-----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, MwusbpqGpu3k8+KsxkYprArRZk+bhY5coizER0UVZACTBVoxONiiE635yW3i0t64 pILE+ENGCl8XrDFKGgoVqg== 0000775483-96-000002.txt : 19960510 0000775483-96-000002.hdr.sgml : 19960510 ACCESSION NUMBER: 0000775483-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960509 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: 1934 Act SEC FILE NUMBER: 001-01196 FILM NUMBER: 96558268 BUSINESS ADDRESS: STREET 1: 515 S FLOWER ST CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134863511 10-Q 1 ARCO 1ST QT 1996 FORM 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 March 31, 1996 Commission file number 1-1196 ________________ ATLANTIC RICHFIELD COMPANY (Exact name of registrant as specified in its charter) ________________ Delaware 23-0371610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 515 South Flower Street Los Angeles, California 90071 (Address of principal executive offices) (Zip code) __________________ (213) 486-3511 (Registrant's telephone number, including area code) __________________ Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock, $2.50 par value, outstanding as of March 31, 1996: 160,838,120. PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENT OF INCOME Three Months Ended March 31, ------------------ (Millions except per share amounts) 1996 1995 ---- ---- Revenues Sales and other operating revenues, including excise taxes. . . . . . . . . . . . . . . $4,534 $4,244 Income from equity investments. . . . . . . . . . . . 17 74 Interest. . . . . . . . . . . . . . . . . . . . . . . 52 59 Other revenues. . . . . . . . . . . . . . . . . . . . 157 80 ----- ----- 4,760 4,457 ----- ----- Expenses Trade purchases . . . . . . . . . . . . . . . . . . . 1,674 1,568 Operating expenses. . . . . . . . . . . . . . . . . . 753 704 Selling, general and administrative expenses. . . . . 415 402 Depreciation, depletion and amortization. . . . . . . 404 412 Exploration expenses (including undeveloped leasehold amortization) . . . . . . . . . . . . . . 100 90 Excise taxes. . . . . . . . . . . . . . . . . . . . . 378 350 Taxes other than excise and income taxes. . . . . . . 217 194 Interest. . . . . . . . . . . . . . . . . . . . . . . 173 203 Unusual items . . . . . . . . . . . . . . . . . . . . 26 - ----- ----- 4,140 3,923 ----- ----- Income before income taxes and minority interest. . . . 620 534 Provision for taxes on income . . . . . . . . . . . . . 220 185 Minority interest in earnings of subsidiaries . . . . . 30 27 ----- ----- Net Income. . . . . . . . . . . . . . . . . . . . . . . $ 370 $ 322 ===== ===== Earned per Share. . . . . . . . . . . . . . . . . . . . $ 2.26 $ 1.97 ===== ===== Cash Dividends Paid per Share of Common Stock . . . . . $1.375 $1.375 ===== =====
The accompanying notes are an integral part of these statements. -1-
ATLANTIC RICHFIELD COMPANY CONSOLIDATED BALANCE SHEET March 31, December 31, 1996 1995 ---- ---- (Millions) Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . $ 1,624 $ 1,537 Short-term investments. . . . . . . . . . . . . . 1,779 1,569 Accounts receivable . . . . . . . . . . . . . . . 1,670 1,684 Inventories . . . . . . . . . . . . . . . . . . . 935 877 Prepaid expenses and other current assets . . . . 294 221 ------ ------ Total current assets. . . . . . . . . . . . . . . 6,302 5,888 ------ ------ Investments and long-term receivables: Investments accounted for on the equity method. . 726 711 Other investments and long-term receivables . . . 559 550 ------ ------ 1,285 1,261 ------ ------ Fixed assets: Property, plant and equipment . . . . . . . . . . 32,995 32,544 Less accumulated depreciation, depletion and amortization . . . . . . . . . . . . . . . 17,533 17,189 ------ ------ 15,462 15,355 ------ ------ Deferred charges and other assets . . . . . . . . . 1,459 1,495 ------ ------ Total assets. . . . . . . . . . . . . . . . . . . . $24,508 $23,999 ====== ======
The accompanying notes are an integral part of these statements. -2-
ATLANTIC RICHFIELD COMPANY CONSOLIDATED BALANCE SHEET March 31, December 31, 1996 1995 ---- ---- (Millions) Liabilities and Stockholders' Equity Current liabilities: Notes payable . . . . . . . . . . . . . . . . . . $ 1,236 $ 1,174 Accounts payable. . . . . . . . . . . . . . . . . 1,128 1,145 Long-term debt due within one year. . . . . . . . 183 184 Taxes payable, including excise taxes . . . . . . 533 303 Accrued interest. . . . . . . . . . . . . . . . . 135 153 Other . . . . . . . . . . . . . . . . . . . . . . 1,116 1,004 ------ ------ Total current liabilities . . . . . . . . . . . . 4,331 3,963 ------ ------ Long-term debt. . . . . . . . . . . . . . . . . . . 6,668 6,708 Deferred income taxes . . . . . . . . . . . . . . . 2,635 2,637 Other deferred liabilities and credits. . . . . . . 