<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
dated July 3, 2000
BP AMOCO P.L.C.
(Translation of registrant's name into English)
BRITANNIC HOUSE, 1 FINSBURY CIRCUS, LONDON, EC2M 7BA, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F x Form 40-F
-------------- --------------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No x
-------------- --------------
THIS REPORT ON FORM 6-K SHALL BE DEEMED TO BE INCORPORATED BY REFERENCE IN THE
PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE NO.
333-9790) OF BP AMOCO p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM F-3 (FILE NO. 33-39075) OF BP AMERICA INC. AND BP AMOCO
p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE
NO. 33-20338) OF BP AMERICA INC. AND BP AMOCO p.l.c., THE PROSPECTUS INCLUDED IN
THE REGISTRATION STATEMENT ON FORM F-3 (FILE NO. 33-29102) OF THE STANDARD OIL
COMPANY AND BP AMOCO p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-8 (FILE NO. 33-21868) OF BP AMOCO p.l.c., THE PROSPECTUS
INCLUDED IN THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-9020) OF BP
AMOCO p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM S-8
(FILE NO. 333-9798) OF BP AMOCO p.l.c., THE PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-79399) OF BP AMOCO p.l.c., AND
THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO.
333-34968) OF BP AMOCO p.l.c., AND TO BE A PART THEREOF FROM THE DATE ON WHICH
THIS REPORT IS FILED, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS
SUBSEQUENTLY FILED OR FURNISHED.
<PAGE>
Contents
1. Unaudited Pro Forma Condensed Financial Information relating to the
Combination of BP Amoco and Atlantic Richfield Company
2. Financial Statements of Atlantic Richfield Company for:
(a) Year ended December 31, 1999 including the Report of the Independent
Accountants and Consent of Independent Accountants
(b) Three months ended March 31, 2000 (unaudited)
<PAGE>
THE COMBINATION OF BP AMOCO AND ARCO
Introduction
On April 1, 1999 the Board of BP Amoco announced that it had reached agreement
on a proposed combination (the combination) with Atlantic Richfield Company
(ARCO) of Los Angeles.
The agreement relating to the proposed combination (the Combination
Agreement), approved by the boards of both BP Amoco and ARCO, provided for all
common shareholders of ARCO, with the exception of BP Amoco, ARCO or any of
their subsidiaries, to receive 9.84 BP Amoco ordinary shares of US$ 0.25 each in
the form of BP Amoco American Depositary Shares (ADSs) or, at the election of
the shareholder, BP Amoco ordinary shares, in return for the cancellation of
each of their shares (other than the shares held by CH-Twenty Holdings, LLC, a
subsidiary of ARCO) (the Cancelled ARCO Shares). It also provided for the issue
to BP Amoco of new common shares equal in number to the Cancelled ARCO Shares by
a newly enlarged ARCO formed by a statutory merger of Prairie Holdings, Inc. (a
direct wholly owned subsidiary of BP Amoco) into and with ARCO. Any right to a
fraction of a BP Amoco ADS or an odd lot of less than six BP Amoco ordinary
shares would be satisfied by a cash payment. Both ARCO and BP Amoco shareholders
voted overwhelmingly in favour of the combination at shareholders' meetings on
August 30, 1999 and September 1, 1999, respectively.
BP Amoco and ARCO announced in early November 1999 that they had reached
provisional agreement with the Alaskan State Governor on a package of asset
disposals and other measures designed to secure Alaskan government acceptance
for the proposed combination of the two companies. The provisional agreement was
finalized into an agreement with the State of Alaska (the Alaskan Charter
Agreement) made in early December 1999.
On February 4, 2000 the US Federal Trade Commission (FTC) filed a complaint in
the US District Court (the Court) seeking a preliminary injunction to prevent
closing of the combination. The Attorney Generals for the States of California,
Oregon and Washington (the Western States) also filed complaints with the same
Court. The Attorney General for the State of Alaska joined in the Court
proceedings in support of the combination. On March 15, 2000 it was announced
that the FTC, the Western States, the State of Alaska, ARCO and BP Amoco had
agreed to suspend the Court proceedings, pending discussions for a consent
order.
On March 15, 2000 ARCO entered into an agreement with Phillips Petroleum
Company (Phillips) for the sale of its Alaskan businesses (see Sale of Alaskan
Businesses below).
On March 15, 2000 BP Amoco announced that it was at an advanced stage in
discussions with the FTC on the combination and was hopeful of obtaining a
consent order within a few weeks allowing the Company to close the combination.
On March 23, 2000 BP Amoco and ARCO jointly agreed to extend the termination
date of the Combination Agreement from March 31, 2000 to June 30, 2000.
On March 24, 2000 ExxonMobil Corporation (ExxonMobil) filed a Complaint in
State Court, Los Angeles, seeking a preliminary injunction and other relief
against BP Amoco, ARCO and Phillips to prevent the sale of ARCO's Alaskan
businesses to Phillips referred to below.
On April 13, 2000 BP Amoco, ExxonMobil, ARCO and Phillips announced that they
had reached an agreement (the agreement) to resolve outstanding issues relating
to the ownership and operation of the Prudhoe Bay Unit (PBU) and the Point
Thompson Unit in Alaska. The agreement will align the respective equity
interests of BP Exploration (Alaska) Inc., ExxonMobil and Phillips (as the
purchaser of ARCO's Alaskan businesses) in the Prudhoe Bay Unit, and provides
for a single operator at the PBU.
The aligned oil and gas interests among the major owners will be 26.7 per cent
for BP Exploration (Alaska), 36.8 per cent for ExxonMobil and 36.5 per cent for
Phillips. BP Exploration (Alaska), current operator of the Western Operating
Area in the Prudhoe Bay Unit, will become the single operator. ExxonMobil and BP
Exploration (Alaska) Inc. have also agreed to work towards alignment in the
Point Thomson field area with respective interests of 45 per cent for BP
Exploration and 55 per cent for Exxon Mobil.
<PAGE>
In addition, the agreement resolved the issues that had resulted in the
Complaint filed by ExxonMobil in State Court, Los Angeles seeking to prevent the
sale of ARCO's Alaskan businesses to Phillips discussed below.
On April 16, 2000 BP Amoco and ARCO announced that they had received clearance
from the FTC for the combination of the two companies and the combination was
completed on April 18, 2000.
Sale of Alaskan Businesses
On March 15, 2000 ARCO entered into an agreement to sell its Alaskan
businesses to Phillips for approximately $6.5 billion cash subject to purchase
price adjustments (and up to an additional $500 million based on the prices
realized on production subsequent to December 31, 1999). Under the purchase and
sale agreement, which was amended on April 6, 2000, ARCO agreed to sell all of
the outstanding shares of ARCO Alaska Inc., together with certain other
subsidiaries of ARCO engaged principally in the operation of ARCO's Alaskan
businesses, along with certain pipeline and marine assets associated with the
transport of Alaskan crude oil. The major portion of the sale closed on April
26, 2000. The remainder of the assets are expected to be transferred upon
receipt of government approvals.
Merger agreement with Vastar Resources, Inc.
On May 24, 2000 BP Amoco announced that it had entered into a merger agreement
with Vastar Resources, Inc. (Vastar) which provides for the acquisition by BP
Amoco of Vastar's publicly-held minority stockholding at a price of $83 per
share. The agreement is the outcome of negotiations between BP Amoco and
Vastar's special committee which followed BP Amoco's announcement on March 16,
2000 of its intention to make an offer of $71 per share for the Vastar minority.
The merger has been approved by the Vastar board, including all the members of
the special committee. Through its combination with ARCO, BP Amoco already owns
approximately 81.9 per cent of Vastar. The acquisition of the outstanding
minority stockholders under the terms of the merger agreement would allow the
integration of Vastar with BP Amoco's own operations.
The acquisition is structured as a merger of a wholly-owned indirect
subsidiary of BP Amoco into Vastar and will not involve a tender offer. The
merger is contingent on the approval by the holders of at least two-thirds of
the Vastar shares not held by BP Amoco at a meeting scheduled for the summer of
2000.
<PAGE>
Unaudited Pro Forma Condensed Consolidated Financial Information
The following Unaudited Pro Forma Condensed Consolidated Financial Information
gives pro forma effect to the merger, after giving effect to the pro forma
adjustments described in the accompanying notes. The Unaudited Pro Forma
Condensed Consolidated Financial Information has been prepared from, and should
be read in conjunction with, the historical consolidated financial statements
and notes thereto of BP Amoco, which are included in BP Amoco's Annual Report on
Form 20-F for the year ended December 31, 1999 (the 1999 Form 20-F) and the
historical Financial Statements of ARCO which are included elsewhere in this
report on Form 6-K.
The Unaudited Pro Forma Condensed Consolidated Financial Information is
provided for illustrative purposes only and does not purport to represent what
the actual results of operations or the financial position of BP Amoco would
have been had the merger of ARCO with a subsidiary of BP Amoco occurred on the
respective dates assumed, nor is it necessarily indicative of BP Amoco's future
operating results or consolidated financial position.
The Unaudited Pro Forma Condensed Consolidated Financial Information has been
prepared in accordance with UK generally accepted accounting practice (UK GAAP),
which differs in certain respects from US GAAP. Note 44 to the consolidated
financial statements of BP Amoco included in the 1999 Form 20-F, which presented
financial information for the years ended December 31, 1999, 1998 and 1997,
provides a description of the principal differences between UK GAAP and US GAAP
as they relate to BP Amoco. A reconciliation of the pro forma profit and the pro
forma ordinary shareholders' interest to US GAAP is included in Note 9 of Notes
to the Unaudited Pro Forma Condensed Consolidated Financial Information.
BP Amoco's use of the replacement cost basis for inventory accounting is
explained in Note 1 of Notes to the Unaudited Pro Forma Condensed Consolidated
Financial Information. The replacement cost basis is generally similar to the
LIFO basis.
BP Amoco will account for the merger as an acquisition under UK GAAP and as a
purchase under US GAAP. Under UK GAAP acquisition accounting, the identifiable
assets and liabilities of ARCO are recorded at their fair value on the date of
acquisition. The date of acquisition for determining the cost of acquisition is
the date on which control of ARCO passed to BP Amoco, that is April 13, 2000,
the date on which the FTC cleared the transaction and the offer became
unconditional. The cost of acquisition comprises the fair value of BP Amoco
shares issued together with the expenses of acquisition. The cost of acquisition
and the fair values used in the Unaudited Pro Forma Condensed Consolidated
Financial Information are provisional and may differ from the finally determined
amounts. UK GAAP requires the identification and valuation of assets and
liabilities acquired to be completed by the date on which the first
post-acquisition financial statements of BP Amoco are approved by the directors.
The relevant financial statements will be those for the year ended December 31,
2000 approved by the directors in February 2001. These fair values may be
amended if necessary in the next financial statements with a corresponding
adjustment to goodwill. BP Amoco has estimated the fair values of all
significant assets and liabilities of ARCO, apart from the restructuring costs
of approximately $650 million to be incurred following the combination as such
costs may not be recognized as at the date of acquisition under UK GAAP. BP
Amoco has averaged the closing share price and the (pound)/$ exchange rate for
the two working days between the offer becoming unconditional and the ARCO
shares being exchanged for BP Amoco shares on April 18, 2000. This average price
of (pound)5.2925, has been translated into US dollars at $1.5857 to (pound)1.00,
the average of the closing rates on those two days.
Under US GAAP purchase accounting, the cost of acquisition is based on the BP
Amoco share price for a reasonable period before and after the terms of the
acquisition were agreed. BP Amoco has averaged the share price and the (pound)/$
exchange rate for three working days straddling the date of the announcement,
that is, March 31, April 1 and April 6, 1999. The London Stock Exchange was
closed for the Easter holiday on April 2 and 5. This average price was
(pound)5.115, which has been translated into US dollars at $1.6049 to
(pound)1.00, the average closing rate on those three days.
The historical financial statements of ARCO have been prepared in accordance
with US GAAP. For purposes of presenting the Unaudited Pro Forma Condensed
Consolidated Financial Information, financial information relating to ARCO has
been adjusted to conform materially with BP Amoco's accounting policies under UK
GAAP as described in Note 3 of Notes to the Unaudited Pro Forma Condensed
Consolidated Financial Information. In the historical financial statements for
ARCO the net income and net assets of those operations and assets which were
required to be sold as a condition of the agreement of the FTC to the merger are
shown as one amount.
<PAGE>
The pro forma acquisition adjustments reflected in the accompanying Unaudited
Pro Forma Condensed Consolidated Income Statements and Balance Sheet and
described in Notes 5 and 7, respectively, reflect estimates made by BP Amoco
management and assumptions that it believes to be reasonable. There are no pro
forma adjustments in the accompanying Unaudited Pro Forma Condensed Consolidated
Income Statements to eliminate transactions between ARCO and BP Amoco because
such amounts are considered to be immaterial. No account has been taken, within
the Unaudited Pro Forma Condensed Consolidated Financial Information, of any
cost savings or any severance and restructuring costs which may or are expected
to occur as a result of the combination.
ARCO shareholders were entitled to receive, for each share of ARCO common
stock held as of the effective time of the merger, 9.84 BP Amoco ordinary
shares. Such BP Amoco ordinary shares were delivered in the form of BP Amoco
ADSs, each of which represents six BP Amoco ordinary shares, or, at the election
of ARCO shareholders, BP Amoco ordinary shares. For purposes of the pro forma
adjustments within the Unaudited Pro Forma Condensed Consolidated Financial
Information at March 31, 2000, the number of ARCO shares issued and outstanding
on April 17, 2000 (324 million shares) together with the estimated number of
additional shares which may be issued in respect of outstanding options and
contingent stock and on conversion of ARCO preference stock (15 million shares)
have been used, which would result in the issue of approximately 3,335 million
BP Amoco ordinary shares.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
For the Three Months Ended March 31, 2000
The following unaudited pro forma condensed consolidated income statement for
the three months ended March 31, 2000 is derived from the unaudited historical
condensed consolidated income statements of BP Amoco and ARCO for the three
months then ended, after giving effect to the pro forma adjustments described in
the Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information. These adjustments have been determined as if the combination of
ARCO and BP Amoco took place on January 1, 1999, the first day of the earliest
financial period presented in the Unaudited Pro Forma Condensed Consolidated
Financial Information. The Unaudited Pro Forma Condensed Consolidated Financial
Information has been prepared from, and should be read in conjunction with, the
historical consolidated financial statements and notes thereto of BP Amoco,
which are included in the 1999 Form 20-F and the historical financial statements
of ARCO which are included elsewhere in this report on Form 6-K.
