SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________
For the quarterly period ended September 30, 1999 Commission file number 1-1196
________________
ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)
_________________
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 South Hope Street
Los Angeles, California 90071
(Address of principal executive offices) (Zip code)
_________________
(213) 486-3511
(Registrant's telephone number, including area code)
__________________
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $2.50 par value, outstanding as of
September 30, 1999: 322,731,860.
PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
------- --------- ------- --------
(Millions except per share amounts)
Revenues
Sales and other operating revenues................... $3,423 $2,655 $8,885 $7,755
Other revenues....................................... 119 146 428 346
------- ------ ------ ------
3,542 2,801 9,313 8,101
------- ------ ------ ------
Expenses
Trade purchases...................................... 1,418 1,039 3,397 3,096
Operating expenses................................... 593 919 1,753 2,013
Selling, general and administrative expenses......... 168 187 496 572
Depreciation, depletion and amortization............. 423 399 1,334 1,077
Impairment of oil and gas properties................. - 147 - 257
Exploration expenses (including undeveloped
leasehold amortization)............................ 100 135 282 410
Taxes other than income taxes........................ 117 121 353 397
Interest............................................. 98 123 288 326
Loss on disposition of Algeria assets................ 175 - 175 -
Restructuring cost adjustments....................... 20 - 20 -
------- ------ ------ ------
3,112 3,070 8,098 8,148
------- ------ ------ ------
Income (loss) from continuing operations before
income taxes and minority interest................... 430 (269) 1,215 (47)
Provision (benefit) for taxes on income................ 87 (138) 382 (128)
Minority interest in earnings of subsidiaries.......... 13 7 25 21
------- ------ ------ ------
Income (loss) from continuing operations............... 330 (138) 808 60
Income from discontinued operations, net of
income taxes of $7 and $93 (1998).................... - 12 - 188
Gain on disposition of discontinued operations,
net of income taxes (benefit) of $(38) (1999, both
periods) and $1,612 (1998, both periods)............. 42 998 42 998
------- ------ ------ ------
Net income............................................. $ 372 $ 872 $ 850 $1,246
======= ====== ====== ======
Earned per Share
Basic
Continuing operations.............................. $ 1.03 $(0.43) $ 2.51 $ 0.18
Discontinued operations............................ .13 3.14 .13 3.70
------- ------ ------- -------
Net income......................................... $ 1.16 $ 2.71 $ 2.64 $ 3.88
======= ====== ======= =======
Diluted
Continuing operations.............................. $ 1.00 $(0.43) $ 2.46 $ .18
Discontinued operations............................ .13 3.14 .13 3.63
------- ------ ------- -------
Net income......................................... $ 1.13 $ 2.71 $ 2.59 $ 3.81
======= ====== ======= =======
Cash Dividends Paid per Share of Common Stock.......... $ .7125 $.7125 $2.1375 $2.1375
======= ====== ======= =======
The accompanying notes are an integral part of these statements.
1
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1999 1998
------------- ------------
(Millions)
Assets
Current assets:
Cash and cash equivalents........................ $ 745 $ 657
Short-term investments........................... 246 260
Accounts receivable.............................. 1,504 1,002
Inventories...................................... 427 475
Prepaid expenses and other current assets........ 224 317
------- -------
Total current assets............................. 3,146 2,711
------- -------
Investments and long-term receivables:
Investments accounted for on the equity method... 1,291 1,235
Other investments and long-term receivables...... 1,322 831
------- -------
2,613 2,066
------- -------
Net property, plant and equipment.................. 18,563 18,762
Net assets of discontinued operations.............. 67 339
Deferred charges and other assets.................. 1,438 1,321
------- -------
Total assets....................................... $25,827 $25,199
======= =======
The accompanying notes are an integral part of these statements.
2
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1999 1998
-------------- -------------
(Millions)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable................................... $ 1,958 $ 2,403
Accounts payable................................ 717 976
Long-term debt due within one year.............. 105 399
Taxes payable................................... 509 634
Other........................................... 1,007 1,285
------ ------
Total current liabilities....................... 4,296 5,697
Long-term debt.................................... 5,691 4,332
Deferred income taxes............................. 3,468 3,318
Dismantlement, restoration and reclamation........ 1,138 1,058
Other deferred liabilities and credits............ 2,845 2,955
Minority interest................................. 285 259
------ ------
Total liabilities............................... 17,723 17,619
------ -------
Stockholders' equity:
Preference stocks............................... 1 1
Common stock.................................... 816 815
Capital in excess of par value of stock......... 859 863
Retained earnings............................... 6,749 6,589
Treasury stock.................................. (285) (344)
Accumulated other comprehensive income (loss)... (36) (344)
------ ------
Total stockholders' equity...................... 8,104 7,580
------ ------
Total liabilities and stockholders' equity........ $25,827 $25,199
====== ======
The accompanying notes are an integral part of these statements.
3
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
(Millions)
Cash flows from operating activities:
Income from continuing operations................................. $ 808 $ 60
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation, depletion and amortization........................ 1,334 1,077
Impairment of oil and gas properties............................ - 257
Dry hole expense and undeveloped leasehold amortization......... 150 194
Loss on disposition of Algeria assets........................... 175 -
Net gain on asset sales......................................... (70) (56)
Income from equity investments.................................. (31) (53)
Dividends from equity investments............................... 50 9
Minority interest in earnings of subsidiaries................... 25 21
Cash payments (greater) less than noncash provisions............ (347) 85
Changes in working capital accounts............................. (811) (217)
Deferred income taxes........................................... 184 (103)
Other........................................................... 48 108
----- ------
Net cash provided by operating activities..................... 1,515 1,382
----- ------
Cash flows from investing activities:
Union Texas Petroleum acquisition............................... - (2,707)
Additions to fixed assets (including dry hole costs)............ (1,988) (2,477)
Net cash used by short-term investments......................... (1) (7)
Proceeds from sale of ARCO Chemical stock....................... - 4,593
Proceeds from asset sales....................................... 732 1,169
Investments and long-term receivables........................... (168) (149)
Other........................................................... 38 (166)
----- ------
Net cash (used) provided by investing activities.............. (1,387) 256
------ ------
Cash flows from financing activities:
Repayments of long-term debt.................................... (826) (235)
Proceeds from issuance of long-term debt........................ 1,891 215
Net cash used by notes payable.................................. (439) (347)
Dividends paid.................................................. (690) (688)
Treasury stock purchases........................................ (2) (31)
Other........................................................... 37 48
----- ------
Net cash used by financing activities......................... (29) (1,038)
----- -----
Cash flows from discontinued operations........................... (8) 37
Effect of exchange rate changes on cash........................... (3) (1)
----- ------
Net increase in cash and cash equivalents......................... 88 636
Cash and cash equivalents at beginning of period.................. 657 434
----- ------
Cash and cash equivalents at end of period........................ $ 745 $ 1,070
===== ======
The accompanying notes are an integral part of these statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Accounting Policies.
Basis of Presentation.
The foregoing financial information is unaudited and has been prepared from
the books and records of the Company. Certain previously reported amounts have
been restated to conform to classifications adopted in 1999. In the opinion of
the Company, the financial information reflects all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations in conformity with generally accepted
accounting principles.
NOTE B. Comprehensive Income.