3,491 3,456 Minority interest . . . . . . . . . . . . . . . . . 496 477 Stockholders' equity: Preference stocks . . . . . . . . . . . . . . . . 1 1 Common stock. . . . . . . . . . . . . . . . . . . 402 402 Capital in excess of par value of stock . . . . . 624 632 Retained earnings . . . . . . . . . . . . . . . . 5,964 5,816 Pension liability adjustment. . . . . . . . . . . (60) (60) Foreign currency translation. . . . . . . . . . . (30) (17) Net unrealized loss on investments. . . . . . . . (9) (11) Treasury stock, at cost . . . . . . . . . . . . . (5) (5) ------ ------ Total stockholders' equity. . . . . . . . . . . . 6,887 6,758 ------ ------ Total liabilities and stockholders' equity. . . . . $24,508 $23,999 ====== ======
The accompanying notes are an integral part of these statements. -3-
ATLANTIC RICHFIELD COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, ------------------ 1996 1995 ---- ---- (Millions) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . $ 370 $ 322 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization . . . . . . . 404 412 Dry hole expense and undeveloped leasehold amortization 48 36 Net gain on asset sales. . . . . . . . . . . . . . . . (26) (8) Income from equity investments . . . . . . . . . . . . (17) (74) Dividends from equity investments. . . . . . . . . . . 27 21 Minority interest in earnings of subsidiaries. . . . . 30 27 Cash payments greater than noncash provisions. . . . . (27) (210) Deferred income taxes. . . . . . . . . . . . . . . . . 7 (4) Changes in accounts receivable, inventories and accounts payable. . . . . . . . . . . . . . . . . (58) (84) Changes in other working capital accounts. . . . . . . 59 8 Other. . . . . . . . . . . . . . . . . . . . . . . . . 23 (57) ----- ----- Net cash provided by operating activities. . . . . . 840 389 ----- ----- Cash flows from investing activities: Additions to fixed assets (including dry hole costs) . (352) (353) Net cash provided (used) by short-term investments . . (218) 677 Proceeds from asset sales. . . . . . . . . . . . . . . 26 45 Investments and long-term receivables. . . . . . . . . (21) 1 Other. . . . . . . . . . . . . . . . . . . . . . . . . 17 (112) ----- ----- Net cash provided (used) by investing activities . . (548) 258 ----- ----- Cash flows from financing activities: Repayments of long-term debt . . . . . . . . . . . . . (79) (470) Proceeds from issuance of long-term debt . . . . . . . 45 149 Net cash provided (used) by notes payable. . . . . . . 72 (324) Dividends paid . . . . . . . . . . . . . . . . . . . . (222) (222) Treasury stock purchases . . . . . . . . . . . . . . . (14) (11) Other. . . . . . . . . . . . . . . . . . . . . . . . . (5) (4) ----- ----- Net cash used by financing activities. . . . . . . . (203) (882) ----- ----- Effect of exchange rate changes on cash. . . . . . . . . (2) 5 ----- ----- Net increase (decrease) in cash and cash equivalents . . 87 (230) Cash and cash equivalents at beginning of period . . . . 1,537 1,394 ----- ----- Cash and cash equivalents at end of period . . . . . . . $1,624 $1,164 ===== =====
The accompanying notes are an integral part of these statements. -4- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE A. Accounting Policies. Basis of Presentation. The foregoing financial information is unaudited and has been prepared from the books and records of the Company. Certain previously reported amounts have been restated to conform to classifications adopted in 1996. In the opinion of the Company, the financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations in conformity with generally accepted accounting principles. Sales of Stock by a Subsidiary. Gains or losses arising from issuances by a subsidiary of its own stock are recorded in ARCO's Consolidated Income Statement. NOTE B. Restructuring Program. During 1993 and 1994, ARCO announced restructuring programs under which approximately 3,700 positions were to be eliminated. Both programs have been completed. The following summarizes the costs related to each program:
($ Millions) Funded Unfunded Actual long-term long-term Short-term Terminations Benefits (a) Benefits (b) Benefits (c) Total ------------ ------------ ------------ ------------ ----- 1993 Program 1,189 $ 35 $ 5 $ 65 $105 1994 Program 2,589 130 70 157 357 ----- --- -- --- --- Total 3,778 $165 $75 $222 $462 ===== === == === === ________________ (a) Enhanced pension benefits to be paid from assets of qualified pension plans after retirement of recipient. (b) Enhanced non-qualified pension benefits and postretirement medical and life insurance benefits. Benefits will be paid after retirement over the life of the recipient. (c) Severance and other ancillary benefits paid currently from Company funds.
