-----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, LfolRQ+cC6F1/m+XetpcU1N6qLMoK2LaTlZxTmQxnm/OW9c7ngMvEt/53gpHQUKW +VnoBcWl2OJfd/Nd8n+uqw== 0000898430-99-000635.txt : 19990224 0000898430-99-000635.hdr.sgml : 19990224 ACCESSION NUMBER: 0000898430-99-000635 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990223 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-K405 SEC ACT: SEC FILE NUMBER: 001-01196 FILM NUMBER: 99548038 BUSINESS ADDRESS: STREET 1: 515 S FLOWER ST CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134863511 10-K405 1 FORM 10-K405 FOR PERIOD ENDED 12/31/1998 1998 ---------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1998 Commission file number 1-1196 [LOGO OF ARCO] Atlantic Richfield Company (Exact name of registrant as specified in its charter) Delaware 23-0371610 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 South Flower Street, Los Angeles, California 90071 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 486-3511 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ------------------------------- Common Stock ($2.50 par value) New York Stock Exchange Pacific Exchange, Inc. Elektronische Borse Schweiz EBS London Stock Exchange $3.00 Cumulative Convertible Preference New York Stock Exchange Stock ($1 par value) Pacific Exchange, Inc. $2.80 Cumulative Convertible Preference New York Stock Exchange Stock ($1 par value) Pacific Exchange, Inc. Twenty year 10 7/8% Debentures Due July 15, 2005 New York Stock Exchange Thirty year 9 7/8% Debentures Due March 1, 2016 New York Stock Exchange Twenty-five year 9 1/8% Debentures Due March 1, 2011 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by nonaffiliates of the registrant on December 31, 1998, based on the closing price on the New York Stock Exchange composite tape on that date, was $21,221,156,300. Number of shares of Common Stock, $2.50 par value, outstanding as of December 31, 1998: 321,315,367. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998 are incorporated by reference under Part III. TABLE OF CONTENTS PART I
Item Page ---- ---- 1. and 2. Business and Properties....................................... 1 The Company................................................. 1 Review of 1998.............................................. 1 Worldwide Exploration and Production Operations............. 2 Refining and Marketing...................................... 9 All Other Operations........................................ 10 Discontinued Operations..................................... 11 Capital Program............................................. 11 Patents..................................................... 11 Competition................................................. 12 Human Resources............................................. 12 Research and Development.................................... 12 Environmental Matters....................................... 13 3. Legal Proceedings............................................. 17 4. Submission of Matters to a Vote of Security Holders........... 20 ---------------- Executive Officers of the Registrant.......................... 21 Description of Capital Stock.................................. 23 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................... 27 6. Selected Financial Data....................................... 28 7. and 8. Management's Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data............................................ 29 Index to Consolidated Financial Statements and Financial Statement Schedule.......................................... 29 Independent Accountant's Report............................. 30 Operating Review............................................ 31 Results of Segment Operations.............................. 32 Consolidated Statement of Income........................... 35 Results of Consolidated Operations......................... 36 Consolidated Balance Sheet................................. 38 Consolidated Statement of Cash Flows....................... 39 Analysis of Cash Flows and Financial Condition............. 40 Market-Sensitive Instruments and Risk Management........... 41 Consolidated Statement of Changes in Stockholders' Equity.. 43 Safe Harbor for Forward-Looking Statements................. 44 Year 2000 Issue............................................ 45 Notes to Consolidated Financial Statements................. 46 Supplemental Information (Unaudited)....................... 60 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 64
(i) TABLE OF CONTENTS--(Continued) PART III
Item Page ---- ---- 10. Directors and Executive Officers of the Registrant.................. 64 11. Executive Compensation.............................................. 64 12. Security Ownership of Certain Beneficial Owners and Management...... 64 13. Certain Relationships and Related Transactions...................... 64 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 64
(ii) PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES THE COMPANY The company began operations in 1866 as the Atlantic Petroleum Storage Company. The company's present name, Atlantic Richfield Company (ARCO), was adopted in 1966 after Richfield Oil Corporation was merged into the company. Sinclair Oil Corporation was merged into ARCO in 1969. ARCO acquired the Anaconda Company in 1977. ARCO became a Delaware corporation in 1985. ARCO's principal executive offices are currently at 515 South Flower Street, Los Angeles, California 90071 (Telephone 213-486-3511). During 1999 the principal executive offices will be moved to the ARCO Center, 333 South Hope Street, Los Angeles, California 90071. The telephone number will remain the same. You can find additional information about ARCO on our website at www.arco.com. ARCO is a global oil and gas enterprise operating in two segments, exploration and production (E&P) and refining and marketing (R&M). Its upstream exploration and production operations are focused primarily in Alaska, the Gulf of Mexico and the Midcontinent in the United States (largely through its 82% owned subsidiary, Vastar Resources, Inc. (Vastar)), China, Indonesia, the United Kingdom North Sea, Algeria and Venezuela. The Alaska oil production is integrated with ARCO's downstream refining and marketing operations in the western United States. These include two refineries, branded consumer marketing outlets in six western states and British Columbia, a marine fleet, and supporting pipelines and terminals. You will find financial information about our two segments in Note 2 of Notes to Consolidated Financial Statements on page 47. REVIEW OF 1998 Disposal of coal operations As part of ARCO's strategy to focus on its core hydrocarbon businesses, ARCO disposed of its U.S. coal operations to Arch Coal in June 1998. These included its Black Thunder and Coal Creek mines in Wyoming, its West Elk mine in Colorado, and its 65% interest in three mines in Utah for a total consideration of approximately $1.1 billion. In early 1999, ARCO sold two of its coal properties in Australia, the Blair Athol mine for $226.5 million and the Gordonstone mine for $150 million. During the third quarter of 1998, ARCO recorded a net after-tax charge of $92 million in connection with its divestiture of its coal businesses. Disposal of chemical operations On July 28, 1998, ARCO completed the sale of its 80,000,001 shares of ARCO Chemical stock to its former subsidiary, Lyondell Petrochemical Company for $57.75 per share, or for total cash proceeds of approximately $4.6 billion. The sale was pursuant to a public tender offer by Lyondell for all of the outstanding shares of ARCO Chemical stock. ARCO recorded a net after-tax gain of $1.1 billion in the third quarter of 1998. Acquisition and disposition of certain E&P operations On June 29, 1998, ARCO purchased the outstanding common stock of Union Texas Petroleum Holdings, Inc. (UTP) for a purchase price of approximately $2.5 billion, or $29 per share. ARCO also purchased substantially all of UTP's 7.14% Series A Cumulative Preferred Stock for approximately $200 million, or $122 per share. ARCO made both purchases pursuant to public tender offers for the two classes of equity securities. UTP was a U.S.-based, non-integrated oil and gas company with substantially all of its oil and gas producing operations conducted outside of the U.S. Following the completion of the tender offers, UTP ceased to be a public company and ceased filing reports with the SEC under the 1934 Securities Exchange Act effective July 30, 1998. The results of operations of UTP have been included in the consolidated financial statements of ARCO beginning July 1, 1998. As a result of lower expected crude oil prices, ARCO 1 announced in January 1999 that it had taken an after-tax charge of $507 million for the impairment of oil and gas assets acquired from UTP. This charge was part of ARCO's total impairment charge of $925 million after-tax for 1998. The impairment charge was largely based on ARCO's downward revision of its price expectations for West Texas Intermediate crude oil: $15 per barrel for 1999, $16 for 2000 and $17 for 2001 and beyond. The principal assets acquired from UTP include properties in the United Kingdom North Sea, Indonesia and Venezuela. ARCO also acquired interests in three oil concessions in the Badin area of Pakistan, the Alpine field in Alaska and a 41.67% interest in the Geismar petrochemical plant in Louisiana. ARCO expects to enter into an agreement to sell the petrochemical operations. In October 1998, ARCO exchanged its California heavy crude oil properties in the San Joaquin Valley for exploration acreage and producing properties in the Gulf of Mexico. The California properties had average production of 37,000 barrels per day (BPD) in October 1998, and accounted for proved reserves of 148 MMBOE. In connection with the disposition of the heavy crude oil properties, ARCO took an impairment writedown of $114 million after-tax in 1998. Effective October 31, 1998, ARCO sold the subsidiary holding the Gulf of Mexico properties to Vastar for a net purchase price of approximately $437 million comprised of cash and the assumption of $300 million of indebtedness. Vastar added approximately 60 MMBOE of proved reserves as a result of this acquisition. Global cost restructuring program In October 1998, ARCO announced it was undertaking a worldwide cost reduction program designed to reduce (1) upstream and downstream operating and support costs; (2) exploration spending; and (3) costs for the corporate center and support services. In connection with this cost reduction program, ARCO is increasing its focus on its core exploration and production areas, and plans to divest non-strategic assets, which the company believes will facilitate the cost reductions. ARCO estimates that these cost reductions will save $350 million in 1999 and rise to annual cost savings of $500 million by 2000. ARCO took a $170 million net after-tax charge in the 1998 fourth quarter for these cost reductions. ARCO is also reducing capital spending (additions to fixed assets) by at least 25% to $2.7 billion. See "Capital Program" at page 11. WORLDWIDE EXPLORATION AND PRODUCTION OPERATIONS General ARCO conducts its worldwide oil and gas exploration and production operations primarily in the United States, China, Indonesia, the United Kingdom North Sea, Algeria and Venezuela. Reserves Proved oil and gas reserves at December 31, 1998 - --------------------------------------------------------------------------------
Petroleum Liquids Natural Gas (Million barrels) (Billion cubic feet) ------------------------ ------------------------ U.S.(a) International(b) U.S.(c) International(d) ------- ---------------- ------- ---------------- Proved reserves......... 2,043 799 5,117 4,727 Proved developed reserves............... 1,582 328 4,480 2,830
-------- (a) Includes 185 million barrels (MMB) proved and 109 MMB developed attributable to Vastar. (b) Includes 61 MMB proved and 36 MMB developed attributable to the equity interest in the LUKARCO joint venture. (c) Includes 2,590 billion cubic feet (BCF) proved and 2,071 BCF developed attributable to Vastar. (d) Includes 401 BCF proved and 344 BCF developed attributable to the equity interest in the LUKARCO joint venture. You can find additional information concerning oil and gas producing activities and estimates of proved oil and gas reserves under the caption Supplemental Information, Oil and Gas Producing Activities, beginning on page 60. 2 Production Production Volumes - --------------------------------------------------------------------------------
Natural Gas Petroleum Liquids (Million cubic feet (Barrels per day) per day) --------------------- --------------------- Years Ended December 31, U.S.(a) International U.S.(b) International ------------ ------- ------------- ------- ------------- 1998............................. 527,600 123,200 1,175 929 1997............................. 557,900 82,600 1,066 844 1996............................. 564,500 66,100 1,044 730
-------- (a) Includes 50,100, 50,700 and 48,800 barrels per day produced by Vastar in 1998, 1997, and 1996, respectively. (b) Includes 988, 882 and 872 million cubic feet per day (MMCFD) produced by Vastar in 1998, 1997, and 1996, respectively. Average sales prices and production costs - --------------------------------------------------------------------------------
Years Ended December 31, ------------------------------------------------------------- 1998 1997 1996 ------------------- -------------------- -------------------- U.S. International U.S. International U.S. International ----- ------------- ------ ------------- ------ ------------- Average sales price (including transfers) per barrel of petroleum liquids produced....... $9.43 $11.07 $15.63 $18.20 $16.07 $19.02 Average lifting cost per equivalent barrel of production............. 3.34 3.73 3.85 4.07 3.86 4.14 Average sales price per thousand cubic feet (MCF) of natural gas produced............... 1.82 2.54 2.04 2.64 1.80 2.54
Exploration and Drilling Activity Wells drilled to completion - --------------------------------------------------------------------------------
Years Ended December 31, ----------------------------------------------------------------- 1998 1997 1996 --------------------- --------------------- --------------------- U.S.(a) International U.S.(b) International U.S.(c) International ------- ------------- ------- ------------- ------- ------------- Net productive exploratory wells drilled................ 32 10 33 3 28 2 Net dry exploratory wells drilled.......... 29 10 27 10 48 7 Net productive development wells drilled................ 573 27 563 23 332 23 Net dry development wells drilled.......... 37 -- 37 -- 33 --
-------- (a) Includes 23, 16, 187, and 35 wells, respectively, drilled by Vastar. (b) Includes 18, 15, 162, and 27 wells, respectively, drilled by Vastar. (c) Includes 17, 29, 156, and 25 wells, respectively, drilled by Vastar. 3 Current drilling activities, as of December 31, 1998 - --------------------------------------------------------------------------------
U.S. International ---- ------------- Gross wells in process of drilling (including wells temporarily suspended).................................. 51 18 Net wells in process of drilling (including wells temporarily suspended).................................. 34 7 Waterflood projects in process........................... 4 -- Enhanced oil recovery operations......................... 63 3
Number of productive wells at December 31, 1998 - --------------------------------------------------------------------------------
Oil Gas --------------------------- --------------------- U.S.(a)(b) International(c) U.S.(d) International ---------- ---------------- ------- ------------- Total gross productive wells.................... 9,458 704 3,679 255 Total net productive wells.................... 3,930 271 1,820 76
-------- (a) Includes approximately 1,688 gross and 352 net multiple completions for ARCO, of which there are 402 gross and 184 net multiple completions for Vastar. (b) Includes approximately 1,536 gross and 774 net wells, respectively, attributable to Vastar. (c) Includes approximately 89 gross and 36 net multiple completions. (d) Includes approximately 2,851 gross and 1,473 net wells, respectively, attributable to Vastar. Petroleum rights acreage as of December 31, 1998(a) - --------------------------------------------------------------------------------
Developed Undeveloped Acreage Acreage ----------- -------------- Net Gross Net Gross ----- ----- ------ ------- (thousands) U.S. Alaska........................................... 208 341 984 1,618 Lower 48(b)...................................... 1,888 3,224 3,123 4,960 ----- ----- ------ ------- Total U.S...................................... 2,096 3,565 4,107 6,578 International...................................... 295 669 64,027 123,787 ----- ----- ------ ------- Total.......................................... 2,391 4,234 68,134 130,365 ===== ===== ====== =======
-------- (a) Includes options and exploration rights. (b) Includes 1,539 net developed acreage, 2,468 gross developed acreage, 2,815 net undeveloped acreage and 4,243 gross undeveloped acreage, respectively, held by Vastar. Delivery Commitments ARCO has various long-term natural gas sales contracts covering the majority of its production in Indonesia, the United Kingdom North Sea, and China. ARCO's various annual delivery obligations under these contracts are substantially limited to producible reserves from specific fields. In the Lower 48, Vastar has various long-term natural gas sales contracts. In connection with the formation in 1997 of Southern Company Energy Marketing L.P. (SCEM), a strategic alliance limited partnership with the Southern Company, Vastar entered into a gas purchase and sale agreement with SCEM. The primary term expires December 31, 2007 and the prices are market-based. The contract covers substantially all of the gas produced and owned or controlled by Vastar. Excluded from this contract is gas which Vastar is committed to deliver under certain longer-term gas marketing contracts with cogeneration facilities pursuant to which Vastar delivered an average of 72 MMCFD in 1998. These long- term contracts have an average remaining contract term of approximately 12 years. In 1998, the average price of gas sold under these contracts was approximately $2.62 per MCF. There have been no instances in the last three years in which 4 Vastar was unable to meet any significant natural gas delivery commitment. Alaska Approximately 53% of ARCO's worldwide petroleum liquids production came from ARCO's interests in Alaska, primarily in the Prudhoe Bay, Greater Kuparuk Area and the Greater Point McIntyre Area fields on the North Slope of Alaska. ARCO's net liquids production from Alaska in 1998 decreased 8% to 346,700 BPD. ARCO's interests in Alaska included net proved reserves of 1,857 MMBOE at December 31, 1998. ARCO operates the eastern half of the Prudhoe Bay field and has a 21.87% working interest in the oil rim production from the field and a 42.56% working interest in the gas cap production. ARCO's net petroleum liquids production from the Prudhoe Bay field averaged 175,300 BPD in 1998, compared to 198,500 BPD in 1997. ARCO is the sole operator in the Greater Kuparuk Area, which includes the Kuparuk River field and three satellite fields. ARCO holds a 55.2% working interest in each of these fields. ARCO's share of production from the Kuparuk River field was 123,000 net BPD of petroleum liquids during 1998, compared to 128,200 net BPD during 1997. The Kuparuk Large Scale Enhanced Oil Recovery (EOR) Project, which began operations in September 1996, added 15,000 net barrels of oil to daily production by the end of 1998. EOR production is expected to increase further in 1999. ARCO has working interests in five of six Greater Point McIntyre Area fields as follows: 30.1% in Point McIntyre, 40.0% in Lisburne, and 50.0% in both West Beach and North Prudhoe Bay State. ARCO also has a working interest in the West Niakuk field; ARCO is currently negotiating the precise amount of its interest with the other owners of that field. All six of the fields are processed through the Lisburne Production Center, which ARCO operates. During 1998, liquids processed through the Lisburne Production Center averaged 169,700 gross BPD, or 41,500 net BPD. ARCO has several projects underway in Alaska that it expects will stop the decline in Alaska production after 1999. The $150 million Prudhoe Bay Miscible Injectant Expansion (MIX) project is designed to add 50 million gross barrels of petroleum liquids to ultimate field recovery and 20,000 net BPD of petroleum liquids production in late 1999. ARCO and its partners approved MIX in 1997 and expect it to become operational in 1999. ARCO commenced development of the Alpine field in 1998 and expects production to start up in mid 2000 at a gross rate of 40,000 BPD. Following its acquisition of an additional 22% working interest from UTP, ARCO has a 78% working interest in the field. A $44 million EOR project currently underway at Greater Point MacIntyre is expected to be completed by the end of 1999. ARCO also began production from four satellite fields at the end of 1997 and during 1998. Three of these satellite fields are in the Greater Kuparuk Area: Tarn, Tabasco, and West Sak. The Tarn field began production in July 1998, only nine months after receiving approval for development. Production also began from the Tabasco field, with a single producing well on-line. Additional drilling in Tabasco is underway. West Sak contributed production throughout 1998. Midnight Sun, the first satellite field in the Prudhoe Bay area, started up in the fourth quarter of 1998. Net production from these four satellite fields in 1998 averaged 6,100 BPD. ARCO transports all of the petroleum liquids produced from the North Slope fields to market through the Trans Alaska Pipeline System (TAPS), an 800-mile pipeline system that ties the North Slope of Alaska to the port of Valdez in south central Alaska. ARCO has a 22.2% weighted average undivided ownership interest in TAPS. ARCO also owns approximately 22% of the stock of Alyeska Pipeline Service Company, which constructed and now operates TAPS for the owners. ARCO's undivided interest in TAPS is proportionately consolidated in the Alaska E&P operations for financial reporting purposes. TAPS 1998 throughput averaged approximately 1,207,000 BPD. ARCO operates six ocean-going tankers that ship the liquids from Valdez to West Coast locations. 5 Lower 48 ARCO's consolidated Lower 48 operations had net production of 417 BCF of natural gas (including consumption) and 66 MMB of petroleum liquids in 1998 as compared to 385 BCF and 66 MMB in 1997. ARCO replaced 45% of Lower 48 1998 production on a BOE basis through its exploration and development activities and purchases (net of sales). The primary vehicle for ARCO's Lower 48 exploration and production operations is Vastar, of which ARCO owns 82%. Vastar, headquartered in Houston, Texas, explores for, develops, produces and markets natural gas and petroleum liquids in major producing basins in the Gulf of Mexico, the Gulf Coast, the San Juan Basin/Rockies and the Midcontinent areas. You can obtain additional information about Vastar, a copy of Vastar's 1998 Annual Report to Stockholders and 1998 Annual Report on Form 10-K by writing to Manager, Investor Relations, Vastar Resources, Inc., 15375 Memorial Drive, Houston, Texas 77079. Vastar's telephone number is (281) 584-6000. After the disposition of its California heavy crude oil properties in the San Joaquin Valley in October 1998, ARCO's Lower 48 assets (other than Vastar) consist of oil and gas producing assets in the Permian Basin of west Texas and southeast New Mexico. These assets accounted for reserves at December 31, 1998 of 338 MMBOE, of which 72% were petroleum liquids. In 1998 net production from ARCO's other Lower 48 interests was 31 MMBOE, down from 57 MMBOE in 1997. ARCO announced in February 1999 that it and Chevron U.S.A. Production Company will pursue a combination of their oil and gas producing assets in the Permian Basin. If final agreement is reached, each company will own 50% of the joint venture. International ARCO expanded its international exploration and production operations in 1998 with the acquisition of UTP in June 1998. Production from former UTP interests in the United Kingdom North Sea, Indonesia and Venezuela was included in ARCO's consolidated financial statements beginning July 1, 1998. ARCO's 1998 international petroleum liquids production averaged 123,200 BPD, up from 82,600 BPD in 1997. Natural gas production in 1998 averaged 929 MMCFD, up from 844 MMCFD in 1997. ARCO's net proved reserves from its international interests at December 31, 1998 were 1,587 MMBOE. Principal properties acquired from UTP in the United Kingdom North Sea are the 15.5% working interest in the Alba oil field, which has been producing since 1994, the 9.42% unit interest in the Britannia gas field, which began production in 1998, the 20% working interest in the Piper and Claymore fields and a 25% working interest in the Sean fields. During 1998, ARCO and its partners continued development of the Shearwater gas condensate field in the Central Graben; start-up is expected in 2000. In September 1998, ARCO and Mobil entered into an agreement to combine offshore operations in the Southern North Sea through the creation of a joint venture in which each company will have a 50% interest. The partners expect to reduce operating costs and to make new, smaller fields economically attractive to develop using existing infrastructure. The interests currently held by each company in the individual Southern North Sea assets and licenses will remain unchanged. Details of the Southern Gas Basin combination are under negotiation between the two companies. In Indonesia, ARCO's acquisition of UTP gave ARCO its entry into the liquefied natural gas (LNG) business. The new Indonesian operations consist primarily of a 37.81% working interest in the East Kalimantan joint venture that produces natural gas and, to a lesser extent, oil and condensate from the Sanga Sanga block. Substantially all the natural gas produced by the joint venture is supplied to a liquefaction plant at Bontang Bay, pursuant to long- term contracts with Pertamina, the Indonesian national oil company. The Bontang plant converts the gas into LNG in parallel processing units called "trains." Seven trains are currently in operation and an eighth is under construction. ARCO's 1998 production from all Indonesian interests totaled 423 MMCFD. 6 During 1998, estimated gross resources in the giant Tangguh field increased to 14.4 trillion cubic feet (TCF). ARCO will operate the Wiriagar, Berau and Muturi fields that will feed gas to the Tangguh project. The planned two-train LNG production facility will be operated by an Indonesian company that will be jointly owned by Pertamina and the participants in those production sharing contracts that will supply gas to the plant. ARCO and Pertamina are jointly marketing the LNG. ARCO's Venezuelan operations consist of risked service contracts covering six blocks and an interest in a joint venture to produce and upgrade heavy oil. Under a risked service contract, the contractor is responsible for providing capital and technology for the redevelopment of the fields along with costs of operating existing production. In exchange for providing and funding overall operation and field development, the contractor is paid a per barrel service fee to cover reimbursement of costs plus profit. There are two components to the fees, which include (i) a set fee for contractual baseline production and (ii) a fee for incremental production. The fee for incremental production is based on a sliding scale incentive mechanism, which is indexed to a basket of international oil prices and overall field profitability. The Venezuelan government maintains full ownership of all hydrocarbons in the fields. ARCO acquired from UTP interests in two risked service contracts covering the Desarrollo Zulia Occidente (DZO) contract area (a 100% interest) and the Boqueron contract area (a 60% interest). In acquiring DZO, ARCO assumed a contingent liability for payments of up to a maximum of $15 million annually for six years based primarily on oil price levels. Given the current price environment, ARCO considers it unlikely these payments will ever be made. ARCO also signed risked service contracts covering the Kaki (56%), Maulpa (56%) and LL-652 (18%) blocks, as well as the La Vela exploration block. ARCO is the operator of the DZO and Boqueron blocks. Proved reserves and production quantities for Venezuelan operations are recorded based on ARCO's net working interest in each of the contract areas, "net" meaning reserves excluding royalties and interests owned by others per the contractual arrangements. Total production from ARCO's interests from the date of initial involvement was 6,099,000 barrels, or 16,700 barrels per day on a full-year basis. Production for the fourth quarter of 1998 averaged 32,000 barrels per day. These properties represented 166 MMBOE of net proved reserves at December 31, 1998. With the fall in worldwide crude prices, ARCO recorded a $190 million impairment to the capitalized cost of the DZO unit. ARCO is in discussions with the Venezuelan government on the terms of the DZO unit contract to improve the profitability under current oil prices. ARCO's long-term work program and investment in the DZO unit depend on the results of these discussions. ARCO's other interest in Venezuela consists of a 30% interest in the Hamaca joint venture to produce and upgrade extra heavy oil from the Orinoco Belt. As a result of the current low price environment, activities on the Hamaca project are progressing, but at a slower pace, by agreement of the parties. In China, ARCO operates the Yacheng--13 gas field, from which ARCO obtained net production of 133 MMCFD during 1998, down from 142 MMCFD in 1997. In August 1998, ARCO acquired a 25% interest in a major natural gas project in the Malaysia-Thailand Joint Development Area (JDA) in the Gulf of Thailand. ARCO purchased a 50% interest in the Triton Energy Limited subsidiaries that held Triton's interest in the JDA for a cash payment of $150 million and an agreement to fund half the development costs until first commercial production, up to a maximum of $377 million. Triton continues to hold a 25% interest in the JDA, and the other 50% is owned by the Malaysian national oil company Petronas. ARCO's operations in Algeria consist of the EOR project currently under development in the Rhourde El Baguel field. Under its agreements with Sonatrach, the Algerian state oil company, ARCO will receive up to 49% of the project's annual production. For 1998, ARCO reported net production of 21,100 BPD. 7 ARCO also holds a 46% interest in LUKARCO, a joint venture with the Russian oil company LUKOIL that holds a 54% interest. LUKARCO was formed in February 1997 to facilitate joint oil and gas investment in Russia and other countries in the Commonwealth of Independent States. The LUKARCO joint venture holds a 5% interest in the joint venture operating the Tengiz oil field in Kazakhstan, a 12.5% interest in the Caspian Pipeline Consortium (CPC), a multi-party effort to build a 900-mile pipeline from the Tengiz field to the Black Sea via Russia, and a 60% interest in the Yalama block in the Caspian Sea offshore of Azerbaijan. Under the terms of the joint venture arrangement, ARCO has agreed to provide financing to LUKARCO covering most of the costs of any projects approved by ARCO. ARCO is obligated to fund LUKARCO's 25% share of the construction costs of the CPC pipeline. In addition to the joint venture interest, ARCO owns 8% of LUKOIL's total equity, which at December 31, 1998 was valued at $225 million. See Note 24 of Notes to Consolidated Financial Statements on page 59. 8 REFINING AND MARKETING ARCO's downstream operations include its two refineries on the West Coast, branded retail gasoline outlets in six western states and British Columbia, transportation operations including pipelines and terminals in California and a marine fleet of ocean-going tankers, and a polypropylene plant under construction at the Los Angeles Refinery complex. ARCO's two U.S. petroleum refineries are the Los Angeles Refinery in Carson, California and the Cherry Point Refinery near Ferndale, Washington. Both of these refineries have easy access to major supply sources and major markets through ocean-going tankers, pipelines and other transportation facilities. Refinery Capacity - --------------------------------------------------------------------------------
Annual Average Operable Crude Distillation Capacity(a) (Barrels per day) ----------------------- 1998 1997 1996 ------- ------- ------- Los Angeles Refinery.................................. 260,000 260,000 260,000 Cherry Point Refinery................................. 202,000 202,000 200,500 ------- ------- ------- Total............................................... 462,000 462,000 460,500 ======= ======= =======
-------- (a) Measured pursuant to standards of the American Petroleum Institute. Refinery runs and petroleum products manufactured - --------------------------------------------------------------------------------
Years Ended December 31, ----------------------- 1998 1997 1996 ------- ------- ------- (Equivalent barrels per day) Crude oil refinery runs............................... 449,600 452,200 452,700 ======= ======= ======= Petroleum products manufactured: Gasoline............................................ 225,800 224,200 214,800 Jet fuels........................................... 92,000 106,700 105,700 Distillate fuels.................................... 76,600 73,100 66,000 Other(a)............................................ 93,400 85,300 100,500 ------- ------- ------- Total(b).......................................... 487,800 489,300 487,000 ======= ======= =======
-------- (a) Includes chemical products, natural gas liquids (NGLs), petroleum coke (green and calcined) and feedstocks, sulfur, middle-of-barrel specialties and changes in unfinished stocks. (b) Total manufactured petroleum products volumes exceed total crude oil runs as a result of the expansion of petroleum product through rearrangement of molecular structure and refinery blending of oxygenates. 9 In October 1998, ARCO and Itochu Corporation entered into a $200 million joint venture for the production and marketing of polypropylene resin. ARCO has a two-thirds interest and Itochu has a one-third interest in the 200,000 metric ton manufacturing plant currently under construction at the Los Angeles Refinery complex. Feedstock for the new polypropylene facility, the only one on the West Coast, will be supplied by the Los Angeles Refinery under the joint venture agreement. In connection with its refining operations, ARCO also produces calcined coke and operates electric cogeneration facilities. ARCO markets its gasoline under the ARCO(R) trademark. ARCO sells its gasoline at ARCO branded retail outlets located in Arizona, California, Nevada, Oregon, Utah and Washington, and in British Columbia. The company currently has more than 1,700 branded retail outlets, which include franchisee and company- operated am/pm(R) convenience stores and SmogPros(R) Service Centers, and traditional service stations. ARCO's am/pm franchises make up about 60% of the retail outlets which are full scale convenience stores that also sell gasoline. ARCO also sells gasoline to dealers and resellers who do not use the ARCO brand in connection with retail sales. ARCO markets jet fuel, calcined coke and NGLs to end-users and resellers. ARCO sells jet fuels directly to airlines and the United States Department of Defense. The company sells its calcined coke to U.S. and international industrial consumers. ARCO sells NGLs directly to end-use customers including the Watson Cogeneration Facility, which is 51% owned by ARCO; ARCO also markets NGLs through distributors. ARCO sells certain of its petroleum products through cargo and bulk sales to commercial and industrial consumers. Refined petroleum product sales - --------------------------------------------------------------------------------
Years Ended December 31, ----------------------- 1998 1997 1996 ------- ------- ------- (Equivalent barrels per day) Petroleum product sales: Gasoline............................................ 307,100 281,900 266,400 Jet fuels........................................... 102,800 117,300 117,000 Distillate fuels.................................... 80,600 76,600 69,000 Other(a)............................................ 72,700 68,000 80,700 ------- ------- ------- Total(b).......................................... 563,200 543,800 533,100 ======= ======= =======
