1997
---------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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, 1997 Commission file number 1--1196
[LOGO OF ARCO]
ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 South Flower 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
------------------- -------------------------------
Common Stock ($2.50 par value) New York Stock Exchange
Pacific Exchange, Inc.
Elektronische Borse Schweiz EBS
London Stock Exchange
$3.00 Cumulative Convertible New York Stock Exchange
Preference Stock ($1 par value) Pacific Exchange, Inc.
$2.80 Cumulative Convertible New York Stock Exchange
Preference Stock ($1 par value) Pacific Exchange, Inc.
Twenty year 10 7/8% Debentures
Due July 15, 2005 New York Stock Exchange
Thirty year 9 7/8% Debentures Due
March 1, 2016 New York Stock Exchange
Twenty-five year 9 1/8% Deben-
tures Due March 1, 2011 New York Stock Exchange
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 voting stock held by nonaffiliates of the
registrant on December 31, 1997, based on the closing price on the New York
Stock Exchange composite tape on that date, was $26,135,000,809.
Number of shares of Common Stock, $2.50 par value, outstanding as of December
31, 1997: 320,369,895.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be filed
with the Securities and Exchange Commission within 120 days after December 31,
1997 are incorporated by reference under Part III.
TABLE OF CONTENTS
PART I
ITEM PAGE
---- ----
1. and 2. Business and Properties....................................... 1
Corporate History and Organization........................ 1
Recent Developments....................................... 1
Financial Information about Industry Segments............. 2
Worldwide Exploration and Production Operations........... 2
Refining and Marketing.................................... 7
Chemicals................................................. 8
Other Operations.......................................... 9
Capital Program........................................... 9
Patents................................................... 9
Competition............................................... 9
Human Resources........................................... 10
Research and Development.................................. 10
Environmental Matters..................................... 10
3. Legal Proceedings............................................. 13
4. Submission of Matters to a Vote of Security Holders........... 15
----------------
Executive Officers of the Registrant.......................... 16
Description of Capital Stock.................................. 19
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 22
6. Selected Financial Data....................................... 22
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 23
8. Financial Statements and Supplementary Data................... 56
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 58
PART III
10. Directors and Executive Officers of the Registrant............ 58
11. Executive Compensation........................................ 58
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 58
13. Certain Relationships and Related Transactions................ 58
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 58
(i)
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
CORPORATE HISTORY AND ORGANIZATION
Atlantic Richfield Company ("ARCO" or the "Company") was incorporated in
1870 under the laws of Pennsylvania as The Atlantic Refining Company. Atlantic
Petroleum Storage Company, a predecessor to The Atlantic Refining Company,
began operations in 1866. The Company's principal executive offices are at 515
South Flower Street, Los Angeles, California 90071 (Telephone (213) 486-3511).
ARCO's present name was adopted subsequent to the merger of Richfield Oil
Corporation into The Atlantic Refining Company in 1966. In 1969, Sinclair Oil
Corporation was merged into ARCO. In 1977, The Anaconda Company was merged
into a wholly-owned subsidiary of ARCO and, on December 31, 1981, that
subsidiary was merged into ARCO. On May 7, 1985, ARCO was reincorporated in
the State of Delaware. Unless indicated otherwise, the terms "ARCO" or the
"Company" as used herein refer to Atlantic Richfield Company or Atlantic
Richfield Company and one or more of its consolidated subsidiaries.
ARCO, including its subsidiaries, constitutes one of the largest integrated
enterprises in the petroleum industry. ARCO's exploration and production
("E&P") segment includes the worldwide exploration, development, production
and transportation of petroleum, which includes petroleum liquids (crude oil,
condensate and natural gas liquids ("NGLs")) and natural gas, and the purchase
and sale of petroleum liquids and natural gas. The Company's investment in
LUKOIL Common Stock is included in the E&P segment as well. ARCO's refining
and marketing ("R&M") segment includes the refining and transportation of
petroleum and petroleum products and the marketing of petroleum products on
the U.S. West Coast. The Company's equity investment in Zhenhai Refining and
Chemical Company ("Zhenhai") is also included in the R&M segment. ARCO's
chemicals segment includes the worldwide manufacture and sale of chemical
products.
ARCO's corporate structure consists of wholly-owned and majority-owned
subsidiaries and various divisions or units of the parent company, ARCO, that
have been delineated or defined for various operational reasons. Many of the
wholly-owned subsidiaries are formed to conduct ARCO's numerous international
operations. The principal majority-owned subsidiaries are Vastar Resources,
Inc. ("Vastar") and ARCO Chemical Company ("ARCO Chemical"). Vastar was formed
in September 1993, and in July 1994 sold under 20% of its common stock to the
public; ARCO currently owns 82.2% of Vastar. Vastar is the primary vehicle
through which ARCO conducts natural gas and, to a lesser extent oil,
exploration, production and marketing in the Lower 48 States (the "Lower 48").
ARCO Chemical was formed in July 1987, and it sold just under 20% of its
common stock to the public in October 1987; ARCO currently owns 82.3% of ARCO
Chemical, through which ARCO conducts its chemicals operations. ARCO's
principal subsidiaries are Vastar, ARCO Alaska, Inc. (a wholly-owned
subsidiary through which ARCO conducts its Alaska operations) ARCO
Transportation Alaska, Inc. (a wholly-owned subsidiary through which ARCO
holds its interest in the Trans Alaska Pipeline System ("TAPS")), and ARCO
Chemical.
The information included or incorporated by reference in this report is
provided solely for the benefit of ARCO shareholders. Such information is not
provided for the benefit of the shareholders of Vastar, ARCO Chemical,
Lyondell Petrochemical Company ("Lyondell"), LUKOIL, or Zhenhai and should not
be relied upon by those shareholders or by anyone considering an investment in
those companies. This report does not reflect information that could be
considered material to an investment in Vastar, ARCO Chemical, Lyondell,
LUKOIL or Zhenhai. For information concerning those companies, reference
should be made to their publicly available reports.
RECENT DEVELOPMENTS
In April 1997, ARCO announced its intent to divest its worldwide coal
business, which has coal mining operations in the United States and Australia.
The coal business no longer is considered a core part of the Company's
business. On February 27, 1998, ARCO announced that it has entered into
exclusive final discussions with Alliance Coal Corporation, an affiliate of
The Beacon Group, for the sale of the U.S. assets. No final decision regarding
the Australian assets has been made. See "Other Operations" on page 9.
1
In September 1997, ARCO disposed of its remaining interest in Lyondell,
which operates petrochemical processing and petroleum refining businesses.
ARCO settled the outstanding principal amount of $988 million of its 9%
Exchangeable Notes due September 15, 1997 with substantially all of its 39.9
million shares of Lyondell Common Stock. ARCO sold its remaining shares in a
privately negotiated transaction in late September. See Note 23 of Notes to
Consolidated Financial Statements on page 51.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to Note 2 of Notes to Consolidated Financial Statements on
page 40 for segment information concerning sales and other operating revenues,
earnings, total assets and additional information for certain operations of
the Company.
WORLDWIDE EXPLORATION AND PRODUCTION OPERATIONS
General
ARCO conducts its worldwide oil and gas exploration and production
operations primarily in the United States, the United Kingdom, Indonesia,
China, Algeria, Tunisia, Dubai and Qatar, and has additional interests in
producing fields in Kazakhstan and Turkey. Exploration and planned
developments are underway in other countries, including Venezuela and Ecuador.
Reserves
Estimated net quantities of ARCO's proved oil and gas reserves at December
31, 1997 were as follows:
PETROLEUM LIQUIDS NATURAL GAS
(MILLION BARRELS) (BILLION CUBIC FEET)
------------------------ ------------------------
U.S.(a) INTERNATIONAL(b) U.S.(c) INTERNATIONAL(d)
------- ---------------- ------- ----------------
Proved reserves............... 2,131 568 4,988 3,484
Proved developed reserves..... 1,821 211 4,467 1,653
- --------
(a) Includes 129 million barrels ("MMB") proved and 96 MMB developed
attributable to Vastar.
(b) Includes 48 MMB proved and 7 MMB developed attributable to the equity
interest in the LUKARCO joint venture.
(c) Includes 2,379 billion cubic feet ("BCF") proved and 1,954 BCF developed
attributable to Vastar.
(d) Includes 67 BCF proved and 10 BCF developed attributable to the equity
interest in the LUKARCO joint venture.
Reference is made to Supplemental Information, Oil and Gas Producing
Activities, beginning on page 52, for additional information concerning oil
and gas producing activities and estimates of proved oil and gas reserves.
Production
Net quantities of petroleum liquids and natural gas produced by ARCO were as
follows:
NATURAL GAS
PETROLEUM LIQUIDS (MILLION CUBIC FEET
(BARRELS PER DAY) PER DAY)
--------------------- ---------------------
YEARS ENDED
DECEMBER 31, U.S.(A) INTERNATIONAL U.S.(B) INTERNATIONAL
- ------------ ------- ------------- ------- -------------
1997............................... 557,900 82,600 1,066 844
1996............................... 564,500 66,100 1,044 730
1995............................... 583,100 66,800 999 557
- --------
(a) Includes 50,700, 48,800, and 45,300 barrels per day produced by Vastar in
1997, 1996, and 1995, respectively.
(b) Includes 882, 872, and 810 million cubic feet per day ("MMCFD") produced
by Vastar in 1997, 1996, and 1995, respectively.
2
Average sales prices and average production costs per unit of petroleum
liquids and natural gas were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
U.S. INTERNATIONAL U.S. INTERNATIONAL U.S. INTERNATIONAL
------ ------------- ------ ------------- ------ -------------
Average sales price
(including transfers)
per barrel of petroleum
liquids produced....... $15.63 $18.20 $16.07 $19.02 $12.17 $15.96
Average lifting cost per
equivalent barrel of
production............. 3.85 4.07 3.86 4.14 3.73 3.98
Average sales price per
thousand cubic feet
("MCF") of natural gas
produced.............. 2.04 2.64 1.80 2.54 1.35 2.56
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,
substantially all of which are reservoir specific. While annual delivery
requirements may vary under these contracts, delivery obligations under the
agreements are essentially limited to producible reserves from specific
fields.
In the Lower 48, Vastar has various long-term natural gas sales contracts.
In connection with the formation of Southern Company Energy Marketing L.P.
("SCEM"), a strategic alliance limited partnership with the Southern Company,
Vastar has entered into a gas purchase and sale agreement for a primary term
expiring December 31, 2007, under which Vastar has contracted to sell, and
SCEM is obligated to purchase, substantially all of the gas produced and owned
or controlled by Vastar at market-based prices. Excluded from this contract is
gas which Vastar is committed to deliver under certain longer-term gas
marketing contracts with cogeneration facilities pursuant to which Vastar
delivered an average of 81 MMCFD in 1997. These contracts have an average
contract term of approximately 19 years, of which an average of 12 years
remain. In 1997, the average price of gas sold under these contracts was
approximately $2.54 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.
Exploration and Drilling Activity
The following table shows the number of wells drilled to completion by the
Company:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
U.S.(A) INTERNATIONAL U.S.(B) INTERNATIONAL U.S.(C) INTERNATIONAL
------- ------------- ------- ------------- ------- -------------
Net productive
exploratory wells
drilled................ 33 3 28 2 17 8
Net dry exploratory
wells drilled.......... 27 10 48 7 37 13
Net productive
development wells
drilled................ 563 23 332 23 315 12
Net dry development
wells drilled.......... 37 -- 33 -- 30 --
- --------
(a) Includes 18, 15, 162, and 27 wells, respectively, drilled by Vastar.
(b) Includes 17, 29, 156, and 25 wells, respectively, drilled by Vastar.
(c) Includes 15, 26, 133, and 23 wells, respectively, drilled by Vastar.
The Company's current activities, as of December 31, 1997, were as follows:
U.S. INTERNATIONAL
---- -------------
Gross wells in process of drilling (including wells
temporarily suspended)..................................... 62 11
Net wells in process of drilling (including wells
temporarily suspended)..................................... 47 7
Waterflood projects in process.............................. 3 --
Enhanced oil recovery operations............................ 12 1
3
The following table shows the approximate number of productive wells at
December 31, 1997:
OIL GAS
--------------------------- ---------------------
U.S.(a)(b) INTERNATIONAL(c) U.S.(d) INTERNATIONAL
---------- ---------------- ------- -------------
Total gross productive
wells.................. 11,628 591 3,623 255
Total net productive
wells.................. 5,849 246 1,705 76
- --------
(a) Includes approximately 1,566 gross and 308 net multiple completions for
ARCO, of which there are 280 gross and 136 net multiple completions for
Vastar.
(b) Includes approximately 1,414 gross and 703 net wells, respectively,
attributable to Vastar.
(c) Includes approximately 89 gross and 36 net multiple completions.
(d) Includes approximately 2,790 gross and 1,364 net wells, respectively,
attributable to Vastar.
As of December 31, 1997, the Company's holdings of petroleum rights acreage
(including options and exploration rights) were as follows (in thousands):
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------- -------------
NET GROSS NET GROSS
----- ----- ------ ------
U.S.
Alaska.............................................. 194 315 732 1,189
Lower 48(a)......................................... 1,659 3,123 2,840 5,304
----- ----- ------ ------
Total U.S......................................... 1,853 3,438 3,572 6,493
International......................................... 149 399 36,656 61,109
----- ----- ------ ------
Total............................................. 2,002 3,837 40,228 67,602
===== ===== ====== ======
- --------
(a) Includes 1,328 net developed acreage, 2,144 gross developed acreage, 2,506
net undeveloped acreage and 3,831 gross undeveloped acreage, respectively,
held by Vastar.
Alaska
Approximately 59% of ARCO's worldwide petroleum liquids production came from
ARCO's interests in Alaska, primarily in the Prudhoe Bay, Kuparuk River and
the Greater Point McIntyre Area fields on the North Slope of Alaska. ARCO's
net liquids production from Alaska in 1997 decreased 4% to 377,200 barrels per
day. ARCO's interests in Alaska included net proved reserves of 1,848 million
barrels of oil equivalent at December 31, 1997.
ARCO operates the eastern half of the Prudhoe Bay field and has a 21.87%
working interest in the oil rim production from the field and a 42.56% working
interest in the gas cap production. ARCO's net petroleum liquids production
from the Prudhoe Bay field averaged 198,500 barrels per day in 1997, compared
to 210,800 barrels per day in 1996.
ARCO is the sole operator of the Kuparuk River field and holds a 55.2%
working interest in the field. Its share of production from the field was
128,200 net barrels per day of petroleum liquids during 1997, compared to
130,500 net barrels per day during 1996. The Kuparuk Large Scale Enhanced Oil
Recovery project, which began operations in September 1996, added 7,500 net
barrels of oil to daily gross production in 1997, and is expected to add
35,000 to 40,000 barrels of oil to daily gross production by 1999. NGLs,
obtained from the Prudhoe Bay field, are injected into existing wells in the
Kuparuk River field in order to recover additional barrels of oil and offset
natural field decline. ARCO estimates that this project will result in an
additional 200 million gross barrels (97 million net barrels to ARCO) of
incremental oil from the Kuparuk River field.
ARCO has established working interests in four of five Greater Point
McIntyre Area fields as follows: 30.1% in Point McIntyre, 40.0% in Lisburne,
and 50.0% in both West Beach and North Prudhoe Bay State. Additionally, ARCO
4
has a working interest in the Niakuk field, which is currently being
negotiated among the owners of that field. All five of the fields are
processed through the Lisburne Production Center, which ARCO operates. During
1997, liquids processed through the Lisburne Production Center averaged
201,900 gross barrels per day, or 50,200 net barrels per day.
In 1997, the Company started several projects and had several successes that
it believes will stop the decline in production after 1999. The Prudhoe Bay
Miscible Injectant Expansion ("MIX") project was approved by ARCO and its
partners. This $160 million expansion of the gas handling facilities is
expected to add 50 million gross barrels of petroleum liquids and 20 thousand
net barrels of petroleum liquids per day to the field when it becomes
operational, targeted for 1999. The Alpine field was approved for development.
In late December 1997, ARCO began commercial production from West Sak, a heavy
oil accumulation. Commercial development of West Sak has become feasible
because of lower costs, new drilling technologies and a production facility
sharing arrangement with the Kuparuk production facility. The first phase of
West Sak development has resulted in proved gross reserves of 50 million
barrels of oil (25 net to ARCO). ARCO also had success drilling in a number of
satellite accumulations, including the Tarn field.
All of ARCO's petroleum liquids shipped from the North Slope fields are
transported to market through TAPS, an 800-mile pipeline system used to
transport petroleum liquids from the North Slope of Alaska to the port of
Valdez in south central Alaska. ARCO has a 22.3% weighted average undivided
ownership interest in TAPS. ARCO also owns approximately 22% of the stock of
Alyeska Pipeline Service Company, which constructed and now operates TAPS for
the owners. ARCO's undivided interest in TAPS is proportionately consolidated
for financial reporting purposes. TAPS 1997 throughput averaged approximately
1,335,000 barrels per day. From Valdez the liquids are shipped to West Coast
locations by ARCO's ocean-going tankers.
Lower 48
During 1997, ARCO's consolidated Lower 48 operations had net production of
385 BCF of natural gas (including consumption) and 66 MMB of petroleum liquids
as compared to 380 BCF and 63 MMB in 1996, respectively. Exploration,
development and purchases (net of sales) replaced 141% of 1997 production on a
barrel-of-oil-equivalent ("BOE") basis.
The primary vehicle for ARCO's Lower 48 exploration and production
operations is Vastar, of which ARCO owns 82.2%. Vastar, headquartered in
Houston, Texas, is engaged in the exploration for and the development,
production and marketing of natural gas and petroleum liquids in selected
major producing basins in the Gulf of Mexico, the Gulf Coast, the San Juan
Basin/Rockies and the Midcontinent areas. For additional information about
Vastar, a copy of Vastar's 1997 Annual Report to Stockholders and 1997 Annual
Report on Form 10-K can be obtained by writing to Manager, Investor Relations,
Vastar Resources, Inc., 15375 Memorial Drive, Houston, Texas 77079. Vastar's
telephone number is (281) 584-6000.
ARCO's other Lower 48 operations accounted for reserves at December 31, 1997
of 589 MMBOE, of which 84% were petroleum liquids. In 1997 net production from
ARCO's other Lower 48 interests was 57 MMB of oil equivalent, up slightly from
54 MMB in 1996.
International
ARCO's international operations include both exploration and production.
ARCO's 1997 international production of petroleum liquids averaged 82,600
barrels per day, and came primarily from Indonesia, the North Sea and Algeria.
Natural gas production averaged 844 MMCFD. Natural gas production from the
North Sea accounted for 46%, the Java Sea accounted for 37% and the South
China Sea accounted for 17% of ARCO's 1997 international natural gas
production.
ARCO's net proved reserves from international interests at December 31, 1997
were 1,148 MMBOE.
5
Natural gas production from ARCO's Yacheng 13 field, situated in the South
China Sea, began on January 1, 1996. With net production to ARCO of 142 MMCFD
during 1997, the Yacheng 13 field contributed 64% of the increase in ARCO's
international natural gas production for 1997.
In 1996, ARCO signed an agreement with Sonatrach, the Algerian state oil
company, to undertake a major enhanced oil recovery ("EOR") project in the
Rhourde El Baguel oil field. The agreement provides for ARCO to make an
investment of over $1.3 billion in the project, of which over $400 million was
spent during 1997. Under the production sharing contract, ARCO will receive up
to 49% of the project's annual production. ARCO believes its EOR efforts
should yield over 500 million incremental barrels of crude oil equivalent over
the 25-year life of the project and increase production rates to a peak of
125,000 barrels per day within the next five years. ARCO began receiving
production on July 1, 1996, and received 17,100 net barrels per day during
1997.
Exploration activities by an ARCO-operated consortium in which ARCO holds a
27.5% interest led to the discovery of an oil field called Al-Rayyan, in the
Arabian Gulf offshore Qatar, from which production commenced in late 1996.
Delineation and appraisal of the discovery were completed in 1997. ARCO, along
with its co-venturers, is currently negotiating with the governments of Qatar
and Dubai a contractual framework for the supply of natural gas to Dubai from
the huge Qatar North field, which is located in close proximity to the Al-
Rayyan field.
In the United Kingdom North Sea, ARCO added 100 million barrels of oil-
equivalent reserves for the Shearwater, Elgin, and Franklin gas condensate
fields for 1997. Production is expected to begin in 2000.
In early 1997, ARCO finalized a joint venture with LUKOIL, one of Russia's
largest oil companies, to pursue exploration and production projects in the
Commonwealth of Independent States ("CIS"). The joint venture entity, LUKARCO,
is owned 54% by LUKOIL and 46% by ARCO. LUKARCO may invest up to $5 billion in
various projects over the next 18 years. ARCO has agreed to provide most of
the financing to LUKARCO only for those projects approved by ARCO. In April
1997, LUKARCO acquired a 5% interest in the joint venture operating the Tengiz
oil field in the Republic of Kazakhstan. A second investment is an interest in
the Caspian Pipeline Consortium, a multi-party $2 billion project to construct
a 900-mile pipeline from the Tengiz oil field in Kazakhstan to the Black Sea
via Russia. LUKARCO holds a 12.5% interest, which obligates LUKARCO to fund
25% of the construction costs. This project is in the final stages of
acquiring necessary governmental approvals. In addition to the joint venture
participation, ARCO owns approximately 8% of LUKOIL's total equity.