<TABLE>
<CAPTION>
BP Amoco BP Amoco
historical ARCO historical Pro Forma
---------- ------------------------------ Pro Forma ---------
UK GAAP US GAAP Adjustments UK GAAP Adjustments UK GAAP
---------- ------- ----------- ------- ----------- ---------
$ $ $ $ $ $
(Millions, except per share amounts)
(Note 1) (Note 2) (Note 4) (Note 5)
<S> <C> <C> <C> <C> <C> <C>
Turnover 33,091 3,537 -- 3,537 -- 36,628
Less: Joint ventures 5,380 57 23 (a) 80 -- 5,460
---------- ------- ---------- ------- ----------- ---------
Group turnover 27,711 3,480 (23) 3,457 -- 31,168
Replacement cost of sales 22,166 2,844 (50)(b) 2,794 441 (a) 25,401
Production taxes 498 29 -- 29 -- 527
---------- ------- ---------- ------- ----------- ---------
Gross profit 5,047 607 27 634 (441) 5,240
Distribution and administration expenses 1,379 135 (7)(c) 128 -- 1,507
Exploration expense 131 84 -- 84 -- 215
---------- ------- ---------- ------- ----------- ---------
3,537 388 34 422 (441) 3,518
Other income 84 182 (79)(d) 103 -- 187
---------- ------- ---------- ------- ----------- ---------
Group replacement cost operating profit 3,621 570 (45) 525 (441) 3,705
Share of profits of joint ventures 169 -- 27 (e) 27 -- 196
Share of profits of associated undertakings 171 -- 7 (f) 7 -- 178
---------- ------- ---------- ------- ----------- ---------
Total replacement cost operating profit 3,961 570 (11) 559 (441) 4,079
Profit (loss) on sale of fixed assets and
businesses and termination of operations (157) -- 66 (g) 66 -- (91)
---------- ------- ---------- ------- ----------- ---------
Replacement cost profit
before interest and tax 3,804 570 55 625 (441) 3,988
Inventory holding gains (losses) 532 -- 93 (h) 93 -- 625
---------- ------- ---------- ------- ----------- ---------
Historical cost profit before
interest and tax 4,336 570 148 718 (441) 4,613
Interest expense 296 90 20 (i) 110 (2)(b) 404
---------- ------- ---------- ------- ----------- ---------
Profit (loss) before taxation 4,040 480 128 608 (439) 4,209
Taxation 887 114 41 (j) 155 -- 1,042
---------- ------- ---------- ------- ----------- ---------
Profit (loss) after taxation 3,153 366 87 453 (439) 3,167
Income from operations sold
as required by FTC -- 265 -- 265 -- 265
Minority shareholders' interest (MSI) 68 14 -- 14 (38)(c) 44
---------- ------- ---------- ------- ----------- ---------
Profit (loss) for the period 3,085 617 87 704 (401) 3,388
---------- ------- ---------- ------- ----------- ---------
Profit (loss) for the period
applicable to ordinary shares 3,085 617 87 704 (401) 3,388
========== ======= ========== ======= =========== =========
Profit (loss) per ordinary share
Profit (loss) for the period 0.1588 2.1851 0.1486
Replacement cost profit before
exceptional items 0.1378 1.7565 0.1248
========== ======== =========
Average number outstanding
shares (in millions) 19,427 322 3,335 22,762
========== ======== =========== =========
Reconciliation of replacement cost results
Profit (loss) for the period 3,085 704 (401) 3,388
Inventory holding (gains) losses (532) (93) -- (625)
---------- -------- ----------- ---------
Replacement cost profit
(loss) for the period 2,553 611 (401) 2,763
Exceptional items net of tax and MSI 124 (45) -- 79
---------- -------- ----------- ---------
Replacement cost profit 2,677 566 (401) 2,842
before exceptional items
========== ======== =========== =========
</TABLE>
The Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information are an integral part of the statement.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
For the Year Ended December 31, 1999
The following unaudited pro forma condensed consolidated income statement for
the year ended December 31, 1999 is derived from the historical condensed
consolidated income statements of BP Amoco and ARCO for the year then ended,
after giving effect to the pro forma adjustments described in the Notes to the
Unaudited Pro Forma Condensed Consolidated Financial Information. These
adjustments have been determined as if the combination of ARCO and BP Amoco took
place on January 1, 1999, the first day of the earliest financial period
presented in the Pro Forma Condensed Consolidated Financial Information. The
Unaudited Pro Forma Condensed Consolidated Financial Information has been
prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of BP Amoco, which are
included in the 1999 Form 20-F and the historical financial statements of ARCO
which are included elsewhere in this report on Form 6-K.
<TABLE>
<CAPTION>
---------- ARCO historical
BP Amoco ------------------------------ BP Amoco
historical Continuing Pro Forma
---------- Operaions Pro Forma ---------
UK GAAP US GAAP Adjustments UK GAAP Adjustments UK GAAP
---------- ------- ----------- ---------- ----------- ---------
$ $ $ $ $ $
(Millions, except per share amounts)
(Note 1) (Note 2) (Note 4) (Note 5)
<S> <C> <C> <C> <C> <C> <C>
Turnover 101,180 11,352 -- 11,352 -- 112,532
Less: Joint ventures 17,614 185 123 (a) 308 -- 17,922
---------- ------- ---------- ---------- ----------- ---------
Group turnover 83,566 11,167 (123) 11,044 -- 94,610
Replacement cost of sales 68,615 8,913 (111)(b) 8,802 1,506 (a) 78,923
Production taxes 1,017 62 -- 62 -- 1,079
---------- ------- ---------- ---------- ----------- ---------
Gross profit 13,934 2,192 (12) 2,180 (1,506) 14,608
Distribution and administration expenses 6,064 689 (26)(c) 663 -- 6,727
Exploration expense 548 334 -- 334 -- 882
---------- ------- ---------- ---------- ----------- ---------
7,322 1,169 14 1,183 (1,506) 6,999
Other income 414 391 (104)(d) 287 -- 701
---------- ------- ---------- ---------- ----------- ---------
Group replacement cost
operating profit (loss) 7,736 1,560 (90) 1,470 (1,506) 7,700
Share of profits of joint ventures 555 -- 73 (e) 73 -- 628
Share of profits of associated undertakings 603 -- 39 (f) 39 -- 642
---------- ------- ---------- ---------- ----------- ---------
Total replacement cost
operating profit (loss) 8,894 1,560 22 1,582 (1,506) 8,970
Profit (loss) on sale of fixed assets and
businesses and termination of operations (337) (156) 253 (g) 97 -- (240)
Restructuring costs (1,943) -- -- -- -- (1,943)
---------- ------- ---------- ---------- ----------- ---------
Replacement cost profit
(loss) before interest and tax 6,614 1,404 275 1,679 (1,506) 6,787
Inventory holding gains (losses) 1,728 -- 77 (h) 77 -- 1,805
---------- ------- ---------- ---------- ----------- ---------
Historical cost profit (loss)
before interest and tax 8,342 1,404 352 1,756 (1,506) 8,592
Interest expense 1,316 359 59 (i) 418 (7)(b) 1,727
---------- ------- ---------- ---------- ----------- ---------
Profit (loss) before taxation 7,026 1,045 293 1,338 (1,499) 6,865
Taxation 1,880 167 153 (j) 320 -- 2,200
---------- ------- ---------- ---------- ----------- ---------
Profit (loss) after taxation 5,146 878 140 1,018 (1,499) 4,665
Income from operations sold
as required by FTC -- 582 -- 582 -- 582
Minority shareholders' interest (MSI) 138 38 -- 38 (123)(c) 53
---------- ------- ---------- ---------- ----------- ---------
Profit (loss) for the year 5,008 1,422 140 1,562 (1,376) 5,194
---------- ------- ---------- ---------- ----------- ---------
Dividend requirements on preference shares 2 2 -- 2 (2)(d) 2
---------- ------- ---------- ---------- ----------- ---------
Profit (loss) for the year
applicable to ordinary shares 5,006 1,420 140 1,560 (1,374) 5,192
========== ======= ========== ========== =========== ========
Profit (loss) per ordinary share
Profit (loss) for the year 0.2582 4.8463 0.2285
Replacement cost profit (loss)
before exceptional items 0.2748 4.7935 0.2419
========== ========== ========
Average number outstanding of ordinary
shares (in millions) 19,386 322 3,335 22,721
========== ========== =========== ========
Reconciliation of replacement cost results
Profit (loss) for the year 5,008 1,562 (1,376) 5,194
Inventory holding (gains) losses (1,728) (77) -- (1,805)
---------- ---------- ----------- --------
Replacement cost profit (loss)for the year 3,280 1,485 (1,376) 3,389
Exceptional items net of tax and MSI 2,050 60 -- 2,110
---------- ---------- ----------- --------
Replacement cost profit (loss) before
exceptional items 5,330 1,545 (1,376) 5,499
========== ========== =========== ========
</TABLE>
The Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information are an integral part of the statement.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At March 31, 2000
The following unaudited pro forma condensed consolidated balance sheet
consolidates the respective unaudited historical condensed consolidated balance
sheets of BP Amoco and ARCO as of March 31, 2000 and has been prepared to
reflect the combination of ARCO and BP Amoco after giving effect to the pro
forma adjustments described in the Notes to the Unaudited Pro Forma Condensed
Consolidated Financial Information as if the combination had occurred on March
31, 2000. The Unaudited Pro Forma Condensed Consolidated Financial Information
has been prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of BP Amoco, which are
included in the 1999 Form 20-F and the historical financial statements of ARCO
which are included elsewhere in this report on Form 6-K.
<TABLE>
<CAPTION>
BP Amoco BP Amoco
historical ARCO historical Pro Forma
---------- ------------------------------- Pro Forma ---------
UK GAAP US GAAP Adjustments UK GAAP Adjustments UK GAAP
---------- ------- ----------- ------- ----------- ---------
$ $ $ $ $ $
(Millions, except per share amounts)
(Note 1) (Note 2) (Note 6) (Note 7)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed assets
Intangible assets 3,320 1,358 (20)(a) 1,338 10,596 (a) 15,254
Tangible assets 51,939 12,040 (2,546)(b) 9,494 7,641 (b) 69,074
Investments
Joint ventures
Gross assets 9,817 1,665 118 1,783 188 (c) 11,788
Gross liabilities 4,650 595 36 631 -- 5,281
---------- ------- ----------- ------- ----------- ---------
Net investment 5,167 1,070 82 (c) 1,152 188 6,507
Associated undertakings 5,154 84 -- 84 (18)(d) 5,220
Other 519 1,701 (529)(d) 1,172 585 (c) 985
---------- ------- ----------- ------- ----------- ---------
10,840 2,855 (447) 2,408 755 14,003
---------- ------- ----------- ------- ----------- ---------
Total fixed assets 66,099 16,253 (3,013) 13,240 18,992 98,331
---------- ------- ----------- ------- ----------- ---------
Current assets
Net assets of operations sold as
required by FTC -- 4,293 -- 4,293 1,097 (f) 5,390
Inventories 5,321 415 337 (e) 752 285 (g) 6,358
Trade receivables 10,137 784 -- 784 -- 10,921
Other receivables falling due
Within 1 year 4,402 855 (25)(f) 830 46 (h) 5,278
After more than 1 year 3,411 1,038 (14)(g) 1,024 -- 4,435
Investments 274 234 (1)(h) 233 -- 507
Cash in bank and in hand 462 994 -- 994 -- 1,456
---------- ------- ----------- ------- ----------- ---------
Total current assets 24,007 8,613 297 8,910 1,428 34,345
---------- ------- ----------- ------- ----------- ---------
Current liabilities falling due within 1 year
Finance debt 4,612 1,498 170 (i) 1,668 -- 6,280
Trade payables 7,931 617 (9)(j) 608 -- 8,539
Other creditors 10,099 1,405 757 (k) 2,162 588 (i) 12,849
---------- ------- ----------- ------- ----------- ---------
Net current (liabilities) assets 1,365 5,093 (621) 4,472 840 6,677
---------- ------- ----------- ------- ----------- ---------
Total assets less current liabilities 67,464 21,346 (3,634) 17,712 19,832 105,008
---------- ------- ----------- ------- ----------- ---------
Non-current liabilities
Finance debt 9,745 4,933 (170)(l) 4,763 489 (j) 14,997
Accounts payable and accrued liabilities 2,057 905 -- 905 -- 2,962
Provisions for liabilities and charges
Deferred taxation 1,648 3,641 (3,320)(m) 321 -- 1,969
Other provisions 8,115 2,324 56 (n) 2,380 (21)(k) 10,474
---------- ------- ----------- ------- ----------- ---------
Net assets 45,899 9,543 (200) 9,343 19,364 74,606
Minority shareholders' interest 1,126 310 37 (o) 347 1,248 (l) 2,721
---------- ------- ----------- ------- ----------- ---------
Shareholders' interest 44,773 9,233 (237) 8,996 18,116 71,885
========== ======= =========== ======= =========== =========
REPRESENTED BY
Capital shares
Preference 21 1 -- 1 (1)(m) 21
Ordinary 4,874 809 2 (p) 811 23 (n) 5,708
Paid-in surplus 3,716 913 -- 913 (1,228)(o) 3,401
Merger reserve 697 -- -- -- 26,593 (p) 27,290
Retained earnings 35,465 7,510 (239)(q) 7,271 (7,271)(q) 35,465
---------- ------- ----------- ------- ----------- ---------
44,773 9,233 (237) 8,996 18,116 71,885
========== ======= =========== ======= =========== =========
</TABLE>
The Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information are an integral part of the statement.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Note 1--Replacement cost profit
Operating profit is a UK GAAP measure of trading performance. It excludes
profits and losses on the sale or termination of operations and fundamental
restructuring costs, interest expense and taxation.
BP Amoco determines operating profit on a replacement cost basis, which
eliminates the effect of inventory holding gains and losses. For the oil and gas
industry, the price of crude oil can vary significantly from period to period,
hence the value of crude oil (and products) also varies. As a consequence, the
amount that would be charged to cost of sales on a FIFO basis of inventory
valuation would include the effect of oil price fluctuations on oil and products
inventories. BP Amoco therefore charges cost of sales with the average cost of
supplies incurred during the period rather than the historical cost of supplies
on a FIFO basis. For this purpose, inventories at the beginning and end of the
period are valued at the average cost of supplies incurred during the period
rather than at their historical cost. These valuations are made quarterly by
each business unit, based on local oil and product price indices applicable to
their specific inventory holdings, following a methodology that has been
consistently applied by BP Amoco for many years. Operating profit on the
replacement cost basis is used by BP Amoco management as the primary measure of
business unit trading performance, and BP Amoco management believes that this
measure assists investors to assess the group's underlying trading performance
from period to period.
Replacement cost is not a US GAAP measure. The major US oil companies apply
the LIFO basis of inventory valuation. The LIFO basis is not permitted under UK
GAAP. The LIFO basis eliminates the effect of price fluctuations on crude oil
and product inventory except where an inventory drawdown occurs in a period. BP
Amoco management believes that, where inventory volumes remain constant or
increase in a period, operating profit on the LIFO basis will not differ
materially from operating profit on BP Amoco's replacement cost basis.
Where an inventory drawdown occurs in a period, cost of sales on a LIFO basis
will be charged with the historical cost of the inventory drawn down, whereas BP
Amoco's replacement cost basis charges cost of sales at the average cost of
supplies for the period. To the extent that the historical cost on the LIFO
basis of the inventory drawn down is lower than the current cost of supplies in
the period, operating profit on the LIFO basis will be greater than operating
profit on BP Amoco's replacement cost basis. To the extent that the historical
cost on the LIFO basis of the inventory drawn down is greater than the current
cost of supplies in the period, operating profit on the LIFO basis will be lower
than operating profit on BP Amoco's replacement cost basis.
Replacement cost profit before exceptional items excludes profits and losses
on the sale or termination of operations and fundamental restructuring costs,
which are defined by UK GAAP. This is the measure of profit used by the BP Amoco
board of directors in setting targets for and monitoring performance within BP
Amoco. BP Amoco's management believes this indicator provides the most relevant
and useful measure for investors because it most accurately reflects underlying
trading performance.
Note 2--Reclassification
Reclassifications have been made to the ARCO historical financial information
presented under US GAAP to conform to BP Amoco's presentation under UK GAAP.
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP Amoco's accounting policies under UK GAAP
ARCO prepares its financial statements in accordance with US GAAP. For
purposes of preparing the Unaudited Pro Forma Condensed Consolidated Income
Statements and Balance Sheet, the financial statements of ARCO have been
restated to conform with BP Amoco accounting policies under UK GAAP by giving
effect to the adjustments described below.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP Amoco's accounting policies under UK GAAP (continued)
Consolidation basis
Under US GAAP, ARCO's interest in a cogeneration facility is proportionately
consolidated, whereas under UK GAAP the joint venture would be equity accounted.
Inventory accounting
ARCO carries inventories at the lower of current market value or cost. Cost is
determined under the LIFO method for the majority of inventories of crude oil
and petroleum products. The costs of remaining inventories are determined
predominantly on an average cost basis.
BP Amoco carries inventories at the lower of cost or net realizable value.
Cost to BP Amoco is determined using the FIFO method. Cost of sales determined
on a FIFO basis is adjusted to a replacement cost basis, i.e., to reflect the
average cost of supplies incurred during the period, by excluding inventory
holding gains and losses.
Deferred taxation
Under the UK GAAP restricted liability method, deferred taxation is only
provided for where timing differences are expected to reverse in the foreseeable
future. For US GAAP under the liability method, deferred taxation is provided
for temporary differences between the financial reporting basis and the tax
basis of assets and liabilities at enacted tax rates.
Exceptional items
Under UK GAAP, certain exceptional items are shown separately on the face of
the income statement after operating profit. These items are profits or losses
on the sale or closure of businesses and fixed assets and fundamental
restructuring charges. Under US GAAP, these items other than for discontinued
operations are classified as operating income or expenses.
