recorded an impairment charge of $286 million before tax
primarily related to several Latin American oil fields along with smaller
impairments of properties in the United States and Europe.
Note 15 Short-term Borrowings and Bank Credit Facilities
Notes payable consist primarily of ARCO's commercial paper issued to a variety
of financial investors and institutions and any amounts outstanding under ARCO
credit facilities. There were no short-term notes payable outstanding at
December 31, 2000. The weighted average interest rate on notes payable
outstanding at December 31, 1999 was 6.0%. In April 2000, following the
acquisition of ARCO by BP, ARCO's $3.0 billion unused committed bank credit
facility was terminated.
53
Notes to Consolidated Financial Statements
Note 16 Long-term Debt
Long-term debt at December 31 comprised the following:
Millions 2000 1999
- ------------------------------------------------------------
5.55%, due in 2003 $ 500 $ 500
5.9%, due in 2009 500 500
8 1/4%, due in 2022 70 245
8 1/2%, due in 2012 178 178
8 3/4%, due in 2032 34 159
9%, due in 2021 15 209
9%, due in 2031 28 97
9 1/8%, due in 2011 253 253
9 1/8%, due in 2031 28 155
9 7/8%, due in 2016 36 181
10 7/8%, due in 2005 410 410
Series A Medium-Term Notes,(c) 9.37%(a) 77 84
Series B Medium-Term Notes,(d) 8.18%(a) 250 250
Variable rate, due in 2031, 3.57%(b) - 265
Variable rate, due in 2032, 4.15%(a) 108 108
Capital Construction Fund, 7.00%(e) 490 391
Vastar:
Commercial paper, 6.64%(b) - 226
6% Putable/Callable Notes, due in 2010 - 100
6.39%, due in 2008 50 50
6 1/2%, due in 2009 299 299
6.95%, due in 2006 75 75
6.96%, due in 2007 75 75
8.75%, due in 2005 150 150
Union Texas Petroleum:
6.66%, due in 2002 through 2007 100 100
7.40%, due in 2038 150 150
8 3/8%, due in 2005 125 125
8 1/2%, due in 2007 75 75
Other 318 299
-----------------
Total, including debt due within one year 4,394 5,709
-----------------
Less debt due within one year 304 11
-----------------
Long-term debt $ 4,090 $ 5,698
=================
- --------
(a) Weighted average interest rate at December 31, 2000.
(b) Weighted average interest rate at December 31, 1999.
(c) Maturities vary through 2011.
(d) Maturities vary through 2012.
(e) The Capital Construction Fund is a related party. Maturities vary through
2032.
Maturities for the five years subsequent to December 31, 2000, are as
follows:
Millions 2001 2002 2003 2004 2005
- ----------------------------------------------
Maturities $ 304 $ 135 $ 500 $ 3 $ 685
During 2000, Vastar's $1.1 billion commercial paper program and $1.1 billion
revolving credit facility were terminated.
In April 1998, Vastar issued $100 million of 6% Putable/Callable Notes due
April 20, 2010 Putable/Callable April 20, 2000. In 1998, Vastar also entered
into an interest rate swap covering the Putable/Callable Notes, which
effectively changed the 6% fixed rate to a floating rate. The effective
interest rate paid on these notes, which were redeemed in 2000, was 6.17%. The
financial impact of swaps in 1999 and 1998 was immaterial.
54
Notes to Consolidated Financial Statements
Extraordinary Loss on Extinguishment of Debt
ARCO incurred a loss of $243 million before tax, or $152 after tax, on early
retirement of long-term debt during 2000.
No long-term debt was denominated in a foreign currency at December 31,
2000. Approximately $3 million of long-term debt was denominated in foreign
currencies at December 31,1999.
No material amounts of long-term debt are collateralized by ARCO assets.
Note 17 Interest
Interest for the years ended December 31 comprised the following:
Millions 2000 1999 1998
- -------------------------------------------------------
Long-term debt $ 403 $ 413 $ 322
Short-term debt 86 113 158
Other(a) 56 38 (115)
-------------------------
545 564 365
Capitalized interest (66) (166) (106)
-------------------------
Total interest expense $ 479 $ 398 $ 259
=========================
Total interest paid in cash $ 513 $ 377 $ 248
=========================
Interest income(b) $ 480 $ 126 $ 119
=========================
- --------
(a) Includes interest to BP of $53 in 2000 and a credit of $153 for interest
on a tax refund in 1998.
(b) Includes $305 of interest income from BP.
Note 18 Financial Instruments and Fair Value
ARCO does not hold or issue financial instruments for trading purposes.
Prior to the acquisition of ARCO by BP, ARCO entered into various types of
foreign currency forward, option and swap contracts. Foreign currency forward
contracts were used to minimize foreign exchange exposures associated with
U.S. dollar-denominated debt issued by a foreign subsidiary, anticipated
foreign currency commitments and anticipated future cash flows related to
overseas operations.
Gains and losses on foreign currency forward contracts covering anticipatory
cash flows were recognized currently as other income or expense. Gains and
losses on foreign currency swaps associated with intercompany debt were
recognized currently in income and offset foreign exchange gains and losses on
the underlying intercompany loans. Gains and losses on other foreign currency
contracts were generally deferred and offset the transactions being hedged.
Prior to the acquisition of ARCO by BP, ARCO also used various hedging
arrangements to manage the exposure to price risk for future natural gas and
crude oil transactions. Gains and losses resulting from those transactions
were deferred and included in other assets or accrued liabilities until
realized in sales and other operating revenues as the physical production
required by the contracts was delivered.
55
Notes to Consolidated Financial Statements
At December 31, the carrying value and estimated fair value of ARCO's
financial instruments are shown as assets (liabilities) in the table below:
2000 1999
----------------- ------------------
Carrying Fair Carrying Fair
Millions Value Value Value Value
- ------------------------------------------------------------------------
Non-derivatives:
Short-term investments $ 202 $ 202 $ 264 $ 264
Equity method investments 1,484 1,434 1,508 1,472
Other investments and long-term
receivables 1,660 1,660 1,660 1,660
Notes payable -- -- (1,672) (1,672)
Long-term debt, including current
maturities (4,394) (4,654) (5,709) (5,920)
Derivatives:
Foreign currency forwards $ -- $ -- $ 2 $ 2
Oil and gas options and swaps -- -- (20) (19)
Oil and gas futures -- -- 21 18
Commodity futures -- -- 2 1
Commodity options 14 6 7 15
Short-term investments are carried at fair value. The fair value of notes
payable approximates carrying value due to its short-term maturities. Equity
method investments and other investments and long-term receivables were valued
at quoted market prices if available. For unquoted investment securities, the
reported fair value was estimated on the basis of financial and other
information. The fair value of ARCO's long-term debt was estimated based on
the quoted market prices for the same or similar issues or on the current
rates offered to ARCO for debt of the same remaining maturities. The fair
value of foreign currency contracts and interest rate swaps represented the
amount to be exchanged if the existing contracts had been settled at year end
and was estimated based on market quotes.
ARCO is exposed to credit risk in the event of nonperformance by the
counterparties. ARCO does not generally require collateral or other security
to support these financial instruments. The counterparties to these
instruments are major institutions deemed creditworthy; ARCO does not
anticipate nonperformance by the counterparties.
[LOGO OF ARCO]
Note 19 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.
ARCO has also guaranteed all of LUKARCO's obligations associated with the
Caspian Pipeline project, which amount to 25% of all funding requirements for
this project. The current estimates of total project funding requirements are
between $2.4 to $2.6 billion.
Following the March 1989 Exxon Valdez oil spill, numerous federal, state and
private plaintiff lawsuits were brought against Exxon (now ExxonMobil),
Alyeska Pipeline Service Company (Alyeska) and Alyeska's owner companies,
including ARCO Transportation Alaska, Inc., owned by ARCO until the FTC-
mandated sale to Phillips Petroleum in April 2000. While all of the federal,
state and private plaintiff lawsuits have been settled, certain issues
relating to liability for the spill remain unresolved between Exxon and
Alyeska (including its owner companies).
Lawsuits, including purported class actions and actions by governmental
entities, are pending or threatened against ARCO and others seeking damages,
abatement of housing units, and compensation for medical problems arising out
of the presence of lead-based paint in certain housing units. ARCO is unable
to predict the scope or amount of any such liability.
The State of Montana, along with the United States and the Salish and
Kootenai Tribes, have been seeking recovery from ARCO for alleged injuries to
natural resources resulting from mining and mineral processing businesses
formerly operated by Anaconda. In 1998, ARCO entered into two consent decrees,
which were approved by the court in 1999,
56
Notes to Consolidated Financial Statements
settling all of the natural resources damage claims of the United States and
the tribes and the bulk of such claims of the State of Montana. Remaining for
disposition are the State's claims for $206 million of restoration damages at
three sites.
ARCO is subject to other loss contingencies pursuant to federal, state and
local environmental laws and regulations that require ARCO to do some or all
of the following:
. Remove or mitigate the effects on the environment at various sites from
the disposal or release of certain substances;
.Perform restoration work at such sites; and
.Pay damages for loss of use and non-use values.
The federal agencies involved with the sites include the Department of the
Interior, Department of Justice and Environmental Protection Agency.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federal- and state-managed sites as well as other clean-up sites including
service stations, refineries, terminals, third-party landfills, former nuclear
processing facilities, sites associated with discontinued operations and sites
previously owned by ARCO or predecessors. This comprises 148 sites for which
ARCO has been named a potentially responsible party (PRP), along with other
sites for which no claims have been asserted. 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 responsibility varies from
sole responsibility to very little responsibility.
ARCO may in the future be involved in additional assessments and cleanups.
Future costs depend on unknown factors such as:
.Nature and extent of contamination;
.Timing, extent and method of remedial action;
.ARCO's proportional share of costs; and
.Financial condition of other responsible parties.
The environmental remediation accrual is updated annually, at a minimum, and
at December 31, 2000 was $1,098 million (total of short and long-term compo-
nents). During 2000, management of the Company assessed the estimated future
costs to remediate all of the Company's environmental sites and concluded that
its best estimate of the cost to remediate such sites was greater than previ-
ously recorded. As a result the environmental reserve was increased by $521
million during 2000, of which $274 million was recognized during the fourth
quarter. As these costs become more clearly defined, they may require future
charges against earnings.
Approximately 85% 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. One
site represented 13% of the total accrual. No other site represented more than
8% of the total accrual. Substantially all amounts accrued are expected to be
paid out over the next six years.
Claims for recovery of remediation costs already incurred and to be incurred
in the future have been filed against various third parties. Many 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.
57
Notes to Consolidated Financial Statements
The operations and consolidated financial position of ARCO continue to be
affected 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.
Note 20 Taxes
See Note 3 of Notes to Consolidated Financial Statements for discussion of tax
sharing agreement with BP.
The income tax provision for the years ended December 31 comprised the
following:
Millions 2000 1999 1998
- ---------------------------------------------------------------------------
Federal:
Current $1,999 $ 26 $ (189)
Deferred (846) 322 (7)
------------------------------
1,153 348 (196)
Foreign:
Current 363 227 91
Deferred (66) (68) (486)
------------------------------
297 159 (395)
State:
Current 244 16 (14)
Deferred (65) 10 (46)
------------------------------
179 26 (60)
------------------------------
Provision (benefit) for taxes on income $1,629 $ 533 $ (651)
------------------------------
Total income taxes paid in cash(a) $2,362 $ 676 $1,417
------------------------------
- --------
(a) Includes cash taxes paid relating to the sale of discontinued operations.
A deferred tax benefit of $55 million was recorded in 2000 versus a deferred
tax expense of $189 million in 1999 and a $426 million deferred tax benefit in
1998 related to unrealized investment gains and losses included in accumulated
other comprehensive income.
Major components of the net deferred tax liability at December 31 were as
follows:
Millions 2000 1999
- --------------------------------------------------------------
Depreciation, depletion and amortization $(4,113) $(4,573)
Other (713) (510)
----------------
Total deferred tax liabilities (4,826) (5,083)
================
Dismantlement and environmental 513 619
Postretirement benefits 265 285
Foreign excess tax basis/loss carryforwards 72 92
Other 600 443
----------------
Total deferred tax assets 1,450 1,439
----------------
Valuation allowance - -
----------------
Net deferred income tax liability $(3,376) $(3,644)
================
ARCO has federal loss carryforwards of $28 million which begin expiring in
2001 ARCO has foreign loss carryforwards of $46 million, which begin expiring
in 2001.