In Tunisia, ARCO purchased a 50% interest in the offshore Ashtart oil field,
adding 24 million barrels of oil to its proved reserves in 1997. The Ashtart
field is adjacent to ARCO's exploration block.
ARCO announced the Tangguh liquefied natural gas ("LNG") project located in
eastern Indonesia. The reserves for the project are located primarily on the
Wiriagar and Berau blocks, in which ARCO has an 80% and 40% interest,
respectively. Pertamina, the Indonesian state oil company, which already
operates two of the world's largest LNG plants, will market the LNG produced
from the Tangguh project. Plans for development include a two-train LNG
production facility.
In Venezuela, ARCO and its partners submitted successful bids for contracts
on four blocks, Kaki, Maulpa, LL-652 and La Vela, in which ARCO has a 56%,
56%, 20% and 50% interest, respectively. ARCO and its partners expect to
produce more than 800 million gross barrels from these projects over the next
20 years, which will require over $2 billion in additional investment. Future
development of these blocks will require approvals by the Government of
Venezuela and PDVSA, the state oil company.
The Hamaca Project, a joint venture to produce and upgrade extra-heavy crude
oil production from Venezuela's Orinoco Belt, received final governmental
approval during 1997. Still remaining to be completed are certain agreements
among the joint venture partners for construction and operation of the
production and upgrading module. Oil produced from the Hamaca region will be
transported via pipeline to an upgrading plant for processing.
6
REFINING AND MARKETING
ARCO operates two U.S. petroleum refineries on the West Coast, the Los
Angeles Refinery in Carson, California and the Cherry Point Refinery near
Ferndale, Washington. Both of these refineries are accessible to major supply
sources and major markets through ocean-going tankers, pipelines and other
transportation facilities.
The combined annual average operable crude distillation capacities of these
two refineries, as measured pursuant to the standards of the American
Petroleum Institute, are shown in the following table:
ANNUAL AVERAGE OPERABLE
CRUDE DISTILLATION
CAPACITY
(BARRELS PER DAY)
-----------------------
1997 1996 1995
------- ------- -------
Los Angeles Refinery.................................... 260,000 260,000 237,000
Cherry Point Refinery................................... 202,000 200,500 185,000
------- ------- -------
Total................................................. 462,000 460,500 422,000
======= ======= =======
ARCO's crude oil refinery runs and petroleum products manufactured at its
refining facilities were as follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------- -------
(EQUIVALENT BARRELS PER
DAY)
Crude oil refinery runs................................. 452,200 452,700 438,800
======= ======= =======
Petroleum products manufactured:
Gasoline.............................................. 224,200 214,800 217,400
Jet fuels............................................. 106,700 105,700 101,300
Distillate fuels...................................... 73,100 66,000 70,700
Other (a)............................................. 85,300 100,500 82,700
------- ------- -------
Total (b)........................................... 489,300 487,000 472,100
======= ======= =======
- --------
(a) Includes chemical products, 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.
In connection with its refining operations, ARCO produces calcined coke and
operates electric cogeneration facilities.
ARCO markets gasoline and other refined petroleum products to both consumers
and resellers. Gasoline is marketed under the ARCO(R) trademark through
independent dealers and distributors and directly to motorists at branded
retail outlets located in Arizona, California, Nevada, Oregon and Washington.
ARCO also sells gasoline to unbranded resellers. NGLs are sold directly to
end-use customers including the Watson Cogeneration Facility, which is 51%
owned by ARCO, and are also marketed through distributors. Jet fuels are sold
directly to airlines and the United States Department of Defense. Calcined
coke is sold to U.S. and international industrial consumers. Cargo and bulk
sales of petroleum products are also made to commercial and industrial
consumers, and certain products are marketed through other channels.
During 1997 ARCO expanded its retail gasoline sites within its marketing
region, and expanded the marketing region to include western Canada. In
Southern California the Company integrated more than 200 former Thrifty
gasoline stations into its network through a long-term lease arrangement. ARCO
also initiated the purchase of over 30 retail outlets in Vancouver, which was
completed in early 1998. The Company currently has over 1,700 branded retail
outlets, which included franchisee and Company-operated am/pm(R) convenience
stores and SMOGPROS(R) Service Centers, and traditional service stations.
7
Total refined petroleum product sales, which include insignificant sales to
ARCO Chemical, for the periods indicated, were as follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(EQUIVALENT BARRELS PER
DAY)
Petroleum product sales:
Gasoline.............................................. 281,900 266,400 256,800
Jet fuels............................................. 117,300 117,000 106,200
Distillate fuels...................................... 76,600 69,000 69,100
Other(a).............................................. 68,000 80,700 61,800
------- ------- -------
Total................................................. 543,800 533,100 493,900
======= ======= =======
- --------
(a) Includes heavy fuel oils, NGLs, calcined and green coke.
Total petroleum product sales differ from total petroleum products
manufactured due to the consumption of some products as refinery fuel, the
exchange of products with other companies, change in inventory levels, and the
purchase and resale of products not manufactured by ARCO.
The R&M segment also operates 8 ocean-going U.S. oil tankers which transport
crude oil and petroleum products from the Valdez terminal or the Gulf Coast to
the West Coast.
The Company's equity investment in Zhenhai Refining and Chemical Company is
also included in the R&M segment.
CHEMICALS
The Company's chemicals operation consists of the businesses owned by ARCO
Chemical. ARCO currently owns 80,000,001 shares of common stock of ARCO
Chemical, which represent 82.3% of the outstanding shares.
ARCO Chemical is an international manufacturer and marketer of chemicals
used in a broad range of consumer products. ARCO Chemical's core product is
propylene oxide ("PO"), which it produces through two distinct technologies
based on indirect oxidation (peroxidation) processes that yield co-products.
One process yields tertiary butyl alcohol ("TBA") as the co-product; the other
process yields styrene monomer ("SM") as the co-product. The two technologies
are mutually exclusive such that either a dedicated PO/TBA plant or a
dedicated PO/SM plant must be built. ARCO Chemical also manufactures numerous
derivatives of PO and TBA. Key PO derivatives are polyols and propylene
glycols ("PG"); methyl tertiary butyl ether ("MTBE"), an oxygenate, is the
principal derivative of TBA.
In 1995, the Company began selling toluene diisocyanate ("TDI") obtained
under long-term supply agreements with Rhone-Poulenc. With the 1996
acquisition of TDI production facilities from Olin Corporation, the Company
also manufactures TDI. TDI and polyols are combined in the manufacture of
polyurethanes.
ARCO Chemical's principal chemical facilities are located in: Bayport,
Texas; Channelview, Texas; Rotterdam, the Netherlands; Fos-sur-Mer, France;
Lake Charles, Louisiana and a joint venture in Chiba, Japan. ARCO Chemical
also owns a majority equity interest in a second PO/SM plant at Channelview,
Texas. The other equity investors in the plant each take a portion of the SM
output of the plant through long-term processing agreements. In 1997, ARCO
Chemical entered into an engineering and construction contract for a new PO/SM
plant in Rotterdam; the plant is scheduled for completion in 2000. Expansion
of the Channelview, Texas PO/SM capacity is expected to be completed in early
1998.
The following table shows ARCO Chemical's worldwide production capacity (in
millions of pounds per year, except where otherwise noted) for PO, SM and
certain key derivatives:
PRODUCT U.S. INTERNATIONAL
------- ------ -------------
PO 2,335 1,395
Polyols 740 610
PG 565 345
TDI 250 --
SM 2,570 830
MTBE--Bbls/day 30,000 28,500
8
Capacities shown are the production capacities that, as of December 31,
1997, ARCO Chemical believes it can obtain based upon plant design and subject
to certain onstream factors, product mix and other variable factors.
Capacities shown include the full capacity of joint-venture facilities. Plants
can and have exceeded these capacities for extended periods of time.
In addition to raw material purchase agreements and product sales or
processing agreements with unrelated third parties, ARCO Chemical has entered
into a long-term sales agreement with ARCO providing for delivery of fixed
quantities of MTBE. Heightened public awareness about MTBE has resulted in
certain state and federal initiatives that either seek to rescind the
oxygenate requirement for reformulated gasoline in California or restrict the
use of MTBE. Restrictions on the use of MTBE in California, if adopted, could
affect ARCO Chemical's MTBE sales in California.
For additional information about ARCO Chemical, a copy of ARCO Chemical's
1997 Annual Report to Stockholders and 1997 Annual Report on Form 10-K can be
obtained by writing to Manager, Investor Relations, ARCO Chemical Company,
3801 West Chester Pike, Newtown Square, Pennsylvania 19073-2387. ARCO
Chemical's telephone number is (610) 359-2000.
OTHER OPERATIONS
Historical results of ARCO's former equity interest in the operations of
Lyondell for the three years ended December 31, 1997 are reflected in the
Consolidated Financial Statements. See Note 23 of Notes to Consolidated
Financial Statements on page 51.
ARCO has interests in nine surface and underground coal mines in the western
United States and in northeastern Australia. In the United States, ARCO owns
and operates two mines in Wyoming's Powder River Basin, Black Thunder and Coal
Creek, and West Elk, in western Colorado. ARCO also has a 65% interest in
Canyon Fuel Company, a limited liability company that owns three mines--SUFCO,
Skyline and Soldier Creek--located in Utah's Uinta Basin. In Queensland,
Australia, ARCO has interests in three mines: Curragh, Gordonstone and Blair
Athol. Reference is made to Supplemental Information, Coal Operations on page
55 for further information concerning reserves and shipments of coal.
In the Lower 48, ARCO manages facilities for transportation and terminalling
of petroleum liquids, refined petroleum products, petrochemicals and natural
gas.
CAPITAL PROGRAM
The Company's capital expenditures for additions to fixed assets (including
dry hole costs) totaled approximately $3.0 billion in 1997. The capital
program for additions to fixed assets is budgeted at $3.8 billion for 1998.
The levels of future capital expenditures may be affected by business
conditions in the industry, particularly possible changes in prices of and
demand for crude oil, natural gas and petroleum products. Changes in the tax
laws, the imposition of and changes in federal and state clean air and clean
fuel requirements, and other changes in environmental rules and regulations
may also affect future capital expenditures.
PATENTS
ARCO owns numerous patents, many of which are available for license to the
petroleum industry, and is itself a licensee under certain patents which are
available generally to the industry. The Company's operations are not
dependent upon any particular patent or patents or upon any exclusive patent
rights.
COMPETITION
The petroleum industry is competitive in all its phases, including
manufacturing, distribution and marketing of petroleum products and
petrochemicals. Methods of competition for new sources of supply include
finding and developing such sources and competition in bidding for leases
which may contain such sources and the acquisition of
9
producing properties. Competitive factors in manufacturing, distribution and
marketing include price, methods and reliability of delivery, product quality,
new product development and, with respect to consumer products, advertising
and sales promotion.
Crude oil and natural gas supplies are currently abundant relative to demand
in the worldwide markets for those commodities. Market prices are typically
volatile as a result of uncertainties caused by world events. ARCO's emphasis
on the cost-efficient exploration and development of petroleum resources and
on innovative marketing strategies make the Company well situated to compete
in this environment.
In the refining and marketing segment of the industry, refining operations
that yield a higher proportion of high-margin products and marketing
operations that put a premium on high volume and innovation are of primary
importance.
The U.S. coal mines primarily serve competitive U.S. markets, where the
availability of specific transportation arrangements, primarily rail
transportation, are often a key element in competition because transportation
costs are a significant component of the delivered price of coal. Almost all
of the Company's U.S. coal customers are electric utilities. The Company's
Australian mines are export-oriented, largely to Japan, and face worldwide
competition from Canadian, Indonesian, South African, U.S. and other
Australian producers.
Key competitive factors in the chemicals markets include research and
development, product price, quality, reliability of supply, technical support,
customer service and potential substitute materials.
The Company ranked as the sixth largest U.S.-based oil company on the basis
of revenues in the most recent Fortune 500 list of U.S. industrial companies.
HUMAN RESOURCES
As of December 31, 1997, ARCO had approximately 24,000 full-time equivalent
employees, of whom approximately 11% were represented by collective bargaining
agents.
RESEARCH AND DEVELOPMENT
ARCO engages in research for new and improved products and methods for
operating its businesses principally at two facilities located at Newtown
Square, Pennsylvania and Plano, Texas. Total research and development expenses
were $120 million, $106 million and $104 million in 1997, 1996 and 1995,
respectively.
ENVIRONMENTAL MATTERS
Site Remediation
The Company 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 the
Company to remove or mitigate the effects on the environment of the disposal
or release of certain chemical, mineral and petroleum substances at various
sites, to perform certain restoration work on these sites and to pay damages
for loss of use and non-use values. The Company is currently participating in
environmental assessments and cleanups under these laws at federal Superfund
and state-managed sites, as well as other clean-up sites, including service
stations, refineries, terminals, chemical facilities, third party landfills,
former nuclear processing facilities, sites associated with discontinued
operations and sites that were formerly owned by ARCO. The Company may in the
future be involved in additional environmental assessments and cleanups,
including the restoration of natural resources and damages for loss of use and
non-use values. The ultimate amount of the future costs associated with such
environmental assessments and cleanups is indeterminable due to
10
such unknown factors as the nature and/or extent of contaminants at many
sites, the timing, extent and method of the remedial actions which may be
required and the determination of the Company's liability in proportion to
other responsible parties. In addition, environmental loss contingencies
include claims for personal injuries allegedly caused by exposure to toxic
materials manufactured or used by ARCO. The Company continues to estimate the
amount of these costs in periodically establishing reserves based on progress
made in determining the magnitude of remediation costs, experience gained from
sites on which remediation has been completed, the timing, extent and method
of remedial actions required by the applicable governmental authorities and an
evaluation of the amount of the Company's liability considered in light of the
liability and financial wherewithal of the other responsible parties. As the
scope of the Company's obligation becomes more clearly defined, there may be
changes in these estimated costs, which might result in future charges against
the Company's earnings.
The Company's environmental remediation reserve of $767 million at December
31, 1997 covers federal Superfund and state-managed sites as well as other
clean-up sites, including service stations, refineries, terminals, chemical
facilities, third-party landfills, former nuclear processing facilities, sites
associated with discontinued operations and sites formerly owned by ARCO. The
Company has been named a potentially responsible party ("PRP") for 133 sites.
The number of PRP sites in and of itself does not represent a relevant measure
of liability, because the nature and extent of environmental concerns vary
from site to site and the Company's share of responsibility varies from sole
responsibility to very little responsibility. The Company reviews all of the
PRP sites along with other sites as to which no claims have been asserted, in
estimating the amount of accrual. The Company's future remediation costs for
these sites could exceed the amount reserved by as much as $500 million.
Approximately 58% of the reserve relates to sites associated with the
Company's discontinued operations, primarily mining activities in the states
of Montana, Utah and New Mexico. Another significant component relates to
currently and formerly owned chemical, nuclear processing, and refining and
marketing facilities, and other sites that received wastes from these
facilities. The Company is also the subject of certain material legal
proceedings described below under the caption "Material Environmental
Litigation." The remainder relates to sites with reserves ranging from
$1 million to $10 million per site. No one site represents more than 10% of
the total reserve. Substantially all amounts reserved are expected to be paid
out over the next five to six years.
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. The Company does not anticipate any
material adverse effect upon its consolidated financial position as a result
of compliance with such environmental laws and regulations.
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 and the Wilmington calciner 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.
11
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 approximately $153 million per year. The Company
anticipates environment-related capital expenditures of approximately
$300 million and $200 million for 1997 and 1998, 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 $125 million per year. Cash payments for site remediation have
averaged $118 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 $220 million per
year.
In addition to the reserve for environmental remediation costs, the Company
has also accrued, as of December 31, 1997, $1 billion 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 has
asserted claims against ARCO for compensation for damage to natural resources
up to the maximum amount allowed by 42 United States Code (S)9607. These
alleged damages, arising out of ARCO's or its predecessors' alleged
activities, include restoration and compensable damages, assessment costs, and
prejudgment interest. On December 12, 1983, a lawsuit, styled Montana v. ARCO,
ex rel. (Case No. CV-83-317-HLN-PGH), was filed in the United States District
Court for the District of Montana. The State's claim, as of January 1, 1997,
was for damages of $764 million for alleged injuries to natural resources
resulting from mining and mineral processing operations. ARCO is contesting
this demand. In addition, on January 21, 1997, the court granted the
Confederated Salish and Kootenai Tribes of the Flathead Reservation ("Tribes")
a limited form of intervention in Montana v. ARCO. The Tribes, as alleged
trustees, have asserted claims against ARCO for alleged injury to and loss of
natural resources located in the Clark Fork River Basin in southwest Montana.
On March 3, 1997, trial commenced and is continuing. The United States
Department of Interior also has stated an intention to make a claim for
natural resource damages in the Clark Fork River Basin.
On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO
(amended October 15, 1992), 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 the EPA's claims (in the approximate amount
of $80 million) 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.
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
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 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
12
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.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking
compensatory and punitive damages and injunctions were filed by the State of
Alaska, the United States, and private plaintiffs against Exxon, Alyeska, and
Alyeska's owner companies (including ARCO Transportation Alaska, Inc.).
Alyeska and its owner companies have settled the civil damage claims by
federal and state governments and the lawsuits by private plaintiffs. Certain
issues relating to liability for the spill remain unresolved between the Exxon
companies, on the one hand, and Alyeska and its owner companies, on the other
hand.
On November 21, 1990, ARCO filed a complaint in Los Angeles County Superior
Court, Atlantic Richfield Company v. AETNA Casualty and Surety Company of
America, et al. (Case No. BC 015575), seeking recovery under numerous
insurance policies in effect at times during past years for certain
environmental expenses incurred by ARCO. The claims arise from the activities
of ARCO and its predecessor companies, including The Anaconda Company, at
sites and locations throughout the United States. ARCO has settled with most
of the insurance company defendants.
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 13 of Notes to Consolidated Financial
Statements on page 45, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 (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 seek 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; (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 seek
punitive damages and attorney fees. As a result of various court rulings, the
plaintiffs' only remaining claims are for fraud and restitution and indemnity.
On January 24, 1996, ARCO (as successor to IS&R) was added as a defendant to
a class action suit pending in the United States District Court for the
Southern District of New York, German, et al. v. Federal Home Loan Mortgage
Corp., et al. (Case No. 93 Civ 6941), by plaintiff intervenors Naquan and
Naiya Thomas, minors, and their mother and guardian Kaii Henry. The complaint
in intervention names as defendants, in addition to ARCO, eight alleged former
processors of lead pigment and lead paint, the LIA, the City of New York and
its Housing Authority, and the owner of the building where plaintiffs reside.
Plaintiffs seek on behalf of themselves, and a purported class of children
under seven and pregnant women residing in dwellings in the City of New York
containing or presumed to contain lead paint, injunctive relief from all
defendants including orders to abate lead paint and to contribute to court-
administered funds to pay for abatement and medical monitoring and treatment.
The complaint alleges causes of action against the lead pigment defendants and
the LIA for negligence, strict product liability, fraud and misrepresentation,
breach of express and implied warranty, nuisance, conspiracy, concert of
action, and enterprise and market share liability. The City of New York, its
Housing Authority, and the owner of the building where plaintiffs reside have
filed cross-claims against ARCO, the other alleged former processors of lead
pigment and paint, and the LIA seeking indemnification against or contribution
toward any liability they (cross-claimants) may have to plaintiffs.
13
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, 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.
In addition, the Company is a defendant in several lawsuits brought by
individuals that allege injury from exposure to lead paint. Such cases, in the
aggregate, are not material to the financial condition of the Company.
In 1993, natural gas royalty owners filed an action in Zapata County, Texas
titled Stanley Marshall, et al. v. ARCO (Case No. 3217). The plaintiffs
claimed breach of lease, breach of Texas Railroad Commission rules and
regulations, conversion, and fraud. On September 8, 1997, a jury found in
favor of the plaintiffs and on January 20, 1998 the trial court entered
Judgment on the verdict awarding $69.2 million in damages, comprised of $3.8
million in actual damages, $50 million in exemplary damages, $13.4 million in
attorney's fees and $1.9 million in pre-judgment interest. ARCO has appealed
this judgment to the Court of Appeals for the Fourth District of Texas in San
Antonio.
On March 29, 1994, Siemens Solar Industries ("Siemens") filed a complaint in
the Supreme Court of the State of New York for the County of New York, titled
Siemens Solar Industries v. Atlantic Richfield Company (Case No. 94-109092).
Siemens' complaint alleged breach of contract and misrepresentation in
connection with the February 1990 sale by ARCO to Siemens of the stock of ARCO
Solar, Inc. Siemens sought damages in the amount of the purchase price,
operating losses incurred after the sale, prejudgment interest, and punitive
damages. ARCO denied the allegations of the complaint. On December 8, 1997,
the court granted ARCO's motion for summary judgment, and dismissed the
complaint. Siemens has filed a notice of appeal from this decision.
