-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SgxacMVwYrPqp66W9mixR005elLM0kYjqPZyPglu8MAKTAGHBQXriqdsaDblj8us hv6jyvnjCb2JrMHlvpP5dQ== 0000775483-98-000008.txt : 19980810 0000775483-98-000008.hdr.sgml : 19980810 ACCESSION NUMBER: 0000775483-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC RICHFIELD CO /DE CENTRAL INDEX KEY: 0000775483 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 230371610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01196 FILM NUMBER: 98679530 BUSINESS ADDRESS: STREET 1: 515 S FLOWER ST CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134863511 10-Q 1 ARCO 2ND QT 1998 10-Q 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 June 30, 1998 Commission file number 1-1196 ________________ ATLANTIC RICHFIELD COMPANY (Exact name of registrant as specified in its charter) _________________ Delaware 23-0371610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 515 South Flower Street Los Angeles, California 90071 (Address of principal executive offices) (Zip code) __________________ (213) 486-3511 (Registrant's telephone number, including area code) __________________ Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock, $2.50 par value, outstanding as of June 30, 1998: 321,139,022. PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENT OF INCOME Three Months Ended Six Months Ended ------------------ ---------------- June 30, June 30, ------------------ ---------------- (Millions except per share amounts) 1998 1997 1998 1997 ---- ---- ---- ---- (Restated) (Restated) Revenues Sales and other operating revenues $2,564 $3,534 $5,100 $7,426 Other revenues . . . . . . . . . . 90 148 200 248 ----- ----- ----- ----- 2,654 3,682 5,300 7,674 ----- ----- ----- ----- Expenses Trade purchases. . . . . . . . . . 1,071 1,634 2,057 3,455 Operating expenses . . . . . . . . 559 649 1,094 1,227 Selling, general and administrative expenses . . . . . 202 204 385 384 Depreciation, depletion and amortization. . . . . . . . . . . 436 341 788 687 Exploration expenses (including undeveloped leasehold amortization) . . . . . . . . . . 126 90 275 216 Taxes other than income taxes. . . 122 144 276 340 Interest . . . . . . . . . . . . . 106 (12) 203 132 ----- ----- ----- ----- 2,622 3,050 5,078 6,441 ----- ----- ----- ----- Income before income taxes, minority interest and extraordinary item . . . . . . . . 32 632 222 1,233 Provision (benefit) for taxes on income. . . . . . . . . . . . . (37) 212 10 411 Minority interest in earnings of subsidiary . . . . . . . . . . . . 5 11 14 22 ----- ----- ----- ----- Income from continuing operations before extraordinary item. . . . . 64 409 198 800 Income from discontinued operations, net of income taxes of $43 and $89 (1998) and $30 and $67 (1997). . . 90 99 176 191 ----- ----- ----- ----- Income before extraordinary item . . 154 508 374 991 Extraordinary loss on extinguishment of debt (net of income taxes of $74). . . . . . . . . . . . . . - (118) - (118) ----- ----- ----- ----- Net Income . . . . . . . . . . . . . $ 154 $ 390 $ 374 $ 873 ===== ===== ===== ===== Earned per Share Basic Continuing operations. . . . . . $ .19 $ 1.27 $ .61 $ 2.48 Discontinued operations. . . . . .29 .31 .55 .60 Extraordinary loss . . . . . . . - (.37) - (.37) ----- ----- ----- ----- Net income . . . . . . . . . . . $ .48 $ 1.21 $ 1.16 $ 2.71 ===== ===== ===== ===== Diluted Continuing operations. . . . . . $ .19 $ 1.25 $ .60 $ 2.44 Discontinued operations. . . . . .28 .30 .54 .59 Extraordinary loss . . . . . . . - (.36) - (.36) ----- ----- ----- ----- Net income . . . . . . . . . . . $ .47 $ 1.19 $ 1.14 $ 2.67 ===== ===== ===== ===== Cash Dividends Paid per Share of Common Stock . . . . . . . . . . . $.7125 $.7125 $1.425 $1.400 ===== ===== ===== ===== The accompanying notes are an integral part of these statements.
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ATLANTIC RICHFIELD COMPANY CONSOLIDATED BALANCE SHEET June 30, December 31, 1998 1997 -------- ------------ (Millions) (Restated) Assets Current assets: Cash and cash equivalents . . . . . . . . . . $ 513 $ 434 Short-term investments. . . . . . . . . . . . 215 222 Accounts receivable . . . . . . . . . . . . . 840 929 Inventories . . . . . . . . . . . . . . . . . 451 456 Prepaid expenses and other current assets . . 295 204 ------ ------ Total current assets. . . . . . . . . . . . . 2,314 2,245 ------ ------ Investments and long-term receivables: Investment in Union Texas Petroleum . . . . . 2,646 - Investments accounted for on the equity method . . . . . . . . . . . . . . . . . . . 821 763 Other investments and long-term receivables . 979 1,820 ------ ------ 4,446 2,583 ------ ------ Net property, plant and equipment . . . . . . . 14,308 13,560 Net assets of discontinued operations . . . . . 2,013 2,777 Deferred charges and other assets . . . . . . . 1,353 1,260 ------ ------ Total assets. . . . . . . . . . . . . . . . . . $24,434 $22,425 ====== ====== The accompanying notes are an integral part of these statements.
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ATLANTIC RICHFIELD COMPANY CONSOLIDATED BALANCE SHEET June 30, December 31, 1998 1997 -------- ------------ (Millions) (Restated) Liabilities and Stockholders' Equity Current liabilities: Notes payable . . . . . . . . . . . . . . . . . $ 4,364 $ 1,456 Accounts payable. . . . . . . . . . . . . . . . 791 948 Long-term debt due within one year. . . . . . . 102 164 Taxes payable. . . . . . . . . . . . . . . . . 190 308 Other . . . . . . . . . . . . . . . . . . . . . 920 953 ------ ------ Total current liabilities . . . . . . . . . . . 6,367 3,829 ------ ------ Long-term debt. . . . . . . . . . . . . . . . . . 3,679 3,619 Deferred income taxes . . . . . . . . . . . . . . 2,335 2,661 Other deferred liabilities and credits. . . . . . 3,739 3,396 Minority interest . . . . . . . . . . . . . . . . 251 240 Stockholders' equity: Preference stocks . . . . . . . . . . . . . . . 1 1 Common stock. . . . . . . . . . . . . . . . . . 814 807 Capital in excess of par value of stock . . . . 856 640 Retained earnings . . . . . . . . . . . . . . . 6,969 7,054 Treasury stock. . . . . . . . . . . . . . . . . (356) (170) Accumulated other comprehensive income (loss) . (221) 348 ------ ------ Total stockholders' equity. . . . . . . . . . . 8,063 8,680 ------ ------ Total liabilities and stockholders' equity. . . . $24,434 $22,425 ====== ====== The accompanying notes are an integral part of these statements.
