-----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, QJwoHU+Ann8KN/0FJyT01tQJKW4XUSPjOIS06P1Cx+J555fKI839/tU5vuD4WzDv 9c+gF1fsupwwmUzbM0PpAg== 0000898430-99-001914.txt : 19990510 0000898430-99-001914.hdr.sgml : 19990510 ACCESSION NUMBER: 0000898430-99-001914 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC RICHFIELD CO /DE CENTRAL INDEX KEY: 0000775483 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 230371610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01196 FILM NUMBER: 99614506 BUSINESS ADDRESS: STREET 1: 333 S HOPE STREET CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134863511 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-Q ________________ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ________________ For the quarterly period ended March 31, 1999 Commission file number 1-1196 ________________ ATLANTIC RICHFIELD COMPANY (Exact name of registrant as specified in its charter) _________________ Delaware 23-0371610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 South Hope Street Los Angeles, California 90071 (Address of principal executive offices) (Zip code) __________________ (213) 486-3511 (Registrant's telephone number, including area code) __________________ Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock, $2.50 par value, outstanding as of March 31, 1999: 321,952,768. PART I. FINANCIAL INFORMATION ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31, ---------------------- 1999 1998 -------- ----------- (Restated) (Millions except per share amounts) Revenues Sales and other operating revenues............. $2,415 $2,536 Other revenues................................. 136 110 ------ ------ 2,551 2,646 ------ ------ Expenses Trade purchases................................ 800 986 Operating expenses............................. 566 535 Selling, general and administrative expenses... 152 183 Depreciation, depletion and amortization....... 483 352 Exploration expenses (including undeveloped leasehold amortization)...................... 74 149 Taxes other than income taxes.................. 120 154 Interest....................................... 95 97 ------ ------ 2,290 2,456 ------ ------ Income from continuing operations before income taxes and minority interest............. 261 190 Provision for taxes on income.................... 93 47 Minority interest in earnings of subsidiaries.... 3 9 ------ ------ Income from continuing operations................ 165 134 Income from discontinued operations, net of income taxes of $0 (1999) and $46 (1998)....... - 86 ------ ------ Net Income....................................... $ 165 $ 220 ====== ====== Earned per Share Basic Continuing operations........................ $ .51 $ .42 Discontinued operations...................... - .27 ------ ------ Net income................................... $ .51 $ .69 ====== ====== Diluted Continuing operations........................ $ .51 $ .41 Discontinued operations...................... - .26 ------ ------ Net income................................... $ .51 $ .67 ====== ====== Cash Dividends Paid per Share of Common Stock.... $.7125 $.7125 ===== =====
The accompanying notes are an integral part of these statements. 1 ATLANTIC RICHFIELD COMPANY CONSOLIDATED BALANCE SHEET
March 31, December 31, 1999 1998 --------- ------------ (Millions) Assets Current assets: Cash and cash equivalents........................ $ 790 $ 657 Short-term investments........................... 248 260 Accounts receivable.............................. 1,018 1,002 Inventories...................................... 489 475 Prepaid expenses and other current assets........ 228 317 ------- ------- Total current assets............................. 2,773 2,711 ------- ------- Investments and long-term receivables: Investments accounted for on the equity method... 1,223 1,235 Other investments and long-term receivables...... 1,023 831 ------- ------- 2,246 2,066 ------- ------- Net property, plant and equipment.................. 18,942 18,762 Net assets of discontinued operations.............. 64 339 Deferred charges and other assets.................. 1,338 1,321 ------- ------- Total assets....................................... $25,363 $25,199 ======= =======
The accompanying notes are an integral part of these statements. 2 ATLANTIC RICHFIELD COMPANY CONSOLIDATED BALANCE SHEET
March 31, December 31, 1999 1998 ---------- ------------- (Millions) Liabilities and Stockholders' Equity Current liabilities: Notes payable................................... $ 2,564 $ 2,403 Accounts payable................................ 830 976 Long-term debt due within one year.............. 199 399 Taxes payable................................... 828 634 Other........................................... 897 1,285 ------- ------- Total current liabilities....................... 5,318 5,697 ------- ------- Long-term debt.................................... 4,618 4,332 Deferred income taxes............................. 3,279 3,318 Dismantlement, restoration and reclamation........ 1,082 1,058 Other deferred liabilities and credits............ 2,958 2,955 Minority interest................................. 262 259 ------- ------- Total liabilities............................... 17,517 17,619 ------- ------- Stockholders' equity: Preference stocks............................... 1 1 Common stock.................................... 815 815 Capital in excess of par value of stock......... 858 863 Retained earnings............................... 6,525 6,589 Treasury stock.................................. (313) (344) Accumulated other comprehensive income (loss)... (40) (344) ------- ------- Total stockholders' equity...................... 7,846 7,580 ------- ------- Total liabilities and stockholders' equity........ $25,363 $25,199 ======= =======