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 which infringed on UNOCAL's patent. The court has instructed the
parties to establish a method for updating, through the date of judgment, the
volumes of infringing gallons. The inequitable conduct phase was tried in
December 1997 without a jury. To date, no decision on that phase has been
rendered by the court. The last phase, in which UNOCAL seeks $2.6 million in
attorneys fees, will be tried without a jury in March 1998. Final judgment is
expected to be entered in May or June 1998, after which an appeal to the Court
of Appeals for the Federal Circuit is available.
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 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
14
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.
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." Set forth below is a description, in accordance
with SEC rules, of certain fines and penalties imposed by governmental
agencies in respect of environmental rules and regulations.
Certain substances are present in the soil and ground water at the site of a
plant, formerly owned by ARCO Chemical and located in Monaca, Pennsylvania
(Beaver Valley). In October 1997, ARCO Chemical, Beazer East, Inc. and the
Pennsylvania Department of Environmental Protection ("PADEP") entered into a
second consent agreement that acknowledged the completion of remedial
investigations pursuant to the work plan performed under the 1994 consent
agreement relating to the Beaver Valley site. The second consent agreement
also conditionally approved the proposed remediation methods at the Beaver
Valley site. Final approval of the remediation methods is subject to PADEP's
approval of risk assessment studies to be submitted by ARCO Chemical. Under
the second consent agreement, the monetary penalties contained in the 1994
consent agreement will be imposed only if ARCO Chemical fails to meet the
deadlines for submitting the risk assessment studies to PADEP. Following the
1996 sale of the Beaver Valley plant assets to NOVA Chemicals Inc. ("NOVA"),
NOVA agreed to assume ownership of certain portions of the Beaver Valley
land, which was temporarily leased to NOVA until ARCO Chemical finalized the
second consent agreement. Title to the leased land was transferred to NOVA in
November 1997. ARCO Chemical will retain responsibility for the remediation of
the land as required by the second consent agreement.
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 disposal, emission
and storage 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).
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.
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 1997.
----------------
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of February 27,
1998.
NAME, AGE AND PRESENT
POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST
RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b)
---------------------- ---------------------------------------------
Mike R. Bowlin, 55 Mr. Bowlin has been Chairman of the Board of ARCO since July
Chairman of the Board 1995, Chief Executive Officer since July 1994, and a director
and Chief Executive since June 1992. He served as President (June 1993-January
Officer 1998), an Executive Vice President (June 1992-May 1993) and a
Senior Vice President of ARCO (August 1985-June 1992), Presi-
dent of ARCO International Oil and Gas Company (November
1987-June 1992), President of ARCO Coal Company (August 1985-
July 1987), a Senior Vice President of International Oil and
Gas Acquisitions (July 1987-November 1987), a Vice President
of ARCO (October 1984-July 1985) and a Vice President of ARCO
Oil and Gas Company (April 1981-December 1984). He has been
an officer of the Company since 1984.
William E. Wade, Jr., 55 Mr. Wade has been President of ARCO since January 1998 and a
President and Director director since June 1993. He served as an Executive Vice
President (June 1993-January 1998) and a Senior Vice Presi-
dent of ARCO (May 1987-May 1993), President of ARCO Oil and
Gas Company (October 1990-May 1993), President of ARCO Alas-
ka, Inc. (July 1987-July 1990), a Vice President of ARCO
(1985-1987) and a Vice President of ARCO Exploration Company
(1981-1985). He has been an officer of the Company since
1985. He also serves as a Director of Vastar.
Anthony G. Fernandes, 52 Mr. Fernandes has been an Executive Vice President of ARCO
Executive Vice and a director since September 1994. He served as a Senior
President and Director Vice President of ARCO and President of ARCO Coal Company
(September 1990-September 1994), Vice President and Control-
ler of ARCO (July 1987-July 1990), a Vice President of ARCO
Oil and Gas Company (January 1985-July 1987) and a Vice Pres-
ident of Anaconda Minerals (May 1981-January 1985). He has
been an officer of the Company since 1987. He also serves as
Chairman of the Board of ARCO Chemical.
Marie L. Knowles, 51 Mrs. Knowles has been an Executive Vice President and the
Executive Vice Chief Financial Officer of ARCO and a director since July
President, Chief 1996. She served as a Senior Vice President of ARCO and Pres-
Financial Officer and ident of ARCO Transportation Company (June 1993- July 1996),
Director Vice President and Controller of ARCO (July 1990-May 1993),
Vice President of Finance, Control and Planning of ARCO In-
ternational Oil and Gas Company (July 1988-July 1990), and
Assistant Treasurer of Banking of ARCO (October 1986-July
1988). She has been an officer of the Company since 1990. She
also serves as a Director of ARCO Chemical and Vastar.
J. Kenneth Thompson, 46 Mr. Thompson has been an Executive Vice President of ARCO
Executive Vice since January 1998. He was a Senior Vice President of ARCO
President and President of ARCO Alaska, Inc. (June 1994-January 1998).
He was a Vice President of ARCO and a Vice President of ARCO
Exploration and Production Technology (June 1993-June 1994)
and a Senior Vice President, Western District of ARCO Oil and
Gas Company (January 1990-June 1993). He has been an officer
of the Company since 1993.
Michael E. Wiley, 47 Mr. Wiley has been an Executive Vice President of ARCO since
Executive Vice March 1997 and a director since June 1997. He served as Chief
President and Director Executive Officer of Vastar (January 1994-March 1997) and
President (September 1993-March 1997). Prior to the formation
of Vastar, he was Senior Vice President of ARCO (June 1993-
June 1994), President of ARCO Oil and Gas Company (June-Octo-
ber 1993) and Vice President of ARCO and Manager of ARCO Ex-
ploration and Production Technology (1991-1993). He has been
an officer of the Company since 1997. He also serves as
Chairman of the Board of Vastar.
16
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH ATLANTIC RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b)
--------------------------------- ---------------------------------------------
H. L. Bilhartz, 51 Mr. Bilhartz has been a Senior Vice President of ARCO since
Senior Vice President July 1990 and President of ARCO Exploration and Production
Technology since June 1994. He served as President of ARCO
Alaska, Inc. (July 1990-May 1994), a Vice President of ARCO
(June 1987-July 1990), President of ARCO Coal Company (July
1987-July 1990), Vice President and Managing Director for
ARCO British Limited and ARCO Netherlands in London (1985-
1987), Vice President of Finance, Control and Planning of
ARCO International Oil and Gas Company (1984-1985) and Vice
President and District Manager for ARCO Oil and Gas Company
(1983-1984). He has been an officer of the Company since
1987.
John B. Cheatham IV, 50 Mr. Cheatham has been a Senior Vice President of ARCO since
Senior Vice President December 1995. He was President of ARCO International Oil and
Gas Company (December 1995-January 1998), Senior Vice Presi-
dent, Operations and New Business Development (November 1993-
November 1995) and Senior Vice President, New Business Ven-
tures (November 1992-November 1993) of ARCO International Oil
and Gas Company, and Senior Vice President, Eastern District
(August 1991-November 1992) and Vice President, Southeastern
District (November 1989-August 1991) of ARCO Oil and Gas Com-
pany. He has been an officer of the Company since 1995.
Terry G. Dallas, 47 Mr. Dallas has been a Senior Vice President of ARCO since
Senior Vice President November 1996 and Treasurer since January 1994. He was a Vice
and Treasurer President of ARCO (June 1993-November 1996), the Vice
President, Corporate Planning (June 1993-January 1994), and
Assistant Treasurer, Corporate Finance of ARCO (1990-1993)
and Manager, Finance, Control and Planning, ARCO British,
Ltd. (1988-1990). He has been an officer of the Company since
1993. He also serves as a Director of Vastar.
Mark L. Hazelwood, 47 Mr. Hazelwood has been a Senior Vice President of External
Senior Vice President Affairs of ARCO since July 1997. He served as President of
ARCO Alaska Transportation, Inc. (September 1996-July 1997),
President of ARCO Pipe Line Company (1994-March 1996), Senior
Vice President of Marketing of ARCO Oil and Gas Company
(1991-1994), and Vice President and General Tax Officer of
ARCO (August 1988-March 1991). He has been an officer of the
Company since 1997.
John H. Kelly, 43 Mr. Kelly has been a Senior Vice President, Human Resources
Senior Vice President of ARCO since January 1997. He was Vice President, Corporate
Units Human Resources of ARCO (June 1993-January 1997) and
Vice President, Human Resources of ARCO Oil and Gas Company
(July 1991-June 1993). He has been an officer of the Company
since 1993.
Stephen R. Mut, 47 Mr. Mut has been a Senior Vice President of ARCO since Sep-
Senior Vice President tember 1994. He was President of ARCO Global Energy Ventures
(August 1996-January 1998), President of ARCO Coal Company
(September 1994-August 1996) and Senior Vice President of Op-
erations of ARCO International Oil and Gas Company (1991-
1994). He has been an officer of the Company since 1994. He
also serves as a Director of ARCO Chemical.
John M. Slater, 54 Mr. Slater has been a Senior Vice President of ARCO since
Senior Vice President July 1997 and President of ARCO Coal Company since August
1997. He previously worked for BP Coal for 19 years. His most
recent positions for BP were Chief Executive Officer BP Coal
and Chairman, Kaltim Prima Coal.
17
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH ATLANTIC RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b)
-------------------------------- ---------------------------------------------
Roger E. Truitt, 52 Mr. Truitt has been a Senior Vice President of ARCO and
Senior Vice President President of ARCO Products Company since November 1997. He
was Senior Vice President, Asia Region, ARCO International
Oil and Gas Company (November 1994-November 1997), a Senior
Vice President of ARCO Products Company (January 1994-
November 1994) and a Vice President of ARCO International Oil
and Gas Company (December 1991-December 1993). He has been an
officer of the Company since 1997.
Donald R. Voelte, Jr., 45 Mr. Voelte has been a Senior Vice President of ARCO since
Senior Vice President April 1997. He previously worked for the Mobil Corporation
for 22 years. His most recent position was President of Mobil
Oil Company's New Exploration and Producing Ventures (1994-
April 1997). He has been an officer of the Company since
1997.
Bruce G. Whitmore, 53 Mr. Whitmore has been the Senior Vice President, General
Senior Vice President, Counsel and Corporate Secretary of ARCO since December 1994.
General Counsel and He served as Vice President and General Counsel of ARCO Chem-
Corporate Secretary ical Company (October 1990-December 1994) and as Associate
General Counsel, Finance and Corporate Affairs of ARCO (June
1986-September 1990). He has been an officer of the Company
since 1994.
Allan L. Comstock, 54 Mr. Comstock has been a Vice President and Controller of ARCO
Vice President and since June 1993. He was a Vice President of ARCO Chemical
Controller Company (October 1989-June 1993) and General Auditor of ARCO
(November 1985-October 1989). He has been an officer of the
Company since 1993.
- --------
(a) Division names used in the descriptions of business experience of
executive officers of the Company are the names which were in effect at
the time such officers held such positions. In some instances, divisions
have been combined or reorganized and, accordingly, activities thereof are
presently conducted under different division names.
(b) The By-Laws of the Company provide that each officer shall hold office
until the officer's successor is elected or appointed and qualified or
until the officer's death, resignation or removal by the Board of
Directors.
18
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock is included in
order to facilitate incorporation by reference of such description in filings
by the Company under the federal securities laws.
Certain statements under this heading are summaries of provisions of the
Restated Certificate of Incorporation of ARCO, dated June 27, 1994, and do not
purport to be complete. The summaries make use of certain terms defined in the
Certificate of Incorporation and are qualified in their entirety by reference
thereto.
The term "$3.00 Preference Stock" refers to the Company's $3.00 Cumulative
Convertible Preference Stock, par value $1 per share. The term "$2.80
Preference Stock" refers to the Company's $2.80 Cumulative Convertible
Preference Stock, par value $1 per share. The term "Preferred Stock" refers to
the Company's Preferred Stock, par value $.01 per share; this class of
Preferred Stock was authorized by stockholders on May 3, 1993. The term
"Common Stock" refers to the Company's Common Stock, par value $2.50 per
share.
The following is a summary of the capital stock of ARCO as of December 31,
1997.
SHARES SHARES
AUTHORIZED OUTSTANDING
----------- -----------
$3.00 Preference Stock.......................... 78,089 55,941
$2.80 Preference Stock.......................... 833,776 615,653
Preferred Stock................................. 75,000,000 --
Common Stock.................................... 600,000,000 320,369,895*
- --------
* Excludes treasury stock.
Certain Open Market Stock Purchases. Pursuant to the 1985 Executive Long-
Term Incentive Plan, as amended through July 28, 1997 (the "LTIP"), officers
and key employees are eligible to receive shares of Common Stock upon
exercises of stock options, surrender of dividend share credits, and upon
grants of Restricted Stock. Pursuant to the compensation program for outside
directors, effective January 1, 1998, outside directors are eligible to
receive shares of Common Stock upon grants of Restricted Stock, including
Restricted Stock granted in lieu of some or all of their cash compensation for
serving as directors and in connection with the termination of the Outside
Directors Retirement Plan. Pursuant to the Company's Capital Accumulation
Plans, employees are eligible to receive Common Stock in satisfaction of
employer and employee contributions thereunder. ARCO may satisfy these
obligations by issuing new shares of Common Stock. From time to time ARCO may
also purchase Common Stock on the open market and contribute it to treasury to
provide for current and future obligations to deliver Common Stock under each
of these plans; in addition, ARCO may purchase Common Stock on the open market
and contribute it to treasury in satisfaction of its obligations upon
conversion of the $3.00 Preference Stock and the $2.80 Preference Stock.
Power of Board to Determine Terms of Preferred Stock. Under the Certificate
of Incorporation, as amended following approval by stockholders on May 3,
1993, the Board is authorized to issue, at any time or from time to time, one
or more series of Preferred Stock at its discretion. In addition, the Board
has the power to determine all designations, powers, preferences and the
rights of such stock and any qualifications, limitations and restrictions,
including but not limited to: (i) the designation of series and numbers of
shares; (ii) the dividend rights, if any; (iii) the rights upon liquidation or
distribution of the assets of the Company, if any; (iv) the conversion or
exchange rights, if any; (v) the redemption provisions, if any; and (vi) the
voting rights, if any. No shares of Preferred Stock have been issued.
So long as the Preference Stocks are outstanding, and only for that period
of time, the rights of the Preferred Stock are subordinate to the rights of
the holders of Preference Stocks.
Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80
Preference Stock are entitled to receive cumulative dividends at the annual
rate of $3.00 per share and $2.80 per share, respectively, payable quarterly,
before cash dividends are paid on the Preferred Stock, if any, and the Common
Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock
rank on a parity as to dividends. After provision for payment in full of
cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference
Stocks, and the payment in full of cumulative
19
dividends on the outstanding Preferred Stock, if any, dividends may be paid on
the Common Stock as the Board of Directors may deem advisable, within the
limits and from the sources permitted by law.
Conversion Rights. Each share of $3.00 Preference Stock is convertible, at
the option of the holder, into 13.6 shares of Common Stock of the Company at
any time, and each share of $2.80 Preference Stock is convertible, at the
option of the holder, into 4.8 shares of Common Stock of the Company at any
time. These conversion rates are subject to adjustment as set forth in the
Certificate of Incorporation. Shares of Preferred Stock would be convertible,
if at all, on such terms as were designated by the Board of Directors.
Voting Rights. The holders of $3.00 Preference Stock are entitled to sixteen
votes per share; holders of $2.80 Preference Stock are entitled to four votes
per share; and holders of Common Stock are entitled to one vote per share.
Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote
cumulatively for directors; holders of Common Stock have no cumulative voting
rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together
as one class, except as provided by law and except as to certain matters which
require a vote by the holders of $3.00 Preference Stock or by the holders of
$2.80 Preference Stock as a separate class as set forth below.
The Certificate of Incorporation provides that if the Company shall be in
default with respect to dividends on the $3.00 Preference Stock in an amount
equal to six quarterly dividends, the number of directors of the Company shall
be increased by two at the first annual meeting thereafter, and at such
meeting and at each subsequent annual meeting until all dividends on the $3.00
Preference Stock shall have been paid in full, the holders of the $3.00
Preference Stock shall have the right, voting as a class, to elect such two
additional directors. The Certificate of Incorporation contains identical
provisions with respect to the $2.80 Preference Stock.
The Certificate of Incorporation provides that the Company shall not,
without the assent of the holders of two-thirds of the then outstanding shares
of $3.00 Preference Stock, (a) change any of the terms of the $3.00 Preference
Stock in any material respect adverse to the holders, or (b) authorize any
prior ranking stock; and that the Company shall not, without the assent of the
holders of a majority of the then outstanding shares of $3.00 Preference
Stock, (1) authorize any additional $3.00 Preference Stock or stock on a
parity with it; (2) sell, lease or convey all or substantially all of the
property or business of the Company; or (3) become a party to a merger or
consolidation unless the surviving or resulting corporation will have
immediately after such merger or consolidation no stock either authorized or
outstanding (except such stock of the Company as may have been authorized or
outstanding immediately before such merger or consolidation of such stock of
the surviving or resulting corporation as may be issued upon conversion
thereof or in exchange therefor) ranking as to dividends or assets prior to or
on a parity with the $3.00 Preference Stock or the stock of the surviving or
resulting corporation issued upon conversion thereof or in exchange therefor.
The Certificate of Incorporation contains identical provisions with respect to
the $2.80 Preference Stock.
The holders of Preferred Stock, if any, would have such voting rights, if
any, as were designated by the Board.
Redemption Provisions. The $3.00 Preference Stock is redeemable at the
option of the Company as a whole or in part at any time on at least thirty
days' notice at $82 per share plus accrued dividends to the redemption date.
The $2.80 Preference Stock is redeemable at the option of the Company as a
whole or in part at any time on at least thirty days' notice at $70 per share
plus accrued dividends to the redemption date. The holders of Preferred Stock,
if any, would have such redemption provisions, if any, as were designated by
the Board.
Liquidation Rights. In the event of liquidation of the Company, the holders
of $3.00 Preference Stock and holders of $2.80 Preference Stock will be
entitled to receive, before any payment to holders of Common Stock, $80 per
share and $70 per share, respectively, together in each case with accrued and
unpaid dividends. Shares of $3.00 Preference Stock and shares of $2.80
Preference Stock will rank on a parity as to assets of the Company upon its
liquidation. Subject to the rights of creditors and the holders of $3.00
Preference Stock and $2.80 Preference Stock, the holders of Common Stock are
entitled pro rata to the assets of the Company upon its liquidation. The
holders of Preferred Stock, if any, would have such liquidation rights, if
any, as were designated by the Board.
Preemptive Rights. No holders of shares of capital stock of the Company have
or will have any preemptive rights to acquire any securities of the Company.
20
Liability to Assessment. The shares of Common Stock are fully paid and non-
assessable.
Prohibition of Greenmail. Article VII of the Certificate of Incorporation
provides in general that any direct or indirect purchase by the Company of any
of its voting stock (or rights to acquire voting stock) known to be
beneficially owned by any person or group which holds more than 3% of a class
of its voting stock and which has owned the securities being purchased for
less than two years must be approved by the affirmative vote of at least 66
2/3% of the votes entitled to be cast by the holders of the voting stock. Such
approval shall not be required with respect to any purchase by the Company of
such securities made (i) at or below fair market value (based on average New
York Stock Exchange closing prices over the preceding 90 days) or (ii) as part
of a Company tender offer or exchange offer made on the same terms to all
holders of such securities and complying with the Securities Exchange Act of
1934 or (iii) in a Public Transaction (as defined).
Rights to Purchase Common Stock. On July 24, 1995, the Board of Directors of
the Company declared a dividend of one common share purchase right (a "Right")
for each outstanding share of Common Stock, par value $2.50 per share (the
"Common Shares"), of the Company. The dividend was paid on August 18, 1995 to
the stockholders of record on that date. Each Right entitled the registered
holder to purchase from the Company one Common Share at a price of $400.00 per
share (the "Purchase Price"), subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement between the Company and
First Chicago Trust Company of New York, as Rights Agent.
The Rights will be evidenced by and will be transferred with the Common
Share certificates until the Distribution Date. The Distribution Date is
defined as the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 15% or more of the outstanding Common Shares (an
"Acquiring Person") or (ii) 10 business days following the commencement of, or
announcement of an intention to make, a tender or exchange offer, the
consummation of which would result in a person or group becoming an Acquiring
Person. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights will be issued.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on August 18, 2005 unless redeemed prior to that date by the Company.
The Purchase Price payable, and the number of Common Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution.
In the event that any person becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person and its
affiliates and associates (which will thereafter be void), will have the right
to receive, upon exercise of each Right, that number of Common Shares having a
market value of two times the Purchase Price. If, after the Distribution Date,
the Company is acquired in a merger or other business combination with, or 50%
or more of its consolidated assets or earning power are sold to, the Acquiring
Person, each holder of a Right will have the right to receive, upon exercise
of each Right, that number of shares of common stock of the acquiring company
with a market value of two times the Purchase Price.