-------- (a) Includes heavy fuel oils, NGLs, calcined and green coke. (b) The total of petroleum product sales differs from the total of petroleum products manufactured because of a number of factors: the consumption of some products as refinery fuel, the exchange of products with other refiners, changes in levels of product inventory, and the purchase and sale of petroleum products not manufactured by ARCO. ARCO's marine fleet consists of eight tankers. Six transport crude oil from Valdez to Cherry Point, Washington and Long Beach, California and two transport clean fuels products. ARCO has under construction three double-hulled tankers; the first is scheduled for delivery in 2000, and the remaining two by 2002. ALL OTHER OPERATIONS ARCO's other operations during 1998 included its pipeline operations in the Lower 48 and its aluminum rolling mill operations. You can find more details in Results of Segment Operations--Other Operations, on page 33. 10 DISCONTINUED OPERATIONS ARCO's discontinued operations consisted of its interests in chemical and coal businesses. In July 1998, ARCO sold all of its 80,000,001 shares of ARCO Chemical stock to its other former chemical business, Lyondell Petrochemical Company. ARCO reduced its interest in ARCO Chemical in 1987, when ARCO Chemical Company sold just under 20% of its stock to the public. ARCO disposed of its interest in Lyondell Petrochemical Company in three transactions: the 1989 sale of just over 50% of its Lyondell stock to the public, the 1994 sale of three- year notes exchangeable into its Lyondell stock at maturity, and the 1997 transfer of its remaining Lyondell stock to the noteholders. ARCO's consolidated financial statements reflect its interest in Lyondell through September 1997 and its interest in ARCO Chemical through July 1998 under Income From Discontinued Operations on page 34. ARCO's interest in the Geismar petrochemical plant acquired from UTP was classified as a discontinued operation because of ARCO's intent to dispose of its interest. ARCO expects to complete the sale of the business during 1999. In 1997, ARCO announced its intent to divest its coal operations. You can find a description of the June 1998 disposition of ARCO's U.S. coal operations and of the sale of two of ARCO's Australian coal properties in the first quarter of 1999 on page 1. ARCO intends to sell its remaining Australian coal interests in the Curragh and Clermont mines. The income from and net assets of ARCO's coal operations are included in ARCO's historical financial statements under discontinued operations. You can find more details regarding disposition of all these assets on page 1, under Gain on Disposition of Discontinued Operations on page 34, and in Note 4 of Notes to Consolidated Financial Statements on page 49. CAPITAL PROGRAM ARCO's capital program includes spending for additions to fixed assets and other capital expenditures. During 1998, the company spent approximately $3.6 billion for additions to fixed assets. For 1999 ARCO plans to spend $2.7 billion on additions to fixed assets, a 25% reduction from 1998 spending. Key expenditures in 1999 will include continued development of the Alpine field on the North Slope of Alaska, the Shearwater gas condensate field in the United Kingdom North Sea, and the Villano oil field in Ecuador. In downstream operations, the expenditures primarily relate to construction of two new double-hulled marine tankers and completion of the West Coast's first polypropylene plant at ARCO's Los Angeles Refinery. ARCO's current long-range plans for capital spending may change during 1999 and thereafter, depending on whether and for how long the current low price levels for crude oil and natural gas continue. Other factors that may affect ARCO's future spending plans are changes in the tax laws, changes in clean air and clean fuel requirements, and changes in other environmental rules and regulations. PATENTS ARCO owns numerous patents, many of which it makes generally available for license to others in the petroleum industry. ARCO itself is a licensee under certain patents that are available generally to the industry. ARCO's operations are not dependent upon any particular patent or patents or upon any exclusive patent rights. 11 COMPETITION ARCO faces intense competition from a number of companies in both its E&P and R&M operations. Several of its competitors are larger and have substantially greater resources. In many areas outside the United States ARCO may be in competition with state owned or sponsored companies for upstream exploration and development projects. No single competitor, or small group of competitors, dominates either of ARCO's operating segments. Upstream, ARCO competes with numerous other companies in the oil and gas industry to locate and obtain new sources of oil and gas and to produce that oil and gas in a cost-effective and efficient manner. Bidding for leases and acquiring producing properties is characterized by intense competition. ARCO believes its expertise in geological and geophysical technology enables it to compete effectively in property acquisition, exploration and development in those geographic areas where it is focusing its efforts. Another major competitive factor is a company's cost structure for producing oil and gas. ARCO believes its cost structure enables it to compete on a cost effective basis in those areas of geographic focus. Major factors affecting the profitability of the oil and gas industry are the general price levels for crude oil and natural gas, which have typically been volatile as a result of fluctuations in world, and sometimes local, economic conditions and political events. Prices for these commodities are currently at or near historic lows when adjusted for inflation. Worldwide inventories are high relative to worldwide demand, which has been adversely affected in the recent past by the financial malaise in Asia and its effect on economic growth in Asia and other developing nations, as well as increases in crude oil production from OPEC and other countries. Downstream, ARCO competes with numerous companies in both its refining operations and its retail gasoline marketing. Key competitive methods include refining operations that yield a greater proportion of high-margin products, technological expertise in developing new products that meet environmental specifications, and marketing operations that put a premium on high volume and innovation. ARCO's refineries are among the most efficient in the industry and it has been an industry leader in developing reformulated gasoline. It has also sought to be a leader in low cost, high volume retail marketing and distribution, combining convenience stores and standardized automotive services with gasoline delivery to spread station site costs and increase revenue. ARCO ranked as the seventh largest U.S.-based oil company on the basis of revenues in the most recent Fortune 500 list of U.S. industrial companies. HUMAN RESOURCES As of December 31, 1998, ARCO had approximately 18,400 full-time equivalent employees, of whom approximately 12% were represented by collective bargaining agents. RESEARCH AND DEVELOPMENT ARCO engages in research for new and improved products and methods for operating its businesses principally at facilities located at Plano, Texas. Total research and development expenses were $32 million, $38 million and $25 million in 1998, 1997 and 1996, respectively. 12 ENVIRONMENTAL MATTERS Site Remediation ARCO is subject to federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), and the Superfund Amendments and Reauthorization Act of 1986 and the Resource Conservation Recovery Act of 1976 (RCRA). These regulations require ARCO to do some or all of the following: . Remove or mitigate the effects on the environment at various sites from the disposal or release of certain substances; . Perform restoration work at such sites; and . Pay damages for loss of use and non-use values. Environmental liabilities include personal injury claims allegedly caused by exposure to toxic materials manufactured or used by ARCO. ARCO is currently involved in environmental assessments and cleanups under these laws at federal and state-managed sites, as well as other clean-up sites, including service stations, refineries, terminals, third party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites that were formerly owned by ARCO or its predecessors. This comprises 125 sites for which ARCO has been named a potentially responsible party (PRP), along with other sites for which no claims have been asserted. The number of PRP sites in and of itself is not a relevant measure of liability because the nature and extent of environmental concerns varies by site and ARCO's responsibility varies from sole responsibility to very little responsibility. Future costs depend on unknown factors such as: . Nature and extent of contamination; . Timing, extent and method of remedial action; . ARCO's proportional share of costs; and . Financial condition of other responsible parties. The environmental remediation accrual is updated annually, at a minimum, and at December 31, 1998 was $870 million. The amount accrued represents the estimated undiscounted costs that ARCO will incur to complete the remediation of sites with known contamination. In view of the uncertainties associated with estimating these costs (such as differences of opinion between ARCO and various regulatory agencies with respect to the appropriate method for remediating contaminated sites, uncertainty as to the extent of contamination at various sites, and uncertainty regarding ARCO's ultimate share of costs at various sites), it is possible that actual costs could exceed the amount accrued by as much as $500 million. This estimate was determined by applying Monte Carlo analysis to estimated site maximums on a portfolio basis. See Note 15 of Notes to Consolidated Financial Statements regarding environmental matters. Approximately 54% of the reserve relates to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component relates to currently and formerly owned nuclear processing, and refining and marketing facilities, and other sites that received wastes from these facilities. The remainder relates to sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total accrual. Substantially all amounts reserved are expected to be paid out over the next five to six years. ARCO is also the subject of certain material legal proceedings described below under the caption "Material Environmental Litigation." Clean Air The Federal Clean Air Act Amendments of 1990 (the 1990 Clean Air Act Amendments) and various state and local laws and regulations impose certain air quality requirements. Among other things, the 1990 Clean Air Act Amendments effectively require the manufacture and sale of reformulated and oxygenated gasolines in areas not meeting specified air quality standards. The Environmental Protection Agency (EPA) wintertime oxygenate gasoline program became effective in the fall of 1993. The EPA 13 reformulated gasoline requirements became effective January 1, 1995 for the nine U.S. cities, including Los Angeles and San Diego, and other areas with the worst ozone pollution. The specifications for reformulated gasoline of the California Air Resources Board (CARB), which are stricter than the EPA requirements, became effective for retail sales on and after June 1, 1996. To comply with the EPA air quality requirements and CARB standards, in 1995 ARCO completed major modifications at its Los Angeles Refinery. In 1993 the South Coast Air Quality Management District (AQMD), which sets air quality standards for a five-county area of Southern California, including Los Angeles County, adopted regulations requiring phased reductions of certain pollutants. By 2003 the Los Angeles Refinery and the Wilmington calciner will be required to achieve cumulative reductions from 1992 levels of oxides of nitrogen (NOx) of 63% and oxides of sulfur (SOx) of 83%. As part of the regulations, AQMD created a Regional Clean Air Incentives Market (RECLAIM) program under which regulated firms can earn credits for achieving emission reductions below targeted levels. Those credits may then be bought and sold. The Los Angeles Refinery plans to achieve the requisite levels of emission reductions by a combination of reductions and acquisitions of credits, substantial amounts of which have already been purchased. The AQMD is currently considering modifications to the RECLAIM program, but nothing has yet been finalized. Environment-Related Expenditures For the past three years, the company's environment-related expenditures have been comprised of both capital expenditures and operating expenses. Environment-related capital expenditures include the cost of projects to reduce and/or eliminate pollution and contamination in the future and the cost of modifications to the company's manufacturing facilities necessary to comply with the aforementioned federal, state and local air quality laws and regulations. Environment-related operating costs include both costs to eliminate, control or dispose of, pollutants, as well as costs to remediate previously contaminated sites. Sites are remediated using a variety of techniques, including on-site stabilization, bioremediation, soil removal, pump and treat and other methods as deemed appropriate for each specific site. For the past three years, the company's environment-related capital expenditures have averaged approximately $169 million per year. The company anticipates environment-related capital expenditures of approximately $240 million and $220 million for 1999 and 2000, respectively. For the past three years, the company's operating expenses for the remediation of previously contaminated properties either compelled or likely to be compelled in the foreseeable future by government or third parties have averaged approximately $170 million per year. Cash payments for site remediation have averaged $106 million per year over the same period. The company's operating expenses also include ongoing costs of controlling or disposing of pollutants. For the past three years, the company estimates that its operating expenses related to these ongoing costs have averaged approximately $207 million per year. In addition to the reserve for environmental remediation costs, the company has also accrued, as of December 31, 1998, $1.1 billion for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and the estimated costs of restoration and reclamation of land associated with such facilities. Material Environmental Litigation Pursuant to the authority provided under Superfund, the State of Montana has asserted claims against ARCO for compensation for damage to natural resources up to the maximum amount allowed by 42 United States Code (S)9607. These alleged damages, arising out of ARCO's or its predecessors' alleged activities, include restoration and compensable damages, assessment costs, and prejudgment interest. On December 12, 1983, a lawsuit, styled Montana v. ARCO (Case No. CV- 83-317-HLN-PGH), was filed in the United States District Court for the District of Montana. At the time trial commenced on March 3, 1997, the State's claim was for damages of $767 million for alleged injuries to natural 14 resources resulting from mining and mineral processing operations. In addition, the Confederated Salish and Kootenai Tribes of the Flathead Reservation (Tribes) were granted a limited form of intervention in Montana v. ARCO. The Tribes, as alleged trustees, have asserted claims against ARCO for alleged injury to and loss of natural resources located in the Clark Fork River Basin in southwest Montana. The United States Department of Interior also has stated an intention to make a claim for natural resource damages in the Clark Fork River Basin. In 1998 ARCO agreed to the terms of two consent decrees, under which ARCO has agreed to pay $135 million for settlement of $561 million of the State's natural resource damage claims relating to the Clark Fork River Basin (excluding only the State's claims for restoration at three sites), $86 million primarily for remediation at the Stream Side Tailings Operable Unit (SSTOU) in the Clark Fork Basin, including a civil penalty of $1.8 million, and $20 million to resolve natural resource damage claims by the Tribes and the United States. All of these settlements are subject to court approval. On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO, styled U.S. v. ARCO, et al. (Case No. CV-89-039-BU-PGH), in the United States District Court for the District of Montana, for oversight costs at several of the Upper Clark Fork River Basin Superfund sites. Litigation is proceeding on both the EPA's claims (in the approximate amount of $90 million, including $14.7 million pertaining to the SSTOU) and ARCO's counterclaims against various federal agencies. In the counterclaims, ARCO seeks contributions from the federal agencies for remediation costs and for any natural resource damage liability ARCO might incur in Montana v. ARCO. The proposed settlements in Montana v. ARCO, described above, will resolve the claims and counterclaims in U.S. v. ARCO pertaining to the SSTOU and should provide a framework for possible future settlement of the remaining claims. ARCO and its subsidiary, Atlantic Richfield Hanford Company (ARHCO), and several other companies who have served as government contractors at the Hanford Nuclear Reservation in south central Washington State are named as defendants in a consolidated complaint in the United States District Court for the Eastern District of Washington, titled In re Hanford Nuclear Reservation Litigation (CY-91-3015-AAM). In October 1994, the Department of Energy (DOE) determined that the government will indemnify ARCO and ARHCO for any judgment or settlement in the action pursuant to the contract between ARHCO and the Atomic Energy Commission and the provisions of the Price-Anderson Act. On April 4, 1997, ARCO was served with a new complaint making allegations similar to those already pending in the litigation, filed by six individual Native Americans in the United States District Court for the Western District of Washington, purportedly on behalf of classes of Native Americans living near the Hanford Nuclear Reservation. The DOE has indicated that it will indemnify ARCO and ARHCO with respect to this new action as well. This action has been transferred to the United States District Court for the Eastern District of Washington. On August 21, 1998, the court issued a ruling that, if upheld on appeal, should result in the dismissal of ARHCO and ARCO from the case. Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking compensatory and punitive damages and injunctions were filed by the State of Alaska, the United States, and private plaintiffs against Exxon, Alyeska, and Alyeska's owner companies (including ARCO which has a 22% interest). Alyeska and its owner companies have settled the civil damage claims by federal and state governments and the lawsuits by private plaintiffs. Certain issues relating to liability for the spill remain unresolved between the Exxon companies, on the one hand, and Alyeska and its owner companies, on the other hand. On November 21, 1990, ARCO filed a complaint in the Superior Court of California for the County of Los Angeles, Atlantic Richfield Company v. AETNA Casualty and Surety Company of America, et al. (Case No. BC 015575), seeking recovery under numerous insurance policies in effect at times during past years for certain environmental expenses incurred by ARCO. The claims arise from the activities of ARCO and its predecessor companies, including The Anaconda Company, at 15 sites and locations throughout the United States. ARCO has settled with most of the insurance company defendants. Conclusion Environmental concerns, including the minimization and prevention of environmental contamination from ongoing operations, and the cost-effective remediations of existing contaminated sites, continue to be vital factors in the company's future planning. See Note 15 of Notes to Consolidated Financial Statements on page 53, and "Environmental Matters" on page 13. 16 ITEM 3. LEGAL PROCEEDINGS The Company On June 7, 1989, the City of New York, the New York City Housing Authority, and the New York City Health and Hospitals Corporation brought suit in the Supreme Court of the State of New York for the County of New York (Case No. 14365/89) against six alleged former lead pigment manufacturers or their successors (including ARCO as successor to International Smelting and Refining Company (IS&R), a former subsidiary of The Anaconda Company), and the Lead Industries Association (LIA), a trade association. Plaintiffs sought to recover damages in excess of $50 million including (i) past and future costs of abating lead-based paint from housing owned by New York City and the New York City Housing Authority (Housing Authority); (ii) other costs associated with dealing with the presence of lead-based paint in that housing and privately-owned housing; and (iii) any amounts paid by the City or the Housing Authority to tenants because of injuries caused by the ingestion of lead-based paint. Plaintiffs also seek punitive damages and attorney's fees. As a result of various court rulings, the plaintiffs' only remaining claims are for fraud and restitution and indemnity. Recently, two stipulated dismissals have further narrowed the case. The City of New York and the New York City Health and Hospitals Corporation entered into a stipulated order dismissing with prejudice all of their pending claims against ARCO and the other defendants. The remaining plaintiff, the Housing Authority, then entered into another stipulated order dismissing its claims as to all the Housing Authority properties except for two housing projects. The Housing Authority initially sought relief for 322 housing projects. On January 24, 1996, ARCO (as successor to IS&R) was added as a defendant to a class action suit pending in the United States District Court for the Southern District of New York, German, et al. v. Federal Home Loan Mortgage Corp., et al. (Case No. 93 Civ 6941), by plaintiff intervenors Naquan and Naiya Thomas, minors, and their mother and guardian Kaii Henry. The complaint in intervention names as defendants, in addition to ARCO, eight alleged former processors of lead pigment and lead paint, the LIA, the City of New York and its Housing Authority, and the owner of the building where plaintiffs reside. Plaintiffs seek on behalf of themselves, and a purported class of children under seven and pregnant women residing in dwellings in the City of New York containing or presumed to contain lead paint, injunctive relief from all defendants including orders to abate lead paint and to contribute to court- administered funds to pay for abatement and medical monitoring and treatment. The complaint alleges causes of action against the lead pigment defendants and the LIA for negligence, strict product liability, fraud and misrepresentation, breach of express and implied warranty, nuisance, conspiracy, concert of action, and enterprise and market share liability. The City of New York, its Housing Authority, and the owner of the building where plaintiffs reside have filed cross-claims against ARCO, the other alleged former processors of lead pigment and paint, and the LIA seeking indemnification against or contribution toward any liability they (cross-claimants) may have to plaintiffs. On November 12, 1998, the court dismissed without prejudice the claims in this lawsuit brought against the lead pigment manufacturers, including ARCO. The court ruled that the claims against the pigment manufacturers should not have been joined to this lawsuit. On November 25, 1998, ARCO (as successor to IS&R) was named as a defendant in a purported class action suit, Sabater, et al. v. Lead Industries Association, et al. (Case No. 25533/98), filed in the Supreme Court of the State of New York for the County of Bronx by the mothers of four minor plaintiffs. The complaint also names the LIA and eight former lead pigment/paint manufacturers. The plaintiffs seek, on behalf of themselves and a purported class of children age six and under residing in dwellings in the City of New York containing or presumed to contain lead paint, compensatory damages and injunctive relief from all defendants, including orders requiring defendants to contribute to a court- administered fund to pay for (i) notification to class members of the dangers of lead-based paint, (ii) abatement of properties where class members reside and to pay for temporary relocation during abatement, (iii) medical monitoring, including screening, 17 testing, diagnosing, and treating of class members, and (iv) attorney fees. The complaint alleges causes of action against the defendants for negligence, strict products liability, conspiracy, concert of action, and enterprise and market share liability. On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to a purported class action suit pending in the Court of Common Pleas in Cuyahoga County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case No. 236835), which seeks on behalf of the three named plaintiffs, and all other persons similarly situated in the state of Ohio, money damages for injuries allegedly suffered from exposure to lead paint, punitive damages, and an order requiring defendants to remove and abate all lead paint applied to any building in Ohio. The suit names as defendants, in addition to ARCO, the LIA and 16 companies alleged to have participated in the manufacture and sale of lead pigments and paints and includes causes of action for strict product liability, negligence, breach of warranty, fraud, nuisance, restitution, negligent infliction of emotional distress, and enterprise, market share and alternative liability. In addition, the company is a defendant in several lawsuits brought by individuals that allege injury from exposure to lead paint. Such cases, in the aggregate, are not material to the financial condition of the company. In 1993, natural gas royalty owners filed an action in Zapata County, Texas titled Stanley Marshall, et al. v. ARCO (Case No. 3217). The plaintiffs claimed breach of lease, breach of Texas Railroad Commission rules and regulations, conversion, and fraud. On September 8, 1997, a jury found in favor of the plaintiffs and on March 19, 1998, the trial court entered the Second Modified Judgment on the verdict awarding $3.8 million in actual damages, $50 million in exemplary damages, $13.4 million in attorney's fees and $1.7 million in pre- judgment interest. ARCO has appealed this judgment to the Court of Appeals for the Fourth District of Texas in San Antonio. On June 7, 1994, a purported class action was filed by several individuals in United States District Court in Pittsburgh, Pennsylvania against ARCO and Babcock & Wilcox Company (B & W) on behalf of persons "estimated to be in the thousands" who lived or worked in Apollo and Parks Township, Pennsylvania, and areas downwind of those places, from 1957 to the present. The suit, Hall, et al. v. Babcock & Wilcox Company, et al. (Case No. 94-0951), claims that the plaintiffs and alleged class members were exposed to releases of radioactive and other toxic substances from two nuclear materials processing facilities that have contaminated the air, soil, and surface and ground water in those communities. The suit seeks damages for death and personal injury, diminution in property values, costs of decontamination of property, injunctive relief requiring defendants to establish a fund for medical monitoring, and punitive damages. ARCO has been sued as the former owner of Nuclear Materials and Equipment Corporation (NUMEC), the original owner and operator of the Apollo and Parks Township facilities from March 1967 to November 1971. On September 17, 1998, the jury in a trial of eight "test-case" plaintiffs' claims returned a verdict of $33.7 million jointly and severally against ARCO and B & W and another $2.8 million just against B & W. On September 24, 1998, these eight test-case plaintiffs withdrew their claim for punitive damages against ARCO. ARCO and B & W have filed motions for judgment in their favor or for a new trial. The claims of other plaintiffs remain for trial or other disposition. On April 13, 1995, a lawsuit was filed in United States District Court for the Central District of California titled ARCO, et al. v. UNOCAL (Case No. 95- 2379-KMW-JRx). ARCO and five other refiners sought a declaration that UNOCAL's U.S. Patent No. 5,288,393 (the '393 patent) is invalid and unenforceable. The '393 patent purports to cover a substantial portion of the reformulated gasoline compositions that were required by the State of California when the Phase II regulations of the California Air Resources Board (CARB) went into effect in March 1996. In the same lawsuit, UNOCAL filed a claim for infringement of the '393 patent against ARCO and the five other refiners. On July 15, 1997, the first phase of trial commenced and on October 14, 1997, the jury 18 found in UNOCAL's favor on the issues of whether ARCO and the other refiners had infringed the '393 patent and whether that patent is valid. The jury also found that ARCO had produced approximately 149 million gallons of infringing gasoline during the first five months of production. On November 3, 1997, the jury found that each refiner owed UNOCAL $.0575 for each gallon of gasoline that infringed on UNOCAL's patent. On September 29, 1998, the court issued a judgment in favor of UNOCAL for $10.3 million (including prejudgment interest) against ARCO for infringing gallons during the first five months of production and for $1.5 million joint and several against ARCO and the other five refiners for UNOCAL's attorneys fees. ARCO and the other five refiners have appealed the decision to the Court of Appeals for the Federal Circuit. On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et al. (Case No. 700810) was brought in the Superior Court of California for the County of San Diego against ARCO and eight other refiner-marketers of CARB reformulated gasoline. The plaintiffs allege that the defendants conspired to restrict the supply, and thereby to raise the price, of CARB gasoline in violation of California state antitrust and unfair competition law. The plaintiffs seek to recover treble damages, restitution, attorneys fees, and injunctive relief. The court has certified a class of California residents who bought CARB gasoline after March 1, 1996 other than for resale. On October 17, 1997, the court granted the defendants' motion for summary judgment. On January 23, 1998, the court granted the plaintiffs' motion for a new trial. The defendants have appealed from the order granting a new trial, and the plaintiffs have cross-appealed from the summary judgment. On January 23, 1998, the case of Gilley v. Atlantic Richfield, et al., [Case No. CV UU132BTM (RBB)] was filed in the United States District Court for the Southern District of California. The case, which is brought on behalf of a purported class of wholesale purchasers of CARB gasoline including lessee and contract gasoline dealers, claims violations of federal antitrust laws based upon factual allegations that are essentially the same as those contained in the Aguilar complaint. On October 22, 1998, ARCO was served with a complaint filed in the Superior Court of California for the County of Sacramento entitled Cal-Tex Citrus Juice, et al. v. Atlantic Richfield Company, et al. (Case No. 98AS05227). The complaint is purportedly on behalf of a class of all direct or indirect purchasers of California diesel fuel between March 19, 1996 and December 31, 1997 against all California refiners of California diesel fuel. The complaint alleges violations of various state statutes by the defendants' alleged conspiracy to fix prices of California diesel fuel and seeks treble damages and restitution. 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. 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 19 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. Environmental Proceedings As discussed under the caption "Environmental Matters," ARCO is currently participating in environmental assessments and cleanups at numerous operating and non-operating sites under Superfund and comparable state laws, RCRA, and other state and local laws and regulations, and pursuant to third party indemnification requests, and is the subject of material legal proceedings relating to certain of these sites. See "Environmental Matters--Material Environmental Litigation," beginning on page 14. In addition to the matters reported herein, from time to time, certain of ARCO's operating divisions and subsidiaries receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Such alleged violations may become the subject of enforcement actions or other legal proceedings and may involve monetary sanctions of $100,000 or more (exclusive of interest and costs). Other Litigation The company and its subsidiaries are defendants in numerous suits in which they are not covered by insurance which involve smaller amounts than the matters described above. Although the legal responsibility and financial impact in respect to such litigation cannot be ascertained, it is not anticipated that these suits will result in the payment by the company or its subsidiaries of monetary damages which in the aggregate would be material in relation to the net assets of the company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. ---------------- 20 EXECUTIVE OFFICERS OF THE REGISTRANT SEC rules require the designation by the company of its officers who are deemed "executive officers" for purposes of the proxy rules and insider reporting rules. The employees named below are ARCO's executive officers as of February 22, 1999. Designations for operating units have changed over time; names given are those in effect at time position was held. - ----------------------------------------------------------------------------------------------- Mike R. Bowlin, 56 Mr. Bowlin has been Chairman of the Board of ARCO since July Chairman of the Board 1995, Chief Executive Officer since July 1994, and a director and Chief Executive since June 1992. He served as President (June 1993-January Officer 1998), an Executive Vice President (June 1992-May 1993) and a Senior Vice President of ARCO (August 1985-June 1992), President of ARCO International Oil and Gas Company (November 1987-June 1992), President of ARCO Coal Company (August 1985-July 1987), a Senior Vice President of International Oil and Gas Acquisitions (July 1987-November 1987), a Vice President of ARCO (October 1984-July 1985) and a Vice President of ARCO Oil and Gas Company (April 1981-December 1984). He has been an officer of the company since 1984. - ----------------------------------------------------------------------------------------------- Michael E. Wiley, 48 Mr. Wiley has been President and Chief Operating Officer of ARCO President and Chief since October 1998. He was an Executive Vice President of ARCO Operating Officer (March 1997-September 1998) and a director (June 1997-May 1998). He served as Chief Executive Officer of Vastar (January 1994- March 1997) and President (September 1993-March 1997). Prior to the formation of Vastar, he was Senior Vice President of ARCO (June 1993-June 1994), President of ARCO Oil and Gas Company (June-October 1993) and Vice President of ARCO and Manager of ARCO Exploration and Production Technology (1991-1993). He has been an officer of the company since 1997. He also serves as Chairman of the Board of Vastar. - ----------------------------------------------------------------------------------------------- Marie L. Knowles, 52 Mrs. Knowles has been an Executive Vice President and the Chief Executive Vice President Financial Officer of ARCO since July 1996. She was a director of and Chief Financial ARCO (July 1996-May 1998). She served as a Senior Vice President Officer of ARCO and President of ARCO Transportation Company (June 1993- July 1996), Vice President and Controller of ARCO (July 1990-May 1993), Vice President of Finance, Control and Planning of ARCO International Oil and Gas Company (July 1988-July 1990), and Assistant Treasurer of Banking of ARCO (October 1986-July 1988). She has been an officer of the company since 1990. She also serves as a Director of Vastar. - ----------------------------------------------------------------------------------------------- J. Kenneth Thompson, 47 Mr. Thompson has been an Executive Vice President of ARCO since Executive Vice President January 1998. He was a Senior Vice President of ARCO and President of ARCO Alaska, Inc. (June 1994-January 1998). He was a Vice President of ARCO and a Vice President of ARCO Exploration and Production Technology (June 1993-June 1994) and a Senior Vice President, Western District of ARCO Oil and Gas Company (January 1990-June 1993). He has been an officer of the company since 1993. - ----------------------------------------------------------------------------------------------- Donald R. Voelte, Jr., 46 Mr. Voelte has been an Executive Vice President since October Executive Vice President 1998. He served as a Senior Vice President of ARCO (April 1997- September 1998). He previously worked for the Mobil Corporation for 22 years. His most recent position was President of Mobil Oil Company's New Exploration and Producing Ventures (1994-April 1997). He has been an officer of the company since 1997. - -----------------------------------------------------------------------------------------------