Equity accounting
UK GAAP requires the investor's share of operating profit or loss, exceptional
items, interest expense and taxation of associated undertakings and joint
ventures to be shown separately from those of the group. For US GAAP, the
after-tax profits or losses (i.e. operating results after exceptional items,
interest expense and taxation) are included in the income statement as a single
line item.
UK GAAP requires the investor's share of the gross assets and gross
liabilities of joint ventures to be shown on the face of the balance sheet,
whereas under US GAAP the net investment is included as a single line item.
Provisions
UK GAAP requires provisions for decommissioning and environmental liabilities
to be determined on a discounted basis if the effect of the time value of money
is material.
Provisions for decommissioning are recognized in full, on a discounted basis,
at the commencement of oil and natural gas production. UK GAAP also requires the
capitalization as a tangible fixed asset and subsequent depreciation of an
amount equivalent to the provision.
The unwinding of the discount, which represents a period-by-period cost, is
included within interest expense. Under US GAAP (i) environmental liabilities
are discounted only where the timing and amounts of payments are fixed and
reliably determinable and (ii) provisions for decommissioning are provided for
on a unit-of-production basis over field lives.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP Amoco's accounting policies under UK GAAP (continued)
Impairment
Both UK and US GAAP require that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
US GAAP requires, in performing the review for recoverability, the entity to
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized, otherwise no impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use is based on the
fair value of the assets.
For UK GAAP, to the extent that the carrying amount exceeds the recoverable
amount, that is the higher of net realizable value and value in use (fair value)
the fixed asset is written down to its recoverable amount.
The loss on sale of businesses recognised for US GAAP in ARCO's historical
financial statements in 1999 has been treated as a fair value adjustment at
January 1, 1999 for UK GAAP.
Business combinations
US GAAP requires the recognition of a deferred tax asset or liability for the
tax effects of differences between the assigned values and the tax bases of
assets acquired and liabilities assumed in a purchase business combination,
whereas under UK GAAP no such deferred tax asset or liability is recognized.
Under US GAAP the deferred tax asset or liability is amortized over the same
period as the assets and liabilities to which it relates.
US GAAP requires certain reorganization and integration costs to be incurred
as part of a purchase business combination to be recognized as liabilities
assumed and included in the allocation of the acquisition cost. UK GAAP does not
generally permit recognition of these costs as part of the accounting for the
business combination.
Investments
Under US GAAP ARCO has classified its investments in LUKOIL ADRs and the
Zhenhai Refining and Chemical Company convertible bonds as available for sale.
Consequently they are reported at fair value, with unrealized holding gains and
losses, net of tax, reported in accumulated other comprehensive income. If a
decline in fair value below cost is "other than temporary" the unrealized loss
should be accounted for as a realized loss and charged against income. Under UK
GAAP these investments are deemed to be long term and carried in the balance
sheet at cost, subject to review for impairment.
Pensions
US GAAP requires an additional minimum liability to be shown in the balance
sheet if the accumulated benefit obligation exceeds the fair value of pension
plan assets. UK GAAP does not require recognition of a liability in these
circumstances.
Debt
For US GAAP borrowings under US Industrial Revenue/Municipal Bonds are
classified as non-current liabilities.
For UK GAAP such borrowings are classed as current liabilities - falling due
within one year.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP Amoco's accounting policies under UK GAAP (continued)
Treasury stock
Under US GAAP treasury stock is deducted from shareholders' interest. Under UK
GAAP stock purchased to meet obligations under employee share schemes is shown
in the balance sheet as fixed asset--investments and stock purchased which may
be re-issued is deducted from shareholders' interest.
Note 4--UK GAAP adjustments to historical ARCO income statements
The adjustments to restate the income statements of ARCO for the three months
ended March 31, 2000 and the year ended December 31, 1999 to conform with BP
Amoco accounting policies under UK GAAP are set out below.
<TABLE>
<CAPTION>
For the three For the year
months ended ended
Increase (decrease) in caption heading March 31, December 31,
-------------------------------------- 2000 1999
------------- ------------
$ $
(Millions)
Consolidation basis
<S> <C> <C>
Turnover: Joint ventures 23 123
Replacement cost of sales (11) (47)
Distribution and administration expenses (7) (26)
Share of profits of joint ventures 5 50
Profit for the period -- --
Inventory accounting
Replacement cost of sales (9) (10)
Inventory holding gains (losses) 93 77
Profit for the period 102 87
Deferred taxation
Other income -- (1)
Profit (loss) on the sale of fixed assets and
businesses and termination of operations -- 1
Taxation 5 21
Profit for the period (5) (21)
Exceptional items
Other income (66) (74)
Profit (loss) on the sale of fixed assets
and businesses and termination of operations 66 75
Taxation -- 1
Profit for the period -- --
Equity accounting
Other income (13) (29)
Share of profits of joint ventures 22 23
Share of profits of associated undertakings 7 39
Interest expense 8 4
Taxation 8 29
Profit for the period -- --
Provisions
Replacement cost of sales (2) 48
Interest expense 12 55
Minority shareholders interest -- --
Profit for the period (10) (103)
Impairment
Profit (loss) on the sale of fixed assets
and businesses and termination of operations -- 177
Profit for the period -- 177
Business combinations
Replacement cost of sales (28) (102)
Taxation 28 102
Profit for the period -- --
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 4--UK GAAP adjustments to historical ARCO income statements (Continued)
These adjustments may be summarized by caption heading as set out below.
<TABLE>
<CAPTION>
For the three For the year
months ended ended
March 31, December 31,
2000 1999
------------- ------------
$ $
(Millions)
<S> <C> <C>
(a) Turnover: Joint ventures
Consolidation basis 23 123
======= =======
(b) Replacement cost of sales
Consolidation basis (11) (47)
Inventory accounting (9) (10)
Provisions (2) 48
Business combinations (28) (102)
------- -------
(50) (111)
======= =======
(c) Distribution and administration expenses
Consolidation basis (7) (26)
======= =======
(d) Other income
Deferred taxation -- (1)
Exceptional items (66) (74)
Equity accounting (13) (29)
------- -------
(79) (104)
======= =======
(e) Share of profits of joint ventures
Consolidation basis 5 50
Equity accounting 22 23
------- -------
27 73
======= =======
(f) Share of profits of associated undertakings
Equity accounting 7 39
======= =======
(g) Profit (loss) on sale of fixed assets and businesses
and termination of operations
Deferred taxation -- 1
Exceptional items 66 75
Impairment -- 177
------- -------
66 253
======= =======
(h) Inventory holding gains (losses)
Inventory accounting 93 77
======= =======
(i) Interest expense
Equity accounting 8 4
Provisions 12 55
------- -------
20 59
======= =======
(j) Taxation
Deferred taxation 5 21
Exceptional items -- 1
Equity accounting 8 29
Business combinations 28 102
------- -------
41 153
======= =======
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 5--Pro Forma adjustments to the consolidated income statements
The Unaudited Pro Forma Condensed Consolidated Income Statements give effect
to the pro forma adjustments set out below.
(a) The depreciation and amortization rates for the fair value adjustments to
tangible fixed assets and goodwill are set out below.
Depreciation: Exploration and Production assets have been depreciated on a
unit-of-production basis. Refining and Marketing assets have been
depreciated over 15 years (refineries) and 10 years (marketing assets).
Goodwill: Amortized over a period of 10 years.
(b) The difference between the fair value and the carrying value of ARCO
long-term debt, including current maturities, ($229 million) has been
amortized on a constant yield basis over the remaining term of the debt
and is shown as an adjustment to interest expense.
(c) Minority shareholders' interest
This represents the share of the other pro forma adjustments attributable
to minority shareholders.
(d) Dividend requirements on preference shares
It has been assumed that ARCO preference shares were exchanged for BP
Amoco ordinary shares on completion of the merger.
All the adjustments apart from (d) above will have a continuing effect. The
estimated charge for additional depreciation and amortization of goodwill in the
first full year following the combination is $2.0 billion.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 5--Pro Forma adjustments to the consolidated income statements (Continued)
<TABLE>
<CAPTION>
For the three For the year
months ended ended
March 31, December 31,
2000 1999
------------- ------------
$ $
(Millions)
<S> <C> <C>
(a) Replacement cost of sales
Depreciation.............................. 271 825
Goodwill amortization..................... 170 681
------- -------
441 1,506
======= =======
(b) Interest expense (2) (7)
(c) Minority shareholders' interest (38) (123)
(d) Dividend requirements on preference shares -- (2)
</TABLE>
The Unaudited Pro Forma Condensed Consolidated Income Statements do not
include adjustments to eliminate transactions between ARCO and BP Amoco, because
such amounts are not considered material.
Note 6--UK GAAP adjustments to historical ARCO balance sheet
The adjustments to restate the balance sheet of ARCO at March 31, 2000 to
conform with BP Amoco accounting policies under UK GAAP are set out below.
<TABLE>
<CAPTION>
Increase (decrease) in caption heading At March 31, 2000
-------------------------------------- -----------------
$
(Millions)
<S> <C>
Consolidation basis
Tangible assets (97)
Fixed assets: Investments--Joint ventures--gross assets 118
Fixed assets Investments--Joint ventures--gross liabilities 36
Other receivables
Within 1 year (21)
After more than 1 year 27
Trade payables (9)
Retained earnings --
Inventory accounting
Inventories 337
Retained earnings 337
Deferred taxation
Intangible assets (20)
Tangible assets 169
Other receivables
Within 1 year (4)
After more than 1 year (91)
Other creditors 757
Deferred taxation (1,987)
Other provisions (189)
Minority shareholders' interest 52
Retained earnings 1,421
Provisions
Tangible assets 176
Provisions 245
Minority shareholders' interest (15)
Retained earnings (54)
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 6--UK GAAP adjustments to historical ARCO balance sheet (Continued)
<TABLE>
<CAPTION>
Increase (decrease) in caption heading At March 31, 2000
-------------------------------------- -----------------
$
(Millions)
<S> <C>
Impairment
Tangible assets (1,726)
Retained earnings (1,726)
Business combinations
Tangible assets (1,068)
Deferred taxation (1,131)
Retained earnings 63
Investments
Fixed assets: Investments--Other (574)
Current assets: Investments (1)
Deferred taxation (221)
Retained earnings (354)
Pensions
Other receivables falling due after more than 1 year 50
Deferred taxation 19
Retained earnings 31
Debt
Finance debt due within one year 170
Finance debt due after one year (170)
Retained earnings --
Treasury stock
Fixed assets: Investments--Other 45
Capital shares--Ordinary 2
Retained earnings 43
</TABLE>
These adjustments may be summarized by caption heading as set out below.
<TABLE>
<CAPTION>
At March 31, 2000
-----------------
$
(Millions)
<S> <C>
(a) Intangible assets
Deferred taxation (20)
=======
(b) Tangible assets
Consolidation basis (97)
Deferred taxation 169
Provisions 176
Impairment (1,726)
Business combinations (1,068)
-------
(2,546)
=======
(c) Fixed assets: Investments--Joint ventures
Gross assets:
Consolidation basis 118
Gross liabilities:
Consolidation basis 36
-------
82
=======
(d) Fixed Assets: Investment--Other
Investments (574)
Treasury stock 45
-------
(529)
=======
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 6--UK GAAP adjustments to historical ARCO balance sheet (Continued)
<TABLE>
<CAPTION>
At March 31, 2000
-----------------
$
(Millions)
<S> <C>
(e) Inventories
Inventory accounting 337
=======
(f) Other receivables falling due within 1 year
Consolidation basis (21)
Deferred taxation (4)
-------
(25)
=======
(g) Other receivables falling due after 1 year
Consolidation basis 27
Deferred taxation (91)
Pensions 50
-------
(14)
=======
(h) Current assets: Investments
Investments (1)
=======
(i) Finance debt falling due within 1 year
Debt 170
=======
(j) Trade payables
Consolidation basis (9)
=======
(k) Other creditors
Deferred taxation 757
=======
(l) Finance debt falling due after 1 year
Debt (170)
=======
(m) Deferred taxation
Deferred taxation (1,987)
Business combinations (1,131)
Investments (221)
Pensions 19
-------
(3,320)
=======
(n) Other provisions
Deferred taxation (189)
Provisions 245
-------
56
=======
(o) Minority interest
Deferred taxation 52
Provisions (15)
-------
37
=======
(p) Capital shares--Ordinary
Treasury stock 2
=======
(q) Retained earnings
Inventory 337
Deferred taxation 1,421
Provisions (54)
Impairment (1,726)
Business combinations 63
Investments (354)
Pensions 31
Treasury stock 43
-------
(239)
=======
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 7--Pro Forma adjustments to the consolidated balance sheet
The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the pro forma adjustments set forth below, which include adjustments to reflect
the fair values of the assets and liabilities of ARCO under the acquisition
method of accounting.
BP Amoco expects to incur severance and other restructuring costs as a result
of the combination. Preliminary estimates indicate that these costs will be
approximately $700 million; $50 million have been reflected in the fair value
adjustment and the remaining $650 million will be charged to income as and when
the criteria for recognition of such costs under UK GAAP are met and,
accordingly, no amount for these costs has been included in the Unaudited Pro
Forma Condensed Consolidated Financial Information. For US GAAP $450 million of
these costs have been included as part of the fair value adjustments and the
remaining $250 million will be charged to income when the criteria for
recognition under US GAAP have been met.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet does not include
adjustments to eliminate amounts payable and receivable between BP Amoco and
ARCO, because such amounts are not considered material.
Fair value adjustments
The methods and assumptions set out in the following paragraphs were used in
estimating the preliminary fair value of the assets and liabilities acquired.
Tangible and intangible fixed assets
The fair value of the tangible and intangible assets have been estimated by
determining the net present value of future cash flows. The increase over
carrying value for tangible fixed assets was $7,490 million and for intangible
fixed assets was $3,788 million. The fair value of fixed asset investments
exceeds their carrying value by $773 million.
Goodwill represents the difference between the value of the business and the
value of the assets acquired. The goodwill created was $6,808 million.
Net assets of operations sold as required by the FTC
The fair value of the net assets of these operations reflects the estimated
sales proceeds, net of attributable taxation.
Inventories
Inventories has been revalued on a replacement cost basis.
Finance debt
The fair value of ARCO long-term debt, including current maturities, has been
estimated based on the quoted market prices for the same or similar issues. The
adjustment increases the book value of finance debt by $229 million. As part of
the fair value exercise finance lease obligations were increased by $136
million.
Other provisions
Liabilities for pensions and other post retirement benefits have been
estimated by independent actuaries. Provisions for other liabilities have been
reassessed in line with BP Amoco practice.
Other assets and liabilities
The carrying amounts for most other assets and liabilities approximate their
fair value.
Minority shareholders' interest
A part of the fair value adjustment relating to Vastar Resources, Inc. is
ascribed to the minority shareholders' interest.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 7--Pro Forma adjustments to the consolidated balance sheet (Continued)
Consideration
ARCO shareholders received for each share of ARCO common stock held as of
April 17, 2000, 9.84 BP Amoco ordinary shares. Such BP Amoco ordinary shares
were delivered in the form of BP Amoco ADSs or, at the election of a holder of
ARCO common stock, BP Amoco ordinary shares. For purposes of the pro forma
adjustments within the Unaudited Pro Forma Condensed Consolidated Financial
Information at March 31, 2000, the number of ARCO shares issued and outstanding
on April 17, 2000 (324 million shares) together with the estimated number of
additional shares which may be issued in respect of outstanding options and
contingent stock and on conversion of ARCO preference stock (15 million shares)
have been used, which would result in the issue of approximately 3,335 million
BP Amoco ordinary shares or 556 million BP Amoco ADSs.
For the purposes of the Unaudited Pro Forma Condensed Consolidated Financial
Information, the cost of acquisition has been determined as follows:
<TABLE>
<CAPTION>
At March 31, 2000
-----------------
$
(Millions)
<S> <C>
Issue of 3,335 million BP Amoco ordinary shares
at (pound)5.2925 ($8.39) per share 27,992
Less: expected consideration receivable on
issue of shares under option 565
-------
27,427
=======
</TABLE>
Accruals for amounts and payable on the combination
Stamp Duty Reserve Tax (SDRT) of 1.5% of the value of the BP Amoco ordinary
shares underlying the BP Amoco ADSs, at the time the BP Amoco ordinary shares
are transferred to the depositary (or its nominee), is payable by BP Amoco on
the issue of BP Amoco ADSs. To the extent that ARCO shareholders elected to take
BP Amoco ordinary shares (which underlie BP Amoco ADSs) rather than ADSs, BP
Amoco had no SDRT liability for the ordinary shares issued. The amount of SDRT
payable has been estimated at $315 million.