58
Notes to Consolidated Financial Statements
Taxes other than income taxes for the years ended December 31 comprised the
following:
Millions 2000 1999 1998
- ------------------------------------
Property $108 $135 $143
Production/severance 245 237 227
Other 118 103 136
--------------
Total $471 $475 $506
==============
The domestic and foreign components of income from continuing operations
before income taxes and minority interest, and a reconciliation of income tax
expense with tax at the effective federal statutory rate for the years ended
December 31 were as follows:
2000 1999 1998
----------------------------------------------------------------------------
Millions Amount % Pretax Income Amount % Pretax Income Amount % Pretax Income
- -----------------------------------------------------------------------------------------------------
Income (loss) before
income taxes:
Domestic $4,094 85.3 $1,620 84.6 $ 96 7.5
Foreign 704 14.7 296 15.4 (1,378) (107.5)
----------------------------------------------------------------------------
Total $4,798 100.0 $1,916 100.0 $(1,282) 100.0
----------------------------------------------------------------------------
Tax at 35% $1,679 35.0 $ 671 35.0 $ (449) (35.0)
Increase (reduction) in
taxes resulting from:
Taxes on foreign income
in excess of statutory
rate 80 1.7 12 0.6 32 2.5
Affiliate stock
transactions (55) (1.1) (30) (1.6) (51) (4.0)
State income taxes (net
of federal effect) 116 2.4 17 0.9 (39) (3.0)
Tax credits (109) (2.3) (143) (7.4) (123) (9.6)
Sale of Alaskan
operations (195) (4.1) - - - -
Other 113 2.4 6 0.3 (21) (1.7)
----------------------------------------------------------------------------
Provision (benefit) for
taxes on income $1,629 34.0 $ 533 27.8 $ (651) (50.8)
----------------------------------------------------------------------------
Note 21 Employee Benefit Plans
ARCO and its subsidiaries sponsor numerous postretirement benefit plans.
Defined benefit pension plans (Pension) provide to substantially all employees
pension benefits based on years of service and the employee's compensation,
primarily during the last three years of service. Defined postretirement
benefit plans (Other) provide health care and life insurance benefits to
substantially all employees who retire with ARCO having rendered the required
years of service, and to their spouses and eligible dependents. ARCO pays for
the cost of a benchmark health maintenance organization with employees
responsible for the differential cost, if any, of their selected option. Life
insurance benefits are partially paid for by retiree contributions, which vary
based upon coverage chosen by the retiree. ARCO and BP have the right to
terminate or modify the plans at any time.
59
Notes to Consolidated Financial Statements
2000 1999
-------------------------------
Millions Pension Other Pension Other
- --------------------------------------------------------------------------
Plan obligations
Benefit obligation at January 1 $(2,263) $(574) $(2,822) $(616)
Service cost (36) (5) (51) (7)
Interest cost (147) (40) (179) (41)
Actuarial gain (loss) (151) (51) 349 45
Benefits paid 856 45 429 45
Special termination costs (248) (3) - -
Curtailment 93 38 - -
Transfer 59 - - -
Amendment (37) - - -
Divestiture - - 11 -
-------------------------------
Benefit obligation at December 31 $(1,874) $(590) $(2,263) $(574)
-------------------------------
2000 1999
-------------------------------
Millions Pension Other Pension Other
- --------------------------------------------------------------------------
Plan assets
Fair value of assets at January 1 $ 2,903 $ - $2,886 $ -
Actual return on assets (102) - 392 -
Company contributions 266 - 64 -
Benefits paid (856) - (429) -
Acquisition - - - -
Transfer/Divestiture (57) - (10) -
-------------------------------
Fair value of assets at December 31 $ 2,154 $ - $2,903 $ -
-------------------------------
Funded status
Assets greater (less) than obligations $ 280 $(590) $ 640 $(574)
Unrecognized actuarial (gain) loss 290 60 (164) 8
Unrecognized prior service cost (benefit) 79 (175) 125 (191)
Unrecognized transition obligation (128) - (173) -
-------------------------------
Total recognized $ 521 $(705) $ 428 $(757)
-------------------------------
Balance sheet recognition
Prepaid benefits $ 556 $ - $ 564 $ -
Accrued liabilities (38) (705) (205) (757)
Intangible asset 1 - 18 -
Accumulated other comprehensive income 2 - 51 -
-------------------------------
Total recognized $ 521 $(705) $ 428 $(757)
-------------------------------
The projected benefit obligation, accumulated benefit obligation (ABO), and
fair value of plan assets for pension plans with ABO in excess of plan assets
were $33, $23 and $0, respectively, at December 31, 2000, and $252, $200 and
$1, respectively, at December 31, 1999.
2000 1999
-------------------------------
Percent Pension Other Pension Other
- ---------------------------------------------------------------
Assumptions
Discount rate 7.5 7.5 7.75 7.75
Expected return on plan assets 10.0 n/a 10.5 n/a
Rate of salary progression 4.0 4.0 4.0 4.0
60
Notes to Consolidated Financial Statements
For measurement purposes, a 7% annual rate of increase in the per capita
cost of health care benefits was assumed for 1997 to 2000, 15% for 2001, and
10% for 2002, after which the rate was assumed to decrease to 5% and remain at
that level thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
2000
-----------------
Millions Increase Decrease
- -----------------------------------------------------
Total of service and interest cost $ 4 $ 3
Postretirement benefit obligation $ 44 $ 37
Million 2000 1999 1998
- -------------------------------------------------------------------------
Components of net benefit cost
Pension benefits:
Service cost $ 36 $ 51 $ 53
Interest cost 147 179 173
Expected return on plan assets (268) (289) (281)
Amortization of transition asset (25) (27) (27)
Amortization of prior service cost 8 8 7
Recognized actuarial (gain) loss 7 9 10
Curtailment (14) - -
Settlement 73 - -
Special termination costs 211 - -
------------------------
Net benefit (income) cost $ 175 $ (69) $ (65)
------------------------
Other postretirement benefits:
Service cost $ 5 $ 7 $ 7
Interest cost 40 41 39
Amortization of prior service cost (benefit) (15) (15) (15)
Curtailment (28) - -
Recognized actuarial (gain) loss - 1 -
------------------------
Net benefit (income) cost $ 2 $ 34 $ 31
------------------------
Included in pension obligations are liabilities related to non-qualified pen-
sion plans that provide retirement benefits in excess of current Internal Rev-
enue Service maximums. The company also has deferred compensation plans that
permit executives, outside directors and key employees to defer a portion of
their compensation (including bonuses). Amounts deferred accrue interest at a
defined rate and are not included as pension obligations. The liability for
deferred compensation and interest thereon was $638 million and $343 million
at December 31, 2000 and 1999, respectively, and is included in "other de-
ferred liabilities and credits" on the balance sheet. The liabilities for non-
qualified pension plans and deferred compensation are unfunded based on defi-
nitions of generally accepted accounting standards. However, to assist in
funding these liabilities, the company has invested in corporate-owned life
insurance policies. The cash surrender value of the policies supporting these
liabilities was $630 million and $572 million at December 31, 2000 and 1999,
respectively, and is included in "deferred charges and other assets" on the
balance sheet.
[LOGO OF ARCO]
Note 22 Lease Commitments
Capital lease obligations are recorded at the present value of future rental
payments. The related assets are amortized on a straight-line basis.
61
Notes to Consolidated Financial Statements
At December 31, 2000, future minimum rental payments due under leases were
as follows:
Capital Operating
Millions Leases Leases
- ----------------------------------------------------------------------------
2001 3 177
2002 3 153
2003 3 142
2004 3 76
2005 3 59
Later years 54 303
----------------
Total minimum lease payments 69 $ 910
-------
Imputed interest (rates ranging from 8% to 12%) 45
--------
Present value of minimum lease payments included in long-
term debt $ 24
----------------
Operating lease net rental expense for the years ended December 31 was as
follows:
Millions 2000 1999 1998
- --------------------------------------------------
Minimum rentals $ 159 $ 190 $ 189
Contingent rentals - - 2
Sublease rental income (23) (22) (20)
-------------------------
Net rental expense $ 136 $ 168 $ 171
=========================
No restrictions on dividends or on additional debt or lease financing exist
under ARCO's lease commitments. Under certain conditions, options exist to
purchase certain leased properties.
Note 23 Stock Options
Options to purchase shares of ARCO's common stock have been granted to exec-
utives, outside directors and key employees. The exercise price of each option
is equal to the fair market value of common stock at the date of grant. These
options become exercisable in varying installments and expire 10 years after
the date of grant. Options granted vest equally over three years. Effective
upon consummation of the merger, all options to purchase ARCO common stock
were converted into options to purchase BP ADSs, pursuant to the merger agree-
ment. Transactions during 2000, 1999 and 1998 were as follows:
Weighted Average
Exercise Price
- -----------------------------------------------------------
Balance, January 1, 1998 8,007,146 $ 56.45
Granted 1,862,840 73.73
Exercised (420,012) 49.85
Cancelled (37,647) 69.52
------------------------
Balance, December 31, 1998 9,412,327 $ 60.12
------------------------
Granted 1,234,727 57.67
Exercised (851,288) 55.32
Cancelled (42,111) 68.12
------------------------
Balance, December 31, 1999 9,753,655 $ 60.19
------------------------
Granted 1,759,148 68.81
Exercised (329,245) 58.50
Cancelled (10,079) 64.70
Converted to BP ADS options (11,173,479) 61.59
------------------------
Balance, December 31, 2000 - $ -
------------------------
62
Notes to Consolidated Financial Statements
A summary of ARCO's fixed stock options as of December 31, 2000, 1999 and
1998, was as follows:
2000 1999 1998
- ------------------------------------------------------------------------------
Shares available for option - 9,618,570 8,523,492
Options exercisable - 7,308,855 6,803,228
Weighted average exercise price of options
exercisable - $ 58.74 $ 56.01
Weighted average fair value of options granted
during the year $24.41 $ 15.46 $ 18.96
Used to calculate fair value:
Risk-free interest rate 6.42% 5.02% 5.57%
Expected life (years) 10 10 10
Expected volatility 34.21% 30.29% 23.06%
Expected dividends 4.14% 5.02% 3.85%
At December 31, 2000, there were no outstanding options to purchase ARCO com-
mon stock.
ARCO applies APB No. 25 in accounting for its fixed stock options. Accord-
ingly, no compensation cost has been recognized for options granted. The fol-
lowing table reflects pro forma net income and earnings per share had the com-
pany elected to adopt the fair value method under SFAS No. 123:
2000 1999 1998
- ------------------------------------------------------------------------------
Net income:
As reported $3,026 $ 1,422 $ 452
Pro forma $2,989 $ 1,407 $ 440
Earnings per share (diluted):
As reported - $ 4.33 $ 1.40
Pro forma - $ 4.29 $ 1.36
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options would be amortized to expense over
the vesting period, and additional options may be granted in future years.
ARCO awards contingent restricted stock to executives and key employees.
Contingent restricted stock may be converted to performance-based restricted
stock in various multiples depending on attainment of certain performance
criteria over a specified evaluation period. Restricted stock ultimately
issued is subject to a two-year restriction on transfer.
There were no new grants of contingent restricted stock in 2000. During
1999, 236,412 shares of contingent restricted stock were awarded at a weighted
average price of $56.81, net of forfeitures and retirements, and with varying
evaluation periods. During 2000, 1999 and 1998, 107,718 shares, 28,696 shares
and 135,180 shares of performance-based restricted stock were issued at
weighted average prices of $68.81, $56.81 and $73.93, respectively. As of
the date of the merger with BP, restrictions on all outstanding contingent and
performance-based restricted shares were removed. The removal of these
restrictions resulted in restricted stock expense of $18 million in 2000. In
1999 and 1998, $21 million and $10 million was recognized as expense for
performance-based restricted stock, respectively.