21 - --------------------------------------------------------------------------------------------- Terry G. Dallas, 48 Mr. Dallas has been a Senior Vice President of ARCO since Senior Vice President November 1996 and Treasurer since January 1994. He was a Vice and Treasurer President of ARCO (June 1993-November 1996), the Vice President, Corporate Planning (June 1993-January 1994), and Assistant Treasurer, Corporate Finance of ARCO (1990-1993) and Manager, Finance, Control and Planning, ARCO British, Ltd. (1988-1990). He has been an officer of the company since 1993. He also serves as a Director of Vastar. - --------------------------------------------------------------------------------------------- John H. Kelly, 44 Mr. Kelly has been a Senior Vice President, Human Resources of Senior Vice President ARCO since January 1997. He was Vice President, Human Resources of ARCO (June 1993-January 1997). He served as Vice President, Human Resources of ARCO Oil and Gas Company (August 1991-June 1993). He has been an officer of the company since 1993. - --------------------------------------------------------------------------------------------- Kevin O. Meyers, 44 Mr. Meyers has been a Senior Vice President of ARCO since July Senior Vice President 1998 and President of ARCO Alaska, Inc. since February 1998. He was Senior Vice President, Prudhoe Bay Unit of ARCO Alaska, Inc. (January 1996-January 1998) and the Vice President, Engineering and Technology of ARCO International Oil and Gas Company (February 1994-December 1995). He has been an officer of the company since 1998. - --------------------------------------------------------------------------------------------- Roger E. Truitt, 53 Mr. Truitt has been a Senior Vice President of ARCO and Senior Vice President President of ARCO Products Company since November 1997. He was Senior Vice President, Asia Region, ARCO International Oil and Gas Company (November 1994-November 1997), a Senior Vice President of ARCO Products Company (January 1994-November 1994) and a Vice President of ARCO International Oil and Gas Company (December 1991-December 1993). He has been an officer of the company since 1997. - --------------------------------------------------------------------------------------------- Bruce G. Whitmore, 54 Mr. Whitmore has been the Senior Vice President, General Counsel Senior Vice President, and Corporate Secretary of ARCO since December 1994. He served General Counsel and as Vice President and General Counsel of ARCO Chemical Company Corporate Secretary (October 1990-December 1994) and as Associate General Counsel, Finance and Corporate Affairs of ARCO (June 1986-September 1990). He has been an officer of the company since 1994. - --------------------------------------------------------------------------------------------- Allan L. Comstock, 55 Mr. Comstock has been a Vice President and Controller of ARCO Vice President and since June 1993. He was a Vice President of ARCO Chemical Controller Company (October 1989-June 1993) and General Auditor of ARCO (November 1985-October 1989). He has been an officer of the company since 1993. - --------------------------------------------------------------------------------------------- Dennis D. Schiffel, 55 Mr. Schiffel has been the Vice President, Corporate Planning of Vice President ARCO since November 1998. He was the Vice President, Investor Relations, of ARCO (1996-1998), the Vice President, Finance, Planning and Control of ARCO International Oil and Gas Company (1992-1996). He has been an officer of the company since 1998. - --------------------------------------------------------------------------------------------- Beverly L. Thelander, 43 Ms. Thelander has been the Vice President, Communications, Vice President Public Affairs and Investor Relations since November 1998. She served as Vice President of Wholesale Marketing, Distribution and Supply for ARCO Products Company (September 1996-October 1998), Vice President of Finance, Planning and Control of ARCO Transportation Company (January 1994-August 1996), and Controller of ARCO Products Company (October 1991-December 1993). She has been an officer of the company since 1998. - ---------------------------------------------------------------------------------------------
22 DESCRIPTION OF CAPITAL STOCK The following description of the company's capital stock is included in order to facilitate incorporation by reference of such description in filings by the company under the federal securities laws. Certain statements under this heading are summaries of provisions of the Re- stated Certificate of Incorporation of ARCO, dated June 27, 1994, and do not purport to be complete. The summaries make use of certain terms defined in the Certificate of Incorporation and are qualified in their entirety by reference thereto. The term "$3.00 Preference Stock" refers to the company's $3.00 Cumulative Convertible Preference Stock, par value $1 per share. The term "$2.80 Preference Stock" refers to the company's $2.80 Cumulative Convertible Preference Stock, par value $1 per share. The term "Preferred Stock" refers to the company's Preferred Stock, par value $.01 per share; this class of Preferred Stock was authorized by stockholders on May 3, 1993. The term "Common Stock" refers to the company's Common Stock, par value $2.50 per share. Capital stock as of December 31, 1998 - --------------------------------------------------------------------------------
Shares Shares Authorized Outstanding ----------- ----------- $3.00 Preference Stock.............................. 78,089 51,608 $2.80 Preference Stock.............................. 833,776 573,336 Preferred Stock..................................... 75,000,000 -- Common Stock........................................ 600,000,000 321,315,367*
-------- * Excludes treasury stock. Certain Open Market Stock Purchases. Pursuant to the 1985 Executive Long-Term Incentive Plan, as amended through February 22, 1999 (the LTIP), officers and key employees are eligible to receive shares of Common Stock upon exercises of stock options, surrender of dividend share credits, and upon grants of Restricted Stock. Pursuant to the compensation program for outside directors, effective January 1, 1998, outside directors are eligible to receive shares of Common Stock upon grants of Restricted Stock, including Restricted Stock granted in lieu of some or all of their cash compensation for serving as directors and in connection with the termination of the Outside Directors Retirement Plan. Pursuant to the company's Capital Accumulation Plans, employees are eligible to receive Common Stock in satisfaction of employer and employee contributions thereunder. ARCO may satisfy these obligations by issuing new shares of Common Stock. From time to time ARCO may also purchase Common Stock on the open market and contribute it to treasury to provide for current and future obligations to deliver Common Stock under each of these plans; in addition, ARCO may purchase Common Stock on the open market and contribute it to treasury in satisfaction of its obligations upon conversion of the $3.00 Preference Stock and the $2.80 Preference Stock. Power of Board to Determine Terms of Preferred Stock. Under the Certificate of Incorporation, as amended following approval by stockholders on May 3, 1993, the Board is authorized to issue, at any time or from time to time, one or more series of Preferred Stock at its discretion. In addition, the Board has the power to determine all designations, powers, preferences and the rights of such stock and any qualifications, limitations and restrictions, including but not limited to: (i) the designation of series and numbers of shares; (ii) the dividend rights, if any; (iii) the rights upon liquidation or distribution of the assets of the company, if any; (iv) the conversion or exchange rights, if any; (v) the redemption provisions, if any; and (vi) the voting rights, if any. No shares of Preferred Stock have been issued. So long as the Preference Stocks are outstanding, and only for that period of time, the 23 rights of the Preferred Stock are subordinate to the rights of the holders of Preference Stocks. Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80 Preference Stock are entitled to receive cumulative dividends at the annual rate of $3.00 per share and $2.80 per share, respectively, payable quarterly, before cash dividends are paid on the Preferred Stock, if any, and the Common Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock rank on a parity as to dividends. After provision for payment in full of cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference Stocks, and the payment in full of cumulative dividends on the outstanding Preferred Stock, if any, dividends may be paid on the Common Stock as the Board of Directors may deem advisable, within the limits and from the sources permitted by law. Conversion Rights. Each share of $3.00 Preference Stock is convertible, at the option of the holder, into 13.6 shares of Common Stock of the company at any time, and each share of $2.80 Preference Stock is convertible, at the option of the holder, into 4.8 shares of Common Stock of the company at any time. These conversion rates are subject to adjustment as set forth in the Certificate of Incorporation. Shares of Preferred Stock would be convertible, if at all, on such terms as would have been designated by the Board of Directors. Voting Rights. The holders of $3.00 Preference Stock are entitled to sixteen votes per share; holders of $2.80 Preference Stock are entitled to four votes per share; and holders of Common Stock are entitled to one vote per share. Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote cumulatively for directors; holders of Common Stock have no cumulative voting rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together as one class, except as provided by law and except as to certain matters which require a vote by the holders of $3.00 Preference Stock or by the holders of $2.80 Preference Stock as a separate class as set forth below. The Certificate of Incorporation provides that if the company shall be in default with respect to dividends on the $3.00 Preference Stock in an amount equal to six quarterly dividends, the number of directors of the company shall be increased by two at the first annual meeting thereafter, and at such meeting and at each subsequent annual meeting until all dividends on the $3.00 Preference Stock shall have been paid in full, the holders of the $3.00 Preference Stock shall have the right, voting as a class, to elect such two additional directors. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock. The Certificate of Incorporation provides that the company shall not, without the assent of the holders of two-thirds of the then outstanding shares of $3.00 Preference Stock, (a) change any of the terms of the $3.00 Preference Stock in any material respect adverse to the holders, or (b) authorize any prior ranking stock; and that the company shall not, without the assent of the holders of a majority of the then outstanding shares of $3.00 Preference Stock, (1) authorize any additional $3.00 Preference Stock or stock on a parity with it; (2) sell, lease or convey all or substantially all of the property or business of the company; or (3) become a party to a merger or consolidation unless the surviving or resulting corporation will have immediately after such merger or consolidation no stock either authorized or outstanding (except such stock of the company as may have been authorized or outstanding immediately before such merger or consolidation of such stock of the surviving or resulting corporation as may be issued upon conversion thereof or in exchange therefor) ranking as to dividends or assets prior to or on a parity with the $3.00 Preference Stock or the stock of the surviving or resulting corporation issued upon conversion thereof or in exchange therefor. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock. The holders of Preferred Stock, if any, would have such voting rights, if any, as would have been designated by the Board. Redemption Provisions. The $3.00 Preference Stock is redeemable at the option of the company as a whole or in part at any time on at least thirty days' notice at $82 per share plus 24 accrued dividends to the redemption date. The $2.80 Preference Stock is redeemable at the option of the company as a whole or in part at any time on at least thirty days' notice at $70 per share plus accrued dividends to the redemption date. The holders of Preferred Stock, if any, would have such redemption provisions, if any, as would have been designated by the Board. Liquidation Rights. In the event of liquidation of the company, the holders of $3.00 Preference Stock and holders of $2.80 Preference Stock will be entitled to receive, before any payment to holders of Common Stock, $80 per share and $70 per share, respectively, together in each case with accrued and unpaid dividends. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock will rank on a parity as to assets of the company upon its liquidation. Subject to the rights of creditors and the holders of $3.00 Preference Stock and $2.80 Preference Stock, the holders of Common Stock are entitled pro rata to the assets of the company upon its liquidation. The holders of Preferred Stock, if any, would have such liquidation rights, if any, as would have been designated by the Board. Preemptive Rights. No holders of shares of capital stock of the company have or will have any preemptive rights to acquire any securities of the company. Liability to Assessment. The shares of Common Stock are fully paid and non- assessable. Prohibition of Greenmail. Article VII of the Certificate of Incorporation provides in general that any direct or indirect purchase by the company of any of its voting stock (or rights to acquire voting stock) known to be beneficially owned by any person or group which holds more than 3% of a class of its voting stock and which has owned the securities being purchased for less than two years must be approved by the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the voting stock. Such approval shall not be required with respect to any purchase by the company of such securities made (i) at or below fair market value (based on average New York Stock Exchange closing prices over the preceding 90 days) or (ii) as part of a company tender offer or exchange offer made on the same terms to all holders of such securities and complying with the Securities Exchange Act of 1934 or (iii) in a Public Transaction (as defined). Rights to Purchase Common Stock. On July 24, 1995, the Board of Directors of the company declared a dividend of one common share purchase right (a "Right") for each outstanding share of Common Stock, par value $2.50 per share (the "Common Shares"), of the company. The dividend was paid on August 18, 1995 to the stockholders of record on that date. Each Right entitled the registered holder to purchase from the company one Common Share at a price of $400.00 per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the company and First Chicago Trust Company of New York, as Rights Agent. The Rights will be evidenced by and will be transferred with the Common Share certificates until the Distribution Date. The Distribution Date is defined as the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding Common Shares (an "Acquiring Person") or (ii) 10 business days following the commencement of, or announcement of an intention to make, a tender or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights will be issued. The Rights are not exercisable until the Distribution Date. The Rights will expire on August 18, 2005 unless redeemed prior to that date by the company. The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be void), will have the right to receive, 25 upon exercise of each Right, that number of Common Shares having a market value of two times the Purchase Price. If, after the Distribution Date, the company is acquired in a merger or other business combination with, or 50% or more of its consolidated assets or earning power are sold to, the Acquiring Person, each holder of a Right will have the right to receive, upon exercise of each Right, that number of shares of common stock of the acquiring company with a market value of two times the Purchase Price. At any time after an Acquiring Person crosses the 15% threshold and prior to the acquisition by such person of 50% or more of the outstanding Common Shares, the Board of Directors of the company may exchange the Rights (other than Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio of one Common Share per Right. The Board of Directors of the company may redeem the Rights in whole, but not in part, at a price of $.01 per Right prior to the acquisition by an Acquiring Person of 15% or more of the outstanding Common Shares. The terms of the Rights may be amended by the Board of Directors of the company without the consent of the holders of the Rights, except that after any person becomes an Acquiring Person no such amendment may adversely affect the interests of the other holders of the Rights. A copy of the Rights Agreement is filed as an exhibit hereto. This summary description of the Rights is qualified in its entirety by reference thereto. 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1998 1997 -------------------------------------- ------------------------------------ 4th 3rd 2nd 1st 4th 3rd 2nd 1st -------- -------- ---------- --------- ------- ------- --------- ------- Common Stock: Market price per share High................. $72 7/16 $81 5/16 $82 1/4 $84 11/16 $87 1/4 $86 15/16 $75 5/8 $69 3/8 Low.................. $62 7/8 $56 1/4 $74 $70 3/8 $74 $67 3/8 $63 11/16 $62 3/16 Cash dividends per share................. $0.7125 $0.7125 $0.7125 $0.7125 $0.7125 $0.7125 $0.7125 $0.6875 $3.00 Cumulative Convertible Preference Stock: Market price per share High................. $900 $ -- $1,047 1/8 $ -- $1,040 $ -- $977 1/2 $864 1/2 Low.................. $900 $ -- $1,006 1/2 $ -- $1,040 $ -- $930 $864 1/2 Cash dividends per share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $2.80 Cumulative Convertible Preference Stock: Market price per share High................. $340 $386 1/2 $388 3/4 $392 $408 $408 $361 3/4 $330 Low.................. $310 $288 $355 $346 1/4 $362 1/2 $331 3/16 $307 $300 Cash dividends per share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
Prices in the foregoing table are from the New York Stock Exchange composite tape. On February 22, 1999 the high price per share was $57 1/4 and the low price per share was $56. As of December 31, 1998, the approximate number of holders of record of Common Stock of ARCO was approximately 81,700. The principal markets in which ARCO's Common Stock is traded are listed on the cover page. The quarterly dividend rate for Common Stock was increased to $0.7125 per share effective June 13, 1997. On January 25, 1999, a dividend of $0.7125 per share was declared on Common Stock, payable on March 15, 1999 to stockholders of record on February 15, 1999. Future cash dividends will depend on earnings, financial conditions and other factors; however, the company presently expects that dividends will continue to be paid. 27 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for ARCO:
Years Ended December 31, ------------------------------------------ (Restated except for net income 1998(1)(2) 1997(1) 1996 1995(3) 1994(4) and cash dividends) ---------- ------- ------- ------- ------- (Millions except per share amounts) Sales and other operating revenues......................... $10,303 $14,340 $14,094 $10,995 $11,132 Income (loss) from continuing operations....................... (655) 1,331 1,261 685 514 Earnings (loss) per share from continuing operations (basic)(5). (2.05) 4.14 3.92 4.27 2.85 Earnings (loss) per share from continuing operations (diluted)(5)(6).................. (2.05) 4.07 3.86 4.22 2.81 Net income........................ 452 1,771 1,663 1,376 919 Cash dividends per common share(5)......................... 2.85 2.825 2.75 2.80 2.75 Total assets...................... 25,199 22,425 22,703 20,934 21,415 Long-term debt and capital lease obligations...................... 4,332 3,619 4,745 5,813 6,293
-------- (1) See Notes 6 and 7 of Notes to Consolidated Financial Statements regarding restructuring costs and an extraordinary item in 1997. (2) Includes $925 million after tax impairment of oil and gas properties. (3) Dividends include a $0.05 per share redemption payment for Common Stock purchase rights. (4) Includes after-tax gain of $273 million from issuance of stock by Vastar Resources, Inc. and a $210 million after-tax charge for the costs associated with the elimination of approximately 2,400 positions company wide. (5) Restated for the effect of 100% stock dividend issued June 13, 1997. (6) No dilution assumed for 1998 due to antidilutive effect on loss from continuing operations. 28 ITEMS 7. AND 8. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements and Financial Statement Schedule
Schedule No. Page --- ---- Independent Accountants' Report............................... 30 Financial Statements: Consolidated Statement of Income............................ 35 Consolidated Balance Sheet.................................. 38 Consolidated Statement of Cash Flows........................ 39 Consolidated Statement of Changes in Stockholders' Equity... 43 Notes to Consolidated Financial Statements.................. 46 Supplemental Information.................................... 60 Supporting Financial Statement Schedule Covered by the Foregoing Independent Accountants' Report: II Valuation and Qualifying Accounts........................... 72
Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. Financial statements with respect to unconsolidated subsidiaries and 50% owned companies are omitted per Rule 3-09(a) of Regulation S-X. 29 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of Atlantic Richfield Company In our opinion, the consolidated financial statements listed in the accompanying index appearing on pages 35, 38, 39 and 43 present fairly, in all material respects, the financial position of Atlantic Richfield Company and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing on page 72 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. PricewaterhouseCoopers LLP Los Angeles, CA February 12, 1999 30 ARCO OPERATING REVIEW [PHOTO APPEARS HERE] During 1998, ARCO took the following actions in line with its strategy to focus on the oil and gas business: (1) sold its interest in ARCO Chemical Company and its U.S. coal assets; (2) completed a tender offer for all of the common stock of Union Texas Petroleum Holdings, Inc. (UTP), which strengthened its presence in the North Sea, Indonesia, Venezuela, and Alaska; and (3) enhanced its position in the Gulf of Mexico by swapping its heavy oil properties in California for assets in the Gulf. The Operating Review that follows explains the major changes in ARCO's key businesses as related to prices, production volumes, sales, and expenses for the years 1998 and 1997. Discontinued operations, unallocated expenses, and other operations, which include Lower 48 pipelines and aluminum, are also examined. The consolidated results of these operations are examined in relation to the Consolidated Statement of Income on page 35. 31 ARCO RESULTS OF SEGMENT OPERATIONS Exploration & Production
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Net income (loss) $ (616) $1,347 $1,329 Special items charge (benefit) 1,002 - (7) --------------------------- Operating results $ 386 $1,347 $1,322 ===========================
ARCO's goal is to increase its international production significantly, stabilize production in Alaska after 1999, and increase its Lower 48 production modestly. During 1998, ARCO's total production on an oil-equivalent barrel basis grew to 1,008,700 barrels per day (b/d), and international production to 285,300 b/d. ARCO's exploration & production operating results in 1998 were significantly impacted by lower crude oil prices and, to a lesser extent, higher exploration expenses. The impact of lower natural gas prices was essentially offset by increased natural gas production. The former UTP properties purchased at the end of the second quarter of 1998 contributed to a 4% increase in production volumes for the year and a 12% increase for the fourth quarter, compared to fourth quarter 1997. The added revenues from that production were more than offset by the depreciation, depletion, and amortization (DD&A), which included the allocated purchase price, and the operating costs associated with those properties. In 1998, special items included after-tax charges of $925 million for the impairment of oil and gas properties, including $507 million related to former UTP properties. See page 37 of the "Results of Consolidated Operations" for a further discussion of the impairment included in DD&A. Special items also included after-tax charges of $107 million primarily for employee termination costs associated with restructuring. These charges were partially offset by tax- related benefits of approximately $30 million. In 1997, higher natural gas prices and continued growth in international natural gas volumes improved operating results. These factors were partially offset by higher operating and DD&A expenses associated with increased production, and higher exploration expense. Petroleum Liquids Production
Barrels/day - net 1998 1997 1996 - ------------------------------------------------------------------------------ Prudhoe Bay* 175,300 198,500 210,800 Kuparuk River 123,000 128,200 130,500 Other Alaska* 48,400 50,500 51,400 Lower 48, including Vastar 180,900 180,700 171,800 International 130,400 82,600 66,100 ----------------------------- Total 658,000 640,500 630,600 =============================
* Includes NGLs In 1998, increased petroleum liquids production primarily reflected 36,700 barrels per day contributed by the former UTP properties, partially offset by natural field decline in Alaskan fields. Average Petroleum Liquids Sales Prices - ------------------------------------------------------------------------------ per barrel [BAR GRAPH APPEARS HERE] U.S., including Vastar International $ 7.50 $ 7.50 98 $ 9.43 $11.07 97 $15.63 $18.20 96 $16.07 $19.02 In a transaction consummated in October 1998, ARCO exchanged California heavy crude oil properties producing approximately 37,000 barrels per day for Gulf of Mexico exploration acreage and producing properties, which were transferred to Vastar Resources, Inc. (Vastar). Production from the Gulf properties is expected to average 180 million cubic feet of gas equivalent per day, net of divestitures, in 1999. ARCO has begun development of the Tarn and Alpine fields and other satellite discoveries. Alpine and the satellite discoveries will help stabilize production in Alaska after 1999. In 1997, increased petroleum liquids production in the Lower 48 partially offset a net decrease in production from Alaskan fields, primarily Prudhoe Bay. The 25% increase in international petroleum liquids production reflected increased contributions from Algeria and Qatar along with new production from interests in Tunisia and Kazakhstan. These volumes were partially offset by natural field decline in Indonesia. The overall increase in petroleum liquids production offset the decline in average petroleum liquids prices. Natural Gas Production
Million cubic feet/day - net 1998 1997 1996 - ------------------------------------------------------------------------------ U.S., including Vastar 1,175 1,066 1,044 ======================= International United Kingdom 369 368 330 Indonesia 293 314 311 Indonesia LNG 98 - - China 133 142 69 Other 36 20 20 ----------------------- Total International 929 844 730 =======================
The 1998 growth in international natural gas production primarily reflected 167 million cubic feet per day (mmcf/d) contributed from former UTP properties, partially offset by declines of approximately 80 mmcf/d associated with ARCO's other properties, primarily a 53 mmcf/d decline from Indonesia. Indonesian volumes fell due to the severe effect of the Asian financial crisis on Indonesia's economy. 32 RESULTS OF SEGMENT OPERATIONS ARCO Average Natural Gas Sales Prices - ------------------------------------------------------------------------------ per thousand cubic feet [BAR GRAPH APPEARS HERE] U.S., including Vastar International $1.50 $1.50 98 $1.82 $2.54 97 $2.04 $2.64 96 $1.80 $2.54 In 1997, international natural gas production increased 16%, reflecting increased production from the Yacheng 13 field in the South China Sea and from fields in the United Kingdom. Refining & Marketing
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Net income $ 281 $ 325 $ 287 Special items charge (benefit) - 38 12 ----------------------- Operating results $ 281 $ 363 $ 299 =======================
ARCO's goal is to increase the profitability and market share of its refining & marketing operations. In 1998, ARCO expanded the refining & marketing cost reduction program which was initiated in 1997. In 1998, a special items charge of $13 million for personnel reductions associated with the cost reduction program was offset by favorable legal settlements. The 1997 special items charge primarily related to personnel reductions associated with the cost reduction program. The decline in operating results in 1998 primarily resulted from lower light product margins. Jet fuel imports from Asia into the West Coast marketing area led to changes in product mix for refineries on the West Coast. This change increased the supply of gasoline and diesel, causing margins to decline as gasoline and diesel prices fell more than crude oil prices during the year. The 1998 net income includes approximately $20 million associated with the recognition of part of the deferred pre-tax gain on the sale of ARCO's chemical interest. (See "Gain on Disposition of Discontinued Operations" on page 34.) In 1997, improved operating results for ARCO's refining & marketing operations reflected higher margins and sales volumes. Increased sales volumes more than offset the higher operating and selling expenses. Petroleum Products Sales
Thousand barrels/day 1998 1997 1996 - ------------------------------------------------------------------------------ Gasoline 308.7 281.9 266.4 Jet 102.8 117.3 117.0 Distillate 80.6 76.6 69.0 Other 72.7 68.0 80.7 ----------------------- Total 564.8 543.8 533.1 =======================
ARCO has had steady growth in sales volumes over the past three years. In order to support its growing market volumes, refined products were purchased from third parties to supplement ARCO's refinery production in 1997 and 1998. Margins on the sale of purchased products are lower than on products produced. The decline in jet fuel sales reflected both a change in the production mix and a turnaround at ARCO's Cherry Point refinery in the third quarter of 1998. The higher volume of other sales in 1996 reflected the sale of intermediate products, produced in larger quantity as a result of turnarounds that limited gasoline production. Other Operations
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Net income $ 111 $ 82 $ 87 Special items charge (benefit) (8) 7 6 ------------------------ Operating results $ 103 $ 89 $ 93 ========================
Results from ARCO's other operations included the earnings from Lower 48 pipeline operations and an aluminum rolling facility. The increase in 1998 earnings, compared to 1997 and 1996, primarily reflected improved operating results from the 50%-owned Seaway pipeline joint venture in the midcontinent. The 1998 special items included gains from pipeline asset sales, partially offset by pipeline restructuring charges. The 1997 special items included restructuring charges for Lower 48 pipeline operations. The 1996 special items included a net after-tax charge for the writedown of ARCO's interest in the Point Arguello Pipeline, partially offset by a gain on a pipeline sale. Unallocated Items
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Unallocated net expense $(228) $(177) $ (54) Interest expense (203) (246) (388) Income from discontinued operations 179 267 402 Gain on disposition of discontinued operations 928 291 - Extraordinary loss on extinguishment of debt - (118) - -------------------------- Total $ 676 $ 17 $ (40) ==========================
33 RESULTS OF SEGMENT OPERATIONS ARCO In 1998, unallocated net expense primarily included charges of $143 million after tax for future environmental remediation, charges of $48 million after tax for restructurings, and interest revenue. In 1997, unallocated net expense primarily included charges of $179 million after tax for future environmental remediation and reclamation, charges of $11 million after tax for restructurings, tax benefits related to affiliate stock transactions and interest revenue. The environmental charges in 1998 and 1997 related both to current operations and natural resource damage liabilities in the state of Montana associated with previously discontinued mining operations. The adoption of a new environmental accounting standard was also included in the 1997 charges. In 1998, the decrease in after-tax interest expense included interest on a tax refund of $94 million. In 1997, the decrease in after-tax interest expense included reversals of reserves for tax-related interest of $89 million. Extraordinary Loss On Extinguishment of Debt The company incurred a loss of $192 million before tax, or $118 million after tax, on early retirement of long-term debt during 1997. The early retirements resulted in a pretax reduction in interest expense of approximately $100 million in 1998. Gain on Disposition of Discontinued Operations ARCO Chemical In July 1998, ARCO sold its entire interest in ARCO Chemical to Lyondell Petrochemical Company (Lyondell), an unrelated third party following the disposition discussed below, for $4.6 billion. After deferral of $313 million of the pretax gain as discussed below, ARCO recorded a net after-tax gain of $1.1 billion. Previously, the company entered into a 10-year purchase agreement with ARCO Chemical providing for the delivery of fixed quantities of methyl tertiary butyl ether (MTBE) at a fixed price approximating the then-market price. Over the last several years the spot market price of MTBE has declined; however, provision for loss on the contract was not necessary since ARCO Chemical was a consolidated, majority-owned subsidiary of the company. The above-market MTBE contract value was reflected in the sale price of the company's interest in ARCO Chemical. As a result, ARCO has deferred $313 million of the pre-tax gain on sale of the ARCO Chemical interest. This deferral represents the estimated discounted present value of the difference over the remaining term of the contract between the contract price and the spot market price for MTBE. The deferral will be amortized over the remaining term of the contract on a straight-line basis. The amortization and recognition of imputed interest will have a net favorable impact of approximately $10 million after tax per quarter on earnings of the refining and marketing segment through the end of the contract in 2001. Coal In June 1998, for a consideration of approximately $1.1 billion, ARCO disposed of its U.S. coal operations in a transaction with Arch Coal (Arch). Operations disposed of included the Black Thunder and Coal Creek mines in Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest in three mines in Utah. The Colorado and Utah mines were sold outright. ARCO contributed its Wyoming coal operations and Arch transferred various of its coal operations into a new joint venture that is 99% owned by Arch and 1% owned by ARCO. As of February 1999, ARCO has sold its interests in two Australian coal mines. ARCO sold its 80% interest in the Gordonstone coal mine and its 31.4% interest in the Blair Athol Joint Venture and has recorded a $92 million provision for the estimated loss on the disposal of the U.S. and Australian coal assets. The recognition of the disposition of U.S. operations has been deferred (by reducing net assets of discontinued operations) until the disposition of the remaining Australian coal assets is completed and the actual loss can be determined. UTP Petrochemical At the time of the UTP acquisition, ARCO determined the UTP petrochemical operations would be divested as soon as possible. Accordingly, $33 million after tax has been accrued as the estimated loss on disposal of the petrochemical assets. Lyondell In September 1997, all of ARCO's 9% Exchangeable Notes due September 15, 1997, with an outstanding principal amount of $988 million, were redeemed with Lyondell common stock owned by ARCO. ARCO then sold its remaining Lyondell shares in a privately negotiated transaction. ARCO realized an aggregate pretax gain of $633 million, or $291 million after tax, on the two transactions. Income From Discontinued Operations