The estimated amounts of SDRT ($315 million) and BP Amoco and ARCO fees and
expenses ($140 million and $68 million respectively) payable have been accrued
for the purposes of these adjustments. SDRT is a share issue expense and has
been charged against the paid-in surplus.
Combination adjustments
The combination adjustments eliminate the ARCO common stock, ARCO preference
shares, paid-in surplus and retained earnings and recognize the goodwill arising
on acquisition.
Change in basis of accounting
Both BP Amoco and ARCO held interests in Great Yarmouth Power Limited which
were equity accounted prior to the acquisition. Following the merger the
combined interests have been consolidated.
<PAGE>
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 7--Pro Forma adjustments to the consolidated balance sheet (Continued)
<TABLE>
<CAPTION>
Increase (decrease) in caption heading At March 31, 2000
-------------------------------------- -----------------
$
(Millions)
<S> <C>
Fair value adjustments
Intangible assets 3,788
Tangible assets 7,490
Fixed assets: Investments-- Joint Ventures 188
Fixed assets: Investments-- Other 585
Net assets of operations sold as required by FTC 1,097
Inventory 285
Other receivables falling due within 1 year 40
Other creditors falling due within 1 year 50
Finance debt 365
Other provisions (21)
Minority shareholders' interest 1,233
Consideration
Capital shares--Ordinary 834
Merger reserve 26,593
Accruals for amounts payable on the combination
Other creditors 523
Paid-in surplus (315)
Combination adjustments
Intangible assets -- Goodwill 6,808
Capital shares
Preference (1)
Ordinary (811)
Paid-in surplus (913)
Retained earnings (7,271)
Change in basis of accounting
Tangible assets 151
Fixed assets: Investments -- Associated undertakings (18)
Other receivables falling due within 1 year 6
Other creditors falling due within 1 year 15
Finance debt 124
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 7--Pro Forma adjustments to the consolidated balance sheet (Continued)
These adjustments may be summarized by caption heading as set out below.
<TABLE>
<CAPTION>
At March 31, 2000
---------------------------
$ $
(Millions)
<S> <C> <C>
(a) Intangible assets
Fair value adjustments 3,788
Combination adjustments 6,808
-------
10,596
(b) Tangible assets
Fair value adjustments 7,490
Change in basis of accounting 151
-------
7,641
(c) Fixed assets : Investments -- Joint Ventures
Fair value adjustments 188
(d) Fixed assets: Investments -- Associated undertakings
Change in basis of accounting (18)
(e) Fixed assets: Investments--Other
Fair value adjustments 585
(f) Net assets of operations sold as required by FTC
Fair value adjustments 1,097
(g) Inventory
Fair value adjustments 285
(h) Other receivables falling due within 1 year
Fair value adjustments 40
Change in basis of accounting 6
-------
46
(i) Other creditors falling due within 1 year
Fair value adjustments 50
Accruals for amounts payable on the combination 523
Change in basis of accounting 15
-------
588
(j) Finance debt
Fair value adjustments 365
Change in basis of accounting 124
-------
489
(k) Other provisions
Fair value adjustments (21)
(l) Minority shareholders' interest
Fair value adjustments 1,248
(m) Capital shares -- Preference
Combination adjustments (1)
(n) Capital shares -- Ordinary
Consideration 834
Combination adjustments (811)
-------
23
(o) Paid-in surplus
Accruals for amounts payable on the combination (315)
Combination adjustments (913)
-------
(1,228)
(p) Merger reserve
Consideration 26,593
(q) Retained earnings
Combination adjustments (7,271)
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 8--Operating cost savings
BP Amoco expects to achieve an annual rate of pre-tax cost savings of
approximately $1 billion during the second full year of operations of the
combined enterprise, through organizational efficiencies, more focused
exploration efforts, standardization and simplification of business processes
and rationalization of operations. No adjustment has been included in the
Unaudited Pro Forma Condensed Consolidated Financial Information for the
anticipated benefits of these operating cost savings. There can be no assurance
that anticipated cost savings will be achieved in the expected amounts or at the
times anticipated.
Note 9--Significant differences between UK GAAP and US GAAP
The Unaudited Pro Forma Condensed Consolidated Financial Information has been
prepared in accordance with UK GAAP, which differs in certain respects from US
GAAP.
The main differences between UK GAAP and US GAAP that are relevant to BP
Amoco's Unaudited Pro Forma Condensed Consolidated Financial Information are set
out below.
For US GAAP the cost of acquisition has been determined as follows:
<TABLE>
<CAPTION>
At March 31, 2000
-----------------
$
(Millions)
<S> <C>
Issue of 3,335 million BP Amoco ordinary
shares at(pound)5.115 ($8.21) per share 27,386
Less: expected consideration receivable on
issue of shares under option 565
-------
26,821
=======
</TABLE>
Group consolidation
Investments in entities over which the Group does not exercise control
(associates and joint ventures) are accounted for by the equity method.
UK GAAP requires the consolidated financial statements to show separately the
Group proportion of operating profit or loss, exceptional items, inventory
holding gains or losses, interest expense and taxation of associated
undertakings and joint ventures. In addition the turnover of joint ventures
should be disclosed. For US GAAP the after tax profits or losses (i.e. operating
results after exceptional items, inventory holding gains or losses, interest
expense and taxation) are included in the income statement as a single line
item.
UK GAAP requires the Group's share of the gross assets and gross liabilities
of joint ventures to be shown on the face of the balance sheet whereas under US
GAAP the net investment is included as a single line item.
Where the Group conducts activities through a joint arrangement that is not
carrying on a trade or business in its own right the Group accounts for its own
assets, liabilities and cash flows of the activity measured according to the
terms of the arrangement. For the Group this method of accounting applies to
certain oil and natural gas activities and undivided interests in pipelines. US
GAAP allows these activities to be accounted for by proportional consolidation,
which is equivalent to UK GAAP.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 9--Significant differences between UK GAAP and US GAAP (Continued)
Income statement
The income statement prepared under UK GAAP shows sub-totals for replacement
cost profit before interest and tax, historical cost profit before interest and
tax and profit after taxation. These line items are not recognized under US
GAAP.
Exceptional items
Under UK GAAP certain exceptional items are shown separately on the face of
the income statement after operating profit. These items are profits or losses
on the sale of businesses and fixed assets and fundamental restructuring
charges. Under US GAAP these items are classified as operating income or
expenses.
Impairment
Both UK and US GAAP require that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. US GAAP requires, in performing the review for
recoverability, the entity to estimate the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, no impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles that an entity expects to
hold and use is based on the fair value of the assets.
For UK GAAP to the extent that the carrying amount exceeds the recoverable
amount, that is the higher of net realizable value and value in use (fair value)
the fixed asset is written down to its recoverable amount.
Provisions
UK GAAP requires that the amount recognised as a provision should be an
estimate of the expenditure required to settle the obligation at the balance
sheet date. Provisions for decommissioning, environmental liabilities and
onerous contracts should be determined on a discounted basis if the effect of
the time value of money is material.
Under US GAAP if the probable cost of settling the obligation is within a
range of estimated amounts and no amount within the range appears to be a more
likely outcome than any other amount in the range, the minimum amount in the
range should be accrued. Also under US GAAP (i) environmental liabilities are
discounted only where the timing and amounts of payments are fixed and reliably
determinable and (ii) provisions for decommissioning are provided on a
unit-of-production basis over field lives.
Deferred taxation
Under the UK GAAP restricted liability method, deferred taxation is only
provided where timing differences are expected to reverse in the foreseeable
future. Under US GAAP deferred taxation is provided for temporary differences
between the financial reporting basis and the tax basis of the Group's assets
and liabilities at enacted tax rates.
US GAAP requires the recognition of a deferred tax asset or liability for the
tax effects of differences between the assigned values and the tax bases of
assets acquired and liabilities assumed in a purchase business combination,
whereas under US GAAP no such deferred tax asset or liability is recognized.
Under US GAAP the deferred tax asset or liability is amortized over the same
period as the assets and liabilities to which it relates.
The adjustments for fixed assets, depreciation and deferred taxation arise
from the difference between the UK GAAP and US GAAP bases for deferred taxation.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 9--Significant differences between UK GAAP and US GAAP (Continued)
Ordinary shares held for future awards to employees
Under UK GAAP, Company shares held by an Employee Share Ownership Plan to meet
future requirements of employee share schemes are recorded in the balance sheet
as Fixed assets -- investments. Under US GAAP, such shares are recorded in the
balance sheet as a reduction of shareholders' interest.
Sale and leaseback
The sale and leaseback of the Amoco building in Chicago, Illinois in 1998 is
treated as a sale for UK GAAP whereas for US GAAP it is treated as a financing
transaction.
A provision was recognized under UK GAAP in 1999 to cover the likely shortfall
on rental income from subletting the Chicago office building. As the original
sale and leaseback was not treated as a sale for US GAAP the provision has been
reversed for US GAAP.
Under UK GAAP the profit arising on the sale and operating leaseback of
certain railcars in 1999 is taken to income in the period in which the
transaction occurs. Under US GAAP this profit is not recognized immediately but
amortized over the term of the operating lease.
Dividends
Under UK GAAP, dividends are recorded in the year in respect of which they are
announced or declared by the board of directors to the shareholders. Under US
GAAP, dividends are recorded in the period in which dividends are declared.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 9--Significant differences between UK GAAP and US GAAP (Continued)
<TABLE>
<CAPTION>
For the three For the year
months ended ended
Profit for the Period March 31, December 31,
-------------------------------------- 2000 1999
------------- ------------
$ $
(Millions, except per share
and ADS amounts)
<S> <C> <C>
Profit (loss) from continuing operations as
reported under UK GAAP 3,388 5,194
Adjustments
Depreciation charge (179) (593)
Decommissioning and environmental expense (76) (111)
Onerous property leases (7) 133
Interest expense 48 165
Sale and leaseback of fixed assets -- (37)
Deferred taxation (343) 149
Other 15 6
------- -------
Profit (loss) for the year from continuing
operations as adjusted to accord with US GAAP 2,846 4,906
Dividend requirements on preference shares -- 2
------- -------
Profit (loss)for the period from continuing operations
applicable to ordinary shares as adjusted to
accord with US GAAP 2,846 4,904
------- -------
Profit (loss) for the period from continuing
operations as adjusted:
Per ordinary share
Basic 0.13 0.22
Diluted 0.12 0.21
======= =======
Per ADS
Basic 0.78 1.32
Diluted 0.72 1.26
======= =======
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (Continued)
Note 9--Significant differences between UK GAAP and US GAAP (Continued)
BP Amoco shareholders' interest
<TABLE>
<CAPTION>
At March 31, 2000
-----------------
$
(Millions)
<S> <C>
Shareholders' interest as reported in the
consolidated balance sheet 71,885
Adjustments
Fixed assets 7,952
Ordinary shares held for future awards to employees (449)
Sale and leaseback of Chicago office building (413)
Decommissioning and environmental provisions (287)
Onerous property leases 134
Restructuring costs (400)
Deferred taxation (14,960)
Dividend 1,133
Pension liability adjustment (144)
Other (192)
-------
Shareholders' interest as adjusted to accord
with US GAAP 64,259
=======
</TABLE>
Note 10--Profit per ordinary share on a US GAAP basis
<TABLE>
<CAPTION>
BP Amoco ARCO
Three months ended March 31, 2000 Historical Historical Pro Forma
--------------------------------- ---------- ---------- ---------
$ $ $
(millions, except per share and ADS amounts)
<S> <C> <C> <C>
Profit (loss) for the period applicable
to common (ordinary) shares 2,528 617 2,846
====== ====== ======
Profit (loss) for the period:
Per common (ordinary) share
Basic 0.13 1.92 0.13
Diluted 0.13 1.88 0.12
Per ADS
Basic 0.78 0.78
Diluted 0.78 0.72
Average number of common (ordinary)
shares outstanding (in millions)
Basic 19,427 322 22,762
Assuming dilution 19,563 329 22,898
====== ====== ======
Year ended December 31, 1999
----------------------------
Profit for the year applicable to common
(ordinary) shares 4,594 1,420 4,904
====== ====== ======
Profit for the year:
Per common (ordinary) share
Basic 0.24 4.41 0.22
Diluted 0.24 4.32 0.21
Per ADS
Basic 1.44 1.32
Diluted 1.44 1.26
Average number of common (ordinary)
shares outstanding (in millions)
Basic 19,386 322 22,721
Assuming dilution 19,497 329 22,832
====== ====== ======
</TABLE>
<PAGE>
2(a) FINANCIAL INFORMATION OF ATLANTIC RICHFIELD COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1999
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 30, 34, 35 and 40 present fairly, in all
material respects, the financial position of Atlantic Richfield Company and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedule
listed in the accompanying index appearing on page 98 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 auditing standards generally
accepted in the United States 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
January 31, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectus included
in the registration statement on Form F-3 (File No. 333-9790) of BP Amoco
p.l.c., the prospectus included in the registration statement on Form F-3 (File
No. 33-39075) of BP America Inc. and BP Amoco p.l.c., the prospectus included in
the registration statement on Form F-3 (File No. 33-20338) of BP America Inc.
and BP Amoco p.l.c., the prospectus included in the registration statement on
Form F-3 (File No. 33-29102) of The Standard Oil Company and BP Amoco p.l.c.,
the prospectus included in the registration statement on Form S-8 (File No.
33-21868) of BP Amoco p.l.c., the prospectus included in the registration
statement on Form S-8 (File No. 333-9020) of BP Amoco p.l.c., the prospectus
included in the registration statement on Form S-8 (File No. 333-9798) of BP
Amoco p.l.c., the prospectus included in the registration statement on Form S-8
(File No. 333-79399) of BP Amoco p.l.c., and the prospectus included in the
registration statement on Form S-8 (File No. 333-34968) of BP Amoco p.l.c., of
our report dated January 31, 1999 relating to the financial statements of
Atlantic Richfield Company, which appears in the Current Report on Form 6-K of
BP Amoco p.l.c. dated July 3, 2000.
PricewaterhouseCoopers LLP
Los Angeles, California
July 3, 2000
<PAGE>
Operating Review
Introduction
In 1999, ARCO took a number of actions, primarily divestitures, to implement
its strategy of focusing on key oil and gas businesses. The divestitures
included both non-oil and gas businesses and non-core oil and gas properties. In
addition, ARCO achieved total before-tax cost reductions in operating,
exploration, and selling, general, and administrative (SG&A) expenses of over
$740 million, compared to baseline 1998 expenses. This achievement in one year
exceeded the two-year goal of $500 million announced in October 1998. All areas
of ARCO's business contributed to the cost reductions, which were increased by
expense timing factors. Adjusted for these items, ARCO believes that the
sustainable annual savings are on the order of $650 million. However, the event
which could have the greatest potential impact on the company in the future is
the proposed combination of BP Amoco and ARCO. The combination has been approved
by the shareholders of both ARCO and BP Amoco. The European Commission approved
the transaction with some stipulations on September 29, 1999. On February 4,
2000, the Federal Trade Commission (FTC) filed a complaint in the United States
District Court in San Francisco alleging that the combination violated section 7
of the Clayton Act and filed a motion for preliminary injunction to enjoin BP
Amoco from completing the combination. The status of the combination is
discussed in detail on page 1.
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 1999 and 1998. 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 30.
<PAGE>
Results of Segment Operations
Exploration & Production
<TABLE>
<CAPTION>
Millions 1999 1998 1997
---------------------------
<S> <C> <C> <C>
Net income (loss) $ 938 $ (616) $ 1,347
Special items charge 190 1,002 -
---------------------------
Operating results $ 1,128 $ 386 $ 1,347
---------------------------
</TABLE>
In 1999, ARCO's operating results from worldwide oil and gas exploration and
production operations were significantly impacted by higher crude oil prices
and, to a lesser extent, higher natural gas volumes and domestic natural gas
prices. In addition, as a result of the company's cost reduction program,
combined operating, exploration, and SG&A expenses before tax were more than
$500 million lower, compared to 1998.