63
Notes to Consolidated Financial Statements
Holders of options granted prior to 1997 accrue dividend share credits
(DSCs) on all shares under option. The amount of DSCs accrued is determined
based upon the quarterly dividend rate and fair market value of ARCO common
stock as of each quarterly record date. Upon exercise of options, holders
receive additional shares of common stock equal to DSCs accumulated. A summary
of ARCO's DSC activity was as follows:
Shares
- ---------------------------------------
Balance, December 31, 1997 1,642,565
Accrued 316,486
Paid out (166,512)
Cancelled (83)
----------
Balance, December 31, 1998 1,792,456
Accrued 265,807
Paid out (323,845)
----------
Balance, December 31, 1999 1,734,418
Accrued 71,792
Paid out (148,304)
Conversion to BP ADSs (1,657,906)
----------
Balance, December 31, 2000 --
----------
During 2000, 1999 and 1998, $5 million, $34 million and $11 million was
recognized as expense for DSCs, respectively. An additional $80 million of DSC
expense was recognized in 2000 due to benefit acceleration upon change of
control of the company.
Note 24 Stockholders' Equity
Detail of capital stock as of December 31 was as follows:
2000 1999
- --------------------------------------------------
$3.00 Cumulative
convertible
preference stock, par
$1:
Shares authorized 78,089 78,089
Shares issued and
outstanding 35,437 40,869
Aggregate value in
liquidation -
(thousands) $ 2,835 $ 3,270
$2.80 Cumulative
convertible
preference stock, par
$1:
Shares authorized 833,776 833,776
Shares issued and
outstanding 402,665 493,126
Aggregate value in
liquidation-
(thousands) $ 28,187 $ 34,519
Common stock, par $2.50:
Shares authorized 600,000,000 600,000,000
Shares issued 327,436,320 326,713,278
Shares outstanding 324,711,290 323,048,817
Shares held in treasury 2,725,030 3,664,461
Changes in preference stocks were due to conversions. The $3.00 cumulative
convertible preference stock is convertible into 22.304 shares of BP ADSs. The
$2.80 cumulative convertible preference stock is convertible into 7.872 shares
of BP ADSs. Common stock of ARCO, all of which is held indirectly by BP, is
subordinate to the preference stocks for dividends and assets. The $3.00 and
$2.80 preference stocks may be redeemed at the option of ARCO for $82 and $70
per share, respectively.
64
Notes to Consolidated Financial Statements
Note 25 Supplemental Cash Flow Information
The following is supplemental cash flow information for the years ended
December 31:
Millions 2000 1999 1998
- ------------------------------------------------------------------------------
Short-term investments:
Gross sales and maturities $103 $ 168 $ 226
Gross purchases (35) (190) (259)
--------------------------------
Net cash provided (used) $68 $ (22) $ (33)
--------------------------------
Notes payable:
Gross proceeds $ 3,697 $ 12,640 $ 14,978
Gross repayments (5,371) (13,335) (14,066)
--------------------------------
Net cash provided (used) $ (1,674) $ (695) $ 912
--------------------------------
Gross noncash provisions charged to income $ 1,153 $ 247 $ 652
Cash payments of
previously accrued items (535) (669) (468)
--------------------------------
Noncash provisions greater (less) than
cash payments $ 618 $ (422) $ 184
--------------------------------
Changes in working capital -increase
(decrease) to cash:
Accounts receivable $ 93 $ (117) $ 19
Inventories 63 36 8
Accounts payable 351 (146) (60)
Other working capital 137 (427) 340
--------------------------------
$ 644 $ (654) $ 307
--------------------------------
In conjunction with the acquisition of UTP, liabilities were assumed as
follows:
Millions
- -----------------------------------------
Fair value of assets acquired $ 3,745
Cash paid (2,707)
---------
Liabilities assumed $ 1,038
---------
Excluded from the Consolidated Statement of Cash Flows for the year ended
December 31, 1998 was the issuance of 2,725,030 shares of ARCO common stock to
a consolidated subsidiary in exchange for certain property, plant and
equipment owned by the subsidiary. The transaction was recorded at fair market
value.
In October 1998, through a three-way exchange involving ARCO, Vastar and
Mobil, ARCO disposed of its California heavy crude properties. In the
transaction, an ARCO subsidiary holding the California properties traded the
California properties for Mobil's interests in producing fields and
exploration acreage in the Gulf of Mexico. Vastar then purchased the ARCO
subsidiary holding the Gulf of Mexico properties for $437 million, including
the assumption of $300 million of debt which was repaid in first quarter 1999.
[LOGO OF ARCO]
Note 26 Foreign Currency Transactions
Foreign currency transactions resulted in net losses of $12 million, $1
million and $2 million in 2000, 1999 and 1998, respectively.
65
Notes to Consolidated Financial Statements
Note 27 Earnings Per Share
Earnings per share for 2000 has been omitted from ARCO's financial statements
because ARCO had no publicly held common stock after ARCO's acquisition by BP
on April 18, 2000.
1999 1998
-------------------------------------------------
(Millions, except per share
amounts) Income Shares Per Share Income Shares Per Share
- -----------------------------------------------------------------------------------
Income (loss) from continuing
operations $1,345 $ (655)
Less: Preference stock dividends (2) (2)
-------------------------------------------------
Income (loss) from continuing
operations available to common
shareholders 1,343 322.3 $4.17 (657) 321.0 $(2.05)
===== =====
Discontinued operations 77 322.3 0.24 1,107 321.0 3.45
===== =====
Extraordinary item - loss on
extinguishment of debt
-------------------------------------------------
Total income available to common
shareholders - basic EPS $1,420 322.3 $4.41 $ 450 321.0 $ 1.40
-------------------------------------------------
Income (loss) from continuing
operations available to common
shareholders $1,343 322.3 $ (657) 321.0
Contingently issuable shares
(primarily options) 3.3 -
$3.00 Convertible preference
stock 0.6 -
$2.80 Convertible preference
stock 2 2.6 -
-------------------------------------------------
Income (loss) from continuing
operations available to common
shareholders 1,345 328.8 $4.09 (657) 321.0 $(2.05)
===== =====
Discontinued operations 77 328.8 0.24 1,107 321.0 3.45
===== =====
Extraordinary item - loss on
extinguishment of debt
-------------------------------------------------
Total income available to common
shareholders and assumed
conversions - diluted EPS(a) $1,422 328.8 $4.33 $ 450 321.0 $ 1.40
-------------------------------------------------
- --------
(a) No dilution assumed for 1998 due to antidilutive effect on loss from
continuing operations.
Note 28 Comprehensive Income
Comprehensive income comprises net income plus all other changes in equity
from nonowner sources.
The related tax effects allocated to each component of other comprehensive
income at December 31 were as follows:
Unrealized
Gain (Loss) Foreign Minimum
on Currency Pension
Millions Securities Translation Liability
- --------------------------------------------------------
2000
Pre-tax amount $ (143) $ (256) $ 49
Tax (expense) benefit 55 98 (19)
-------------------------------
Net-of-tax amount $ (88) $ (158) $ 30
-------------------------------
1999
Pre-tax amount $ 492 $ 313 $ 27
Tax (expense) benefit (189) (121) (11)
-------------------------------
Net-of-tax amount $ 303 $ 192 $ 16
-------------------------------
1998
Pre-tax amount $ (1,107) $ (30) $ 11
Tax (expense) benefit 426 12 (4)
-------------------------------
Net-of-tax amount $ (681) $ (18) $ 7
-------------------------------
66
Notes to Consolidated Financial Statements
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at December 31 were as follows:
Millions 2000 1999
- --------------------------------------------------------------
Net unrealized gain (loss) on investments $ 140 $ 228
Foreign currency translation adjustment (188) (30)
Minimum pension liability (1) (31)
--------------
Accumulated other comprehensive income (loss) $ (49) $ 167
--------------
Unrealized gains (losses) on securities related primarily to changes in the
fair value of ARCO's investment in LUKOIL common stock, which had a fair value
of $494 million, $714 million and $225 million at December 31, 2000, 1999 and
1998, respectively, versus a book value was $324 million, $342 million and
$342 million at December 31, 2000, 1999 and 1998, respectively.
[LOGO OF ARCO]
Note 29 Research and Development
Expenditures for research and development totaled $9 million, $28 million and
$45 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
[LOGO OF ARCO]
Note 30 Unaudited Quarterly Results
Millions, except per share amounts 2000 1999
- -------------------------------------------------------------------------------
Sales and other operating revenues
Quarter ended:
March 31 $ 3,993 $ 2,415
June 30 4,300 3,047
September 30 4,524 3,423
December 31 4,683 3,616
-----------------------
Total $ 17,500 $ 12,501
-----------------------
Income (loss) from continuing
operations before income taxes, minority interest and
extraordinary item
Quarter ended:
March 31 $ 902 $ 261
June 30 2,744(a)(b) 524
September 30 645 430
December 31 507 701
-----------------------
Total $ 4,798 $ 1,916
-----------------------
Net income (loss)
Quarter ended:
March 31 $ 617 $ 165
June 30 1,855(a)(b) 313
September 30 367 372
December 31 187 572
-----------------------
Total $ 3,026 $ 1,422
-----------------------
Earned (loss) per share
Quarter ended:
March 31 $ 1.87 $ 0.51
June 30 $ - $ 0.95
September 30 $ - $ 1.13
December 31 $ - $ 1.74
(a) Includes gain on sale of Alaskan operations of $2,596 ($1,815 after tax).
Additional smaller amounts were recorded in the third and fourth quarters.
See Note 4 of Notes to Consolidated Financial Statements.
(b) Includes costs related to BP merger of $639 ($391 after tax). Additional
smaller amounts were recorded in the third and fourth quarters. See Note
11 of Notes to Consolidated Financial Statements.
67
Notes to Consolidated Financial Statements
Note 31 Unaudited Subsequent Event
On March 28, 2001, ARCO's Board of Directors announced that it had elected to
redeem all of the outstanding $3.00 and $2.80 Preference Shares on April 27,
2001.
Shareholders of the $3.00 Cumulative Convertible Preference Stock will
receive a total cash payment equal to the market value of 22.304 ADSs, as
determined by the average NYSE closing prices for the BP ADSs on the last four
business days before the April 27th redemption date. The number 22.304
represents the number of BP ADSs into which each share of the $3.00 Preference
Stock is convertible through April 20, 2001.
Shareholders of the $2.80 Cumulative Convertible Preference Stock will
receive a total cash payment equal to the market value of 7.872 BP ADSs, as
determined by the average NYSE closing prices for the BP ADSs on the last four
business days before the April 27th redemption date. The number 7.872
represents the number of BP ADSs into which each share of the $2.80 Preference
Stock is convertible through April 20, 2001.
68
Supplemental Information (Unaudited)
Oil and Gas Producing Activities
The Securities and Exchange Commission (SEC) defines proved oil and gas
reserves as those estimated quantities of crude oil, natural gas, and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
Petroleum reserves are estimated by the Company's engineers. The estimates
include reserves in which ARCO holds an economic interest under production-
sharing and other types of operating agreements with foreign governments.
Reserves attributable to certain oil and gas discoveries were not considered
proved as of December 31, 2000 due to geological, technical or economic
uncertainties. Proved reserves do not include amounts that may result from
extensions of currently proved areas or from application of enhanced recovery
processes not yet determined to be commercial in specific reservoirs. Proved
reserves also do not include any reserves attributable to ARCO's 8% interest
in LUKOIL, a Russian oil company. Natural gas liquids comprise 13% of
petroleum liquid proved reserves.
ARCO has no long-term supply contracts to purchase petroleum liquids or
natural gas from foreign governments.