At any time after an Acquiring Person crosses the 15% threshold and prior to
the acquisition by such person of 50% or more of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by the Acquiring Person), in whole or in part, at an
exchange ratio of one Common Share per Right.
The Board of Directors of the Company may redeem the Rights in whole, but
not in part, at a price of $.01 per Right prior to the acquisition by an
Acquiring Person of 15% or more of the outstanding Common Shares. The terms of
the Rights may be amended by the Board of Directors of the Company without the
consent of the holders of the Rights, except that after any person becomes an
Acquiring Person no such amendment may adversely affect the interests of the
other holders of the Rights.
A copy of the Rights Agreement is filed as an exhibit hereto. This summary
description of the Rights is qualified in its entirety by reference thereto.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1997 1996
------------------------------------ -----------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------- ------- --------- ------- ------- -------- -------- --------
Common Stock:
Market price per share
High................. $87 1/4 $86 15/16 $75 5/8 $69 3/8 $71 1/4 $64 $61 1/2 $59 15/16
Low.................. $74 $67 3/8 $63 11/16 $62 3/16 $63 3/8 $57 3/16 $56 1/4 $53 3/4
Cash dividends per
share................. $0.7125 $0.7125 $0.7125 $0.6875 $0.6875 $0.6875 $0.6875 $0.6875
$3.00 Cumulative Con-
vertible Preference
Stock:
Market price per share
High................. $1,040 $ -- $977 1/2 $864 1/2 $873 $822 3/4 $822 $778 3/8
Low.................. $1,040 $ -- $930 $864 1/2 $873 $794 $812 5/8 $748 1/2
Cash dividends per
share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75
$2.80 Cumulative Con-
vertible Preference
Stock:
Market price per share
High................. $408 $408 $361 3/4 $330 $337 1/2 $305 1/8 $290 1/2 $283 5/8
Low.................. $362 1/2 $331 3/16 $307 $300 $303 5/8 $277 $270 1/2 $260
Cash dividends per
share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
Prices in the foregoing table are from the New York Stock Exchange composite
tape. On February 27, 1998 the high price per share was $77 3/4 and the low
price per share was $75 3/4.
As of December 31, 1997, the approximate number of holders of record of
Common Stock of ARCO was 85,100. The principal markets in which ARCO's Common
Stock is traded are listed on the cover page.
The quarterly dividend rate for Common Stock was increased to $0.7125 per
share effective June 13, 1997. On January 26, 1998, a dividend of $0.7125 per
share was declared on Common Stock, payable on March 13, 1998 to stockholders
of record on February 13, 1998. Future cash dividends will depend on earnings,
financial conditions and other factors; however, the Company presently expects
that dividends will continue to be paid.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for ARCO:
YEARS ENDED DECEMBER 31,
---------------------------------------
1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
------- ------- ------- ------- -------
(MILLIONS EXCEPT PER SHARE AMOUNTS)
Sales and other operating revenues..... $18,684 $18,592 $15,819 $15,035 $17,189
Net income............................. 1,771 1,663 1,376 919 269
Earned per share-basic (5)............. 5.51 5.17 4.27 2.85 .83
Earned per share-diluted (5)........... 5.41 5.09 4.22 2.81 .82
Cash dividends per common share (5).... 2.825 2.75 2.80 2.75 2.75
Total assets........................... 25,322 25,715 23,999 24,563 23,894
Long-term debt and capital lease
obligations........................... 4,414 5,593 6,708 7,198 7,089
- --------
(1) See Notes 3 and 5 of Notes to Consolidated Financial Statements regarding
unusual items and an extraordinary item on page 41.
(2) Dividends include a $0.05 per share redemption payment for Common Stock
purchase rights.
(3) Includes after-tax gain of $273 million from issuance of stock by Vastar
Resources, Inc. and a $210 million after-tax charge for the costs
associated with the elimination of approximately 2,400 positions company
wide.
(4) Includes charges of $404 million after tax related to the writedown for
sale or other disposition of oil and gas properties and excess office
space, and the costs associated with the elimination of approximately
1,300 positions.
(5) Restated for the effect of 100% stock dividend issued June 13, 1997.
22
ARCO
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
[PHOTO APPEARS HERE]
Operating
Review
ARCO had a number of operating achievements in 1997, including the discovery and
certification of a major natural gas field in Indonesia. These achievements also
included increases in production, a 164% reserves replacement and growth in
earnings. ARCO's overriding goals are to increase global oil and natural gas
production and reserves and the profitability and market share of its downstream
refining and marketing segment.
The Operating Review that follows explains the major changes in Exploration
and Production, Refining and Marketing, and Chemicals as related to prices,
production volumes, sales, and expenses for the years 1997 and 1996. Other
operations, including Lower 48 pipelines, aluminum, coal and ARCO's divested
interest in Lyondell Petrochemical Company (Lyondell), are also examined.
The consolidated results of these operations are examined in relation to
the Consolidated Statement of Income on page 28.
23
ARCO
Results of Segment Operations
- -----------------------------
Exploration and Production
Millions 1997 1996 1995
-----------------------
Net income $1,347 $1,329 $ 784
Special items (benefit) -- (7) (23)
-----------------------
Operating results $1,347 $1,322 $ 761
=======================
Higher natural gas prices and continued growth in international natural gas
volumes contributed to improved operating results. These factors were partially
offset by higher operating and depreciation, depletion and amortization (DD&A)
expenses associated with increased production. Exploration expense was also
higher in 1997. In 1996, higher crude oil and natural gas prices, growth in
natural gas volumes and lower exploration expenses combined to benefit earnings.
Natural Gas Production
Million cubic feet/day-net 1997 1996 1995
--------------------------
U.S., including Vastar 1,066 1,044 999
International
United Kingdom 368 330 265
Indonesia 314 311 270
China 142 69 --
Other 20 20 22
--------------------------
Total International 844 730 557
International natural gas production increased 16% in 1997, reflecting
increased production from the Yacheng 13 field in the South China Sea and from
fields in the United Kingdom.
Average Natural Gas Sales Prices (per thousand cubic feet)
[BAR GRAPH APPEARS HERE]
U.S., including Vastar International
$1.00 $1.00
97 $2.04 $2.64
96 $1.80 $2.54
95 $1.35 $2.56
In 1996, international natural gas production increased as a result of the
startup of the Yacheng 13 field and higher production volumes in the U.K. and
Indonesia. A full year of production from the Gawain field contributed to the
increase in U.K. natural gas sales. Production from Indonesian natural gas
fields grew as a result of greater contract takes by purchasers.
Petroleum Liquids Production
Barrels/day-net 1997 1996 1995
---------------------------
Prudhoe Bay 198,500 210,800 226,600
Kuparuk River 128,200 130,500 140,700
Greater Point McIntyre 50,500 51,400 46,300
Lower 48, including Vastar 180,700 171,800 169,500
International 82,600 66,100 66,800
---------------------------
Total 640,500 630,600 649,900
===========================
In 1997, increased petroleum liquids production in the Lower 48 partially
offset a net decrease in production from Alaskan fields, primarily Prudhoe Bay.
ARCO's goal is to increase production modestly in the Lower 48 and stabilize
production in Alaska after 1999. In late 1997, ARCO started production from the
West Sak field in Alaska and started development of the Tarn and Alpine fields
and other satellite discoveries. West Sak and the satellite discoveries will
help stabilize production in Alaska. The 1997 decline in Alaska production was
4% compared with a 5% decline in 1996.
[PHOTO APPEARS HERE]
24
ARCO
Average Petroleum Liquids Sales Prices (per barrel)
[BAR GRAPH APPEARS HERE]
U.S. including Vastar International
$10.00 $10.00
97 $15.63 $18.20
96 $16.07 $19.02
95 $12.17 $15.96
The 25% increase in international petroleum liquids production reflected
increased contributions from Algeria and Qatar along with new production from
interests in Tunisia and Kazakhstan. These volumes were partially offset by a
natural field decline in Indonesia. The overall increase in petroleum liquids
production offset the decline in average petroleum liquids prices.
In 1996, production from the Greater Point McIntyre fields increased but
was more than offset by production declines in the Prudhoe Bay and Kuparuk River
fields.
Refining and Marketing
Millions 1997 1996 1995
------------------------
Net income $ 325 $ 287 $ 200
Special items charge 38 12 23
------------------------
Operating results $ 363 $ 299 $ 223
========================
Improved operating results for ARCO's refining and marketing operations in
1997 reflected higher margins and sales volumes. The 6% increase in gasoline
sales volumes was partially attributable to the integration of over 200 former
Thrifty gasoline stations into ARCO's retailing network. Increased sales volumes
more than offset the higher operating and selling expenses related to those
stations.
ARCO's goal is to increase the profitability and market share of its
refining and marketing operations. A major cost reduction program was initiated
in 1997 and starting in 1998, the company began operating gasoline stations in
Vancouver, British Columbia.
In 1996, higher refined product prices and sales volumes were partially
offset by the impact of higher crude oil prices, higher prices and volumes of
purchased refined products and increased operating costs associated with
maintenance turnarounds and charges for environmental and other remediation.
The 1997 special items charges primarily included an organizational
restructuring to achieve greater operating efficiencies. The 1996 special items
included a charge related to environmental and other remediation. The 1995
special items charges related to terminating certain contractual agreements and
future environmental remediation.
Petroleum Products Sales
Thousand barrels/day 1997 1996 1995
------------------------
Gasoline 281.9 266.4 256.8
Jet 117.3 117.0 106.2
Distillate 76.6 69.0 69.1
Other 68.0 80.7 61.8
------------------------
Total 543.8 533.1 493.9
========================
ARCO increased its refining capacity as a result of modifications and
debottlenecking projects completed in 1996 that were necessary to make
reformulated gasolines. The volume increase in other sales in 1996 reflected the
sale of intermediate products, produced in larger quantity as a result of
turnarounds which limited gasoline production. To support its growing market
volumes, refined products were purchased from third parties to supplement ARCO's
refinery production in both 1997 and 1996.
[PHOTO APPEARS HERE]
25
ARCO
Chemicals
Millions 1997 1996 1995
--------------------
ARCO Chemical
Net income (reported) $ 111 $ 348 $ 508
ARCO's share* $ 128 $ 320 $ 460
* Reflects ARCO's share of ARCO Chemical net income after segment adjustments,
primarily for interest expense and minority interest.
ARCO Chemical Company's (ARCO Chemical) reported earnings for 1997 included
an after-tax charge of $116 million for its organizational restructuring and
asset review programs. The operating earnings decline reflected lower product
margins and higher scheduled plant turnaround costs. ARCO Chemical's selling,
general and administrative expenses decreased in 1997, compared to 1996, as it
began to realize some of the initial benefits of its restructuring program.
Volumes for core products (propylene oxide (PO), PO derivatives and
isocyanates) increased by 16%, compared to 1996. The increase reflected higher
volumes of PO derivatives, which benefited from improved demand and temporary
industry supply shortages of certain products. Core product sales also included
higher toluene di-isocyanate (TDI) volumes due to the December 1996 Olin
acquisition.
In 1996, ARCO Chemical's earnings declined primarily as a result of lower
styrene monomer (SM) margins. SM sale prices fell more than raw material costs,
because production from increased industry capacity depressed SM market prices.
[PHOTO APPEARS HERE]
In 1997, ARCO Chemical continued to move forward with its plans to build a
worldscale PO/SM plant in Rotterdam, the Netherlands, and expand its existing
PO/SM capacity in Channelview, Texas.
Other Operations
Millions 1997 1996 1995
--------------------
Net income $ 257 $ 200 $ 394
Special items charge 17 6 10
--------------------
Operating results $ 274 $ 206 $ 404
====================
Results from ARCO's other operations included the earnings from Lower 48
pipeline, coal and aluminum operations as well as ARCO's equity in the earnings
of Lyondell. Following the settlement of ARCO's 9% Exchangeable Notes with
Lyondell stock in September 1997, ARCO no longer holds an interest in Lyondell.
The increase in 1997 earnings and the decrease in 1996 earnings primarily
reflected fluctuations in earnings from ARCO's 49.9% interest in Lyondell. In
1997, ARCO earned $119 million from its equity interest in Lyondell, compared to
$53 million and $194 million in 1996 and 1995, respectively.
The 1997 special items primarily included restructuring charges for coal
and Lower 48 pipeline operations. The 1996 special items included a net after-
tax charge for the writedown of ARCO's interest in the Point Arguello Pipeline,
partially offset by a gain on a pipeline sale. The 1995 special items included a
charge related to coal operations for the impact on deferred taxes of an
Australian tax rate increase.
In April 1997, ARCO announced its intent to divest its worldwide coal
business which has coal mining operations in the United States and Australia.
The coal business is no longer considered part of the company's core growth
agenda. The manner of disposition is currently under study.
26
ARCO
Unallocated Items
Millions 1997 1996 1995
--------------------------
Unallocated benefit (expense) $ (156) $ (27) $ 38
Interest (303) (446) (500)
Gain on disposition of Lyondell
common stock 291 -- --
Extraordinary loss on extinguishment of
debt (118) -- --
-------- ------ ------
Total $ (286) $(473) $(462)
======== ====== ======
The increase in the unallocated net expense in 1997 primarily resulted from
charges of $184 million after tax for future environmental remediation and
reclamation. These charges related both to current operations and natural
resource damage liabilities in the state of Montana associated with previously
discontinued mining operations, as well as the adoption of a new environmental
accounting standard. Interest revenue was also lower in 1997. The increase in
unallocated expense in 1997 was partially offset by tax benefits related to
affiliate stock transactions.
In September 1997, all of ARCO's 9% Exchangeable Notes due September 15,
1997 with an outstanding principal amount of $988 million were settled with
Lyondell common stock owned by ARCO. ARCO then sold its remaining Lyondell
shares in a privately negotiated transaction in late September. ARCO realized an
aggregate pretax gain of $633 million, or $291 million after tax, on the two
transactions.
The company incurred a loss of $192 million before tax, or $118 million
after tax, on early retirement of long-term debt during 1997. The early
retirements will result in a pretax reduction in interest expense of
approximately $100 million in 1998.
In 1996 and 1995, the company received insurance settlements related to
certain past environmental expenses. The benefits from those settlements were
greater in 1995. In addition, the recording of final charges for previously
reported personnel reductions, and less interest income from short-term
investments resulted in an after-tax expense in 1996, compared to a net benefit
in 1995.
Impact of the Year 2000 Issue
[PHOTO APPEARS HERE]
The Year 2000 issue arises from computer programs having been written using
two digits rather than four to designate the year. Date-sensitive computer
software may recognize a date using "00" as the year 1900 rather than the year
2000, resulting in system failures or miscalculations, causing operational
disruptions.
ARCO will spend approximately $20 million to avoid potential Year 2000
problems. Plans call for accounting, inventory, revenue, and financial system
modifications to be completed by the first quarter of 1999, with the bulk of
this work completed by the end of 1998.
27
ARCO
Consolidated Statement of Income
- --------------------------------
December 31,
Millions, except per share amounts 1997 1996 1995
--------------------------
REVENUES
Sales and other operating revenues $18,684 $18,592 $15,819
Other revenues 588 577 920
--------------------------
Total revenues 19,272 19,169 16,739
==========================
EXPENSES
Trade purchases 7,881 7,949 6,116
Operating expenses 4,372 3,953 3,790
Selling, general and administrative expenses 1,083 1,018 1,029
Depreciation, depletion and amortization 1,746 1,633 1,641
Exploration expenses (including undeveloped
leasehold amortization) 508 413 523
Taxes other than income taxes 766 800 717
Interest 422 668 750
Unusual items 250 26 --
--------------------------
Total expenses 17,028 16,460 14,566
==========================
Income before gain on investee stock transaction 2,244 2,709 2,173
Gain on disposition of Lyondell Petrochemical
Company stock 633 -- --
--------------------------
Income before income taxes, minority interest and
extraordinary item 2,877 2,709 2,173
Provision for taxes on income 920 941 687
Minority interest in earnings of subsidiaries 68 105 110
--------------------------
Net income before extraordinary item 1,889 1,663 1,376
Extraordinary loss on extinguishment of debt, net of
income taxes of $74 million 118 -- --
--------------------------
Net income $ 1,771 $ 1,663 $ 1,376
==========================
Net income per share:
Basic $ 5.51 $ 5.17 $ 4.27
Diluted $ 5.41 $ 5.09 $ 4.22
Weighted average equivalent shares outstanding:
Basic 321.2 321.7 321.7
Diluted 327.4 326.5 326.5
See Notes on pages 38 through 51.
Results of Consolidated Operations
- ----------------------------------
ARCO's earnings continued to grow in 1997. The earnings increase primarily
reflected higher natural gas prices and volumes, lower interest expense, and
higher refined product margins. Partially offsetting factors were higher DD&A
and exploration expenses, as well as lower earnings from ARCO Chemical.
In 1996, operating results benefited from higher crude oil and natural
gas prices, increased natural gas volumes, higher refining and marketing
volumes, and lower exploration and interest expense. These combined benefits
were partially offset by lower earnings from ARCO's chemical interests.
28
ARCO
Earnings from Consolidated Operations
Millions 1997 1996 1995
-------------------------
Net income $1,771 $1,663 $1,376
- -------------------------------------------------------------------------
Special items (benefit) charge (65) - (45)
- -------------------------------------------------------------------------
Operating results $1,706 $1,663 $1,331
=========================
- -------------------------
Special items after tax
- -------------------------
Millions 1997 1996 1995
--------------------------
Gain on disposition of Lyondell
Petrochemical Company
stock $ (291) $ - $ -
Tax-related benefits (248) - -
Insurance settlements - (47) (82)
Environmental charges 184 19 30
Restructuring charges 141 19 -
Loss on debt redemptions 118 - -
Other, net 31 9 7
--------------------------
Total (benefit) charge $ (65) $ - $ (45)
==========================
Revenues
The 1997 exploration and production revenues reflected higher natural gas
production volumes and prices, partially offset by decreased natural gas
marketing activity. Effective September 1, 1997, Vastar Resources, Inc. (Vastar)
contributed certain of its natural gas marketing operations to a joint venture
with the Southern Company. As a result of the transfer of those operations, the
natural gas marketing sales and purchases volumes for 1997 were lower compared
to the same period in 1996. The natural gas marketing sales will significantly
decrease in future years as the result of Vastar's joint venture, which is
accounted for on the equity method.
Sales and Other Operating Revenues
Millions 1997 1996 1995
-----------------------------
Exploration and production $ 9,548 $ 9,353 $ 8,376
Refining and marketing 6,856 6,939 5,555
Chemicals 3,995 3,955 4,282
Other operations 832 977 1,012
Intersegment eliminations (2,547) (2,632) (3,406)
-----------------------------
Total $18,684 $18,592 $15,819
=============================
In 1996, exploration and production revenues reflected higher crude oil and
natural gas prices, increased natural gas marketing activity and higher natural
gas production volumes. These increases were partially offset by decreased crude
oil trading activity.
The majority of the increase in natural gas marketing and production
volumes was generated by Vastar, where natural gas revenues increased from
$1.3 billion in 1995 to $2.5 billion in 1996. The remainder of the increase came
from production in China, the U.K. and Indonesia.
Natural Gas Trade Sales and Purchases Volumes
Million cubic feet/day 1997 1996 1995
-------------------------
Sales
Marketing 1,804 2,049 1,231
Production 1,910 1,774 1,556
--------------------------
Total trade sales 3,714 3,823 2,787
Marketing purchases 1,865 2,132 1,312
In 1997, increased refining and marketing sales volumes were more than
offset by the expiration near the end of 1996 of a crude-oil-for-refined-product
exchange agreement.
In 1997, increased net chemicals volumes were substantially offset by lower
average sales prices. Increased chemicals volumes reflected higher PO
derivatives volumes, which benefited from improved demand and temporary industry
supply shortages for certain products. Contributing to the lower chemicals
prices were the effects of a stronger U.S. dollar, stronger competition in PO
derivatives and TDI markets, the expiration of most of ARCO Chemical's long-term
fixed-fee methyl tertiary butyl ether (MTBE) contracts and excess SM industry
capacity.
In 1997, revenues from other operations declined primarily as the result of
lower coal sales volumes.
In 1996, increased refining and marketing sales revenues reflected higher
refined products prices and volumes. Decreased chemicals sales revenues
reflected a decline in chemical products prices and volumes.
Other Revenues
Other revenues declined in 1996 primarily because of lower earnings from
ARCO's equity interest in
29
ARCO
Lyondell and lower benefits from insurance settlements and a lower average
balance of short-term investments.
Expenses
ARCO's 1997 trade purchases were lower primarily as a result of decreased
natural gas marketing activity, partially offset by increased purchases of
refined products. Natural gas purchases will significantly decrease in future
years as a result of Vastar's joint venture with the Southern Company. In 1996,
trade purchases were higher as a result of increased natural gas marketing
activity and increased third-party purchases of refined products. Prices for
purchased volumes of natural gas, crude oil and refined products were also
higher in 1996.