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ATLANTIC RICHFIELD COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended June 30, ---------------- 1998 1997 ------ ------ (Millions) (Restated) Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . . . . . . $ 198 $ 682 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on extinguishment of debt. . . . . - 118 Depreciation, depletion and amortization. . . . . . . 788 687 Dry hole expense and undeveloped leasehold amortization . . . . . . . . . . . . . . . . . . . . 138 87 Net gain on asset sales . . . . . . . . . . . . . . . (23) (13) Income from equity investments. . . . . . . . . . . . (32) (5) Dividends from equity investments . . . . . . . . . . 4 10 Minority interest in earnings of subsidiaries . . . . 14 22 Cash payments greater than noncash provisions . . . . (99) (154) Changes in working capital accounts . . . . . . . . . (339) (288) Other . . . . . . . . . . . . . . . . . . . . . . . . 5 (6) ----- ----- Net cash provided by operating activities . . . . . 654 1,140 ----- ----- Cash flows from investing activities: Union Texas Petroleum acquisition . . . . . . . . . . (2,646) - Additions to fixed assets (including dry hole costs). (1,612) (918) Net cash provided by short-term investments . . . . . 8 304 Investment in LUKARCO . . . . . . . . . . . . . . . . (32) (201) Proceeds from asset sales . . . . . . . . . . . . . . 1,135 16 Other . . . . . . . . . . . . . . . . . . . . . . . . (35) (23) ----- ----- Net cash used by investing activities . . . . . . . (3,182) (822) ----- ----- Cash flows from financing activities: Repayments of long-term debt. . . . . . . . . . . . . (155) (403) Proceeds from issuance of long-term debt. . . . . . . 153 95 Net cash provided by notes payable . . . . . . . . . 2,930 42 Dividends paid. . . . . . . . . . . . . . . . . . . . (459) (452) Treasury stock purchases. . . . . . . . . . . . . . . (1) (155) Other . . . . . . . . . . . . . . . . . . . . . . . . 15 22 ----- ----- Net cash provided (used) by financing activities. . 2,483 (851) ----- ----- Cash flows from discontinued operations . . . . . . . . 123 190 Effect of exchange rate changes on cash . . . . . . . . 1 (4) ----- ----- Net increase (decrease) in cash and cash equivalents. . 79 (347) Cash and cash equivalents at beginning of period. . . . 434 1,326 ----- ----- Cash and cash equivalents at end of period. . . . . . . $ 513 $ 979 ===== ===== 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 1998. 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. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 established new rules for the reporting of comprehensive income and its components. Comprehensive income comprises net income plus all other changes in equity from nonowner sources. ARCO's comprehensive income for the three- and six-month periods ended June 30, 1998 and 1997 was as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Net income . . . . . . . . . . $ 154 $ 390 $ 374 $ 873 After-tax changes in: Net unrealized gain on investments (a). . . . . . . (333) 200 (519) 265 Foreign currency translation adjustment . . . . . . . . . (46) (47) (50) (97) ---- ---- ---- ----- Comprehensive income (loss) . . $(225) $ 543 $(195) $1,041 ==== ==== ==== ===== (a) Primarily consists of a decline in ARCO's unrealized gain on its investment in LUKOIL, which had a fair value of approximately $482 million at June 30, 1998, compared to a fair value of approximately $1.3 billion at December 31, 1997. The unrealized pretax gain in the LUKOIL investment at June 30, 1998, was $140 million.
The new disclosure had no impact on ARCO's net income, financial position, stockholders' equity or cash flows. Accumulated nonowner changes in equity (accumulated other comprehensive income) at June 30, 1998 and December 31, 1997 were as follows:
June 30, December 31, 1998 1997 -------- ------------ (Millions) Net unrealized gain on investments . . . . . $ 87 $ 606 Foreign currency translation adjustment. . . (254) (204) Minimum pension liability. . . . . . . . . . (54) (54) ---- ---- Accumulated other comprehensive income . . $(221) $ 348 ==== ====
- 5 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE C. Interim Segment Information.
Three Months Ended June 30, 1998 - -------------------------------- Exploration Refining & All Unallo- (Millions) & Production Marketing Other cated Total ------------ ---------- ----- ------- ----- Sales and other operating revenues . . $ 1,368 $1,432 $ 39 $ 14 $ 2,853 Intersegment revenues . (262) - (21) (6) (289) ------ ----- ----- ----- ------ Total . . . . . . . . . $ 1,106 $1,432 $ 18 $ 8 $ 2,564 ====== ===== ===== ===== ====== Income from continuing operations . . . . . . $ 17 $ 97 $ 29 $ (79) $ 64 Income from discontinued operations . . . . . . - - - 90 90 ------ ----- ----- ----- ------ Net income. . . . . . . $ 17 $ 97 $ 29 $ 11 $ 154 ====== ===== ===== ===== ====== Segment assets. . . . . $12,977 $3,722 $1,178 $6,557 $24,434 ====== ===== ===== ===== ====== December 31, 1997 - ----------------- (Restated) Segment assets. . . . . $12,882 $3,565 $1,164 $4,814 $22,425 ====== ===== ===== ===== ====== Three Months Ended June 30, 1997 - -------------------------------- (Restated) Exploration Refining & All Unallo- (Millions) & Production Marketing Other cated Total ------------ ---------- ----- ------- ----- Sales and other operating revenues . . $ 2,399 $1,631 $ 49 $ 6 $ 4,085 Intersegment revenues . (526) - (21) (4) (551) ------ ----- ----- ----- ------ Total . . . . . . . . . $ 1,873 $1,631 $ 28 $ 2 $ 3,534 ====== ===== ===== ===== ====== Income from continuing operations . . . . . . $ 321 $ 68 $ 24 $ (4) $ 409 Income from discontinued operations . . . . . . - - - 99 99 Extraordinary item. . . - - - (118) (118) ------ ----- ----- ----- ------ Net income. . . . . . . $ 321 $ 68 $ 24 $ (23) $ 390 ====== ===== ===== ===== ======
- 6 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE C. Interim Segment Information (Continued).
Six Months Ended June 30, 1998 - ------------------------------ Exploration Refining & All Unallo- (Millions) & Production Marketing Other cated Total ------------ ---------- ----- ------- ----- Sales and other operating revenues . . $ 2,906 $ 2,784 $ 79 $ 16 $ 5,785 Intersegment revenues . (624) (12) (40) (9) (685) ------ ------ ----- ----- ------ Total . . . . . . . . . $ 2,282 $ 2,772 $ 39 $ 7 $ 5,100 ====== ====== ===== ===== ====== Income from continuing operations . . . . . . $ 199 $ 116 $ 53 $ (170) $ 198 Income from discontinued operations . . . . . . - - - 176 176 ------ ------ ----- ----- ------ Net income. . . . . . . $ 199 $ 116 $ 53 $ 6 $ 374 ====== ====== ===== ===== ====== Six Months Ended June 30, 1997 - ------------------------------ (Restated) Exploration Refining & All Unallo- (Millions) & Production Marketing Other cated Total ------------ ---------- ----- ------- ----- Sales and other operating revenues . . $ 5,246 $ 3,323 $ 93 $ 8 $ 8,670 Intersegment revenues . (1,194) - (42) (8) (1,244) ------ ------ ----- ----- ------ Total . . . . . . . . . $ 4,052 $ 3,323 $ 51 $ - $ 7,426 ====== ====== ===== ===== ====== Income from continuing operations . . . . . . $ 773 $ 114 $ 37 $ (124) $ 800 Income from discontinued operations . . . . . . - - - 191 191 Extraordinary item . . - - - (118) (118) ------ ------ ----- ----- ------ Net income. . . . . . . $ 773 $ 114 $ 37 $ ( 51) $ 873 ====== ====== ===== ===== ======