In 1999, special items included a net charge of $190 million after tax,
primarily for the loss on the disposition of a portion of ARCO's interest in the
Rhourde El Baguel field in Algeria and for the anticipated loss on the sale of
office space in Plano, Texas. Charges for impairment in 1999 were insignificant.
During 1999, ARCO's total production grew to 1,019,600 barrels of oil
equivalent per day (BOEPD), primarily due to increased international production,
which grew to 345,500 BOEPD.
Average Petroleum Liquids Sales Prices
<TABLE>
<CAPTION>
per barrel 1999 1998 1997
---------------------------
<S> <C> <C> <C>
U.S., including Vastar $ 12.83 $ 9.43 $ 15.63
International composite $ 14.39 $ 11.07 $ 18.20
Venezuela $ 7.42 $ 4.05 $ -
---------------------------
</TABLE>
ARCO's 1998 exploration and production operating results 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 Union Texas Petroleum Holdings,
Inc. (UTP)
<PAGE>
Results of Segment Operations
Properties obtained through the purchase of UTP at the end of the second
quarter of 1998 contributed to a 4% increase in production volumes for the year.
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 32 of the "Results of Consolidated Operations" for a
further discussion of the 1998 impairment. Special items also included aftertax
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.
Petroleum Liquids Production
<TABLE>
<CAPTION>
Barrels/day - net 1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Prudhoe Bay 158,700 175,300 198,500
Kuparuk River 110,800 123,000 128,200
Greater Point McIntyre 30,800 41,500 50,200
Other Alaska 18,800 6,900 300
Vastar 60,000 50,100 50,700
Other Lower 48 85,200 130,800 130,000
International 159,100 130,400 82,600
-----------------------------
Total 623,400 658,000 640,500
-----------------------------
</TABLE>
The 1999 decrease in U.S. petroleum liquids production primarily resulted from
natural field declines in Alaska and the absence of production from California
heavy crude oil properties (other Lower 48) that produced approximately 32,000
barrels per day (BPD) in 1998. The California properties were exchanged in
October 1998 for Gulf of Mexico exploration acreage and properties producing
both crude oil and natural gas that were ultimately sold to Vastar. The lower
Alaska petroleum liquids production primarily reflected natural field decline at
the Prudhoe Bay, Kuparuk River and Greater Point McIntyre fields partially
offset by increases in satellite field production.
The increased international petroleum liquids production primarily reflected
the impact of a full year of production contributed by former UTP properties in
1999 versus only six months of production in 1998.
In 1998, increased petroleum liquids production primarily reflected 36,700 BPD
contributed by the former UTP properties, partially offset by natural field
decline in Alaskan fields.
ARCO has begun development of the Alpine field and other satellite discoveries
which will help stabilize production in Alaska after 1999.
Natural Gas Production
<TABLE>
<CAPTION>
Million cubic feet/day - net 1999 1998 1997
-----------------------------
<S> <C> <C> <C>
U.S., including Vastar 1,259 1,175 1,066
-----------------------------
International
United Kingdom 451 369 368
Indonesia 247 293 314
Indonesia LNG 251 98 -
China 114 133 142
Other 56 36 20
-----------------------------
Total International 1,119 929 844
-----------------------------
</TABLE>
In 1999, the growth in international natural gas production reflected the
impact of a full year of production contributed by former UTP properties in 1999
versus only six months of production in 1998, along with increased production
from the United Kingdom North Sea. The growth was partially offset by a decrease
in Indonesian natural gas production as a result of the impact of higher natural
gas prices on production sharing contracts. The increase in U.S. natural gas
production primarily resulted from Vastar's 9% growth in production. Vastar's
increased production reflected the production from the Gulf of Mexico properties
transferred to Vastar late in 1998, and production increases achieved from new
field startups and operational improvements at West Cameron 645, Mississippi
Canyon 148, the San Juan Basin and other fields.
Average Natural Gas Sales Prices
<TABLE>
<CAPTION>
per thousand cubic feet 1999 1998 1997
------------------------
<S> <C> <C> <C>
U.S., including Vastar $1.99 $1.82 $2.04
International (excluding LNG) $2.24 $2.54 $2.64
Indonesian LNG $3.29 $2.49 $ -
</TABLE>
<PAGE>
Results of Segment Operations
The 1998 growth in international natural gas production primarily reflected
167 million cubic feet per day (MMCFD) contributed from former UTP properties,
partially offset by declines of approximately 80 MMCFD associated with ARCO's
other properties, including a 53 MMCFD decline from Indonesia. In 1998,
Indonesian volumes fell due to the severe effect of the Asian financial crisis
on Indonesia's economy.
Refining & Marketing
<TABLE>
<CAPTION>
Millions 1999 1998 1997
--------------------------
<S> <C> <C> <C>
Net income $ 593 $ 281 $ 325
Special items charge 3 - 38
--------------------------
Operating results $ 596 $ 281 $ 363
--------------------------
</TABLE>
Improved operating results in 1999, compared to 1998, primarily resulted from
higher light product margins. The effect of West Coast refinery outages in the
second quarter of 1999 impacted supply in the second and third quarters
resulting in higher product realizations. The higher product sales prices were
partially offset by higher crude oil costs. Gasoline sales volumes increased 2%
at existing ARCO retail outlets.
In 1998, light product margins were lower resulting in reduced operating
results. 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 1999 and 1998 net income included a benefit of approximately $44 million
and $17 million after tax, respectively, associated with the amortization of the
deferred pre-tax gain on the sale of ARCO's chemical interest. See "Gain on
Disposition of Discontinued Operations" on page 28.
In 1998, a special items charge of $13 million for personnel reductions
associated with ARCO's cost reduction programs was offset by favorable legal
settlements. The 1997 special items charge primarily related to personnel
reductions associated with cost reduction programs.
Petroleum Products Sales
<TABLE>
<CAPTION>
Thousand barrels/day 1999 1998 1997
------------------------
<S> <C> <C> <C>
Gasoline 314.5 308.7 281.9
Jet 102.3 102.8 117.3
Distillate 82.9 80.6 76.6
Other 71.0 72.7 68.0
-------------------------
Total 570.7 564.8 543.8
-------------------------
</TABLE>
ARCO has had steady growth in petroleum product sales volumes over the past
three years. In order to support this growth, refined products were purchased
from third parties to supplement ARCO's refinery production in 1999 and 1998.
Margins on the sale of purchased products are lower than on products produced.
The decreased jet fuel sales in 1999 and 1998, compared to 1997, reflected a
change in the production mix and turnarounds at ARCO's Cherry Point Refinery in
both 1999 and 1998.
Other Operations
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------
<S> <C> <C> <C>
Net income $ 87 $ 111 $ 82
Special items (benefit)charge (6) (8) 7
------------------------
Operating results $ 81 $ 103 $ 89
------------------------
</TABLE>
Results from ARCO's other operations comprise earnings from Lower 48 pipeline
operations and an aluminum rolling facility. Excluding the special items, the
decline in operating results in 1999 reflected decreased earnings from the
pipeline operations, primarily as a result of the transfer of certain pipeline
operations to the refining and marketing segment. This decline was partially
offset by a $3 million increase in equity earnings from the 50% owned Seaway
pipeline joint venture in the Midcontinent. The increase in 1998 earnings,
compared to 1997, primarily reflected improved operating results from the Seaway
pipeline joint venture.
Operating results from the aluminum operations were relatively flat for the
three years ended December 31, 1999.
<PAGE>
Results of Segment Operations
The 1999 special items included gains from asset sales. 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.
Unallocated Items
<TABLE>
<CAPTION>
Millions 1999 1998 1997
-------------------------
<S> <C> <C> <C>
Unallocated net income (expense) $ 12 $ (228) $ (177)
Interest expense (285) (203) (246)
Income from discontinued operations - 179 267
Gain on disposition of
discontinued operations 77 928 291
Extraordinary loss on
extinguishment of debt - - (118)
--------------------------
Total $ (196) $ 676 $ 17
--------------------------
</TABLE>
After-tax charges for environmental remediation and restructuring were $24
million and $8 million in 1999, compared to $143 million and $48 million,
respectively, in 1998. This decrease, along with a reduction in corporate staff
and general expenses of approximately $90 million after tax, was only partially
offset by lower tax benefits and decreased interest income on shortterm
investments, resulting in unallocated net income in 1999.
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, corporate staff and general expenses, 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, corporate staff and general expenses 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. In 1997, ARCO adopted a new
environmental accounting standard and accrued the company's estimate of
post-remediation monitoring costs.
After-tax interest expense has declined over the last two years after taking
into account the effect of certain interest credits in 1998 and 1997. In 1998,
interest expense included interest on a tax refund of $94 million after tax,
whereas 1997 included reversal of reserves for tax-related interest of $89
million after tax. The decrease is due primarily to higher capitalized interest
in 1999 and 1998. The impact of increased interest capitalization more than
offset the increase in combined short and long-term debt outstanding during
1999.
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 pre-tax reduction in interest expense on long-term debt 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
Chemical Company (Lyondell), an unrelated third party following ARCO's 1997
disposition of Lyondell stock, for cash proceeds of $4.6 billion. After deferral
of $313 million of the pre-tax gain as discussed below, ARCO recorded a net
after-tax gain of $1.1 billion.
In 1999, adjustments for tax benefits resulted in the recording of an
additional after-tax gain on disposition of $59 million.
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 formula-based price. At the inception of the contract, a
liquid spot market for MTBE did not exist. As the spot market has developed, the
formula-based prices have historically been above spot market prices. Provision
for loss on the contract was not necessary because ARCO Chemical was a
consolidated, majority-owned subsidiary of the company. ARCO believes that, at
the date of sale of ARCO Chemical to Lyondell, the pricing terms were
above-market as compared to similar toll-based contracts.
<PAGE>
Results of Segment Operations
The above-market MTBE contract value was reflected in the sale price of the
company's interest in ARCO Chemical. As a result, ARCO 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 (which terminates in 2002) between the contract price and the
spot market price for MTBE. ARCO does not expect that the above-market
differential will decrease over the remaining term.
The deferral is being amortized over the remaining term of the contract on the
basis of annual volume over total contracted volume. The amortization and
recognition of imputed interest had a net favorable impact of approximately $44
million and $17 million after tax on earnings of the refining and marketing
segment in 1999 and 1998, respectively.
Coal
In the first quarter of 1999, ARCO 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. In 1998, ARCO recorded a $92 million
provision for the estimated loss on the disposal of the U.S. and Australian coal
assets. In 1999, upon the sale of the interests in the Australian mines the
provision was reduced resulting in an after-tax gain of $22 million.
In June 1998, for cash 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.
UTP Petrochemical
At the time of the UTP acquisition, ARCO determined the UTP petrochemical
operations would be divested as soon as possible. Accordingly, in 1998, $33
million after tax was accrued as the estimated loss on disposal of the
petrochemical assets. In March 1999, ARCO sold the UTP petrochemical business
and recorded an additional loss of $4 million.
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
<TABLE>
<CAPTION>
Net income - millions 1999 1998 1997
----------------------------
<S> <C> <C> <C>
ARCO Chemical $ - $ 170 $ 92
Coal operations - 9 56
Lyondell - - 119
UTP petrochemical operations - - -
----------------------------
Total $ - $ 179 $ 267
----------------------------
</TABLE>
See Note 4 of Notes to Consolidated Financial Statements regarding
discontinued operations, beginning on page 47.
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Millions, except per share amounts 1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
REVENUES
Sales and other operating revenues $ 12,501 $ 10,303 $ 14,340
Other revenues 554 506 417
---------------------------------------
Total revenues 13,055 10,809 14,757
---------------------------------------
EXPENSES
Trade purchases 4,893 3,959 6,405
Operating expenses 2,386 2,794 2,714
Selling, general and
administrative expenses 607 713 756
Exploration expenses (including
undeveloped leasehold amortization) 386 629 508
Depreciation, depletion and amortization 1,785 1,535 1,446
Impairment of oil and gas properties 14 1,447 -
Taxes other than income taxes 475 506 640
Interest 398 259 343
Loss on disposition of Algeria assets 175 - -
Restructuring costs 20 249 67
---------------------------------------
Total expenses 11,139 12,091 12,879
---------------------------------------
Income (loss) from continuing operations
before income taxes, minority interest
and extraordinary item 1,916 (1,282) 1,878
Provision (benefit) for taxes on income 533 (651) 504
Minority interest in earnings of subsidiaries 38 24 43
---------------------------------------
Income (loss) from continuing operations
before extraordinary item 1,345 (655) 1,331
Income from discontinued operations, net of
income taxes of $113 (1998) and $74 (1997) - 179 267
Gain on disposition of discontinued operations,
net of income taxes of $58 (1999), $1,620
(1998) and $342 (1997) 77 928 291
---------------------------------------
Income before extraordinary item 1,422 452 1,889
Extraordinary loss on extinguishment
of debt, net of income taxes of $74 - - 118
---------------------------------------
Net income $ 1,422 $ 452 $ 1,771
---------------------------------------
Earnings per share:
Continuing operations
Basic $ 4.17 $ (2.05) $ 4.14
Diluted $ 4.09 $ (2.05) $ 4.07
Net income
Basic $ 4.41 $ 1.40 $ 5.51
Diluted $ 4.33 $ 1.40 $ 5.41
Weighted average equivalent shares outstanding:
Basic 322.3 321.0 321.2
Diluted 328.8 321.0 327.4
</TABLE>
See Notes on pages 43 through 61.
<PAGE>
Results of Consolidated Operations
Income from Continuing Operations
The improvement in ARCO's income from continuing operations in 1999 primarily
reflected higher crude oil prices, increased refined products margins, lower
operating, exploration and SG&A expenses and higher natural gas volumes.
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.
Earnings from Consolidated Operations
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Income (loss)from continuing operations $ 1,345 $ (655) $ 1,331
Special items charge (benefit) 181 1,055 (2)
------------------------------
Operating results $ 1,526 $ 400 $ 1,329
------------------------------
Special items after tax
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Loss on disposition of Algeria assets $ 161 $ - $ -
Impairment of oil and gas properties 9 925 -
Tax-related benefits (33) (153) (248)
Environmental charges 27 145 184
Restructuring charges 13 172 40
Other, net 4 (34) 22
------------------------------
Total charge (benefit) $ 181 $ 1,055 $ (2)
------------------------------
</TABLE>
Revenues
In 1999, the increase in exploration and production sales revenues resulted
from higher petroleum liquids prices and natural gas production volumes,
partially offset by lower petroleum liquids volumes.
The decline in exploration and 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 1999
and 1998 were significantly lower compared to 1997.
Sales and Other Operating Revenues
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Exploration & production $ 7,022 $ 5,936 $ 9,550
Refining & marketing 7,000 5,484 6,856
Other operations 56 170 193
Intersegment eliminations (1,577) (1,287) (2,259)
------------------------------
Total $12,501 $ 10,303 $ 14,340
------------------------------
</TABLE>
In 1999, refining and marketing revenue primarily increased as a result of
higher refined products prices.
The decline in refining and marketing sales revenues in 1998 resulted from
lower refined products prices, only partially offset by increased gasoline sales
volumes.
Other Revenues
In 1999, higher other revenues, compared to 1998, reflected one-time legal
settlements and increased interest and rental income.
In 1998, other revenues increased primarily as a result of improved equity
earnings from ARCO's pipeline operations and gains from pipeline asset sales.
Expenses
Trade purchases for 1999 were higher primarily as a result of increased
purchases of finished and unfinished refined product from third parties and
higher crude oil prices associated with crude oil marketing activity.
In 1998, trade purchases, compared to 1997, 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.
Operating expenses declined in 1999 as a result of a decrease in exploration
and production operating costs of approximately $190 million before tax,
compared to 1998. This decline was due to the 1998 exchange of higher cost
California heavy crude oil properties for Gulf of Mexico crude oil and natural
gas properties, as well as the impact of the company's cost reduction program.
In addition, charges for future remediation and reclamation were $57 million in
1999, compared to $234 million in 1998. The 1998 charges related to both current
operations and to natural resource damage liabilities in the state of Montana
associated with previously discontinued mining operations.