Net income (loss) - millions 1998 1997 1996 - ------------------------------------------------------------------------------ ARCO Chemical $ 170 $ 92 $ 288 Coal operations 9 56 60 Lyondell - 119 54 UTP petrochemical operations - - - ----------------------- Total $ 179 $ 267 $ 402 =======================
See Note 4 to Consolidated Financial Statements regarding discontinued operations. 34 ARCO CONSOLIDATED STATEMENT OF INCOME
December 31, Millions, except per share amounts 1998 1997/(a)/ 1996/(a)/ - ------------------------------------------------------------------------------------------- REVENUES Sales and other operating revenues $10,303 $14,340 $14,094 Other revenues 506 417 486 ----------------------------------- Total revenues 10,809 14,757 14,580 ----------------------------------- EXPENSES Trade purchases 3,959 6,405 6,463 Operating expenses 2,735 2,654 2,268 Selling, general and administrative expenses 772 816 737 Depreciation, depletion and amortization 2,982 1,446 1,322 Exploration expenses (including undeveloped leasehold amortization) 629 508 413 Taxes other than income taxes 506 640 683 Interest 259 343 582 Restructuring costs 249 67 26 ----------------------------------- Total expenses 12,091 12,879 12,494 ----------------------------------- Income (loss) from continuing operations before income taxes, minority interest and extraordinary item (1,282) 1,878 2,086 Provision (benefit) for taxes on income (651) 504 786 Minority interest in earnings of subsidiaries 24 43 39 ----------------------------------- Income (loss) from continuing operations before extraordinary item (655) 1,331 1,261 Income from discontinued operations, net of income taxes of $113 (1998), $74 (1997) and $155 (1996) 179 267 402 Gain on disposition of discontinued operations, net of income taxes of $1,620 (1998) and $342 (1997) 928 291 - ----------------------------------- Income before extraordinary item 452 1,889 1,663 Extraordinary loss on extinguishment of debt, net of income taxes of $74 - 118 - ----------------------------------- Net income $ 452 $ 1,771 $ 1,663 =================================== Earnings per share: Continuing operations Basic $ (2.05) $ 4.14 $ 3.92 Diluted $ (2.05) $ 4.07 $ 3.86 Net income Basic $ 1.40 $ 5.51 $ 5.17 Diluted $ 1.40 $ 5.41 $ 5.09 Weighted average equivalent shares outstanding: Basic 321.0 321.2 321.7 Diluted 321.0 327.4 326.5
(a) Restated for discontinued operations with no effect on net income. See Notes on pages 46 through 59. 35 ARCO RESULTS OF CONSOLIDATED OPERATIONS ARCO's 1998 operating results were down primarily because of lower crude oil prices along with higher exploration expenses. The lower crude oil prices reduced operating income by nearly $800 million. In 1997, ARCO's earnings increase primarily reflected higher natural gas prices and volumes, lower interest expense and higher refined product margins. Partially offsetting factors were higher DD&A and exploration expenses. Earnings from Consolidated Operations
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Income from continuing operations $ (655) $1,331 $1,261 Special items (benefit) charge 1,055 (2) - ------------------------------ Operating results $ 400 $1,329 $1,261 ============================== Special items after tax - ------------------------------------------------------------------------------ Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Impairment of oil and gas properties 925 - - Tax-related benefits (153) (248) - Environmental charges 145 184 19 Restructuring charges 172 40 19 Other, net (34) 22 (38) ------------------------------ Total (benefit) charge $1,055 $ (2) $ - ==============================
Revenues The decline in exploration & production revenues in 1998 resulted primarily from lower petroleum liquids prices and natural gas marketing activity. Effective September 1997, Vastar contributed certain of its natural gas marketing operations to a joint venture with Southern Energy, Inc. The joint venture is accounted for on the equity method. As a result of the transfer of those operations, the natural gas marketing sales and purchases volumes for 1998 were significantly lower compared to 1997 and 1996. The 1997 exploration & production revenues reflected higher natural gas production volumes and prices, partially offset by decreased natural gas marketing activity. Sales and Other Operating Revenues
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Exploration & production $ 5,934 $ 9,548 $ 9,355 Refining & marketing 5,484 6,856 6,940 Other operations 172 195 223 Intersegment eliminations (1,287) (2,259) (2,424) ------------------------------- Total $10,303 $14,340 $14,094 ===============================
Natural Gas Trade Sales and Purchases Volumes
Million cubic feet/day 1998 1997 1996 - ------------------------------------------------------------------------------ Sales Marketing 427 1,804 2,049 Production 2,104 1,910 1,774 ----------------------------- Total trade sales 2,531 3,714 3,823 Marketing purchases 497 1,865 2,132 =============================
The decline in refining & marketing sales revenues in 1998 resulted from lower refined products prices, only partially offset by increased gasoline sales volumes. In 1997, increased refining and marketing sales volumes were more than offset by the expiration near the end of 1996 of a crude-oil-for-refined-product exchange agreement. Other Revenues Other revenues increased in 1998, primarily reflecting increased equity earnings from ARCO's pipeline operations and proceeds from pipeline asset sales. Other revenues declined in 1997 primarily because of less interest income on a lower average balance of short-term investments. Expenses In 1998, trade purchases were lower primarily as a result of lower crude oil prices and the transfer of Vastar's natural gas marketing operations to the Vastar-Southern Energy, Inc. joint venture. ARCO's 1997 trade purchases were lower, compared to 1996, primarily as a result of decreased natural gas marketing activity, partially offset by increased purchases of refined products. In 1998, operating expenses increased because of added expenses from UTP and a $91 million provision associated with the exchange of California heavy crude oil properties. Charges for [PHOTO APPEARS HERE] 36 RESULTS OF CONSOLIDATED OPERATIONS ARCO future environmental remediation and reclamation declined to $234 million before tax. Natural gas marketing delivery charges declined following the transfer of operations to the Vastar-Southern joint venture. In 1997, operating expenses included charges of $300 million before tax for future environmental remediation and reclamation and costs associated with increased production from Rhourde El Baguel in Algeria and other new field production. The environmental charges in 1998 and 1997 related both to current operations and to natural resource damage liabilities in the state of Montana associated with previously discontinued mining operations. In 1997, these charges also related to the adoption of a new environmental accounting standard. The increased DD&A included property, plant and equipment impairment writedowns of $1.4 billion ($794 million for former UTP properties) during 1998. The impairment amount was determined by performing an impairment test in accordance with Statement of Financial Accounting Standards No. 121. The prices used in estimating future cash flows were $15 per barrel in 1999, $16 per barrel in 2000 and $17 per barrel in 2001 and beyond. A discount rate of 10% was used. The impairment loss was included in DD&A in the Statement of Income. The impaired properties included former UTP properties in Pakistan, Venezuela and the U.K. North Sea, as well as other ARCO properties in California, the U.K. North Sea, North Africa and the Middle East. DD&A in 1998 also included the DD&A of former UTP operations in the third and fourth quarters of 1998. The higher DD&A in 1997 reflected new crude oil and natural gas production from international operations. In 1998 and 1997, ARCO's international exploration operations incurred increased geological and geophysical expense and dry hole costs. Vastar had higher exploration expenses of $35 million in 1998 primarily resulting from increased dry hole expense associated with deepwater drilling activity. Taxes other than income taxes decreased in 1998 and 1997 primarily as the result of the impact of lower crude oil prices and, to a lesser extent, lower volumes on U.S. production taxes. The decrease in interest expense in 1998 primarily reflected increased capitalized interest compared to 1997. In 1997, the reversal of reserves for tax-related interest which resulted from the partial resolution of certain federal and state income tax audits and reduction in long-term debt resulted in a decline in interest expense, compared to 1996. In 1998, $229 million of the restructuring charges related to costs of eliminating 1,212 positions specifically identified as of December 31, 1998. The entire 1997 charge was for personnel-related costs. See Note 7 to Consolidated Financial Statements regarding restructuring costs. In 1996, restructuring charges were final charges for previously reported personnel reductions, the majority of which were reported in 1994. Income Taxes The company had a tax benefit in 1998 reflecting the company's loss from continuing operations. The company had an effective tax rate of 26.8% in 1997 and 37.7% in 1996. The lower effective tax rate in 1997, compared to 1996, primarily reflected the net effect of affiliate stock transactions. [PHOTO APPEARS HERE] 37 CONSOLIDATED BALANCE SHEET ARCO
December 31, Millions 1998 1997/(a)/ - ---------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 657 $ 434 Short-term investments 260 222 Accounts receivable 1,002 929 Inventories 475 456 Prepaid expenses and other current assets 317 204 --------------------- Total current assets 2,711 2,245 --------------------- Investments and long-term receivables: Investments accounted for on the equity method 1,235 763 Other investments and long-term receivables 831 1,820 --------------------- Total investments and long-term receivables 2,066 2,583 --------------------- Net property, plant and equipment 18,762 13,560 Net assets of discontinued operations 339 2,777 Deferred charges and other assets 1,321 1,260 --------------------- Total assets $25,199 $22,425 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 2,403 $ 1,456 Accounts payable 976 948 Taxes payable 634 308 Long-term debt due within one year 399 164 Other 1,285 953 --------------------- Total current liabilities 5,697 3,829 --------------------- Long-term debt 4,332 3,619 Deferred income taxes 3,318 2,661 Dismantlement, restoration and reclamation 1,058 966 Other deferred liabilities and credits 2,955 2,430 Minority interest 259 240 --------------------- Total liabilities 17,619 13,745 --------------------- Stockholders' equity: Preference stocks 1 1 Common stock, $2.50 par value; shares issued 325,902,559 (1998), 322,719,890 (1997) shares outstanding 321,315,367 (1998), 320,369,895 (1997) 815 807 Capital in excess of par value of stock 863 640 Retained earnings 6,589 7,054 Treasury stock (344) (170) Accumulated other comprehensive income (loss) (344) 348 --------------------- Total stockholders' equity 7,580 8,680 --------------------- Total liabilities and stockholders' equity $25,199 $22,425 =====================
(a) Restated for discontinued operations See Notes on pages 46 through 59. 38 CONSOLIDATED STATEMENT OF CASH FLOWS ARCO
December 31, Millions 1998 1997/(a)/ 1996/(a)/ - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from continuing operations $ (655) $ 1,213 $ 1,261 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,535 1,446 1,322 Impairment writedown 1,447 - - Dry hole expense and undeveloped leasehold amortization 303 235 209 Extraordinary loss on extinguishment of debt - 118 - Income from equity investments (78) (19) (22) Dividends from equity investments 37 26 29 Noncash provisions greater (less) than cash payments 184 61 (203) Minority interest in earnings of subsidiaries 24 43 39 Net gain on asset sales (61) (49) (35) Deferred income taxes (539) 112 (44) Changes in working capital accounts 307 183 158 Other 58 2 (27) ----------------------------------- Net cash provided by operating activities 2,562 3,371 2,687 ----------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Union Texas Petroleum acquisition (2,707) - - Additions to fixed assets, including dry hole costs (3,551) (2,655) (1,854) Net proceeds from sale of ARCO Chemical and U.S. coal assets 3,988 - - Net cash provided (used) by short-term investments (33) 558 753 Investment in/advances to LUKARCO (59) (227) - Investment in LUKOIL and Zhenhai securities - - (218) Proceeds from asset sales 207 182 47 Investments and long-term receivables (242) (202) (115) Other (73) 6 4 ----------------------------------- Net cash used by investing activities (2,470) (2,338) (1,383) ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (503) (1,558) (832) Proceeds from issuance of long-term debt 536 254 680 Net cash provided by notes payable 912 521 99 Dividends paid (917) (908) (887) Treasury stock purchases (32) (256) (57) Other 50 43 146 ----------------------------------- Net cash provided (used) by financing activities 46 (1,904) (851) ----------------------------------- Cash flows from discontinued operations 85 (16) (381) Effect of exchange rate changes on cash - (5) 4 ----------------------------------- Net increase (decrease) in cash and cash equivalents 223 (892) 76 Cash and cash equivalents at beginning of year 434 1,326 1,250 ----------------------------------- Cash and cash equivalents at end of year $ 657 $ 434 $ 1,326 ===================================
(a) Restated for discontinued operations See Notes on pages 46 through 59. 39 ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITIONS ARCO 1998 Cash Inflows - (millions) - ------------------------------------------------------------------------------ [PIE CHART APPEARS HERE] ARCO Chemical and U.S. coal asset sales $3,988 Operations $2,562 Short-term debt issuance $ 912 Long-term debt issuance $ 536 Asset sales $ 207 In light of current oil prices, ARCO has taken a hard look at all of its projects and reaffirmed its intention to pursue those projects that are key to its focus areas. However, even in focus areas, ARCO may defer some projects that require a more positive market outlook. Accordingly, ARCO's 1999 capital spending program includes $2.7 billion for additions to fixed assets, compared to $3.6 billion in 1998. Future capital expenditures remain subject to business conditions affecting the industry, as well as changes in environmental rules and regulations and the tax laws. Cash and cash equivalents and short-term investments totaled $917 million at year-end 1998, short-term borrowings were $2.4 billion and long-term debt due within one year was $399 million. Beginning in 1997 and continuing through the end of 1998, the company utilized increased short-term borrowing in lieu of increased long-term borrowing (other than long-term debt assumed in connection with the UTP acquisition). As a result, the company has been in a working capital deficit position (currently $3 billion at December 31, 1998). Depending upon the revenues earned and cash received from the sale of assets during 1999, the company may increase total indebtedness during the course of the year. On January 27, 1999, ARCO filed a Form S-3 Registration Statement for the issuance of up to $1.5 billion of debt securities as determined by market conditions. The net proceeds from the sale of debt securities will be used for general corporate purposes, primarily the replacement of short-term debt with 1999 Budgeted Adds to Fixed Assets - (millions) - ------------------------------------------------------------------------------ [PIE CHART APPEARS HERE] International oil & gas $ 950 Vastar $ 695 Alaska $ 475 Other Lower 48 $ 105 Refining & marketing $ 400 Other $ 75 1998 Cash Outflows - (millions) - ------------------------------------------------------------------------------ [PIE CHART APPEARS HERE] Adds to fixed assets $3,551 UTP acquisition $2,707 Dividends $ 917 Repayment of long-term debt $ 503 Other $ 439 long-term debt. The proceeds may also be used for capital expenditures, the retirement of maturing debt, and other corporate purposes. Such long-term financing may not necessarily reduce or eliminate the working capital deficit. At December 31, 1998, ARCO had unused committed bank credit facilities totaling $3.0 billion. The company believes it has adequate resources and liquidity to fund future cash requirements for working capital, capital expenditures, dividends and debt repayments with cash generated from operations, existing cash balances, additional short- and long-term borrowing, and the sale of assets. Effective June 13, 1997, ARCO had a 2-for-1 stock split in the form of a 100% stock dividend and a 4% increase in the quarterly dividend. In November 1998, Vastar filed with the SEC a Form S-3 Registration Statement for the issuance of up to $300 million of debt securities. As of December 31, 1998, no debt securities had been issued. Vastar had a revolving credit facility of $1.1 billion with an effective interest rate of 5.6% during the year. As of December 31, 1998, $320 million was outstanding under the facility. [PHOTO APPEARS HERE] 40 MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT ARCO The following discussion of the company's risk-management activities includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. At December 31, 1998 the company holds a variety of financial instruments, derivative instruments, and derivative-commodity instruments that are sensitive to changes in interest rates, foreign exchange rates and commodity prices. To minimize the effects of interest rate and foreign currency fluctuations, ARCO enters into the following transactions using derivatives: 1) foreign currency forward, option and swap contracts; 2) interest rate swaps; and 3) financial futures contracts and over-the-counter Treasury options which are limited to investment portfolio hedging, alteration of portfolio duration and changing asset mix. ARCO and its subsidiaries also engage in hedging strategies involving forward and futures contracts, swaps and options covering part of its natural gas and crude oil production to minimize the effects of commodity price fluctuations. The company uses simple, non-leveraged derivative instruments that are placed with major institutions whose creditworthiness is continually monitored. Risk management strategies are reviewed and approved by senior management before being implemented. Policy controls limit the maximum amount of positions that can be taken in any given instrument. In the normal course of business, the company also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the following analyses. Interest Rate Risk The fair value of the company's cash and short-term investment portfolio and the fair value of notes payable at December 31, 1998, approximated carrying value. Given the short-term nature of these instruments, market risk, as measured by the change in fair value resulting from a hypothetical 10% change in interest rates, is not material. The fair value of the company's long-term debt, including current maturities, was estimated to be $5.5 billion at December 31, 1998, and exceeded the carrying value by $765 million. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the company's weighted average long-term borrowing rate at December 31, 1998, or $172 million. Interest rate risk is mitigated by the use of floating rate instruments, which comprise approximately $400 million of the company's long- term debt, and a LIBOR-based fixed-to-floating rate swap on $100 million of long-term debt. Foreign Exchange Rate Risk The company has bought foreign currency contracts (principally involving European currencies) to hedge anticipated foreign currency commitments and future cash flows from overseas operations with varying maturities ranging from January 1999 to June 1999. The hypothetical loss in cash flows of the combined foreign-exchange positions is estimated to be $52 million. A hypothetical adverse change of 10 percent in year-end exchange rates (a strengthening of the U.S. Dollar), is assumed. For purposes of the estimation, it was also assumed that the exercise of the foreign currency contracts and the anticipated commitments or future cash flows were realizable at the same time and at the hypothetical exchange rate. The foreign currency amounts for the future cash flows were translated to US dollars by using the hypothetical exchange rate and the cash value of the option, multiplied by the difference between the hypothetical and strike exchange rates to the option-contract amount. At December 31, 1998, approximately $750 million of financial instruments, primarily short-term debt, were denominated in foreign currencies. Assuming a hypothetical adverse change of 10% in year-end exchange rates(a weakening of the U.S. dollar), the fair value of those instruments would increase by $70 million. Commodity Price Risk From time to time, the company uses various hedging arrangements, predominantly natural gas swaps and crude oil futures and options, to manage the company's exposure to price risk from its natural gas and petroleum liquids production. These hedging arrangements have the effect of locking in for specified periods (at predetermined prices or ranges of prices) the prices the company will receive for the volumes to which the hedge relates. As a result, while these hedging arrangements are structured to reduce the company's exposure to decreases in price associated with the hedging commodity, they also limit the benefit the company might otherwise have received from any price increases associated with the hedged commodity. At December 31, 1998, ARCO had entered into a series of crude oil futures and options contracts and a series of forward natural gas contracts. 41 MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT ARCO Based on year-end forward prices ARCO had a net liability of $16 million on those contracts. The hypothetical incremental loss in earnings for the combined commodity positions at year end is estimated to be $6 million, assuming an increase in crude oil and natural gas year-end forward prices of 10%. In order to calculate the hypothetical loss, the relevant parameters of the commodity contracts are the type of commodity and the delivery price. The hypothetical loss on the commodity contracts was estimated by calculating the cash value of the contracts as the difference between the hypothetical and contract delivery prices, then multiplying it by the contract amount. Equity Price Risk Other investments at December 31, 1998, included marketable equity securities which are recorded at fair value of $336 million, including net unrealized losses of $75 million. Those securities have exposure to price risk. The estimated potential loss in fair value resulting from a hypothetical 10% decrease in prices quoted by stock exchanges is $34 million. Environmental Matters ARCO is subject to federal, state and local environmental laws and regulations that require the company to remove or mitigate the effect on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites. ARCO is currently participating in environmental assessments and cleanups at numerous sites under these laws and may in the future be involved in additional environmental assessments and cleanups. Environmental Reserves*
Millions 1998 1997 1996 - ------------------------------------------------------------------------------ Beginning balance $ 722 $ 524 $ 600 Charges 234 300 45 Payments (86) (102) (121) ------------------------- Ending balance $ 870 $ 722 $ 524 =========================
* Total long-term and short-term liabilities The amount accrued represents the estimated undiscounted costs that ARCO will incur to complete the remediation of sites with known contamination. In view of the uncertainties associated with estimating these costs (such as differences of opinion between ARCO and various regulatory agencies with respect to the appropriate method for remediating contaminated sites, uncertainty as to the extent of contamination at various sites, and uncertainty regarding ARCO's ultimate share of costs at various sites), it is possible that actual costs could exceed the amount accrued by as much as $500 million. This estimate was determined by applying Monte Carlo analysis to estimated site maximums on a portfolio basis. See Note 15 to Consolidated Financial Statements regarding environmental matters. In addition to the provision for environmental remediation costs, $1.1 billion has been accrued for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and for the estimated costs of restoration and reclamation of land associated with such facilities. Statements of Financial Accounting Standards Not Yet Adopted In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting the Costs of Start-up Activities." SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-5 states that costs of start-up activities, including organization costs, should be expensed as incurred. The company has determined that the adoption of SOP 98-5 will not have a material effect on ARCO's financial position or results of operations. 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 No. 133 standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. The company has not yet completed evaluating the impact of the provisions of SFAS No. 133. 42 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ARCO
Accumulated Other Common Stock Preference Capital in Treasury Stock Comprehensive Retained Millions Shares Dollars Stock Excess of Par Shares Dollars* Income (loss) Earnings Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance January 1, 1996 160.9 $402 $1 $632 0.1 $ (5) $ (88) $5,816 $6,758 ============================================================================================== Net income 1,663 1,663 Other comprehensive income: Unrealized gain on securities 236 236 Foreign currency translation (2) (2) Minimum pension liability 32 32 ---------------------------------------------------------------------------------------------- Total comprehensive income 1,929 Common stock dividends (885) (885) Preference stock dividends (2) (2) Common stock issued 0.2 1 12 13 Treasury stock purchases 0.5 (57) (57) Treasury stock issued (16) (0.5) 61 45 ---------------------------------------------------------------------------------------------- Balance December 31, 1996 161.1 $403 $1 $628 0.1 $ (1) $ 178 $6,592 $7,801 ============================================================================================== Net income 1,771 1,771 Other comprehensive income: Unrealized gain on securities 381 381 Foreign currency translation (185) (185) Minimum pension liability (26) (26) ---------------------------------------------------------------------------------------------- Total comprehensive income 1,941 Common stock dividends (906) (906) Preference stock dividends (2) (2) 100% stock dividend 161.3 403 (403) - Common stock issued 0.3 1 8 9 Treasury stock purchases 3.5 (256) (256) Treasury stock issued 4 (1.3) 87 91 Other 2 2 ---------------------------------------------------------------------------------------------- Balance December 31, 1997 322.7 $807 $1 $640 2.3 $(170) $ 348 $7,054 $8,680 ============================================================================================== Net income 452 452 Other comprehensive income: Unrealized gain (loss) on securities (681) (681) Foreign currency translation (18) (18) Minimum pension liability 7 7 ---------------------------------------------------------------------------------------------- Total comprehensive income (loss) (240) Common stock dividends (915) (915) Preference stock dividends (2) (2) Common stock issued 3.2 8 226 234 Treasury stock purchases 3.2 (249) (249) Treasury stock issued (3) (.9) 75 72 ---------------------------------------------------------------------------------------------- Balance December 31, 1998 325.9 $815 $1 $863 4.6 $(344) $(344) $6,589 $7,580 ==============================================================================================
* At cost See Notes on pages 46 through 59. 43 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS* ARCO ARCO's management from time to time may make forward-looking statements to inform existing and potential security holders regarding various matters. Such statements are generally accompanied by words such as estimate, project, predict or expect, that convey the uncertainty of future events or outcomes. These statements may include projections and estimates concerning the timing and success of specific projects, the size and timing of cost reductions, the level of future income, production volumes, size of hydrocarbon resources, ability to replace reserves and levels of capital spending. Actual results could differ materially based on numerous factors, including those described below. Price Volatility, Political, Economic and Regulatory Instability Volatility in prices and margins affects all of the company's businesses. Volatility is caused by a number of factors, including changes in market supply and demand balances and fluctuations in political, regulatory and economic climates throughout the world. The ability to operate ARCO's businesses is dependent on the politics and regulations in the U.S. and in the particular geographic regions where the company operates. The ability to negotiate and implement specific projects in a timely and favorable manner may be impacted by political considerations unrelated to or beyond the control of the company. Level of Oil and Gas Prices ARCO's management makes assumptions about the future prices of oil and gas for various planning, budgetary and accounting disclosure purposes. Management expects that these assumptions will change over time and actual prices in the future may differ from these estimates. Any substantial or extended decline in actual prices could have a material adverse effect on ARCO's financial position and results of operations, on the quantities of crude oil and natural gas reserves that economically may be produced and on the quantity of proved reserves that may be attributed to our properties. Production Rates and Reserve Replacement Projecting future rates of oil and gas production is inherently imprecise. Production rates of oil and gas reservoirs generally decline. Future production rates can be affected by price volatility and the company's ability to replace depleting reserves. There can be no assurances (a) as to the level or timing of success, if any: that the company will have in acquiring or finding and developing economically recoverable reserves; (b) that estimates of proved reserves will not be revised in the future; or (c) that the actual quantities of oil and gas ultimately recovered will not differ from the reserve estimates. Refining & Marketing Overall profitability of the company's refining and marketing operations depends heavily on the margin between the price of crude oil and/or purchased products and the sales price of products produced and/or purchased. Volumes produced and margins historically have been volatile and are impacted by market demand, regulatory changes (particularly environmental regulations regarding gasoline), the price of crude oil, and the ability of regional refiners and the company to provide a sufficient supply of refined products. Operating Hazards Operations are subject to various hazards common to the industry, including explosions, fires, uncontrollable spills, and damage from severe weather conditions. Year 2000 Risks The company has described its plans for addressing the Year 2000 issue and made a number of forward-looking statements regarding its Year 2000 readiness under the caption "Impact of the Year 2000 Issue." These statements are made on a number of assumptions: (a) that the company will be able to timely identify and locate all relevant Year 2000 items; (b) that the company's repair and replacement program will be timely completed, including work to be performed by third-party vendors and contractors; and (c) that representations by third parties regarding their readiness are correct. Actual results could differ materially if any of these assumptions are incorrect. Due to the general uncertainty as to the Year 2000 readiness of third parties and as to the reaction of the general population to any perceived gasoline shortages, as well as the general interconnectedness of businesses and their dependency on computers and embedded computer chips, the company cannot assure its stockholders that its operations and business will not be affected by a Year 2000 issue. * The company desires to take advantage of the "safe harbor" provisions contained in Section 27A of the Securities Act and Section 21B of the Exchange Act and is including this statement in order to do so. 44 YEAR 2000 ISSUE ARCO The Year 2000 issue (Y2K) arises from computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000, resulting in system failures or miscalculations that could cause operational disruptions. Completion of the company's Y2K project in a timely fashion is expected to reduce the possibility of material disruptions of normal business operations. ARCO is addressing the Y2K issue in three major areas: (1) computing integrity, (2) asset integrity, and (3) commercial integrity. Computing integrity refers to functionality of information technology, including computer hardware and software used throughout the company's facilities. Asset integrity refers to functionality of the company's worldwide exploration and production [PHOTO APPEARS HERE] operations, shipping operations, and its refining and marketing operations, all of which use embedded systems in the automated equipment and associated software responsible for the movement of product. Commercial integrity refers to the functionality of non-ARCO operated joint ventures and third party operated production operations, including the Trans Alaska Pipeline System (TAPS), as well as third party vendors of goods and services. ARCO is managing the project internally and is working to assure Y2K readiness by conducting internal audits. The company has also hired outside consultants to do certain minor audits. The company's implementation of the Y2K Project has not impacted other technology projects. ARCO is addressing its Y2K efforts in four phases: (1) inventory of Y2K items; (2) assessment of criticality of these items and prioritization of remediation efforts; (3) evaluation of various remediation strategies; and (4) the remediation and testing of modifications or new software. In all three areas, ARCO has identified critical items and prioritized their remediation based on the likelihood that failure attributable to Y2K issues would have a material adverse effect on the company's operations. Critical items are those believed by ARCO that could, in the event of failure, pose a risk to the health and safety of ARCO employees and other people, cause damage to the property or the environment, adversely affect revenues, or affect ARCO's business relationships.