In 1997, operating expenses included charges of $300 million before tax for
future environmental remediation and reclamation. These charges related both to
current operations and to natural resource damage liabilities in the state of
Montana associated with previously discontinued mining operations, as well as
the adoption of a new environmental accounting standard. In addition, higher
operating costs included costs associated with increased production from Rhourde
El Baguel in Algeria and other new field production and scheduled plant
turnaround maintenance expenses at ARCO Chemical.
ARCO's 1996 operating expenses included higher oil and gas lease operating
and other support costs for new international operations, partially offset by
lower operating costs in Alaska. In addition, refining and marketing and coal
operating expenses were higher in 1996. The refining and marketing expenses were
associated with maintenance turnarounds, marketing improvements and charges for
environmental and other remediation. The coal expenses were associated with
increased production volumes and maintenance.
The higher depreciation, depletion and amortization in 1997 reflected new
crude oil and natural gas production from international operations.
In 1997, ARCO's international exploration operations incurred increased
geological and geophysical expense and dry hole costs. In 1996, the lower
exploration expense primarily reflected lower dry hole costs in ARCO's
international exploration and production operations.
The lower taxes other than income taxes in 1997 primarily result from the
impact of lower crude oil prices and volumes on U.S. production taxes. In 1996,
the higher taxes other than income taxes primarily reflected the impact of
higher crude oil prices on U.S. production taxes and the impact of higher crude
oil prices and production volumes in the U.K.
The reversal of reserves for tax-related interest which resulted from the
partial resolution of certain federal and state income tax audits and reduction
in long-term debt resulted in a decline in interest expense in 1997. In 1996,
the decline in interest expense reflected lower average long-term debt balances
outstanding during the year, compared to prior years.
Unusual items in 1997 were organizational restructuring charges primarily
for ARCO Chemical, ARCO's refining and marketing operations and corporate
headquarters. The charge for the ARCO Chemical organizational restructuring and
other ARCO Chemical management actions was $175 million before tax. See Note 3
to Consolidated Financial Statements regarding unusual items. In 1996, unusual
items were final charges for previously reported personnel reductions, the
majority of which were reported as unusual items in 1994.
Income Taxes
The company's effective tax rate was 32.0% in 1997, compared to 34.7% in
1996 and 31.6% in 1995. The lower effective tax rate in 1997 primarily reflected
the net effect of affiliate stock transactions.
The higher effective tax rate in 1996 primarily reflected a decrease in the
benefit from the dividends received tax deduction and the absence of a 1995
foreign deferred asset valuation allowance benefit.
30
ARCO
Consolidated Balance Sheet
- --------------------------
December 31,
Millions 1997 1996
---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 533 $ 1,460
Short-term investments 222 784
Accounts receivable 1,588 1,936
Inventories 1,004 995
Prepaid expenses and other current assets 229 258
---------------------
Total current assets 3,576 5,433
---------------------
Investments and long-term receivables:
Investments accounted for on the equity method 1,194 1,174
Other investments and long-term receivables 1,872 1,188
---------------------
3,066 2,362
Net property, plant and equipment 16,998 16,195
Deferred charges and other assets 1,682 1,725
---------------------
Total assets $25,322 $25,715
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,599 $ 1,157
Accounts payable 1,292 1,443
Long-term debt due within one year 188 1,102
Taxes payable 390 438
Other 1,276 1,163
---------------------
Total current liabilities 4,745 5,303
---------------------
Long-term debt 4,414 5,593
Deferred income taxes 3,083 2,884
Other deferred liabilities and credits 3,621 3,450
Minority interest 779 684
---------------------
Total liabilities 16,642 17,914
---------------------
Stockholders' equity:
Preference stocks 1 1
Common stock, $2.50 par value;
shares issued 322,719,890 (1997), 161,086,174 (1996)
shares outstanding 320,369,895 (1997), 161,082,043
(1996) 807 403
Capital in excess of par value of stock 640 628
Retained earnings 7,054 6,592
Treasury stock (170) (1)
Equity adjustments 348 178
---------------------
Total stockholders' equity 8,680 7,801
---------------------
Total liabilities and stockholders' equity $25,322 $25,715
=====================
See Notes on pages 38 through 51.
31
ARCO
Consolidated Statement of Cash Flows
- ------------------------------------
December 31,
Millions 1997 1996 1995
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,771 $ 1,663 $ 1,376
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,746 1,633 1,641
Dry hole expense and undeveloped leasehold
amortization 235 209 317
Gain on disposition of Lyondell Petrochemical
Company stock (291) - -
Extraordinary loss on extinguishment of debt 118 - -
Income from equity investments (150) (74) (243)
Dividends from equity investments 102 77 89
Cash payments (greater) less than noncash
provisions 247 (220) (183)
Minority interest in earnings of subsidiaries 68 105 110
Net gain on asset sales (59) (41) (16)
Deferred income taxes 91 11 26
Changes in working capital accounts (158) 121 (204)
Other 2 (79) 6
---------------------------------------
Net cash provided by operating activities 3,722 3,405 2,919
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets, including dry hole costs (2,985) (2,141) (1,699)
Net cash provided by short-term investments 558 778 1,500
Acquisition of businesses - (576) -
Investment in/advances to LUKARCO (227) - -
Investment in LUKOIL and Zhenhai securities - (218) (252)
Proceeds from asset sales 197 208 66
Investments and long-term receivables (204) (515) (73)
Other 56 85 (92)
---------------------------------------
Net cash used by investing activities (2,605) (2,379) (550)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,741) (861) (1,138)
Proceeds from issuance of long-term debt 413 680 178
Net cash provided (used) by notes payable 466 (79) (293)
Dividends paid (908) (887) (902)
Treasury stock purchases (256) (57) (39)
Other (4) 100 (31)
---------------------------------------
Net cash used by financing activities (2,030) (1,104) (2,225)
---------------------------------------
Effect of exchange rate changes on cash (14) 1 (1)
----------------------------------------
Net increase (decrease) in cash and cash equivalents (927) (77) 143
Cash and cash equivalents at beginning of year 1,460 1,537 1,394
----------------------------------------
Cash and cash equivalents at end of year $ 533 $ 1,460 $ 1,537
=======================================
See Notes on pages 38 through 51.
32
ARCO
Analysis of Cash Flows and Financial Condition
- ----------------------------------------------
1997 Cash Inflows - (millions)
- -----------------------------
[PIE CHART APPEARS HERE]
Operations $3,722
Short-term debt $ 466
Short-term investments $ 558
Long-term debt $ 413
Other $ 253
Driven by investment opportunities to achieve ARCO's growth goals, ARCO's 1998
capital spending program includes $3.8 billion for additions to fixed assets,
compared to $3.0 billion in 1997. Future capital expenditures remain subject to
business conditions affecting the industry, as well as changes in environmental
rules and regulations and the tax laws.
Cash and cash equivalents and short-term investments totaled $755 million at
year-end 1997, short-term borrowings were $1.6 billion and long-term debt due
within one year was $188 million.
In 1997, the company used approximately $1.7 billion in cash for repayment
of long-term debt. Approximately $1 billion of that total was used for the early
retirement of debt. By retiring this high-coupon debt, the company will have
better opportunities to adjust its debt portfolio using a combination of short-
and long-term debt and floating rate as well as fixed rate debt as ARCO
continues to invest in its businesses.
1998 Adds to Fixed Assets - (millions)
- -------------------------------------
[PIE CHART APPEARS HERE]
International Exploration
& Production $1,260
Vastar $ 660
Alaska $ 515
Other Lower 48 $ 160
Refining & Marketing $ 600
ARCO Chemical $ 565
Other $ 20
1997 Cash Outflows - (millions)
- ------------------------------
[PIE CHART APPEARS HERE]
Adds to fixed assets $2,985
Long-term debt $1,741
Dividends $ 908
Other $ 691
Primarily as a result of the long-term debt redemptions in July 1997 and the
increased use of short-term borrowing, the company is in a working capital
deficit position of approximately $1.2 billion at December 31, 1997. It is
expected that future cash requirements for working capital, capital
expenditures, dividends and debt repayments will come from cash generated from
operating activities, existing cash balances, and future financings.
At December 31, 1997, ARCO had unused committed bank credit facilities
totaling $3.1 billion and ARCO Chemical had an unused bank credit facility
totaling $500 million. Vastar had an unused revolving credit facility of $1.1
billion.
In September 1997, ARCO exchanged substantially all of its 39.9 million
shares of Lyondell stock in full payment of the $988 million principal amount of
9% Exchangeable Notes due September 15, 1997.
Effective June 13, 1997, ARCO declared a 2-for-1 stock split in the form of
a 100% stock dividend and a 4% increase in the quarterly dividend.
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
33
ARCO
laws and may in the future be involved in additional environmental assessments
and cleanups.
Environmental Reserves
Millions 1997 1996 1995
-------------------------------
Beginning balance $ 577 $ 658 $ 670
Charges 300 49 101
Payments (110) (130) (113)
-------------------------------
Ending balance $ 767 $ 577 $ 658
===============================
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 exceed the amount accrued by as much as $500 million. See Notes 4 and 13
to Consolidated Financial Statements regarding environmental matters.
In addition to the provision for environmental remediation costs, $1 billion
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.
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.
This analysis presents the hypothetical loss in earnings, cash flows or fair
value of the financial instruments, derivative instruments, and derivative-
commodity instruments which are held by the company at December 31, 1997 and are
sensitive to changes in interest rates, foreign exchange rates and commodity
prices.
To minimize the effects of interest rate and foreign currency fluctuations,
ARCO enters into the following transactions using derivatives: 1) foreign
currency forward, option and swap contracts; 2) interest rate swaps; and 3)
financial futures contracts and over-the-counter Treasury options which are
limited to investment portfolio hedging, alteration of portfolio duration and
changing asset mix. ARCO and its subsidiaries also engage in hedging strategies
involving forward and futures contracts, swaps and options covering part of its
natural gas and crude oil production to minimize the effects of commodity price
fluctuations.
The company uses simple, non-leveraged derivative instruments that are
placed with major institutions whose creditworthiness is continually monitored.
Risk management strategies are reviewed and approved by senior management before
being implemented. Policy controls limit the maximum amount of positions that
can be taken in any given instrument.
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 represented in the following
analyses.
Interest Rate Risk
The fair value of the company's cash and short-term investment portfolio at
December 31, 1997, approximated carrying value due to its short-term duration.
Market risk was estimated as the potential decrease in fair value resulting from
a hypothetical 10% increase in interest rates for
34
ARCO
the issues contained in the investment portfolio and was not materially
different from the year-end carrying value.
At December 31, 1997, the fair value of notes payable approximated carrying
value due to its short-term maturities. Market risk was estimated as the
potential increase in fair value resulting from a hypothetical 10% decrease in
the company's weighted average short-term borrowing rate at December 31, 1997,
and was not materially different from the year-end carrying value.
The fair value of the company's long-term debt, including current
maturities, was estimated to be $5.4 billion at December 31, 1997, and exceeded
the carrying value by $798 million. Market risk was estimated as the potential
increase in fair value resulting from a hypothetical 10% decrease in the
company's weighted average long-term borrowing rate at December 31, 1997, or
$185 million.
Foreign Exchange Rate Risk
The company has bought foreign currency contracts (principally involving
European currencies and Australian dollars) to hedge anticipated foreign
currency commitments and future cash flows from overseas operations with varying
maturities ranging from 1998 to 2000.
The hypothetical loss in cash flows of the combined foreign-exchange
positions at year end is estimated to be $17 million. A hypothetical adverse
change of 10% in year-end exchange rates (a weakening of the U.S. dollar), is
assumed. The future cash flows were translated to U.S. dollars by using the
hypothetical exchange rate and the cash value of the currency contract,
multiplied by the difference between the hypothetical and strike exchange rates
to the contract amount.
At December 31, 1997, approximately $1 billion of financial instruments,
primarily short-term debt, were denominated in foreign currencies. Assuming a
hypothetical adverse change of 10% in year-end exchange rates (a weakening of
the U.S. dollar), the fair value of those instruments would increase by $80
million.
Commodity Price Risk
From time to time, the company uses various hedging arrangements,
predominantly natural gas swaps and crude oil futures and options, to manage the
company's exposure to price risk from its natural gas and petroleum liquids
production. These hedging arrangements have 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 community, they also limit the
benefit the company might otherwise have received from any price increases
associated with the hedged commodity.
At December 31, 1997, ARCO had entered into a series of crude oil futures
and options contracts and a series of forward natural gas contracts. Based on
year-end forward prices ARCO had a net deferred loss of $5 million on those
contracts. The hypothetical incremental loss in earnings for the combined
commodity positions at year end is estimated to be $14 million, assuming an
increase in crude oil and natural gas year-end forward prices of 10%.
To calculate the hypothetical loss, the relevant parameters of the commodity
contracts are the type of commodity and the delivery price. The hypothetical
loss on the commodity contracts was estimated by calculating the cash value of
the contracts as the difference between the hypothetical and contract delivery
prices, then multiplying it by the contract amount.
Equity Price Risk
Other investments at December 31, 1997, included marketable equity
securities which are recorded at a fair value of $1.4 billion, including net
unrealized gains of $979 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 $140 million.
35
ARCO
Consolidated Statement of Changes in Stockholders' Equity
- ---------------------------------------------------------
Common Stock Preference Capital in Treasury Stock Equity Retained
Millions Shares Dollars Stock Excess of Par Shares Dollars* Adjustments Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1995 160.8 $402 $ 1 $647 0.1 $ (5) $(109) $5,342 $6,278
Net income 1,376 1,376
Common stock dividends (900) (900)
Preference stock dividends (2) (2)
Common stock issued 0.1 -- -- --
Treasury stock purchases 0.3 (39) (39)
Treasury stock issued (15) (0.3) 39 24
Unrealized gain on securities 27 27
Foreign currency translation 34 34
Minimum pension liability (40) (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 160.9 $402 $ 1 $632 0.1 $ (5) $ (88) $5,816 $6,758
====================================================================================================================================
Net income 1,663 1,663
Common stock dividends (885) (885)
Preference stock dividends (2) (2)
Common stock issued 0.2 1 12 13
Treasury stock purchases 0.5 (57) (57)
Treasury stock issued (16) (0.5) 61 45
Unrealized gain on securities 236 236
Foreign currency translation (2) (2)
Minimum pension liability 32 32
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 161.1 $403 $ 1 $628 0.1 $ (1) $ 178 $6,592 $7,801
====================================================================================================================================
Net income 1,771 1,771
Common stock dividends (906) (906)
Preference stock dividends (2) (2)
100% stock dividend 161.3 403 (403) --
Common stock issued 0.3 1 8 9
Treasury stock purchases 3.5 (256) (256)
Treasury stock issued 4 (1.3) 87 91
Unrealized gain on securities 381 381
Foreign currency translation (185) (185)
Minimum pension liability (26) (26)
Other 2 2
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 322.7 $807 $ 1 $640 2.3 $ (170) $ 348 $7,054 $8,680
====================================================================================================================================
*At cost
See Notes on pages 38 through 51.
Devaluation of the Indonesian Rupiah
- ------------------------------------
The company's exploration and production operations in Indonesia are likely to
be affected by the recent devaluation in that country's currency. While the
company's natural gas sales are made in U.S. dollars, ARCO customers may lower
their contract takes, resulting in lower revenues and net income in 1998. In
addition, customers may have difficulty making payments on natural gas
purchases, which are made in U.S. dollars. Substantially all of the Indonesian
natural gas sales projected for 1998 are covered by standby letters of credit,
which are due to be renewed, issued by two Indonesian state banks.
ARCO Chemical's Asia Pacific revenues and assets, including Indonesia, were
not material to ARCO's consolidated financial condition or results of operations
in 1997.
36
ARCO
Safe Harbor*
- -----------
From time to time ARCO's management may wish to make forward-looking statements
to more fully inform existing and potential security holders regarding various
matters. Such statements are generally accompanied by words such as estimate,
project, predict or expect, that convey the uncertainty of future events or
outcomes.
Price, 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.
Exploration and Production
Projections as to the level of future earnings are based on assumptions as
to the future prices of crude oil and natural gas. Any substantial or extended
decline in actual prices could have a material adverse effect on ARCO's
financial position, results of operations and on the quantities of crude oil and
natural gas reserves that may be economically produced.
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 reservoirs. There can be no assurances as to the level or timing of
success, if any, that the company will have in acquiring or finding and
developing economically recoverable reserves.
Refining and 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.
Chemicals
Results of chemical operations typically are cyclical and depend heavily on
the margin between the price of raw materials and sales prices of products
produced. They are also influenced by changes in the cost of raw materials, the
availability of substitutes and changes in the industry capacity and in the
supply/demand balance.
Operating Hazards
Operations are subject to various hazards common to the industry, including
explosions, fires, uncontrollable spills, and damage from severe weather
conditions.
*The company desires to take advantage of the "safe harbor" provisions 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.
37
ARCO
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 1 Accounting Policies
ARCO's accounting policies conform to generally accepted accounting
principles, including the "successful efforts" method of accounting for oil and
gas producing activities.
Principles of Consolidation
The consolidated financial statements include the accounts of all
subsidiaries, ventures and partnerships in which a controlling interest is held,
including ARCO Chemical Company and Vastar Resources, Inc., of which ARCO owned
82.3% and 82.2% of the outstanding shares, respectively, at December 31, 1997.
ARCO also consolidates its interests in undivided interest pipeline companies
and in oil and gas and coal mining joint ventures. ARCO uses the equity method
of accounting for companies where its ownership is between 20% and 50% and for
other ventures and partnerships in which an effective controlling interest is
not held.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as time
deposits, certificates of deposit and marketable securities other than equity
securities, maturing within three months of purchase. Cash equivalents are
stated at cost, which approximates fair value.
Oil and Gas Unproved Property Costs
Unproved property costs are capitalized and amortized on a composite basis,
considering past success 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.
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.
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 and mining operations are accrued during production
and classified as a long-term liability. Such costs are taken into account in
determining the cost of production in all operations, except oil and gas
production, in which case such costs are considered 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
prescribed by Accounting Principles Board Opinion (APB) No. 25.
Derivative Instruments
The company uses a variety of derivative instruments, both financial and
commodity based, to minimize the effects of commodity price, interest rate and
foreign currency fluctuations. The company does not hold or issue derivative
instruments for trading purposes and is not a party to leveraged instruments.
All derivative instruments are off-balance sheet instruments; however, net
receivable or payable positions related to derivative instruments are carried on
the balance sheet. The nature of the transaction underlying a risk management
strategy, primarily whether or not the instrument qualifies as a hedge,
determines which accounting method is used.
38
ARCO
The conditions that must be met for a derivative instrument to qualify
as a hedge are: (1) the item to be hedged exposes the company to price or
interest rate risk; (2) the derivative reduces the risk exposure and is
designated as a hedge at the time the derivative contract is entered into; and
(3) at the inception of the hedge and throughout the hedge period there is a
high correlation between changes in market value of the derivative instrument
and fair value of the underlying items being hedged.
Deferral accounting is used for the following types of transactions (if the
instrument qualifies as a hedge): future crude oil and natural gas production,
fixed-price crude oil and natural gas purchase and sale commitments, U.S.
dollar-denominated debt issued by a foreign subsidiary, debt denominated in a
foreign currency or anticipated foreign currency commitments. Under the deferral
method, gains and losses are deferred and included in other assets or accrued
liabilities until the designated underlying item is recognized in income.
Recognized gains and losses under the deferral method are recorded in sales and
other operating revenues, other revenues or trade purchases depending on the
underlying item associated with the derivative instrument. Instruments typically
used in these transactions are crude oil and natural gas swap and price collar
contracts and some foreign currency swap, forward and option contracts.
The accrual method of accounting is used for interest rate swap agreements
entered into by the company which convert the interest rate on variable-rate
debt to a fixed rate. Under the accrual method, each net payment or receipt due
or owed under the derivative instrument is recognized in income during the
period to which the payment or receipt relates. Amounts to be paid or received
under these agreements are recognized as an adjustment to interest expense. The
related amounts payable to, or receivable from, the counterparties are included
in other accrued liabilities.
The fair value method of accounting is used for any derivative instrument
that does not qualify as a hedge. The fair value method, whereby gains and
losses associated with changes in fair value of a derivative instrument are
recognized currently in income or stockholders' equity, is 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. Presently, changes in fair value of all
transactions accounted for under this method are recognized currently in income
and reported as other revenues.
Under each method of accounting used by the company the cash flows related
to any recognized gains or losses associated with derivative instruments are
reported as cash flows from operations.
If a derivative instrument designated as a hedge is terminated prior to
expected maturity, gains or losses are deferred and included in income when the
underlying hedged item is recognized in income.
When the designated item associated with a derivative instrument matures,
is sold, extinguished or terminated, gains or losses are recognized as part of
the gain or loss on sale or settlement of the underlying item. When a derivative
instrument is associated with an anticipated transaction that is no longer
expected to occur, the gain or loss on the derivative is recognized immediately
in income.
Earnings per Share
Basic earnings per share is based on the average number of common shares
outstanding during each period. Diluted earnings per share includes certain
outstanding options and all convertible or potentially issuable securities. All
historical earnings per share have been restated to give effect to the 100%
stock dividend effective June 13, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
Reclassifications
Certain previously reported amounts have been restated to conform to
classifications adopted in 1997.