<PAGE>
Results of Consolidated Operations
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 future environmental remediation and reclamation
declined to $234 million before tax. In 1998, natural gas marketing delivery
charges declined following the transfer of operations to the Vastar-Southern
Energy, Inc. joint venture.
In 1997, operating expenses included charges of $300 million before tax for
future environmental remediation and reclamation as well as 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.
In 1999, SG&A expense declined primarily as a result of lower personnel costs
and a favorable adjustment to self-insurance reserves for estimated claims
incurred but not yet reported.
DD&A expense in 1999, compared to 1998, was higher as a result of a full year
of DD&A associated with the former UTP operations, which became a part of ARCO's
operations in the third quarter of 1998. In addition, DD&A expense also
increased as a result of increased natural gas production and higher average
depletive writeoff rates associated with Vastar's operations.
The higher DD&A expense in 1998 reflected the inclusion of the DD&A of former
UTP operations in the third and fourth quarters of 1998.
Each year ARCO performs an impairment review of its oil and gas properties.
The 1999 impairment review resulted in insignificant charges related to a few
isolated properties. ARCO used a benchmark price of $25.60/bbl in preparing its
December 31, 1999 Supplemental Oil and Gas Information.
In the fourth quarter of 1998, after a year-long decline in crude oil prices,
ARCO determined that part of the oil price decline that had taken place was
permanent. Accordingly, ARCO revised its official crude oil price forecast used
for economic decision making during the fourth quarter of 1998. This forecast
was based on a West Texas Intermediate (WTI) benchmark price of $15 per barrel
(bbl) in 1999, $16/bbl in 2000, and $17/bbl in 2001, with 2% escalation
thereafter. While crude oil prices reached as low as $12/bbl in December 1998,
many oil industry expert forecasts considered crude oil prices in that range to
be unusually low and inappropriate for economic decision making. ARCO used a
benchmark price of $12.05/bbl in preparing its December 31, 1998 Supplemental
Oil and
Gas Information.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
in 1998 ARCO performed an impairment review to determine whether any of ARCO's
oil and gas properties were impaired based on the new crude oil price forecast.
Net undiscounted cash flows before tax were calculated and compared to the net
book value on a field-by-field basis. This included cash flows from proved
developed, proved undeveloped and potential oil and gas reserves, which included
both producing and non-producing reserves. The potential reserves were
calculated on a risk-weighted basis to include the uncertainties associated with
field size, reservoir performance, technological development and commercial
risk. Where appropriate, contracted prices were used but did not materially
impact the result. For those fields where the net book value exceeded the net
undiscounted cash flows before tax, the discounted future cash flows before tax
were calculated using a 10% discount rate factor. This resulted in a pre-tax
impairment charge of $1.4 billion in 1998. ARCO also tested a downside case
using WTI benchmark crude oil prices of $1/bbl lower than each year of its
official forecast. ARCO believes that prices below $14/bbl are not sustainable
and like most commodities will cycle around their historical midpoints. 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.
<PAGE>
Results of Consolidated Operations
Significant downward revisions of these oil and gas reserves could result in
material impairment provisions in future years if crude oil prices permanently
decline below the price forecast used in determining the 1998 impairment.
Accounting rules do not permit the reversal of prior impairments if oil prices
rise.
The lower exploration expense in 1999 reflected a decline in geological and
geophysical and dry-hole expense in ARCO's international exploration operations
and a decline in Vastar's dry-hole expense.
In 1998, 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
dryhole expense associated with deepwater drilling activity.
In 1999, taxes other than income taxes declined as lower production volumes on
which certain production taxes are based more than offset the increase in crude
oil prices.
Taxes other than income taxes decreased in 1998 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 1999 interest expense was slightly lower, compared to 1998, after
adjusting the 1998 interest expense for interest on a tax refund. The decline
resulted from the impact of increased interest capitalization more than
offsetting the increase in combined short and long-term debt outstanding during
1999.
The decrease in interest expense in 1998 primarily reflected increased
capitalized interest compared to 1997.
In 1998, $229 million of the restructuring charges related to costs of
eliminating approximately 1,200 positions specifically identified as of December
31, 1998. The $20 million of restructuring charges in 1999 relates to an
adjustment of the 1998 accrual, primarily due to the elimination of additional
positions. The entire 1997 charge was for personnel-related costs. See Note 7 of
Notes to Consolidated Financial Statements on page 49 regarding restructuring
costs.
Income Taxes
The company had an effective tax rate of 27.8% in 1999. An effective tax rate
lower than the statutory rate primarily reflected various tax credits and other
benefits, partially offset by taxes on foreign income in excess of statutory
rate. The company had a tax benefit in 1998 reflecting the company's loss from
continuing operations in that year.
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
Millions 1999 1998
-------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 879 $ 657
Short-term investments 264 260
Accounts receivable 1,301 1,002
Inventories 430 475
Prepaid expenses and other current assets 184 317
-------------------
Total current assets 3,058 2,711
-------------------
Investments and long-term receivables:
Investments accounted for on the equity method 1,508 1,235
Other investments and long-term receivables 1,660 831
-------------------
Total investments and long-term receivables 3,168 2,066
-------------------
Net property, plant and equipment 18,466 18,762
Net assets of discontinued operations 67 339
Deferred charges and other assets 1,513 1,321
-------------------
Total assets $ 26,272 $ 25,199
-------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,672 $ 2,403
Accounts payable 830 976
Taxes payable 420 634
Long-term debt due within one year 11 399
Other 1,090 1,285
-------------------
Total current liabilities 4,023 5,697
-------------------
Long-term debt 5,698 4,332
Deferred income taxes 3,644 3,318
Dismantlement, restoration and reclamation 1,154 1,058
Other deferred liabilities and credits 2,770 2,955
Minority interest 297 259
-------------------
Total liabilities 17,586 17,619
-------------------
Stockholders' equity:
Preference stocks 1 1
Common stock, $2.50 par value; shares issued 326,713,278
(1999), 325,902,559 (1998)
shares outstanding 323,048,817 (1999), 321,315,367 (1998) 817 815
Capital in excess of par value of stock 889 863
Retained earnings 7,091 6,589
Treasury stock (279) (344)
Accumulated other comprehensive income (loss) 167 (344)
-------------------
Total stockholders' equity 8,686 7,580
-------------------
Total liabilities and stockholders' equity $ 26,272 $ 25,199
-------------------
</TABLE>
See Notes on pages 43 through 61.
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 1,345 $ (655) $ 1,213
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,785 1,535 1,446
Impairment of oil and gas properties 14 1,447 -
Dry-hole expense and undeveloped leasehold amortization 235 303 235
Loss on Algeria asset disposal 175 - -
Income from equity investments (56) (78) (19)
Dividends from equity investments 65 37 26
Cash payments (greater) less than noncash provisions (422) 184 61
Minority interest in earnings of subsidiaries 38 24 43
Net gain on asset sales (70) (61) (49)
Deferred income taxes 264 (539) 112
Extraordinary loss on extinguishment of debt - - 118
Changes in working capital accounts (654) 307 183
Other 83 58 2
------------------------------
Net cash provided by operating activities 2,802 2,562 3,371
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets, including dry-hole costs (2,727) (3,551) (2,655)
Net proceeds from sale of ARCO Chemical and U.S.
coal assets - 3,988 -
Union Texas Petroleum acquisition - (2,707) -
Proceeds from asset sales 913 207 182
Net cash provided (used) by short-term investments (22) (33) 558
Investment in/advances to LUKARCO (144) (59) (227)
Investments and long-term receivables (13) (242) (202)
Other (4) (73) 6
------------------------------
Net cash used by investing activities (1,997) (2,470) (2,338)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,019) (503) (1,558)
Proceeds from issuance of long-term debt 1,999 536 254
Net cash provided (used) by notes payable (695) 912 521
Dividends paid (920) (917) (908)
Treasury stock purchases (2) (32) (256)
Other 52 50 43
-------------------------------
Net cash provided (used) by financing activities (585) 46 (1,904)
-------------------------------
Cash flows from discontinued operations 13 85 (16)
Effect of exchange rate changes on cash (11) - (5)
-------------------------------
Net increase (decrease) in cash and cash equivalents 222 223 (892)
Cash and cash equivalents at beginning of year 657 434 1,326
-------------------------------
Cash and cash equivalents at end of year $ 879 $ 657 $ 434
-------------------------------
</TABLE>
See Notes on pages 43 through 61.
<PAGE>
Analysis of Cash Flows and Financial Condition
1999 Cash Inflows - (millions)
--------------------------------------------------------------------------------
[CHART APPEARS HERE]
<TABLE>
<S> <C>
$2,802 Operations
$1,999 Long-term debt issuance
$ 913 Asset sales
$ 65 Other
</TABLE>
ARCO's 2000 capital spending program includes $2.6 billion for additions to
fixed assets, compared to $2.7 billion in 1999. Future capital expenditures
remain subject to business conditions affecting the industry, as well as changes
in environmental rules and regulations and the tax laws. They are also subject
to change based on the timing and the status of the combination with BP Amoco.
Cash and cash equivalents and short-term investments totaled $1.1 billion at
year-end 1999, short-term borrowings were $1.7 billion and long-term debt due
within one year was $11 million.
Beginning in 1997 and continuing through the first quarter of 1999, the
company utilized increased short-term borrowing in lieu of increased long-term
borrowing (other than long-term debt assumed in connection with the UTP
acquisition in 1998). While overall short-term borrowings were lower at December
31, 1999, compared to December 31, 1998, the company remained in a working
capital deficit position (currently $1.0 billion at December 31, 1999).
Depending upon the revenues earned and cash received from the sale of assets
during 2000, the company may increase total indebtedness during the course of
the year.
2000 Budgeted Adds to Fixed Assets - (millions)
--------------------------------------------------------------------------------
[CHART APPEARS HERE]
<TABLE>
<S> <C>
$ 850 Vastar
$ 690 International oil & gas
$ 475 Alaska
$ 90 Other Lower 48
$ 420 Refining & Marketing
$ 30 Other
</TABLE>
1999 Cash Outflows - (millions)
--------------------------------------------------------------------------------
[CHART APPEARS HERE]
<TABLE>
<S> <C>
$2,727 Adds to fixed assets
$1,019 Repayment of long-term debt
$ 920 Dividends
$ 695 Repayment of short-term debt
$ 185 Other
</TABLE>
On January 27, 1999, ARCO filed a Form S-3 Registration Statement (S-3) for
the issuance of up to $1.5 billion of debt securities as determined by market
conditions. At December 31, 1999, ARCO had issued a total of $1 billion of
long-term debt securities under the S-3. As of February 28, 2000, the remaining
$500 million of debt securities that could be issued under the S-3 have not been
issued by the company.
At December 31, 1999, 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 March 1999, Vastar issued $300 million of debt securities. During 1999,
Vastar had a revolving credit facility of $1.1 billion. The effective interest
rate for the debt outstanding under this facility averaged 5.9% for the year. As
of December 31, 1999, no debt was outstanding under the facility.
<PAGE>
Market-Sensitive Instruments and Risk Management
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, 1999 the company held 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, 1999, 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 $5.9 billion at December 31, 1999, and exceeded the carrying
value by $211 million. Market risk was estimated at $227 million, representing
potential increase in fair value resulting from a hypothetical 10% decrease in
the company's weighted average long-term borrowing rate at December 31, 1999.
Interest rate risk is mitigated by the use of floating rate instruments, which
comprise approximately $435 million of the company's longterm 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 2000 to March 2000.
The hypothetical loss in cash flows of the combined foreign-exchange contract
positions is estimated to be $61 million. A hypothetical adverse change of 10%
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 took
place at the same time and at the hypothetical exchange rate. The foreign
currency amounts for the future cash flows were translated to U.S. 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, 1999, approximately $580 million of short-term investments and
$845 million of short-term debt were denominated in foreign currencies. Assuming
a hypothetical adverse change of 10% in year-end exchange rates (a strengthening
of the U.S. dollar), the company would experience a net increase in cash flows
from the short-term investments and debt of approximately $57 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, 1999, ARCO had entered into a series of crude oil futures and
options contracts and a series of forward natural gas contracts.
Based on year-end forward prices ARCO had a net liability of $1 million on
those contracts. The hypothetical incremental loss in earnings for the combined
commodity positions at year end is estimated to be $12 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, 1999, included marketable equity securities
which are recorded at fair value of $846 million, including net unrealized gains
of $376 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 $85 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*
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Beginning balance $ 870 $ 722 $ 524
Charges 57 234 300
Payments (241) (86) (102)
------------------------------
Ending balance $ 686 $ 870 $ 722
------------------------------
</TABLE>
* 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 uncertainty
regarding the appropriate method for remediation of various sites and regarding
ARCO's ultimate share of costs, it is possible that actual costs could exceed
the amount accrued by as much as $550 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 beginning on page 53
regarding environmental matters.
The increased payments against the environmental reserves in 1999 reflected a
payment of $160 million in settlement of a majority of the State of Montana's
claims in a lawsuit resulting from mining and mineral processing businesses
formerly operated by Anaconda.
In addition to the provision for environmental remediation costs, $1.2 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.
<PAGE>
Statements of Financial Accounting Standards
Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to adopt its provisions for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (as deferred by SFAS No. 137). Earlier
application of all of the provisions of SFAS No. 133 is permitted, but the
provisions cannot be applied retroactively to financial statements of prior
periods. SFAS No. 133 standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
statement of financial position and measure them at fair value. The company has
not yet completed evaluating the impact of the provisions of SFAS No. 133.
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Preference Capital in Treasury Stock Comprehensive Retained
Millions Shares Dollars Stock Excess of Par Shares Dollars* Income (loss) Earnings Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1997 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 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) (0.9) 75 72
------------------------------------------------------------------------------------------------------
Balance December 31, 1998 325.9 $ 815 $ 1 $ 863 4.6 $ (344) $ (344) $ 6,589 $ 7,580
------------------------------------------------------------------------------------------------------
Net income 1,422 1,422
Other comprehensive income:
Unrealized gain on securities 303 303
Foreign currency translation 192 192
Minimum pension liability 16 16
------------------------------------------------------------------------------------------------------
Total comprehensive income 1,933
Common stock dividends (918) (918)
Preference stock dividends (2) (2)
Common stock issued 0.8 2 21 23
Treasury stock purchases - (2) (2)
Treasury stock issued 5 (0.9) 67 72
------------------------------------------------------------------------------------------------------
Balance December 31, 1999 326.7 $ 817 $ 1 $ 889 3.7 $ (279) $ 167 $ 7,091 $8,686
------------------------------------------------------------------------------------------------------
</TABLE>
*At cost
See Notes on pages 43 through 61.
<PAGE>
Safe Harbor for Forward-Looking Statements*
ARCO's management from time to time may make forward-looking statements to
inform existing and potential security holders regarding various matters. Such
statements are generally accompanied by words such as estimate, project, predict
or expect, that convey the uncertainty of future events or outcomes. These
statements may include projections and estimates concerning the timing and
success of specific projects, the size and timing of cost reductions, the level
of future income, production volumes, size of hydrocarbon resources, ability to
replace reserves and levels of capital spending. Actual results could differ
materially based on numerous factors, including those described below. Unless
otherwise noted in the statements, ARCO does not intend to update any
forward-looking statements.
Likelihood of BP Amoco Combination
The closing of the combination with BP Amoco is subject to the outcome of the
pending litigation brought by the FTC. See page 1 for a detailed discussion of
the legal proceedings.
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.
* 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.
<PAGE>
Impact of the Year 2000 Issue
The Year 2000 issue (Y2K) arose 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. The company's planning for possible Y2K disruptions was successful,
as no major problems occurred. The few incidents that did occur during the
actual transition from 1999 to 2000 were quickly analyzed, resolved, and/or
contingency plans implemented and had only minimal business impacts.
ARCO addressed 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.
<TABLE>
<CAPTION>
Percent Total expended
complete at through
December December 31,
Areas addressed 31, 1999 1999 (millions)
-------------------------------
<S> <C> <C>
Computing integrity 100% $ 14
Asset integrity 100% 12
Commercial integrity 100% 4
-------------------------------
Total costs $ 30
---------
</TABLE>
The total expended does not include ARCO's potential share of Y2K costs that
may have been incurred by partnerships and joint ventures in which the company
participates but is not the operator.