An adjustment of $26 million was recorded as an unusual item in the first quarter 1996 to increase reserves from previously estimated amounts. Through March 31, 1996, approximately $207 million of short-term benefits have been paid. -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE C. Investments. At March 31, 1996 and 1995, investments were primarily composed of U.S. Treasury securities, corporate debt instruments, and municipal securities and were principally included in short-term investments. Maturities generally ranged from one day to 20 months. At March 31, 1996, all investments were classified as available-for-sale ("AFS"); there were no investments considered held-to-maturity ("HTM"). AFS investments were reported at fair value, with unrealized holding gains and losses, net of tax, reported in a separate component of stockholders' equity. The following summarizes investments in securities, principally debt securities, at March 31:
Millions 1996 1995 ------ ---------------- AFS AFS HTM --- --- --- Aggregate fair value . . . . . . . . . $1,832 $1,769 $ 910 Gross unrealized holding losses. . . . 19 35 - Gross unrealized holding gains . . . . (12) - - ----- ----- ----- Amortized cost . . . . . . . . . . . . $1,839 $1,804 $ 910 ===== ===== =====
Investment activity for the three months ended March 31 was as follows:
Millions 1996 1995 ------ ---------------- AFS AFS HTM --- --- --- Gross purchases. . . . . . . . . . . . $1,321 $ 698 $1,293 Gross sales. . . . . . . . . . . . . . 531 854 - Gross maturities . . . . . . . . . . . 1,050 36 1,624
Gross realized gains and losses were insignificant and were determined by the specific identification method. NOTE D. Inventories. Inventories at March 31, 1996 and December 31, 1995 comprised the following:
March 31, December 31, 1996 1995 ---- ---- (Millions) Crude oil and petroleum products. . . . . . . $232 $184 Chemical products . . . . . . . . . . . . . . 430 423 Other products. . . . . . . . . . . . . . . . 30 32 Materials and supplies. . . . . . . . . . . . 243 238 --- --- Total . . . . . . . . . . . . . . . . . . . $935 $877 === ===
-6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE E. Capital Stock. Detail of the Company's capital stock was as follows:
March 31, December 31, 1996 1995 ---- ---- (Thousands) $3.00 Cumulative convertible preference stock, par $1 . . . . . . . . . . . . . . . . . . . . . $ 66 $ 66 $2.80 Cumulative convertible preference stock, par $1 . . . . . . . . . . . . . . . . . . . . . 716 731 Common stock, par $2.50. . . . . . . . . . . . . . 402,199 402,199 ------- ------- Total. . . . . . . . . . . . . . . . . . . . . $402,981 $402,996 ======= =======
NOTE F. Capitalization of Interest. Interest expense excludes capitalized interest of $5 million and $12 million for the three-month periods ended March 31, 1996 and 1995, respectively. NOTE G. Income Taxes. Provision for taxes on income:
Three Months Ended March 31, ------------------ 1996 1995 ---- ---- (Millions) Federal: Current . . . . . . . . . . . . . . . . . . . . $ 147 $ 140 Deferred. . . . . . . . . . . . . . . . . . . . 5 (2) ---- ---- 152 138 ---- ---- Foreign: Current . . . . . . . . . . . . . . . . . . . . 39 22 Deferred. . . . . . . . . . . . . . . . . . . . 2 1 ---- ---- 41 23 ---- ---- State: Current . . . . . . . . . . . . . . . . . . . . 27 27 Deferred. . . . . . . . . . . . . . . . . . . . - (3) ---- ---- 27 24 ---- ---- Total . . . . . . . . . . . . . . . . . . . . $ 220 $ 185 ==== ====
-7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE G. Income Taxes (Continued). Reconciliation of provision for taxes on income with tax at federal statutory rate:
Three Months Ended March 31, ------------------------------------- 1996 1995 ---------------- ----------------- Percent Percent of of Pretax Pretax Amount Income Amount Income ------ ------- ------ ------- (Millions) Income before income taxes and minority interest . . . . . . . . . $620 100.0 $534 100.0 === ===== === ===== Tax at federal statutory rate . . . . $217 35.0 $187 35.0 Increase (reduction) in taxes resulting from: Dividend exclusion. . . . . . . . . (3) (.5) (18) (3.4) Taxes on foreign income in excess of statutory rate . . . . . . . . 17 2.7 16 3.0 State income taxes (net of federal effect) . . . . . . . . . . . . . 18 2.9 16 3.0 Tax credits . . . . . . . . . . . . (22) (3.5) (18) (3.4) Other . . . . . . . . . . . . . . . (7) (1.1) 2 .4 --- ---- --- ---- Provision for taxes on income . . . . $220 35.5 $185 34.6 === ==== === ====
NOTE H. Earned Per Share. Earned per share is based on the average number of common shares outstanding during each period, including common stock equivalents that consist of certain outstanding options and all outstanding convertible securities. The information necessary for the calculation of earned per share is as follows:
Three Months Ended March 31, ------------------ 1996 1995 ---- ---- (Millions of shares) Average number of common shares outstanding . . . . . 160.8 160.8 Common stock equivalents . . . . . . . . . . . . . . 2.5 2.6 ----- ----- Total . . . . . . . . . . . . . . . . . . . . . . 163.3 163.4 ===== =====
-8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE I. Supplemental Income Statement Information. Taxes other than excise and income taxes comprised the following:
Three Months Ended March 31, ------------------ 1996 1995 ---- ---- (Millions) Production/severance. . . . . . . . . . . . . . . . $103 $ 89 Property. . . . . . . . . . . . . . . . . . . . . . 47 48 Other . . . . . . . . . . . . . . . . . . . . . . . 67 57 --- --- Total . . . . . . . . . . . . . . . . . . . . . . $217 $194 === ===
NOTE J. Supplemental Cash Flow Information. Following is supplemental cash flow information for the three months ended March 31, 1996 and 1995:
Three Months Ended March 31, ------------------ 1996 1995 ---- ---- (Millions) Gross sales and maturities of short-term investments . $ 702 $1,567 Gross purchases of short-term investments. . . . . . . (920) (890) ----- ----- Net cash provided (used) by short-term investments . . $ (218) $ 677 ===== ===== Gross proceeds from issuance of notes payable. . . . . $1,472 $1,892 Gross repayments of notes payable. . . . . . . . . . . (1,400) (2,216) ----- ----- Net cash provided (used) by notes payable. . . . . . . $ 72 $ (324) ===== ===== Gross noncash provisions charged to income . . . . . . $ 132 $ 108 Cash payments of previously accrued items. . . . . . . (159) (318) ----- ----- Cash payments greater than noncash provisions. . . . . $ (27) $ (210) ===== =====
Interest paid during the three-month periods ended March 31, 1996 and 1995 was $191 million and $235 million, respectively. Income taxes paid during the three-month periods ended March 31, 1996 and 1995 were $47 million and $129 million, respectively. Excluded from the Consolidated Statement of Cash Flows for the three months ended March 31, 1996 was the accrual (in other accrued liabilities) of a signing bonus due a foreign state owned oil company of $225 million. -9- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE K. Summarized Financial Information. Summarized financial information for Lyondell Petrochemical Company ("Lyondell"), a company in which Atlantic Richfield owned a 49.9% interest at March 31, 1996, was as follows:
Three Months Ended March 31, ------------------ 1996 1995 ---- ---- (Millions) Revenues (including sales to ARCO and ARCO Chemical Company). . . . . . . . . . . . . $1,165 $1,174 Sales to ARCO and ARCO Chemical Company . . . . . 64 90 Operating income. . . . . . . . . . . . . . . . . 61 222 Net income. . . . . . . . . . . . . . . . . . . . 24 127 _____________________________ ARCO's equity in net income of Lyondell . . . . . $ 12 $ 64 Cash dividends received from Lyondell . . . . . . 9 9
________________________
March 31, December 31, 1996 1995 ---- ---- (Millions) Current assets. . . . . . . . . . . . . . . . . . $ 817 $ 678 Noncurrent assets . . . . . . . . . . . . . . . . 2,100 1,928 Current liabilities . . . . . . . . . . . . . . . 630 750 Long-term debt. . . . . . . . . . . . . . . . . . 1,176 807 Other liabilities . . . . . . . . . . . . . . . . 221 210 Minority interest . . . . . . . . . . . . . . . . 505 459 Stockholders' equity. . . . . . . . . . . . . . . 385 380
-10- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE L. Other Commitments and Contingencies. ARCO has commitments, including those related to the acquisition, construction and development of facilities, all made in the normal course of business. At March 31, 1996 and December 31, 1995, there were contingent liabilities primarily with respect to guarantees of securities of other issuers of approximately $32 million and $29 million, respectively. Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking compensatory and punitive damages and injunctions were filed by the State of Alaska, the United States and private plaintiffs against Exxon, Alyeska Pipeline Service Company ("Alyeska"), and Alyeska's owner companies (including ARCO, which owns approximately 21%). Alyeska and its owner companies have settled the civil damage claims by federal and state governments and the lawsuits by private plaintiffs. Certain issues relating to liability for the spill remain unresolved between the Exxon companies, on the one hand, and Alyeska and its owner companies, on the other hand. ARCO and former producers of lead pigments have been named as defendants in cases filed by a municipal housing authority, three purported classes and several individuals seeking damages and injunctive relief as a consequence of the presence of lead-based paint in certain housing units. ARCO is also the subject of or party to a number of other pending or threatened legal actions. In October 1995, the State of Montana presented to ARCO a second revised demand for damages of $713 million based on alleged injuries to natural resources resulting from ARCO's mining and mineral processing businesses formerly operated by Anaconda, ARCO's predecessor, in Montana. ARCO is contesting this demand. ARCO is subject to other loss contingencies pursuant to federal, state and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, including the restoration of natural resources located at these sites and damages for loss of use and non-use values. ARCO is currently participating in environmental assessments and cleanups under these laws at federal Superfund and state-managed sites, as well as other clean-up sites. ARCO may in the future be involved in additional environmental assessments and cleanups, including the restoration of natural resources and damages for loss of use and non-use values. The amount of such future costs will depend on such factors as the unknown nature and extent of contamination, the unknown timing, extent and method of remedial actions which may be required and the determination of ARCO's liability in proportion to other responsible parties. In addition, environmental loss contingencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO. ARCO continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the magnitude of remediation costs, experience gained from sites on which remediation has been completed, the timing and extent of remedial actions required by the applicable governmental authorities and an evaluation of the amount of ARCO's liability considered in light of the liability and financial wherewithal of the other responsible parties. At March 31, 1996, the environmental remediation reserve was $652 million. As the scope of ARCO's obligations becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against ARCO's earnings. -11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE L. Other Commitments and Contingencies (Continued). ARCO's environmental remediation reserve covers federal Superfund and state-managed sites as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. ARCO has been named a potentially responsible party (PRP) for 113 sites. The number of PRP sites in and of itself is not a relevant measure of liability, because the nature and extent of environmental concerns varies by site and ARCO's share of responsibility varies from sole responsibility to very little responsibility. ARCO reviews