The accompanying notes are an integral part of these statements. 3 ATLANTIC RICHFIELD COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, ---------------------- 1999 1998 ---------- ---------- (Millions) (Restated) Cash flows from operating activities: Net income from continuing operations....................... $ 165 $ 134 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation, depletion and amortization.................. 483 352 Dry hole expense and undeveloped leasehold amortization... 21 63 Net gain on asset sales................................... (14) (21) Income from equity investments............................ (7) (8) Dividends from equity investments......................... 20 1 Minority interest in earnings of subsidiaries............. 3 9 Cash payments greater than noncash provisions............. (125) (47) Deferred income taxes..................................... (5) 21 Changes in working capital accounts....................... (296) (160) Other..................................................... (43) 41 ----- ----- Net cash provided by operating activities................ 202 385 ----- ----- Cash flows from investing activities: Additions to fixed assets (including dry hole costs)...... (760) (755) Net cash provided (used) by short-term investments........ 5 (8) Proceeds from asset sales................................. 577 45 Investments and long-term receivables..................... (2) (17) Other..................................................... 27 (25) ----- ----- Net cash used by investing activities.................... (153) (760) ----- ----- Cash flows from financing activities: Repayments of long-term debt.............................. (549) (52) Proceeds from issuance of long-term debt.................. 634 68 Net cash provided by notes payable........................ 202 570 Dividends paid............................................ (229) (229) Other..................................................... 13 10 ----- ----- Net cash provided by financing activities................ 71 367 ----- ----- Cash flows from discontinued operations..................... 21 52 Effect of exchange rate changes on cash..................... (8) 1 ----- ----- Net increase in cash and cash equivalents................... 133 45 Cash and cash equivalents at beginning of period............ 657 434 ----- ----- Cash and cash equivalents at end of period.................. $ 790 $ 479 ===== =====
The accompanying notes are an integral part of these statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE A. Accounting Policies. Basis of Presentation. The foregoing financial information is unaudited and has been prepared from the books and records of the Company. Certain previously reported amounts have been restated to conform to classifications adopted in 1999. Unless otherwise stated, the Notes to Consolidated Financial Statements exclude discontinued operations. In the opinion of the Company, the financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations in conformity with generally accepted accounting principles. NOTE B. Comprehensive Income. Comprehensive income comprises net income plus all other changes in equity from nonowner sources. ARCO's comprehensive income for the three-month periods ended March 31, 1999 and 1998 was as follows:
Three Months Ended March 31, ------------------ (Millions) 1999 1998 --------- ------ Net income.................................. $ 165 $ 220 Other comprehensive income: Net unrealized gain (loss) on investments (a) 111 (186) Foreign currency translation adjustment... 193 (4) ----- ----- Comprehensive income........................ $ 469 $ 30 ===== =====
(a) Primarily consists of changes in the fair value of ARCO's investment in LUKOIL, which had a fair value of approximately $411 million at March 31, 1999, compared to a fair value of approximately $225 million at December 31, 1998. The unrealized pretax gain in the LUKOIL investment at March 31, 1999, was $69 million. Accumulated nonowner changes in equity (accumulated other comprehensive income) at March 31, 1999 and December 31, 1998 were as follows:
March 31, December 31, 1999 1998 ---------- ------------ (Millions) Net unrealized gain (loss) on investments......... $ 36 $ (75) Foreign currency translation adjustment........... (29) (222) Minimum pension liability......................... (47) (47) ----- ----- Accumulated other comprehensive income (loss)... $ (40) $(344) ===== =====
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE C. Interim Segment Information.