Percent Total expended Total complete at Expected through estimated December date of December 31, cost Areas addressed 31, 1998 completion 1998 (millions) - -------------------------------------------------------------------------------- Computing integrity 70% March 1999 $ 8 $ 12 Asset integrity 50% June 1999 5 10 Commercial integrity 25% June 1999 1 3 --------------------------------------------------------- Total costs $ 14 $25 =========================================================
This estimate does not include ARCO's potential share of Y2K costs that may be incurred by partnerships and joint ventures in which the company participates but is not the operator. After completion of its Y2K efforts, ARCO will continue to monitor changes to remediated systems. In addition, ARCO is developing contingency plans to mitigate any disruption that might occur. Because ARCO has no control over third party remediation efforts, a large portion of ARCO's contingency planning is focusing on its external commercial relationships. ARCO is also identifying alternate sources of software and alternate vendors of goods and services. In addition, ARCO's contingency planning is focusing in part on existing business interruption plans to determine their applicability to Y2K items. ARCO believes that the impact of any Y2K failure will most likely be localized. However, as a result of the general uncertainty inherent in the Y2K problem, particularly the possible failure of critical third parties to successfully address their Y2K problems, ARCO is unable to assess the likelihood of significant business disruptions in one or more of its locations. Such disruptions could cause the company to be unable to produce or transport crude oil or natural gas, or to manufacture and deliver refined products to wholesale and retail customers. As a result, the company is currently unable to predict the aggregate financial or other consequences of such interruptions. The foregoing "Impact of the Year 2000 Issue" contains forward-looking statements that should be read in conjunction with the disclosures under the heading "Safe Harbor Cautionary Statement." 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Note 1 Accounting Policies ARCO's accounting policies conform to generally accepted accounting principles, including the "successful efforts" method of accounting for oil and gas producing activities. Unless otherwise stated, the Notes to Consolidated Financial Statements exclude discontinued operations. Principles of Consolidation The consolidated financial statements include the accounts of all subsidiaries, ventures and partnerships in which a controlling interest is held, including Vastar Resources, Inc., of which ARCO owned 82.1% of the outstanding shares at December 31, 1998. ARCO also consolidates its interests in undivided interest pipeline companies and in oil and gas joint ventures. ARCO uses the equity method of accounting for companies where its effective ownership is between 20% and 50% and for other ventures and partnerships in which a controlling interest is not held. Cash Equivalents Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit and marketable securities other than equity securities, maturing within three months of purchase. Cash equivalents are stated at cost, which approximates fair value. Oil and Gas Unproved Property Costs Unproved property costs are initially capitalized. Significant unproved properties are not amortized but are periodically assessed for impairment. Other properties are amortized on a composite basis, considering past success experience and average property life. In general, costs of properties surrendered or otherwise disposed of are charged to accumulated amortization. Costs of successful properties are transferred to developed properties. Fixed Assets Fixed assets are recorded at cost and are written off on either the unit-of- production or straight-line method based on the expected lives of individual assets or groups of assets. Upon disposal of assets depreciated on an individual basis, residual cost less salvage value is included in current income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage value is charged against accumulated depreciation. Dismantlement, Restoration and Reclamation Costs The estimated costs, net of salvage value, of dismantling facilities or projects with limited lives or that are required to be dismantled by contract, regulation or law, and the estimated costs of restoration and reclamation associated with oil and gas operations are accrued during production and classified as a long- term liability. Such costs are taken into account in determining depreciation, depletion and amortization. Environmental Remediation Environmental remediation costs are accrued as operating expenses based on the estimated timing and extent of remedial actions required by applicable governmental authorities and the amount of ARCO's liability in consideration of the liability and financial wherewithal of other responsible parties. Estimated liabilities are not discounted to present value. Stock-based Compensation Employee stock options are accounted for under the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25. Earnings per Share Basic earnings per share is based on the average number of common shares outstanding during each period. Diluted earnings per share includes as outstanding certain options and all convertible or potentially issuable securities as well. All historical earnings per share have been restated to give effect to the 100% stock dividend effective June 13, 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivative Instruments The company uses a variety of derivative instruments, both financial and commodity based, to minimize the market risks of commodity price, interest rate and foreign currency fluctuations. The company does not hold or issue derivative instruments for trading purposes and is not a party to leveraged instruments. All derivative instruments are off-balance sheet instruments; however, net receivable or payable positions related to derivative instruments are carried on the balance sheet. The nature of the transaction underlying a risk management strategy, primarily whether or not the instrument qualifies as a hedge, determines which accounting method is used. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO The conditions that must be met for a derivative instrument to qualify as a hedge are: (1) the item to be hedged exposes the company to price or interest rate risk; (2) the derivative reduces the risk exposure and is designated as a hedge at the time the derivative contract is entered into; and (3) at the inception of the hedge and throughout the hedge period there is a high correlation between changes in market value of the derivative instrument and fair value of the underlying items being hedged. Deferral accounting is used for the following types of transactions (if the instrument qualifies as a hedge): future crude oil and natural gas production; fixed-price crude oil and natural gas purchase and sale commitments; U.S. dollar-denominated debt issued by a foreign subsidiary; debt denominated in a foreign currency; and anticipated foreign currency commitments. Under this method, deferred gains and losses are included in other assets or accrued liabilities until the designated underlying item is recognized in income. Recognized gains and losses are recorded in sales and other operating revenues, other revenues or trade purchases depending on the underlying item associated with the derivative. Instruments typically used in these transactions are crude oil and natural gas swap and price collar contracts and some foreign currency swap, forward and option contracts. The accrual method of accounting is used for interest rate swap agreements entered into by the company which convert the interest rate on fixed-rate debt to a variable rate. Under the accrual method, each net payment or receipt due or owed under the derivative is recognized in income in the period to which the payment or receipt relates. Amounts to be paid/received under these agreements are recognized as an adjustment to interest expense. The related amounts payable to/receivable from the counterparties are included in other accrued liabilities. The fair value method of accounting is used for any derivative instrument that does not qualify as a hedge. The fair value method, whereby gains and losses associated with changes in fair value of a derivative instrument are recognized currently in income or in accumulated other comprehensive income, is used for the following derivative instruments: foreign currency forward and option contracts associated with anticipated future cash flows related to overseas operations, and foreign currency swap contracts associated with foreign-denominated intercompany debt with maturities exceeding one year. Presently, changes in fair value of all transactions accounted for under this method are recognized currently in income and reported as other revenues. Under all methods of accounting, the cash flows related to any recognized gains or losses associated with derivative instruments are reported as cash flows from operations. If a derivative instrument designated as a hedge is terminated prior to expected maturity, gains or losses are deferred and included in income when the underlying hedged item is recognized in income. When the designated item associated with a derivative instrument matures, is sold, extinguished or terminated, gains or losses are recognized as part of the gain or loss on sale or settlement of the underlying item. When a derivative instrument is associated with an anticipated transaction that is no longer expected to occur, the gain or loss on the derivative is recognized immediately in income. Reclassifications Certain previously reported amounts have been restated to conform to classifications adopted in 1998 or to reflect the company's chemical and coal operations as discontinued. Note 2 Segment Information Segment information has been prepared in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information." ARCO has two reportable segments: exploration and production (E&P) and refining and marketing (R&M). The segments were determined based upon types of products produced/sold by each segment. Segment performance is evaluated based upon net income, excluding interest expense. The E&P segment is an aggregation of several business units engaged in one or more of the following: the worldwide exploration, development and production of petroleum liquids (crude oil, condensate and natural gas liquids) and natural gas; the purchase and sale of petroleum liquids and natural gas; and the transportation via pipeline of petroleum liquids within the State of Alaska. The company's investments in the LUKARCO joint venture and LUKOIL common stock are included in the E&P segment as well. The R&M segment comprises the refining of crude oil, primarily from the North Slope of Alaska; the marketing of petroleum products, primarily in the West Coast region of the U.S.; and the transportation of petroleum liquids and petroleum products via ocean-going tankers, primarily between Alaska and the West Coast. The company's equity investment in Zhenhai Refining and Chemical Company is included in the R&M segment as well. Revenue from other operating segments is attributable to the pipeline transportation and storage of petroleum liquids and petroleum products in the 48 contiguous United States. Intersegment sales were made at prices approximating current market value. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Segment Information
1998 ---------------------------------------------------------------------- Exploration Refining & Unallocated Millions & Production Marketing All Other Items Totals - --------------------------------------------------------------------------------------------------- Sales and other operating revenue: U.S. $ 4,372 $5,457 $ 156 $ 2 $ 9,987 International 1,562 27 - 14 1,603 Intersegment revenues (1,179) (14) (80) (14) (1,287) ---------------------------------------------------------------------- Total 4,755 5,470 76 2 10,303 Income from equity affiliates 25 19 34 - 78 Interest revenue 18 5 - 96 119 Interest expense - - - 259 259 Depreciation, depletion and amortization 2,686 252 18 26 2,982 Income tax expense (benefit) (563) 145 65 (298) (651) Net income (loss) (616) 281 111 676(a) 452 Investment in equity affiliates 661 219 344 11 1,235 Property, plant and equipment (net): U.S. 7,420 2,939 432 132 10,923 International 7,824 15 - - 7,839 Additions to fixed assets 3,020 488 38 5 3,551 Segment assets 18,203 3,826 1,119 2,051(b) 25,199 1997 - --------------------------------------------------------------------------------------------------- Sales and other operating revenue: U.S. $ 7,918 $6,853 $ 177 $ 3 $14,951 International 1,630 3 - 15 1,648 Intersegment revenues (2,164) (3) (77) (15) (2,259) ---------------------------------------------------------------------- Total 7,384 6,853 100 3 14,340 Income from equity affiliates 5 8 6 - 19 Interest revenue 12 3 - 99 114 Interest expense - - - 343 343 Depreciation, depletion and amortization 1,184 226 15 21 1,446 Income tax expense (benefit) 653 161 47 (357) 504 Net income 1,347 325 82 17(a) 1,771 Investment in equity affiliates 336 98 329 - 763 Property, plant and equipment (net): U.S. 6,734 2,714 470 146 10,064 International 3,496 - - - 3,496 Additions to fixed assets 2,276 330 46 3 2,655 Segment assets 13,269 3,564 1,149 4,443(b) 22,425 1996 - --------------------------------------------------------------------------------------------------- Sales and other operating revenue: U.S. $ 7,968 $6,935 $ 202 $ - $15,105 International 1,387 5 - 21 1,413 Intersegment revenues (2,303) (8) (92) (21) (2,424) ---------------------------------------------------------------------- Total 7,052 6,932 110 - 14,094 Income from equity affiliates 13 - 9 - 22 Interest revenue 3 1 - 163 167 Interest expense - - - 582 582 Depreciation, depletion and amortization 1,061 227 18 16 1,322 Income tax expense (benefit) 767 150 52 (183) 786 Net income (loss) 1,329 287 87 (40)(a) 1,663 Investment in equity affiliates 94 - 330 - 424 Property, plant and equipment (net): U.S. 6,434 2,621 463 183 9,701 International 2,866 - - - 2,866 Additions to fixed assets 1,684 121 41 8 1,854 Segment assets 11,838 3,380 1,141 6,344(b) 22,703
(a) Includes: income from discontinued operations of $179, $267 and $402 in 1998, 1997 and 1996, respectively; gain on disposition of discontinued operations of $928 and $291 in 1998 and 1997, respectively; and extraordinary loss of $118 in 1997. (b) Includes assets of discontinued operations of $339 (1998), $2,777 (1997) and $3,395 (1996). 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Note 3 Acquisition of Union Texas Petroleum Holdings, Inc. In June 1998, ARCO completed its tender offer for all outstanding common shares of Union Texas Petroleum Holdings, Inc. (UTP) for approximately $2.5 billion, or $29 per share in cash. ARCO also purchased in a tender offer 1,649,500 shares of UTP's 7.14% Series A Cumulative Preferred Stock for approximately $200 million, or $122 per share in cash. UTP was a U.S.-based, non-integrated oil and gas company with substantially all of its oil and gas producing operations conducted outside of the U.S. in the United Kingdom sector of the North Sea, Indonesia and Pakistan. The acquisition is being accounted for as a purchase. The results of operations of UTP are included in the consolidated financial statements of ARCO as of July 1, 1998. The cost of the acquisition was allocated on the basis of the estimated fair value of the assets acquired and liabilities assumed. Those liabilities included employee termination costs and other costs, such as lease and other contract cancellation costs, totaling $87 million associated with the merging of UTP's businesses into ARCO's operations. At December 31, 1998, ARCO had paid out $52 million against those liabilities for severance to terminated employees. The following unaudited pro forma summary presents information as if UTP had been acquired as of the beginning of ARCO's fiscal years 1998 and 1997. The pro forma amounts include certain adjustments, primarily to recognize depreciation, depletion and amortization based on the allocated purchase price of UTP assets, and do not reflect any benefits from economies which might be achieved from combining operations. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies:
Millions, except per share amounts 1998 1997 - ------------------------------------------------------------------------------ Sales and other operating revenues $10,570 $15,061 ==================== Income (loss) from continuing operations before extraordinary item $ (702) $ 1,372 Income and gains on discontinued operations 1,107 590 Extraordinary loss - (118) -------------------- Net income $ 405 $ 1,844 ==================== Earnings (loss) per share Basic Continuing operations $ (2.19) $ 4.27 Discontinued operations 3.45 1.84 Extraordinary loss - (.37) -------------------- Net income $ 1.26 $ 5.74 ==================== Diluted Continuing operations $ (2.19) $ 4.19 Discontinued operations 3.45 1.80 Extraordinary loss - (.36) -------------------- Net income $ 1.26 $ 5.63 ====================
Note 4 Discontinued Operations In June 1998, ARCO disposed of its U.S. coal operations in a transaction with Arch Coal. Operations disposed of included the Black Thunder and Coal Creek mines in Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest in three mines in Utah. The Colorado and Utah mines were sold outright. ARCO contributed its Wyoming coal operations and Arch Coal transferred various of its coal operations into a new joint venture that is 99% owned by Arch Coal and 1% owned by ARCO. As of February 1999, ARCO has disposed of its interests in two Australian coal mines. ARCO disposed of its 80% interest in the Gordonstone coal mine and its 31.4% interest in the Blair Athol Joint Venture. At December 31, 1998, the carrying value of the Australian coal assets was $197 million and was included in net assets of discontinued operations on the balance sheet. Beginning in January 1999, ARCO suspended depreciation on the Australian coal assets (1998 annual depreciation was $23 million). ARCO has recorded a $92 million provision for the estimated loss on the disposal of the U.S. and Australian coal assets. The recognition of the sale of U.S. coal operations has been deferred (by reducing the net assets of discontinued operations) until the disposition of the remaining Australian coal assets is completed in 1999 and the actual loss can be determined. In July 1998, ARCO tendered its entire interest of 80 million shares of ARCO Chemical Company common stock to Lyondell Petrochemical Company (Lyondell) for $57.75 per share, or total cash proceeds of approximately $4.6 billion. ARCO recorded an after-tax gain of approximately $1.1 billion in the third quarter of 1998 from the sale of the shares. As part of the acquisition of UTP, ARCO determined it would sell UTP's petrochemical business. ARCO expects to complete the sale during 1999. At December 31, 1998, the carrying value of these assets was $142 million and was included in the net assets of discontinued operations on the balance sheet. If depreciation had not been suspended for the last six months of 1998, the petrochemical business would have had a loss of $5 million. ARCO has recorded a $33 million after-tax provision for loss on the sale of the assets. In September 1997, ARCO disposed of its 49.9% equity interest in Lyondell. ARCO recorded an after-tax gain of $291 million on the disposition. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Revenues and net income from discontinued operations were as follows:
Millions 1998 1997 - ------------------------------------------------------------------------------ Revenues: ARCO Chemical $1,990 $3,726 Coal operations $ 338 $ 637 UTP petrochemical $ 58 $ - Net income: ARCO Chemical $ 170 $ 92 Coal operations 9 56 Lyondell - 119 UTP petrochemical - - ----------------- $ 179 $ 267 =================
Note 5 Accounting Changes Effective January 1, 1997, ARCO adopted Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." The provisions include standards affecting the measurement, recognition and disclosure of environmental remediation liabilities. The effect of initially applying the provisions of SOP 96-1 in 1997 was a decrease in net income of $30 million ($0.09 per share). Note 6 Extraordinary Item During 1997, ARCO retired debt with a face value of $756 million prior to maturity. The debt repurchases resulted in an extraordinary charge of $118 million against net income, after tax of $74 million. Note 7 Restructuring Costs During 1998, ARCO recorded pretax charges of $229 million for the costs of eliminating over 1,200 positions related to the downsizing of continuing operations, primarily E&P technical support, international E&P support operations and the corporate headquarters. All positions eliminated were specifically identified prior to December 31, 1998; all terminations are scheduled to take place prior to December 31, 1999. The following table summarizes the personnel-related costs:
($ Millions) Funded Unfunded Short-term Long-term Long-term Terminations Benefits(a) Benefits(b) Benefits(c) Total - ------------------------------------------------------------------------------ 1,212 $89 $86 $54 $229
(a) Severance and ancillary benefits, primarily relocation and outplacement (b) Net increase in pension benefits to be paid from assets of qualified pension plans (c) Net increase in non-qualified pension benefits and other postretirement benefits to be paid from Company funds Costs of incremental long-term benefits have been recorded as adjustments to long-term balance sheet accounts. Severance and ancillary costs have been recorded as short-term liabilities. No significant amounts have been paid as of December 31, 1998. In addition, the Company recorded a pretax charge of $20 million related to office space and facilities that will be vacated with no future economic benefit. During 1997, the Company recorded pretax charges of $67 million for the costs of eliminating approximately 360 positions. The majority of those terminations occurred prior to the 1998 actions discussed above. The 1996 charge represents an adjustment to costs of restructuring actions originally accrued in 1994. Note 8 Inventories Inventories are recorded when purchased, produced or manufactured and are stated at the lower of cost or market. In 1998, approximately 80% of inventories, excluding materials and supplies, were determined by the last-in, first-out (LIFO) method. Materials and supplies and other non-LIFO inventories are determined predominantly on an average cost basis. Total inventories at December 31 comprised the following:
Millions 1998 1997 - ------------------------------------------------------------------------------ Crude oil and petroleum products $ 220 $ 247 Other products 24 24 Materials and supplies 231 185 --------------- Total $ 475 $ 456 ===============
The excess of the current cost of inventories over book value was approximately $193 million and $240 million at December 31, 1998 and 1997, respectively. Note 9 Investments At December 31, 1998 and 1997, investments in debt securities were primarily composed of U.S. Treasury securities and corporate debt instruments. Maturities generally ranged from four days to ten years. These investments are classified as short or long term depending on maturity. ARCO's investments in LUKOIL common stock and Zhenhai Refining and Chemical Company convertible bonds were included in other investments and long-term receivables. At December 31, 1998 and 1997, all investments were classified as available-for-sale and were reported at fair value, with unrealized holding gains and losses, net of tax, reported in accumulated other comprehensive income. The following summarizes investments at December 31:
Millions 1998 1997 - ------------------------------------------------------------------------------- Aggregate fair value $ 926 $ 1,897 Gross unrealized holding losses 135 1 Gross unrealized holding gains (13) (985) -------------------- Amortized cost $ 1,048 $ 913 ====================
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Investment activity for the years ended December 31 was as follows:
Millions 1998 1997 - ----------------------------------------------------------------------------- Gross purchases $15,118 $ 6,902 Gross sales 463 1,753 Gross maturities 14,520 6,111
Gross realized gains and losses were insignificant and were determined by the specific identification method. Note 10 Fixed Assets Property, plant and equipment at December 31 was as follows:
1998 1997 ---------------------------------------- Millions Gross Net Gross Net - ------------------------------------------------------------------------------ Exploration & production $32,072 $15,244 $25,145 $10,230 Refining & marketing 5,450 2,954 5,017 2,714 Other operations 649 432 731 470 Unallocated 1,151 132 332 146 ---------------------------------------- Total $39,322 $18,762 $31,225 $13,560 ========================================
Expenses for maintenance and repairs for 1998, 1997 and 1996 were $420 million, $334 million and $338 million, respectively. During 1998, a $1.4 billion impairment was recorded as increased DD&A on E&P assets. The impairment was due to a decline in crude oil prices and was determined in accordance with SFAS No. 121. The prices used in estimating future cash flows were $15 per barrel in 1999, $16 in 2000 and $17 in 2001 and beyond. A discount rate of 10% was used. Note 11 Short-term Borrowings and Bank Credit Facilities Notes payable consist primarily of ARCO's commercial paper issued to a variety of financial investors and institutions and any amounts outstanding under ARCO credit facilities. The weighted average interest rate on notes payable outstanding at December 31, 1998 and 1997, was 5.6% and 6.7%, respectively. In 1998 ARCO and certain wholly owned subsidiaries had committed bank credit facilities of approximately $3.1 billion. At December 31, 1998, there were $62 million of borrowings under these committed facilities. At December 31, 1998, ARCO had unused letters of credit totaling approximately $418 million. Note 12 Long-term Debt Long-term debt at December 31 comprised the following:
Millions 1998 1997 - ----------------------------------------------------------------------------- 8 1/4%, due in 2022 $ 245 $ 245 8 1/2%, due in 2012 178 178 8 3/4%, due in 2032 159 159 9%, due in 2021 209 209 9%, due in 2031 97 97 9 1/8%, due in 2011 253 253 9 1/8%, due in 2031 155 155 9 7/8%, due in 2016 181 181 10 7/8%, due in 2005 410 410 Medium-Term Notes - A Series, 8.48%/(a)/ 110 182 Medium-Term Notes - B Series, 8.34%/(a)/ 250 250 ARCO Tresop Notes, 5.06%/(a)/ 88 163 Variable rate, due in 2031, 3.28%/(a)/ 265 265 Variable rate, due in 2032, 4.96%/(a)/ 108 108 Vastar: Commercial paper, 6.0%/(a)/ 219 373 LIBOR Revolving Credit Agreement, 5.6%/(a)/ 320 - 6% Putable/Callable Notes, due in 2010 100 - 6.39%, due in 2008 50 - 6.95%, due in 2006 75 75 6.96%, due in 2007 75 75 8.75%, due in 2005 149 149 Union Texas Petroleum: 6.66%, due in 2002 100 - 7.34%, due in 1999 179 - 7.40%, due in 2038 150 - 8 1/4%, due in 1999 100 - 8 3/8%, due in 2005 125 - 8 1/2%, due in 2007 75 - Other 306 256 ----------------- Total, including debt due within one year 4,731 3,783 ----------------- Less debt due within one year 399 164 ----------------- Long-term debt $4,332 $3,619 =================
(a) Weighted average of interest rates at December 31, 1998. Maturities for the five years subsequent to December 31, 1998, are as follows:
Millions 1999 2000 2001 2002 2003 - ----------------------------------------------------------------------------- Maturities $ 399 $ 12 $ 76 $ 117 $ 555
In 1996, Vastar established a $1.1 billion Commercial Paper Program for issuance of unsecured notes with maturities of up to 270 days from the date of issue. Vastar has agreed to maintain credit lines sufficient to support payment on the notes. In 1996, Vastar consolidated existing unsecured revolving credit agreements into a single facility. As of December 31, 1998, commitments under this facility, as amended to date, totaled $1.1 billion. The commitment expires March 31, 2002. During 1998, $320 million of debt was outstanding under this facility. The credit facility is not guaranteed by ARCO. The agreement contains covenants, the most restrictive of which require Vastar to 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO maintain certain financial ratios and minimum levels of tangible stockholders' equity and restrict encumbrance of assets. In April 1998, Vastar issued $100 million of 6% Putable/Callable Notes due April 20, 2010 Putable/Callable April 20, 2000. In 1998 Vastar also entered into an interest rate swap covering the Putable/Callable Notes, which effectively changed the 6% fixed rate to a floating rate. The effective interest rate paid on these notes in 1998 was 5.6%. At December 31, 1997, Vastar had no outstanding interest rate swaps. The financial impact of swaps in 1998 and 1997 was immaterial. At December 31, 1998, approximately $247 million of long-term debt was denominated in foreign currencies. At December 31, 1997, no long-term debt was denominated in foreign currencies. No material amounts of long-term debt are collateralized by ARCO assets. Note 13 Interest Interest for the years ended December 31 comprised the following:
Millions 1998 1997 1996 - ----------------------------------------------------------------------------- Long-term debt $ 322 $ 417 $ 500 Short-term debt 158 86 82 Other/(a)/ (115) (122) 19 ------------------------- 365 381 601 Capitalized interest (106) (38) (19) ------------------------- Total interest expense $ 259 $ 343 $ 582 ========================= Total interest paid in cash $ 248 $ 390 $ 586 ========================= Interest income $ 119 $ 114 $ 167 =========================
(a) Includes $153 of interest on a tax refund in 1998 and $145 reversal from partial tax audit settlements in 1997. Note 14 Financial Instruments and Fair Value ARCO does not hold or issue financial instruments for trading purposes. ARCO enters into various types of foreign currency forward, option and swap contracts. Foreign currency forward and option contracts are used to minimize foreign exchange exposures associated with U.S. dollar-denominated debt issued by a foreign subsidiary, anticipated foreign currency commitments and anticipated future cash flows related to overseas operations. Foreign currency swap contracts are used to minimize foreign exchange exposures related to foreign-denominated intercompany debt with maturities exceeding one year. At December 31, 1998, the notional amounts of foreign currency contracts outstanding (principally involving European currencies) were approximately $528 million, with various maturities in 1999. At December 31, 1997, the notional amounts of foreign currency contracts outstanding were approximately $613 million. Gains and losses on foreign currency forward contracts covering anticipatory cash flows are recognized currently as other income or expense. Gains and losses on foreign currency swaps associated with intercompany debt are recognized currently in income and offset foreign exchange gains and losses on the underlying intercompany loans. Gains and losses on other foreign currency contracts are generally deferred and offset the transactions being hedged. ARCO also uses various hedging arrangements to manage the exposure to price risk for future natural gas and crude oil transactions. Gains and losses resulting from these transactions are deferred and included in other assets or accrued liabilities until realized in sales and other operating revenues as the physical production required by the contracts is delivered. During 1998, Vastar entered into a series of natural gas price collar agreements which at December 31, 1998, covered an average of 200 million cubic feet per day of its 1999 natural gas production for the period January 1999 through September 1999. These agreements will serve as hedges which secure weighted average prices on these volumes between $2.30 and $2.91 per thousand cubic feet for 1999 (on a Henry Hub basis). At December 31, the carrying value and estimated fair value of ARCO's financial instruments are shown as assets (liabilities) in the table below:
1998 1997 ------------------------------------------- Carrying Fair Carrying Fair Millions Value Value Value Value - ------------------------------------------------------------------------------------ Non-derivatives: Short-term investments $ 260 $ 260 $ 222 $ 222 Equity method investments 1,235 1,176 1,194 1,204 Other investments and long-term receivables 831 831 1,872 1,872 Notes payable (2,403) (2,403) (1,599) (1,599) Long-term debt, including current maturities (4,731) (5,466) (4,602) (5,400) Derivatives: Foreign currency forwards $ (1) $ (1) $ (1) $ (1) Foreign currency options - - 4 4 Foreign currency swaps - - 3 2 Oil and gas options and swaps 40 47 (7) (7) Oil and gas futures (56) (59) - - Commodity futures (12) (12) 2 2 Commodity options (2) (2) - -
1997 amounts include derivative and non-derivative financial instruments for discontinued operations. Carrying amounts for those instruments were included with net assets of discontinued operations on the restated balance sheet. All derivative instruments are off-balance-sheet instruments; however, net receivable or payable positions related to derivative instruments are carried on the balance sheet. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Short-term investments are carried at fair value. The fair value of notes payable approximates carrying value due to its short-term maturities. Equity method investments and other investments and long-term receivables were valued at quoted market prices if available. For unquoted investment securities, the reported fair value was estimated on the basis of financial and other information. The fair value of ARCO's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to ARCO for debt of the same remaining maturities. The fair value of foreign currency contracts and interest rate swaps represented the amount to be exchanged if the existing contracts had been settled at year end and was estimated based on market quotes. ARCO is exposed to credit risk in the event of nonperformance by the counterparties. ARCO does not generally require collateral or other security to support these financial instruments. The counterparties to these instruments are major institutions deemed creditworthy by ARCO; ARCO does not anticipate nonperformance by the counterparties. Note 15 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 federal, state and private plaintiff lawsuits were brought against Exxon, Alyeska Pipeline Service Company (Alyeska) and Alyeska's owner companies, including ARCO, which owns approximately 22%. While all of the federal, state and private plaitiff lawsuits have been settled, certain issues relating to liability for the spill remain unresolved between Exxon and Alyeska (including its owner companies). ARCO, together with other former producers of lead paint, has been named in a number of lawsuits, including purported class actions, seeking compensatory damages, abatement of the housing units, and compensation for medical problems arising out of the presence of lead-based paint in certain housing units. ARCO is unable to predict the scope or amount of any such liability. The State of Montana, along with the United States and the Salish and Kootenai Tribes, have been seeking recovery from ARCO for alleged injuries to natural resources resulting from mining and mineral processing businesses formerly operated by Anaconda. By November 1998 two consent decrees had been lodged with the court. ARCO has agreed to pay $135 million for settlement of $561 million of the State's $767 million natural resource damage claim relating to the Clark Fork River Basin, $86 million for clean-up and related liabilities at Silver Bow Creek, and $20 million to resolve claims by the Tribes and the United States. ARCO is subject to liability pursuant to various federal, state and local environmental laws and regulations that require ARCO to do some or all of the following: . Remove or mitigate the effects on the environment at various sites from the disposal or release of certain substances; . Perform restoration work at such sites; and . Pay damages for loss of use and non-use values. Environmental liabilities include personal injury claims allegedly caused by exposure to toxic materials manufactured or used by ARCO. ARCO is currently involved in assessments and cleanups under these laws at federal- and state-managed sites as well as other clean-up sites including service stations, refineries, terminals, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites previously owned by ARCO or predecessors. This comprises 125 sites for which ARCO has been named a potentially responsible party (PRP), along with other sites for which no claims have been asserted. The number of PRP sites in and of itself is not a relevant measure of liability because the nature and extent of environmental concerns varies by site and ARCO's responsibility varies from sole responsibility to very little responsibility. ARCO may in the future be involved in additional assessments and cleanups. Future costs depend on unknown factors such as: . Nature and extent of contamination; . Timing, extent and method of remedial action; . ARCO's proportional share of costs; and . Financial condition of other responsible parties. The environmental remediation accrual is updated annually, at a minimum, and at December 31, 1998 was $870 million. As these costs become more clearly defined, they may require future charges against earnings. Applying Monte Carlo analysis to estimated site maximums on a portfolio basis, ARCO estimates that future costs could exceed the amount accrued by as much as $500 million. Approximately 54% of the reserve related to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total accrual. Substantially all amounts accrued are expected to be paid out over the next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various third parties. Many of these claims have been resolved. ARCO has neither recorded any asset nor reduced any liability in connection with unresolved claims. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO 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 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 16 Taxes The income tax provision for the years ended December 31 comprised the following:
Millions 1998 1997 1996 - ----------------------------------------------------------------------------- Federal: Current $(189) $ 241 $ 582 Deferred (7) 143 (26) ----------------------------- (196) 384 556 Foreign: Current 91 108 140 Deferred (486) (45) (15) ----------------------------- (395) 63 125 State: Current (14) 43 108 Deferred (46) 14 (3) ----------------------------- (60) 57 105 ============================= Provision (benefit) for taxes on income $(651) $ 504 $ 786 ============================= Total income taxes paid in cash $1,417(a) $ 781(a) $ 752 =============================
(a) Includes cash taxes paid relating to the sale of discontinued operations A deferred tax benefit of $426 million was recorded in 1998 versus a $242 million deferred tax expense in 1997 related to unrealized investment losses and gains included in accumulated other comprehensive income. Major components of the net deferred tax liability at December 31 were as follows:
Millions 1998 1997 - ----------------------------------------------------------------------------- Depreciation, depletion and amortization $(4,600) $(3,250) Other (389) (743) --------------------- Total deferred tax liabilities (4,989) (3,993) --------------------- Dismantlement and environmental 664 587 Postretirement benefits 293 295 Foreign excess tax basis/loss carryforwards 107 117 Other 607 333 --------------------- Total deferred tax assets 1,671 1,332 --------------------- Valuation allowance - - --------------------- Net deferred income tax liability $(3,318) $(2,661) =====================
The valuation allowance was $7 million at December 31, 1996. Taxes other than income taxes for the years ended December 31 comprised the following:
Millions 1998 1997 1996 - ----------------------------------------------------------------------------- Property $ 143 $ 146 $ 144 Production/severance 227 359 401 Other 136 135 138 -------------------------------- Total $ 506 $ 640 $ 683 ================================
ARCO has foreign loss carryforwards of $32 million which begin expiring in 2001. The domestic and foreign components of income from continuing operations before income taxes and minority interest, and a reconciliation of income tax expense with tax at the effective federal statutory rate for the years ended December 31 were as follows:
1998 1997 1996 --------------------------------------------------------------------- % Pretax % Pretax % Pretax Millions Amount Income Amount Income Amount Income - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes: Domestic $ 96 7.5 $ 1,647 87.7 $ 1,896 90.9 Foreign (1,378) (107.5) 231 12.3 190 9.1 --------------------------------------------------------------------- Total $(1,282) 100.0 $ 1,878 100.0 $ 2,086 100.0 ===================================================================== Tax at 35% $ (449) (35.0) $ 657 35.0 $ 730 35.0 Increase (reduction) in taxes resulting from: Taxes on foreign income in excess of statutory rate 32 2.5 21 1.1 84 4.0 Affiliate stock transactions (51) (4.0) (109) (5.8) - - State income taxes (net of federal effect) (39) (3.0) 37 2.0 68 3.3 Tax credits (123) (9.6) (106) (5.6) (95) (4.6) Other (21) (1.7) 4 0.1 (1) - --------------------------------------------------------------------- Provision for taxes on income $ (651) (50.8) $ 504 26.8 $ 786 37.7 =====================================================================
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Note 17 Postretirement Benefit Plans ARCO and its subsidiaries sponsor numerous postretirement benefit plans. Defined benefit pension plans (Pension) provide to substantially all employees pension benefits based on years of service and the employee's compensation, primarily during the last three years of service. Defined postretirement benefit plans (Other) provide health care and life insurance benefits to substantially all employees who retire with ARCO having rendered the required years of service, and to their spouses and eligible dependents. ARCO pays for the cost of a benchmark health maintenance organization with employees responsible for the differential cost, if any, of their selected option. Life insurance benefits are partially paid for by retiree contributions, which vary based upon coverage chosen by the retiree. ARCO has the right to terminate or modify the plans at any time.