39
ARCO
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 2 Segment Information
1997
----------------------------------------------------------------------------------
Millions Exploration Refining & Unallocated
& Production Marketing Chemicals All Other Items Totals
----------------------------------------------------------------------------------
Sales and other operating revenue:
U.S. $ 7,918 $6,853 $2,446 $ 521 $ 3 $17,741
International 1,630 3 1,549 293 15 3,490
Intersegment revenues (2,171) (17) (263) (81) (15) (2,547)
----------------------------------------------------------------------------------
Total 7,377 6,839 3,732 733 3 18,684
Income (loss) from equity affiliates 5 8 (2) 139 - 150
Interest revenue 12 3 2 4 104 125
Interest expense - - - - 422 422
Depreciation, depletion and amortization 1,184 226 229 70 37 1,746
Income tax expense (benefit) 653 161 70 56 (20) 920
Net income (loss) 1,347 325 128 257 (286) 1,771
Investment in equity affiliates 336 98 47 713 - 1,194
Property, plant and equipment (net):
U.S. 6,734 2,714 1,774 881 153 12,256
International 3,496 - 760 486 - 4,742
Additions to fixed assets 2,276 330 263 113 3 2,985
Segment assets 13,269 3,561 4,116 2,742 1,634 25,322
1996
----------------------------------------------------------------------------------
Sales and other operating revenue:
U.S. $ 7,966 $6,934 $2,363 $ 594 $ - $17,857
International 1,387 5 1,592 362 21 3,367
Intersegment revenues (2,311) (28) (180) (92) (21) (2,632)
----------------------------------------------------------------------------------
Total 7,042 6,911 3,775 864 - 18,592
Income (loss) from equity affiliates 13 - (1) 62 - 74
Interest revenue 1 1 2 3 186 193
Interest expense - - - - 668 668
Depreciation, depletion and amortization 1,061 227 222 107 16 1,633
Income tax expense (benefit) 767 150 136 68 (180) 941
Net income (loss) 1,329 287 320 200 (473) 1,663
Investment in equity affiliates 94 - 54 1,026 - 1,174
Property, plant and equipment (net):
U.S. 6,434 2,621 1,723 858 194 11,830
International 2,866 - 899 600 - 4,365
Additions to fixed assets 1,684 121 244 84 8 2,141
Segment assets 11,838 3,380 4,394 3,168 2,935 25,715
1995
----------------------------------------------------------------------------------
Sales and other operating revenue:
U.S. $ 7,207 $5,555 $2,505 $ 604 $ 3 $15,874
International 1,169 - 1,777 378 27 3,351
Intersegment revenues (2,908) (195) (195) (81) (27) (3,406)
----------------------------------------------------------------------------------
Total 5,468 5,360 4,087 901 3 15,819
Income (loss) from equity affiliates 14 - 14 215 - 243
Interest revenue 4 - 3 2 203 212
Interest expense - - - - 750 750
Depreciation, depletion and amortization 1,063 219 233 105 21 1,641
Income tax expense (benefit) 422 121 230 92 (178) 687
Net income (loss) 784 200 460 394 (462) 1,376
Investment in equity affiliates 95 - 75 541 - 711
Property, plant and equipment (net):
U.S. 6,472 2,729 1,346 857 200 11,604
International 2,215 - 947 589 - 3,751
Additions to fixed assets 1,190 212 195 90 12 1,699
Segment assets 10,468 3,165 4,135 2,645 3,586 23,999
40
ARCO
Segment information has been prepared in accordance with Statement of
Financial Accounting Standards (SFAS) No.131, "Disclosure about Segments of an
Enterprise and Related Information." ARCO has three reportable segments:
exploration and production (E&P), refining and marketing (R&M) and chemicals.
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 and minority interests in consolidated subsidiaries.
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, including petroleum liquids (crude oil, condensate and natural gas
liquids) and natural gas; the purchase and sale of petroleum liquids and natural
gas; and the transportation via pipeline of petroleum liquids within the State
of Alaska. The company's investment 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 the transportation of petroleum 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. The chemicals segment comprises the
worldwide manufacture and sale of chemical products, including propylene oxide
and derivatives, toluene di-isocyanate, styrene monomer and methyl tertiary
butyl ether.
Revenue from other operating segments is attributable to the following: the
mining and sale of coal in the western U.S. and Australia; the pipeline
transportation and storage of petroleum and petroleum products in the 48
contiguous United States; the processing and marketing of aluminum sheet. The
company's equity interest in Lyondell Petrochemical Company is included with
other operating segment information until September 1997 when ARCO disposed of
its interest.
Intersegment sales were made at prices approximating current market value.
Note 3 Unusual Items
During 1997, the company recorded pretax charges of $250 million for
several restructuring actions. ARCO Chemical Company announced a charge of
$175 million consisting of $75 million of personnel-related costs, $23 million
of exit costs, and $77 million related to the review of certain assets including
$52 million of valuation adjustments. In a separate action, ARCO accrued an
additional $75 million in personnel-related costs, related to organizational
restructuring, primarily in refining and marketing operations and corporate
headquarters. The following table summarizes the personnel-related costs of both
actions.
($ Millions) Funded Unfunded
Short-term Long-Term Long-term
Terminations Benefits/(a)/ Benefits/(b)/ Benefits/(c)/ Total
- -------------------------------------------------------------------------------------------------------
1,200 $133 $5 $12 $150
(a) Severance and ancillary benefits
(b) Net increase in pension benefits to be paid from assets of qualified pension
plans.
(c) Net increase in non-qualified pension benefits and other postretirement
benefits to be paid from Company funds.
As of December 31, 1997, approximately 480 employees have been terminated
and approximately $14 million of short-term benefits have been paid. Payments do
not correlate with the number of terminations because certain short-term
benefits may be deferred.
Note 4 Accounting Changes
Effective January 1, 1997, the company adopted Statement of Position (SOP)
96-1, "Environmental Remediation Liabilities." The provisions include standards
affecting the measurement, recognition and disclosure of environmental
remediation liabilities. The effect of initially applying the provisions of SOP
96-1 in 1997 was a decrease in the company's net income of $30 million, or $0.09
per share (basic and diluted).
Note 5 Extraordinary Item
During 1997, ARCO retired debt with a face value of $756 million prior to
maturity. The debt repurchases resulted in an extraordinary charge of
$118 million against net income, after tax of $74 million.
The impact of the extraordinary item on basic and diluted earnings per
share was as follows:
Millions Basic Diluted
-------------------------------
Income before extraordinary item $ 1,889 $ 5.88 $ 5.77
Extraordinary loss (118) (0.37) (0.36)
-------------------------------
Net income $ 1,771 $ 5.51 $ 5.41
===============================
41
ARCO
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 6 Inventories
Inventories are recorded when purchased, produced or manufactured and are
stated at the lower of cost or market. In 1997, approximately 83% 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 1997 1996
------------------
Crude oil and petroleum products $ 247 $ 204
Chemical products 439 488
Other products 43 48
Materials and supplies 275 255
------------------
Total $ 1,004 $ 995
==================
The excess of the current cost of inventories over book value was
approximately $271 million and $293 million at December 31, 1997 and 1996,
respectively.
Note 7 Investments
At December 31, 1997 and 1996, investments in debt securities were
primarily composed of U.S. Treasury securities and corporate debt instruments.
Maturities generally ranged from two days to 22 months. These investments were
principally included in short-term investments. 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, 1997
and 1996, all investments were classified as available-for-sale and investments
were reported at fair value, with unrealized holding gains and losses, net of
tax, reported in a separate component of stockholders' equity.
The following summarizes investments at December 31:
Millions 1997 1996
----------------------
Aggregate fair value $ 1,897 $ 2,311
Gross unrealized holding losses 1 3
Gross unrealized holding gains (985) (365)
----------------------
Amortized cost $ 913 $ 1,949
======================
Investment activity for the years ended December 31 was as follows:
Millions 1997 1996
----------------------
Gross purchases $ 6,902 $ 7,799
Gross sales 1,753 2,371
Gross maturities 6,111 5,920
Gross realized gains and losses were insignificant and were determined by
the specific identification method.
Note 8 Fixed Assets
Property, plant and equipment at December 31 was as follows:
1997 1996
----------------------------------
Millions Gross Net Gross Net
----------------------------------
Exploration and production $25,145 $10,230 $23,238 $ 9,300
Refining and marketing 5,017 2,714 4,743 2,621
Chemicals 4,149 2,534 4,152 2,622
Other operations 2,117 1,367 2,197 1,458
Unallocated 358 153 407 194
----------------------------------
Total $36,786 $16,998 $34,737 $16,195
==================================
Expenses for maintenance and repairs for 1997, 1996 and 1995 were $506
million, $497 million and $475 million, respectively.
Note 9 Short-term Borrowings and Bank Credit Facilities
Notes payable consist primarily of commercial paper issued to a variety of
financial investors and institutions and any amounts outstanding under ARCO or
ARCO Chemical credit facilities. The weighted average interest rate on notes
payable outstanding at December 31, 1997 and 1996, was 6.7% and 5.7%,
respectively.
In 1997, ARCO and certain wholly owned subsidiaries had committed bank
credit facilities of approximately $3.1 billion. At December 31, 1997, there
were no borrowings under these committed facilities.
ARCO Chemical maintains its own credit facility, not guaranteed by ARCO,
under which it may borrow up to $500 million. At December 31, 1997, there were
no borrowings against this credit facility.
At December 31, 1997, ARCO had unused letters of credit totaling
approximately $480 million.
42
ARCO
Note 10 Long-term Debt
Long-term debt at December 31 comprised the following:
Millions 1997 1996
-----------------
8 1/4%, due in 2022 $ 245 $ 250
8 1/2%, due in 2012 178 178
8 3/4%, due in 2032 159 198
9% exchangeable notes, due in 1997 - 988
9%, due in 2021 209 286
9%, due in 2031 97 136
9 1/8%, due in 2011 253 300
9 1/8%, due in 2031 155 345
9 7/8%, due in 2016 181 450
10 1/4%, due in 2000 - 250
10 7/8%, due in 2005 410 500
Medium-Term Notes -- A Series, 8.70%/(a)/ 182 197
Medium-Term Notes -- B Series, 8.34%/(a)/ 250 250
ARCO Tresop Notes, 5.06%/(a)/ 163 224
Variable rate, due in 2031, 3.80%/(a)/ 265 265
Variable rate, due in 2032 6.66%/(a)/ 108 -
ARCO Chemical:
9.375%, due in 2005 100 100
9.8%, due in 2020 224 224
9.9%, due in 2000 200 200
10.25%, due in 2010 100 100
French bank loans, 7.2%/(a)/ 33 55
Dutch bank loans 149 173
Vastar:
Commercial paper, 6.2%/(a)/ 373 554
6.95%, due in 2006 75 75
6.96%, due in 2007 75 -
8 3/4%, due in 2005 149 149
Other 269 248
-----------------
Total, including debt due within one year 4,602 6,695
Less debt due within one year 188 1,102
-----------------
Long-term debt $4,414 $5,593
=================
(a) Weighted average of interest rates at December 31, 1997.
Maturities for the five years subsequent to December 31, 1997, are as
follows:
Millions 1998 1999 2000 2001 2002
-------------------------------------
Maturities $188 $143 $219 $66 $584
In 1996, Vastar established a $1.1 billion Commercial Paper Program for
issuance of unsecured notes with maturities of up to 270 days from the date of
issue. Vastar has agreed to maintain credit lines sufficient to support payment
on the notes.
In 1996, Vastar consolidated existing unsecured revolving credit agreements
into a single facility. As of December 31, 1997, commitments under this
facility, as amended to date, totaled $1.1 billion. The commitment expires March
31, 2002. During 1997, no debt was outstanding under this facility. The credit
facility is not guaranteed by ARCO. The agreement contains covenants, the most
restrictive of which require Vastar to maintain certain financial ratios and
minimum levels of tangible stockholders' equity and restrict encumbrance of
assets.
ARCO periodically enters into interest rate swap agreements with the
objective of managing interest rate risk by converting the interest rate on
variable-rate debt to a fixed rate. The fixed rate is accrued and charged to
interest expense through the term of the interest rate swap agreement. All
interest rate swaps are intended to be held until maturity. At December 31,
1997, ARCO Chemical had outstanding interest rate swaps on one loan of
300 million Dutch guilders (approximately $149 million) due in 2002. The swaps
mature when the related debt becomes due. The swaps effectively change the
loan's floating interest rate to a fixed rate of 4.8%.
At December 31, 1997 and 1996, approximately $180 million and $230 million,
respectively, of long-term debt was denominated in foreign currencies.
No material amounts of long-term debt are collateralized by ARCO assets.
Note 11 Interest
Interest for the years ended December 31 comprised the following:
Millions 1997 1996 1995
------------------------
Long-term debt $ 491 $ 579 $ 637
Short-term debt 95 83 90
Other /(a)/ (117) 28 72
------------------------
469 690 799
Capitalized interest (47) (22) (49)
------------------------
Total interest expense $ 422 $ 668 $ 750
========================
Total interest paid in cash $ 469 $ 675 $ 780
========================
Interest income $ 125 $ 193 $ 212
========================
(a) Includes $145 million reversal from partial tax audit settlements in 1997.
43
ARCO
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 12 Financial Instruments and Fair Value
ARCO does not hold or issue financial instruments for trading purposes.
ARCO enters into various types of foreign currency forward, option and swap
contracts. Foreign currency forward and option contracts are 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. Foreign currency
swap contracts are used to minimize foreign exchange exposures related to
foreign-denominated intercompany debt with maturities exceeding one year.
At December 31, 1997, the notional amounts of foreign currency contracts
outstanding (principally involving European currencies and Australian dollars)
were approximately $613 million, with various maturities ranging from 1998 to
2000. At December 31, 1996, the notional amounts of foreign currency contracts
outstanding were approximately $804 million.
Gains and losses on foreign currency forward contracts covering
anticipatory cash flows are recognized currently as other income or expense.
Gains and losses on foreign currency swaps associated with intercompany debt are
recognized currently in income and offset foreign exchange gains and losses on
the underlying intercompany loans. Gains and losses on other foreign currency
contracts are generally deferred and offset the transactions being hedged.
ARCO periodically enters into interest rate swaps to manage interest rate
risk. Interest rate swaps are used in conjunction with debt (see Note 10).
ARCO also uses various hedging arrangements to manage the exposure to price
risk for future natural gas and crude oil transactions. Gains and losses
resulting from these transactions are 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 is delivered. During 1997, Vastar
entered into a series of natural gas swap and price collar agreements which at
December 31, 1997, covered 201 million cubic feet per day of its 1998 natural
gas production. These swap agreements will serve as hedges which secure prices
on these volumes at an average price of $2.13 per thousand cubic feet for 1998
(on a Henry Hub basis).
At December 31, the carrying value and estimated fair value of ARCO's
financial instruments are shown as assets (liabilities) in the table below:
1997 1996
------------------------------------------
Millions Carrying Fair Carrying Fair
Value Value Value Value
------------------------------------------
Non-derivatives:
Short-term investments $ 222 $ 222 $ 784 $ 784
Equity method investments 1,194 1,204 1,174 1,779
Other investments and
long-term receivables 1,872 1,872 1,188 1,188
Notes payable (1,599) (1,599) (1,157) (1,157)
Long-term debt, including
current maturities (4,602) (5,400) (6,695) (7,213)
Derivatives:
Foreign currency forwards $ (1) $ (1) $ (14) $ (14)
Foreign currency options 4 4 6 6
Foreign currency swaps 3 2 (4) (4)
Interest rate swaps on debt -- -- (1) (3)
Oil & gas price swaps (7) (7) (21) (21)
Commodity futures 2 2 (6) (6)
All derivative instruments are off-balance-sheet instruments; however, net
receivable or payable positions related to derivative instruments are carried on
the balance sheet.
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 by ARCO; ARCO does not anticipate
nonperformance by the counterparties.
44
ARCO
Note 13 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.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking
compensatory and punitive damages and injunctions were filed by the State of
Alaska, the United States and private plaintiffs against Exxon, Alyeska Pipeline
Service Company (Alyeska) and Alyeska's owner companies (including ARCO, which
owns approximately 22%). Alyeska and its owner companies have settled the civil
damage claims by federal and state governments and the lawsuits by private
plaintiffs. Certain issues relating to the liability for the spill remain
unresolved between the Exxon companies, on the one hand, and Alyeska and its
other owner companies.
ARCO and former producers of lead pigments have been named as defendants in
cases filed by a municipal housing authority, two purported classes and several
individuals seeking damages and injunctive relief as a consequence of the
presence of lead-based paint in certain housing units. ARCO is also the subject
of or party to other pending or threatened legal actions.
The State of Montana is seeking recovery from ARCO of $764 million based on
alleged injuries to natural resources resulting from mining and mineral
processing businesses formerly operated by Anaconda, ARCO's predecessor in
Montana. ARCO is contesting this demand.
ARCO is subject to other loss contingencies pursuant to federal, state and
local environmental laws and regulations. These require ARCO to remove or
mitigate the effects on the environment of the disposal or release of certain
chemical, mineral and petroleum substances at various sites, perform certain
restoration work on these sites and to pay damages for loss of use and non-use
values. ARCO is currently participating in environmental assessments and
cleanups under these laws at federal Superfund and state-managed sites, as well
as other clean-up sites. ARCO may in the future be involved in additional
environmental assessments and cleanups, including restoration of natural
resources and damages for loss of use and non-use values. The amount of future
costs will depend on such unknown factors as the nature and extent of
contamination, the timing, extent and method of remedial actions which may be
required and the determination of ARCO's liability in proportion to other
responsible parties. Environmental loss contingencies include claims for
personal injuries allegedly caused by exposure to toxic materials manufactured
or used by ARCO.
ARCO continues to estimate the amount of these costs in periodically
establishing reserves based on progress made in determining the magnitude of
remediation costs, experience gained from sites on which remediation has been
completed, the timing and extent of remedial actions required by the applicable
governmental authorities and an evaluation of the amount of ARCO's liability
considered in light of the liability and financial wherewithal of the other
responsible parties. At December 31, 1997, the environmental remediation accrual
was $767 million. As the scope of ARCO's obligations becomes more clearly
defined, there may be changes in these estimated costs, which might result in
future charges against ARCO's earnings.
ARCO's environmental remediation accrual covers federal Superfund and
state-managed sites as well as other clean-up sites, including service stations,
refineries, terminals, chemical facilities, third-party landfills, former
nuclear processing facilities, sites associated with discontinued operations and
sites formerly owned by ARCO. ARCO has been named a potentially responsible
party (PRP) for 133 sites. The number of PRP sites in and of itself is not a
relevant measure of liability because the nature and extent of environmental
concerns varies by site and ARCO's share of responsibility varies from sole
responsibility to very little responsibility. ARCO reviews all PRP sites, along
with other sites as to which no claims have been asserted, in estimating the
amount of the accrual. ARCO's future costs at these sites could exceed the
amount accrued by as much as $500 million.
Approximately 58% of the reserve related to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of Montana,
Utah and New Mexico. Another significant component related to currently and
formerly owned chemical, nuclear processing, and refining and marketing
facilities, and other sites which received wastes from these facilities. The
remainder related to other sites with reserves ranging from $1 million to
$10 million per site. No one site represents more than 10% of the total accrual.
Substantially all amounts accrued are expected to be paid out over the next five
to six years.
Claims for recovery of remediation costs already incurred and to be
incurred in the future have been filed against various 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.
45
ARCO
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 14 Taxes
The income tax provision for the years ended December 31 comprised the
following:
Millions 1997 1996 1995
---------------------------
Federal:
Current $ 614 $ 662 $ 497
Deferred 129 (9) 42
---------------------------
743 653 539
Foreign:
Current 117 155 108
Deferred (35) 24 (40)
---------------------------
82 179 68
State:
Current 98 113 56
Deferred (3) (4) 24
---------------------------
95 109 80
---------------------------
Total provision for taxes on income $ 920 $ 941 $ 687
===========================
Total income taxes paid in cash $ 831 $ 930 $ 785
===========================
A deferred tax expense of $242 million and $144 million was recorded in
1997 and 1996, respectively, related to unrealized investment gains included in
stockholders' equity.
Major components of the net deferred tax liability at December 31 were as
follows:
Millions 1997 1996
----------------------
Depreciation, depletion and amortization $ (3,713) $ (3,741)
Other (878) (510)
----------------------
Total deferred tax liabilities (4,591) (4,251)
----------------------
Dismantlement and environmental 604 518
Postretirement benefits 321 330
Foreign excess tax basis/loss carryforwards 279 299
Other 431 350
----------------------
Total deferred tax assets 1,635 1,497
----------------------
Valuation allowance (127) (130)
----------------------
Net deferred income tax liability $ (3,083) $ (2,884)
======================
The valuation allowance was $113 million at December 31, 1995.
Taxes other than income taxes for the years ended December 31 comprised the
following:
Millions 1997 1996 1995
---------------------------
Property $ 189 $ 178 $ 180
Production/severance 397 445 343
Other 180 177 194
---------------------------
Total $ 766 $ 800 $ 717
===========================
ARCO has foreign loss carryforwards of $490 million which begin expiring in
1998.