March 31, 1999 - -------------- Exploration Refining & All (Millions) & Production Marketing Other Unallocated Total ------------ --------- ------- ----------- ------- Sales and other operating revenues..... $ 1,304 $ 1,306 $ 17 $ 2 $ 2,629 Intersegment revenues... (211) - (1) (2) (214) ------- ------- ------ ------ ------- Total................... $ 1,093 $ 1,306 $ 16 $ - $ 2,415 ======= ======= ====== ====== ======= Income from continuing operations............. $ 89 $ 129 $ 24 $ (77) $ 165 Income from discontinued operations............. - - - - - ------- ------- ------ ------ ------- Net income.............. $ 89 $ 129 $ 24 $ (77) $ 165 ======= ======= ====== ====== ======= Segment assets.......... $18,168 $ 4,124 $ 922 $2,149 $25,363 ======= ======= ====== ====== ======= December 31, 1998 ----------------- Segment assets.......... $18,203 $ 3,826 $1,119 $2,051 $25,199 ======= ======= ====== ====== ======= March 31, 1998 - -------------- (Restated) Exploration Refining & All (Millions) & Production Marketing Other Unallocated Total ------------ --------- ------- ----------- ------- Sales and other operating revenues..... $ 1,538 $ 1,352 $ 40 $ 2 $ 2,932 Intersegment revenues... (361) (12) (21) (2) (396) ------- ------- ------ ------ ------- Total................... $ 1,177 $ 1,340 $ 19 $ - $ 2,536 ======= ======= ====== ====== ======= Income from continuing operations............. $ 182 $ 19 $ 24 $ (91) $ 134 Income from discontinued operations............. - - - 86 86 ------- ------- ------ ------ ------- Net income.............. $ 182 $ 19 $ 24 $ (5) $ 220 ======= ======= ====== ====== =======
The Company's coal and chemical operations have been reported as discontinued since March 31, 1998 and June 30, 1998, respectively. Accordingly, at December 31, 1998 and March 31, 1999, the income from and net assets of discontinued operations are included with unallocated items in the segment presentation above. The prior period has been restated to conform to the current presentation. The amortization and recognition of imputed interest associated with a gain deferred in conjunction with the sale of the chemicals operations had a favorable impact of approximately $10 million after tax on Refining and Marketing earnings in the first quarter 1999. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE D. Investments. At March 31, 1999 and 1998, investments in debt securities were primarily composed of U.S. Treasury securities and corporate debt instruments. Maturities generally ranged from one day to 10 years. ARCO's investments in LUKOIL common stock and Zhenhai Refining and Chemical Company convertible bonds were included in other investments and long-term receivables. At March 31, 1999 and 1998, all investments were classified as available-for-sale and were reported at fair value, with unrealized holding gains and losses, net of tax, reported in accumulated other comprehensive income (loss). The following summarizes investments in securities at March 31:
(Millions) 1999 1998 ------- ------- Aggregate fair value.......................................... $ 869 $1,675 Gross unrealized holding losses............................... 14 2 Gross unrealized holding gains................................ (73) (684) ------ ------ Amortized cost................................................ $ 810 $ 993 ====== ====== Investment activity for the three months ended March 31 was as follows: (Millions) 1999 1998 ------ ------ Gross purchases............................................... $2,285 $4,802 Gross sales................................................... 445 124 Gross maturities.............................................. 2,078 4,598
Gross realized gains and losses were insignificant and were determined by the specific identification method. NOTE E. Inventories. Inventories at March 31, 1999 and December 31, 1998 comprised the following:
March 31, December 31, 1999 1998 --------- ------------ (Millions) Crude oil and petroleum products..... $ 226 $ 220 Other products....................... 27 24 Materials and supplies............... 236 231 ----- ----- Total.............................. $ 489 $ 475 ===== =====
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE F. Capital Stock. Detail of the Company's capital stock was as follows:
March 31, December 31, 1999 1998 --------- ------------ (Thousands) $3.00 Cumulative convertible preference stock, par $1..... $ 50 $ 52 $2.80 Cumulative convertible preference stock, par $1..... 564 573 Common stock, par $2.50................................... 814,921 814,673 -------- -------- Total................................................... $815,535 $815,298 ======== ========
NOTE G. Capitalization of Interest. Interest expense excludes capitalized interest of $39 million and $16 million for the three-month periods ended March 31, 1999 and 1998, respectively. NOTE H. Restructuring Programs. During 1998, ARCO recorded pretax charges of $229 million for the costs of eliminating over 1,200 positions, primarily exploration and production technical support, international exploration and production support operations and the corporate headquarters. The following table summarizes the liabilities related to the 1998 restructuring program, including $11 million transferred from the 1997 program to cover those people who had not yet terminated under the 1997 program and became eligible for the 1998 program:
($ Millions) Funded Unfunded Short-term Long-term Long-term Terminations Benefits (a) Benefits (b) Benefits (c) Total ------------ ------------ ------------ ------------ ----- 1,212 $93 $90 $56 $239
(a) Severance and ancillary benefits such as relocation and outplacement. (b) Net increase in pension benefits to be paid from assets of qualified plans. (c) Net increase in non-qualified pension benefits and other postretirement benefits to be paid from Company funds. Through March 31, 1999, approximately 590 employees have been terminated and approximately $41 million of severance and ancillary benefits have been paid and charged against the accrual. Payments made do not necessarily correlate to the number of terminations due to the ability of terminees to defer receipt of certain payments. UTP Restructure. As part of the purchase price allocation for the purchase of UTP in 1998, the company established a $78 million provision for the termination of 357 employees resulting 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE H. Restructuring Programs (continued). from the integration of UTP into ARCO's operations. At March 31, 1999, 299 employees have been terminated and a total of $68 million in severance benefits has been paid. The group of employees terminated included U.S. citizens employed in exploration and production operations and corporate headquarters personnel. NOTE I. Income Taxes.