The most significant activity during 2000 was the sale of all ARCO's Alaskan
oil and gas properties. Changes in proved reserves for the years ended Decem-
ber 31 were as follows:
Petroleum Liquids (million barrels) Natural Gas (billion cubic feet)
-------------------------------------------------------------------------------------------------
Consolidated Consolidated
---------------------------- Other ---------------------------- Other
U.S. International Total Reserves/1/ Worldwide U.S. International Total Reserves/1/ Worldwide
- ----------------------------------------------------------------------------------------------------------------------------
Reserves at
January 1, 1998 2,131 520 2,651 48 2,699 4,988 3,417 8,405 67 8,472
------------------------------------------------------------------------------------------------------
Revisions 72 (13) 59 2 61 33 (95) (62) (1) (63)
Improved
recovery 30 - 30 - 30 6 5 11 - 11
Purchases 42 279 321 13 334 74 1,333 1,407 349 1,756
Exchanges (119) - (119) - (119) 184 - 184 - 184
Extensions and
discoveries 88 1 89 - 89 367 - 367 - 367
Production (192) (46) (238) (2) (240) (429) (325) (754) (14) (768)
Consumed - - - - - (79) (9) (88) - (88)
Sales (9) (3) (12) - (12) (27) - (27) - (27)
------------------------------------------------------------------------------------------------------
Reserves at
December 31,
1998 2,043 738 2,781 61 2,842 5,117 4,326 9,443 401 9,844
------------------------------------------------------------------------------------------------------
Revisions 119 46 165 8 173 59 (58) 1 73 74
Improved
recovery 51 4 55 - 55 47 - 47 - 47
Purchases 7 65 72 6 78 137 3 140 416 556
Extensions and
discoveries 121 - 121 - 121 380 - 380 - 380
Production (169) (56) (225) (3) (228) (460) (379) (839) (29) (868)
Consumed - - - - - (80) (11) (91) - (91)
Sales (13) (83) (96) - (96) (42) - (42) - (42)
------------------------------------------------------------------------------------------------------
Reserves at
December 31,
1999 2,159 714 2,873 72 2,945 5,158 3,881 9,039 861 9,900
------------------------------------------------------------------------------------------------------
Revisions (3) (3) (6) 5 (1) (221) (566) (787) (80) (867)
Improved
recovery 9 21 30 - 30 102 - 102 - 102
Purchases - - - - - 56 - 56 - 56
Extensions and
discoveries 16 2 18 - 18 100 20 120 - 120
Production/Consumed (82) (44) (126) (2) (128) (482) (359) (841) (27) (868)
Sales (1,648) (119) (1,767) - (1,767) (1,872) (25) (1,897) - (1,897)
------------------------------------------------------------------------------------------------------
Reserves at
December 31,
2000 451 571 1,022 75 1,097 2,841 2,951 5,792 754 6,546
------------------------------------------------------------------------------------------------------
Proved developed
reserves:
At January 1,
1998 1,821 204 2,025 7 2,032 4,467 1,643 6,110 10 6,120
At December 31,
1998 1,582 292 1,874 36 1,910 4,480 2,487 6,967 343 7,310
At December 31,
1999 1,562 365 1,927 42 1,969 4,439 2,323 6,762 330 7,092
At December 31,
2000 311 322 633 43 676 2,464 1,981 4,445 220 4,665
- --------
/1/Comprises reserves attributable to ARCO's ownership interest in equity
affiliates.
69
Supplemental Information (Unaudited)
ARCO is a contractor to an affiliate of the Venezuelan government under six
risked service contracts. ARCO, either solely or with partners, is responsible
for providing capital and technology for the redevelopment of the fields along
with operating existing production. In exchange for providing and funding
overall operation and field development, ARCO is paid a per-barrel service fee
to cover reimbursement of costs plus profit. There are two components to the
fees, which include (1) a set fee for contractual baseline production and (2)
a fee for incremental production. The fee for incremental production is based
on a sliding scale incentive mechanism, which is indexed to a basket of
international oil prices and overall field profitability.
Proved reserves and production quantities for Venezuelan operations are
recorded based on ARCO's net working interest in each of the contract areas,
"net" meaning reserves excluding royalties and interests owned by others per
the contractual arrangements. The Venezuelan government maintains full
ownership of all hydrocarbons in the fields.
ARCO reports reserve estimates to various federal government agencies and
commissions. These estimates may cover various regions of crude oil and
natural gas classifications within the United States and may be subject to
mandated definitions. There have been no reports since the beginning of the
last fiscal year of total ARCO reserve estimates furnished to federal
government agencies or commissions which vary from those reported to the SEC.
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and
amortization as of December 31 were as follows:
2000 1999 1998
---------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
--------------------------------------------------------------------------------------------------------------------
Proved properties $10,320 $9,193 $19,513 $17,112 $11,222 $28,334 $ 16,348 $ 11,345 $ 27,693
Unproved properties 880 986 1,866 428 1,153 1,581 622 1,142 1,764
---------------------------------------------------------------------------------------------------
11,200 10,179 21,379 17,540 12,375 29,915 16,970 12,487 29,457
Accumulated
depreciation,
depletion and
amortization 5,676 4,211 9,887 10,782 5,163 15,945 10,569 4,789 15,358
---------------------------------------------------------------------------------------------------
Net capitalized costs 5,524 5,968 11,492 6,758 7,212 13,970 6,401 7,698 14,099
---------------------------------------------------------------------------------------------------
Net capitalized costs of
equity affiliates* - 424 424 - 385 385 - 338 338
---------------------------------------------------------------------------------------------------
Total $ 5,524 $6,392 $11,916 $ 6,758 $ 7,597 $14,355 $ 6,401 $ 8,036 $ 14,437
---------------------------------------------------------------------------------------------------
- --------
*ARCO's share
70
Supplemental Information (Unaudited)
Costs, both capitalized and expensed, incurred in oil and gas producing
activities during the three years ended December 31 are set forth below.
Property acquisition costs represent costs incurred to purchase or lease oil
and gas properties. Exploration costs include costs of geological and
geophysical activity and drilling exploratory wells. Development costs include
costs of drilling and equipping development wells and construction of
production facilities to extract, treat and store oil and gas.
2000 1999 1998
----------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
- ------------------------------------------------------------------------------------------------------------
Property acquisition
costs:
Proved properties $ 93 $ - $ 93 $149 $ 28 $ 177 $ 235 $2,594 $2,829
Unproved
properties 18 - 18 14 5 19 72 512 584
Exploration costs 328 60 388 316 159 475 306 376 682
Development costs 856 501 1,357 875 832 1,707 1,102 1,200 2,302
----------------------------------------------------------------------------------------------
Total expenditures 1,295 561 1,856 1,354 1,024 2,378 1,715 4,682 6,397
----------------------------------------------------------------------------------------------
Costs incurred of
equity affiliates* - 54 54 - 88 88 - 499 499
----------------------------------------------------------------------------------------------
Total $1,295 $ 615 $1,910 $1,354 $1,112 $2,466 $1,715 $5,181 $6,896
----------------------------------------------------------------------------------------------
- --------
*ARCO's share
Results of operations from oil and gas producing activities (including
operating overhead) for the three years ended December 31 were as follows:
2000 1999 1998
----------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
- ------------------------------------------------------------------------------------------------------------
Revenues:
Sales $2,807 $1,937 $4,744 $1,711 $1,663 $3,374 $1,535 $1,305 $2,840
Transfers 749 - 749 1,379 - 1,379 1,077 - 1,077
----------------------------------------------------------------------------------------------
3,556 1,937 5,493 3,090 1,663 4,753 2,612 1,305 3,917
Production costs 364 348 712 463 427 890 609 332 941
Production taxes 227 77 304 308 16 324 273 56 329
Exploration expenses 259 44 303 239 148 387 272 357 629
Depreciation,
depletion and
amortization 641 575 1,216 763 676 1,439 651 517 1,168
Impairment 9 277 286 8 6 14 180 1,267 1,447
Other operating
expenses (income) 116 123 239 209 37 246 157 169 326
----------------------------------------------------------------------------------------------
Results before
income taxes 1,940 493 2,433 1,100 353 1,453 470 (1,393) (923)
Income tax
expense (benefit) 614 228 842 290 91 381 58 (532) (474)
----------------------------------------------------------------------------------------------
Results of operations
from oil and gas
producing
activities 1,326 265 1,591 810 262 1,072 412 (861) (449)
----------------------------------------------------------------------------------------------
Results from equity
affiliates* - 26 26 - 10 10 - (3) (3)
----------------------------------------------------------------------------------------------
Total $1,326 $ 291 $1,617 $ 810 $ 272 $1,082 $ 412 $ (864) $ (452)
----------------------------------------------------------------------------------------------
- --------
*ARCO's share
The difference between the above results of operations and the amounts
reported for exploration and production segment net income in Note 7 of Notes
to Consolidated Financial Statements is primarily gains or losses on asset
sales, the exclusion of non-producing exploration and production units
(Alaskan pipelines, technical support), minority interest adjustments and
restructuring costs related to oil and gas operations.
71
Supplemental Information (Unaudited)
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31 was as follows:
2000 1999 1998
-------------------------------------------------------------------------------------
Billions U.S. International Total U.S. International Total U.S. International Total
- ----------------------------------------------------------------------------------------------------------
Future cash inflows $39.0 $19.4 $58.4 $ 53.6 $ 24.6 $ 78.2 $ 21.9 $ 16.2 $ 38.1
Future development and
production costs 8.3 6.4 14.7 16.8 7.8 24.6 13.0 7.6 20.6
Future income tax
expense 10.0 3.6 13.6 12.9 5.8 18.7 2.3 2.9 5.2
-------------------------------------------------------------------------------------
Future net cash flows 20.7 9.4 30.1 23.9 11.0 34.9 6.6 5.7 12.3
10% annual discount 8.5 3.7 12.2 11.9 5.0 16.9 2.7 2.7 5.4
-------------------------------------------------------------------------------------
Standardized measure of
discounted future net
cash flows 12.2 5.7 17.9 12.0 6.0 18.0 3.9 3.0 6.9
-------------------------------------------------------------------------------------
Standardized measure of
discounted future net
cash
flows of equity
affiliates* - 0.8 0.8 - 0.5 0.5 - 0.1 0.1
-------------------------------------------------------------------------------------
Total $12.2 $ 6.5 $18.7 $ 12.0 $ 6.5 $ 18.5 $ 3.9 $ 3.1 $ 7.0
-------------------------------------------------------------------------------------
- --------
*ARCO's share
Primary changes in the standardized measure of discounted estimated future net
cash flows for the years ended December 31 were as follows:
Billions 2000 1999 1998
- -----------------------------------------------------------------------------
Sales and transfers of oil and gas, net of production
costs $(4.4) $(3.7) $ (2.7)
Extensions, discoveries and improved recovery, less
related costs 1.4 1.6 0.5
Revisions of estimates of reserves proved in prior
years:
Quantity estimates (0.8) 0.9 -
Net changes in price and production costs 12.4 17.0 (11.3)
Purchases/sales (7.3) (0.1) 3.1
Other (0.4) (0.5) (0.6)
Accretion of discount 0.9 1.0 1.7
Development costs incurred during the period 1.4 1.7 2.3
Net change in income taxes (3.0) (6.4) 2.8
--------------------
Net change $0.2 $11.5 $ (4.2)
--------------------
Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves. Future price changes are
considered only to the extent provided by contractual arrangements. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates (adjusted for
permanent differences and tax credits) to estimated future pre-tax net cash
flows related to proved oil and gas reserves, less the tax basis of the
properties involved.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Estimates of future
net cash flows presented do not represent management's assessment of future
profitability or future cash flows to ARCO. Management's investment and
operating decisions are based on reserve estimates that include proved
reserves prescribed by the SEC as well as probable reserves, and on different
price and cost assumptions from those used here.
It should be recognized that applying current costs and prices and a 10%
standard discount rate does not convey absolute value. The discounted amounts
arrived at are only one measure of the value of proved reserves.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
73
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF ARCO
SEC rules require the designation by the company of its officers who are
deemed "executive officers" for purposes of the proxy rules and insider
reporting rules. The employees named below are ARCO's executive officers as of
March 1, 2001. Designations for operating units have changed over time; names
given are those in effect at time position was held.
ROBERT A. MALONE, Age 49
President of ARCO since November 13, 2000. Presently Regional President of BP
Amoco p.l.c., and Vice President of BP America Inc. and BP Amoco p.l.c. since
August 2000. President of Alyeska Pipeline Service Company, a subsidiary of BP
America Inc., from September 1, 1996 to June 15, 2000; President of BP
Pipelines (Alaska) Inc., a subsidiary of BP America Inc., from April 1, 1994
to September 1, 1996.