As discussed in Note K, the Company's coal and chemical operations and investment in Lyondell Petrochemical Company ("Lyondell") have been reported as discontinued at June 30, 1998. Accordingly, the income from and net assets of discontinued operations are included with unallocated items in the segment presentation above. At December 31, 1997, coal operations and ARCO's investment in Lyondell were included as part of "all other" for segment purposes and chemical operations were shown as a separate segment. The prior period has been restated to conform to the current presentation. - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE D. Acquisition of Union Texas Petroleum Holdings, Inc. On June 16, 1998, ARCO announced the completion of its tender offer for all outstanding shares of Union Texas Petroleum Holdings, Inc.'s ("UTP") common stock. ARCO purchased the outstanding common stock of UTP for approximately $2.5 billion, or $29 per share in cash. ARCO also purchased in a tender offer 1,649,500 shares of Union Texas Petroleum Holdings, Inc.'s 7.14% Series A Cumulative Preferred Stock for approximately $200 million, or $122 per share in cash. UTP was a U.S.- based, non-integrated oil and gas company with worldwide operations. Substantially all of UTP's oil and gas producing operations were conducted outside of the U.S. in the United Kingdom sector of the North Sea, Indonesia and Pakistan. The acquisition is being accounted for as a purchase and the operations of UTP will be included in the consolidated financial statements of ARCO as of July 1, 1998. The cost of the acquisition will be allocated on the basis of the estimated fair value of the assets acquired and liabilities assumed. ARCO expects that this allocation will be completed by year-end 1998. NOTE E. Investments. At June 30, 1998 and 1997, investments in debt securities were primarily composed of U.S. Treasury securities and corporate debt instruments and were principally included in short-term investments. Maturities generally ranged from one day to 20 months. Investments in LUKOIL common stock and Zhenhai Refining and Chemical Company convertible bonds were included in other investments and long-term receivables. At June 30, 1998, all investments were classified as available-for-sale; there were no investments considered held-to-maturity. Investments were reported at fair value, with unrealized holding gains and losses, net of tax, reported in a separate component of stockholders' equity. The following summarizes investments in securities, at June 30:
1998 1997 ---- ---- (Millions) Aggregate fair value . . . . . . . . . . . . . . $1,058 $1,961 Gross unrealized holding losses. . . . . . . . . 7 3 Gross unrealized holding gains . . . . . . . . . (148) (798) ----- ----- Amortized cost . . . . . . . . . . . . . . . . . $ 917 $1,166 ===== =====
Investment activity for the six-month periods ended June 30 was as follows:
1998 1997 ---- ---- (Millions) Gross purchases. . . . . . . . . . . . . . . . . $7,191 $4,185 Gross sales. . . . . . . . . . . . . . . . . . . 267 1,303 Gross maturities . . . . . . . . . . . . . . . . 6,920 3,588
Gross realized gains and loss were determined by the specific identification method and for the three- and six-month periods ended June 30, 1998 and 1997, were insignificant. - 8 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE F. Inventories. Inventories at June 30, 1998 and December 31, 1997 comprised the following:
June 30, December 31, 1998 1997 -------- ------------ (Millions) (Restated) Crude oil and petroleum products . . . . . . . $ 228 $ 247 Other products . . . . . . . . . . . . . . . . 23 24 Materials and supplies . . . . . . . . . . . . 200 185 ------- ------- Total. . . . . . . . . . . . . . . . . . . . $ 451 $ 456 ======= =======
NOTE G. Capital Stock. Detail of the Company's capital stock was as follows:
June 30, December 31, 1998 1997 -------- ------------ (Thousands) $3.00 Cumulative convertible preference stock, par $1 . . . . . . . . . . . . . . . . $ 52 $ 56 $2.80 Cumulative convertible preference stock, par $1 . . . . . . . . . . . . . . . . 589 616 Common stock, par $2.50 . . . . . . . . . . . . 814,435 806,800 ------- ------- Total . . . . . . . . . . . . . . . . . . . . $815,076 $807,472 ======= =======
NOTE H. Capitalization of Interest. Interest expense excluded capitalized interest of $21 million and $12 million, respectively, for the three-month periods ended June 30, 1998 and 1997, and $37 million and $14 million, respectively, for the six-month periods ended June 30, 1998 and 1997. - 9 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE I. Restructuring Programs. During 1997, the Company undertook several restructuring actions, primarily at ARCO Chemical Company ("ARCO Chemical"), within the refining and marketing operations and at corporate headquarters. The following table summarizes the personnel-related amounts accrued as of December 31, 1997:
($ 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 plans. (c) Net increase in non-qualified pension benefits and other postretire- ment benefits to be paid from Company funds.
Through June 30, 1998, approximately 920 employees have been terminated and approximately $49 million of severance and ancillary benefits have been paid and charged against the accrual. Payments made do not necessarily correlate to the number of terminations due to the ability of terminees to defer receipt of certain payments. In the second quarter of 1998, ARCO Chemical re-evaluated its restructuring program and reduced the number of employees to be terminated by approximately 140. Accordingly, the termination reserve was reduced by approximately $17 million before tax. - 10 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE J. Income Taxes. Provision (benefit) for taxes on income:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Millions) (Restated) (Restated) Federal: Current. . . . . . . . . . . . . $(35) $131 $(45) $273 Deferred . . . . . . . . . . . . 22 25 49 9 --- --- --- --- (13) 156 4 282 --- --- --- --- Foreign: Current. . . . . . . . . . . . . (3) 19 25 71 Deferred . . . . . . . . . . . . (26) - (36) (12) --- --- --- --- (29) 19 (11) 59 --- --- --- --- State: Current. . . . . . . . . . . . . 3 37 11 70 Deferred . . . . . . . . . . . . 2 - 6 - --- --- --- --- 5 37 17 70 --- --- --- --- Total . . . . . . . . . . . . $(37) $212 $ 10 $411 === === === ===
- 11 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED Note J. Income Taxes (continued). Reconciliation of provision for taxes on income with tax at federal statutory rate:
Three Months Ended June 30, ------------------------------------- 1998 1997 ----------------- ----------------- Percent Percent of of Pretax Pretax Amount Income Amount Income ------ ------ ------ ------ (Restated) (Millions) Income before income taxes, minority interest and extraordinary item. . . $ 32 100.0 $ 632 100.0 ===== ===== ==== ===== Tax at federal statutory rate . . . . $ 11 35.0 $ 221 35.0 Increase (reduction) in taxes resulting from: Subsidiary stock transactions . . . (44) (137.5) (22) (3.5) Taxes on foreign income in excess of statutory rate . . . . . 20 62.5 16 2.5 State income taxes (net of federal effect). . . . . . . . . . 3 9.4 25 4.0 Tax credits . . . . . . . . . . . . (28) (87.5) (26) (4.1) Other . . . . . . . . . . . . . . . 1 3.1 (2) (0.4) ----- ----- ---- ----- Provision (benefit) for taxes on income. . . . . . . . . . . . . . $ (37) (115.0) $ 212 33.5 ===== ===== ==== =====
Six Months Ended June 30, ------------------------------------- 1998 1997 ----------------- ----------------- Percent Percent of of Pretax Pretax Amount Income Amount Income ------ ------ ------ ------ (Restated) (Millions) Income before income taxes, minority interest and extraordinary item. . . $ 222 100.0 $1,233 100.0 ===== ====== ===== ====== Tax at federal statutory rate . . . . $ 78 35.0 $ 432 35.0 Increase (reduction) in taxes resulting from: Subsidiary stock transactions . . . (57) (25.7) (44) (3.6) Taxes on foreign income in excess of statutory rate. . . . . . . . . 40 18.0 33 2.7 State income taxes (net of federal effect). . . . . . . . . . 11 5.0 46 3.7 Tax credits . . . . . . . . . . . . (59) (26.6) (51) (4.1) Other . . . . . . . . . . . . . . . (3) (1.2) (5) (0.4) ----- ----- ----- ------ Provision for taxes on income . . . . $ 10 4.5 $ 411 33.3 ===== ===== ===== ======
- 12 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE K. Discontinued Operations. On June 1, 1998, ARCO disposed of its U.S. coal operations to Arch Coal. Operations disposed of included the Black Thunder and Coal Creek mines in Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest in three mines in Utah. ARCO contributed its Wyoming coal operations and Arch Coal transferred various of its coal operations into a new joint venture that is 99% owned by Arch Coal and 1% owned by ARCO. The net assets of ARCO's Australian coal mining operations are included in the net assets of discontinued operations at June 30, 1998. The Company expects to dispose of the Australian operations by March 31, 1999 and does not expect to incur a loss from the disposal of the U.S. and Australian coal assets. Net proceeds from the sale of U.S. operations have been deferred in other liabilities and credits until the ultimate gain, if any, on disposition of all coal assets can be determined. Revenues from the discontinued coal operations were $232 million and $362 million for the six months ended June 30, 1998 and 1997, respectively. In July 1998, ARCO tendered its 80,000,001 shares of ARCO Chemical common stock to Lyondell for $57.75 per share, or total cash proceeds of approximately $4.6 billion. ARCO expects to record an after-tax gain of approximately $1.3 billion in the third quarter of 1998 from the sale of the shares. ARCO Chemical's income and net assets were reported as part of discontinued operations in the financial statements. Revenues from the discontinued ARCO Chemical operations were $1.7 billion and $1.9 billion for the six months ended June 30, 1998 and 1997, respectively. In September 1997, ARCO disposed of its 49.9% equity interest in Lyondell. Accordingly, the 1997 financial statements were restated to reflect ARCO's earnings from and investment in Lyondell as discontinued. - 13 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE L. Earned Per Share. The information necessary for the calculation of earned per share is as follows:
Three Months Ended Three Months Ended June 30, 1998 June 30, 1997 ------------------------- ------------------------- Income Shares Per share Income Shares Per share ------ ------ --------- ------ ------ --------- (Millions, except per share amounts) Income from continuing operations . . . . . . . $ 64 $409 Less: Preference stock dividends. . . . . . . . (1) (1) --- --- Income from continuing operations available to common stockholders - basic EPS. . . . . . . . 63 321.0 $0.19 408 321.1 $1.27 ===== ===== Income from discontinued operations, net of tax . 90 321.0 0.29 99 321.1 0.31 --- ===== ---- --- ===== Income before extra- ordinary item available to common stockholders - basic EPS. . . . . . . . 153 507 Extraordinary item. . . . - (118) 321.1 (0.37) --- --- ===== ---- Net income available to common stockholders - basic EPS. . . . . . . . 153 321.0 $0.48 389 321.1 $1.21 ==== ==== Effect of dilutive securities: Contingently issuable shares (primarily options) . . . . . . . . 3.0 2.4 Convertible preference stock. . . . . . . . . . 1 3.6 1 3.9 --- ----- --- ----- Net income available to common stockholders and assumed conversions - diluted EPS. . . . . . . 154 327.6 $0.47 390 327.4 $1.19 ===== ===== Extraordinary item. . . . - 118 327.4 0.36 --- --- ===== Income before extra- ordinary item available to common stockholders and assumed conversions - diluted EPS. . . . . . . 154 508 Income from discontinued operations, net of tax . (90) 327.6 (0.28) (99) 327.4 (0.30) --- ===== ---- --- ===== ---- Income from continuing operations available to common stockholders and assumed conversions - diluted EPS. . . . . . . $ 64 327.6 $0.19 $409 327.4 $1.25 === ===== ==== === ===== ====
- 14 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE L. Earned Per Share (continued).
Six Months Ended Six Months Ended June 30, 1998 June 30, 1997 ------------------------- ------------------------- Income Shares Per share Income Shares Per share ------ ------ --------- ------ ------ --------- (Millions, except per share amounts) Income from continuing operations . . . . . . $198 $800 Less: Preference stock dividends. . . . . . . (1) (1) --- --- Income from continuing operations available to common stockholders - basic EPS. . . . . . . 197 320.8 $0.61 799 321.7 $2.48 ===== ===== Income from discontinued operations, net of tax 176 320.8 0.55 191 321.7 0.60 Income before extra- ordinary item available to common stockholders - basic EPS. . . . . . . 373 990 Extraordinary item. . . - (118) 321.7 (0.37) --- --- ===== ---- Net income available to common stockholders - basic EPS. . . . . . . 373 320.8 $1.16 872 321.7 $2.71 ==== ==== Effect of dilutive securities: Contingently issuable shares (primarily options) . . . . . . . 3.0 1.6 Convertible preference stock. . . . . . . . . 1 3.6 1 3.9 --- ----- --- ----- Net income available to common stockholders and assumed conversions - diluted EPS. . . . . . 374 327.4 $1.14 873 327.2 $2.67 ===== ===== Extraordinary item . . . - 118 327.2 0.36 --- --- ===== Income before extra- ordinary item available to common stockholders and assumed conversions - diluted EPS . . . . . . 374 991 Income from discontinued operations, net of tax. (176) 327.4 (0.54) (191) 327.2 (0.59) --- ===== ---- --- ===== ---- Income from continuing operations available to common stockholders and assumed conversions - diluted EPS . . . . . . $198 327.4 $0.60 $800 327.2 $2.44 === ===== ==== === ===== ====
- 15 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE M. Supplemental Income Statement Information. Taxes other than income taxes comprised the following:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- (Restated) (Restated) (Millions) Production/severance. . . . . $ 55 $ 74 $119 $186 Property. . . . . . . . . . . 30 36 70 70 Other . . . . . . . . . . . . 37 34 87 84 --- --- --- --- Total . . . . . . . . . . . $122 $144 $276 $340 === === === ===
NOTE N. Supplemental Cash Flow Information. Following is supplemental cash flow information for the six months ended June 30, 1998 and 1997:
Six Months Ended June 30, ---------------- 1998 1997 ---- ---- (Restated) (Millions) Gross sales and maturities of short-term investments . . $ 134 $ 1,373 Gross purchases of short-term investments. . . . . . . . (126) (1,069) ------ ------ Net cash provided by short-term investments. . . . . . . $ 8 $ 304 ====== ====== Gross proceeds from issuance of notes payable. . . . . . $ 9,987 $ 2,975 Gross repayments of notes payable. . . . . . . . . . . . (7,057) (2,933) ------ ------ Net cash provided by notes payable . . . . . . . . . . . $ 2,930 $ 42 ====== ====== Gross noncash provisions charged to income . . . . . . . $ 106 $ 139 Reserve reversal from partial tax audit settlements. . . - (145) Cash payments of previously accrued items. . . . . . . . (205) (148) ------ ------ Cash payments greater than noncash provisions. . . . . . $ (99) $ (154) ====== ======
Interest paid during the six-month periods ended June 30, 1998 and 1997 was $205 million and $292 million, respectively. Income taxes paid during the six-month periods ended June 30, 1998 and 1997 were $140 million and $573 million, respectively. - 16 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE N. Supplemental Cash Flow Information (continued). Excluded from the Consolidated Statement of Cash Flows for the six months ended June 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 at the time of the exchange. Changes in working capital accounts for the six-month periods ended June 30, 1998 and 1997 were as follows:
Six Months Ended June 30, ---------------- 1998 1997 ---- ---- (Restated) (Millions) Changes in working capital - Increase (decrease) to cash: Accounts receivable. . . . . . . . . . . . . . . . . $ 89 $196 Inventories. . . . . . . . . . . . . . . . . . . . . 2 (54) Accounts payable . . . . . . . . . . . . . . . . . . (157) (262) Other working capital. . . . . . . . . . . . . . . . (273) (168) ----- ----- Total . . . . . . . . . . . . . . . . . . . . . . . $ (339) $ (288) ===== =====
NOTE O. 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 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 a number of other pending or threatened legal actions. The State of Montana is seeking recovery from ARCO of $767 million based on alleged injuries to natural resources resulting from mining and mineral processing operations formerly operated by Anaconda. ARCO and the State have lodged with the court an agreement to settle for $135 million the State's natural resource damages at three sites. That agreement is contingent upon the State, ARCO and others completing and lodging with the court a related settlement agreement and upon court approval of both agreements. - 17 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE O. Other Commitments and Contingencies (continued). 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 factors as the unknown nature and extent of contamination, the unknown timing, extent and method of the remedial actions which may be required and the determination of ARCO's liability in proportion to other responsible parties. 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 where withal of the other responsible parties. At June 30, 1998, the environmental remediation accrual was $696 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 of the 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 55% of the reserve related to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total reserve. Substantially all amounts accrued are expected to be paid out over the next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various insurance companies and other third parties. Many of these claims have been resolved. ARCO has neither recorded any asset nor reduced any liability in connection with unresolved claims. - 18 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE O. Other Commitments and Contingencies (continued). 