Provision for taxes on income: Three Months Ended March 31, --------- 1999 1998 ---------- --------- (Millions) (Restated) Federal: Current................................................................................... $ 41 $ (10) Deferred.................................................................................. 11 27 ------ ------ 52 17 ------ ------ Foreign: Current................................................................................... 45 28 Deferred.................................................................................. (17) (10) ------ ------ 28 18 ------- ------ State: Current................................................................................... 12 8 Deferred.................................................................................. 1 4 ------ ------ 13 12 ------- ------ Total.................................................................................... $ 93 $ 47 ====== ======
Reconciliation of provision for taxes on income with tax at federal statutory rate:
Three Months Ended March 31, --------- 1999 1998 --------- --------- Percent of Percent of Pretax Pretax Amount Income Amount Income --------- -------- --------- --------- (Millions) (Restated) Income from continuing operations before income taxes and minority interest.................................. $ 261 100.0 $ 190 100.0 ===== ====== ====== ====== Tax at federal statutory rate........................................ $ 91 35.0 $ 67 35.0 Increase (reduction) in taxes resulting from: Subsidiary stock transaction........................................ - - (13) (6.8) Taxes on foreign income in excess of statutory rate..................................................... 21 8.0 20 10.5 State income taxes (net of federal effect)............................................................ 8 3.1 8 4.2 Tax credits......................................................... (24) (9.2) (31) (16.3) Other............................................................... (3) (1.3) (4) (1.9) ----- ------ ------ ------ Provision for taxes on income........................................ $ 93 35.6 $ 47 24.7 ===== ====== ====== ======
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE J. Discontinued Operations. In first quarter 1999, ARCO disposed of its interests in two Australian coal mines. ARCO disposed of its 80% interest in the Gordonstone coal mine and its 31.4% interest in the Blair Athol Joint Venture. At March 31, 1999, the carrying value of the remaining Australian assets was $64 million and was included in net assets of discontinued operations on the balance sheet. Beginning in January 1999, ARCO suspended depreciation on the Australian coal assets (1998 annual depreciation was $23 million). In 1998, ARCO recorded a $92 million provision for the estimated loss on the disposal of the U.S. and Australian coal assets. As part of the acquisition of UTP, ARCO determined it would sell UTP's petrochemical business. In March 1999, ARCO sold the UTP petrochemical business to Williams Energy Services. At March 31, 1999, the carrying value of UTP's net petrochemical assets, which included a $33 million after-tax provision for loss on the sale of UTP's assets, was zero. Revenues and income from discontinued operations for the three months ended March 31, 1999 and 1998 were:
March 31, March 31, 1999 1998 --------- --------- (Millions) Revenues: ARCO Chemical....... $ - $ 934 Coal operations..... 26 141 UTP petrochemical... 24 - -------- ------ Total............. $ 50 $1,075 ======== ====== Net income: ARCO Chemical....... $ - $ 76 Coal operations..... - 10 UTP petrochemical... - - -------- ------ Total............. $ - $ 86 ======== ======
10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE K. Earned Per Share. The information necessary for the calculation of earned per share is as follows:
Three Months Ended March 31, 1999 ---------------------------------- Income Shares Per share -------- ------- --------- (Millions, except per share amounts) Income from continuing operations........................... $165.4 Less: Preference stock dividends............................ (.5) ------ Income from continuing operations available to common stockholders - basic EPS............................ 164.9 321.6 $0.51 ===== Income from discontinued operations, net of tax............. - 321.6 - ------ ===== ----- Net income available to common stockholders - basic EPS..... 164.9 321.6 $0.51 ===== Effect of dilutive securities: Contingently issuable shares (primarily options)............ 2.2 Convertible preference stock................................ .5 3.4 ------ ----- Net income available to common stockholders and assumed conversions - diluted EPS.......................... 165.4 327.2 $0.51 ===== Income from discontinued operations, net of tax............. - 327.2 - ------ ===== ----- Income from continuing operations available to common stockholders and assumed conversions - diluted EPS......... $165.4 327.2 $0.51 ====== ===== ===== Three Months Ended March 31, 1998 --------------------------------- Income Shares Per share -------- ------- --------- Income from continuing operations........................... $134.4 Less: Preference stock dividends............................ (.5) ------ Income from continuing operation available to common stockholders - basic EPS............................ 133.9 320.6 $ .42 ===== Income from discontinued operations, net of tax............. 85.7 320.6 .27 ------ ===== ----- Net income available to common stockholders - basic EPS...... 219.6 320.6 $ .69 ===== Effect of dilutive securities: Contingently issuable shares (primarily options)............ 2.9 Convertible preference stock................................ .5 3.7 ------ ----- Net income available to common stockholders and assumed conversions - diluted EPS.......................... 220.1 327.2 $ .67 ===== Income from discontinued operations, net of tax............. (85.7) 327.2 (.26) ------ ===== ----- Income from continuing operations available to common stockholders and assumed conversions - diluted EPS......... $134.4 327.2 $ .41 ====== ===== =====
11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE L. Supplemental Income Statement Information. Taxes other than income taxes comprised the following:
Three Months Ended March 31, ---------- 1999 1998 ------ ---------- (Restated) (Millions) Production/severance.......................................... $ 40 $ 64 Property...................................................... 35 40 Other......................................................... 45 50 ----- ----- Total....................................................... $ 120 $ 154 ===== =====
NOTE M. Supplemental Cash Flow Information. Following is supplemental cash flow information for the three months ended March 31, 1999 and 1998:
Three Months Ended March 31, ----------------------- 1999 1998 ------- ---------- (Restated) (Millions) Gross sales and maturities of short-term investments... $ 15 $ 64 Gross purchases of short-term investments.............. (10) (72) ------- ------- Net cash provided (used) by short-term investments..... $ 5 $ (8) ======= ======= Gross proceeds from issuance of notes payable.......... $ 3,737 $ 3,960 Gross repayments of notes payable...................... (3,535) (3,390) ------- ------- Net cash provided by notes payable..................... $ 202 $ 570 ======= ======= Gross noncash provisions charged to income............. $ 37 $ 67 Cash payments of previously accrued items.............. (162) (114) ------- ------- Cash payments greater than noncash provisions.......... $ (125) $ (47) ======= ======= Interest paid.......................................... $ 101 $ 128 (a) ======= ======= Income paid............................................ $ 98 $ 109 (a) ======= ======= - ---------- (a) Includes amounts paid related to discontinued operations.