all PRP sites, along with other sites as to which no claims have been asserted, in estimating the amount of the reserve. ARCO's future costs at these sites could exceed the amount accrued by as much as $700 million. Approximately 40% of the reserve related to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total reserve. Substantially all amounts accrued are expected to be paid out over the next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various insurance companies and other third parties. Most of these claims have been resolved. ARCO has neither recorded any asset nor reduced any liability in connection with unresolved claims. Although any ultimate liability arising from any of the matters described herein could result in significant expenses or judgments that, if aggregated and assumed to occur within a single fiscal year, would be material to ARCO's results of operations, the likelihood of such occurrence is considered remote. On the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on ARCO's consolidated financial statements. The operations and consolidated financial position of ARCO continue to be affected from time to time in varying degrees by domestic and foreign political developments as well as legislation, regulations and litigation pertaining to restrictions on production, imports and exports, tax increases, environmental regulations, cancellation of contract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on ARCO vary greatly and are not predictable. These uncertainties are part of a number of items that ARCO has taken and will continue to take into account in periodically establishing reserves. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Quarter 1996 vs. First Quarter 1995 Consolidated Earnings The earnings increase in 1996 primarily reflected higher crude oil and natural gas prices, growing international and U.S. natural gas volumes and lower interest expense, partially offset by a decline in earnings from ARCO's chemical businesses, in particular its equity interest in Lyondell Petrochemical Company ("Lyondell"). The 1996 first quarter included a net benefit from special items of approximately $28 million after tax. Benefits from insurance settlements and the sale of an interest in a crude oil pipeline were partially offset by final charges for previously reported personnel reductions and by other remediation-related charges. Revenues
Millions 1996 1995 ---- ---- Sales and other operating revenues Upstream . . . . . . . . . . . . . . . . $2,211 $2,156 Downstream . . . . . . . . . . . . . . . 2,976 2,941 Intersegment eliminations. . . . . . . . (653) (853) ----- ----- Total. . . . . . . . . . . . . . . . $4,534 $4,244 ===== =====
The increase in upstream sales and other operating revenues resulted primarily from higher crude oil and natural gas prices, increased natural gas marketing activity and higher natural gas produced volumes. Third- party sales of natural gas (proprietary and marketed volumes) increased to 3.4 billion cubic feet per day in the 1996 first quarter, up from 2.8 billion cubic feet per day in the 1995 first quarter. The majority of the increase was generated by Vastar Resources, Inc. ("Vastar"), where revenues increased from $489 million in first quarter 1995 to $759 million in first quarter 1996. The increased revenues from natural gas marketing activity were substantially offset by decreased crude oil marketing activity, as third party sales of petroleum liquids declined by 126,600 barrels per day in the 1996 first quarter, compared to the 1995 first quarter. Downstream sales and other operating revenues increased because of higher refined products volumes and prices. This increase was offset by a net decline in chemical products prices and volumes. Revenues of ARCO Chemical Company ("ARCO Chemical") decreased from $1,141 million in the 1995 first quarter to $982 million in the 1996 first quarter. The higher average crude oil and natural gas prices realized by ARCO reflected a strong surge in prices throughout the first quarter of 1996. The combination of a colder than normal winter and a low level of inventories led to the increased prices. The price for West Texas intermediate crude oil fluctuated between $21.20 and $25.19 per barrel during the month of April, with recent prices close to the bottom of that range. -13- The decrease in 1996 Income From Equity Investments primarily reflected a decline in earnings from ARCO's 49.9% equity interest in Lyondell. The increase in 1996 Other Revenues primarily reflected insurance settlements. Expenses Trade purchases were higher primarily as a result of higher natural gas marketing activity and prices, partially offset by decreased crude oil trading activity. The higher operating expenses in 1996 were primarily incurred by the Company's refining and marketing and coal operations. These higher operating expenses reflected the impact of refinery turnarounds, a charge related to environmental and other remediation associated with refining and marketing operations and unscheduled maintenance and two longwall moves associated with coal operations. The lower interest expense reflected lower average long- and short- term debt balances outstanding and lower average short-term rates in 1996. Unusual items consisted of final charges for previously reported personnel reductions. Upstream Earnings
Millions (after tax) 1996 1995 ---- ---- Oil & Gas. . . . . . . . . . . . . . . $275 $195 Coal . . . . . . . . . . . . . . . . . $ 5 $ 16
ARCO's earnings from worldwide oil and gas exploration and production operations benefited from higher crude oil and natural gas prices and growth in natural gas volumes. Worldwide exploration expenses were $100 million in the 1996 first quarter, compared to $90 million in last year's first quarter. The higher exploration expense was primarily geological and geophysical and dry hole costs in Vastar's natural gas operations. Average Oil & Gas Prices