JACK E. GOLDEN, Age 52
Executive Vice President of ARCO since December 2000. Group Vice President of
BP since 1997. President, BP Exploration Inc. from 1994 to 1997. Director of
Amoco (U.K.) Exploration Company since April 1999; and a Director of BP
Exploration (Alaska) Inc. since June 1999. Previously held position as a
Director of various BP subsidiaries.
JOHN R. THOMAS, Age 44
Executive Vice President of ARCO since December 2000. From May 1995 to March
1998, Mr. Thomas has held various positions with BP.
IAN SPRINGETT, Age 43
Vice President and Chief Financial Officer of ARCO since October 2000. Vice
President and Chief Financial Officer of BP America Inc. and of BP Amoco
Corporation, two wholly owned subsidiaries of BP, since October 2000. From
August 1985 to September 2000 Mr. Springett has held various positions with
BP.
74
DIRECTORS OF ARCO
Set forth below are the members of the Board of Directors of ARCO at March
1, 2001. All of the directors are employees of BP or its wholly owned
subsidiaries other than ARCO or Vastar.
ROBERT D. AGDERN 51 Chairman of ARCO since June 23, 2000 and Director
since April 18, 2000. President of ARCO from
April 18, 2000-November 13, 2000. Director and
President of BP America Inc. and BP Amoco
Corporation, two wholly owned subsidiaries of BP
from April 2000 to November 2000. Vice President
of both companies since November 2000. Vice
President and General Counsel of both companies
from April 1999-April 2000. Between 1975 and
April 1999, Mr. Agdern has held various positions
with Amoco Corporation.
DONALD E. PACKHAM 50 Director of ARCO since September 18, 2000. Vice
President, Human Resources of ARCO since August
1, 2000. Senior Vice President, Human Resources
of BP since August 1, 2000. Vice President, Human
Resources Integration from February 1999 to July
2000. From October 1993 to January 1999, Mr.
Packham held various positions with BP.
JAMES G. NEMETH 42 Director of ARCO since April 18, 2000. Vice
President and General Tax Officer of BP Amoco
Corporation since April 1999; General Tax Officer
of BP America Inc. since June 1996; Head of
Taxation of BP Australia Ltd, a wholly owned
subsidiary of BP, between October 1993 and June
1996.
75
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Executive officers and directors and "beneficial owners" of more than ten
percent of the common stock or either class of the Preference Stocks must file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (SEC) and the New York Stock Exchange
pursuant to Section 16(a).
None of the executive officers or directors own any equity securities of
ARCO. We have reviewed the reports and written representations from the
executive officers and directors. Due to inadvertent oversights, certain
employees of BP who were elected as officers and Directors of ARCO following
the merger failed to file timely reports on Form 3. In all cases, the late
report on Form 3 showed that no equity securities of ARCO were owned by any of
these employees of BP. On July 18, 2000, Form 3s were filed by the following
persons elected to their positions on April 18, 2000: Robert D. Agdern,
director and President; John F. Campbell, director and Vice President; James
G. Nemeth, Director and Vice President; Eileen A. Kamerick, Chief Financial
Officer and Vice President; David H. Welch, Executive Vice President; and
Roger E. Williams, Executive Vice President. On January 4, 2001, Form 3s were
filed by the following persons elected to their positions on the date
indicated in parentheses following their names: Robert A. Malone, President
(November 13, 2000); Donald E. Packham, Director (September 18, 2000); and Ian
Springett, Chief Financial Officer and Vice President (October 2, 2000).
76
ITEM 11. EXECUTIVE COMPENSATION
PRE-MERGER AND CHANGE OF CONTROL COMPENSATION OF CERTAIN OF ARCO'S
FORMER EXECUTIVE OFFICERS
Change of Control Benefits Received by Certain
Former ARCO Executive Officers
General
As a result of the merger of ARCO into BP, effective April 18, 2000, ARCO
employees terminated following the merger, including the former executive
officers became eligible for the benefits described herein. In accordance with
the proxy rules under the Securities & Exchange Act of 1934, described below
are the change of control benefits received by three former executive officers
of ARCO named below.
ARCO's Change of Control Arrangements Effective Upon Merger
Pursuant to the merger agreement between BP and ARCO, the consummation of the
merger was considered a change of control within the meaning of ARCO's various
change of control arrangements. BP and ARCO agreed that all of the change of
control provisions would become operative immediately following the
consummation of the merger. The merger agreement also specifically provided
that all ARCO stock-related benefits automatically would be converted into the
right to purchase or receive BP Amoco ordinary shares, which were issued in
the form of BP ADSs.
Severance Benefits
The employment of all executive officers was terminated following the change
of control. Severance benefits included:
(1) an enhancement of the normal retirement benefit, known as the "5+5" be-
cause the enhancement adds five years of age and five years of service
to the normal retirement benefit, payable in the form of a lump sum or
an annuity,
(2) a severance benefit equal to the product of one and one-half weeks of
pay for each year of continuous service, capped at 36 weeks of pay,
payable in a lump sum,
(3) payment of the executive's pro-rated target Annual Incentive Plan (AIP)
award, and
(4) the continuation of health, dental and life insurance coverage for 36
months.
Other Change of Control Benefits
All executive officers, regardless of post-merger employment status, received
the following benefits upon the merger:
(1) crediting of prospective dividend share credits (future undeclared and
unpaid dividends),
(2) vesting of a pro-rated number of shares in respect of contingent stock
awards,
(3) lifting of restrictions on restricted stock, and
(4) vesting of previously unvested stock options, other than options issued
after April 1, 1999.
In addition to the change of control-related benefits, upon termination of
employment, each of the named executive officers received normal retirement
benefits, including payments under the retirement plan, the supplementary ex-
ecutive retirement plan and the executive deferral plan, and continued to hold
previously vested options and other stock rights. The date of actual receipt
of certain of the retirement benefits depended on an individual's age and
length of service at the time of termination and on individual payout elec-
tions.
Prospective Dividend Share Credits (DSCs). Under ARCO's Executive Long-Term
Incentive Plan (LTIP), for all option grants made prior to 1997, DSCs are
credited to an optionee's account whenever dividends are declared on
77
ARCO common stock. The number of credits is computed by multiplying the
dividend rate per share times the sum of (1) the number of eligible options
and (2) the number of DSCs then accrued and then dividing the resulting number
by the stock price on the dividend record date. Upon exercise of options
having the right to DSCs, the option holder is entitled to receive an
additional number of shares equal to the number of DSCs then accrued with
respect to the options being exercised. The number of prospective DSCs yet to
be accrued for the remaining term of a particular option grant were
accelerated and vested effective April 17, 2000.
Conversion and Vesting of Contingent Restricted Stock. Under the LTIP, since
1997, grants of contingent restricted stock have been awarded having one- to
three-year performance periods. At the conclusion of the performance period,
grants of restricted stock are made in amounts ranging from zero to three
times the number of contingent shares awarded, depending on ARCO's performance
relative to a peer group of other oil and gas companies. Effective April 17,
2000 upon the change of control, a prorated number of shares of common stock
were granted based on the portion of the performance cycle completed for the
outstanding 1998 and 1999 grants of contingent restricted stock.
Restricted Stock. Under the LTIP, performance based restricted stock was
granted in 1999 and 2000, with each grant having a two-year restricted period.
Prior to the merger, dividends paid after the grant date were reinvested in
additional restricted stock. The restricted stock vested immediately upon the
consummation of the merger.
Unvested Options. All unvested options granted prior to April 1, 1999, none
of which had the right to DSCs, vested on the merger date. The unvested
options granted for 1999 in February 2000 did not vest on the merger, nor did
they have the right to DSCs. In addition, the net value of each executive's
vested options (and related DSCs) had accrued to his or her account regardless
of the change of control provisions.
Indemnification, Directors' and Officers' Insurance
BP has agreed to indemnify and provide directors' and officers' liability
insurance through April 18, 2006 for individuals who were directors or
officers of ARCO prior to April 18, 2000 for their acts or omissions in that
capacity.
78
Pre-Merger and Change of Control Summary
Compensation Table
Long-Term
Compensation
------------------
Annual Compensation Awards Payouts
------------------------------------------ ------- ----------
Other Annual ARCO ARCO All Other
Salary Compensation Options Restricted Compensation
Name & Position Year ($) Bonus ($) ($) (#) Stock (#) ($)
(2) (3) (4) (5)
------------------------------------------------------------------------------------------------------
Mike R. Bowlin 2000(1) $ 407,077 $ 345,915 $ 28,118 -- 12,977 $ 1,607,601
Chairman of the Board 1999 $ 980,000 $ 1,557,710 $ 14,377 217,329 18,220 $ 131,270
Chief Executive Officer 1998 $ 980,000 $ 740,000 $ 167,131 131,986 3,036 $ 117,722
------------------------------------------------------------------------------------------------------
Michael E. Wiley 2000(1) $ 270,000 $ 202,459 $ 13,141 -- 5,057 $ 858,297
President 1999 $ 642,308 $ 841,500 $ 16,731 96,436 7,100 $ 89,432
Chief Operating Officer 1998 $ 525,769 $ 332,500 $ 42,984 140,902 1,183 $ 59,553
------------------------------------------------------------------------------------------------------
Marie L. Knowles 2000(1) $ 207,692 $ 134,973 $ 14,804 -- 5,057 $ 729,667
Executive Vice President 1999 $ 500,000 $ 662,010 $ 13,244 74,560 7,100 $ 82,193
Chief Financial Officer 1998 $ 500,000 $ 310,000 $ 47,437 46,571 1,183 $ 67,069
Notes to Summary Compensation Table
(1) All information in this chart for the year 2000 covers the period January
1-June 1, 2000. Messrs. Bowlin and Wiley and Mrs. Knowles resigned as
officers and directors of ARCO on April 18, 2000 concurrently with the
merger of ARCO with BP Amoco, and retired from employment with ARCO on June
1, 2000.
(2) Other Annual Compensation. "Other Annual Compensation" includes amounts of
tax gross-ups for financial counseling reimbursements and for certain other
items reported under IRS rules as imputed income.
(3) Types of Option Grants. Prior to the merger of ARCO into BP Amoco, options
exercisable for common stock of ARCO were issued under ARCO's Executive
Long-Term Incentive Plan (LTIP). All information herein relates to the
number of options for ARCO common stock. Pursuant to the merger agreement,
all options for ARCO common stock became converted into rights to BP ADSs.
Two types of option grants were made under the LTIP for the years 1998 and
1999. No option grants were made for 2000 in 2001:
. re.u.ar a..ua. optio. .ra.ts made i. Fe.ruary of each year for the
precedi.. fisca. year
. specia. .ra.ts upo. promotio.s a.d other specia. circumsta.ces.
Special grants. Special grants were as follows:
Mr. Wiley
President and Chief Operating Officer........... 82,300 options October 1998
Number of Dividend Share Credits. The number of dividend share credits accrued
during each period with respect to ARCO options granted prior to 1997 are
shown below.
2000* 1999 1998
----- ------ ------
Mr. Bowlin 5,986 20,796 22,150
Mr. Wiley none none none
Mrs. Knowles 1,170 3,898 4,475
- --------
* Accrued through April 17, 2000.
79
Notes to Pre-Merger and Change of Control Summary Compensation Table
Computation of Dividend Share Credits. Prior to the merger, dividend share
credits were allocated to an optionee's account whenever dividends were
declared on common stock. The number of credits is computed by
. multiplying the dividend rate per share times
(1) the number of eligible options plus
(2) the number of dividend share credits then accrued
. and dividing the resulting number by the fair market value of the
common stock on the dividend record date.
Prior to the merger the value of the accrued dividend share credits was not
fixed until the eligible options were exercised. The value, which was
received in shares of stock or cash, was equal to the number of accrued
credits allocated to the options being exercised multiplied by the fair
market value of the common stock on the date of exercise. Until the option
exercise date the optionee had no right to their value. Following the
merger, all dividend share credits were vested and were converted into BP
ADSs.
(4) Restricted Stock Awards. The Executive Long-Term Incentive Plan was
amended in 1997 to provide for grants of restricted stock. Prior to the
merger participants could earn restricted stock based on ARCO's total
return to shareholders as measured against that of a peer group. The table
shows the normal lifting of restrictions on the 1998 grant of restricted
stock on February 23, 2000, before the re-investment of dividends.