12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE M. Supplemental Cash Flow Information (continued). Changes in working capital accounts for the three-month periods ended March 31, 1999 and 1998 were as follows:
Three Months Ended March 31, -------------------- 1999 1998 ------- ---------- (Restated) (Millions) Increase (decrease) to cash Accounts receivable......... $ (16) $ 108 Inventories................. (16) (61) Accounts payable............ (146) (194) Other working capital....... (118) (13) ----- ----- Total..................... $(296) $(160) ===== =====
NOTE N. Other Commitments and Contingencies. ARCO has commitments, including those related to the acquisition, construction and development of facilities, all made in the normal course of business. Following governmental approvals, construction on the Caspian pipeline project is scheduled to begin during the second quarter of 1999. ARCO has guaranteed all of LUKARCO's obligations associated with the Caspian pipeline project, which amount to 25% of all funding requirements for this project. The current estimates of total project funding requirements are between $2.2 to $2.4 billion. Following the March 1989 EXXON VALDEZ oil spill, numerous federal, state and private plaintiff lawsuits were brought against Exxon, Alyeska Pipeline Service Company (Alyeska), and Alyeska's owner companies including ARCO, which owns approximately 22%. While all of the federal, state and private plaintiff lawsuits have been settled, certain issues relating to the liability for the spill remain unresolved between Exxon and Alyeska (including its owner companies). ARCO, together with other former producers of lead paint have been named in a number of lawsuits, including purported class actions, seeking 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 of alleged injuries to natural resources resulting from mining and mineral processing businesses formerly operated by Anaconda. In April 1999 the court approved two consent decrees. Under the terms of these decrees, 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 other loss contingencies pursuant to federal, state and local environmental laws and regulations that require ARCO to do some or all of the following: 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE N. Other Commitments and Contingencies (continued). . 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 share of 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 March 31, 1999, was $847 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 reserve. Substantially all amounts accrued are expected to be paid out over the next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various third parties. Many of these claims have been resolved. ARCO has neither recorded any asset nor reduced any liability in connection with unresolved claims. Although any ultimate liability arising from any of the matters described herein could result in significant expenses or judgments that, if aggregated and assumed to occur within a single fiscal 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 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE N. Other Commitments and Contingencies (Continued). are not expected to have a material adverse effect on ARCO's consolidated financial statements. The operations and consolidated financial position of ARCO continue to be affected by domestic and foreign political developments as well as legislation, regulations and litigation pertaining to restrictions on production, imports and exports, tax increases, environmental regulations, cancellation of contract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on ARCO vary greatly and are not predictable. These uncertainties are part of a number of items that ARCO has taken and will continue to take into account in periodically establishing reserves. NOTE O. Merger Agreement between ARCO and BP Amoco. On March 31, 1999, BP Amoco and ARCO reached agreement to combine with each other in an all-share transaction in which shareholders of ARCO will receive .82 BP Amoco American Depositary Shares for each share of ARCO stock exchanged. The agreement was approved by both boards of directors. The transaction is subject to the approval of the shareholders of both BP Amoco and ARCO and the consent of various state and regulatory authorities, including the Federal Trade Commission and the European Commission. At the time the transaction was announced, BP Amoco estimated that the transaction will close by year-end 1999. NOTE P. Subsequent Events. On April 23, 1999, ARCO issued $1 billion of senior debt securities, which consisted of $500 million of four-year notes with a coupon of 5.55%, due 2003, and $500 million of 10-year notes with a coupon of 5.90%, due 2009. Net proceeds from the offering will be used for general corporate purposes and, principally, for the replacement of short-term debt with long-term debt. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Quarter 1999 vs. First Quarter 1998 Consolidated Earnings The $31 million increase in income from continuing operations in the first quarter of 1999 reflected improved refining and marketing margins, due to lower crude oil prices, and increased retail marketing volumes. These factors were partially offset by lower exploration and production earnings due to lower crude oil and natural gas prices, compared to the same period in 1998. The lower net income in 1999 reflected the absence of earnings from discontinued operations disposed of in the second and third quarters of 1998. Those operations included ARCO Coal's U.S. operations and ARCO's entire interest in ARCO Chemical Company (ARCO Chemical). For the first quarter of 1999, net special items charges totaled $7 million and consisted primarily of charges for future environmental remediation. For the first quarter of 1998, a special items benefit of $8 million consisted of a deferred tax benefit, partially offset by charges for future environmental remediation.