1996 1995 ---- ---- U.S. Crude oil - per bbl Alaska . . . . . . . . . . . . . . $13.10 $10.62 Lower 48, including Vastar. . . . . $17.17 $15.53 Composite average price . . . . . . $14.17 $11.87 Natural gas - per mcf . . . . . . . . $ 1.58 $ 1.33 International Crude oil - per bbl. . . . . . . . . . $17.72 $16.32 Natural gas - per mcf. . . . . . . . . $ 2.60 $ 2.57
-14- Petroleum Liquids and Natural Gas Production
1996 1995 ---- ---- Net Production U.S. Petroleum liquids bbld . . . . . . . . 579,700 603,000 Natural gas mmcfd. . . . . . . . . . . 1,055 1,031 Barrels of oil equivalent (BOE). . . . 755,500 774,900 International Petroleum liquids bbld . . . . . . . . 64,900 60,600 Natural gas mmcfd. . . . . . . . . . . 793 640 BOE. . . . . . . . . . . . . . . . . . 197,100 167,300
The reduction in U.S. petroleum liquids production primarily resulted from natural field declines in Alaska, where natural field declines in the Prudhoe Bay and Kuparuk River fields were only partially offset by increased production from the Point McIntyre Area. The overall decline in petroleum liquids in the United States was partially offset by increased international production related to new production from the Blenheim oil field in the U.K. North Sea. The increase in U.S. natural gas production primarily resulted from various Gulf of Mexico fields and from the San Juan Basin, which are owned and produced by Vastar. ARCO holds an 82.3% interest in Vastar. The record international natural gas volumes in 1996 reflected increased production from ARCO's offshore Indonesia gas fields, ARCO's new South China Sea natural gas field, Yacheng 13, which began sales into Hong Kong on January 1, 1996, and the Southern Gas Basin in the North Sea. Each of these three areas increased production by approximately 50 million cubic feet per day compared to the 1995 first quarter. Coal Operations The earnings decline in 1996 reflected higher operating costs, primarily because of unscheduled maintenance and two longwall moves and lower average U.S. coal prices. Increased U.S. sales volumes of approximately 840,000 tons were more than offset by lower average prices for U.S. coal. Higher average prices for Australian coal were offset by a sales decrease of approximately 400,000 tons of Australian coal. Australian production was down as the result of inclement weather and other factors. Downstream Earnings
Millions (after tax) 1996 1995 ---- ---- Refining and marketing . . . . . . . . . . . . . $15 $ 22 Transportation . . . . . . . . . . . . . . . . . $60 $ 50 Intermediate chemicals and specialty products. . $97 $115
-15- Refining and Marketing Operations The refining and marketing results reflected the benefits of increased products sales volumes and prices offset by higher crude oil costs and the impact of refinery turnarounds. The 1996 results included an after-tax charge of approximately $8 million related to environmental and other remediation. The Company expects margins to improve in the second quarter, after the completion of turnarounds at the end of April, as product price increases catch up with crude oil price increases. Sales prices for the Company's refined products have increased, particularly in California, as a result of increasing prices for the feedstock for those refined products, clean-air standards in California that require specially formulated gasoline that is more expensive to produce than traditional fuel and production problems at refineries serving California. West Coast Petroleum Products Sales
Volumes (barrels/day) 1996 1995 ---- ---- Gasoline. . . . . . . . . . . . . . . . 261,300 251,500 Jet . . . . . . . . . . . . . . . . . . 106,100 93,900 Distillate. . . . . . . . . . . . . . . 75,000 66,700 Other . . . . . . . . . . . . . . . . . 67,300 50,500 ------- ------- Total . . . . . . . . . . . . . . . . 509,700 462,600 ======= =======
Transportation Operations The 1996 transportation results included a net benefit of approximately $15 million after tax primarily related to a gain on the sale of ARCO's interests in the Platte pipeline. Additionally, Trans Alaska Pipeline System volumes decreased 5% compared to the first quarter of 1995, while tariff revenues were also lower. Intermediate Chemical and Specialty Products For the intermediate chemicals and specialty products segment, reflecting ARCO's 82.8% interest in ARCO Chemical, the 1996 earnings decline primarily reflected lower volumes for most products and reductions in styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE") margins. The lower SM and MTBE margins more than offset higher propylene oxide ("PO") and derivatives margins. Lower worldwide SM demand resulted in significantly lower SM margins as SM prices decreased more than raw materials costs. MTBE margins declined as a result of lower domestic prices and short-term operating problems at a European plant. Domestic MTBE prices decreased from first quarter 1995 levels when MTBE prices were affected by the high market price of methanol, an MTBE feedstock. Propylene oxide and derivatives margins improved primarily as a result of higher sales prices for PO derivatives and lower raw materials costs. PO derivative prices were higher primarily due to price increases implemented during mid-1995. The higher PO and derivatives margins were partially partially offset by lower PO and derivatives volumes. -16- Equity Affiliate ARCO earned $12 million from its 49.9% equity interest in Lyondell in the first quarter of 1996, compared to $64 million in the first quarter of 1995. The decline in earnings resulted primarily from a significant drop in petrochemicals margins and a major decrease in methanol sales prices. Liquidity and Capital Resources
Millions 1996 ---- Cash flow provided (used) by: Operations . . . . . . . . . . . . . . . . $ 840 Investing activities . . . . . . . . . . . $(548) Financing activities . . . . . . . . . . . $(203)