On the merger date, restrictions were also lifted on the 1999 and 2000
grants of restricted stock. The fair market value of ARCO Common Stock
converted to ADSs on April 18, 2000, was $47.75 per ADS. The values of the
restricted shares to each of the named officers on this date were:
Mr. Bowlin 35,025 shares $ 1,672,446
Mr. Wiley 13,648 shares $ 651,716
Mrs. Knowles 13,648 shares $ 651,716
Values for 1998 and 1999 Grants. The value of the shares of restricted
stock awarded for the years 1998 and 1999, based on the fair market value
of $79.59 per share on April 17, 2000, for each named officer is shown
below:
Mr. Bowlin $ 7,698,732
Mr. Wiley $ 3,178,082
Mrs. Knowles $ 2,891,208
Acceleration and Vesting of Outstanding Contingent Restricted Stock
Following Change of Control. Pursuant to the change of control provisions
in the merger agreement, outstanding shares of contingent restricted ARCO
stock were converted into ADSs of BP effective May 2, 2000. The value of
the total ADSs granted, based on a fair market value of $51.4375 per ADS,
to each of the named officers was as follows:
Mr. Bowlin $ 5,175,258
Mr. Wiley $ 2,194,757
Mrs. Knowles $ 1,887,883
80
Notes to Pre-Merger and Change of Control Summary Compensation Table
(5) All Other Compensation includes the amounts shown below:
Mrs.
Year Mr. Bowlin Mr. Wiley Knowles
---- ----------- ---------- ----------
Executive Supplementary Savings Plan
contributions 2000 $ 32,566 $ 21,600 $ 16,615
1999 $ 78,400 $ 51,385 $ 40,000
1998 $ 78,400 $ 42,061 $ 40,000
Financial Counseling reimbursements 2000 $ 13,200 $ 11,600 $ 13,200
1999 $ 13,200 $ 19,400 $ 17,200
1998 $ 8,000 $ -- $ 8,000
Executive Life Insurance Plan* 2000 $ 14,962 $ 6,827 $ 7,301
1999 $ 39,670 $ 18,647 $ 24,993
1998 $ 27,509 $ 10,455 $ 15,312
Long-Term Disability Plan imputed
income 2000
1999 $ -- $ -- $ --
1998 $ 3,813 $ 7,037 $ 3,757
Pay-in-lieu of vacation** 2000 $ 113,077 $ 62,500 $ 48,077
1999 -- -- --
1998 -- -- --
Pay-in-lieu of Notice** 2000 $ 45,231 $ 30,000 $ 23,077
1999 -- -- --
1998 -- -- --
Severance Benefit of 1 1/2 weeks
pay/year of service** 2000 $ 678,462 $ 450,000 $ 346,154
1999 -- -- --
1998 -- -- --
Pro-rated AIP** 2000 $ 345,945 $ 202,459 $ 134,973
1999 -- -- --
1998 -- -- --
Cash Payment in lieu of Partial
Restricted Stock Award*** 2000 $ 725,065 $ 282,545 $ 282,545
1999 -- -- --
1998 -- -- --
Enhanced 5+5 Retirement**** 2000 $ 6,297,412 $4,215,975 $3,283,512
1999 -- -- --
1998 -- -- --
* SEC rules require the reporting of value received in respect of
executive life insurance. These numbers have been calculated pursuant
to SEC rules.
** Amounts represent severance benefits paid upon retirement of the named
executive officers following the merger.
*** Payment resulted from a recalculation of the performance multiple for
the 2000 grant of restricted stock.
**** Amounts represent enhanced component included in lump sum payment of
retirement benefit at termination.
81
Aggregated ARCO Option Exercises in 2000
and ARCO Option Values
As of April 17, 2000
Value of in-the-Money
Total Number Unexercised Options
ARCO Shares of Unexercised Options(1) (2)(3)
Acquired Value ------------------------- -------------------------
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#)(4) ($) (#) (#) ($) ($)
- ----------------------------------------------------------------------------------------------
M. R. Bowlin(5) 15,664 $1,065,152 658,674 346,053 $14,011,559 $4,583,597
- ----------------------------------------------------------------------------------------------
M. E. Wiley(5) 0 0 112,966 210,070 $ 1,276,856 $2,619,691
- ----------------------------------------------------------------------------------------------
M. L. Knowles(5) 0 0 168,277 125,306 $ 3,069,195 $1,621,523
- -------------------------------------------------------------------------------
Notes to Option Exercise Table
(1) Prior to the merger, options awarded prior to 1997 carried with them the
right to a potential payment in respect of dividend share credits. See
Note (3) of Notes to Pre-Merger Summary Compensation Table.
(2) Closing price of ARCO common stock on April 17, 2000 was $79.59.
(3) For illustrative purposes only, set forth below are the hypothetical
aggregate values of both in-the-money exercisable options and
unexercisable options, including the value of the dividend share credits
accrued through April 17, 2000, in respect of options granted prior to
1997. These calculations assume these options were exercised on April 17,
2000, at the closing price of $79.59. All unexercisable in-the-money
options were granted in 1997 or later and therefore do not carry with them
the right to dividend share credits.
In-the-Money Option Values,
Including Dividend Share Credit Values
at April 17, 2000
-----------------------------------------
Exercisable Options Unexercisable Options
------------------- ---------------------
Mr. Bowlin $24,120,475 $4,583,597
Mr. Wiley $ 1,276,856 $2,619,691
Mrs. Knowles $ 4,334,266 $1,621,523
(4) Represents number of options exercised; underlying shares were sold for
"value realized."
(5) Vesting of Prospective Dividend Share Credits. Pursuant to the merger
agreement, the number of prospective dividend share credits yet to be
accrued for the remaining term of outstanding options vested upon the
change of control. At April 17, 2000, the number and value of these
prospective dividend share credits were as follows:
Number Value
------- ----------
Mr. Bowlin 109,848 $8,743,240
Mr. Wiley - -
Mrs. Knowles 26,161 $2,082,243
82
Estimated Regular Retirement Benefits
The following table shows estimated annual regular pension benefits payable
to officers and other key employees upon retirement on January 1, 2001 at age
65 under the provisions of ARCO's qualified pension plan as well as its non-
qualified supplementary retirement plan, based on remuneration and years of
service.
Average
final
earnings
(average of
highest
three
consecutive
years of
base salary
plus
Annual
Incentive Approximate annual benefit for years of
Plan membership service indicated(1)(2)
awards)
-----------------------------------------------------------
15 Years 20 Years 25 Years 30 Years 35 Years 40 Years
- --------------------------------------------------------------------------------
$2,250,000 $ 518,000 $ 691,000 $ 864,000 $ 1,037,000 $ 1,210,000 $ 1,373,000
2,000,000 461,000 614,000 768,000 921,000 1,075,000 1,220,000
1,750,000 403,000 537,000 672,000 806,000 940,000 1,067,000
1,500,000 345,000 460,000 575,000 690,000 806,000 914,000
1,250,000 287,000 383,000 479,000 575,000 671,000 761,000
1,000,000 230,000 306,000 383,000 459,000 536,000 609,000
750,000 172,000 229,000 287,000 344,000 401,000 456,000
500,000 114,000 152,000 190,000 228,000 267,000 303,000
250,000 56,000 75,000 94,000 113,000 132,000 150,000
Notes To Estimated Regular Retirement Benefits.
(1) The amounts shown are based upon a number of assumptions, including:
. Retirement date of January 1, 2001.
. Payment option: benefit for the life of employee, with a minimum payment
period of 60 months. If a lump sum or other payment option is elected,
the amount will change.
. Benefits are not subject to deduction for Social Security benefits or
other offsets.
(2) Credited years of service at retirement date of June 1, 2000:
Mr. Bowlin 31 years, 5 months
Mr. Wiley 28 years
Mrs. Knowles 27 years, 6 months
83
POST-MERGER COMPENSATION OF CURRENT EXECUTIVE OFFICERS
Post-Merger Summary Compensation Table
Long-Term
Compensation
------------------
Annual Compensation Awards Payouts
------------------------------ ------- ----------
Other Annual All Other
Salary Bonus Compensation Options Restricted Compensation
Name & Position Year ($) ($) ($) (#) Stock (#) ($)
-----------------------------------------------------------------------------------------
R. A. Malone, 2000 (1) (1) (1) (2) (3)
President
-----------------------------------------------------------------------------------------
J. E. Golden, 2000 (1) (1) (1) (2) (3)
Vice President
-----------------------------------------------------------------------------------------
J. R. Thomas, 2000 (1) (1) (1) (2) (3)
Vice President
-----------------------------------------------------------------------------------------
Ian Springett, 2000 (1) (1) (1) (2) (3)
Vice President and
Chief Financial Officer
Notes to Post-Merger Summary Compensation Table
(1) Annual Compensation. None of the named executive officers received any
compensation from ARCO for their services. All of the named executive
officers are employees of BP or its wholly owned subsidiaries other than
ARCO or Vastar. Any amounts shown for salary or bonus represent the pro
rata portion of the amount paid to the officer in his capacity as a BP
employee in respect of the portion of his time allocable to activities as
an officer of ARCO. The pro rated amount for each of the named officers
was less than $100,000 and not required to be disclosed pursuant to SEC
rules. Since BP became the owner of all of the common stock of ARCO
following the merger, BP determined that the organization of its business
operations obviated the need for a chief executive officer of ARCO. BP
organizes its businesses according to functional relationships and not
according to corporate identity.
(2) Long-Term Compensation. No amounts are shown, because all equity-related
long-term compensation was payable in BP equity securities and not in ARCO
equity securities.
(3) All Other Compensation. Any amounts payable in respect of other employee
benefits were paid pursuant to BP benefit plans, and hence are not shown
in this chart.
Compensation of Directors
None of the members of the Board of Directors receives any compensation from
ARCO for their services. All of the members of the Board are employees of BP
or wholly owned subsidiaries other than ARCO or Vastar.
84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Stock of ARCO Owned by "Beneficial Owner"
The following is the only entity known by ARCO to own beneficially more than
five percent of any class of the company's voting securities as of February 1,
2001.
Title of Class Name and Address Number of Shares Percent of Class
- ----------------------------------------------------------------------------------------
Common Stock BP Amoco p.l.c. 327,436,320(*) 100%
Britannic House
1 Finsbury Circus
London EC2M 71BA
* The total number of shares of outstanding common stock, none of which are
registered with the SEC or publicly traded, is based on information
furnished to ARCO by BP. These shares are owned by BP through BP America, a
wholly owned Delaware subsidiary of BP which owns 324,711,290 shares. The
remaining 2,725,030 shares are owned by CH-Twenty, Inc., a wholly owned
Delaware subsidiary of ARCO. BP has indirect sole voting, dispositive and
investment power over all of the common stock of ARCO, and is the
controlling shareholder of ARCO.
Stock of BP Owned by Directors and Executive Officers
None of the directors or executive officers of ARCO owns any shares of the
common or Preferred Stocks of ARCO. As employees of subsidiaries of BP other
than ARCO, they participate in United States employee stock compensation
plans. This table indicates the number of ADS Shares of BP, the indirect
controlling shareholder of ARCO, owned by the executive officers and directors
as of February 1, 2001. This number includes options exercisable within 60
days of February 1, 2001. The total number of shares in BP owned by all
directors and executive officers is less than 1%. Each individual has sole
voting and investment power for the shares indicated below.
Aggregate Number Aggregate Number
of ADSs of BP Ordinary
Beneficially Shares Owned as
Owned as of of February 1,
Name February 1, 2001 2001
- --------------------------------------------------------------------------
Robert D. Agdern(1) 182,096 --
- --------------------------------------------------------------------------
J. E. Golden(2) 47,771 --
- --------------------------------------------------------------------------
Robert A. Malone(3) 35,366 --
- --------------------------------------------------------------------------
James G. Nemeth(4) 16,967 5,044
- --------------------------------------------------------------------------
Donald E. Packham(5) 43,239 --
- --------------------------------------------------------------------------
Ian Springett(6) 1,480 9,600
- --------------------------------------------------------------------------
J. R. Thomas(7) 2,908 86,899
- --------------------------------------------------------------------------
All directors and executive
officers as a group(8) 329,827 101,543
(1) Includes 167,621 options exercisable within 60 days of February 1, 2000,
3,222 shares held jointly with his spouse, as to which Mr. Agdern shares
investment and voting power, and shares held in BP benefit plans.