Comprehensive income comprises net income plus all other changes in equity
from nonowner sources. ARCO's comprehensive income for the three- and nine-
month periods ended September 30, 1999 and 1998 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
--------- -------- ------- --------
(Millions)
Net income........................................ $ 372 $ 872 $ 850 $1,246
Other comprehensive income:
Net unrealized gain (loss) on investments (a) (114) (198) 101 (717)
Foreign currency translation adjustment......... 23 38 207 (12)
Minimum pension liability....................... - 7 - 7
----- ----- ------ ------
Comprehensive income.............................. $ 281 $ 719 $1,158 $ 524
===== ===== ====== ======
(a) Primarily consists of tax-effected changes in the fair value of ARCO's
investment in LUKOIL, which had a fair value of approximately $382 million
at September 30, 1999, compared to a fair value of approximately $225
million at December 31, 1998. The unrealized pretax gain on the LUKOIL
investment at September 30, 1999, was $40 million.
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at September 30, 1999 and December 31, 1998 were as follows:
September 30, December 31,
1999 1998
------------- -------------
(Millions)
Net unrealized gain (loss) on investments......... $ 26 $ (75)
Foreign currency translation adjustment........... (15) (222)
Minimum pension liability......................... (47) (47)
----- -----
Accumulated other comprehensive income (loss)... $ (36) $(344)
===== =====
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Interim Segment Information.
Three Months Ended September 30, 1999
- -------------------------------------
Exploration Refining & Other Unallocated
(Millions) & Production Marketing Operations Items Total
------------ --------- ---------- ----------- -----
Sales and other
operating revenues . . $ 1,882 $1,959 $ 8 $ 2 $ 3,851
Intersegment revenues. . (424) - (1) (3) (428)
------ ----- ----- ----- -------
Total. . . . . . . . . . $ 1,458 $1,959 $ 7 $ (1) $ 3,423
====== ===== ===== ====== ======
Income (loss) from
continuing operations $ 183 $ 182 $ 25 $ (60) $ 330
Income from discontinued
operations* . . . . . - - - 42 42
------- ------ ------ ------ -----
Net income (loss). . . . $ 183 $ 182 $ 25 $ (18) $ 372
====== ===== ===== ====== ======
Segment assets . . . . . $18,428 $4,270 $ 929 $2,200 $25,827
====== ===== ===== ====== ======
December 31, 1998
- -----------------
Segment assets . . . . . $18,203 $3,826 $1,119 $2,051 $25,199
====== ===== ===== ====== ======
Three Months Ended September 30, 1998
- -------------------------------------
Exploration Refining & Other Unallocated
(Millions) & Production Marketing Operations Items Total
------------ --------- ---------- ----------- -----
Sales and other
operating revenues . . $ 1,518 $1,386 $ 39 $ 3 $ 2,946
Intersegment revenues. . (268) - (20) (3) (291)
------ ----- ----- ------ ------
Total. . . . . . . . . . $ 1,250 $1,386 $ 19 $ - $ 2,655
====== ===== ===== ====== ======
Income (loss) from
continuing operations $ (56) $ 108 $ 45 $ (235) $ (138)
Income from discontinued
operations* . . . . . - - - 1,010 1,010
------ ----- ----- ------ ------
Net income (loss). . . . $ (56) $ 108 $ 45 $ 775 $ 872
====== ===== ===== ====== ======
_______________
* Includes gains on disposition of discontinued operations of $42 million and
$998 million for the periods, ended September 30, 1999 and 1998, respectively.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Interim Segment Information (Continued).
Nine Months Ended September 30, 1999
- ------------------------------------
Exploration Refining & Other Unallocated
(Millions) & Production Marketing Operations Items Total
------------ --------- ---------- ----------- -----
Sales and other
operating revenues . . $ 4,735 $ 5,084 $ 37 $ 7 $ 9,863
Intersegment revenues. . (968) - (3) (7) (978)
------ ------ ----- ----- ------
Total. . . . . . . . . . $ 3,767 $ 5,084 $ 34 $ - $ 8,885
====== ====== ===== ===== ======
Income from continuing
operations . . . . . . $ 446 $ 517 $ 73 $ (228) $ 808
Income from discontinued
operations* . . . . . - - - 42 42
------ ------ ----- ----- ------
Net income (loss). . . . $ 446 $ 517 $ 73 $ (186) $ 850
====== ====== ===== ===== ======
Nine Months Ended September 30, 1998
- ------------------------------------
Exploration Refining & Other Unallocated
(Millions) & Production Marketing Operations Items Total
------------ --------- ---------- ----------- -----
Sales and other
operating revenues . . $ 4,424 $ 4,170 $ 118 $ 19 $ 8,731
Intersegment revenues. . (892) (12) (60) (12) (976)
------ ------ ----- ----- ------
Total. . . . . . . . . . $ 3,532 $ 4,158 $ 58 $ 7 $ 7,755
====== ====== ===== ===== ======
Income from continuing
operations . . . . . . $ 143 $ 224 $ 98 $ (405) $ 60
Income from discontinued
operations* . . . . . - - - 1,186 1,186
------ ------ ----- ----- ------
Net income . . . . . . . $ 143 $ 224 $ 98 $ 781 $ 1,246
====== ====== ===== ===== ======
_______________
* Includes gains on disposition of discontinued operations of $42 million and
$998 million for the periods, ended September 30, 1999 and 1998, respectively.
The Company's coal and chemical operations have been reported as
discontinued operations since March 31, 1998 and June 30, 1998, respectively.
Accordingly, at December 31, 1998 and September 30, 1999, the income from and
net assets of discontinued operations are included with unallocated items in the
segment presentation above.
The amortization (and recognition of imputed interest) associated with a
gain deferred in conjunction with the sale of the chemicals operations had a
favorable impact of approximately $11 million and $38 million after tax on
Refining and Marketing earnings in the third quarter and first nine months of
1999, respectively. The amortization, which began in the third quarter of 1998,
had a favorable impact of approximately $9 million after tax in the third
quarter of 1998.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE D. Investments.
At September 30, 1999 and 1998, investments in debt securities were
primarily composed of U.S. Treasury securities and corporate debt instruments.
Maturities generally ranged from one day to ten years. 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 September 30,
1999, all investments were classified as available-for-sale and were reported at
fair value, with unrealized holding gains and losses, net of tax, reported in
accumulated other comprehensive income (loss).
The following summarizes investments in securities at September 30:
1999 1998
-------- --------
(Millions)
Aggregate fair value........................................................... $ 1,142 $ 951
Gross unrealized holding losses................................................ 6 200
Gross unrealized holding gains................................................. (45) (19)
------- -------
Amortized cost................................................................. $ 1,103 $ 1,132
======= =======
Investment activity for the nine-month periods ended September 30 was as
follows:
1999 1998
------- -------
(Millions)
Gross purchases................................................................ $16,330 $14,493
Gross sales.................................................................... 708 339
Gross maturities............................................................... 15,567 13,935
Gross realized gains and losses were determined by the specific identification
method and for the three- and nine-month periods ended September 30, 1999 and
1998, were insignificant.
NOTE E. Inventories.
Inventories at September 30, 1999 and December 31, 1998 comprised the
following:
September 30, December 31,
1999 1998
------------ ------------
(Millions)
Crude oil and petroleum products... $ 187 $ 220
Other products..................... 26 24
Materials and supplies............. 214 231
----- -----
Total............................ $ 427 $ 475
===== =====
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE F. Capital Stock.