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 from time to time in varying degrees by domestic and foreign political developments as well as legislation, regulations and litigation pertaining to restrictions on production, imports and exports, tax increases, environmental regulations, cancellation of contract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on ARCO vary greatly and are not predictable. These uncertainties are part of a number of items that ARCO has taken and will continue to take into account in periodically establishing reserves. Note P. Subsequent Event. On August 4, 1998, ARCO announced that its wholly owned subsidiary, Western Midway Company, had reached agreement with Mobil Exploration & Producing U.S. Inc. to exchange all ARCO's oil and gas producing properties and associated facilities in California's San Joaquin Valley for certain Mobil oil and gas properties in the Gulf of Mexico. The exchange is contingent upon the completion of a due diligence period during which each party has certain rights to withdraw from the exchange. The effective date of the transaction is July 1, 1998, with closing scheduled for October 30, 1998. The exchange will result in a pre-tax loss in excess of $100 million for ARCO to be charged against earnings in the third quarter of 1998. In a separate agreement ARCO has agreed to sell Western Midway Company including its newly acquired Gulf of Mexico properties to Vastar for $470 million. The purchase price is subject to adjustment at closing. ARCO owns an 82.2% interest in Vastar. - 19 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Second Quarter 1998 vs. Second Quarter 1997 Consolidated Earnings The earnings decline in 1998 primarily reflected lower crude oil prices, partially offset by increased refined products margins and sales volumes. The 1998 second quarter included net charges of $66 million consisting of the writedown of a North Sea natural gas field, partially offset by a reduction in the ARCO Chemical Company restructuring reserve established in 1997. The 1997 second quarter included an extraordinary loss of $118 million after tax related to early retirement of debt. The impact of the extraordinary loss was offset by the reversal of reserves for taxes and related interest which resulted primarily from the partial resolution of certain federal and state income tax audits. As the result of the sale of ARCO's 80 million shares of ARCO Chemical Company ("ARCO Chemical") common stock in July 1998, the 1998 results from operations reflected the Chemical operations as discontinued along with the worldwide coal operations discontinued in the first quarter 1998. In September 1997, ARCO disposed of its 49.9% interest in Lyondell Petrochemical Company ("Lyondell"). The 1997 results have been restated to reflect these operations as discontinued. After-tax Segment Earnings
1998 1997 ---- ---- (Restated) (Millions) Exploration and production . . . . . . . . . . . $ 17 $321 Refining and marketing . . . . . . . . . . . . . 97 68 Other operations . . . . . . . . . . . . . . . . 29 24 Interest expense . . . . . . . . . . . . . . . . (75) (1) Other unallocated expenses . . . . . . . . . . . (4) (3) --- --- Income from continuing operations. . . . . . . 64 409 Discontinued operations. . . . . . . . . . . . . 90 99 Extraordinary item . . . . . . . . . . . . . . . - (118) --- --- Net income . . . . . . . . . . . . . . . . . . $154 $390 === ===
Exploration and Production ARCO's earnings from worldwide oil and gas exploration and production operations in 1998 were significantly impacted by lower crude oil prices and to a much lesser extent a decline in crude oil and natural gas production volumes. Exploration expense was higher primarily as a result of the writeoff of dryholes by Vastar Resources, Inc. The results also included a $75 million after-tax writedown in the value of a North Sea natural gas field following the unsuccessful resolution of a sales contract dispute. - 20 - Average Oil and Gas Prices
1998 1997 ---- ---- U.S. Petroleum liquids - per barrel (bbl) Alaska . . . . . . . . . . . . . . . . . . . . $ 7.58 $14.65 Lower 48, including Vastar . . . . . . . . . . $10.74 $16.06 Composite average price. . . . . . . . . . . . $ 8.71 $15.11 Natural gas - per thousand cubic feet (mcf). . . $ 1.92 $ 1.72 International Petroleum liquids - per bbl. . . . . . . . . . . $12.11 $17.06 Natural gas - per mcf. . . . . . . . . . . . . . $ 2.56 $ 2.75
Petroleum Liquids and Natural Gas Production
1998 1997 ---- ---- Net Production U.S. Petroleum liquids - bbl/day Alaska . . . . . . . . . . . . . . . . . . . . 339,900 374,300 Vastar . . . . . . . . . . . . . . . . . . . . 49,400 52,800 Other Lower 48 . . . . . . . . . . . . . . . . 138,600 126,900 --------- --------- Total. . . . . . . . . . . . . . . . . . . . 527,900 554,000 Natural gas - mcf/day. . . . . . . . . . . . . . 1,120,500 1,060,100 Barrels of oil equivalent - (BOE)/day* . . . . . 714,600 730,700 International Petroleum liquids - bbl/day. . . . . . . . . . . 82,100 79,100 Natural gas - mcf/day. . . . . . . . . . . . . . 647,800 855,400 BOE/day. . . . . . . . . . . . . . . . . . . . . 190,100 221,700 Total net production - BOE/day . . . . . . . . . 904,700 952,400 __________ * Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
The decline in U.S. petroleum liquids production reflected a 26,600 barrel-per-day decrease in Prudhoe Bay production due to natural field decline. Increased production from the addition (effective July 1, 1997) of the Ashtart field in Tunisia and from the Rhourde El Baguel field in Algeria were partially offset by declines in Indonesian and United Kingdom production. The decline in international natural gas volumes in 1998 reflected reduced gas takes in the United Kingdom as a result of the timing of gas takes, reduced gas takes in Indonesia because of the economic downturn there and reduced gas takes in China as a result of customer operating problems. Production from the United Kingdom natural gas fields decreased by approximately 80 million cubic feet per day, while production from Indonesian gas fields and the South China Sea natural gas field decreased by approximately 68 million and 58 million cubic feet per day, respectively. - 21 - Refining and Marketing The higher earnings in 1998 resulted from higher margins and a 14% increase in gasoline sales volumes. While West Coast gasoline prices were lower than in 1997, margins improved because of falling crude oil prices. The increased gasoline sales volumes reflected the full integration of over 200 former Thrifty Oil Co. gas stations into ARCO's retail network and increased volumes at ARCO's retail outlets. The decline in jet fuel sales reflected ARCO's decision to reduce its sales of jet fuel in Northern California. West Coast Petroleum Products Sales
1998 1997 ---- ---- Volumes (Barrels/day) Gasoline. . . . . . . . . . . . . . . . . . . . . . 313,900 275,800 Jet . . . . . . . . . . . . . . . . . . . . . . . . 111,800 122,400 Distillate. . . . . . . . . . . . . . . . . . . . . 78,100 78,100 Other . . . . . . . . . . . . . . . . . . . . . . . 89,600 75,100 ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . 593,400 551,400 ======= =======
Other Operations The 1998 and 1997 results included earnings from Lower 48 pipeline and aluminum operations. The increase in 1998 earnings reflected improved pipeline operations resulting from higher revenues and successful efforts at cost reduction. Discontinued Operations After-tax earnings from discontinued operations totaled $90 million in the 1998 second quarter, comprised of earnings from ARCO's interest in ARCO Chemical Company. The 1998 second quarter results for discontinued included no income from coal operations. Although cash proceeds were received, the sale of U.S. coal assets will not be recognized in income until disposition of the Company's Australian coal assets is completed and the ultimate gain, if any, on disposition can be determined. In the 1997 second quarter ARCO's worldwide coal operations earned $24 million after tax while the Company's interest in ARCO Chemical earned $29 million. The 1997 discontinued operations included earnings of $46 million from ARCO's equity interest in Lyondell, which was disposed of in the third quarter of 1997. - 22 - Consolidated Revenues
1998 1997 ---- ---- (Restated) (Millions) Sales and other operating revenues Exploration and production . . . . . . . . . . . $1,368 $2,399 Refining and marketing . . . . . . . . . . . . . 1,432 1,631 Other. . . . . . . . . . . . . . . . . . . . . . 53 55 Intersegment eliminations. . . . . . . . . . . . (289) (551) ----- ----- Total. . . . . . . . . . . . . . . . . . . . . $2,564 $3,534 ===== =====