<PAGE>
Notes to Consolidated Financial Statements
Note 1 Accounting Policies
ARCO's accounting policies conform to accounting principles generally accepted
in the United States, 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 81.9% of the outstanding
shares at December 31, 1999. 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.
Revenue Recognition
Revenues are generally recognized upon the passage of title, net of royalties,
if applicable.
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
unproved 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.
Exploratory wells that find oil and gas reserves which cannot be classified as
proved within one year of discovery and do not continue to qualify as
capitalized costs are charged to expense as dry-hole costs.
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.
Impairment of Long-lived Assets
Long-lived assets are assessed for possible impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
whenever changes in economic or operating conditions indicate the carrying
amount may not be recoverable. If undiscounted future cash flows are less than
the carrying amount, an impairment loss is recognized to the extent the carrying
amount exceeds future discounted cash flows. For proved oil and gas properties,
the assessment is performed on an individual field basis and is based on the
company's price forecast used for economic decision making.
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.
<PAGE>
Notes to Consolidated Financial Statements
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 contingently issuable shares, primarily stock options and
convertible preference stock. All 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 accounting
principles generally accepted in the United States 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.
In order to qualify for hedge accounting, the derivative instrument must be
designated and effective as a hedge.
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.
<PAGE>
Notes to Consolidated Financial Statements
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 1999.
Note 2 Segment Information
Segment information has been prepared in accordance with 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.
<PAGE>
Notes to Consolidated Financial Statements
Segment Information
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------
Exploration Refining & Unallocated
Millions & Production Marketing All Other Items Totals
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenue:
U.S. $5,045 $6,941 $ 46 $ - $12,032
International 1,977 59 - 10 2,046
Intersegment revenues (1,563) - (4) (10) (1,577)
-------------------------------------------------------------------
Total 5,459 7,000 42 - 12,501
Income from equity affiliates 20 - 36 - 56
Interest revenue 30 25 - 71 126
Interest expense - - - 398 398
Depreciation, depletion
and amortization 1,501 268 9 7 1,785
Income tax expense (benefit) 366 334 52 (219) 533
Net income (loss) 938 593 87 (196)(a) 1,422
Investment in equity affiliates 972 190 342 4 1,508
Property, plant and equipment (net):
U.S. 7,735 3,225 170 101 11,231
International 7,212 23 - - 7,235
Additions to fixed assets 2,225 481 5 16 2,727
Segment assets 18,752 4,695 916 1,909(b) 26,272
<CAPTION>
1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenue:
U.S. $ 4,374 $5,457 $ 156 $ - $ 9,987
International 1,562 27 - 14 1,603
Intersegment revenues (1,179) (14) (80) (14) (1,287)
-------------------------------------------------------------------
Total 4,757 5,470 76 - 10,303
Income from equity affiliates 25 19 34 - 78
Interest revenue 18 5 - 96 119
Interest expense - - - 259 259
Depreciation, depletion
and amortization 1,239 252 18 26 1,535
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
<CAPTION>
1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenue:
U.S. $ 7,920 $6,853 $ 177 $ 1 $14,951
International 1,630 3 - 15 1,648
Intersegment revenues (2,164) (3) (77) (15) (2,259)
-------------------------------------------------------------------
Total 7,386 6,853 100 1 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
</TABLE>
(a) Includes: income from discontinued operations of $179 and $267 in 1998 and
1997, respectively; gain on disposition of discontinued operations of $77,
$928 and $291 in 1999, 1998 and 1997, respectively; and extraordinary loss
of $118 in 1997.
(b) Includes assets of discontinued operations of $67 (1999), $339
(1998) and $2,777 (1997).
<PAGE>
Notes to Consolidated Financial Statements
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, Venezuela and Pakistan.
The acquisition was 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 and there are no
contingencies or other matters that could affect the allocation of the purchase
cost.
The liabilities assumed included employee termination costs of $78 million.
The group of employees terminated included U.S. citizens employed in exploration
and production operations and corporate headquarters personnel. In the third
quarter of 1999 ARCO recorded an additional $8 million provision for termination
of UTP employees to reflect an increase in the estimated costs. At December 31,
1999, ARCO had terminated 353 of the 357 employees to be terminated and had paid
out $82 million of the $86 million provided for severance payments.
Liabilities assumed also included other costs associated with the merging of
UTP's businesses into ARCO's operations, such as lease and other contract
cancellation costs, totalling $18 million, of which $7 million were non-cash
charges. Approximately half of the cash costs were paid in 1999. All remaining
cash costs for severance, office lease and software maintenance contract buyouts
are expected to be paid out by the end of 2000.
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:
<TABLE>
<CAPTION>
Millions, except per share amounts 1998 1997
-----------------
<S> <C> <C>
Sales and other operating revenues $ 10,570 $ 15,061
-----------------
Income (loss) from continuing
operations before extraordinary item $ (702) $ 1,372
Income from 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
-----------------
</TABLE>
Note 4 Discontinued Operations
Coal
In the first quarter of 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 December 31, 1999, the
carrying value of the remaining Australian coal assets was $67 million and was
included as net assets of discontinued operations on the balance sheet.
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
<PAGE>
Notes to Consolidated Financial Statements
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.
In 1998, ARCO recorded a $92 million provision for the estimated loss on the
disposal of the U.S. and Australian coal assets. In 1999, upon completion of the
Australian sales noted above, the provision was reduced, resulting in an
after-tax gain of $22 million.
Chemicals
In July 1998, ARCO tendered its entire interest of 80 million shares of ARCO
Chemical Company common stock to Lyondell Chemical Company (Lyondell) for $57.75
per share, or total cash proceeds of approximately $4.6 billion. After deferral
of $313 million of the pre-tax gain, ARCO recorded an after-tax gain of
approximately $1.1 billion in 1998 from the sale of the shares.
The $313 million deferral represents the estimated discounted present value of
the difference, over the remaining term of an above-market MTBE contract between
ARCO and ARCO Chemical, between the contract price and the spot market price for
MTBE. The deferral is being amortized over the remaining term of the contract,
ending in 2002, on the basis of annual volume over total contracted volume.
In 1999, adjustments for tax benefits resulted in the recording of an
additional after-tax gain of $59 million on the disposition of ARCO Chemical.
At the time of the acquisition of UTP, ARCO determined it would sell UTP's
petrochemical business. Accordingly, in 1998, ARCO recorded a $33 million
after-tax provision for loss on the sale of the assets. If depreciation had not
been suspended for the last six months of 1998, the petrochemical business would
have had a loss of $5 million for 1998. In March 1999, ARCO sold the UTP
petrochemical business and recorded an additional loss of $4 million.
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.
Revenues and net income from discontinued operations were as follows:
<TABLE>
<CAPTION>
Millions 1999 1998 1997
--------------------------
<S> <C> <C> <C>
Revenues:
ARCO Chemical $ - $ 1,990 $3,726
Coal operations $ 97 $ 338 $ 637
UTP petrochemical $ 25 $ 58 $ -
Net income:
ARCO Chemical $ - $ 170 $ 92
Coal operations - 9 56
Lyondell - - 119
UTP petrochemical - - -
--------------------------
$ - $ 179 $ 267
--------------------------
</TABLE>
Note 5 Accounting Changes
Effective January 1, 1999, ARCO adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and SOP 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 states that costs of start-up activities should be expensed as
incurred. The implementation of SOP 98-5 did not have a material cumulative
effect on ARCO's results of operations (less than $0.01 per share). SOP 98-1
establishes criteria for determining how the costs of developing or obtaining
internal-use computer software should be accounted for. SOP 98-1 was adopted
prospectively and therefore there was no cumulative effect of adoption.
Effective January 1, 1997, ARCO adopted 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.
<PAGE>
Notes to Consolidated Financial Statements
Note 7 Restructuring Costs
During 1998, ARCO recorded pre-tax 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. These 1,200 positions eliminated were
specifically identified prior to December 31, 1998. During 1999, the reserve was
increased by $12 million, primarily to reflect additional terminations.
The following table summarizes the liabilities related to the 1998
restructuring program, including $11 million transferred from the 1997 program
discussed below:
<TABLE>
<CAPTION>
($ Millions)
Funded Unfunded
Short-term Long-term Long-term
Terminations Benefits(a) Benefits(b) Benefits(c) Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,250 $103 $90 $58 $251
</TABLE>
(a) Severance payments and ancillary benefits such as relocation and
outplacement.
(b) Net increase in pension benefits to be paid from assets of qualified plans.
(c) Net increase in non-qualified pension benefits and other postretirement
benefits to be paid from company funds.
Long-term benefits will be paid after retirement over the remaining lives of
the recipients or, for pension benefits, in a lump sum upon election. Long-term
benefits have been accrued in accordance with SFAS No. 88. As of December 31,
1999, approximately 1,160 employees have been terminated and approximately $73
million of the short-term benefits have been paid and charged against the
accrual. Payments made do not necessarily correlate to the number of
terminations due to the ability of terminees to defer receipt of certain
payments. The remaining severance and ancillary benefits are expected to be paid
by the first quarter 2001.
In addition, in 1998 the company recorded a pre-tax charge of $20 million
related to office space and facilities that will be vacated with no future
economic benefit. Cash payments will be made through 2005, the remaining term of
the lease.
During 1997, ARCO recorded pre-tax charges of $67 million for personnel
reductions in refining and marketing operations and corporate headquarters. As
of December 31, 1999, $53 million was paid and $11 million was transferred to
reserves for the 1998 program, with a balance of $3 million remaining to be
paid. The transfer was necessary because when the 1998 program was announced,
certain employees who had not yet terminated under the 1997 program became
eligible for 1998 program benefits. Approximately 480 employees were originally
planned to terminate under the 1997 program. About 400 people terminated under
the 1997 program, with the remainder transferred to the 1998 program.
Note 8 Inventories
Inventories are recorded when purchased, produced or manufactured and are
stated at the lower of cost or market. In 1999, approximately 76% 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:
<TABLE>
<CAPTION>
Millions 1999 1998
------------------
<S> <C> <C>
Crude oil and petroleum products $ 199 $ 220
Other products 26 24
Materials and supplies 205 231
---------------
Total $ 430 $ 475
---------------
</TABLE>
The excess of the current cost of inventories over book value was
approximately $246 million and $193 million at December 31, 1999 and 1998,
respectively.
Note 9 Investments
At December 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 month 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, 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.
<PAGE>
Notes to Consolidated Financial Statements
The following summarizes investments at December 31:
<TABLE>
<CAPTION>
Millions 1999 1998
--------------------
<S> <C> <C>
Aggregate fair value $ 1,501 $ 926
Gross unrealized holding losses 7 135
Gross unrealized holding gains (376) (13)
--------------------
Amortized cost $ 1,132 $ 1,048
--------------------
</TABLE>
Investment activity for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
Millions 1999 1998
--------------------
<S> <C> <C>
Gross purchases $ 20,269 $ 15,118
Gross sales 746 463
Gross maturities 19,439 14,520
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
Millions Gross Net Gross Net
----------------------------------
<S> <C> <C> <C> <C>
Exploration & production $33,490 $14,947 $32,072 $15,244
Refining & marketing 6,024 3,248 5,450 2,954
Other operations 279 170 649 432
Unallocated 264 101 1,151 132
-----------------------------------
Total $40,057 $18,466 $39,322 $18,762
-----------------------------------
</TABLE>
Expenses for maintenance and repairs for 1999, 1998 and 1997 were $292
million, $387 million and $334 million, respectively.
In the fourth quarter of 1998, after a year-long decline in crude oil prices,
ARCO determined that part of the oil price decline that had taken place was
permanent. Accordingly, ARCO revised its official crude oil price forecast used
for economic decision making. This forecast was based on a West Texas
Intermediate (WTI) benchmark price of $15/bbl in 1999, $16/bbl in 2000, and
$17/bbl in 2001, with 2% escalation thereafter. While crude oil prices reached
as low as $12/bbl in December 1998, many oil industry expert forecasts consider
crude oil prices in that range to be unusually low and inappropriate for
economic decision making.
In accordance with SFAS No. 121, in 1998 ARCO performed an impairment review
to determine whether any of ARCO's oil and gas properties were impaired based on
the new crude oil price forecast. Net undiscounted cash flows before tax were
calculated and compared to the net book value on a field-by-field basis. This
included cash flows from proved developed, proved undeveloped and potential oil
and gas reserves, which included both producing and non-producing reserves. The
potential reserves were calculated on a risk-weighted basis to include the
uncertainties associated with field size, reservoir performance, technological
development and commercial risk. Where appropriate, contracted prices were used
but did not materially impact the result. For those fields where the net book
value exceeded the net undiscounted cash flows before tax, the discounted future
cash flows before tax were calculated using a 10% discount rate factor. This
resulted in a pre-tax impairment charge of $1.4 billion in 1998. ARCO tested a
downside case using WTI benchmark crude oil prices of $1/bbl lower than each
year of its official forecast. ARCO believes that prices below $14/bbl are not
sustainable and like most commodities will cycle around their historical
midpoints. 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.
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, 1999 and 1998, was 6.0% and 5.6%, respectively.
At December 31, 1999, ARCO had unused letters of credit totaling approximately
$398 million.
<PAGE>
Notes to Consolidated Financial Statements
In 1999, ARCO and certain wholly owned subsidiaries had committed bank credit
facilities of approximately $3.1 billion. At December 31, 1999, there were $57
million of borrowings under these committed facilities.
Note 12 Long-term Debt
Long-term debt at December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1999 1998
---------------
<S> <C> <C>
5.55%, due in 2003 $ 500 $ --
5.9%, due in 2009 500 --
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
Series A Medium-
Term Notes,(b) 8%(a) 84 110
Series B Medium-
Term Notes,(c) 8.34%(a) 250 250
ARCO Tresop Notes, 5.06%(d) -- 88
Variable rate, due in 2031, 3.57%(a) 265 265
Variable rate, due in 2032, 5.63%(a) 108 108
Capital Construction Fund, 5.51%(e) 391 --
Vastar:
Commercial paper,
6.6%(a) 226 219
LIBOR Revolving Credit Agreement,
5.6%(d) -- 320
6% Putable/Callable
Notes, due in 2010 100 100
6.39%, due in 2008 50 50
6.50%, due in 2009 299 --
6.95%, due in 2006 75 75
6.96%, due in 2007 75 75
8.75%, due in 2005 150 150
Union Texas Petroleum:
6.66%, due in 2002 100 100
7.34%, due in 1999 -- 179
7.40%, due in 2038 150 150
8 1/4%, due in 1999 -- 100
8 3/8%, due in 2005 125 125
8 1/2%, due in 2007 75 75
Other 299 305
---------------
Total, including debt due
within one year 5,709 4,731
---------------
Less debt due within one year 11 399
---------------
Long-term debt $ 5,698 $ 4,332
---------------
</TABLE>
(a) Weighted average of interest rates at December 31, 1999.
(b) Maturities vary through 2011.
(c) Maturities vary through 2012.
(d) Weighted average of interest rates at December 31, 1998.
(e) The Capital Construction Fund is a related party. Maturities vary through
2032.
Maturities for the five years subsequent to December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
Millions 2000 2001 2002 2003 2004
------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturities $ 11 $ 76 $ 151 $ 516 $ 243
</TABLE>
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, 1999, commitments under this
facility, as amended to date, totaled $1.1 billion. The commitment expires March
31, 2002. As of December 31, 1999, no debt was outstanding under this facility.
The effective rate of borrowings under this facility during 1999 averaged 5.9%.
The credit facility is not guaranteed by ARCO. The agreement contains covenants,
the most restrictive of which require Vastar to 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 1999 was 5.3%. The financial impact of swaps in 1999
and 1998 was immaterial.
Approximately $3 million and $247 million of long-term debt was denominated in
foreign currencies at December 31, 1999 and 1998, respectively.
No material amounts of long-term debt are collateralized by ARCO assets.
<PAGE>
Notes to Consolidated Financial Statements
Note 13 Interest
Interest for the years ended December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1999 1998 1997
----------------------------
<S> <C> <C> <C>
Long-term debt $ 413 $ 322 $ 417
Short-term debt 113 158 86
Other(a) 38 (115) (122)
----------------------------
564 365 381
Capitalized interest (166) (106) (38)
----------------------------
Total interest expense $ 398 $ 259 $ 343
----------------------------
Total interest paid in cash $ 377 $ 248 $ 390
----------------------------
Interest income $ 126 $ 119 $ 114
----------------------------
</TABLE>
(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 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.