Detail of the Company's capital stock was as follows:
September 30, December 31,
1999 1998
------------ ------------
(Thousands)
$3.00 Cumulative convertible preference stock, par $1... $ 43 $ 52
$2.80 Cumulative convertible preference stock, par $1... 509 573
Common stock, par $2.50................................. 815,881 814,673
-------- --------
Total................................................. $816,433 $815,298
======== ========
NOTE G. Capitalization of Interest.
Interest expense excluded capitalized interest of $45 million and $29
million, respectively, for the three-month periods ended September 30, 1999 and
1998, and $133 million and $66 million, respectively, for the nine-month periods
ended September 30, 1999 and 1998.
NOTE H. Restructuring Programs.
During 1998, ARCO recorded pretax charges of $229 million for the costs of
eliminating over 1,200 positions, primarily exploration and production technical
support, international exploration and production support operations and the
corporate headquarters. During the third quarter of 1999 ARCO increased the
provision by $12 million primarily to reflect approximately 75 additional
terminations. The following table summarizes the liabilities related to the
1998 restructuring program, including $10.5 million transferred from the 1997
program to cover those people who had not yet terminated under the 1997 program
and became eligible for the 1998 program:
($ Millions)
Funded Unfunded
Short-term Long-term Long-term
Terminations Benefits (a) Benefits (b) Benefits (c) Total
------------ ------------ ------------ ------------ -----
1,285 $103 $90 $58 $251
(a) Severance payments and ancillary benefits such as relocation and
outplacement.
(b) Net increase in pension benefits to be paid from assets of qualified
plans.
(c) Net increase in non-qualified pension benefits and other
postretirement benefits to be paid from Company funds.
Through September 30, 1999, approximately 1,045 employees have been
terminated and approximately $64 million ($14 million in the third quarter of
1999) of severance and ancillary benefits have been paid and charged against the
accrual. Payments made do not necessarily correlate to the number of
terminations due to the ability of terminees to defer receipt of certain
payments. The remaining severance and ancillary benefits are expected to be
paid by first quarter 2001.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE H. Restructuring Programs (continued).
Union Texas Petroleum Holdings, Inc. (UTP) Restructure.
As part of the purchase price allocation for the purchase of UTP in 1998,
the company established a $78 million reserve for the termination of 357
employees resulting from the integration of UTP into ARCO's operations. In
September 1999, the reserve was increased to $86 million. At September 30,
1999, 352 employees have been terminated and a total of $80 million in severance
benefits has been paid. The remaining severance benefits are expected to be paid
by second quarter 2000. The group of employees terminated included U.S.
citizens employed in exploration and production operations and corporate
headquarters personnel.
NOTE I. Income Taxes.
Provision (benefit) for taxes on income:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
(Millions)
Federal:
Current..... $(128) $ (41) $ 37 $ (86)
Deferred.... 197 (66) 228 (17)
----- ----- ----- -----
69 (107) 265 (103)
----- ----- ----- -----
Foreign:
Current..... 32 19 144 44
Deferred.... (5) (40) (55) (76)
----- ----- ----- -----
27 (21) 89 (32)
----- ----- ----- -----
State:
Current..... (18) 6 17 17
Deferred.... 9 (16) 11 (10)
----- ----- ----- -----
(9) (10) 28 7
----- ----- ----- -----
Total..... $ 87 $(138) $ 382 $(128)
===== ===== ===== =====
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note I. Income Taxes (continued).
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
Three Months Ended
September 30,
--------------
1999 1998
---- ----
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
-------- -------- ------ --------
(Millions)
Income (loss) from continuing operations
before income taxes and minority interest...... $ 430 100.0 $(269) 100.0
====== ===== ===== ======
Tax at federal statutory rate................... $ 150 35.0 $ (94) (35.0)
Increase (reduction) in taxes resulting from:
Subsidiary stock transactions.................. (22) (5.1) (7) (2.6)
Taxes on foreign income in excess of
statutory rate................................ 3 0.7 4 1.5
State income taxes (net of federal effect)..... (6) (1.4) (6) (2.2)
Tax credits.................................... (42) (9.8) (28) (10.4)
Other.......................................... 4 0.8 (7) (2.6)
------ ----- ----- ------
Provision (benefit) for taxes on income......... $ 87 20.2 $(138) (51.3)
====== ===== ===== ======
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions)
Income (loss) from continuing operations
before income taxes and minority interest ..... $1,215 100.0 $ (47) 100.0
====== ===== ===== ======
Tax at federal statutory rate................... $ 425 35.0 $ (16) (35.0)
Increase (reduction) in taxes resulting from:
Subsidiary stock transactions.................. (22) (1.8) (64) (136.2)
Taxes on foreign income in excess of
statutory rate................................ 46 3.8 44 93.6
State income taxes (net of federal effect)..... 18 1.5 5 10.6
Tax credits.................................... (92) (7.6) (87) (185.1)
Other.......................................... 7 0.5 (10) (20.2)
------ ----- ----- ------
Provision (benefit) for taxes on income......... $ 382 31.4 $(128) (272.3)
====== ===== ===== ======
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Discontinued Operations.
In the first quarter 1999, ARCO disposed of its interests in two Australian
coal mines. ARCO disposed of its 80% interest in the Gordonstone coal mine and
its 31.4% interest in the Blair Athol Joint Venture. At September 30, 1999, the
carrying value of the remaining Australian assets was $67 million and was
included in net assets of discontinued operations on the balance sheet.
Beginning in January 1999, ARCO suspended depreciation on the Australian coal
assets (1998 annual depreciation was $23 million). In 1998, ARCO recorded a $92
million provision for the estimated loss on the disposal of the U.S. and
Australian coal assets.
As part of the acquisition of UTP, ARCO determined it would sell UTP's
petrochemical business. In March 1999, ARCO sold the UTP petrochemical business
to Williams Energy Services.
In the third quarter of 1999, the gain or loss recorded on the disposition
of ARCO Chemical, the ARCO coal operations and UTP's petrochemical business was
adjusted to reflect an additional net gain of $42 million.
Revenues and income from discontinued operations for the three months and
nine months ended September 30, 1999 and 1998 were:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- -------- ------ --------
Revenues:
ARCO Chemical....... $ - $ 290 $ - $1,990
Coal operations..... 20 61 63 293
UTP petrochemical... - 23 24 23
------- ----- ----- ------
$ 20 $ 374 $ 87 $2,306
======= ===== ===== ======
Net income:
ARCO Chemical....... $ - $ 12 $ - $ 178
Coal operations..... - - - 10
UTP petrochemical... - - - -
------- ----- ----- ------
$ - $ 12 $ - $ 188
======= ===== ===== ======
_______________
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Earned Per Share.
The information necessary for the calculation of earned per share is as
follows:
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
-------------------------- -----------------------
Income Shares Per share Income Shares Per share
-------------------------- ----------------------
(Millions, except per share amounts)
Income (loss) from continuing
operations.......................... $330 $ (138)
Less: Preference stock dividends* . - -
---- -----
Income (loss) from continuing
operations available to common
stockholders - basic EPS............ 330 322.5 $1.03 (138) 321.2 $(0.43)
===== =====
Income from discontinued operations 42 322.5 .13 1,010 321.2 3.14
---- ===== ----- ------- ===== ------
Net income available to common
stockholders - basic EPS............ 372 322.5 $1.16 $ 872 321.2 $ 2.71
===== ======= ===== ======
Effect of dilutive securities**:
Contingently issuable shares
(primarily options)................. 3.8
Convertible preference stock.......... - 3.2
---- -----
Net income available to common
stockholders and assumed
conversions - diluted EPS........... 372 329.5 $1.13
=====
Less: income from discontinued
operations.......................... 42 329.5 .13
---- ===== -----
Income from continuing operations
available to common stockholders
and assumed conversions -
diluted EPS......................... $330 329.5 $1.00
==== ===== =====
- ---------------
* Dividend rounds to zero for the three-month periods presented.