The decline in exploration and production sales revenues resulted primarily from lower petroleum liquids prices and lower natural gas and crude oil marketing activity. Effective September 1, 1997, Vastar Resources, Inc. ("Vastar") contributed the majority of its natural gas marketing operations to a joint venture with the Southern Company. Primarily, as a result of the transfer of those operations, total natural gas sales volumes decreased to 2.3 billion cubic feet per day in the 1998 second quarter, down from 3.8 billion cubic feet per day in the 1997 second quarter. Refining and marketing sales revenues primarily decreased because of lower refined products prices, partially offset by higher refined products volumes. The decrease in 1998 other revenues primarily reflected the absence of revenue from the termination of a lease agreement in the second quarter of 1998. Consolidated Expenses Trade purchases were lower primarily as a result of lower crude oil prices and decreased natural gas marketing activity. Natural gas purchase volumes decreased to .5 billion cubic feet per day in the 1998 second quarter, down from 2.0 billion cubic feet per day in the 1997 second quarter. Operating expenses were lower in 1998 primarily in oil and gas operations, reflecting decreased natural gas marketing activity and other cost reductions. The increased depreciation, depletion and amortization expense in 1998 includes a $110 million pre-tax writedown of a North Sea natural gas field. The lower taxes other than income taxes in 1998 primarily resulted from the impact of lower crude oil prices on U.S. production taxes. The higher interest expense in 1998 reflected the absence of the reversal of reserves for tax-related interest in the second quarter of 1997. Income Taxes The Company had a net tax benefit of $37 million in the 1998 second quarter, compared to a tax provision of $212 in the 1997 second quarter. The tax benefit in 1998 primarily reflected that the Company had an increase in the net effect of affiliate stock transactions and slightly increased tax credits, while income before incomes taxes decreased 95% in the second quarter of 1998. - 23 - Six-Month Period Ended June 30, 1998 vs. Same Six-Month Period 1997 Consolidated Earnings The earnings decline in the first six months of 1998 primarily reflected lower crude oil prices and lower crude oil and natural gas volumes. After-tax Segment Earnings
1998 1997 ---- ---- (Restated) (Millions) Exploration and production . . . . . . . . . . . $199 $773 Refining and marketing . . . . . . . . . . . . . 116 114 Other operations . . . . . . . . . . . . . . . . 53 37 Interest expense . . . . . . . . . . . . . . . . (144) (98) Other unallocated expenses . . . . . . . . . . . (26) (26) --- --- Income from continuing operations. . . . . . . . 198 800 Discontinued operations. . . . . . . . . . . . . 176 191 Extraordinary item . . . . . . . . . . . . . . . - (118) --- --- Net income . . . . . . . . . . . . . . . . . . $374 $873 === ===
Consolidated Revenues
1998 1997 ---- ---- (Restated) (Millions) Sales and other operating revenues Exploration and production . . . . . . . . . . . $2,906 $5,246 Refining and marketing . . . . . . . . . . . . . 2,784 3,323 Other. . . . . . . . . . . . . . . . . . . . . . 95 101 Intersegment eliminations. . . . . . . . . . . . (685) (1,244) ----- ----- Total. . . . . . . . . . . . . . . . . . . . . $5,100 $7,426 ===== =====
The decline in exploration and production sales revenues for the first six months of 1998 resulted primarily from lower petroleum liquids prices and natural gas marketing activity. Effective September 1, 1997, Vastar contributed the majority of its natural gas marketing operations to a joint venture with the Southern Company. Primarily, as a result of the transfer of those operations, total natural gas sales volumes decreased to 2.3 billion cubic feet per day for the first six months of 1998, down from 4.3 billion cubic feet per day for the same period in 1997. For the first six months of 1998 refining and marketing sales revenues primarily decreased because of lower refined products prices, partially offset by higher refined products volumes. - 24 - Consolidated Expenses Trade purchases for the six months ended June 30, 1998 were lower primarily as a result of lower crude oil prices and decreased natural gas marketing activity. Natural gas purchase volumes decreased to .5 billion cubic feet per day in 1998, down from 2.4 billion cubic feet per day in the same period in 1997. Operating expenses were lower during the first half of 1998 primarily in oil and gas operations, reflecting decreased natural gas marketing activity and other cost reductions. The increased depreciation, depletion and amortization expense in 1998 includes a $110 million pre-tax writedown of a North Sea natural gas field. The higher exploration expense for the first six months of 1998 reflected increased geological and geophysical and dryhole expense in international operations and higher dryhole expense at Vastar in the second quarter of 1998. The lower taxes other than income taxes in 1998 primarily resulted from the impact of lower crude oil prices on U.S. production taxes. For the six months ended June 30, 1998, the higher interest expense reflected the absence of the reversal of reserves for tax-related interest in the second quarter of 1997. Excluding the prior year reserve reversal, interest expense was down almost $75 million in the first six months of 1998 as a result of debt retirements and capitalized interest in 1997. Income Taxes The Company's effective tax rate was 4.5% for the first six months of 1998, compared to 33.3% for the same period in 1997. The lower effective tax rate in 1998 primarily reflected that the Company had an increase in the net effect of affiliate stock transactions and increased tax credits, while income before income taxes decreased 82% in the 1998 period. Average Oil and Gas Prices
Six Months Ended June 30, ---------------- 1998 1997 ---- ---- U.S. Petroleum liquids - per bbl Alaska . . . . . . . . . . . . . . . . . . . $ 8.95 $16.36 Lower 48, including Vastar. . . . . . . . . . $11.71 $17.65 Composite average price . . . . . . . . . . . $ 9.92 $16.77 Natural gas - per mcf . . . . . . . . . . . . . $ 1.91 $ 2.03 International Petroleum liquids - per bbl . . . . . . . . . . $12.35 $19.00 Natural gas - per mcf . . . . . . . . . . . . . $ 2.63 $ 2.70
- 25 - Petroleum Liquids and Natural Gas Production
1998 1997 ---- ---- Net Production U.S. Petroleum liquids - bbl/day Alaska . . . . . . . . . . . . . . . . . . . 351,900 386,600 Vastar . . . . . . . . . . . . . . . . . . . 50,500 51,900 Other Lower 48 . . . . . . . . . . . . . . . 139,600 125,800 Total. . . . . . . . . . . . . . . . . . . 542,000 564,300 Natural gas - mcf/day. . . . . . . . . . . . . 1,106,100 1,054,600 Barrels of oil equivalent - (BOE)/day* . . . . 726,400 740,100 International Petroleum liquids - bbl/day. . . . . . . . . . 84,100 74,900 Natural gas - mcf/day. . . . . . . . . . . . . 747,200 867,000 BOE/day. . . . . . . . . . . . . . . . . . . . 208,600 219,400 Total net production - BOE/day . . . . . . . . 935,000 959,500 __________ * Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
Liquidity and Capital Resources
1998 ---- (Millions) Cash flow provided (used) by: Operations. . . . . . . . . . . . . . . . . . . . . $ 654 Investing activities. . . . . . . . . . . . . . . . $(3,182) Financing activities. . . . . . . . . . . . . . . . $ 2,483