(2) Includes 7,142 options and 29,736 SARs exercisable within 60 days as of
February 1, 2001, and shares held in BP benefit plans.
(3) Includes 8,458 options and 7,000 SARs exercisable within 60 days of
February 1, 2001, and shares held in BP benefit plans.
(4) Includes 4,334 options and 9,600 SARs exercisable within 60 days of
February 1, 2001 and shares held in BP benefit plans.
(5) Includes 7,142 options and 29,736 SARs exercisable within 60 days of
February 1, 2000 and shares held in BP benefit plans.
(6) Includes 9,600 options exercisable within 60 days of February 1, 2001.
(7) Includes options for 1,408 ADSs and SARs for 14,700 ADSs and options for
64,000 BP Ordinary Shares exercisable within 60 days of February 1, 2001.
(8) See notes (1)-(7).
85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Controlling Shareholder
BP is the controlling shareholder of ARCO because it owns all of the
outstanding common stock of ARCO.
Related Party Transactions
Sales to and purchases from BP or its subsidiaries consisted primarily of
the sale or purchase of petroleum liquids and natural gas. Related party
interest in 2000 relates to an intercompany receivable from BP that has been
outstanding since the sale of Alaskan operations in the second quarter 2000.
Pursuant to the terms of the Merger Agreement, BP has assumed certain
obligations of ARCO, all relating to compensation and other employee benefit
matters, following the merger. See Note 3 of Notes to Consolidated Financial
Statements.
86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedules: These
documents are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule.
3. Exhibits:
2.1 Agreement and Plan of Merger Among BP Amoco p.l.c., Atlantic
Richfield Company and Prairie Holdings, Inc. dated as of March
31, 1999, as amended as of July 12, 1999, filed with the
Commission as Exhibit 2 to ARCO's report on Form 10-Q for the
quarterly period ended September 30, 1999, under File No. 1-
1196 and incorporated herein by reference.
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of
July 12, 1999, filed with the Commission as Exhibit 2.1 to
ARCO's report on Form 10-Q for the quarterly period ended
September 30, 1999, under File No. 1-1196 and incorporated
herein by reference.
3.1 Restated Certificate of Incorporation of Atlantic Richfield
Company ("ARCO") as of June 27, 1994, filed with the
Securities and Exchange Commission (the "Commission") as
Exhibit 3 to ARCO's report on Form 10-Q for the quarterly
period ended June 30, 1994, under File No. 1-1196 and
incorporated herein by reference.
3.2 By-Laws of ARCO as amended through November 23, 1998, filed
with the Commission as Exhibit 3 to ARCO's Current Report on
Form 8-K dated November 23, 1998, under File No. 1-1196 and
incorporated herein by reference.
3.3 Guarantee dated February 1, 2001 given by BP Amoco p.l.c. in
favor of holders of $2.80 Cumulative Convertible Preference
Stock, filed herewith.
3.4 Notice of Redemption dated March 28, 2001 calling for
redemption of all outstanding shares of $2.80 Cumulative
Convertible Preference Stock on April 27, 2001, filed
herewith.
3.5 Guarantee dated February 1, 2001 given by BP Amoco p.l.c. in
favor of holders of $3.00 Cumulative Preference Stock, filed
herewith.
3.6 Notice of Redemption dated March 28, 2001 calling for
redemption of all outstanding shares of $3.00 Cumulative
Convertible Preference Stock on April 27, 2001, filed
herewith.
4.1 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed with the Commission on January 27,
1999 as Exhibit 4.2 to ARCO's Registration Statement on Form
S-3 (No. 333-71293), under File No. 1-1196 and incorporated
herein by reference.
4.2 Indenture, dated as of January 1, 1992, between ARCO and The
Bank of New York, filed with the Commission on January 27,
1999 as Exhibit 4.3 to ARCO's Registration Statement on
Form S-3 (No. 333-71293, under File No. 1-1196) and incorpo-
rated herein by reference.
4.3 Instruments defining the rights of holders of long-term debt
which is not registered under the Securities Exchange Act of
1934 are not filed because the total amount of securities
authorized under any such instrument does not exceed 10% of
the consolidated total assets of the Company. The Company
agrees to furnish a copy of any such instrument to the
Commission upon request.
87
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement
Plan, as adopted by the Board of Directors of ARCO on March
26, 1990 and effective as of October 1, 1990, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-K for
the year 1990, under File No. 1-1196 and incorporated herein
by reference.
10.1(b)* Amendment No. 1 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of March
22, 1993, filed with the Commission as Exhibit 10 to ARCO's
report on Form 10-Q for the quarterly period ended June 30,
1993, under File No. 1-1196 and incorporated herein by
reference.
10.1(c)* Amendment No. 2 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
February 28, 1994, filed with the Commission as Exhibit
10.1(c) to ARCO's report on Form 10-K for the year 1995, under
File No. 1-1196 and incorporated herein by reference.
10.1(d)* Amendment No. 3 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
August 1, 1997, filed with the Commission as Exhibit 10.1(d)
to ARCO's report on Form 10-K for the year 1997, under File
No. 1-1196 and incorporated herein by reference.
10.1(e)* Amendment No. 4 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
August 1, 1997, filed with the Commission as Exhibit 10.1 to
ARCO's report on Form 10-Q for the quarterly period ended
September 30, 1998, under File No. 1-1196 and incorporated
herein by reference.
10.1(f)* Amendment No. 5 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of May
1, 1997, filed with the Commission as Exhibit 10.1(f) to
ARCO's report on Form 10-K for the year 1998, under File No.
1-1196 and incorporated herein by reference.
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted
by the Board of Directors of the Company on March 26, 1990 and
effective as of October 1, 1990, filed with the Commission as
Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990,
under File No. 1-1196 and incorporated herein by reference.
10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of July 27, 1992, filed with the
Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of February 28, 1994, filed with
the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-
K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of January 1, 1997, filed with the
Commission as Exhibit 10.2(d) to ARCO's report on Form 10-K
for the year 1997, under File No. 1-1196 and incorporated
herein by reference.
10.2(e)* Amendment No. 4 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of January 1, 1997, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
88
10.2(f)* Amendment No. 5 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of May 1, 1997, filed with the
Commission as Exhibit 10.2(f) to ARCO's report on Form 10-K
for the year 1998, under File No. 1-1196 and incorporated
herein by reference.
10.3(a)* Atlantic Richfield Company Executive Supplementary Savings
Plan II, as amended, restated and effective as of July 1,
1988, filed with the Commission as Exhibit 10.6(b) to ARCO's
report on Form 10-K for the year 1988, under File No. 1-1196
and incorporated herein by reference.
10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
January 1, 1989, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1989, under File
No. 1-1196 and incorporated herein by reference.
10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
July 1, 1994, filed with the Commission as Exhibit 10.4(c) to
ARCO's report on Form 10-K for the year 1994, under File No.
1-1196 and incorporated herein by reference.
10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
August 5, 1996, filed with the Commission as Exhibit 10.4(d)
to ARCO's report on Form 10-K for the year 1996, under File
No. 1-1196 and incorporated herein by reference.
10.4* Atlantic Richfield Company Policy on Financial Counseling and
Individual Income Tax Service, as revised and effective
January 1, 1997, filed with the Commission as Exhibit 10.4 to
ARCO's report on Form 10-K for the year 1998, under File No.
1-1196 and incorporated herein by reference.
10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of
ARCO on November 26, 1984, and effective as of that date, as
amended through February 28, 1994, filed with the Commission
as Exhibit 10.6 to ARCO's report on Form 10-K for the year
1994, under File No. 1-1196 and incorporated herein by
reference.
10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of
January 1, 1995, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1995, under File
No. 1-1196 and incorporated herein by reference.
10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of
February 24, 1997, filed with the Commission as Exhibit
10.5(c) to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.5(d)* Amendment No. 5 to the Atlantic Richfield Company Annual
Incentive Plan, effective as of July 28, 1997, filed with the
Commission as Exhibit 10.3 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
10.5(e)* Amendment No. 6 to the Atlantic Richfield Company Annual
Incentive Plan, effective as of July 28, 1997, filed with the
Commission as Exhibit 10.4 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
89
10.6(a)* Atlantic Richfield Company's 1985 Executive Long-Term
Incentive Plan, as adopted by the Board of Directors of ARCO
on May 28, 1985, and effective as of that date, as amended
through July 28, 1997, filed with the Commission as Exhibit
10.6 to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.6(b)* Amendment No. 10 to the Atlantic Richfield Company 1985
Executive Long-Term Incentive Plan, effective as of July 18,
1997, filed with the Commission as Exhibit 10.5 to ARCO's
report on Form 10-Q for the quarterly period ended September
30, 1998, under File No. 1-1196 and incorporated herein by
reference.
10.6(c)* Amendment No. 11 to the Atlantic Richfield Company 1985
Executive Long-Term Incentive Plan, effective as of July 18,
1997, filed with the Commission as Exhibit 10.6 to ARCO's
report on Form 10-Q for the quarterly period ended September
30, 1998, under File No. 1-1196 and incorporated herein by
reference.
10.6(d)* Amendment No. 12 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective March 23, 1999, filed with
the Commission as Exhibit 10.3 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1999, under File
No. 1-1196 and incorporated herein by reference.
10.6(e) Amendment No. 13 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective March 31, 1999, filed with
the Commission as Exhibit 10.4 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1999, under File
No. 1-1196 and incorporated herein by reference.
10.6(f)* Amendment No. 14 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective December 10, 1999, filed
herewith.
10.6(g)* Amendment No. 15 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective February 15, 2000, filed
herewith.
10.7(a)* Atlantic Richfield Company Executive Life Insurance Plan--
Summary Plan Description, effective as of June 28, 1990, filed
with the Commission as Exhibit 10.8 to ARCO's report on Form
10-K for the year 1993, under File No. 1-1196 and incorporated
herein by reference.
10.7(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective July 28, 1997, filed with the
Commission as Exhibit 10.7(b) to ARCO's report on Form 10-K,
under File No. 1-1196 and incorporated herein by reference.
10.7(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective July 28, 1997, filed with the
Commission as Exhibit 10.7(c) to ARCO's report on Form 10-K,
under File No. 1-1196 and incorporated herein by reference.
10.7(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective May 1, 1997, filed with the
Commission as Exhibit 10.7(d) to ARCO's report on Form 10-K,
under File No. 1-1196 and incorporated herein by reference.
10.8(a)* Atlantic Richfield Company Executive Long-Term Disability
Plan--Summary Plan Description, effective as of January 1,
1994, filed with the Commission as Exhibit 10.9 to ARCO's
report on Form 10-K for the year 1993, under File No. 1-1196
and incorporated herein by reference.
90
10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective as of February 28, 1994,
filed with the Commission as Exhibit 10.9(b) to ARCO's report
on Form 10-K for the year 1995, under File No. 1-1196 and
incorporated herein by reference.
10.8(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective May 1, 1997, filed with
the Commission as Exhibit 10.8(c) to ARCO's report on Form 10-
K, under File No. 1-1196 and incorporated herein by reference.
10.9 Amendment No. 6 to the Atlantic Richfield Company Special
Termination Allowance Plan which contains the current change
of control provisions applicable to the Company's executive
management team, including its five most highly compensated
executive officers, effective as of July 28, 1997, filed with
the Commission as Exhibit 10.7 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1998, under File
No. 1-1196 and incorporated herein by reference.
10.10 Form of Indemnity Agreement filed with the Commission as
Exhibit 99 to ARCO's Registration Statement on Form S-3 (No.
333-71293) under File No. 1-1196 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.