** No dilution assumed for three months ended September 30, 1998
due to loss from continuing operations.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Earned Per Share (continued).
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Income Shares Per share Income Shares Per share
------ ------ --------- ------ ------ ---------
(Millions, except per share amounts)
Income from continuing operations...... $ 808 $ 60
Less: Preference stock dividends....... (1) (2)
--- -----
Income from continuing operations
available to common stockholders -
basic EPS............................ 807 322.1 $2.51 58 320.9 $0.18
===== =====
Income from discontinued operations 42 322.1 .13 1,186 320.9 3.70
===== ---- ------ ===== -----
Net income available to common
stockholders - basic EPS............. 849 322.1 $2.64 1,244 320.9 $3.88
==== ====
Effect of dilutive securities:
Contingently issuable shares
(primarily options).................. 3.1 2.8
Convertible preference stock........... 1 3.3 2 3.6
--- ----- ----- -----
Net income available to common
stockholders and assumed
conversions - diluted EPS............ 850 328.5 $2.59 1,246 327.3 $3.81
===== =====
Less: Income from discontinued
operations........................... 42 328.5 .13 1,186 327.3 3.63
--- ===== --- ----- ===== ----
Income from continuing operations
available to common stockholders
and assumed conversions -
diluted EPS........................... $ 808 328.5 $2.46 $ 60 327.3 $0.18
===== ===== ==== ===== ===== ====
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Supplemental Income Statement Information.
Taxes other than income taxes comprised the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Millions)
Production/severance... $ 64 $ 54 $ 156 $ 173
Property............... 32 39 101 109
Other.................. 21 28 96 115
----- ----- ----- -----
Total................ $ 117 $ 121 $ 353 $ 397
===== ===== ===== =====
NOTE M. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the nine months ended
September 30, 1999 and 1998:
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
(Millions)
Gross sales and maturities of short-term investments... $ 153 $ 171
Gross purchases of short-term investments.............. (154) (178)
------ -------
Net cash used by short-term investments................ $ (1) $ (7)
====== =======
Gross proceeds from issuance of notes payable.......... $ 9,526 $ 12,096
Gross repayments of notes payable...................... (9,965) (12,443)
------ -------
Net cash used by notes payable......................... $ (439) $ (347)
====== =======
Gross noncash provisions charged to income............. $ 168 $ 416
Cash payments of previously accrued items.............. (515) (331)
------ -------
Cash payments (greater) less than noncash provisions... $ (347) $ 85
====== =======
Interest paid.......................................... $ 258 $ 318(a)
====== =======
Income taxes paid...................................... $ 472 $ 169(a)
====== ======
(a) Includes amounts paid related to discontinued operations.
15
s
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE M. Supplemental Cash Flow Information (continued).
Excluded from the Consolidated Statement of Cash Flows for the nine months
ended September 30, 1998 was the issuance of 2,725,030 shares of ARCO common
stock to a consolidated subsidiary in exchange for certain property, plant and
equipment owned by the subsidiary. The transaction was recorded at fair market
value.
In conjunction with the acquisition of UTP in 1998, liabilities were assumed
as follows:
(Millions)
Fair value of assets acquired . . . . . . $3,745
Cash paid . . . . . . . . . . . . . . . . 2,707
-----
Liabilities assumed. . . . . . . . . . $1,038
=====
Changes in working capital accounts for the nine-month periods ended
September 30, 1999 and 1998 were as follows:
Nine Months Ended
September 30,
---------------
1999 1998
---- ----
(Millions)
Changes in working capital - Increase (decrease) to cash:
Accounts receivable.................................. $(232) $ 71
Inventories.......................................... 38 (18)
Accounts payable..................................... (259) 22
Other working capital................................ (358) (292)
------ ------
Total.............................................. $(811) $(217)
====== ======
NOTE N. Other Commitments and Contingencies.
ARCO has commitments, including those related to the acquisition,
construction and development of facilities, all made in the normal course of
business. ARCO has guaranteed all of LUKARCO's obligations associated with the
Caspian Pipeline project, which amount to 25% of all funding requirements for
this project. The current estimates of total project funding requirements are
between $2.2 to $2.4 billion.
Following the March 1989 EXXON VALDEZ oil spill, numerous federal, state and
private plaintiff lawsuits were brought against Exxon, Alyeska Pipeline Service
Company (Alyeska) and Alyeska's owner companies including ARCO, which owns
approximately 22%. While all of the federal, state and private plaintiff
lawsuits have been settled, certain issues relating to the liability for the
spill remain unresolved between Exxon and Alyeska (including its owner
companies).
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (continued).
Lawsuits, including purported class actions and actions by governmental
entities, are pending or threatened against ARCO and others seeking damages,
abatement of housing units, and compensation for medical problems arising out of
the presence of lead-based paint in certain housing units. ARCO is unable to
predict the scope or amount of any such liability.
The State of Montana, along with the United States and the Salish and
Kootenai Tribes, have been seeking recovery from ARCO of alleged injuries to
natural resources resulting from mining and mineral processing businesses
formerly operated by Anaconda. In April 1999 the United States District Court
for the District of Montana approved two consent decrees. Under the terms of
these decrees, ARCO has paid $135 million, plus interest, for settlement of $561
million of the State's $767 million natural resource damage claim relating to
the Clark Fork River Basin, $86 million for clean-up and related liabilities at
Silver Bow Creek, and $20 million to resolve claims by the Tribes and the United
States.
ARCO is subject to other loss contingencies pursuant to federal, state and
local environmental laws and regulations that require ARCO to do some or all of
the following:
. Remove or mitigate the effects on the environment at various sites from the
disposal or release of certain substances;
. Perform restoration work at such sites; and
. Pay damages for loss of use and non-use values.
The federal agencies involved with the sites include the Department of the
Interior, Department of Justice and Environmental Protection Agency.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federal- and state-managed sites, as well as other clean-up sites including
service stations, refineries, terminals, third-party landfills, former nuclear
processing facilities, sites associated with discontinued operations and sites
previously owned by ARCO or predecessors. This comprised 125 sites for which
ARCO has been named a potentially responsible party (PRP), along with other
sites for which no claims have been asserted. The number of PRP sites in and of
itself is not a relevant measure of liability because the nature and extent of
environmental concerns varies by site and ARCO's share of responsibility varies
from sole responsibility to very little responsibility.
ARCO may in the future be involved in additional environmental assessments
and cleanups. Future costs depend on unknown factors such as:
. Nature and extent of contamination;
. Timing, extent and method of the remedial action;
. ARCO's proportional share of costs; and
. Financial condition of other responsible parties.
The environmental remediation accrual is updated annually, at a minimum, and
at September 30, 1999, was $702 million. As these costs become more clearly
defined, they may require future charges against earnings. Applying Monte Carlo
analysis to estimated site maximums on a portfolio basis, ARCO estimates that
future costs could exceed the amount accrued by as much as $500 million.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (continued).