The domestic and foreign components of income 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:
1997 1996 1995
------------------------ ------------------------ -----------------------
Millions Amount % Pretax Income Amount % Pretax Income Amount % Pretax Income
------------------------ ------------------------ -----------------------
Income before income taxes:
Domestic $2,582 89.7 $2,279 84.1 $1,896 87.3
Foreign 295 10.3 430 15.9 277 12.7
------------------------ ------------------------ -----------------------
Total $2,877 100.0 $2,709 100.0 $2,173 100.0
======================== ======================== =======================
Tax at 35% $1,007 35.0 $ 948 35.0 $ 761 35.0
Increase (reduction) in taxes resulting from:
Dividend exclusion (33) (1.1) (15) (0.6) (54) (2.5)
Taxes on foreign income in excess of statutory rate 32 1.1 41 1.5 46 2.1
Affiliate stock transactions (109) (3.8) -- -- -- --
Disposition of equity investment 90 3.1 -- -- -- --
Foreign deferred tax asset valuation -- -- 28 1.0 (30) (1.4)
State income taxes (net of federal effect) 62 2.2 71 2.6 52 2.4
Tax credits (106) (3.7) (95) (3.5) (81) (3.7)
Other (23) (0.8) (37) (1.3) (7) (0.3)
------------------------ ------------------------ -----------------------
Provision for taxes on income $ 920 32.0 $ 941 34.7 $ 687 31.6
======================== ======================== =======================
46
ARCO
Note 15 Retirement Plans
The following table sets forth the plans' funded status and amounts
recognized in the balance sheet at December 31:
1997 1996
------------------------------ ------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Millions Benefits Exceed Assets Benefits Exceed Assets
------------------------------ ------------------------------
Actuarial present value of benefits:
Vested benefits $(2,285) $(249) $(2,131) $(213)
Non-vested benefits (37) (4) (31) (1)
------------------------------ ------------------------------
Accumulated benefits (2,322) (253) (2,162) (214)
Effect of future projected salary increases (254) (31) (359) (78)
------------------------------ ------------------------------
Projected benefit obligation (PBO) (2,576) (284) (2,521) (292)
Plan assets at fair value, primarily stocks and bonds 3,100 1 2,895 2
------------------------------ ------------------------------
PBO(greater) less than plan assets 524 (283) 374 (290)
Unrecognized net loss 76 115 178 123
Prior service cost not yet recognized in net periodic pension cost 129 20 136 22
Remaining unrecognized (asset) obligation from transition (234) 5 (263) 7
Adjustment for minimum liability - (110) - (76)
------------------------------ ------------------------------
Prepaid pension asset (liability) recognized in the balance sheet $ 495 $(253) $ 425 $(214)
============================== ==============================
ARCO and its subsidiaries have defined benefit pension plans to provide
pension benefits to substantially all employees. The benefits are based on years
of service and the employee's compensation, primarily during the last three
years of service. ARCO's funding policy is to make annual contributions as
required by applicable regulations. ARCO accrues pension costs based on an
actuarial valuation for each plan and funds the plan through contributions to
trust funds that are kept apart from company funds.
The assumptions used as of December 31 in determining the pension cost and
pension liability were as follows:
Percent 1997 1996 1995
----------------------
Discount rate 7.0 7.25 7.0
Rate of salary progression 4.0 5.0 5.0
Long-term rate of return
on assets 10.5 10.5 10.5
Pension costs related to ARCO-sponsored plans, on a pretax basis, for the
years ended December 31 were as follows:
Millions 1997 1996 1995
----------------------
Service cost-benefits earned
during the period $ 73 $ 79 $ 62
Interest cost on PBO 196 198 195
Actual (return) loss on plan assets (427) (454) (517)
Net amortization and deferral 130 190 272
----------------------
Net pension (income) cost $ (28) $ 13 $ 12
======================
Note 16 Other Postretirement Benefits
ARCO and its subsidiaries sponsor defined postretirement benefit plans
which provide other postretirement benefits to substantially all employees who
retire with ARCO having rendered the required years of service, and to their
spouses and eligible dependents. Health care benefits are provided primarily
through comprehensive indemnity plans or health maintenance organizations
(HMOs), as chosen by the employee. Beginning January 1, 1997, ARCO paid for the
cost of the benchmark HMO with employees responsible for the differential cost,
if any, of their selected option. Previously, ARCO paid approximately 80% of the
cost of a comprehensive indemnity plan. This change resulted in an unrecognized
prior service benefit. Life insurance benefits are based primarily on the
employee's final compensation and are partially paid for by retiree
contributions, which vary based upon coverage chosen by the retiree. ARCO has
the right to modify the plans at any time.
ARCO's current policy is to fund the cost of postretirement health care and
life insurance plans on a pay-as-you-go basis.
The significant assumptions used in determining postretirement benefit cost
and the accumulated postretirement benefit obligation (APBO) were as follows:
Percent 1997 1996 1995
----------------------
Discount rate 7.0 7.25 7.0
Rate of salary progression 4.0 5.0 5.0
47
ARCO
Notes to Consolidated Financial Statements
- ------------------------------------------
ARCO accrues postretirement benefit costs based on actuarial calculations
for each plan. Net postretirement benefit costs for the years ended December 31
included the following:
1997 1996 1995
------------------------------------------------------------------------------------------------------
Health Life Health Life Health Life
Millions Care Insurance Total Care Insurance Total Care Insurance Total
------------------------------------------------------------------------------------------------------
Service cost-benefits
earned during the period $ 8 $ 3 $ 11 $ 7 $ 3 $ 10 $ 8 $ 2 $ 10
Interest cost on APBO 30 13 43 32 13 45 49 13 62
Net amortization (15) - (15) (13) - (13) - (1) (1)
------------------------------------------------------------------------------------------------------
Net postretirement benefit
cost $ 23 $ 16 $ 39 $ 26 $ 16 $ 42 $ 57 $ 14 $ 71
======================================================================================================
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care trend rate) for the health plans is 9%
for 1995 and 1996, 7% for 1997 to 2001, and 5% thereafter. The effect of a one-
percentage-point increase in the assumed trend rate would increase the APBO as
of December 31, 1997, by approximately $52 million, and the aggregate of the
service and interest cost components of net annual postretirement benefit cost
by approximately $5 million.
The plans' combined postretirement benefit liability at December 31 was as
follows:
1997 1996
-----------------------------------------------------------
Millions Health Life Total Health Life Total
Care Insurance Care Insurance
-----------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees $(345) $(156) $(501) $(370) $(153) $(523)
Employees fully eligible (18) (7) (25) (16) (7) (23)
Other active participants (98) (31) (129) (88) (33) (121)
-----------------------------------------------------------
Total APBO (461) (194) (655) (474) (193) (667)
Unrecognized prior service (benefit) cost (217) 2 (215) (233) 2 (231)
Unrecognized net (gain) loss 46 (14) 32 65 (13) 52
-----------------------------------------------------------
Accrued postretirement benefit cost recognized
in the balance sheet $(632) $(206) $(838) $(642) $(204) $(846)
===========================================================
Note 17 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.
At December 31, 1997, future minimum rental payments due under leases were
as follows:
Capital Operating
Millions Leases Leases
----------------------
1998 $ 3 $ 249
1999 3 209
2000 3 178
2001 3 120
2002 3 103
Later years 67 632
----------------------
Total minimum lease payments 82 $ 1,491
========
Imputed interest (rates ranging from
9.75% to 12%) 56
---------
Present value of minimum lease
payments included in long-term debt $ 26
======================
Minimum future rental income under noncancellable subleases at December 31,
1997, amounted to $63 million.
Operating lease net rental expense for the years ended December 31 was as
follows:
Millions 1997 1996 1995
--------------------------------
Minimum rentals $ 257 $ 215 $ 225
Contingent rentals 1 2 10
Sublease rental income (11) (11) (12)
--------------------------------
Net rental expense $ 247 $ 206 $ 223
================================
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.
48
ARCO
Note 18 Stock Options
Options to purchase shares of ARCO's common stock have been granted to
executives, 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 prior to 1997 vest over two years in
equal installments. Options granted in 1997 vest equally over three years.
Transactions during 1997, 1996 and 1995 were as follows (restated to give effect
to June 13, 1997 100% stock dividend):
Weighted Average
Exercise Price
-----------------------------------
Balance, January 1, 1995 7,147,484 $ 52.13
Granted 973,196 54.50
Exercised (442,172) 43.66
Cancelled (2,236) 52.11
-----------------------------------
Balance, December 31, 1995 7,676,272 $ 52.92
===================================
Granted 1,101,834 56.61
Exercised (1,110,326) 46.15
Cancelled (34,358) 58.47
-----------------------------------
Balance, December 31, 1996 7,633,422 $ 54.41
===================================
Granted 1,414,048 64.47
Exercised (1,022,100) 52.21
Cancelled (18,224) 61.18
-----------------------------------
Balance, December 31, 1997 8,007,146 $ 56.45
===================================
A summary of ARCO's fixed stock options as of December 31, 1997, 1996 and
1995, was as follows:
1997 1996 1995
----------------------------------------
Shares available for option 6,605,106 8,672,714 7,166,892
Options exercisable 6,064,856 6,067,976 6,149,752
Weighted average exercise
price of options exercisable $ 54.58 $ 54.01 $ 52.89
Weighted average fair value
of options granted during
the year $ 14.27 $ 25.90 $ 28.63
Used to calculate fair value:
Risk-free interest rate 6.38% 6.00% 7.36%
Expected life (years) 10 10 10
Expected volatility 18.17% 14.42% 17.33%
Expected dividends 4.29% 0.00% 0.00%
At December 31, 1997, exercise prices for options outstanding ranged from
$39.50 to $85.875 and the weighted average remaining contractual life was
5.92 years.
ARCO applies APB 25 in accounting for its fixed stock options. Accordingly,
no compensation cost has been recognized for options granted. The pro forma
impact to net income and earnings per share from calculating compensation
expense consistent with the fair value method under SFAS No. 123 was less than
1% for the years ended December 31, 1997, 1996 and 1995.
Beginning in 1997, ARCO awards contingent performance-based restricted
stock to executives and key employees. The number of shares of restricted stock
ultimately issued depends on the attainment of certain performance criteria over
a specified evaluation period. Restricted stock ultimately issued is subject to
a two-year restriction on transferring.
During 1997, 326,688 shares of contingent performance-based restricted
stock were awarded at a weighted-average price of $64.06, net of forfeitures and
retirements, with varying evaluation periods. During 1997, 62,422 shares of
restricted stock were issued, net of forfeitures, at a weighted-average price of
$63.63. During 1997, $23 million was recognized as expense for performance-based
restricted stock.
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. DSC
activity during 1997 was as follows:
Accrued 2,039,102
Paid out (396,250)
Cancelled (287)
---------------
Balance, December 31, 1997 1,642,565
===============
During 1997, $35 million was recognized as expense for DSCs.
Note 19 Stockholders' Equity
Detail of capital stock as of December 31 was as follows:
1997 1996
----------------------------------
$3.00 Cumulative convertible
preference stock, par $1:
Shares authorized 78,089 78,089
Shares issued and outstanding 55,941 60,759
Aggregate value in liquidation
- (thousands) $ 4,475 $ 4,861
$2.80 Cumulative convertible
preference stock, par $1:
Shares authorized 833,776 833,776
Shares issued and outstanding 615,653 673,855
Aggregate value in liquidation
- (thousands) $ 43,096 $ 47,170
Common stock, par $2.50:
Shares authorized 600,000,000 600,000,000
Shares issued 322,719,890 161,086,174
Shares outstanding 320,369,895 161,082,043
Shares held in treasury 2,349,995 4,131
49
ARCO
Notes to Consolidated Financial Statements
- ------------------------------------------
Changes in preference stocks were due to conversions. The $3.00 cumulative
convertible preference stock is convertible into 13.6 shares of common stock.
The $2.80 cumulative convertible preference stock is convertible into 4.8 shares
of common stock. Common stock 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. ARCO has authorized
75,000,000 shares of preferred stock, $.01 par, of which none were issued or
outstanding at December 31, 1997.
At December 31, 1997, shares of ARCO's authorized and common stock were
reserved as follows:
Conversions:
$3.00 Preference stock 760,797
$2.80 Preference stock 2,955,134
Stock option plans 16,254,817
Employee benefit plans 9,974,482
---------------
Total 29,945,230
===============
Under ARCO's incentive compensation plans, awards of ARCO's common stock
may be made to officers, outside directors and key employees.
Stockholders' equity adjustments at December 31, 1997 and 1996 were as
follows:
Millions 1997 1996
-----------------------
Unrealized gain on investments $ 606 $ 225
Foreign currency adjustments (204) (19)
Pension liability adjustment (54) (28)
-----------------------
Total $ 348 $ 178
=======================
Note 20 Supplemental Cash Flow Information
The following is supplemental cash flow information for the years ended
December 31:
Millions 1997 1996 1995
---------------------------------
Short-term investments:
Gross sales and maturities $ 1,784 $ 3,335 $ 4,216
Gross purchases (1,226) (2,557) (2,716)
---------------------------------
Net cash provided $ 558 $ 778 $ 1,500
=================================
Notes payable:
Gross proceeds $ 9,866 $ 5,806 $ 8,058
Gross repayments (9,400) (5,885) (8,351)
---------------------------------
Net cash provided (used) $ 466 $ (79) $ (293)
=================================
Gross noncash provisions
charged to income $ 714 $ 295 $ 444
Reserve reversal from partial
tax audit settlements (145) - -
Cash payments of previously
accrued items (322) (515) (627)
---------------------------------
Cash payments (greater)
less than noncash provisions $ 247 $ (220) $ (183)
=================================
Changes in working capital --
increase (decrease) to cash:
Accounts receivable $ 332 $ (235) $ (239)
Inventories (19) (96) (75)
Accounts payable (147) 279 159
Other working capital (324) 173 (49)
---------------------------------
$ (158) $ 121 $ (204)
=================================
Note 21 Foreign Currency Transactions
Foreign currency transactions resulted in net losses of $39 million, $17
million and $15 million in 1997, 1996 and 1995, respectively.
Note 22 Earnings Per Share
1997 1996 1995
------------------------------------------------------------------------------------------
(Millions, except per share amounts) Income Shares Per Share Income Shares Per Share Income Shares Per Share
------------------------------------------------------------------------------------------
Net income $ 1,771 $1,663 $1,376
Less: Preference stock dividends (2) (2) (2)
------------------------------------------------------------------------------------------
Income available to common
stockholders -- basic EPS 1,769 321.2 $ 5.51 1,661 321.7 $5.17 1,374 321.7 $4.27
Effect of dilutive securities:
Contingently issuable shares
(primarily options) 2.3 0.6 0.1
$3.00 Convertible preference stock 0.8 0.9 1.0
$2.80 Convertible preference stock 2 3.1 2 3.3 2 3.7
------------------------------------------------------------------------------------------
Income available to common
stockholders and assumed
conversions -- diluted EPS $ 1,771 327.4 $ 5.41 $1,663 326.5 $5.09 $1,376 326.5 $4.22
==========================================================================================
50
ARCO
Note 23 Lyondell Petrochemical Company
Lyondell is engaged in the manufacture and marketing of basic commodity
chemicals, including ethylene, propylene, methanol and polymers, and, through
its approximately 90% interest in LYONDELL-CITGO Refining Company Ltd., the
refining and marketing of petroleum products, primarily in the southwestern
United States.
In September 1997, all of ARCO's 9% Exchangeable Notes due September 15,
1997 with an outstanding principal amount of $988 million were settled with
Lyondell common stock owned by ARCO. All remaining Lyondell shares were sold by
ARCO in a privately negotiated transaction in late September. ARCO realized an
aggregate pretax gain of $633 million, or approximately $291 million after tax,
on the two transactions.
Summarized financial information for Lyondell was as follows:
Nine months ended Year ended
September 30, December 31,
-----------------------------------
Millions 1997 1996 1995
-----------------------------------
Revenues/(a)/ $2,343 $5,052 $4,936
Operating income 378 278 706
Income before income taxes 371 196 618
Net income $ 235 $ 126 $ 389
===================================
ARCO's equity in net
income of Lyondell $ 119 $ 53 $ 194
===================================
Cash dividends received
from Lyondell $ 27 $ 36 $ 36
===================================
At December 31:
Current assets $ 831 $ 678
Noncurrent assets 2,445 1,928
Current liabilities 771 750
Long-term debt 1,194 807
Other liabilities 271 210
Minority interest 609 459
Stockholders' equity/(b)/ 431 380
/(a)/Includes $229, $318 and $325 of sales to ARCO in 1997, 1996 and 1995,
respectively, which approximated 3%, 4% and 5% of ARCO's purchases in
those years.
/(b)/ARCO's investment in Lyondell comprised 49.9% of Lyondell's stockholders'
equity plus $72 of dividends received in excess of basis of investment.
Note 24 Research and Development
Expenditures for research and development totaled $120 million, $106
million and $104 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Note 25 Unaudited Quarterly Results
Millions, except per share amounts 1997 1996
-----------------------------
Sales and other operating revenues
Quarter ended:
March 31 $ 5,044 $ 4,156
June 30 4,587 4,559
September 30 4,553 4,748
December 31 4,500 5,129
-----------------------------
Total $18,684 $18,592
=============================
Income before income taxes, minority
interest and extraordinary item
Quarter ended:
March 31 $ 740 $ 620
June 30 770 720
September 30 890 791
December 31 477 578
-----------------------------
Total $ 2,877 $ 2,709
=============================
Net income
Quarter ended:
March 31 $ 483 $ 370
June 30 390/(a)/ 434
September 30 516/(b)/ 479
December 31 382/(c)/ 380
-----------------------------
Total $ 1,771 $ 1,663
=============================
Earned per share--basic
Quarter ended:
March 31 $ 1.50 $ 1.15
June 30 $ 1.21 $ 1.35
September 30 $ 1.61 $ 1.49
December 31 $ 1.19 $ 1.18
(a) See Note 5 to Consolidated Financial Statements.
(b) Includes $291 gain on disposition of Lyondell stock (Note 23).
(c) See Note 3 to Consolidated Financial Statements.
51
ARCO
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 ARCO 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, 1997 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 14% of
petroleum liquid proved reserves.
ARCO has no long-term supply contracts to purchase petroleum liquids or
natural gas from foreign governments.
The changes in proved reserves for the years ended December 31 were as
follows:
Petroleum Liquids (million barrels)
-------------------------------------------------------
Consolidated
--------------------------- Other
U.S. International Total Reserves/1/ Worldwide
----------------------------------------------------------
Reserves at
January 1, 1995 2,246 222 2,468 - 2,468
Revisions 76 2 78 - 78
Improved recovery 15 - 15 - 15
Purchases 16 1 17 - 17
Extensions and discoveries 33 5 38 - 38
Production (213) (24) (237) - (237)
Consumed - - - - -
Sales (10) - (10) - (10)
----------------------------------------------------------
Reserves at
December 31, 1995 2,163 206 2,369 - 2,369
==========================================================
Revisions 60 4 64 - 64
Improved recovery 5 - 5 - 5
Purchases 16 218 234 - 234
Extensions and discoveries 76 5 81 - 81
Production (207) (24) (231) - (231)
Consumed - - - - -
Sales (1) - (1) - (1)
----------------------------------------------------------
Reserves at
December 31, 1996 2,112 409 2,521 - 2,521
==========================================================
Revisions 115 60 175 - 175
Improved recovery 10 - 10 - 10
Purchases 10 25 35 49 84
Extensions and discoveries 89 55 144 - 144
Production (204) (29) (233) (1) (234)
Consumed - - - - -
Sales (1) - (1) - (1)
----------------------------------------------------------
Reserves at
December 31, 1997 2,131 520 2,651 48 2,699
==========================================================
Proved developed reserves:
At January 1, 1995 1,915 87 2,002 - 2,002
At December 31, 1995 1,896 92 1,988 - 1,988
At December 31, 1996 1,828 150 1,978 - 1,978
At December 31, 1997 1,821 204 2,025 7 2,032
Natural Gas (billion cubic feet)
-----------------------------------------------------------
Consolidated
-------------------------------- Other
U.S. International Total Reserves/1/ Worldwide
----------------------------------------------------------
Reserves at
January 1, 1995 4,615 3,493 8,108 - 8,108
Revisions 184 7 191 - 191
Improved recovery 8 - 8 - 8
Purchases 78 89 167 - 167
Extensions and discoveries 252 302 554 - 554
Production (365) (203) (568) - (568)
Consumed (93) (5) (98) - (98)
Sales (13) - (13) - (13)
----------------------------------------------------------
Reserves at
December 31, 1995 4,666 3,683 8,349 - 8,349
==========================================================
Revisions 103 (94) 9 - 9
Improved recovery 14 - 14 - 14
Purchases 114 - 114 - 114
Extensions and discoveries 343 30 373 - 373
Production (382) (267) (649) - (649)
Consumed (78) (5) (83) - (83)
Sales (4) - (4) - (4)
----------------------------------------------------------
Reserves at
December 31, 1996 4,776 3,347 8,123 - 8,123
==========================================================
Revisions 187 17 204 - 204
Improved recovery 28 3 31 - 31
Purchases 165 16 181 67 248
Extensions and discoveries 308 352 660 - 660
Production (389) (308) (697) - (697)
Consumed (79) (10) (89) - (89)
Sales (8) - (8) - (8)
----------------------------------------------------------
Reserves at
December 31, 1997 4,988 3,417 8,405 67 8,472
==========================================================
Proved developed reserves:
At January 1, 1995 4,301 1,142 5,443 - 5,443
At December 31, 1995 4,294 1,806 6,100 - 6,100
At December 31, 1996 4,310 1,780 6,090 - 6,090
At December 31, 1997 4,467 1,643 6,110 10 6,120
/1/Comprises reserves attributable to ARCO's ownership interest in equity
affiliates
52
ARCO
Supplemental Information (Unaudited)
- -------------------------------------
Included in ARCO's reserves are 100% of the reserves of Vastar, a
consolidated subsidiary of which ARCO owned 82.2% at December 31, 1997. Vastar's
reserves comprised 6% and 48% of U.S. petroleum liquids and natural gas
reserves, respectively, at December 31, 1997.