1998 1997 ------------------------------------------ Millions Pension Other Pension Other - -------------------------------------------------------------------------------- Plan Obligations Benefit obligation at January 1 $(2,498) $(588) $(2,495) $(612) Service cost (53) (7) (53) (7) Interest cost (173) (39) (174) (40) Actuarial (loss) gain (96) (4) (18) 17 Benefits paid 311 51 242 54 Special termination benefits (128) (19) - - Acquisition (185) (24) - - Divestiture - 14 - - ------------------------------------------ Benefit obligation at December 31 $(2,822) $(616) $(2,498) $(588) ========================================== Plan Assets Fair value of assets at January 1 $ 2,710 $ - $ 2,543 $ - Actual return on assets 264 - 374 - Company contributions 69 - 35 - Benefits paid (311) - (242) - Acquisition 154 - - - ------------------------------------------ Fair value of assets at December 31 $ 2,886 $ - $ 2,710 $ - ========================================== Funded Status Assets greater (less) than obligations $ 64 $(616) $ 212 $(588) Unrecognized actuarial loss 300 53 195 45 Unrecognized prior service cost (benefit) 133 (206) 142 (221) Unrecognized transition obligation (200) - (227) - ------------------------------------------ Total recognized $ 297 $(769) $ 322 $(764) ========================================== Balance Sheet Recognition Prepaid benefits $ 449 $ - $ 439 $ - Accrued liabilities (247) (769) (219) (764) Intangible asset 20 - 23 - Accumulated other comprehensive income 75 - 79 - ------------------------------------------ Total recognized $ 297 $(769) $ 322 $(764) ==========================================
The projected benefit obligation, accumulated benefit obligation (ABO), and fair value of plan assets for pension plans with ABO in excess of plan assets were $285, $247 and $0, respectively, at December 31, 1998, and $245, $220 and $0, respectively, at December 31, 1997.
1998 1997 Percent Pension Other Pension Other - ------------------------------------------------------------------------------ Assumptions Discount rate 6.75 6.75 7.0 7.0 Expected return on plan assets 10.5 n/a 10.5 n/a Rate of salary progression 4.0 4.0 4.0 4.0
For measurement purposes, a 7 percent annual rate of increase in the per capita cost of health care benefits was assumed for 1997 to 2001, after which the rate was assumed to decrease to 5 percent and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1998 ---------------------- Millions Increase Decrease - ----------------------------------------------------------------------------- Total of service and interest cost $4.0 $(3.4) Postretirement benefit obligation $44.0 $(37.4)
Millions 1998 1997 1996 - ----------------------------------------------------------------------------- Components of Net Benefit Cost Pension benefits: Service cost $ 53 $ 53 $ 60 Interest cost 173 174 177 Expected return on plan assets (281) (256) (238) Amortization of transition asset (27) (27) (27) Amortization of prior service cost 7 8 8 Recognized actuarial (gain) loss 10 10 24 --------------------------- Net benefit (income) cost $ (65) $ (38) $ 4 =========================== Other postretirement benefits: Service cost $ 7 $ 7 $ 7 Interest cost 39 40 42 Amortization of prior service cost (benefit) (15) (15) (15) Recognized actuarial (gain) loss - - 3 --------------------------- Net benefit (income) cost $ 31 $ 32 $ 37 ===========================
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Note 18 Lease Commitments Capital lease obligations are recorded at the present value of future rental payments. The related assets are amortized on a straight-line basis. At December 31, 1998, future minimum rental payments due under leases were as follows:
Capital Operating Millions Leases Leases - ------------------------------------------------------------------------------ 1999 $ 3 $ 177 2000 3 162 2001 3 193 2002 3 153 2003 3 145 Later years 60 369 ------------------------------- Total minimum lease payments 75 $1,199 ======== Imputed interest (rates ranging from 8% to 12%) 51 --------- Present value of minimum lease payments included in long-term debt $ 24 ===============================
Minimum future rental income under noncancellable subleases at December 31, 1998, amounted to $69 million. Operating lease net rental expense for the years ended December 31 was as follows:
Millions 1998 1997 1996 - ----------------------------------------------------------------------------- Minimum rentals $ 189 $ 109 $ 106 Contingent rentals 2 - - Sublease rental income (20) (11) (11) ----------------------------- Net rental expense $ 171 $ 98 $ 95 =============================
No restrictions on dividends or on additional debt or lease financing exist under ARCO's lease commitments. Under certain conditions, options exist to purchase certain leased properties. Note 19 Stock Options Options to purchase shares of ARCO's common stock have been granted to executives, outside directors and key employees. The exercise price of each option is equal to the fair market value of common stock at the date of grant. These options become exercisable in varying installments and expire 10 years after the date of grant. Options granted prior to 1997 vest over two years in equal installments. Options granted subsequently vest equally over three years. Transactions during 1998, 1997 and 1996 were as follows (restated to give effect to June 13, 1997 100% stock dividend):
Weighted Average Exercise Price - ----------------------------------------------------------------------------- Balance, January 1, 1996 7,676,272 $ 52.92 Granted 1,101,834 56.61 Exercised (1,110,326) 46.15 Cancelled (34,358) 58.47 ------------------------------- Balance, December 31, 1996 7,633,422 $ 54.41 =============================== Granted 1,414,048 64.47 Exercised (1,022,100) 52.21 Cancelled (18,224) 61.18 ------------------------------- Balance, December 31, 1997 8,007,146 $ 56.45 =============================== Granted 1,862,840 73.73 Exercised (420,012) 49.85 Cancelled (37,647) 69.52 ------------------------------- Balance, December 31, 1998 9,412,327 $ 60.12 ===============================
A summary of ARCO's fixed stock options as of December 31, 1998, 1997 and 1996, was as follows:
1998 1997 1996 - ------------------------------------------------------------------------------ Shares available for option 8,523,492 8,247,671 8,672,714 Options exercisable 6,803,228 6,064,856 6,067,976 Weighted average exercise price of options exercisable $ 56.01 $ 54.58 $ 54.01 Weighted average fair value of options granted during the year $ 18.96 $ 14.27 $ 25.90 Used to calculate fair value: Risk-free interest rate 5.57% 6.38% 6.00% Expected life (years) 10 10 10 Expected volatility 23.06% 18.17% 14.42% Expected dividends 3.85% 4.29% 0.00%
At December 31, 1998, exercise prices for options outstanding ranged from $42.25 to $85.875 and the weighted average remaining contractual life was 5.88 years. ARCO applies APB No. 25 in accounting for its fixed stock options. Accordingly, no compensation cost has been recognized for options granted. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value method under SFAS No. 123:
1998 1997 1996 - ----------------------------------------------------------------------------- Net income: As reported $ 452 $1,771 $1,663 Pro forma $ 440 $1,758 $1,651 Earnings per share (diluted): As reported $1.40 $ 5.41 $ 5.09 Pro forma $1.36 $ 5.37 $ 5.05
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options would be amortized to expense over the vesting period, and additional options may be granted in future years. Beginning in 1997, ARCO awards contingent restricted stock to executives and key employees. Contingent restricted stock may be converted to performance- based restricted stock at various multiples depending on attainment of certain performance criteria over a specified evaluation period. Restricted stock ultimately issued is subject to a two-year restriction on transfer. During 1998 and 1997, respectively, 184,488 and 326,688 shares of contingent restricted stock were awarded at weighted average prices of $74.00 and $64.06, net of forfeitures and retirements, with varying evaluation periods. During 1998, 135,180 shares of restricted stock were issued at a weighted average price of $73.93. During 1998 and 1997, $10 million and $23 million was recognized as expense for performance-based restricted stock, respectively. Holders of options granted prior to 1997 accrue dividend share credits (DSCs) on all shares under option. The amount of DSCs accrued is determined based upon the quarterly dividend rate and fair market value of ARCO common stock as of each quarterly record date. Upon exercise of options, holders receive additional shares of common stock equal to DSCs accumulated. A summary of ARCO's DSC activity was as follows:
Shares - ----------------------------------------------------------------------------- Balance, December 31, 1996 1,695,986 Accrued 343,116 Paid out (396,250) Cancelled (287) ----------- Balance, December 31, 1997 1,642,565 ----------- Accrued 316,486 Paid out (166,512) Cancelled (83) ----------- Balance, December 31, 1998 1,792,456 ===========
During 1998 and 1997, $11 million and $35 million was recognized as expense for DSCs, respectively. Note 20 Stockholders' Equity Detail of capital stock as of December 31 was as follows:
1998 1997 - ----------------------------------------------------------------------------- $3.00 Cumulative convertible preference stock, par $1: Shares authorized 78,089 78,089 Shares issued and outstanding 51,608 55,941 Aggregate value in liquidation - (thousands) $ 4,129 $ 4,475 $2.80 Cumulative convertible preference stock, par $1: Shares authorized 833,776 833,776 Shares issued and outstanding 573,336 615,653 Aggregate value in liquidation - (thousands) $ 40,134 $ 43,096 Common stock, par $2.50: Shares authorized 600,000,000 600,000,000 Shares issued 325,902,559 322,719,890 Shares outstanding 321,315,367 320,369,895 Shares held in treasury 4,587,192 2,349,995
Changes in preference stocks were due to conversions. The $3.00 cumulative convertible preference stock is convertible into 13.6 shares of common stock. The $2.80 cumulative convertible preference stock is convertible into 4.8 shares of common stock. Common stock is subordinate to the preference stocks for dividends and assets. The $3.00 and $2.80 preference stocks may be redeemed at the option of ARCO for $82 and $70 per share, respectively. ARCO has authorized 75,000,000 shares of preferred stock, $.01 par, of which none were issued or outstanding at December 31, 1998. At December 31, 1998, shares of ARCO's authorized common stock were reserved as follows:
Conversions: $3.00 Preference stock 701,869 $2.80 Preference stock 2,752,013 Stock option plans 17,935,819 Employee benefit plans 9,974,482 ------------ Total 31,364,183 ============
Under ARCO's incentive compensation plans, awards of ARCO's common stock may be made to officers, outside directors and key employees. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Note 21 Supplemental Cash Flow Information The following is supplemental cash flow information for the years ended December 31:
Millions 1998 1997 1996 - ------------------------------------------------------------------------------------- Short-term investments: Gross sales and maturities $ 226 $ 1,784 $ 3,196 Gross purchases (259) (1,226) (2,443) -------------------------------- Net cash provided (used) $ (33) $ 558 $ 753 ================================ Notes payable: Gross proceeds $ 14,978 $ 7,386 $ 3,850 Gross repayments (14,066) (6,865) (3,751) -------------------------------- Net cash provided $ 912 $ 521 $ 99 ================================ Gross noncash provisions charged to income $ 652 $ 500 $ 261 Reserve reversal from partial tax audit settlements - (145) - Cash payments of previously accrued items (468) (294) (464) -------------------------------- Noncash provisions greater (less) than cash payments $ 184 $ 61 $ (203) ================================ Changes in working capital - increase (decrease) to cash: Accounts receivable $ 19 $ 363 $ (280) Inventories 8 (63) (31) Accounts payable (60) (111) 205 Other working capital 340 (6) 264 -------------------------------- $ 307 $ 183 $ 158 ================================
Excluded from the Consolidated Statement of Cash Flows for the year ended December 31, 1998 was the issuance of 2,725,030 shares of ARCO common stock to a consolidated subsidiary in exchange for certain property, plant and equipment owned by the subsidiary. The transaction was recorded at fair market value. In conjunction with the acquisition of UTP, liabilities were assumed as follows:
Millions - ----------------------------------------------------------------------------- Fair value of assets acquired $ 3,745 Cash paid (2,707) --------- Liabilities assumed $ 1,038 =========
Excluded from the Consolidated Statement of Cash Flows for the year ended December 31, 1997 was ARCO's use of Lyondell common stock to redeem its 9% Exchangeable Notes with an outstanding principal amount of $988 million. Note 22 Foreign Currency Transactions Foreign currency transactions resulted in net losses of $2 million, $12 million and $5 million in 1998, 1997 and 1996, respectively. Note 23 Earnings Per Share
1998 1997 1996 (Millions, except per share amounts) Income Shares Per Share Income Shares Per Share Income Shares Per Share - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations $ (655) $1,331 $1,261 Less: Preference stock dividends (2) (2) (2) ---------------------------------------------------------------------------------------- Income (loss) from continuing operations available to common shareholders $ (657) 321.0 $(2.05) $1,329 321.2 $ 4.14 $1,259 321.7 $ 3.92 Discontinued operations 1,107 321.0 3.45 558 321.2 1.74 402 321.7 1.25 Extraordinary item - loss on extinguishment of debt (118) 321.2 (0.37) ---------------------------------------------------------------------------------------- Total income available to common shareholders - basic EPS $ 450 321.0 $ 1.40 $1,769 321.2 $ 5.51 $1,661 321.7 $ 5.17 ======================================================================================== Income (loss) from continuing operations available to common shareholders $ (657) 321.0 $1,329 321.2 $1,259 321.7 Contingently issuable shares (primarily options) - 2.3 0.6 $3.00 Convertible preference stock - 0.8 0.9 $2.80 Convertible preference stock - 2 3.1 2 3.3 ---------------------------------------------------------------------------------------- Income (loss) from continuing operations available to common shareholders $ (657) 321.0 $(2.05) $1,331 327.4 $ 4.07 $1,261 326.5 $ 3.86 Discontinued operations 1,107 321.0 3.45 558 327.4 1.70 402 326.5 1.23 Extraordinary item - loss on extinguishment of debt (118) 327.4 (0.36) ---------------------------------------------------------------------------------------- Total income available to common shareholders and assumed conversions - diluted EPS/(a)/ $ 450 321.0 $ 1.40 $1,771 327.4 $ 5.41 $1,663 326.5 $ 5.09 ========================================================================================
(a) No dilution assumed for 1998 due to antidilutive effect on loss from continuing operations 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO Note 24 Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which 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. The new disclosures had no impact on ARCO's net income, financial position, stockholders' equity or cash flows. The related tax effects allocated to each component of other comprehensive income at December 31 were as follows:
Unrealized Foreign Minimum Gain (Loss) Currency Pension Millions on Securities Translation Liability - ----------------------------------------------------------------------------- 1998 Pre-tax amount $(1,107) $ (30) $ 11 Tax (expense) benefit 426 12 (4) ------------------------------------------- Net-of-tax amount $ (681) $ (18) $ 7 =========================================== 1997 Pre-tax amount $ 623 $(299) $ (42) Tax (expense) benefit (242) 114 16 ------------------------------------------- Net-of-tax amount $ 381 $(185) $ (26) =========================================== 1996 Pre-tax amount $ 379 $ (6) $ 52 Tax (expense) benefit (143) 4 (20) ------------------------------------------- Net-of-tax amount $ 236 $ (2) $ 32 ===========================================
Accumulated nonowner changes in equity (accumulated other comprehensive income) at December 31 were as follows:
Millions 1998 1997 - ----------------------------------------------------------------------------- Net unrealized gain (loss) on investments $ (75) $ 606 Foreign currency translation adjustment (222) (204) Minimum pension liability (47) (54) -------------------- Accumulated other comprehensive income (loss) $ (344) $ 348 ====================
Unrealized gains (losses) on securities related primarily to changes in the fair value of ARCO's investment in LUKOIL common stock, which had a fair value of $225 million, $1.3 billion and $678 million at December 31, 1998, 1997 and 1996, respectively, and a book value of $342 million. Note 25 Research and Development Expenditures for research and development totaled $32 million, $38 million and $25 million for the years ended December 31, 1998, 1997 and 1996, respectively. Note 26 Unaudited Quarterly Results
Millions, except per share amounts 1998 1997 - ---------------------------------------------------------------------------- Sales and other operating revenues Quarter ended (restated): March 31 $ 2,536 $ 3,892 June 30 2,564 3,534 September 30 2,655 3,494 December 31 2,548 3,420 -------------------------- Total $10,303 $14,340 ========================== Income (loss) from continuing operations before income taxes, minority interest and extraordinary item Quarter ended (restated): March 31 $ 190 $ 601 June 30 32 632 September 30 (269) 268 December 31 (1,235)/(c, d)/ 377 -------------------------- Total $(1,282) $ 1,878 ========================== Net income (loss) Quarter ended: March 31 $ 220 $ 483 June 30 154 390/(a)/ September 30 872/(e)/ 516/(b)/ December 31 (794)/(c, d)/ 382/(c)/ -------------------------- Total $ 452 $ 1,771 ========================== Earned per share Quarter ended: March 31 $ .67 $ 1.48 June 30 $ .47 $ 1.19 September 30 $ 2.67 $ 1.57 December 31 $ (2.47) $ 1.17
(a) See Note 6 to Consolidated Financial Statements. (b) Includes $291 gain on disposition of Lyondell stock. (c) See Note 7 to Consolidated Financial Statements. (d) Includes $925 impairment writedown. (e) Includes $998 net gain on disposition of segments. 59 SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO Oil and Gas Producing Activities The Securities and Exchange Commission (SEC) defines proved oil and gas reserves as those estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Petroleum reserves are estimated by ARCO engineers. The estimates include reserves in which ARCO holds an economic interest under production-sharing and other types of operating agreements with foreign governments. Reserves attributable to certain oil and gas discoveries were not considered proved as of December 31, 1998 due to geological, technical or economic uncertainties. Proved reserves do not include amounts that may result from extensions of currently proved areas or from application of enhanced recovery processes not yet determined to be commercial in specific reservoirs. Proved reserves also do not include any reserves attributable to ARCO's 8% interest in LUKOIL, a Russian oil company. Natural gas liquids comprise 13% of petroleum liquid proved reserves. ARCO has no long-term supply contracts to purchase petroleum liquids or natural gas from foreign governments. The changes in proved reserves for the years ended December 31 were as follows:
Petroleum Liquids (million barrels) Natural Gas (billion cubic feet) --------------------------------------------------------------------------------------------------- Consolidated Consolidated ---------------------- Other ---------------------- Other U.S. Int'l Total Reserves/1/ Worldwide U.S. Int'l Total Reserves/1/ Worldwide - ------------------------------------------------------------------------------------------------------------------------------------ Reserves at January 1, 1996 2,163 206 2,369 -- 2,369 4,666 3,683 8,349 -- 8,349 Revisions 60 4 64 -- 64 103 (94) 9 -- 9 Improved recovery 5 -- 5 -- 5 14 -- 14 -- 14 Purchases 16 218 234 -- 234 114 -- 114 -- 114 Extensions and discoveries 76 5 81 -- 81 343 30 373 -- 373 Production (207) (24) (231) -- (231) (382) (267) (649) -- (649) Consumed -- -- -- -- -- (78) (5) (83) -- (83) Sales (1) -- (1) -- (1) (4) -- (4) -- (4) --------------------------------------------------------------------------------------------------- Reserves at December 31, 1996 2,112 409 2,521 -- 2,521 4,776 3,347 8,123 -- 8,123 =================================================================================================== Revisions 115 60 175 -- 175 187 17 204 -- 204 Improved recovery 10 -- 10 -- 10 28 3 31 -- 31 Purchases 10 25 35 49 84 165 16 181 67 248 Extensions and discoveries 89 55 144 -- 144 308 352 660 -- 660 Production (204) (29) (233) (1) (234) (389) (308) (697) -- (697) Consumed -- -- -- -- -- (79) (10) (89) -- (89) Sales (1) -- (1) -- (1) (8) -- (8) -- (8) --------------------------------------------------------------------------------------------------- Reserves at December 31, 1997 2,131 520 2,651 48 2,699 4,988 3,417 8,405 67 8,472 =================================================================================================== Revisions 72 (13) 59 2 61 33 (95) (62) (1) (63) Improved recovery 30 -- 30 -- 30 6 5 11 -- 11 Purchases 42 279 321 13 334 74 1,333 1,407 349 1,756 Exchanges (119) -- (119) -- (119) 184 -- 184 -- 184 Extensions and discoveries 88 1 89 -- 89 367 -- 367 -- 367 Production (192) (46) (238) (2) (240) (429) (325) (754) (14) (768) Consumed -- -- -- -- -- (79) (9) (88) -- (88) Sales (9) (3) (12) -- (12) (27) -- (27) -- (27) --------------------------------------------------------------------------------------------------- Reserves at December 31, 1998 2,043 738 2,781 61 2,842 5,117 4,326 9,443 401 9,844 =================================================================================================== Proved developed reserves: At January 1, 1996 1,896 92 1,988 -- 1,988 4,294 1,806 6,100 -- 6,100 At December 31, 1996 1,828 150 1,978 -- 1,978 4,310 1,780 6,090 -- 6,090 At December 31, 1997 1,821 204 2,025 7 2,032 4,467 1,643 6,110 10 6,120 At December 31, 1998 1,582 292 1,874 36 1,910 4,480 2,487 6,967 343 7,310
/1/ Comprises reserves attributable to ARCO's ownership interest in equity affiliates 60 SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO Included in ARCO's reserves are 100% of the reserves of Vastar, a consolidated subsidiary of which ARCO owned 82% at December 31, 1998. Vastar's reserves comprised 9% and 51% of U.S. petroleum liquids and natural gas reserves, respectively, at December 31, 1998. During 1998, net reserve additions replaced 197% of worldwide oil- equivalent production. During the three-year period 1996-1998, ARCO's net reserve additions replaced 166% of worldwide oil-equivalent production. Significant changes in 1998 related to the following: . The addition of approximately 500 million barrels of oil equivalent (MMBOE) from the acquisition of UTP; . The addition of approximately 80 MMBOE associated with risked service contracts with the government of Venezuela; and . The exchange of California heavy oil properties for oil and gas properties in the Gulf of Mexico. Including contracts acquired with UTP, ARCO is a contractor to an affiliate of the Venezuelan government under six risked service contracts. ARCO, either solely or with partners, is responsible for providing capital and technology for the redevelopment of the fields along with operating existing production. In exchange for providing and funding overall operation and field development, ARCO is paid a per-barrel service fee to cover reimbursement of costs plus profit. There are two components to the fees, which include (1) a set fee for contractual baseline production and (2) a fee for incremental production. The fee for incremental production is based on a sliding scale incentive mechanism, which is indexed to a basket of international oil prices and overall field profitability. Proved reserves and production quantities for Venezuelan operations are recorded based on ARCO's net working interest in each of the contract areas, "net" meaning reserves excluding royalties and interests owned by others per the contractual arrangements. The Venezuelan government maintains full ownership of all hydrocarbons in the fields. Natural gas from the North Slope of Alaska, other than that used in providing fuel in North Slope operations or sold to others on the North Slope, is not presently economically marketable. ARCO is actively evaluating various technical options for commercializing North Slope gas. Among the options being studied are the construction of gas transportation and liquefied natural gas (LNG) manufacturing facilities and the development of a gas-to-liquids conversion process. ARCO is also working with the State of Alaska to enhance the fiscal and regulatory climate for the ultimate commercialization of North Slope gas resources. Significant technical uncertainties and existing market conditions still preclude gas from such potential projects being included in ARCO's reserves. ARCO reports reserve estimates to various federal government agencies and commissions. These estimates may cover various regions of crude oil and natural gas classifications within the United States and may be subject to mandated definitions. There have been no reports since the beginning of the last fiscal year of total ARCO reserve estimates furnished to federal government agencies or commissions which vary from those reported to the SEC. The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of December 31 were as follows:
1998 1997 1996 ------------------------------------------------------------------------------------------ Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total - ----------------------------------------------------------------------------------------------------------------------------- Proved properties $16,348 $11,345 $27,693 $15,845 $ 6,026 $21,871 $15,004 $ 5,245 $20,249 Unproved properties 622 1,292 1,914 365 447 812 257 297 554 ------------------------------------------------------------------------------------------ 16,970 12,637 29,607 16,210 6,473 22,683 15,261 5,542 20,803 Accumulated depreciation, depletion and amortization 10,569 4,789 15,358 10,559 2,959 13,518 9,924 2,668 12,592 ------------------------------------------------------------------------------------------ Net capitalized costs 6,401 7,848 14,249 5,651 3,514 9,165 5,337 2,874 8,211 ------------------------------------------------------------------------------------------ Net capitalized costs of equity affiliates* -- 188 188 -- 55 55 -- -- -- ------------------------------------------------------------------------------------------ Total $ 6,401 $ 8,036 $14,437 $ 5,651 $ 3,569 $ 9,220 $ 5,337 $ 2,874 $ 8,211 ==========================================================================================
* ARCO's share 61 SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO Costs, both capitalized and expensed, incurred in oil and gas producing activities during the three years ended December 31 are set forth below. Property acquisition costs represent costs incurred to purchase or lease oil and gas properties. Exploration costs include costs of geological and geophysical activity and drilling exploratory wells. Development costs include costs of drilling and equipping development wells and construction of production facilities to extract, treat and store oil and gas.