After-tax Segment Earnings 1999 1998 ----- ----- (Restated) (Millions) Exploration and production.......... $ 89 $ 182 Refining and marketing.............. 129 19 Other operations.................... 24 24 Interest expense.................... (70) (69) Other unallocated expenses.......... (7) (22) ----- ----- Income from continuing operations... 165 134 Discontinued operations............. - 86 ----- ----- Net income........................ $ 165 $ 220 ===== =====
Exploration and Production ARCO's earnings from worldwide oil and gas exploration and production operations in 1999 were significantly impacted by lower crude oil prices and, to a lesser extent, lower natural gas prices and increased depreciation, depletion and amortization (DD&A). The increased DD&A reflected the integration of former UTP operations into ARCO and increased DD&A associated with expanded production for Vastar Resources, Inc. (Vastar). The lower commodity prices in the 1999 first quarter were partially offset by higher production volumes and a $75 million decrease in exploration expense, primarily associated with international and Vastar operations. Vastar is 82.1% owned by ARCO. 16 Average Oil & Gas Prices
1999 1998 ----- ------ U.S. Petroleum liquids - per barrel (bbl) Alaska........................................ $6.07 $10.26 Lower 48, including Vastar.................... $9.75 $12.68 Composite average price....................... $7.17 $11.10 Natural gas - per thousand cubic feet (mcf)..... $1.60 $ 1.89 International Petroleum liquids composite average - per bbl $9.16 $12.59 Venezuela crude oil - per bbl................... $3.71 $ - Natural gas - per mcf........................... $2.47 $ 2.69 Indonesia LNG................................... $2.31 $ -
Petroleum Liquids and Natural Gas Production
1999 1998 ------ ------ Net Production U.S. Petroleum liquids - bbl/day Alaska.................................... 345,100 364,100 Vastar.................................... 55,900 51,600 Other Lower 48............................ 92,200 140,500 Total................................... 493,200 556,200 Natural gas - mcf/day. . . . . . . . . . . . 1,359,800 1,091,700 Barrels of oil equivalent (BOE)/day*........ 719,800 738,100 International Petroleum liquids - bbl/day................. 179,100 83,700 Natural gas - mcf/day. . . . . . . . . . . . 1,228,600 847,600 BOE/day..................................... 383,900 225,000 Total net production BOE/day . . . . . . . . . 1,103,700 963,100
____________ * Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid. In 1999, the reduction in U.S. petroleum liquids production primarily resulted from natural field declines in Alaska and the absence of production from California properties (other Lower 48) producing exclusively heavy crude oil, which were exchanged for Gulf of Mexico exploration acreage and properties producing both crude oil and natural gas that were ultimately transferred to Vastar. The increased international petroleum liquids volumes primarily reflected production from UTP properties which became part of ARCO's operations in the third quarter of 1998 and new production from Venezuela, which averaged 31,500 barrels per day in the first quarter of 1999. The increase in international natural gas volumes in 1999 primarily reflected production from former UTP properties. The 1999 increase in U.S. natural gas volumes primarily reflected production from Gulf of Mexico shelf properties transferred to Vastar in the fourth quarter of 1998. The added international production from the former UTP properties contributed 336 million cubic feet per day and ARCO's United Kingdom natural gas fields increased their production by 74 million cubic feet per day. These higher production amounts were partially offset by a reduction in production from the Yacheng 13 field in China of 34 million cubic feet per day. The reduction in Yacheng 13 production resulted from the absence of cost recovery barrels, as ARCO had recovered its costs by the first quarter 1999. 17 Refining and Marketing In the 1999 first quarter, refining and marketing earnings increased as a result of lower crude oil costs and increased retail marketing volumes. Average gasoline realizations for first quarter 1999 were lower than the corresponding 1998 period. However, higher gasoline realizations came late in the quarter and were due primarily to production losses from four separate California refinery incidents, including one at ARCO's Los Angeles Refinery, and the switch from winter blends, which include added butane and oxygenates, to summer blends, that causes a 10% reduction in volumes. The change in jet fuel and distillate volumes in 1999, compared to 1998 reflected the company's decision to produce more distillate and correspondingly less jet fuel due to more favorable market prices for distillate products in first quarter 1999. The amortization and recognition of imputed interest associated with the deferral of part of the pre-tax gain on the sale of the ARCO Chemical interest in 1998 had a net favorable impact of approximately $10 million after tax on refining and marketing earnings in the first quarter of 1999. See the Company's Annual Report on Form 10-K for the year ended December 31, 1998 for a further discussion of the deferred gain. West Coast Petroleum Products Sales
1999 1998 ------- ------- Volumes (barrels/day) Gasoline................ 310,000 295,400 Jet..................... 98,500 110,200 Distillate.............. 87,900 77,900 Other................... 59,100 63,400 ------- ------- Total................. 555,500 546,900 ======= =======