During 1997, net reserve additions, including a purchase by LUKARCO, an
equity affiliate, replaced 164% of worldwide oil-equivalent production. During
the three-year period 1995-1997, ARCO's net reserve additions replaced 127% of
worldwide oil-equivalent production. Significant changes in 1997 related to the
classification as proved of the previously discovered Shearwater gas condensate
field in the U.K. North Sea, the acquisition (by LUKARCO) of an interest in the
Tengiz field in Kazakhstan, and the extension of the estimated life of the
Kuparuk River field in Alaska.
Natural gas from the North Slope of Alaska, other than that used in
providing fuel in North Slope operations or sold to others on the North Slope,
is not presently economically marketable.
ARCO is actively evaluating various technical options for commercializing
North Slope gas. Among the options being studied are the construction of gas
transportation and liquefied natural gas (LNG) manufacturing facilities and the
development of a gas-to-liquids conversion process. ARCO is also working with
the State of Alaska to enhance the fiscal and regulatory climate for the
ultimate commercialization of North Slope gas resources. Significant technical
uncertainties and existing market conditions still preclude gas from such
potential projects being included in ARCO's reserves.
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:
1997 1996 1995
------------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
-------------------------------------------------------------------------------------------------------
Proved properties $ 15,845 $ 6,026 $ 21,871 $ 15,004 $ 5,245 $ 20,249 $ 14,355 $ 4,304 $ 18,659
Unproved properties 365 447 812 257 297 554 182 236 418
-------------------------------------------------------------------------------------------------------
16,210 6,473 22,683 15,261 5,542 20,803 14,537 4,540 19,077
Accumulated depreciation,
depletion and amortization 10,559 2,959 13,518 9,924 2,668 12,592 9,257 2,302 11,559
-------------------------------------------------------------------------------------------------------
Net capitalized costs 5,651 3,514 9,165 5,337 2,874 8,211 5,280 2,238 7,518
-------------------------------------------------------------------------------------------------------
Net capitalized costs of equity
affiliates* - 55 55 - - - - - -
-------------------------------------------------------------------------------------------------------
Total $ 5,651 $ 3,569 $ 9,220 $ 5,337 $ 2,874 $ 8,211 $ 5,280 $ 2,238 $ 7,518
=======================================================================================================
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.
1997 1996 1995
------------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
-------------------------------------------------------------------------------------------------------
Property acquisition costs:
Proved properties $ 92 $ 224 $ 316 $ 82 $ 275 $ 357 $ 56 $ 34 $ 90
Unproved properties 100 8 108 98 11 109 24 15 39
Exploration costs 328 332 660 277 213 490 212 309 521
Development costs 692 794 1,486 481 482 963 389 328 717
-------------------------------------------------------------------------------------------------------
Total expenditures 1,212 1,358 2,570 938 981 1,919 681 686 1,367
-------------------------------------------------------------------------------------------------------
Costs incurred of equity
affiliates* - 109 109 - - - - - -
-------------------------------------------------------------------------------------------------------
Total $ 1,212 $1,467 $ 2,679 $ 938 $ 981 $ 1,919 $ 681 $ 686 $ 1,367
=======================================================================================================
*ARCO's share
53
ARCO
Results of operations from oil and gas producing activities (including
operating overhead) for the three years ended December 31 were as follows:
1997 1996 1995
------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
------------------------------------------------------------------------------------------------
Revenues:
Sales $1,974 $1,349 $3,323 $1,892 $1,140 $3,032 $1,460 $ 920 $2,380
Transfers 2,074 - 2,074 2,199 - 2,199 1,679 - 1,679
Other 42 45 87 47 45 92 83 44 127
------------------------------------------------------------------------------------------------
4,090 1,394 5,484 4,138 1,185 5,323 3,222 964 4,186
Production costs 615 286 901 587 234 821 648 204 852
Production taxes 420 43 463 457 50 507 373 28 401
Exploration expenses 263 245 508 238 175 413 212 311 523
Depreciation, depletion and
amortization 681 429 1,110 691 305 996 713 264 977
Other operating expenses 258 247 505 277 227 504 218 188 406
------------------------------------------------------------------------------------------------
Results before income taxes 1,853 144 1,997 1,888 194 2,082 1,058 (31) 1,027
Income tax expense 609 11 620 628 109 737 332 7 339
------------------------------------------------------------------------------------------------
Results of operations from oil
and gas producing activities 1,244 133 1,377 1,260 85 1,345 726 (38) 688
------------------------------------------------------------------------------------------------
Results from equity affiliates* - (6) (6) - - - - - -
------------------------------------------------------------------------------------------------
Total $1,244 $ 127 $1,371 $1,260 $ 85 $1,345 $ 726 $ (38) $ 688
================================================================================================
The difference between the above results of operations and the amounts
reported for exploration and production segment net income in Note 2 of Notes to
Consolidated Financial Statements is primarily marketing-related activities,
minority interest adjustments, the exclusions of gains on property sales and
unusual items related to the oil and gas operations.
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31 was as follows:
1997 1996 1995
------------------------------------------------------------------------------------------------
Billions U.S. International Total U.S. International Total U.S. International Total
------------------------------------------------------------------------------------------------
Future cash inflows $36.7 $16.6 $53.3 $48.8 $17.8 $66.6 $32.5 $12.1 $44.6
Future development and
production costs 15.0 7.1 22.1 14.2 7.3 21.5 13.2 4.4 17.6
Future income tax expense 7.3 3.5 10.8 12.0 3.2 15.2 6.5 2.5 9.0
------------------------------------------------------------------------------------------------
Future net cash flows 14.4 6.0 20.4 22.6 7.3 29.9 12.8 5.2 18.0
10% annual discount 6.5 2.8 9.3 10.3 3.6 13.9 5.7 2.4 8.1
------------------------------------------------------------------------------------------------
Standardized measure of discounted
future net cash flows 7.9 3.2 11.1 12.3 3.7 16.0 7.1 2.8 9.9
------------------------------------------------------------------------------------------------
Standardized measure of discounted
future net cash flows of equity
affiliates* - 0.1 0.1 - - - - - -
------------------------------------------------------------------------------------------------
Total $ 7.9 $ 3.3 $11.2 $12.3 $ 3.7 $16.0 $ 7.1 $ 2.8 $ 9.9
================================================================================================
*ARCO's share
54
ARCO
Supplemental Information (Unaudited)
- -------------------------------------
Primary changes in the standardized measure of discounted estimated future
net cash flows for the years ended December 31 were as follows:
Billions 1997 1996 1995
----------------------------
Sales and transfers of oil and gas,
net of production costs $ (4.0) $ (3.9) $ (2.9)
Extensions, discoveries and improved
recovery, less related costs 0.9 1.2 0.7
Revisions of estimates of reserves
proved in prior years:
Quantity estimates 0.7 0.5 0.4
Net changes in price and
production costs (8.4) 8.4 1.8
Purchases/sales 0.5 1.0 0.1
Other (0.7) (0.4) (0.4)
Accretion of discount 2.4 1.5 1.3
Development costs incurred
during the period 1.5 1.0 0.7
Net change in income taxes 2.3 (3.2) (0.7)
----------------------------
Net change $ (4.8) $ 6.1 $ 1.0
============================
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 pretax 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.
Coal Operations
Supplemental operating statistics for the coal operations of ARCO for the
three years ended December 31 were as follows:
1997 1996 1995
------------------------------
Coal shipments -- thousand tons:
U.S. 46,939 51,615 45,853
Canyon Fuel* 6,286 - -
International 8,837 10,851 11,772
------------------------------
Total 62,062 62,466 57,625
==============================
Coal reserves -- million tons
recoverable:
U.S. 1,154 1,201 1,265
Canyon Fuel* 169 175 -
International 192 198 216
------------------------------
Total 1,515 1,574 1,481
==============================
Average market price per ton:
U.S. $ 7.33 $ 7.58 $ 8.38
Canyon Fuel* $ 25.50 $ - $ -
International $ 33.14 $ 33.37 $ 32.09
Composite price $ 13.50 $ 12.06 $ 13.22
*ARCO's share of domestic equity affiliate
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
SCHEDULE
NO. PAGE
--- ----
Independent Accountants' Report.................................... 57
Financial Statements:
Consolidated Statement of Income.............................. 28
Consolidated Balance Sheet.................................... 31
Consolidated Statement of Cash Flows.......................... 32
Consolidated Statement of Changes in Stockholders' Equity..... 36
Notes to Consolidated Financial Statements.................... 38
Supplemental Information...................................... 52
Supporting Financial Statement Schedule Covered by the
Foregoing Independent Accountants' Report:
II Valuation and Qualifying Accounts............................. 65
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.
56
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of Atlantic Richfield Company
We have audited the accompanying consolidated balance sheets of Atlantic
Richfield Company as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997 and
the related financial statement schedule. 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 in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above (appearing on
pages 28, 31, 32, 36 and 38 through 51) present fairly, in all material
respects, the consolidated financial position of Atlantic Richfield Company as
of December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above
(appearing on page 65), when considered in relation to the basic financial
statement taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 12, 1998
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the Company is included in Part
I. For the other information called for by Items 10, 11, 12 and 13, reference
is made to the Registrant's definitive proxy statement for its Annual Meeting
of Stockholders, to be held on May 4, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997,
and which is incorporated herein by reference, except for the material
included under the captions "Committee Report on Executive Compensation" and
"Performance Graph."
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:
3.1 Restated Certificate of Incorporation of Atlantic Richfield
Company ("ARCO") as of June 27, 1994, filed with the Securi-
ties 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 January 23, 1989, filed
with the Commission as Exhibit 3.2 to ARCO's report on Form
10-K for the year 1993, under File No. 1-1196 and incorporated
herein by reference.
4.1 Rights Agreement dated as of July 24, 1995 between ARCO and
First Chicago Trust Company of New York, as Rights Agent,
filed with the Commission as Exhibit 4 to ARCO's report on
Form 10-Q for the quarterly period ended June 30, 1995, under
File No. 1-1196 and incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on
Form 10-Q for the quarterly period ended June 30, 1985, under
File No. 1-1196 and incorporated herein by reference.
4.3 Indenture, dated as of January 1, 1992, between ARCO and The
Bank of New York, filed with the Commission on January 6, 1992
as Exhibit 4.3 to ARCO's Registration Statement on Form S-3
(No. 33-44925) and incorporated herein by reference.
58
4.4 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.
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 Supplemen-
tary 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 Supplemen-
tary 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 Supplemen-
tary Executive Retirement Plan, effective as of August 1,
1997, filed herewith.
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 here-
with.
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 10.5 to
ARCO's report on Form 10-K for the year 1996, under File No.
1-1196 and incorporated herein by reference.
59
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 refer-
ence.
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 herewith.
10.6* Atlantic Richfield Company's 1985 Executive Long-Term Incen-
tive 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 herewith.
10.7* Atlantic Richfield Company Executive Life Insurance Plan--Sum-
mary 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.
10.8(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 re-
port on Form 10-K for the year 1993, under File No. 1-1196 and
incorporated herein by reference.
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 in-
corporated herein by reference.
10.9 Form of Indemnity Agreement adopted by the Board of Directors
of ARCO on January 26, 1987 and executed in February 1987 by
ARCO and each of its directors and officers, included in Ex-
hibit A to the 1987 Proxy Statement, filed with the Commission
under File No. 1-1196 and incorporated herein by reference.
10.10(a)* Stock Option Plan for Outside Directors effective as of Decem-
ber 17, 1990, filed with the Commission as Exhibit 10.14 to
ARCO's report on Form 10-K for the year 1990, under File No.
1-1196 and incorporated herein by reference.
10.10(b)* Amendment No. 1 to the Stock Option Plan for Outside
Directors, effective as of June 22, 1992, filed with the
Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.10(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed herewith.
10.10(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed herewith.
10.11(a)* Deferral Plan for Outside Directors, effective as of October
1, 1990, filed with the Commission as Exhibit 10.13(a) to
ARCO's report on Form 10-K for the year 1995, under File No.
1-1196 and incorporated herein by reference.
10.11(b)* Amendment No. 1 to the Deferral Plan for Outside Directors,
effective as of July 27, 1992, filed with the Commission as
Exhibit 10.13(b) to ARCO's report on Form 10-K for the year
1995, under File No. 1-1196 and incorporated herein by
reference.
60
10.11(c)* Amendment No. 2 to the Deferral Plan for Outside Directors
effective as of July 22, 1996, filed herewith.
10.12* Special Incentive Plan, as adopted by the Board of Directors
of ARCO on February 28, 1994, and as effective on that date,
is included in Appendix C to the Company's 1994 Proxy
Statement filed with the Commission under File No. 1-1196 and
incorporated herein by reference.
10.13* 1997 Restricted Stock Plan For Outside Directors effective as
of January 1, 1997, filed herewith.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney.
27 Financial Data Schedule.
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 Report on Form 8-K was filed during the quarter ended
December 31, 1997, and thereafter through February 27, 1998:
DATE OF REPORT ITEM NO. FINANCIAL STATEMENTS
-------------- -------- --------------------
January 25, 1998 5 None
61
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Atlantic Richfield Company; Registration Statement on Form S-8
(No. 333-33151), Registration Statement on Form S-8 (No. 33-43830),
Registration Statement on Form S-8 (No. 33-21558), Registration Statement on
Form S-8 (No. 333-33153), Registration Statement on Form S-8 (No. 333-26901),
Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-
21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8
(No. 33-23639), Registration Statement on Form S-8 (No. 333-26901), Post-
Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-
21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8
(No. 33-21553), Post-Effective Amendment No. 4 to Registration Statement on
Form S-8 (No. 33-23640), Registration Statement on Form S-8 (No. 333-26901),
Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-
21552), and Registration Statement on Form S-8 (No. 333-33245), of our report
dated February 12, 1998, on our audits of the consolidated financial
statements and financial statement schedule of Atlantic Richfield Company as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, which report is included in this Annual Report on
Form 10-K.
Coopers & Lybrand L.L.P.
Los Angeles, California
March 2, 1998
62
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ATLANTIC RICHFIELD COMPANY
By *Mike R. Bowlin
___________________________________
Mike R. Bowlin
Chairman of the Board and
Chief Executive Officer
February 27, 1998
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
--------- ----- ----
*Mike R. Bowlin Chairman of the Board and February 27, 1998
____________________________________ Chief Executive Officer
Mike R. Bowlin
Principal executive officer
*William E. Wade, Jr. President and Director February 27, 1998
____________________________________
William E. Wade, Jr.
*Anthony G. Fernandes Executive Vice President and February 27, 1998
____________________________________ Director
Anthony G. Fernandes
*Marie L. Knowles Executive Vice President, February 27, 1998
____________________________________ Chief Financial Officer and
Marie L. Knowles Director
Principal financial officer
*Michael E. Wiley Executive Vice President and February 27, 1998
____________________________________ Director
Michael E. Wiley
63
SIGNATURE TITLE DATE
--------- ----- ----
*Frank D. Boren Director February 27, 1998
____________________________________
Frank D. Boren
*John Gavin Director February 27, 1998
____________________________________
John Gavin
*Hanna H. Gray Director February 27, 1998
____________________________________
Hanna H. Gray
*Kent Kresa Director February 27, 1998
____________________________________
Kent Kresa
*David T. McLaughlin Director February 27, 1998
____________________________________
David T. McLaughlin
*John B. Slaughter Director February 27, 1998
____________________________________
John B. Slaughter
*Gary L. Tooker Director February 27, 1998
____________________________________
Gary L. Tooker
*Henry Wendt Director February 27, 1998
____________________________________
Henry Wendt
*Allan L. Comstock Vice President and February 27, 1998
____________________________________ Controller
Allan L. Comstock
Principal accounting officer
*By: /s/ Bruce G. Whitmore
--------------------------
Bruce G. Whitmore
(Attorney-in-Fact)
64
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 1997
Amounts deducted from
applicable assets:
Accounts receivable....... $ 20 -- -- 5(a) $ 15
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.......... 950 84 -- 26 1,008
Reduction in force........ -- 174 18 21 171
Insurance ................ 169 20 -- 31 158
Environmental remediation. 577 300 -- 110 767
Other..................... 221 16 (18) 60 158
YEAR 1996
Amounts deducted from
applicable assets:
Accounts receivable....... $ 16 4 -- -- $ 20
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.......... 882 75 -- 7 950
Reduction in force........ 75 -- -- 75 --
Insurance ................ 201 15 -- 47 169
Environmental remediation. 658 49 -- 130 577
Other..................... 201 31 -- 11 221
YEAR 1995
Amounts deducted from
applicable assets:
Accounts receivable....... $ 15 5 -- 4(a) $ 16
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Other investments and
long-term receivables.... 50 -- -- 50 --
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 848 65 -- 31 882
Reduction in force........ 177 -- -- 102 75
Insurance ................ 202 47 -- 48 201
Environmental remediation. 670 101 -- 113 658
Other..................... 249 15 -- 63 201
- --------
(a) Write-off for uncollectible accounts, net of recoveries.
65
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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 January 23, 1989, filed with the
Commission as Exhibit 3.2 to ARCO's report on Form 10-K for the year
1993, under File No. 1-1196 and incorporated herein by reference.
4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First
Chicago Trust Company of New York, as Rights Agent, filed with the
Commission as Exhibit 4 to ARCO's report on Form 10-Q for the
quarterly period ended June 30, 1995, under File No. 1-1196 and
incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhat-
tan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on Form 10-Q
for the quarterly period ended June 30, 1985, under File No. 1-1196
and incorporated herein by reference.
4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of
New York, filed with the Commission on January 6, 1992 as Exhibit 4.3
to ARCO's Registration Statement on Form S-3 (No. 33-44925) and
incorporated herein by reference.
4.4 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.
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
herewith.
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.
EXHIBIT DESCRIPTION
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 herewith.
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 10.5 to ARCO's report on
Form 10-K for the year 1996, 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 herewith.
10.6* 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 herewith.
10.7* 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.
10.8(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--Sum-
mary 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.
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.
EXHIBIT DESCRIPTION
10.9 Form of Indemnity Agreement adopted by the Board of Directors of
ARCO on January 26, 1987 and executed in February 1987 by ARCO and
each of its directors and officers, included in Exhibit A to the
1987 Proxy Statement, filed with the Commission under File No. 1-
1196 and incor-porated herein by reference.
10.10(a)* Stock Option Plan for Outside Directors effective as of December 17,
1990, filed with the Commission as Exhibit 10.14 to ARCO's
report on Form 10-K for the year 1990, under File No. 1-1196 and
incorporated herein by reference.
10.10(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors,
effec-tive as of June 22, 1992, filed with the Commission as
Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992,
under File No. 1-1196 and incorporated herein by reference.
10.10(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed herewith.
10.10(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed herewith.
10.11(a)* Deferral Plan for Outside Directors, effective as of October 1,
1990, filed with the Commission as Exhibit 10.13(a) to ARCO's
report on Form 10-K for the year 1995, under File No. 1-1196 and
incorporated herein by reference.
10.11(b)* Amendment No. 1 to the Deferral Plan for Outside Directors,
effective as of July 27, 1992, filed with the Commission as Exhibit
10.13(b) to ARCO's report on Form 10-K for the year 1995, under
File No. 1-1196 and incorporated herein by reference.
10.11(c)* Amendment No. 2 to the Deferral Plan for Outside Directors
effective as of July 22, 1996, filed herewith.
10.12* Special Incentive Plan, as adopted by the Board of Directors of
ARCO on February 28, 1994, and as effective on that date, is
included in Appendix C to the Company's 1994 Proxy Statement filed
with the Com-mission under File No. 1-1196 and incorporated herein
by reference.
10.13* 1997 Restricted Stock Plan For Outside Directors effective as of
January 1, 1997, filed herewith.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney.
27 Financial Data Schedule.
- -------
* Management compensatory plans filed as exhibits hereto pursuant to Item
14(c) of Form 10-K.