Approximately 54% of the reserve related to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of Montana,
Utah and New Mexico. Another significant component related to currently and
formerly owned chemical, nuclear processing, and refining and marketing
facilities, and other sites which received wastes from these facilities. The
remainder related to other sites with reserves ranging from $1 million to $10
million per site. No one site represents more than 10% of the total reserve.
Substantially all amounts accrued are expected to be paid out over the next five
to six years.
Claims for recovery of remediation costs already incurred and to be incurred
in the future have been filed against various 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 period, would be material to ARCO's
results of operations, the likelihood of such occurrence is considered remote.
On the basis of management's best assessment of the ultimate amount and timing
of these events, such expenses or judgments are not expected to have a material
adverse effect on ARCO's consolidated financial statements.
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 O. Merger Agreement between ARCO and BP Amoco.
On March 31, 1999, BP Amoco and ARCO reached agreement to combine with each
other in an all-share transaction. Following the stock split of BP Amoco
Ordinary Shares effective in October 1999, shareholders of ARCO will receive
1.64 BP Amoco American Depositary Shares for each share of ARCO stock exchanged
or, subject to election by the shareholder, Ordinary Shares. One BP Amoco
American Depositary Share represents 6 BP Amoco Ordinary Shares.
The merger was approved initially by both boards of directors, and in the
third quarter of 1999 by the shareholders of both BP Amoco and ARCO. In
addition, on September 29, 1999, the European Commission announced approval of
the combination conditioned upon some North Sea asset sales. The combination is
subject to the review of various state and regulatory authorities, including the
Federal Trade Commission. Both companies are currently working to close the
transaction later in the year; however, there can be no assurance that the
transaction will be completed by year end.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1999 vs. Third Quarter 1998
Income from Continuing Operations
ARCO's income from continuing operations improved to $330 million in the
third quarter of 1999, compared to a loss of $138 million in the third quarter
of 1998. The improvement primarily was the result of higher crude oil and
natural gas prices, higher refined products margins and lower operating,
exploration and interest expenses.
Special Items included in Net Income
The 1999 third quarter net income included net after-tax charges of $139
million for special items, consisting of a loss on the disposition of Algeria
assets, an increase in the restructuring cost reserves, charges for future
environmental remediation and merger costs, partially offset by tax adjustments.
The 1998 third quarter net income included a net after-tax benefit of $799
million from special items, consisting of a gain of $1,088 million from the sale
of ARCO's interest in ARCO Chemical Company ("ARCO Chemical"), partially offset
by various charges. The charges were for future environmental remediation and
reclamation related to both current operations and to natural resource damage
liabilities in the state of Montana associated with previously discontinued
mining operations; a provision for estimated net loss on divestment of coal
operations; and an impairment writedown of California heavy crude oil
properties.
After-tax Segment Earnings
1999 1998
---- ----
Less: Less:
Special Special
Items Items
(Millions) Net (Charge) Operating Net (Charge) Operating
Income Benefit Results Income Benefit Results
----- -------- ------- ------ -------- -------
Exploration and production....... $183 $(177) $360 $ (56) $ (94) $ 38
Refining and marketing........... 182 (2) 184 108 - 108
Other operations................. 25 5 20 45 17 28
Interest expense................. (70) - (70) (92) - (92)
Other unallocated expenses....... 10 (7) 17 (143) (122) (21)
---- ----- ---- ----- ----- ----
Income (loss) from
continuing operations.......... 330 (181) 511 (138) (199) 61
Income from discontinued
operations..................... - - - 12 - 12
Gain on disposition of
discontinued operations........ 42 42 - 998 998 -
---- ----- ---- ----- ----- ----
Net income..................... $372 $(139) $511 $ 872 $799 $ 73
==== ===== ==== ===== ==== ====
19
Exploration and Production
ARCO's operating results from worldwide oil and gas exploration and
production operations in 1999 were impacted by significantly higher crude oil
prices and, to a lesser extent, higher domestic natural gas prices and lower
petroleum liquids production. In addition, combined operating, exploration, and
selling, general and administrative ("SG&A") expenses before tax were more than
$100 million lower in the 1999 third quarter, compared to third quarter 1998.
The 1999 third quarter included a special item charge of $175 million after
tax for the loss on the sale of a portion of ARCO's interest in the Rhourde El
Baguel field in Algeria. The 1998 third quarter included special items totaling
$94 million after tax, primarily related to the writedown of the California
heavy oil holdings.
Average Oil and Gas Prices
1999 1998
------ ------
U.S.
Petroleum liquids - per barrel (bbl)
Alaska......................................... $13.32 $ 7.84
Lower 48, including Vastar..................... $16.85 $10.47
Composite average price........................ $14.49 $ 8.76
Natural gas - per thousand cubic feet (mcf)...... $ 2.25 $ 1.75
International
Petroleum liquids - per bbl...................... $16.68 $10.96
Venezuela crude oil - per bbl.................... $ 8.47 $ 7.94
Natural gas (excluding LNG) - per mcf............ $ 2.09 $ 2.29
Indonesia liquefied natural gas (LNG)- per mcf... $ 3.53 $ 2.29
Petroleum Liquids and Natural Gas Production
Net Production* 1999 1998
---- ----
U.S.
Petroleum liquids - bbl/day
Alaska............................................ 291,200 334,600
Vastar............................................ 62,500 44,800
Other Lower 48.................................... 82,700 136,400
------- ---------
Total........................................... 436,400 515,800
Natural gas - mcf/day............................... 1,222,000 1,163,500
Barrels of oil equivalent - (BOE)/day............... 640,100 709,700
International
Petroleum liquids - bbl/day......................... 163,600 178,400
Natural gas - mcf/day............................... 997,600 883,500
BOE/day............................................. 329,800 325,700
Total net production - BOE/day...................... 969,900 1,035,400
* Includes ARCO's share of production from equity affiliates. For BOE
calculation, natural gas is converted at the ratio of 6 mcf to 1
barrel of liquid.
20
In 1999, the reduction in U.S. petroleum liquids production primarily
resulted from natural field declines in Alaska and the absence of production
from California properties (other Lower 48), producing exclusively heavy crude
oil. The California properties were exchanged for Gulf of Mexico exploration
acreage and properties producing both crude oil and natural gas that were
ultimately transferred to Vastar. The lower Alaska petroleum liquids production
primarily reflected natural field decline at the Prudhoe Bay, Kuparuk River and
Greater Point McIntyre fields partially offset by increases in satellite field
production. The decline in international petroleum liquids production primarily
reflected a decrease of approximately 16,000 barrels per day in Indonesia
production resulting from the impact of higher crude oil prices on production
sharing contracts.
Most of the growth in international natural gas production came from the
United Kingdom North Sea, while the increase in U.S. natural gas production
reflected Vastar's 7% growth in production, compared to the third quarter 1998.
Vastar's increased production resulted from the Gulf of Mexico properties
transferred to Vastar late in 1998, successful exploitation programs and the
addition of last year's African Swallow discovery.