Other Operations The 1999 and 1998 results from ARCO's other operations included the earnings from Lower 48 pipeline operations and an aluminum rolling facility. Discontinued Operations As of March 31, 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. ARCO recorded in 1998 a $92 million provision for the estimated loss on the disposal of the U.S. and Australian coal assets. On February 24, 1999, ARCO announced that it had sold Union Texas Petrochemicals Corporation (UTP Petrochemical) to Williams Energy Services. ARCO had acquired Union Texas Petrochemical business as part of its purchase of Union Texas Petroleum Holdings, Inc., in June 1998. ARCO had no earnings from discontinued operations in 1999, because of the sale of the U.S. coal and ARCO Chemical operations in 1998. Income or loss from Australian coal and UTP Petrochemical operations is being deferred as part of net assets from discontinued operations on the balance sheet at March 31, 1999. 18 Consolidated Revenues
1999 1998 ------ ------ (Millions) Sales and other operating revenues Exploration and production........... $1,304 $1,538 Refining and marketing............... 1,306 1,352 Other................................ 18 42 Intersegment eliminations............ (213) (396) ------ ------ Total.............................. $2,415 $2,536 ====== ======
The decline in exploration and production sales and other operating revenues resulted primarily from lower crude oil and natural gas prices. Refining and marketing sales and other operating revenues decreased primarily because of lower refined products prices, partially offset by higher gasoline volumes. Consolidated Expenses Trade purchases were lower in 1999 primarily as a result of lower crude oil prices. The small increase in operating expenses in 1999 primarily reflected the operating costs associated with former UTP properties now being operated by ARCO, partially offset by approximately $40 million of cost savings in exploration and production and Lower 48 pipeline operations related to the Company's cost reduction program announced in 1998. The lower selling, general and administrative expenses in 1999 primarily resulted from the Company's cost reduction program. The higher depreciation, depletion and amortization (DD&A) expense in 1999 primarily reflected the inclusion of DD&A of the former UTP operations, which became a part of ARCO's operations in the third quarter of 1998, and expanded production for Vastar in 1999. The lower taxes other than income taxes in 1999 primarily resulted from the impact of lower crude oil prices on U.S. production taxes. Income Taxes The Company's effective tax rate was 35.6% in the 1999 first quarter, compared to 24.7% in the 1998 first quarter. The 1999 effective tax rate approximates the federal statutory rate, reflecting the absence of tax benefits from affiliate stock transactions, which totaled $13 million in 1998, and lower tax credits in 1999 than existed in 1998. Liquidity and Capital Resources
1999 ---- (Millions) Cash flow provided (used) by: Operations . . . . . . . . . . . . . . . . . . . $ 202 Investing activities . . . . . . . . . . . . . . $(153) Financing activities . . . . . . . . . . . . . . $ 71
19 The net cash used by investing activities in the first quarter 1999 included expenditures for additions to fixed assets of $760 million and proceeds from asset sales of $577 million ($377 million associated with Australian coal asset sales). The Company expects total capital expenditures for additions to fixed assets to approximate $2.7 billion for the full year 1999. The net cash provided by financing activities in the first quarter of 1999 included net proceeds of $202 million from the issuance of short-term debt and proceeds of $634 million from the issuance of long-term debt primarily by Vastar. These proceeds were partially offset by repayments of long-term debt of $549 million and dividend payments of $229 million. Cash and cash equivalents and short-term investments totaled $1.0 billion, and short-term borrowings were $2.6 billion at the end of the first quarter of 1999. Beginning in 1997 and continuing through the first quarter of 1999, the Company utilized increased short-term borrowing in lieu of increased long-term borrowing (other than long-term debt assumed in connection with the UTP acquisition in 1998). As a result the Company is in a working capital deficit position of approximately $2.7 billion at March 31, 1999. 