1998 1997 1996 ------------------------------------------------------------------------------ Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total - --------------------------------------------------------------------------------------------------------------------- Property acquisition costs: Proved properties $ 235 $2,594 $2,829 $ 92 $ 224 $ 316 $ 82 $ 275 $ 357 Unproved properties 72 662 734 100 8 108 98 11 109 Exploration costs 306 376 682 328 332 660 277 213 490 Development costs 1,102 1,200 2,302 692 794 1,486 481 482 963 ------------------------------------------------------------------------------ Total expenditures 1,715 4,832 6,547 1,212 1,358 2,570 938 981 1,919 ------------------------------------------------------------------------------ Costs incurred of equity affiliates* -- 349 349 -- 109 109 -- -- -- ------------------------------------------------------------------------------ Total $1,715 $5,181 $6,896 $1,212 $1,467 $2,679 $938 $ 981 $1,919 ==============================================================================
* ARCO's share Results of operations from oil and gas producing activities (including operating overhead) for the three years ended December 31 were as follows:
1998 1997 1996 --------------------------------------------------------------------------------- Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total - ------------------------------------------------------------------------------------------------------------------- Revenues: Sales $1,535 $ 1,305 $2,840 $1,974 $1,349 $3,323 $1,892 $1,140 $3,032 Transfers 1,077 -- 1,077 2,074 -- 2,074 2,199 -- 2,199 Other 44 75 119 42 45 87 47 45 92 --------------------------------------------------------------------------------- 2,656 1,380 4,036 4,090 1,394 5,484 4,138 1,185 5,323 Production costs 609 332 941 615 286 901 587 234 821 Production taxes 273 56 329 420 43 463 457 50 507 Exploration expenses 272 357 629 263 245 508 238 175 413 Depreciation, depletion and amortization 651 517 1,168 681 429 1,110 691 305 996 Impairment 180 1,267 1,447 -- -- -- -- -- -- Other operating expenses 201 244 445 258 247 505 277 227 504 --------------------------------------------------------------------------------- Results before income taxes 470 (1,393) (923) 1,853 144 1,997 1,888 194 2,082 Income tax expense (benefit) 58 (532) (474) 609 11 620 628 109 737 --------------------------------------------------------------------------------- Results of operations from oil and gas producing activities 412 (861) (449) 1,244 133 1,377 1,260 85 1,345 --------------------------------------------------------------------------------- Results from equity affiliates* -- (3) (3) -- (6) (6) -- -- -- --------------------------------------------------------------------------------- Total $ 412 $ (864) $ (452) $1,244 $ 127 $1,371 $1,260 $ 85 $1,345 =================================================================================
* ARCO's share The difference between the above results of operations and the amounts reported for exploration & production segment net income in Note 2 of Notes to Consolidated Financial Statements is primarily restructuring costs related to the oil and gas operations, the exclusions of non-producing exploration & production units (Alaskan pipelines, technical support) and minority interest adjustments. 62 SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO The standardized measure of discounted estimated future net cash flows related to proved oil and gas reserves at December 31 was as follows:
1998 1997 1996 ----------------------------------------------------------------------- Billions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total - --------------------------------------------------------------------------------------------------------------- Future cash inflows $21.9 $16.2 $38.1 $36.7 $16.6 $53.3 $48.8 $17.8 $66.6 Future development and production costs 13.0 7.6 20.6 15.0 7.1 22.1 14.2 7.3 21.5 Future income tax expense 2.3 2.9 5.2 7.3 3.5 10.8 12.0 3.2 15.2 ----------------------------------------------------------------------- Future net cash flows 6.6 5.7 12.3 14.4 6.0 20.4 22.6 7.3 29.9 10% annual discount 2.7 2.7 5.4 6.5 2.8 9.3 10.3 3.6 13.9 ----------------------------------------------------------------------- Standardized measure of discounted future net cash flows 3.9 3.0 6.9 7.9 3.2 11.1 12.3 3.7 16.0 ----------------------------------------------------------------------- Standardized measure of discounted future net cash flows of equity affiliates* -- 0.1 0.1 -- 0.1 0.1 -- -- -- ----------------------------------------------------------------------- Total $ 3.9 $ 3.1 $ 7.0 $ 7.9 $ 3.3 $11.2 $12.3 $ 3.7 $16.0 =======================================================================
* ARCO's share Primary changes in the standardized measure of discounted estimated future net cash flows for the years ended December 31 were as follows:
Billions 1998 1997 1996 - -------------------------------------------------------------------------- Sales and transfers of oil and gas, net of production costs $ (2.7) $(4.0) $(3.9) Extensions, discoveries and improved recovery, less related costs 0.5 0.9 1.2 Revisions of estimates of reserves proved in prior years: Quantity estimates -- 0.7 0.5 Net changes in price and production costs (11.3) (8.4) 8.4 Purchases/sales 3.1 0.5 1.0 Other (0.6) (0.7) (0.4) Accretion of discount 1.7 2.4 1.5 Development costs incurred during the period 2.3 1.5 1.0 Net change in income taxes 2.8 2.3 (3.2) ----------------------------- Net change $ (4.2) $(4.8) $ 6.1 =============================
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flows to ARCO. Management's investment and operating decisions are based on reserve estimates that include proved reserves prescribed by the SEC as well as probable reserves, and on different price and cost assumptions from those used here. It should be recognized that applying current costs and prices and a 10% standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves. 63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding executive officers of the company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 3, 1999, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, and which is incorporated herein by reference, except for the material included under the captions "Committee Report on Executive Compensation" and "Performance Graph." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1 and 2. Financial Statements and Financial Statement Schedules: These documents are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule. 3. Exhibits: 3.1 Restated Certificate of Incorporation of Atlantic Richfield Company ("ARCO") as of June 27, 1994, filed with the Securities and Exchange Commission (the "Commission") as Exhibit 3 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1994, under File No. 1-1196 and incorporated herein by reference. 3.2 By-Laws of ARCO as amended through November 23, 1998, filed with the Commission as Exhibit 3 to ARCO's Current Report on Form 8-K dated November 23, 1998, under File No. 1-1196 and incorporated herein by reference. 4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chicago Trust Company of New York, as Rights Agent, filed with the Commission as Exhibit 4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1995, under File No. 1-1196 and incorporated herein by reference. 4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhattan Bank, N.A., filed with the Commission on January 27, 1999 as Exhibit 4.2 to ARCO's Registration Statement on Form S-3 (No. 333-71293), under File No. 1-1196 and incorporated herein by reference. 4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of New York, filed with the Commission on January 27, 1999 as Exhibit 4.3 to ARCO's Registration Statement on Form S-3 (No. 333-71293, under File No. 1-1196) and incorpo- rated herein by reference. 64 4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities authorized under any such instrument does not exceed 10% of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request. 10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of ARCO on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of March 22, 1993, filed with the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1993, under File No. 1-1196 and incorporated herein by reference. 10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.1(d)* Amendment No. 3 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of August 1, 1997, filed with the Commission as Exhibit 10.1(d) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.1(e)* Amendment No. 4 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of August 1, 1997, filed with the Commission as Exhibit 10.1 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.1(f)* Amendment No. 5 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of May 1, 1997, filed herewith. 10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral Plan, effective as of July 27, 1992, filed with the Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.2(c) to ARCO's report on Form 10- K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Deferral Plan, effective as of January 1, 1997, filed with the Commission as Exhibit 10.2(d) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.2(e)* Amendment No. 4 to the Atlantic Richfield Company Executive Deferral Plan, effective as of January 1, 1997, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 65 10.2(f)* Amendment No. 5 to the Atlantic Richfield Company Executive Deferral Plan, effective as of May 1, 1997, filed herewith. 10.3(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective as of July 1, 1988, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1988, under File No. 1-1196 and incorporated herein by reference. 10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of January 1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1989, under File No. 1-1196 and incorporated herein by reference. 10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of July 1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of August 5, 1996, filed with the Commission as Exhibit 10.4(d) to ARCO's report on Form 10-K for the year 1996, under File No. 1-1196 and incorporated herein by reference. 10.4* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised and effective January 1, 1997, filed herewith. 10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on November 26, 1984, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January 1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of February 24, 1997, filed with the Commission as Exhibit 10.5(c) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.5(d)* Amendment No. 5 to the Atlantic Richfield Company Annual Incentive Plan, effective as of July 28, 1997, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.5(e)* Amendment No. 6 to the Atlantic Richfield Company Annual Incentive Plan, effective as of July 28, 1997, filed with the Commission as Exhibit 10.4 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.6(a)* Atlantic Richfield Company's 1985 Executive Long-Term Incentive Plan, as adopted by the Board of Directors of ARCO on May 28, 1985, and effective as of that date, as amended through July 28, 1997, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.6(b)* Amendment No. 10 to the Atlantic Richfield Company 1985 Executive Long-Term Incentive Plan, effective as of July 18, 1997, filed with the Commission as Exhibit 10.5 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 66 10.6(c)* Amendment No. 11 to the Atlantic Richfield Company 1985 Executive Long-Term Incentive Plan, effective as of July 18, 1997, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.7(a)* Atlantic Richfield Company Executive Life Insurance Plan-- Summary Plan Description, effective as of June 28, 1990, filed with the Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.7(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Life Insurance Plan, effective July 28, 1997, filed herewith. 10.7(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Life Insurance Plan, effective July 28, 1997, filed herewith. 10.7(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Life Insurance Plan, effective May 1, 1997, filed herewith. 10.8(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--Summary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.9 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.8(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective May 1, 1997, filed herewith. 10.9 Amendment No. 6 to the Atlantic Richfield Company Special Termination Allowance Plan which contains the current change of control provisions applicable to the Company's executive management team, including its five most highly compensated executive officers, effective as of July 28, 1997, filed with the Commission as Exhibit 10.7 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.10 Form of Indemnity Agreement filed with the Commission as Exhibit 99 to ARCO's Registration Statement on Form S-3 (No. 333-71293) under File No. 1-1196 and incorporated herein by reference. 10.11(a)* Stock Option Plan for Outside Directors effective as of December 17, 1990, filed with the Commission as Exhibit 10.14 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors, effective as of June 22, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.11(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed with the Commission as Exhibit 10.10(c) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 67 10.11(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed with the Commission as Exhibit 10.10(d) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.12(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990, filed with the Commission as Exhibit 10.13(a) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.12(c)* Amendment No. 2 to the Deferral Plan for Outside Directors effective as of July 22, 1996, filed with the Commission as Exhibit 10.11(c) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.13* Special Incentive Plan, as adopted by the Board of Directors of ARCO on February 28, 1994, and as effective on that date, is included in Appendix C to the Company's 1994 Proxy Statement filed with the Commission under File No. 1-1196 and incorporated herein by reference. 10.14* 1997 Restricted Stock Plan For Outside Directors effective as of January 1, 1997, filed with the Commission as Exhibit 10.13 to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 21 Subsidiaries of the Registrant. 23 Consent of PricewaterhouseCoopers LLP. 24 Power of Attorney. 27 Financial Data Schedule. Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Corporate Secretary. - -------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K: The following Current Reports on Form 8-K were filed during the quarter ended December 31, 1998, and thereafter through February 22, 1999:
Date of Report Item No. Financial Statements - -------------- -------- -------------------- November 23, 1998 5 None January 15, 1999 5 None January 18, 1999 5 None January 25, 1999 5 None
68 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company: Registration Statement on Form S-3 (No. 333-71293), Registration Statement on Form S-8 (No. 333-33151), Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Registration Statement on Form S-8 (No. 333-33153), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), and Registration Statement on Form S-8 (No. 333-33245), of our report dated February 12, 1999, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Los Angeles, California February 22, 1999 69 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATLANTIC RICHFIELD COMPANY By *Michael E. Wiley ___________________________________ Michael E. Wiley President and Chief Operating Officer February 22, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- *Mike R. Bowlin Chairman of the Board and February 22, 1999 ____________________________________ Chief Executive Officer Mike R. Bowlin *Marie L. Knowles Executive Vice President and February 22, 1999 ____________________________________ Chief Financial Officer Marie L. Knowles Principal financial officer *Frank D. Boren Director February 22, 1999 ____________________________________ Frank D. Boren *John Gavin Director February 22, 1999 ____________________________________ John Gavin *Kent Kresa Director February 22, 1999 ____________________________________ Kent Kresa
70
Signature Title Date --------- ----- ---- *David T. McLaughlin Director February 22, 1999 ____________________________________ David T. McLaughlin *John B. Slaughter Director February 22, 1999 ____________________________________ John B. Slaughter *Gary L. Tooker Director February 22, 1999 ____________________________________ Gary L. Tooker *Henry Wendt Director February 22, 1999 ____________________________________ Henry Wendt *Gayle E. Wilson Director February 22, 1999 ____________________________________ Gayle E. Wilson *Allan L. Comstock Vice President and February 22, 1999 ____________________________________ Controller Allan L. Comstock Principal accounting officer
*By: /s/ Bruce G. Whitmore ____________________________ Bruce G. Whitmore (Attorney-in-Fact) 71 SCHEDULE II ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (millions of dollars) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(Column A) (Column B) (Column C) (Column D) (Column E) - ------------------------------------------------------------------------------ Additions ---------------- Balance at Charged Charged Deductions Balance at beginning to to other from close of Description of period income accounts reserves period - ------------------------------------------------------------------------------ Year 1998 Amounts deducted from applicable assets: Accounts receivable....... $ 3 $ 2 $ 5 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 966 64 73 45 1,058 Reduction in force........ 73 185 79 206 131 Insurance ................ 158 48 -- 32 174 Environmental remediation. 722 234 -- 86 870 Other..................... 151 363 -- 119 395 Year 1997 (Restated) Amounts deducted from applicable assets: Accounts receivable....... $ 6 -- -- $ 3(a) $ 3 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 909 78 -- 21 966 Reduction in force........ -- 70 12 9 73 Insurance ................ 169 20 -- 31 158 Environmental remediation. 524 300 -- 102 722 Other..................... 213 15 (12) 65 151 Year 1996 (Restated) Amounts deducted from applicable assets: Accounts receivable....... $ 5 $ 1 -- -- $ 6 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 847 68 -- 6 909 Reduction in force........ 69 -- -- 69 -- Insurance ................ 201 15 -- 47 169 Environmental remediation. 600 45 -- 121 524 Other..................... 195 23 -- 5 213
- -------- (a) Write-off for uncollectible accounts, net of recoveries. 72 EXHIBIT INDEX
Exhibit Description - ------- ----------- 3.1 Restated Certificate of Incorporation of Atlantic Richfield Company ("ARCO") as of June 27, 1994, filed with the Securities and Exchange Commission (the "Commission") as Exhibit 3 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1994, under File No. 1- 1196 and incorporated herein by reference. 3.2 By-Laws of ARCO as amended through November 23, 1998, filed with the Commission as Exhibit 3 to ARCO's Current Report on Form 8-K dated November 23, 1998, under File No. 1-1196 and incorporated herein by reference. 4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chicago Trust Company of New York, as Rights Agent, filed with the Commission as Exhibit 4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1995, under File No. 1-1196 and incorporated herein by reference. 4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhattan Bank, N.A., filed with the Commission on January 27, 1999 as Exhibit 4.2 to ARCO's Registration Statement on Form S-3 (No. 333-71293), under File No. 1-1196 and incorporated herein by reference. 4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of New York, filed with the Commission on January 27, 1999 as Exhibit 4.3 to ARCO's Registration Statement on Form S-3 (No. 333-71293, under File No. 1-1196) and incorporated herein by reference. 4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities authorized under any such instrument does not exceed 10% of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request. 10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of ARCO on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of March 22, 1993, filed with the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1993, under File No. 1-1196 and incorporated herein by reference. 10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.1(d)* Amendment No. 3 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of August 1, 1997, filed with the Commission as Exhibit 10.1(d) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.1(e)* Amendment No. 4 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of August 1, 1997, filed with the Commission as Exhibit 10.1 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.1(f)* Amendment No. 5 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of May 1, 1997, filed herewith. 10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference.
Exhibit Description - ------- ----------- 10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral Plan, effective as of July 27, 1992, filed with the Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Deferral Plan, effective as of January 1, 1997, filed with the Commission as Exhibit 10.2(d) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.2(e)* Amendment No. 4 to the Atlantic Richfield Company Executive Deferral Plan, effective as of January 1, 1997, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.2(f)* Amendment No. 5 to the Atlantic Richfield Company Executive Deferral Plan, effective as of May 1, 1997, filed herewith. 10.3(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective as of July 1, 1988, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1988, under File No. 1-1196 and incorporated herein by reference. 10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Supplemen- tary Savings Plan II, as amended and effective as of January 1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1989, under File No. 1-1196 and incorporated herein by reference. 10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Supplemen- tary Savings Plan II, as amended and effective as of July 1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Supplemen- tary Savings Plan II, as amended and effective as of August 5, 1996, filed with the Commission as Exhibit 10.4(d) to ARCO's report on Form 10-K for the year 1996, under File No. 1-1196 and incorporated herein by reference. 10.4* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised and effective January 1, 1997, filed herewith. 10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on November 26, 1984, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January 1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of February 24, 1997, filed with the Commission as Exhibit 10.5(c) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.5(d)* Amendment No. 5 to the Atlantic Richfield Company Annual Incentive Plan, effective as of July 28, 1997, filed with the Commission as Ex- hibit 10.3 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.5(e)* Amendment No. 6 to the Atlantic Richfield Company Annual Incentive Plan, effective as of July 28, 1997, filed with the Commission as Ex- hibit 10.4 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference.
Exhibit Description - ------- ----------- 10.6(a)* Atlantic Richfield Company's 1985 Executive Long-Term Incentive Plan, as adopted by the Board of Directors of ARCO on May 28, 1985, and ef- fective as of that date, as amended through July 28, 1997, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.6(b)* Amendment No. 10 to the Atlantic Richfield Company 1985 Executive Long-Term Incentive Plan, effective as of July 18, 1997, filed with the Commission as Exhibit 10.5 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.6(c)* Amendment No. 11 to the Atlantic Richfield Company 1985 Executive Long-Term Incentive Plan, effective as of July 18, 1997, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.7(a)* Atlantic Richfield Company Executive Life Insurance Plan--Summary Plan Description, effective as of June 28, 1990, filed with the Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.7(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Life In- surance Plan, effective July 28, 1997, filed herewith. 10.7(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Life In- surance Plan, effective July 28, 1997, filed herewith. 10.7(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Life In- surance Plan, effective May 1, 1997, filed herewith. 10.8(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--Sum- mary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.9 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.8(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective May 1, 1997, filed herewith. 10.9 Amendment No. 6 to the Atlantic Richfield Company Special Termination Allowance Plan which contains the current change of control provisions applicable to the Company's executive management team, including its five most highly compensated executive officers, effective as of July 28, 1997, filed with the Commission as Exhibit 10.7 to ARCO's report on Form 10-Q for the quarterly period ended September 30, 1998, under File No. 1-1196 and incorporated herein by reference. 10.10 Form of Indemnity Agreement filed with the Commission as Exhibit 99 to ARCO's Registration Statement on Form S-3 (No. 333-71293) under File No. 1-1196 and incorporated herein by reference. 10.11(a)* Stock Option Plan for Outside Directors effective as of December 17, 1990, filed with the Commission as Exhibit 10.14 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors, effective as of June 22, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.11(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed with the Commission as Exhibit 10.10(c) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference.
Exhibit Description - ------- ----------- 10.11(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed with the Commission as Exhibit 10.10(d) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.12(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990, filed with the Commission as Exhibit 10.13(a) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.12(c)* Amendment No. 2 to the Deferral Plan for Outside Directors effective as of July 22, 1996, filed with the Commission as Exhibit 10.11(c) to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 10.13* Special Incentive Plan, as adopted by the Board of Directors of ARCO on February 28, 1994, and as effective on that date, is included in Appendix C to the Company's 1994 Proxy Statement filed with the Com- mission under File No. 1-1196 and incorporated herein by reference. 10.14* 1997 Restricted Stock Plan For Outside Directors effective as of January 1, 1997, filed with the Commission as Exhibit 10.13 to ARCO's report on Form 10-K for the year 1997, under File No. 1-1196 and incorporated herein by reference. 21 Subsidiaries of the Registrant. 23 Consent of PricewaterhouseCoopers LLP. 24 Power of Attorney. 27 Financial Data Schedule.
Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Corporate Secretary. - ------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K. EX-10.1(F) 2 AMENDMENT NO. 5 TO ARCO EXECUTIVE RETIREMENT PLAN EXHIBIT 10.1(f) AMENDMENT NO. 5 TO ATLANTIC RICHFIELD COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN __________________________ Pursuant to the power of amendment reserved therein, the Atlantic Richfield Company Supplementary Executive Retirement Plan (the "Plan") is hereby amended effective as of May 1, 1997. Article I, Section 3.22 of the Plan is amended to read as follows: "3.22 Subsidiary or Affiliate means: (a) Any corporation 50 percent or more of the voting stock of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary or Affiliate; or (b) Any partnership, joint venture or similar organization 50 percent or more of the profits interest or capital interest of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary or Affiliate." Executed this 14/th/ day of April, 1998. ATTEST: ATLANTIC RICHFIELD COMPANY /s/ ARMINEH SIMONIAN /s/ JOHN H. KELLY BY:___________________________ By: ___________________________ Armineh Simonian John H. Kelly Senior Vice President Human Resources EX-10.2(F) 3 AMENDMENT NO. 5 TO ARCO EXECUTIVE DEFERRAL PLAN EXHIBIT 10.2(f) AMENDMENT NO. 5 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE DEFERRAL PLAN __________________________ Pursuant to the power of amendment reserved therein, the Atlantic Richfield Company Executive Deferral Plan (the "Plan") is hereby amended effective as of May 1, 1997. Article I, Section 3.28 of the Plan is amended to read as follows: "3.28 Subsidiary or Affiliate means: (a) Any corporation 50 percent or more of the voting stock of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary or Affiliate; or (b) Any partnership, joint venture or similar organization 50 percent or more of the profits interest or capital interest of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary or Affiliate." Executed this 14th day of April, 1998. ATTEST: ATLANTIC RICHFIELD COMPANY /s/ ARMINEH SIMONIAN /s/ JOHN H. KELLY BY:______________________ BY: ___________________________ Armineh Simonian JOHN H. KELLY Senior Vice President Human Resources EX-10.4 4 COMPANY POLICY ON FINANCIAL COUNSELING EXHIBIT 10.4 CONFIDENTIAL ------------ COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1 A. Eligibility ----------- This policy shall be applicable to the executives in salary grades 64E0 and 64E1. B. Effective Date -------------- This policy first became effective January 1, 1987. The provisions herein reflect all modifications made through January 1, 1997, the effective date of this current policy. C. Definitions ----------- Financial counseling service as used in this statement means professional (financial, legal and tax) counseling in the broad area of estate building and estate conservation including, but not necessarily limited to: o Effective utilization of Company benefit programs; o Individual capital building methods and tools; o Income tax planning guideposts and tax shelters; o Estate conservation and insurance planning; o Preparation of personal wills and trust agreements; o Cash flow, commercial banking, leverage and liquidity analysis, and o Problem analysis and financial trade-offs. Individual income tax service as used in this statement is specifically limited to professional assistance in the preparation of the executive's individual federal, state and/or local income tax returns and support of such return upon audit. D. Covered Services and Allowances ------------------------------- 1. The Company will provide the following to eligible executives upon request to the Manager, Executive Relations: a. Information regarding the kinds of financial counseling services provided by nationally known organizations. b. Information regarding nationally known organizations which provide professional assistance in the preparation of individual income tax returns. c. Information regarding the executive's Company benefits for use by the selected counseling organization, including a statement of the extent to which the Company will reimburse the executive for services of financial and tax counseling organizations. Page 1 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1 2. The Company will reimburse eligible executives in accordance with the following provisions for the services of the organizations they select: a. Reimbursement for all financial counseling and individual income tax service rendered during the initial calendar year of the executive's participation under this policy will generally not exceed $12,000. b. Reimbursement for all financial counseling service and individual income tax service during the calendar year of a participating executive's termination will generally not exceed $12,000. c. Reimbursement for follow-up financial counseling and individual income tax services in any calendar year other than the initial calendar year of participation or the calendar year immediately preceding the executive's termination will generally not exceed $8,000. d. Any allowance unused in a calendar year may be carried forward to the next calendar year for use during that period as necessary. However, no more than the maximum allowance for a given year is subject to carry forward, i.e., $12,000 for the initial year and $8,000 for succeeding years. e. If necessary, the allowance for the year following the current year may be carried back to cover expenses in the current year assuming the executive's expected continued eligibility. No more than one year forward is available for carry back. If an executive has received reimbursement under the carry back provisions of the plan at the time of termination of employment, the Company may, at its discretion, request reimbursement from the executive for any such amount. f. A one-time allowance of up to $4,000 for reimbursement of legal services provided in preparation/updating of personal wills and trusts is available. However, if an eligible executive relocates to a different state, an additional allowance of up to $2,000 for reimbursement of legal services provided in updating personal wills and trusts to reflect the laws of the new state is available. g. The first year allowance of $12,000 will also be available to change counseling organizations one time during the entire eligibility period at the executive's discretion, not including the provisions of f. above. This allowance would include individual income tax service for that year. h. If an executive terminates or dies while a participant under this policy, an allowance of $1,550 will apply with respect to individual income tax returns for the last calendar year in which the executive was in the active service of the Company. Page 2 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1 i. If an executive's employment with the Company ceases other than by retirement with an immediate retirement allowance, death, or by agreement with the Company, reimbursement will not be made for any financial counseling or income tax services performed for the executive after the date employment terminates. 3. Brokers' fees or promoters' fees are not reimbursable. 4. To obtain reimbursement under this policy, a participating executive will forward the service organization's invoices with covering memorandum to the Manager, Executive Relations. The Company's check will be payable to the executive. The executive is responsible for payment of the service organization's invoices. 5. Reimbursements will be grossed up in consideration of federal and state income taxes. 6. The total reimbursement made by the Company will be reported to the Internal Revenue Service and to other applicable tax jurisdictions as supplemental payment of compensation. Each reimbursement will be subject to FICA and withholding at the standard federal and state tax rates at the time payment is made. E. Non-Endorsement --------------- It is the Company's policy that the decision whether or not to use financial counseling service and/or income tax service as well as the selection of organizations to render such services is an individual one. Therefore, representatives of the Company will not suggest whether or not an eligible executive should use such services, and will not encourage or discourage use of any particular organization by an eligible executive. By application for information outlined in "D" above, and by acceptance and receipt thereof, any eligible executive shall release and discharge the Company and any employee or other person who furnishes such information from any and all liability and responsibility for loss or damage which said applying executive may suffer as a consequence of receipt or use of such information. F. Administration -------------- All decisions regarding this policy rest entirely with the Company and such decisions shall be final. The Company reserves the right to modify or terminate this policy at any time. Effective: January 1, 1997 Page 3 CONFIDENTIAL ------------ COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3 A. Eligibility ----------- This policy shall be applicable to the executives in salary grades 64E2 and 64E3. B. Effective Date -------------- This policy first became effective January 1, 1987. The provisions herein reflect all modifications made through January 1, 1997, the effective date of this current policy. C. Definitions ----------- Financial counseling service as used in this statement means professional (financial, legal and tax) counseling in the broad area of estate building and estate conservation including, but not necessarily limited to: o Effective utilization of Company benefit programs; o Individual capital building methods and tools; o Income tax planning guideposts and tax shelters; o Estate conservation and insurance planning; o Preparation of personal wills and trust agreements; o Cash flow, commercial banking, leverage and liquidity analysis, and o Problem analysis and financial trade-offs. Individual income tax service as used in this statement is specifically limited to professional assistance in the preparation of the executive's individual federal, state and/or local income tax returns and support of such return upon audit. D. Covered Services and Allowances ------------------------------- 1. The Company will provide the following to eligible executives upon request to the Manager, Executive Relations: a. Information regarding the kinds of financial counseling services provided by nationally known organizations. b. Information regarding nationally known organizations which provide professional assistance in the preparation of individual income tax returns. c. Information regarding the executive's Company benefits for use by the selected counseling organization, including a statement of the extent to which the Company will reimburse the executive for services of financial and tax counseling organizations. Page 1 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3 2. The Company will reimburse eligible executives in accordance with the following provisions for the services of the organizations they select: a. Reimbursement for all financial counseling and individual income tax service rendered during the initial calendar year of the executive's participation under this policy will generally not exceed $10,600. b. Reimbursement for all financial counseling service and individual income tax service during the calendar year of a participating executive's termination will generally not exceed $10,600. c. Reimbursement for follow-up financial counseling and individual income tax services in any calendar year other than the initial calendar year of participation or the calendar year immediately preceding the executive's termination will generally not exceed $6,200. d. Any allowance unused in a calendar year may be carried forward to the next calendar year for use during that period as necessary. However, no more than the maximum allowance for a given year is subject to carry forward, i.e., $10,600 for the initial year and $6,200 for succeeding years. e. If necessary, the allowance for the year following the current year may be carried back to cover expenses in the current year assuming the executive's expected continued eligibility. No more than one year forward is available for carry back. If an executive has received reimbursement under the carry back provisions of the plan at the time of termination of employment, the Company may, at its discretion, request reimbursement from the executive for any such amount. f. A one-time allowance of up to $3,000 for reimbursement of legal services provided in preparation/updating of personal wills and trusts is available. However, if an eligible executive relocates to a different state, an additional allowance of up to $1,500 for reimbursement of legal services provided in updating personal wills and trusts to reflect the laws of the new state is available. g. The first year allowance of $10,600 will also be available to change counseling organizations one time during the entire eligibility period at the executive's discretion, not including the provisions of f. above. This allowance would include individual income tax service for that year. h. If an executive terminates or dies while a participant under this policy, an allowance of $1,250 will apply with respect to individual income tax returns for the last calendar year in which the executive was in the active service of the Company. Page 2 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3 i. If an executive's employment with the Company ceases other than by retirement with an immediate retirement allowance, death, or by agreement with the Company, reimbursement will not be made for any financial counseling or income tax services performed for the executive after the date employment terminates. 3. Brokers' fees or promoters' fees are not reimbursable. 4. To obtain reimbursement under this policy, a participating executive will forward the service organization's invoices with covering memorandum to the Manager, Executive Relations. The Company's check will be payable to the executive. The executive is responsible for payment of the service organization's invoices. 5. Reimbursements will be grossed up in consideration of federal and state income taxes. 6. The total reimbursement made by the Company will be reported to the Internal Revenue Service and to other applicable tax jurisdictions as supplemental payment of compensation. Each reimbursement will be subject to FICA and withholding at the standard federal and state tax rates at the time payment is made. E. Non-Endorsement --------------- It is the Company's policy that the decision whether or not to use financial counseling service and/or income tax service as well as the selection of organizations to render such services is an individual one. Therefore, representatives of the Company will not suggest whether or not an eligible executive should use such services, and will not encourage or discourage use of any particular organization by an eligible executive. By application for information outlined in "D" above, and by acceptance and receipt thereof, any eligible executive shall release and discharge the Company and any employee or other person who furnishes such information from any and all liability and responsibility for loss or damage which said applying executive may suffer as a consequence of receipt or use of such information. F. Administration -------------- All decisions regarding this policy rest entirely with the Company and such decisions shall be final. The Company reserves the right to modify or terminate this policy at any time. Effective: January 1, 1997 Page 3 CONFIDENTIAL ------------ COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4 A. Eligibility ----------- This policy shall be applicable to the executives in salary grades 64E4. B. Effective Date -------------- This policy first became effective January 1, 1987. The provisions herein reflect all modifications made through January 1, 1997, the effective date of this current policy. C. Definitions ----------- Financial counseling service as used in this statement means professional (financial, legal and tax) counseling in the broad area of estate building and estate conservation including, but not necessarily limited to: o Effective utilization of Company benefit programs; o Individual capital building methods and tools; o Income tax planning guideposts and tax shelters; o Estate conservation and insurance planning; o Preparation of personal wills and trust agreements; o Cash flow, commercial banking, leverage and liquidity analysis, and o Problem analysis and financial trade-offs. Individual income tax service as used in this statement is specifically limited to professional assistance in the preparation of the executive's individual federal, state and/or local income tax returns and support of such return upon audit. D. Covered Services and Allowances ------------------------------- 1. The Company will provide the following to eligible executives upon request to the Manager, Executive Relations: a. Information regarding the kinds of financial counseling services provided by nationally known organizations. b. Information regarding nationally known organizations which provide professional assistance in the preparation of individual income tax returns. c. Information regarding the executive's Company benefits for use by the selected counseling organization, including a statement of the extent to which the Company will reimburse the executive for services of financial and tax counseling organizations. Page 1 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4 2. The Company will reimburse eligible executives in accordance with the following provisions for the services of the organizations they select: a. Reimbursement for all financial counseling and individual income tax service rendered during the initial calendar year of the executive's participation under this policy will generally not exceed $5,800. b. Reimbursement for all financial counseling service and individual income tax service during the calendar year of a participating executive's termination will generally not exceed $5,800. c. Reimbursement for follow-up financial counseling and individual income tax services in any calendar year other than the initial calendar year of participation or the calendar year immediately preceding the executive's termination will generally not exceed $4,200. d. Any allowance unused in a calendar year may be carried forward to the next calendar year for use during that period as necessary. However, no more than the maximum allowance for a given year is subject to carry forward, i.e., $5,800 for the initial year and $4,200 for succeeding years. e. If necessary, the allowance for the year following the current year may be carried back to cover expenses in the current year assuming the executive's expected continued eligibility. No more than one year forward is available for carry back. If an executive has received reimbursement under the carry back provisions of the plan at the time of termination of employment, the Company may, at its discretion, request reimbursement from the executive for any such amount. f. A one-time allowance of up to $3,000 for reimbursement of legal services provided in preparation/updating of personal wills and trusts is available. However, if an eligible executive relocates to a different state, an additional allowance of up to $1,500 for reimbursement of legal services provided in updating personal wills and trusts to reflect the laws of the new state is available. g. The first year allowance of $5,800 will also be available to change counseling organizations one time during the entire eligibility period at the executive's discretion, not including the provisions of f. above. This allowance would include individual income tax service for that year. h. If an executive terminates or dies while a participant under this policy, an allowance of $950 will apply with respect to individual income tax returns for the last calendar year in which the executive was in the active service of the Company. Page 2 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4 i. If an executive's employment with the Company ceases other than by retirement with an immediate retirement allowance, death, or by agreement with the Company, reimbursement will not be made for any financial counseling or income tax services performed for the executive after the date employment terminates. 3. Brokers' fees or promoters' fees are not reimbursable. 4. To obtain reimbursement under this policy, a participating executive will forward the service organization's invoices with covering memorandum to the Manager, Executive Relations. The Company's check will be payable to the executive. The executive is responsible for payment of the service organization's invoices. 5. Reimbursements will be grossed up in consideration of federal and state income taxes. 6. The total reimbursement made by the Company will be reported to the Internal Revenue Service and to other applicable tax jurisdictions as supplemental payment of compensation. Each reimbursement will be subject to FICA and withholding at the standard federal and state tax rates at the time payment is made. E. Non-Endorsement --------------- It is the Company's policy that the decision whether or not to use financial counseling service and/or income tax service as well as the selection of organizations to render such services is an individual one. Therefore, representatives of the Company will not suggest whether or not an eligible executive should use such services, and will not encourage or discourage use of any particular organization by an eligible executive. By application for information outlined in "D" above, and by acceptance and receipt thereof, any eligible executive shall release and discharge the Company and any employee or other person who furnishes such information from any and all liability and responsibility for loss or damage which said applying executive may suffer as a consequence of receipt or use of such information. F. Administration -------------- All decisions regarding this policy rest entirely with the Company and such decisions shall be final. The Company reserves the right to modify or terminate this policy at any time. Effective: January 1, 1997 Page 3 EX-10.7(B) 5 AMENDMENT NO. 1 TO ARCO EXEC. LIFE INSURANCE PLAN EXHIBIT 10.7(b) AMENDMENT NO. 1 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE LIFE INSURANCE PLAN ___________________________ Pursuant to authority contained in resolutions adopted by the Board of Directors on July 28, 1997, the following amendment is hereby made to the Atlantic Richfield Company Executive Life Insurance Plan (the "Plan"), effective July 28, 1997, except as stated otherwise. 1. Paragraphs 1.2, 1.4 and 1.8 of the Plan are amended to read as follows: "1.2 "Administrative Committee" means the committee appointed by the Senior Vice President, Human Resources, of the Company, and consisting of at least three employees of the Company, which administers this Plan pursuant to Article XII. 1.4 "Beneficiary(s)" means the person or persons designated by the Participant in accordance with Article XIII of this Plan. 1.8 "Company" means ARCO and its Subsidiaries." 2. Paragraphs 1.28, 1.29, 1.30, 1.31, 1.32, 1.33 and 1.34 are added to Article I of the Plan to read as follows: "1.28 "Anticipatory Change of Control" means (a) the execution of an agreement or a written document which, if the subject thereof were consummated, would result in a Change of Control; (b) a public announcement by any Person, including ARCO, of an intent to take an action(s) which, if consummated, would result in a Change of Control; or (c) the delivery of a signed, written statement to the Trustee of the Change of Control Trust and ARCO's Independent Auditor by the Chief Financial Officer and General Counsel of ARCO that an Anticipatory Change of Control is in effect, provided that, with respect to any of the above three circumstances, the Anticipatory Change of Control shall not be effective until approved by either the Board or the Executive Committee of the Board. 1.29 "ARCO" means Atlantic Richfield Company, its successors and assigns. 1.30 "Benefit Trigger Window" means the 24-month period commencing on the date that a Change of Control occurs. 1 1.31 "Change of Control" means: (a) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of ARCO (a "Business Combination"), unless, in each case, following such Business Combination: (i) All or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of common stock (the "Outstanding Common Stock") of ARCO and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors (the "Outstanding Voting Securities") of ARCO immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then Outstanding Common Stock and the combined voting power of the then Outstanding Voting Securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which, as a result of such transaction, owns ARCO or all or substantially all of ARCO's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be; (ii) No Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of ARCO or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25 percent or more of, respectively, the then Outstanding Common Stock of such corporation resulting from such Business Combination or the combined voting power of the then Outstanding Voting Securities of such corporation, except to the extent that such ownership existed immediately prior to the Business Combination; and (iii) At least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 2 (b) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 or Rule 13d-5 promulgated under the Exchange Act) of 25 percent or more of either (i) the Outstanding Common Stock of ARCO or (ii) the Outstanding Voting Securities of ARCO; provided, however, that for purposes of this Subsection (b), the following shall not constitute a Change of Control: (1) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by ARCO or any corporation controlled by ARCO; (2) any acquisition by ARCO or any increase in beneficial ownership resulting solely from an acquisition by ARCO; (3) any acquisition by any corporation pursuant to a Business Combination which complies with clauses (i), (ii) and (iii) of Subsection (a); or (4) any acquisition directly from ARCO pursuant to a transaction (other than a Business Combination) approved by the Board after July 28, 1997; and provided, further, that in any event, without regard to the manner in which the level of ownership is attained, the ownership by any Person of 40 percent or more of the Outstanding Common Stock of ARCO or Outstanding Voting Securities of ARCO shall constitute a Change of Control; or (c) Individuals who, as of July 28, 1997, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by ARCO's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, except that any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person shall not be considered an Incumbent Director; or (d) Approval by the stockholders of ARCO of a complete liquidation or dissolution of ARCO. 1.32 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1.33 "Person" means any individual, corporation, firm partnership, governmental body, entity or group and shall include any person within the meaning of (S)13(d)(3) or (S)14(d)(2) of the Exchange Act. 1.34 "Surviving Entity" means the entity which exists following a Change of Control and which employs the individuals who were Eligible Employees under Paragraph 1.12 immediately prior to the Change of Control." 3. Effective June 28, 1990, Article IX of the Plan is amended to read as follows: 3 "ARTICLE IX Termination of Employment 9.1 In the event of Termination of Employment prior to the completion of five (5) years of Service, participation of the Participant in this Plan and coverage of the Participant under any Policy issued pursuant to this Plan shall terminate, all incidents of ownership of the Policy (if any) held by the Participant shall be transferred to the Company, which shall retain all incidents of ownership of the Policy on and after such date, and the Company shall have no further legal or equitable obligations of any kind to the Participant under this Plan. 9.2 In the event of Termination of Employment prior to Retirement Eligibility and after five (5) Years of Service, the Participant shall be entitled to purchase the Company's interest in the Policy for an amount equal to either the Company's cumulative premium outlay in the Policy or the cash value of the Policy, whichever is greater. If the Participant does not elect to purchase the Company's interest in the Policy all incidents of ownership of the Policy (if any) held by the Participant shall be transferred to the Company. At the time the Participant purchases the Company's interests in the Policy, or the Participant's incidents of ownership are transferred to the Company, the Company shall have no further legal or equitable obligations of any kind to the Participant under this Plan." 4. Article IX through XIII of the Plan are renumbered as Articles X through XIV and a new Article IX is added to the Plan to read as follows: "ARTICLE IX Continuation of Coverage - Change of Control 9.1 If an Employee who is a Participant in the Plan as of the date of a Change of Control is terminated from employment from the Surviving Entity during the Benefit Trigger Window under any of the circumstances described under Paragraph 9.2, this Plan shall remain in effect for the Applicable Period described under Paragraph 9.3, under terms and provisions no less favorable than were in effect as of the date of the Change of Control, provided that the former Employee complies with any requirements of the Special Plan Administrator regarding the administration of the Plan including the amount or time for making Participant contributions, and provided, further, that failure of the Participant to so comply shall result in a cancellation of coverage on the date of such delinquency with no right of re-instatement. 9.2 Termination of Employment shall mean termination of employment during the Benefit Trigger Window by the Surviving Entity, other than for cause, and with respect to Grades E0, E1, E2 and E3 shall also mean the Employee's voluntary termination following the Surviving Entity's request to accept a (a) 4 demotion to a lesser job, (b) reduction in Base Salary plus Salary Grade Target AIP Award of ten percent or more, or (c) relocation of the principal place of work which would constitute a deductible moving expense under (S)217 of the Internal Revenue Code. With respect to Grades E4, 10 and 9, Clause (a) shall not apply. 9.3 In the event of termination of employment under Paragraph 9.2, the Participant will be entitled to maintain coverage, as described in Paragraph 9.1, during the Applicable Period as follows:
======================================================== Applicable Period of Executive Life Insurance Continuation Following Termination ======================================================== Period of Benefit Employee Continuation Level (Months) ======================================================== EO and E1 36 -------------------------------------------------------- E2 36 -------------------------------------------------------- E3 24 -------------------------------------------------------- All Others 18 --------------------------------------------------------
5. Article XI of the Plan is amended to read as follows: "ARTICLE XI Amendment and Termination of Plan 11.1 Amendment and Termination. Except as provided in Paragraph 11.3 and 11.4, the Company may at any time amend or terminate this Plan in whole or in part. If this Plan is terminated by the Company prior to the commencement of any benefit payments to the Participant or to the Beneficiary, the Participant shall have the same rights as under Article IV of this Plan. 11.2 Termination After Commencement of Plan Benefit Payments. If this Plan is terminated by the Company after the commencement of any benefit payments to the Participant or to the Beneficiary, the Company shall be obligated to continue such payments in accordance with the terms of this Plan as in existence immediately prior to termination of this Plan. 11.3 The Plan may not be amended during an Anticipatory Change of Control, except that the Board of Directors, as defined above, may amend the Plan during such a period as it may deem reasonably necessary, upon advice of counsel, to further the interest of the Company and its shareholders regarding any legal requirements and, provided further, that any such amendment which reduces, or could reduce, the value of any benefit of a Participant, as determined in the sole discretion of the Special Plan Administrator, shall provide substantially equivalent value in replacement thereof to the Participant. 5 11.4 The Plan may not be amended on or after a Change of Control." Executed this 27th day of March, 1998 ATTEST ATLANTIC RICHFIELD COMPANY /s/ ARMINEH SIMONIAN /s/ JOHN H. KELLY BY: ______________________ BY: _________________________ Armineh Simonian John H. Kelly Senior Vice President Human Resources 6 EX-10.7(C) 6 AMENDMENT NO. 2 TO ARCO EXEC. LIFE INSURANCE PLAN EXHIBIT 10.7(c) AMENDMENT NO. 2 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE LIFE INSURANCE PLAN ___________________________ Pursuant to the power of amendment reserved therein, the following amendment is hereby made to the Atlantic Richfield Company Executive Life Insurance Plan (the "Plan") effective as of July 28, 1997. 1. Article I, Paragraphs 1.2 and 1.28 of the Plan are amended to read as follows: "1.2 "Administrative Committee" means the committee appointed by the Senior Vice President, Human Resources, of the Company, and consisting of at least three employees of the Company, which administers this Plan pursuant to Article XII." "1.28 "Anticipatory Change of Control" means (a) the execution of an agreement or a written document which, if the subject thereof were consummated, would result in a Change of Control; (b) a public announcement by any Person, including ARCO, of an intent to take an action(s) which, if consummated, would result in a Change of Control; or (c) the delivery of a signed, written statement to the Trustee of the Change of Control Trust and ARCO's Independent Auditor by the Chief Financial Officer of ARCO and General Counsel of ARCO that an Anticipatory Change of Control is in effect, provided that, with respect to any of the above three circumstances, the Anticipatory Change of Control shall not be effective until approved by either the Board or the Executive Committee of the Board." 2. Article I, Paragraph 1.5 of the Plan is deleted, Paragraph 1.31 is renumbered as Paragraph 1.5 and Paragraphs 1.32, 1.33 and 1.34 are renumberd as Paragraphs 1.31, 1.32 and 1.33. Redesignated Paragraph 1.33 of the Plan is deleted and new Paragraphs 1.33, 1.34, 1.35 and 1.36 are added to Article I of the Plan to read as follows: "1.33 "Board" means the Board of Directors of ARCO established by the Articles of Incorporation of ARCO. 1.34 "Change of Control Trust" means the trust established by ARCO to provide for the payment of any benefits, in whatever form is required, under this Plan on and after a Change of Control. 1.35 "Executive Committee" means the Executive Committee of the Board as established by the Board of Directors of ARCO. 1.36 "Special Plan Administrator" means the entity designated in the Change of Control Trust, which shall have full administrative powers under this 1 Plan on and after a Change of Control, including, but not limited to, all interpretive and decision powers reserved to the Administrative Committee prior to a Change of Control." 3. Article IX of the Plan is amended to read as follows: "ARTICLE IX Continuation of Coverage - Change of Control 9.1 If an Employee who is a Participant in the Plan as of the date of a Change of Control is terminated from employment during the Benefit Trigger Window under any of the circumstances described under Paragraph 9.2, this Plan shall remain in effect for the Applicable Period described under Paragraph 9.3, under terms and provisions no less favorable than were in effect as of the date of the Change of Control, provided that the former Employee complies with any requirements of the Special Plan Administrator regarding the administration of the Plan including the amount or time for making Participant contributions, and provided, further, that failure of the Participant to so comply shall result in a cancellation of coverage on the date of such delinquency with no right of reinstatement. 9.2 Termination of Employment shall mean termination of employment during the Benefit Trigger Window, other than due to voluntary termination or for cause, and with respect to Grades E0, E1, E2 and E3 shall also mean the Employee's voluntary termination following management's request to accept a (a) demotion to a lesser job, (b) reduction in Base Salary plus Salary Grade Target AIP Award of ten percent or more, or (c) relocation of the principal place of work which would constitute a deductible moving expense under (S)217 of the Internal Revenue Code. With respect to Grades E4, 10 and 9, only Clauses (b) and (c) above shall apply and for Employees Grade 8 or below, provision (b) shall apply only to Base Salary. 9.3 In the event of termination of employment under Paragraph 9.2, the Participant will be entitled to maintain coverage, as described in Paragraph 9.1, during the Applicable Period as follows:
====================================================== Applicable Period of Executive Life Insurance Continuation Following Termination ====================================================== Employee Period of Benefit Grade Continuation (Months) ====================================================== EO and E1 36 ------------------------------------------------------ E2 36 ------------------------------------------------------ E3 24 ------------------------------------------------------ All Others 18 ------------------------------------------------------
4. Subarticle 11.3 of the Plan is amended to read as follows: "11.3 The Plan may not be amended during an Anticipatory Change of Control, except that the Board, as defined above, may amend the Plan during such a period as it may deem reasonably necessary, upon advice of counsel, to 2 further the interest of the Company and its shareholders regarding any legal requirements and, provided further, that any such amendment which reduces, or could reduce, the value of any benefit of a Participant, as determined in the sole discretion of the Special Plan Administrator, shall provide substantially equivalent value in replacement thereof to the Participant." Executed this 5th day of November, 1998 ATTEST ATLANTIC RICHFIELD COMPANY /s/ ARMINEH SIMONIAN /s/ JOHN H. KELLY BY: ______________________ BY: _________________________ Armineh Simonian John H. Kelly Senior Vice President Human Resources 3 EX-10.7(D) 7 AMENDMENT NO. 3 TO ARCO EXEC. LIFE INSURANCE PLAN EXHIBIT 10.7(d) AMENDMENT NO. 3 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE LIFE INSURANCE PLAN ___________________________ Pursuant to the power of amendment reserved therein, the Atlantic Richfield Company Executive Life Insurance Plan (the "Plan") is hereby amended effective as of May 1, 1997. Article I, Section 1.23 of the Plan is amended to read as follows: "1.23 Subsidiary means: (a) Any corporation 50 percent or more of the voting stock of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary; or (b) Any partnership, joint venture or similar organization 50 percent or more of the profits interest or capital interest of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary." Executed this 14th day of April, 1998. ATTEST ATLANTIC RICHFIELD COMPANY BY: /s/ ARMINEH SIMONIAN BY: /s/ JOHN H. KELLEY --------------------------- ---------------------------- Armineh Simonian John H. Kelly Senior Vice President Human Resources EX-10.8(C) 8 AMENDMENT NO. 2 TO ARCO EXEC. LONG-TERM DISABILITY PLAN EXHIBIT 10.8(c) AMENDMENT NO. 2 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE LONG-TERM DISABILITY PLAN ___________________________ Pursuant to the power of amendment reserved therein, the following amendment is hereby made to the Atlantic Richfield Company Executive Long-Term Disability Plan (the "Plan") effective as of May 1, 1997. Article I, Section 1.24 of the Plan is amended to read as follows: "1.24 Subsidiary means: (a) Any corporation 50 percent or more of the voting stock of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary; or (b) Any partnership, joint venture or similar organization 50 percent or more of the profits interest or capital interest of which is owned directly or indirectly by Atlantic Richfield Company or a Subsidiary." Executed this 14th day of April, 1998. ATTEST ATLANTIC RICHFIELD COMPANY BY: /s/ Armineh Simonian BY: /s/ John H. Kelly ------------------------ ------------------------ Armineh Simonian John H. Kelly Senior Vice President Human Resources EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Percentage of Voting Securities Owned by Organized Immediate Name of Company Under Laws of Parent --------------- ------------- ------------- Atlantic Richfield Company (Registrant)........... Delaware Subsidiaries of Registrant in consolidated financial statements, as of December 31, 1998: ARCO Alaska, Inc................................ Delaware 100.0 ARCO Transportation Alaska, Inc. ............... Delaware 100.0 Vastar Resources, Inc. ......................... Delaware 82.1
The subsidiaries whose names are not listed above, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 10 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company: Registration Statement on Form S-3 (No. 333-71293), Registration Statement on Form S-8 (No. 333-33151), Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Registration Statement on Form S-8 (No. 333-33153), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), and Registration Statement on Form S-8 (No. 333-33245), of our report dated February 12, 1999, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Los Angeles, California February 22, 1999 EX-24 11 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Marie L. Knowles, J. Kenneth Thompson, Donald R. Voelte, Jr., Michael E. Wiley, Bruce G. Whitmore, Terry G. Dallas and Allan L. Comstock, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, in connection with the issuance of any securities authorized by the Board of Directors of Atlantic Richfield Company (the "Company") or by the Executive Committee thereof pursuant to due authorization by such Board for issuance by the Company, (1) to execute and file, or cause to be filed, with the Securities and Exchange Commission (the "Commission"), (A) Registration Statements and any and all amendments (including post-effective amendments) thereto and to file, or cause to be filed, all exhibits thereto and other documents in connection therewith as required by the Commission in connection with such registration under the Securities Act of 1933, as amended, and (B) any report or other document required to be filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended, (2) to execute and file, or cause to be filed, any application for registration or exemption therefrom, any report or any other document required to be filed by the Company under the Blue Sky or securities laws of any of the United States, and to furnish any other information required in connection therewith, (3) to execute and file, or cause to be filed, any application for registration or exemption therefrom under the securities laws of any jurisdiction outside the United States, including any reports or other documents required to be filed subsequent to the issuance of such securities, and (4) to execute and file, or cause to be filed, any application for listing such securities on the New York Stock Exchange, the Pacific Stock Exchange, the London Stock Exchange or any other securities exchange in any other jurisdiction where any such securities are proposed to be sold, granting to such attorneys- in-fact and agents, and each of them, full power and authority to do and perform each and every act required to be done as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, and each of them, may lawfully do or cause to be done by virtue of this power of attorney. Each person whose signature appears below may at any time revoke this power of attorney as to himself or herself only by an instrument in writing specifying that this power of attorney is revoked as to him or her as of the date of execution of such instrument or at a subsequent specified date. This power of attorney shall be revoked automatically with respect to any person whose signature appears below effective on the date he or she ceases to be a member of the Board of Directors or an officer of the Company. Any revocation hereof shall not void or otherwise affect any acts performed by any attorney-in- fact and agent named herein pursuant to this power of attorney prior to the effective date of such revocation. Dated as of January 25, 1999. Signature Title --------- ----- /s/ MIKE R. BOWLIN Chairman of the Board and _______________________________ Chief Executive Officer Mike R. Bowlin Principal executive officer 1 Signature Title --------- ----- /s/ MICHAEL E. WILEY President and Chief _______________________________ Operating Officer Michael E. Wiley /s/ MARIE L. KNOWLES Executive Vice President ________________________________ and Chief Financial Officer Marie L. Knowles /s/ J. KENNETH THOMPSON ________________________________ Executive Vice President J. Kenneth Thompson /s/ DONALD R. VOELTE, JR. ________________________________ Executive Vice President Donald R. Voelte, Jr. /s/ FRANK D. BOREN ________________________________ Director Frank D. Boren /s/ JOHN GAVIN ________________________________ Director John Gavin /s/ KENT KRESA ________________________________ Director Kent Kresa /s/ ARNOLD G. LANGBO ________________________________ Director Arnold G. Langbo 2 Signature Title --------- ----- /s/ DAVID T. McLAUGHLIN ________________________________ Director David T. McLaughlin /s/ JOHN B. SLAUGHTER ________________________________ Director John B. Slaughter /s/ GARY L. TOOKER ________________________________ Director Gary L. Tooker /s/ HENRY WENDT ________________________________ Director Henry Wendt /s/ GAYLE E. WILSON ________________________________ Director Gayle E. Wilson /s/ ALLAN L. COMSTOCK Vice President and _________________________________ Controller Allan L. Comstock Principal accounting officer 3 EX-27 12 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 657 260 1,002 0 475 2,711 39,332 20,570 25,199 5,697 4,332 0 1 815 6,764 25,199 10,303 10,809 10,182 10,811 249 0 259 (1,282) (651) (655) 1,107 0 0 452 (2.05) (2.05)
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