The net cash used by investing activities in the first six months of 1998 included expenditures for the purchase of Union Texas Petroleum for $2.6 billion and additions to fixed assets of $1.6 billion, offset by proceeds from asset sales, primarily U.S. coal assets, of $1.1 billion. The net cash provided by financing activities in the first six months of 1998 primarily included an increase of $2.9 billion in the Company's short-term debt position offset by dividend payments of $459 million. Cash and cash equivalents and short-term investments totaled $728 million, short-term borrowings were $4.4 billion and long-term debt due within one year was $102 million at the end of the second quarter of 1998. As a result of the increased use of short-term borrowing, primarily for the purchase of UTP in the second quarter of 1998, the Company is in a working capital deficit position of approximately $4.1 billion at June 30, 1998. On July 28, 1998, ARCO received $4.6 billion for the ARCO Chemical shares it tendered to Lyondell and expects to recognize an after-tax gain of approximately $1.3 billion in the third quarter of 1998. 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. - 26 - Statements of Financial Accounting Standards Not Yet Adopted In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-1 establishes criteria for determining which costs of developing or obtaining internal-use computer software should be charged to expense and which should be capitalized. The Company has not yet completed evaluating the impact of the provisions of SOP 98-1. 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, 1999. 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 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. - 27 - PART II. OTHER INFORMATION Item 1. Legal Proceedings. 1. Reference is made to the disclosure on page 12 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (hereinafter, the "1997 Form 10-K Report") and on page 21 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (the "First Quarter Form 10-Q Report") regarding Montana v. ARCO, ex rel. (Case No. CV-83-317-HLN- PGH). On June 19, 1998, ARCO and the State lodged with the court a conditional consent decree to settle for $135 million all but a portion of the State's Natural Resource Damage ("NRD") claims. The NRD claims of the State not settled are for restoration at three sites for which a final cleanup plan has not been ordered. As part of the settlement, ARCO also will pay $80 million in settlement of its liability for cleanup at the Stream Side Tailings Operable Unit ("SSTOU") in the Clark Fork Basin. The State NRD settlement is conditioned upon ARCO, the United States, and the Confederated Salish and Kootenai Tribes of the Flathead Reservation finalizing an agreement providing for the SSTOU cleanup and settling United States and Tribal NRD claims and upon court approval of these agreements. 2. Reference is made to the disclosure on page 12 of the Company's 1997 Form 10-K Report regarding the case of U.S. v. ARCO, et al. (Case No. CV-89- 039-BU-PGH). Litigation is proceeding on both EPA's claims (in the approximate amount of $90 million) and ARCO's counterclaims against various federal agencies. The proposed settlements in Montana v. ARCO, described above, will resolve some, but not all, of the claims and counterclaims in U.S. v. ARCO. 3. Reference is made to the disclosure on page 14 of the Company's 1997 Form 10-K Report regarding Siemens Solar Industries v. Atlantic Richfield Company (Case No. 94-109092). On June 10, 1998, the Appellate Division of the Supreme Court affirmed summary judgment. Siemens has filed a motion for leave to appeal to the New York Court of Appeals. 4. On April 20, 1998, ARCO received a Finding of Violation from EPA Region IX for alleged violations at the Los Angeles Refinery of the federal New Source Performance Standards established for refineries under the Clean Air Act. These standards limit emissions from affected fuel gas combustion devices and Claus sulfur recovery plants. EPA alleges the facility was in noncompliance for approximately 65 days in 1997. EPA has the authority to seek penalties of up to $27,500 per day. Settlement discussions with EPA are ongoing. 5. On May 6, 1998, two purported class actions were filed in the Court of Chancery of the State of Delaware in New Castle County, Squyres v. Barry, et al. (Case No. 16357NC) and McMullen v. Union Texas Petroleum, et al. (Case No. 16358NC), against Union Texas Petroleum Company ("UTP"), individual directors of UTP, Kohlberg Kravis Roberts and Co. ("KKR"), and ARCO relating to ARCO's acquisition and merger of UTP. On July 28, 1998, a purported class action was filed in the United States District Court for the Central District of California, Squyres v. Whitmire, et al. (Case No. 98-6085), against the same defendants, except ARCO. The suits are brought by individual shareholders of UTP on behalf of all holders of UTP common stock and seek rescission of the transaction, damages for the allegedly inadequate consideration being paid by ARCO for the UTP shares, and attorneys' fees and costs. In the Delaware actions, the plaintiffs assert that the individual director defendants and KKR, as UTP's largest shareholder, breached fiduciary duties to other shareholders and that ARCO aided and abetted the alleged breach of duty. In the California case, the plaintiffs allege that the defendants violated the Securities Exchange Act of 1934. - 28 - Item 1. Legal Proceedings (continued). 6. On June 26, 1998, a purported class action was filed in the Court of Chancery of the State of Delaware in New Castle County, McMullin v. Beran, et al. (Case No. 16493NC) against ARCO, Lyondell Petrochemical Company, ARCO Chemical Company, and the individual directors of ARCO Chemical relating to the acquisition of ARCO Chemical by Lyondell. The suit is brought by an individual shareholder of ARCO Chemical on behalf of all common stockholders, other than defendants, and seeks rescission of the transaction, damages for the allegedly inadequate consideration being paid by Lyondell for the shares, and attorneys' fees and costs. The plaintiff alleges that ARCO and the individual directors of ARCO Chemical, who are alleged to be dominated and controlled by ARCO, breached fiduciary duties to the minority shareholders. 7. Reference is made to the Company's 1997 Form 10-K Report for information on other legal proceedings matters reported herein. Item 5. Other. A. PRO FORMA FINANCIAL STATEMENTS The following unaudited pro forma financial statements include certain adjustments to the historical financial statements of the Company. Such adjustments are made to give effect to the sale of ARCO's entire holdings in ARCO Chemical Company ("ARCO Chemical") common stock, 80,000,001 shares, or an 82.1% interest in ARCO Chemical at the time of the sale, July 28, 1998. These adjustments reflect the elimination of ARCO Chemical balances from ARCO's consolidated financial statements and the receipt of $4.6 billion in cash from the sale of ARCO Chemical common stock, as well as an after-tax gain of $1.3 billion and the estimated income taxes payable of $1.7 billion. The pro forma condensed statements of income have been prepared as if the sale of the shares took place as of January 1, 1997. The pro forma condensed balance sheet has been prepared as if the sale of the shares took place as of June 30, 1998. Such pro forma financial statements are not necessarily indicative of the results of future operations, nor the results of historical operations had the sale of ARCO Chemical shares taken place as of the assumed dates. - 29 -
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES (Unaudited) PRO FORMA CONDENSED STATEMENT OF INCOME Year Ended December 31, 1997 ---------------------------------------- Pro Forma After Giving Effect to (Millions except per share amounts) Historical* Adjustments Adjustments ----------- ----------- ------------ Revenues Sales and other operating revenues . . . . . . . . . . . $18,047 $(3,707) $14,340 Other revenues. . . . . . . . . 414 3 417 ------ ------ ------ 18,461 (3,704) 14,757 ------ ------ ------ Expenses Trade purchases . . . . . . . . 7,843 (1,438) 6,405 Operating expenses. . . . . . . 3,958 (1,128) 2,830 Selling, general and administrative expenses. . . . 1,051 (410) 641 Depreciation, depletion and amortization . . . . . . . . . 1,675 (229) 1,446 Exploration expenses (including undeveloped leasehold amortization). . . . . . . . . 508 - 508 Taxes other than income taxes . 710 (70) 640 Interest. . . . . . . . . . . . 422 (79) 343 Unusual items . . . . . . . . . 242 (175) 67 ------ ------ ------ 16,409 (3,529) 12,880 ------ ------ ------ Income before income taxes, minority interest and extraordinary item . . . . . . . 2,052 (175) 1,877 Provision for taxes on income . . (561) 58 (503) Minority interest in earnings of subsidiaries. . . . . . . . . (68) 25 (43) ------ ------ ------ Income from continuing operations before extraordinary item . . . . . . . . . . . . . . $ 1,423 $ (92) $ 1,331 ====== ====== ====== Earned per Share Continuing operations - Basic (321.2 shares) . . . . . . . . $ 4.43 $ (.29) $ 4.14 Continuing operations - Diluted (327.4 shares) . . . . . . . . $ 4.35 $ (.28) $ 4.07 ____________ * As restated to give effect to the discontinuance of coal operations by ARCO in the first quarter of 1998 and the sale of ARCO's interest in Lyondell Petrochemical Company in the third quarter of 1997.