The net cash used by investing activities in the first quarter 1996 included expenditures for additions to fixed assets of $352 million and an increase in short-term investments of $218 million. The Company expects total capital expenditures to approximate $2 billion for the full year 1996. The net cash used in financing activities in the first quarter of 1996 included repayments of long-term debt of $79 million and dividend payments of $222 million, partially offset by an increase of $72 million in the Company's short-term debt position and proceeds of $45 million from the issuance of long-term debt. Cash and cash equivalents and short-term investments totaled $3.4 billion, and short-term borrowings were $1.2 billion at the end of the first quarter of 1996. During the first quarter of 1996, ARCO purchased 125,000 shares of its common stock and contributed them to treasury in order to satisfy ARCO's obligations upon conversion of the $3.00 and $2.80 Preference Stocks and upon exercise of stock options. It is expected that future cash requirements for capital expenditures, dividends and debt repayments will come from cash generated from operating activities, existing cash balances, and future financings. At this time it is not considered likely that there will be an underwritten public equity offering by a subsidiary similar to that by Vastar in July 1994. Conversion of LUKoil Bonds ARCO purchased an additional 94,764 bonds convertible into 2.2% of the total outstanding shares of the Russian oil company LUKoil for $88.8 million. The transaction closed in April 1996. On April 6, 1996, the 94,764 bonds, along with 241,080 bonds purchased by ARCO in September 1995, were mandatorily converted into 57,093,480 shares of LUKoil, which is equivalent to approximately 8% of the total shares of LUKoil and an 8.8% ownership of LUKoil's voting shares. -17- Statements of Financial Accounting Standards Not Yet Adopted In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires companies to adopt its provisions for fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair value-based method of accounting for an employee stock option or similar equity instrument, but allows continued use of the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees." Companies electing to continue to use APB No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value- based method of accounting had been applied. ARCO will continue to follow the provisions of APB No. 25 and accordingly, will make the pro forma disclosures, if material, required by SFAS No. 123 in its financial statements for the year ended December 31, 1996. ____________________ Management cautions against projecting any future results based on present earnings levels because of economic uncertainties, the extent and form of existing or future governmental regulations and other possible actions by governments. -18- PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to the Company's 1995 Form 10-K Report for information on legal proceeding matters reported therein. Item 4. Submission of Matters to a Vote of Security Holders. The Company's annual meeting of stockholders was held on May 6, 1996. The stockholders elected all the Company's nominees for director and approved the appointment of Coopers & Lybrand L.L.P. as the Company's independent auditors for 1996. The votes were as follows: 1. Election of Directors.
For Withheld ----------- --------- Ronald J. Arnault 136,973,819 3,402,842 Mike R. Bowlin 137,836,634 2,540,027 Lodwrick M. Cook 137,225,971 3,150,690 Richard H. Deihl 137,999,487 2,377,174 Hanna H. Gray 137,752,074 2,424,587 Philip M. Hawley 137,725,279 2,651,382 David T. McLaughlin 138,052,803 2,323,858 Henry Wendt 138,118,424 2,258,237
2. Approval of appointment of Coopers & Lybrand L.L.P. For 138,831,995 Against 967,333 Abstain 577,333
In addition, the stockholders voted on the Stockholder's proposal with respect to guidelines for country selection. For 7,875,043 Against 108,506,556 Abstain 11,686,769 Broker Non-Votes 12,308,293
Item 5. Other Information. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the new "safe harbor" provisions contained in Section 27A of the Private Securities Litigation Reform Act and is including this statement in its first quarter 1996 Form 10-Q in order to do so. The Reform Act did not become law until late 1995. -19- Item 5. Other Information (Continued). From time to time ARCO's management may wish to make forward-looking statements to inform more fully existing and potential security holders regarding various matters, including without limitation, projections regarding future income, oil and gas production, production and sales volumes of refined petroleum products and petrochemicals, replacement of oil and gas reserves, capital spending, as well as predictions as to the timing and success of specific projects. Such forward-looking statements are generally accompanied by words such as estimate, project, predict, or expect, that convey the uncertainty of future events or outcomes. The factors identified in this statement are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward looking statement made by or on behalf of the Company. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward looking projections. The Company does not intend to update these cautionary statements. UPSTREAM FACTORS AFFECTING PERFORMANCE Volatility and Level of Crude Oil and Gas Prices The Company's projections as to the level of future earnings are based on certain assumptions as to the future prices of crude oil and natural gas. These price assumptions are used for planning purposes and the Company expects they will change over time. Any substantial or extended decline in the actual prices of crude oil and natural gas could have a material adverse effect on the Company's financial position, results of operations and on quantities of crude oil and natural gas reserves that may be economically produced. These prices historically have been volatile and may vary based on factors affecting commodities markets generally, such as political instability in producing regions, changes in market demand, and fluctuations in political, regulatory and economic climates throughout the world. Ability to Maintain Production Rates and Replace Reserves Projecting future rates of oil and gas production is inherently imprecise. Producing oil and gas reservoirs generally have declining production rates. Production