- --------
* Management compensatory plans filed as exhibits hereto pursuant to Item
14(c) of Form 10-K.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed during the quarter
ended December 31, 2000, and thereafter through March 28, 2001:
None
91
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused the amendment to this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
/s/ Robert A. Malone
By: _________________________________
Robert A. Malone
President and Principal Executive
Officer
March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert D. Agdern Chairman of the Board March 30, 2001
__________________________________
Robert D. Agdern
/s/ James G. Nemeth Director March 30, 2001
____________________________________
James G. Nemeth
/s/ Donald E. Packham Director March 30, 2001
____________________________________
Donald E. Packham
/s/ Ian Springett Vice President and Chief March 30, 2001
____________________________________ Financial Officer
Ian Springett
/s/ Charles L. Hall Principal Accounting Officer March 30, 2001
____________________________________
Charles L. Hall
92
SCHEDULE II
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(millions of dollars)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Column A) (Column B) (Column C) (Column D) (Column E)
- ------------------------------------------------------------------------------
Additions
----------------
Balance at Charged Charged Deductions Balance at
beginning to to other from close of
Description of period income accounts reserves period
- ------------------------------------------------------------------------------
Year 2000
Amounts deducted from
applicable assets:
Accounts receivable....... $ 35 $ -- $ -- $ 2(a) $ 33
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Other investments and
long-term receivables.... -- 56 -- -- 56
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 1,154 86 -- 928 312
Reduction in force........ 45 171 60 145 131
Insurance ................ 169 12 -- 27 154
Environmental remediation. 686 521 -- 109 1,098
Other..................... 318 64 28 99 311
Year 1999
Amounts deducted from
applicable assets:
Accounts receivable....... $ 5 $ 1 $ 29 $-- $ 35
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 1,058 142 -- 46 1,154
Reduction in force........ 131 24 2 112 45
Insurance ................ 174 19 -- 24 169
Environmental remediation. 870 53 4 241 686
Other..................... 395 26 -- 103 318
Year 1998
Amounts deducted from
applicable assets:
Accounts receivable....... $ 3 $ 2 $ -- $ -- $ 5
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 966 64 73 45 1,058
Reduction in force........ 73 185 79 206 131
Insurance ................ 158 48 -- 32 174
Environmental remediation. 722 234 -- 86 870
Other..................... 151 363 -- 119 395
- --------
(a) Write-off for uncollectible accounts, net of recoveries.
93
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1 and 2. Financial Statements and Financial Statement Schedules: These
documents are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule.
3. Exhibits:
2.1 Agreement and Plan of Merger Among BP Amoco p.l.c., Atlantic
Richfield Company and Prairie Holdings, Inc. dated as of March
31, 1999, as amended as of July 12, 1999, filed with the
Commission as Exhibit 2 to ARCO's report on Form 10-Q for the
quarterly period ended September 30, 1999, under File No. 1-
1196 and incorporated herein by reference.
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of
July 12, 1999, filed with the Commission as Exhibit 2.1 to
ARCO's report on Form 10-Q for the quarterly period ended
September 30, 1999, under File No. 1-1196 and incorporated
herein by reference.
3.1 Restated Certificate of Incorporation of Atlantic Richfield
Company ("ARCO") as of June 27, 1994, filed with the
Securities and Exchange Commission (the "Commission") as
Exhibit 3 to ARCO's report on Form 10-Q for the quarterly
period ended June 30, 1994, under File No. 1-1196 and
incorporated herein by reference.
3.2 By-Laws of ARCO as amended through November 23, 1998, filed
with the Commission as Exhibit 3 to ARCO's Current Report on
Form 8-K dated November 23, 1998, under File No. 1-1196 and
incorporated herein by reference.
3.3 Guarantee dated February 1, 2001 given by BP Amoco p.l.c. in
favor of holders of $2.80 Cumulative Convertible Preference
Stock, filed herewith.
3.4 Notice of Redemption dated March 28, 2001 calling for
redemption of all outstanding shares of $2.80 Cumulative
Convertible Preference Stock on April 27, 2001, filed
herewith.
3.5 Guarantee dated February 1, 2001 given by BP Amoco p.l.c. in
favor of holders of $3.00 Cumulative Preference Stock, filed
herewith.
3.6 Notice of Redemption dated March 28, 2001 calling for
redemption of all outstanding shares of $3.00 Cumulative
Convertible Preference Stock on April 27, 2001, filed
herewith.
4.1 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed with the Commission on January 27,
1999 as Exhibit 4.2 to ARCO's Registration Statement on Form
S-3 (No. 333-71293), under File No. 1-1196 and incorporated
herein by reference.
4.2 Indenture, dated as of January 1, 1992, between ARCO and The
Bank of New York, filed with the Commission on January 27,
1999 as Exhibit 4.3 to ARCO's Registration Statement on
Form S-3 (No. 333-71293, under File No. 1-1196) and incorpo-
rated herein by reference.
4.3 Instruments defining the rights of holders of long-term debt
which is not registered under the Securities Exchange Act of
1934 are not filed because the total amount of securities
authorized under any such instrument does not exceed 10% of
the consolidated total assets of the Company. The Company
agrees to furnish a copy of any such instrument to the
Commission upon request.
Exhibit No. Description
----------- -----------
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement
Plan, as adopted by the Board of Directors of ARCO on March
26, 1990 and effective as of October 1, 1990, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-K for
the year 1990, under File No. 1-1196 and incorporated herein
by reference.
10.1(b)* Amendment No. 1 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of March
22, 1993, filed with the Commission as Exhibit 10 to ARCO's
report on Form 10-Q for the quarterly period ended June 30,
1993, under File No. 1-1196 and incorporated herein by
reference.
10.1(c)* Amendment No. 2 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
February 28, 1994, filed with the Commission as Exhibit
10.1(c) to ARCO's report on Form 10-K for the year 1995, under
File No. 1-1196 and incorporated herein by reference.
10.1(d)* Amendment No. 3 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
August 1, 1997, filed with the Commission as Exhibit 10.1(d)
to ARCO's report on Form 10-K for the year 1997, under File
No. 1-1196 and incorporated herein by reference.
10.1(e)* Amendment No. 4 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
August 1, 1997, filed with the Commission as Exhibit 10.1 to
ARCO's report on Form 10-Q for the quarterly period ended
September 30, 1998, under File No. 1-1196 and incorporated
herein by reference.
10.1(f)* Amendment No. 5 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of May
1, 1997, filed with the Commission as Exhibit 10.1(f) to
ARCO's report on Form 10-K for the year 1998, under File No.
1-1196 and incorporated herein by reference.
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted
by the Board of Directors of the Company on March 26, 1990 and
effective as of October 1, 1990, filed with the Commission as
Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990,
under File No. 1-1196 and incorporated herein by reference.
10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of July 27, 1992, filed with the
Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of February 28, 1994, filed with
the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-
K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of January 1, 1997, filed with the
Commission as Exhibit 10.2(d) to ARCO's report on Form 10-K
for the year 1997, under File No. 1-1196 and incorporated
herein by reference.
10.2(e)* Amendment No. 4 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of January 1, 1997, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
Exhibit No. Description
----------- -----------
10.2(f)* Amendment No. 5 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of May 1, 1997, filed with the
Commission as Exhibit 10.2(f) to ARCO's report on Form 10-K
for the year 1998, under File No. 1-1196 and incorporated
herein by reference.
10.3(a)* Atlantic Richfield Company Executive Supplementary Savings
Plan II, as amended, restated and effective as of July 1,
1988, filed with the Commission as Exhibit 10.6(b) to ARCO's
report on Form 10-K for the year 1988, under File No. 1-1196
and incorporated herein by reference.
10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
January 1, 1989, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1989, under File
No. 1-1196 and incorporated herein by reference.
10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
July 1, 1994, filed with the Commission as Exhibit 10.4(c) to
ARCO's report on Form 10-K for the year 1994, under File No.
1-1196 and incorporated herein by reference.
10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
August 5, 1996, filed with the Commission as Exhibit 10.4(d)
to ARCO's report on Form 10-K for the year 1996, under File
No. 1-1196 and incorporated herein by reference.
10.4* Atlantic Richfield Company Policy on Financial Counseling and
Individual Income Tax Service, as revised and effective
January 1, 1997, filed with the Commission as Exhibit 10.4 to
ARCO's report on Form 10-K for the year 1998, under File No.
1-1196 and incorporated herein by reference.
10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of
ARCO on November 26, 1984, and effective as of that date, as
amended through February 28, 1994, filed with the Commission
as Exhibit 10.6 to ARCO's report on Form 10-K for the year
1994, under File No. 1-1196 and incorporated herein by
reference.
10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of
January 1, 1995, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1995, under File
No. 1-1196 and incorporated herein by reference.
10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of
February 24, 1997, filed with the Commission as Exhibit
10.5(c) to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.5(d)* Amendment No. 5 to the Atlantic Richfield Company Annual
Incentive Plan, effective as of July 28, 1997, filed with the
Commission as Exhibit 10.3 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
10.5(e)* Amendment No. 6 to the Atlantic Richfield Company Annual
Incentive Plan, effective as of July 28, 1997, filed with the
Commission as Exhibit 10.4 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
Exhibit No. Description
----------- -----------
10.6(a)* Atlantic Richfield Company's 1985 Executive Long-Term
Incentive Plan, as adopted by the Board of Directors of ARCO
on May 28, 1985, and effective as of that date, as amended
through July 28, 1997, filed with the Commission as Exhibit
10.6 to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.6(b)* Amendment No. 10 to the Atlantic Richfield Company 1985
Executive Long-Term Incentive Plan, effective as of July 18,
1997, filed with the Commission as Exhibit 10.5 to ARCO's
report on Form 10-Q for the quarterly period ended September
30, 1998, under File No. 1-1196 and incorporated herein by
reference.
10.6(c)* Amendment No. 11 to the Atlantic Richfield Company 1985
Executive Long-Term Incentive Plan, effective as of July 18,
1997, filed with the Commission as Exhibit 10.6 to ARCO's
report on Form 10-Q for the quarterly period ended September
30, 1998, under File No. 1-1196 and incorporated herein by
reference.
10.6(d)* Amendment No. 12 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective March 23, 1999, filed with
the Commission as Exhibit 10.3 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1999, under File
No. 1-1196 and incorporated herein by reference.
10.6(e) Amendment No. 13 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective March 31, 1999, filed with
the Commission as Exhibit 10.4 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1999, under File
No. 1-1196 and incorporated herein by reference.
10.6(f)* Amendment No. 14 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective December 10, 1999, filed
herewith.
10.6(g)* Amendment No. 15 to Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective February 15, 2000, filed
herewith.
10.7(a)* Atlantic Richfield Company Executive Life Insurance Plan--
Summary Plan Description, effective as of June 28, 1990, filed
with the Commission as Exhibit 10.8 to ARCO's report on Form
10-K for the year 1993, under File No. 1-1196 and incorporated
herein by reference.
10.7(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective July 28, 1997, filed with the
Commission as Exhibit 10.7(b) to ARCO's report on Form 10-K,
under File No. 1-1196 and incorporated herein by reference.
10.7(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective July 28, 1997, filed with the
Commission as Exhibit 10.7(c) to ARCO's report on Form 10-K,
under File No. 1-1196 and incorporated herein by reference.
10.7(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective May 1, 1997, filed with the
Commission as Exhibit 10.7(d) to ARCO's report on Form 10-K,
under File No. 1-1196 and incorporated herein by reference.
10.8(a)* Atlantic Richfield Company Executive Long-Term Disability
Plan--Summary Plan Description, effective as of January 1,
1994, filed with the Commission as Exhibit 10.9 to ARCO's
report on Form 10-K for the year 1993, under File No. 1-1196
and incorporated herein by reference.
Exhibit No. Description
----------- -----------
10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective as of February 28, 1994,
filed with the Commission as Exhibit 10.9(b) to ARCO's report
on Form 10-K for the year 1995, under File No. 1-1196 and
incorporated herein by reference.
10.8(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective May 1, 1997, filed with
the Commission as Exhibit 10.8(c) to ARCO's report on Form 10-
K, under File No. 1-1196 and incorporated herein by reference.
10.9 Amendment No. 6 to the Atlantic Richfield Company Special
Termination Allowance Plan which contains the current change
of control provisions applicable to the Company's executive
management team, including its five most highly compensated
executive officers, effective as of July 28, 1997, filed with
the Commission as Exhibit 10.7 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1998, under File
No. 1-1196 and incorporated herein by reference.
10.10 Form of Indemnity Agreement filed with the Commission as
Exhibit 99 to ARCO's Registration Statement on Form S-3 (No.
333-71293) under File No. 1-1196 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.