Refining and Marketing
The higher earnings in 1999 primarily resulted from improved light product
margins. The effect of the West Coast refinery outages in the second quarter of
1999 continued to impact supply in the first two months of the third quarter
1999 resulting in higher product realizations. The higher product sales prices
were partially offset by higher crude oil costs. The 3% increase in gasoline
sales volumes reflected increased volumes at existing ARCO retail outlets. The
increase in jet fuel sales in 1999 reflected the timing on jet fuel military
contract takes in 1999 versus 1998. In 1998, the military took more of the
fixed contract amount earlier in the year.
West Coast Petroleum Products Sales
Volumes (Barrels/day) 1999 1998
------- -------
Gasoline.................................. 314,600 304,900
Jet....................................... 104,700 97,100
Distillate................................ 77,000 83,500
Other..................................... 74,200 75,400
------- -------
Total..................................... 570,500 560,900
======= =======
Other Operations
Other operations comprise earnings from Lower 48 pipeline and aluminum
operations. The 1999 and 1998 earnings included special items of $5 million and
$17 million, respectively, primarily from the sale of pipeline assets.
Excluding the special items, the decline in operating results in 1999 reflected
decreased earnings from the pipeline operations, primarily as a result of the
transfer of certain pipeline operations to the refining and marketing segment.
Discontinued Operations
In the first quarter of 1999, ARCO sold its interests in two Australian coal
mines, Gordonstone and the Blair Athol Joint Venture, and sold Union Texas
Petrochemicals Corporation, which ARCO had acquired as part of its purchase of
Union Texas Petroleum Holdings, Inc. in June 1998.
21
After-tax earnings from discontinued operations in the 1998 third quarter
totaled $12 million. Discontinued operations in the third quarter 1998 included
ARCO's interest in ARCO Chemical for part of the quarter and Australian coal
operations.
Gain on Disposition of ARCO Chemical Stock
In the third quarter of 1998, ARCO sold its entire interest in ARCO Chemical
(80,000,001 shares of common stock) to Lyondell, an unrelated third party, for
$4.6 billion and recorded a net after-tax gain of $1,088 million.
Previously, the Company entered into a ten-year purchase agreement with ARCO
Chemical providing for the delivery of fixed quantities of methyl tertiary butyl
ether ("MTBE") at a fixed price approximating the then-market price. Over the
last several years the spot market price of MTBE has declined; however,
provision for loss on the contract was not necessary since ARCO Chemical was a
consolidated, majority-owned subsidiary of the Company.
The above-market MTBE contract value was reflected in the sale price of the
Company's interest in ARCO Chemical. As a result, ARCO has deferred $313
million of the pre-tax gain on sale of the ARCO Chemical interest. This
deferral represents the estimated discounted present value of the difference
over the remaining term of the contract between the contract price and the spot
market price for MTBE.
The deferral will be amortized over the remaining term of the contract on a
unit-of-production basis. The amortization and recognition of imputed interest
associated with the deferral of part of the pre-tax gain on the sale of the ARCO
Chemical interest is expected to have a net favorable impact of approximately
$40 million after tax on earnings of the refining and marketing segment for the
full year 1999.
Consolidated Revenues
1999 1998
------ ------
(Millions)
Sales and other operating revenues
Exploration and production......... $1,882 $1,518
Refining and marketing............. 1,959 1,386
Other.............................. 10 42
Intersegment eliminations.......... (428) (291)
------ ------
Total............................ $3,423 $2,655
====== ======
The increase in exploration and production sales revenues resulted primarily
from higher petroleum liquids and natural gas prices, partially offset by lower
crude oil marketing volumes.
Refining and marketing sales revenues primarily increased because of higher
light product prices.
22
Consolidated Expenses
Trade purchases were higher in 1999 primarily as a result of an increase in
purchases of finished refined product from third parties and higher crude oil
costs, partially offset by lower crude oil marketing volumes.
Operating expenses were lower in 1999 primarily as a result of the absence
of $213 million before tax in special item charges for future environmental
remediation and reclamation related to both current operations and to natural
resource damage liabilities in the state of Montana associated with previously
discontinued mining operations. In addition, exploration and production
operating costs were more than $50 million before tax lower than in the third
quarter of 1998.
Selling, general and administrative expenses in 1999 primarily reflected
lower expenses associated with international exploration and production
operations.
The lower exploration expenses in 1999 primarily resulted from reduced
geological and geophysical ("G&G") expenses including staff-related G&G for
international exploration and production.
The lower interest expense in 1999 primarily resulted from the impact of
capitalized interest.
Income Taxes
The Company had an effective tax rate of 20.2% in the 1999 third quarter.
An effective tax rate in 1999 lower than the statutory rate primarily reflected
various tax credits and other benefits. The Company had a tax benefit in the
1998 third quarter reflecting the Company's loss from continuing operations in
that period.
Nine-Month Period Ended September 30, 1999 vs. Same Nine-Month Period 1998
Income from Continuing Operations
The improvement in income from continuing operations for the first nine
months of 1999, compared to the same period in 1998, primarily reflected higher
crude oil prices and natural gas volumes, increased refined products margins and
lower operating and SG&A expenses.
Special Items included in Net Income
Special items for the first nine months of 1999 primarily included the net
after-tax charges of $139 million reported in the third quarter 1999 results.
Special items for the first nine months of 1998 included the net after-tax
benefit of $799 million included in the third quarter 1998 results, as well as
net charges of $58 million for special items in the first two quarters of 1998.
23
After-tax Segment Earnings
1999 1998
---- -----
Less: Less:
Special Special
Items Items
(Millions) Net (Charge) Operating Net (Charge) Operating
Income Benefit Results Income Benefit Results
------ ------- ------- ------ ------- -------
Exploration and production $ 446 $ (172) $618 $ 143 $ (169) $ 312
Refining and marketing . . 517 (4) 521 224 - 224
Other operations . . . . . 73 5 68 98 17 81
Interest expense . . . . . (211) - (211) (236) - (236)
Other unallocated expenses (17) (6) (11) (169) (117) (52)
------ ------ ----- ------ ------ ------
Income from continuing
operations . . . . . . 808 (177) 985 60 (269) 329
Income from discontinued
operations . . . . . . . - - - 188 12 176
Gain on disposition of
discontinued operations 42 42 - 998 998 -
------ ------ ----- ------ ------ ------
Net income . . . . . . . . $ 850 $ (135) $985 $1,246 $ 741 $ 505
====== ====== ===== ====== ====== ======
Consolidated Revenues
1999 1998
---- ----
(Millions)
Sales and other operating revenues
Exploration and production................... $4,735 $4,424
Refining and marketing....................... 5,084 4,170
Other........................................ 44 137
Intersegment eliminations.................... (978) (976)
------ ------
Total...................................... $8,885 $7,755
====== ======
The increase in exploration and production sales revenues for the first nine
months of 1999 primarily resulted from higher petroleum liquids prices and
natural gas production volumes.
For the first nine months of 1999 refining and marketing sales revenues
primarily increased because of higher refined products prices, and to a much
lesser extent increased sales volumes.
24
Consolidated Expenses
Trade purchases for the nine months ended September 30, 1999 were higher
primarily as a result of increased purchases of finished and unfinished refined
product from third parties.
Operating expenses declined during the first nine months of 1999, compared
to the same period in 1998 primarily as a result of the absence of $213 million
before tax in special item charges for future environmental remediation and
reclamation related to both current operations and to natural resource damage
liabilities in the state of Montana associated with previously discontinued
mining operations. In addition, exploration and production operating costs
decreased approximately $40 million before tax, compared to the nine months
ended September 30, 1998.