- 30 -
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES (Unaudited) PRO FORMA CONDENSED STATEMENT OF INCOME Six Months Ended June 30, 1998 ---------------------------------------- Pro Forma After Giving Effect to (Millions except per share amounts) Historical* Adjustments Adjustments ----------- ----------- ------------ Revenues Sales and other operating revenues . . . . . . . . . . . . . $ 6,898 $(1,798) $ 5,100 Other revenues. . . . . . . . . . . 219 (19) 200 ------ ------ ------ 7,117 (1,817) 5,300 ------ ------ ------ Expenses Trade purchases . . . . . . . . . . 2,713 (656) 2,057 Operating expenses. . . . . . . . . 1,687 (593) 1,094 Selling, general and administrative expenses. . . . . . 479 (94) 385 Depreciation, depletion and amortization . . . . . . . . . . . 892 (104) 788 Exploration expenses (including undeveloped leasehold amortization) 275 - 275 Taxes other than income taxes . . . 315 (39) 276 Interest. . . . . . . . . . . . . . 239 (36) 203 ------ ------ ------ 6,600 (1,522) 5,078 ------ ------ ------ Income before income taxes and minority interest . . . . . . . . . 517 (295) 222 Provision for taxes on income. . . . (97) 87 (10) Minority interest in earnings of subsidiaries. . . . . . . . . . . . (54) 40 (14) ------ ------ ------ Income from continuing operations. . $ 366 $ (168) $ 198 ====== ====== ====== Earned per Share Continuing operations - Basic (320.8 shares) . . . . . . . . . . $ 1.13 $ (.52) $ .61 Continuing operations - Diluted (327.4 shares) . . . . . . . . . . $ 1.11 $ (.51) $ .60 ____________ * Reflects the discontinuance of coal operations by ARCO in the first quarter of 1998.
- 31 -
ATLANTIC RICHFIELD COMPANY (Unaudited) PRO FORMA CONDENSED BALANCE SHEET June 30, 1998 ---------------------------------------- Pro Forma After Giving Effect to (Millions) Historical Adjustments Adjustments ---------- ----------- ------------ Assets Cash, cash equivalents, and short-term investments . . . . . . $ 728 $4,600 $ 5,328 Accounts receivable, inventories and other current assets . . . . . 1,586 1,586 Investment in Union Texas Petroleum 2,646 2,646 Investments and long-term receivables. . . . . . . . . . . . 1,800 1,800 Net property, plant and equipment . 14,308 14,308 Net assets of discontinued operations . . . . . . . . . . . . 2,013 (1,600) 413 Deferred charges and other assets . 1,353 1,353 ------ ----- ------ Total assets. . . . . . . . . . . . $24,434 $3,000 $27,434 ====== ===== ====== Liabilities and Stockholders' Equity Current liabilities . . . . . . . . $ 6,367 $1,700 $ 8,067 Long-term debt. . . . . . . . . . . 3,679 3,679 Deferred income taxes . . . . . . . 2,335 2,335 Other deferred liabilities and credits. . . . . . . . . . . . . . 3,739 3,739 Minority interest . . . . . . . . . 251 251 Stockholders' equity: Preference stocks. . . . . . . . . 1 1 Common stock . . . . . . . . . . . 814 814 Capital in excess of par value of stock. . . . . . . . . . . . . 856 856 Retained earnings. . . . . . . . . 6,969 1,300 8,269 Treasury stock . . . . . . . . . . (356) (356) Accumulated other comprehensive income. . . . . . . . . . . . . . (221) (221) ------ ----- ------ Total stockholders' equity . . . . 8,063 1,300 9,363 ------ ----- ------ Total liabilities and stockholders' equity . . . . . . . $24,434 $3,000 $27,434 ====== ===== ======
- 32 - Item 5. Other (continued) B. TIMELY SUBMISSION OF SHAREHOLDER PROPOSALS The Securities and Exchange Commission ("SEC") requires a registrant to give shareholders notice of deadlines for timely submission of certain types of shareholder proposals that shareholders wish to present for a vote at a registrant's annual meeting. These deadlines are set based on certain SEC rules as they relate to the registrant's annual meeting date and relevant provisions of its articles and by-laws. Set forth below are the deadlines applicable to ARCO shareholders. ARCO's Board has not yet acted to set the annual meeting date; the following dates are based on an assumed meeting date of May 3, 1999 for ARCO's 1999 Annual Meeting. The deadline for submission by shareholders of proposals (other than for the nomination of a director) they wish included in ARCO's 1999 proxy statement is November 16, 1998. If a shareholder wishes to submit a nomination for director, the deadline is January 4, 1999. In the event a shareholder does not notify ARCO by January 29, 1999 of an intent to be present at the 1999 Annual Meeting in order to present a proposal for a vote (other than a proposal for the nomination of a director), the Company will have the right to exercise its discretionary authority to vote against the proposal, if presented, without including any information about the proposal in its proxy materials. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 27 Financial Data Schedule. (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed during the quarter ended June 30, 1998 and through the date hereof. Date of Report Item No. Financial Statements -------------- -------- -------------------- June 3, 1998 5 None June 18, 1998 5 None June 29, 1998 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: August 7, 1998 ________________________________ (signature) Allan L. Comstock Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) - 34 - EX-27 2 FINANCIAL DATA SCHEDULE 6-MONTHS JUNE 1998
5 This schedule contains summary financial information extracted from the Consolidated Statement of Income and the Consolidated Balance Sheet and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1998 JUN-30-1998 $ 513 215 840 0 451 2,314 32,802 18,494 24,434 6,367 3,679 0 1 814 7,248 24,434 5,100 5,300 4,215 4,490 0 0 203 222 10 198 176 0 0 374 $1.16 $1.14
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