rates depend on a number of factors, including crude oil prices, market demand, and the political, economic and regulatory climate. The other major factor affecting production rates is the Company's ability to replace depleting reservoirs with new reserves through acquisition or exploration success. Exploration success is impossible to predict particularly over the short term, where results vary widely year to year; moreover, the ability to replace reserves over an extended period depends not only on the total volumes found, but on the cost of finding and developing such reserves. Depending on the general crude oil price environment, the Company's finding and development costs may not justify the use of resources to produce such reserves. There can be no assurances as to the level or timing of success, if any, that the Company will be able to achieve in acquiring or finding and developing additional reserves. -20- Item 5. Other Information (Continued). DOWNSTREAM FACTORS AFFECTING PERFORMANCE A substantial proportion of the Company's total income for the foreseeable future is expected to come from operations downstream of oil and gas production and sale, chiefly refining and marketing of gasoline and other products and chemical operations. It is possible that the Company could meet its projections for upstream operations and still fail to meet overall projections made in various forward looking statements. Products The Company conducts significant refining and marketing operations in the five western states. Results of these operations will be significantly affected by changes in the volumes sold and the prices received on those volumes. These, in turn, are influenced by such factors as the general economic condition of the western states, which affects the overall demand for gasoline and other refined products, the actions taken by competitors, including both pricing and the expansion and retirement of refining capacity in response to market conditions, environmental regulations issued by the state and federal government, including particularly regulations dealing with gasoline composition and characteristics. Overall profitability of the Company's refining and marketing operations depends heavily on the margin between the price of crude oil and/or purchased products and the sales price of products produced and/or purchased. These margins may fluctuate depending upon changes in the price of crude oil and the relative supply/demand balance for products. Political constraints either in the form of express legal requirements or general political pressure may also limit the margins otherwise available to the Company. The Company's projections as to the level of future earnings are dependent on producing and selling an increasing volume of refined products and achieving products margins substantially higher than those realized in 1995. Products volumes and margins historically have been volatile and may vary with factors such as the national and regional economy, market demand, regulatory changes, the price of crude oil, and the ability of regional refiners and the Company to provide a sufficient supply of refined products. Chemical Operations ARCO derives a material portion of its net income from the chemical operations of its affiliates. Results of its chemical operations are influenced by changes in the cost of raw materials, the availability of substitutes, changes in the supply/demand balance, and actions taken by competitors to increase or decrease their production volumes. Earnings with respect to chemical operations typically are cyclical and show marked responses to changes in the overall economic climate. The Company's projections as to the level of future earnings are dependent on achieving volumes and margins for propylene oxide that are significantly above those realized in 1995. Volumes and margins for these petrochemical products are strongly influenced by national and world economic growth, market demand, the availability of substitutes, regulatory changes, the cost of raw materials, and the worldwide capacity to produce these petrochemical products. EFFECT OF POLITICAL AND REGULATORY INSTABILITY ON COMPANY'S OPERATIONS The Company's ability to conduct acquisition, exploration, development and production of oil and gas interests is dependent on the political and regulatory climate in the particular geographic regions where the properties are located. The Company's ability to negotiate and implement specific products in a timely and favorable manner may be impacted -21- Item 5. Other Information (Continued). by political considerations unrelated to or beyond the control of the Company. Political instability may result in insurgencies and military operations that could interfere with the Company's operating facilities located throughout the world. Possible political and regulatory actions by governments may affect future results in unpredictable ways. OPERATING HAZARDS The Company's drilling operations are subject to various hazards common to the industry, including explosions, fires, and uncontrollable flows of oil and gas. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions. Similarly, the Company's refining and petrochemical operations are subject to explosions, fires, and damage from severe weather conditions. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27 Financial Data Schedule. (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed during the quarter ended March 31, 1996 and through the date hereof. -22- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATLANTIC RICHFIELD COMPANY (Registrant) Dated: May 8, 1996 /s/ ALLAN L. COMSTOCK ----------------------------- ALLAN L. COMSTOCK Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) -23- EX-27 2 FINANCIAL DATA SCHEDULE 3-MONTHS MAR. 1996
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 3-MOS DEC-31-1996 MAR-31-1996 $ 1,624 1,779 1,670 0 935 6,302 32,995 17,533 24,508 4,331 6,668 0 1 402 6,484 24,508 4,534 4,760 3,426 3,526 26 0 173 620 220 370 0 0 0 370 $ 2.26 $ 2.26
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