Depreciation, depletion and amortization expense for the first nine months
of 1999 was higher as a result of DD&A of the former UTP operations, which
became a part of ARCO's operations in the third quarter of 1998, and increased
crude oil and natural gas production and higher average depletive writeoff rates
associated with Vastar's operations.
The lower exploration expense for the first nine months of 1999 reflected a
decline in geological and geophysical and dryhole expense in ARCO's
international exploration operations and Vastar's exploration operations.
For the nine months ended September 30, 1999, the lower interest expense
resulted from the impact of capitalized interest, partially offset by an
increase in long-term debt outstanding during the first nine months of 1999,
compared to the same period in 1998.
Income Taxes
The Company had an effective tax rate of 31.4% for the first nine months of
1999. An effective tax rate in 1999 lower than the statutory rate primarily
reflected various tax credits and other benefits, partially offset by taxes on
foreign income in excess of statutory rate. The Company had a tax benefit in
the 1998 comparable period reflecting the Company's loss from continuing
operations in that period.
Average Oil and Gas Prices
Nine Months Ended
September 30,
-----------------
1999 1998
------- -------
U.S.
Petroleum liquids - per bbl
Alaska....................... $ 9.76 $ 8.59
Lower 48, including Vastar... $13.40 $11.31
Composite average price...... $10.91 $ 9.55
Natural gas - per mcf.......... $ 1.89 $ 1.85
25
Average Oil and Gas Prices
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
International
Petroleum liquids - per bbl.............................................. $12.87 $11.62
Venezuela crude oil - per bbl............................................ $ 6.41 $ 7.96
Natural gas (excluding LNG) - per mcf.................................... $ 2.22 $ 2.51
Indonesia liquid natural gas (LNG) - per mcf............................. $ 2.94 $ 2.29
Petroleum Liquids and Natural Gas Production
1999 1998
------- -------
Net Production*
U.S.
Petroleum liquids - bbl/day
Alaska................................................................. 317,500 346,100
Vastar................................................................. 59,400 48,600
Other Lower 48......................................................... 86,800 138,500
------- -------
Total................................................................ 463,700 533,200
Natural gas - mcf/day.................................................... 1,280,000 1,125,000
Barrels of oil equivalent - (BOE)/day.................................... 677,000 720,700
International
Petroleum liquids - bbl/day.............................................. 163,800 116,000
Natural gas - mcf/day.................................................... 1,091,500 793,100
BOE/day.................................................................. 345,800 248,200
Total net production - BOE/day........................................... 1,022,800 968,900
* Includes ARCO's share of production from equity affiliates. For BOE
calculation, natural gas is converted at the ratio of 6 mcf to 1
barrel of liquid.
Liquidity and Capital Resources
1999
----
(Millions)
Cash flow provided (used) by:
Operations................................................................... $ 1,515
Investing activities......................................................... $(1,387)
Financing activities......................................................... $ (29)
The net cash provided by investing activities in the first nine months of
1999 included expenditures for additions to fixed assets of $2.0 billion, offset
by proceeds from assets sales of $732 million primarily associated with the sale
of Australian coal assets and the Union Texas Petrochemicals Corporation.
The net cash used by financing activities in the first nine months of 1999
primarily included $826 million in long-term debt repayments, a decrease of $439
million in the Company's short-term debt position and dividend payments of $690
million, offset by proceeds from the issuance of $1.9 billion in long-term debt.
26
Cash and cash equivalents and short-term investments totaled $991 million
and short-term borrowings were $1,958 million at the end of the third quarter of
1999.
Beginning in 1997 and continuing through the first quarter of 1999, the
Company utilized increased short-term borrowing in lieu of increased long-term
borrowing (other than long-term debt assumed in connection with the UTP
acquisition in 1998). While overall short-term borrowings are lower at the end
of the third quarter of 1999 compared to the end of the first quarter 1999, the
Company is still in a working capital deficit position of approximately $1,150
million at September 30, 1999.
The Company believes it has adequate resources and liquidity to fund
future cash requirements for working capital, capital expenditures, dividends
and debt repayments with cash from operations, existing cash balances,
additional short- and long-term borrowing and the sale of assets.
Impact of Year 2000 Issue
- -------------------------
The Company's plans to address the Year 2000 issue are fully described in
its Annual Report on Form 10-K for the year ended December 31, 1998. The
following table is an update of a table contained in that document and shows the
Company's progress on addressing the Year 2000 issue as of October 31,
1999:
Total
expended
Percent through Total
complete at Expected date October 31, estimated
October 31, of 1999 cost
Areas addressed 1999 completion (millions) (millions)
--------------- ---- ------------- ---------- ----------
Computing integrity 100% October 1999 $14 $14
Asset integrity 98% November 1999 11 13
Commercial integrity 96% November 1999 3 3
--- ---
Total costs $28 $30
=== ===
________________
Current emphasis is contingency planning for all mission critical com-
ponents and end of year transition. Items outside of ARCO's direct control are
being addressed through the creation of specific contingency plans.
The total cost associated with required modifications to achieve Year 2000
compliance is not expected to be material to the Company's financial position.
The approximate total cost of the Year 2000 project is $30 million. This
estimate does not include ARCO's potential share of Year 2000 costs that may be
incurred by partnerships and joint ventures in which the Company participates
but is not the operator.
The ARCO Year 2000 due diligence requires that vendors of mission critical
components and providers of mission critical services be solicited concerning
Year 2000 compliance. Many of these third party providers have responded in
writing addressing their understanding of the problem and their commitment to
remediating the Year 2000 problem.
27
Statements of Financial Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to adopt
its provisions for all fiscal quarters of all fiscal years beginning after June
15, 2000 (as deferred by SFAS No. 137). Earlier application of all of the
provisions of SFAS No. 133 is permitted, but the provisions cannot be applied
retroactively to financial statements of prior periods. SFAS No. 133
standardizes the accounting for derivative instruments by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The Company has not yet
completed evaluating the impact of the provisions of SFAS No. 133.
_______________________________
Management cautions against projecting any future results based on present
earnings levels because of economic uncertainties, the extent and form of
existing or future governmental regulations and other possible actions by
governments.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. On July 28, 1999, ARCO and the Riverside County District Attorney agreed
in principle to settle the County Department of Environmental Health's
(DEH) claim of violation of underground storage tank laws at thirty-three
ARCO-owned stations in the county. DEH claims ARCO failed to maintain a
continuous monitoring system, primarily due to the alleged improper
placement of monitoring probes. Without admitting liability, ARCO agreed
to pay $200,000 in civil penalties.
2. On August 13, 1999, the San Joaquin County District Attorney filed an
action against ARCO, alleging operation without a certificate of
equipment compliance from the County, among other matters, at eight
service stations in the San Joaquin area. The District Attorney is
seeking penalties in excess of $100,000.
3. On September 20, 1999, ARCO (as successor to IS&R) and The Anaconda
Company were named by 11 homeowners as defendants in a purported class
action suit filed in the Circuit Court for Baltimore City, Maryland, Earl
Cofield, et al. v. Lead Industries Association, et al. (Case No. 24-C-99-
004491). The amended complaint, which also names 13 alleged former
manufacturers of lead products, the Lead Industries Association, and the
National Paint and Coatings Association, alleges causes of action for
negligent product design and failure to warn, supplier negligence, fraud
and deceit, conspiracy, concert of action, aiding and abetting, and
products liability. This matter also incorporates causes of action for
nuisance, indemnification, and enterprise liability. The plaintiffs seek,
on behalf of themselves and a purported class of over 10,000 people
living in the State of Maryland whose pre-1978 residences allegedly were
contaminated with lead-based paint, compensatory and punitive damages and
injunctive relief, including orders requiring defendants to pay for (i)
notification to class members about the hazards of lead pigments, (ii)
abatement of residences where class members reside, (iii) a public
education campaign concerning the hazards of lead pigments, lead paint,
and lead poisoning, and (iv) attorney fees.