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 April 23, 1999, ARCO issued $1 billion of senior debt securities, which consisted of $500 million of four-year notes with a coupon of 5.55%, due 2003, and $500 million of 10-year notes with a coupon of 5.90%, due 2009. Net proceeds from the offering will be used for general corporate purposes and, principally, for the replacement of short-term debt with long-term debt. The Company believes it has adequate resources and liquidity to fund future cash requirements for working capital, capital expenditures, dividends and debt repayments with cash from operations, existing cash balances, additional short- and long-term borrowing, and the sale of assets. On March 31, 1999, BP Amoco and ARCO reached agreement to combine with each other in an all-share transaction in which shareholders of ARCO will receive .82 BP Amoco American Depositary Shares for each share of ARCO stock exchanged. The agreement was approved by both boards of directors. The transaction is subject to the approval of the shareholders of both BP Amoco and ARCO and the consent of various state and regulatory authorities. At the time the transaction was announced, BP Amoco estimated that the transaction will close by year-end 1999. Statements of Financial Accounting Standards Not Yet Adopted In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to adopt its provisions for all fiscal quarters of all fiscal years beginning after June 15, 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. 20 Impact of Year 2000 Issue The Company's plans to address the Year 2000 issue are fully described in its Annual Report on Form 10-K for the year ended December 31, 1998. The following table is an update of a table contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and shows the Company's progress on addressing the Year 2000 issue as of March 31, 1999:
Total expended through Total Percent March 31, estimated complete at Expected date 1999 cost Areas addressed March 31, 1999 of completion (millions) (millions) ------------------ ----------------- ----------------- ------------ -------------- Computing integrity 79% (1) June 1999 $ 9 $12 Asset integrity 50% (2) September 1999 6 11 Commercial integrity 27% (3) June 1999 1 4 --- --- Total costs $16 $27
________________ (1) Internal mission critical components substantially complete with most of the remaining work outside of the direct control of ARCO. (2) Due to additional work being identified in the first quarter the expected completion date has been adjusted. (3) Commercial integrity remediation work largely involves contingency planning which is underway. The total cost associated with required modifications to achieve Year 2000 compliance is not expected to be material to the Company's financial position. The approximate total cost of the Year 2000 project is $27 million, an 8% increase since year-end 1998 due to increased work in 1999, primarily in the Asset Integrity area, and increased budgets for follow-up work in the year 2000. This estimate does not include ARCO's potential share of Year 2000 costs that may be incurred by partnerships and joint ventures in which the Company participates but is not the operator. ____________________ Management cautions against projecting any future results based on present earnings levels because of economic uncertainties, the extent and form of existing or future governmental regulations and other possible actions by governments. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 1. Reference is made to the disclosure on pages 14 and 15 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (hereinafter, the "1998 Form 10-K Report") regarding Montana v. ARCO (Case No. CV-83-317-HLN- PGH) and U.S. v. ARCO (Case No. CV-89-039-BU-PGH). These settlements were approved by the court on April 19, 1999. 2. Reference is made to the Company's 1998 Form 10-K Report for information on other legal proceeding matters reported therein. Item 4. Submission of Matters to a Vote of Security Holders. The Company's annual meeting of stockholders was held on May 3, 1999. The stockholders elected all the Company's nominees for director, who constitute the entire Board of Directors. The Stockholders also approved the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for 1999. The votes were as follows:
1. Election of Directors. Votes For Votes Withheld ------------- -------------- Frank D. Boren 270,371,901 6,180,190 Mike R. Bowlin 270,340,759 6,211,332 John Gavin 270,214,406 6,337,685 Kent Kresa 270,513,052 6,039,039 Arnold G. Langbo 270,439,481 6,112,610 David T. McLaughlin 270,355,429 6,196,662 John B. Slaughter 270,348,646 6,203,445 Gary L. Tooker 270,491,978 6,060,113 Henry Wendt 270,429,842 6,122,249 Gayle E. Wilson 270,287,229 6,264,862 2. Appointment of PricewaterhouseCoopers LLP. For 273,189,649 Against 2,152,366 Abstain 1,210,076 3. Stockholders' proposal requesting the abandonment of ANWR drilling plans. For 11,491,110 Against 210,771,399 Abstain 17,738,667 Broker Non-Votes 36,550,915
22 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27 Financial Data Schedule. (b) Reports on Form 8-K. The following Current Reports on Form 8-K were filed during the quarter ended March 31, 1999 and through the date hereof.
Date of Report Item No. Financial Statements -------------- -------- -------------------- March 31, 1999 5 None April 23, 1999 5 None
23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATLANTIC RICHFIELD COMPANY (Registrant) Dated: May 6, 1999 /s/ Allan L. Comstock ---------------------------- ALLAN L. COMSTOCK Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 790 248 1,018 0 489 2,773 39,993 21,051 25,363 5,318 4,618 0 1 815 7,030 25,363 2,415 2,551 1,969 2,043 0 0 95 261 93 165 0 0 0 165 0.51 0.51
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