4. On October 12, 1999, ARCO (as successor to IS&R) was named as a defendant
in a lead paint lawsuit filed in Rhode Island Superior Court, Providence
County by Rhode Island Attorney General Sheldon Whitehouse, State of
Rhode Island v. Lead Industries Association, et al. (Case No. 99-5226).
The complaint, which also names seven former lead pigment manufacturers
and the Lead Industries Association, alleges causes of action for public
nuisance, violation of Rhode Island's Unfair Trade Practice and Consumer
Protection Act, strict liability, negligence, negligent and fraudulent
misrepresentations, civil conspiracy, unjust enrichment, indemnity and
equitable relief to protect children. The State of Rhode Island seeks
compensatory and punitive damages, funding for a public education
campaign concerning the dangers of lead poisoning and injunctive relief
that includes an order requiring defendants to pay for the detection and
abatement of lead paint in all public and private buildings within the
State that are accessible to children.
29
Item 1. Legal Proceedings (continued).
5. In September, 1999, ARCO and the South Coast Air Quality Management
District recently reached a tentative settlement of certain notices of
violation (the "NOVs") alleging that ARCO and two of its contractors --
Metalclad and Brown & Root -- violated a number of federal and local
asbestos regulations during excavation activities conducted in 1997 at the
Los Angeles Refinery in preparation for the installation of certain
polypropylene manufacturing equipment. The excavation occurred at large
parcel of land that ARCO had earlier purchased from the Johns Manville
Corporation and that was the former location of an asbestos manufacturing
facility. The settlement amount consists of a penalty of $600,000 and
a future payment of $200,000 towards a supplemental environmental project
to be agreed upon later by the District and ARCO.
6. Reference is made to the disclosure on page 19 of the Company's 1998 Form
10-K Report and on page 27 of the Second Quarter Form 10-Q report regarding
Squyres v. Barry, et al., (Case No. 16357NC), McMullen v. Union Texas
Petroleum, et al., (Case No. 16358NC), and Squyres v. Whitmire, et al.
(Case No. 98-6085). These cases have been dismissed with prejudice.
7. Reference is made to the Company's 1998 Form 10-K Report for information on
other legal proceedings matters reported herein.
30
Item 5. Other Information.
Safe Harbor for Forward-Looking Statements*
ARCO's management from time to time may make forward-looking statements to
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. These
statements may include projections and estimates concerning the timing and
success of specific projects, the size and timing of cost reductions, the level
of future income, production volumes, size of hydrocarbon resources, ability to
replace reserves and levels of capital spending. Actual results could differ
materially based on numerous factors, including those described below. Unless
otherwise noted in the statements, ARCO does not intend to update such forward-
looking statements.
Price Volatility, Political, Economic and Regulatory Instability
Volatility in prices and margins affects all of the company's businesses.
Volatility is caused by a number of factors, including changes in market supply
and demand balances and fluctuations in political, regulatory and economic
climates throughout the world. The ability to operate ARCO's businesses is
dependent on the politics and regulations in the U.S. and in the particular
geographic regions where the company operates. The ability to negotiate and
implement specific projects in a timely and favorable manner may be impacted by
political considerations unrelated to or beyond the control of the company.
Level of Oil and Gas Prices
ARCO's management makes assumptions about the future prices of oil and gas for
various planning, budgetary and accounting disclosure purposes. Management
expects that these assumptions will change over time and actual prices in the
future may differ from these estimates. Any substantial or extended decline in
actual prices could have a material adverse effect on ARCO's financial position
and results of operations, on the quantities of crude oil and natural gas
reserves that economically may be produced and on the quantity of proved
reserves that may be attributed to our properties.
Production Rates and Reserve Replacement
Projecting future rates of oil and gas production is inherently imprecise.
Production rates of oil and gas reservoirs generally decline. Future production
rates can be affected by price volatility and the company's ability to replace
depleting reserves. There can be no assurances: (a) as to the level or timing of
success, if any that the company will have in acquiring or finding and
developing economically recoverable reserves; (b) that estimates of proved
reserves will not be revised in the future; or (c) that the actual quantities of
oil and gas ultimately recovered will not differ from the reserve estimates.
*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.
31
Item 5. Other Information (continued).
Refining & Marketing
Overall profitability of the company's refining and marketing operations depends
heavily on the margin between the price of crude oil and/or purchased products
and the sales price of products produced and/or purchased. Volumes produced and
margins historically have been volatile and are impacted by market demand,
regulatory changes (particularly environmental regulations regarding gasoline),
the price of crude oil, and the ability of regional refiners and the company to
provide a sufficient supply of refined products.
Operating Hazards
Operations are subject to various hazards common to the industry, including
explosions, fires, uncontrollable spills, and damage from severe weather
conditions.
Year 2000 Risks
The company has described its plans for addressing the Year 2000 issue and made
a number of forward-looking statements regarding its Year 2000 readiness under
the caption "Impact of the Year 2000 Issue." These statements are made on a
number of assumptions: (a) that the company will be able to timely identify and
locate all relevant Year 2000 items; (b) that the company's repair and
replacement program will be timely completed, including work to be performed by
third-party vendors and contractors; and (c) that representations by third
parties regarding their readiness are correct. Actual results could differ
materially if any of these assumptions are incorrect.
Due to the general uncertainty as to the Year 2000 readiness of third parties
and as to the reaction of the general population to any perceived gasoline
shortages, as well as the general interconnectedness of businesses and their
dependency on computers and embedded computer chips, the company cannot assure
its stockholders that its operations and business will not be affected by a Year
2000 issue.
Pending Merger with BP Amoco
The timing of the closing of the combination with BP Amoco is subject to the
timing of governmental reviews.
32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2 Agreement and Plan of Merger. Among BP Amoco
p.l.c., Atlantic Richfield Company and Prarie
Holdings, Inc. dated as of March 31, 1999, as
amended as of July 12, 1999, filed herewith.
2.1 Amendment No. 1 to Agreement and Plan of Merger,
filed herewith.
10.1 Amended and Restated Atlantic Richfield Capital
Accumulation Plan, effective March 15, 1999,
filed herewith.
10.2 Amended and Restated CH-Twenty, Inc. Capital
Accumulation Plan, effective March 15, 1999,
filed herewith.
10.3 Amendment No. 12 to Atlantic Richfield Company
1985 Executive Long-Term Incentive Plan,
effective March 31, 1999, filed herewith.
10.4 Amendment No. 13 to Atlantic Richfield Company
1985 Executive Long-Term Incentive Plan, effective
March 31, 1999, filed herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the
quarter ended September 30, 1999 and through the date hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
August 30, 1999 5 None
September 14, 1999 5 None
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
(Registrant)
/s/ ALLAN L. COMSTOCK
Dated: November 10, 1999 ----------------------------
(signature)
Allan L. Comstock
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
34