At December 31, 1999, the notional amounts of foreign currency contracts
outstanding (principally involving European currencies) were $633 million, with
various maturities in 2000. At December 31, 1998, the notional amounts of
foreign currency contracts outstanding were $528 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 1999, Vastar entered into a series of natural gas and crude oil price
collar and put agreements. At December 31, 1999, natural gas collars and puts
sold covering an average of 400 million cubic feet per day of production were in
place for the period January 2000 through March 2000. These agreements will
serve as hedges which secure weighted average prices on these volumes between
$2.54 and $3.27 per thousand cubic feet (on a Henry Hub basis) for market prices
in excess of $2.12/mcf. Crude oil collars and puts sold covered an average of
23,000 barrels per day of production for the period January 2000 through
December 2000. These agreements will serve as hedges which secure weighted
average prices on these volumes between $18.80 and $23.31 per barrel for market
prices in excess of $15.80 per barrel.
At December 31, the carrying value and estimated fair value of ARCO's
financial instruments are shown as assets (liabilities) in the table below:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
Carrying Fair Carrying Fair
Millions Value Value Value Value
----------------------------------------
<S> <C> <C> <C> <C>
Non-derivatives:
Short-term investments $ 264 $ 264 $ 260 $ 260
Equity method investments 1,508 1,472 1,235 1,176
Other investments and
long-term receivables 1,660 1,660 831 831
Notes payable (1,672) (1,672) (2,403 (2,403)
Long-term debt,including
current maturities (5,709) (5,920) (4,731) (5,466)
Derivatives:
Foreign currency forwards $ 2 $ 2 $ (1) $ (1)
Oil and gas options
and swaps (20) (19) 40 47
Oil and gas futures 21 18 (56) (59)
Commodity futures 2 1 (12) (12)
Commodity options 7 15 (2) (2)
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
All derivative instruments are off-balance-sheet instruments; however, net
receivable or payable positions related to derivative instruments are carried on
the balance sheet.
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.
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 liability for the spill
remain unresolved between Exxon and Alyeska (including its owner companies).
Lawsuits, including purported class actions and actions by governmental
entities, are pending or threatened against ARCO and others seeking damages,
abatement of housing units, and compensation for medical problems arising out of
the presence of lead-based paint in certain housing units. ARCO is unable to
predict the scope or amount of any such liability.
The State of Montana, along with the United States and the Salish and Kootenai
Tribes, have been seeking recovery from ARCO for alleged injuries to natural
resources resulting from mining and mineral processing businesses formerly
operated by Anaconda. In 1998, ARCO entered into two consent decrees, which were
approved by the court in 1999, settling all of the natural resources damage
claims of the United States and the tribes and the bulk of such claims of the
State of Montana. Remaining for disposition are the State's claims for $206
million of restoration damages at three sites.
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.
The federal agencies involved with the sites include the Department of the
Interior, Department of Justice and Environmental Protection Agency.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federaland 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 130 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.
<PAGE>
Notes to Consolidated Financial Statements
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, 1999 was $686 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 $550 million.
Approximately 60% 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. One
site represented 11% of the total accrual. No other site represented more than
7% of the total accrual. The remainder related to other sites with reserves
ranging from $1 million to $10 million per site. Substantially all amounts
accrued are expected to be paid out over the next 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 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:
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Federal:
Current $ 26 $ (189) $ 241
Deferred 322 (7) 143
------------------------------
348 (196) 384
Foreign:
Current 227 91 108
Deferred (68) (486) (45)
------------------------------
159 (395) 63
State:
Current 16 (14) 43
Deferred 10 (46) 14
------------------------------
26 (60) 57
------------------------------
Provision
(benefit) for taxes on income $ 533 $ (651) $ 504
------------------------------
Total income taxes paid in
cash(a) $ 676 $1,417 $ 781
------------------------------
</TABLE>
(a) Includes cash taxes paid relating to the sale of discontinued operations.
A deferred tax expense of $189 million was recorded in 1999 versus a $426
million deferred tax benefit in 1998 and a $242 million deferred tax expense in
1997 related to unrealized investment gains and losses included in accumulated
other comprehensive income.
<PAGE>
Notes to Consolidated Financial Statements
Major components of the net deferred tax liability at December 31 were as
follows:
<TABLE>
<CAPTION>
Millions 1999 1998
------------------------
<S> <C> <C>
Depreciation, depletion
and amortization $(4,573) $ (4,600)
Other (510) (389)
------------------------
Total deferred tax liabilities (5,083) (4,989)
------------------------
Dismantlement and environmental 619 664
Postretirement benefits 285 293
Foreign excess tax basis/loss
carryforwards 92 107
Other 443 607
------------------------
Total deferred tax assets 1,439 1,671
------------------------
Valuation allowance - -
------------------------
Net deferred income tax liability $(3,644) $ (3,318)
------------------------
</TABLE>
ARCO has federal loss carryforwards of $117 million which begin expiring in
2000. ARCO has foreign loss carryforwards of $21 million which begin expiring in
2001.
Taxes other than income taxes for the years ended December 31 comprised the
following:
<TABLE>
<CAPTION>
Millions 1999 1998 1997
--------------------------
<S> <C> <C> <C>
Property $135 $143 $146
Production/severance 237 227 359
Other 103 136 135
---------------------------
Total $475 $506 $640
---------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------
Millions Amount % Pretax Income Amount % Pretax Income Amount % Pretax Income
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
income taxes:
Domestic $1,620 84.6 $ 96 7.5 $1,647 87.7
Foreign 296 15.4 (1,378) (107.5) 231 12.3
-----------------------------------------------------------------------------------
Total $1,916 100.0 $(1,282) 100.0 $1,878 100.0
-----------------------------------------------------------------------------------
Tax at 35% $ 671 35.0 $ (449) (35.0) $ 657 35.0
Increase (reduction) in
taxes resulting from:
Taxes on foreign income
in excess of statutory
rate 12 0.6 32 2.5 21 1.1
Affiliate stock
transactions (30) (1.6) (51) (4.0) (109) (5.8)
State income taxes (net
of federal effect) 17 0.9 (39) (3.0) 37 2.0
Tax credits (143) (7.4) (123) (9.6) (106) (5.6)
Other 6 0.3 (21) (1.7) 4 0.1
-----------------------------------------------------------------------------------
Provision (benefit) for
taxes on income $ 533 27.8 $ (651) (50.8) $ 504 26.8
-----------------------------------------------------------------------------------
</TABLE>
Note 17 Employee 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.
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1999 1998
--------------------------------
Millions Pension Other Pension Other
--------------------------------
<S> <C> <C> <C> <C>
Plan obligations
Benefit obligation at January 1 $(2,822) $(616) $(2,498) $(588)
Service cost (51) (7) (53) (7)
Interest cost (179) (41) (173) (39)
Actuarial gain (loss) 349 45 (96) (4)
Benefits paid 429 45 311 51
Special termination benefits - - (128) (19)
Acquisition - - (185) (24)
Divestiture 11 - - 14
--------------------------------
Benefit obligation at December 31 $(2,263) $(574) $(2,822) $(616)
--------------------------------
<CAPTION>
1999 1998
--------------------------------
Millions Pension Other Pension Other
--------------------------------
<S> <C> <C> <C> <C>
Plan assets
Fair value of assets at January 1 $2,886 $ - $2,710 $ -
Actual return on assets 392 - 264 -
Company contributions 64 - 69 -
Benefits paid (429) - (311) -
Acquisition - - 154 -
Divestitute (10) - - -
--------------------------------
Fair value of assets at December 31 $2,903 $ - $2,886 $ -
--------------------------------
Funded status
Assets greater (less) than obligations $ 640 $(574) $ 64 $(616)
Unrecognized actuarial (gain) loss (164) 8 300 53
Unrecognized prior service cost (benefit) 125 (191) 133 (206)
Unrecognized transition obligation (173) - (200) -
--------------------------------
Total recognized $ 428 $(757) $ 297 $(769)
--------------------------------
Balance sheet recognition $ 564 $ - $ 459 $ -
Prepaid benefits
Accrued liabilities (205) (757) (257) (769)
Intangible asset 18 - 20 -
Accumulated other comprehensive income 51 - 75 -
--------------------------------
Total recognized $ 428 $(757) $ 297 $(769)
--------------------------------
</TABLE>
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 $252, $200 and $1, respectively, at December 31, 1999, and $285, $247 and
$0, respectively, at December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
--------------------------------
Percent Pension Other Pension Other
--------------------------------
<S> <C> <C> <C> <C>
Plan obligations
Assumptions
Discount rate 7.75 7.75 6.7 6.75
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
</TABLE>
For measurement purposes, a 7% 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% and remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1999
--------------------
Millions Increase Decrease
--------------------
<S> <C> <C>
Total of service and interest cost $ 4.7 $ (3.9)
Postretirement benefit obligation $ 47.2 $ (39.5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Million 1999 1998 1997
------------------------
<S> <C> <C> <C>
Components of net benefit cost
Pension benefits:
Service cost $ 51 $ 53 $ 53
Interest cost 179 173 174
Expected return on plan assets (289) (281) (256)
Amortization of transition asset (27) (27) (27)
Amortization of prior service cost 8 7 8
Recognized actuarial (gain) loss 9 10 10
------------------------
Net benefit (income) cost $ (69) $ (65) $ (38)
------------------------
Other postretirement benefits:
Service cost $ 7 $ 7 $ 7
Interest cost 41 39 40
Amortization of prior service
cost (benefit) (15) (15) (15)
Recognized actuarial (gain) loss 1 - -
------------------------
Net benefit (income) cost $ 34 $ 31 $ 32
------------------------
</TABLE>
Included in pension obligations are liabilities related to non-qualified
pension plans that provide retirement benefits in excess of current Internal
Revenue Service maximums. The company also has deferred compensation plans that
permit executives, outside directors and key employees to defer a portion of
their compensation (including bonuses). Amounts deferred accrue interest at a
defined rate and are not included as pension obligations. The liability for
deferred compensation and interest thereon was $343 million and $299 million at
December 31, 1999 and 1998, respectively, and is included in "other deferred
liabilities and credits" on the balance sheet. The liabilities for non-qualified
pension plans and deferred compensation are unfunded based on definitions of
generally accepted accounting standards. However, to assist in funding these
liabilities, the company has invested in corporate-owned life insurance
policies. The cash surrender value of the policies supporting these liabilities
was $572 million and $541 million at December 31, 1999 and 1998, respectively,
and is included in "deferred charges and other assets" on the balance sheet.
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, 1999, future minimum rental payments due under leases were as
follows:
<TABLE>
<CAPTION>
Capital Operating
Millions Leases Leases
----------------------
<S> <C> <C>
2000 $ 3 $ 179
2001 3 175
2002 3 159
2003 3 152
2004 3 89
Later years 57 406
----------------------
Total minimum lease payments 72 $ 1,160
----------------------
Imputed interest (rates
ranging from 8% to 12%) 48
--------
Present value of minimum
lease payments included
in long-term debt $ 24
--------
</TABLE>
Minimum future rental income under noncancellable subleases at December 31,
1999, amounted to $91 million.
Operating lease net rental expense for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Minimum rentals $ 190 $ 189 $ 109
Contingent rentals - 2 -
Sublease rental income (22) (20) (11)
------------------------------
Net rental expense $ 168 $ 171 $ 98
------------------------------
</TABLE>
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.
<PAGE>
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 1999, 1998 and 1997 were as follows (restated to give effect
to June 13, 1997 100% stock dividend):
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
---------------------------
<S> <C> <C>
Balance, January 1, 1997 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
---------------------------
Granted 1,234,727 57.67
Exercised (851,288) 55.32
Cancelled (42,111) 68.12
---------------------------
Balance, December 31, 1999 9,753,655 $ 60.19
---------------------------
</TABLE>
A summary of ARCO's fixed stock options as of December 31, 1999, 1998 and
1997, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Shares available for option 9,618,570 8,523,492 8,247,671
Options exercisable 7,308,855 6,803,228 6,064,856
Weighted average exercise price
of options exercisable $ 58.74 $ 56.01 $ 54.58
Weighted average fair value of
options granted during the year$ 15.46 $ 18.96 $ 14.27
Used to calculate fair value:
Risk-free interest rate 5.02% 5.57% 6.38%
Expected life (years) 10 10 10
Expected volatility 30.29% 23.06% 18.17%
Expected dividends 5.02% 3.85% 4.29%
</TABLE>
At December 31, 1999, exercise prices for options outstanding ranged from
$50.50 to $97.69 and the weighted average remaining contractual life was 5.99
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:
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Net income:
As reported $ 1,422 $ 452 $ 1,771
Pro forma $ 1,407 $ 440 $ 1,758
Earnings per share (diluted):
As reported $ 4.33 $ 1.40 $ 5.41
Pro forma $ 4.29 $ 1.36 $ 5.37
</TABLE>
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.
ARCO awards contingent restricted stock to executives and key employees.
Contingent restricted stock may be converted to performance-based restricted
stock in 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 1999 and 1998, respectively, 236,412 and 184,488 shares of contingent
restricted stock were awarded at weighted average prices of $56.81 and $74.00,
net of forfeitures and retirements, with varying evaluation periods. During 1999
and 1998, 28,696 and 135,180 shares of restricted stock were issued at weighted
average prices of $56.81 and $73.93, respectively.
During 1999, 1998 and 1997, $21 million, $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:
<TABLE>
<CAPTION>
Shares
----------
<S> <C>
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
Accrued 265,807
Paid out (323,845)
Cancelled --
----------
Balance, December 31, 1999 1,734,418
----------
</TABLE>
During 1999, 1998 and 1997, $34 million, $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:
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
$3.00 Cumulative convertible
preference stock, par $1:
Shares authorized 78,089 78,089
Shares issued and outstanding 40,869 51,608
Aggregate value in liquidation -
(thousands) $ 3,270 $ 4,129
$2.80 Cumulative convertible
preference stock, par $1:
Shares authorized 833,776 833,776
Shares issued and outstanding 493,126 573,336
Aggregate value in liquidation-
(thousands) $ 34,519 $ 40,134
Common stock, par $2.50:
Shares authorized 600,000,000 600,000,000
Shares issued 326,713,278 325,902,559
Shares outstanding 323,048,817 321,315,367
Shares held in treasury 3,664,461 4,587,192
</TABLE>
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, 1999.
<PAGE>
Notes to Consolidated Financial Statements
At December 31, 1999, shares of ARCO's authorized common stock were reserved
as follows:
<TABLE>
<S> <C>
Conversions:
$3.00 Preference stock 555,818
$2.80 Preference stock 2,367,005
Stock option plans 19,372,225
Employee benefit plans 9,974,482
-----------
Total 32,269,530
-----------
</TABLE>
Under ARCO's incentive compensation plans, awards of ARCO's common stock may
be made to officers, outside directors and key employees.
Note 21 Supplemental Cash Flow Information
The following is supplemental cash flow information for the years ended
December 31:
<TABLE>
<CAPTION>
Millions 1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Short-term investments:
Gross sales and maturities $ 168 $ 226 $ 1,784
Gross purchases (190) (259) (1,226)
----------------------------------
Net cash provided (used) $ (22) $ (33) $ 558
----------------------------------
Notes payable:
Gross proceeds $ 12,640 $ 14,978 $ 7,386
Gross repayments (13,335) (14,066) (6,865)
----------------------------------
Net cash provided $ (695) $ 912 $ 521
----------------------------------
Gross noncash provisions charged to income $ 247 $ 652 $ 500
Reserve reversal from partial tax audit
settlements - - (145)
Cash payments of previously accrued items (669) (468) (294)
----------------------------------
Cash payments (greater) less than noncash
provisions $ (422) $ 184 $ 61
----------------------------------
Changes in working capital -increase (decrease)
to cash:
Accounts receivable $ (117) $ 19 $ 363
Inventories 36 8 (63)
Accounts payable (146) (60) (111)
Other working capital (427) 340 (6)
----------------------------------
$ (654) $ 307 $ 183
----------------------------------
</TABLE>
In conjunction with the acquisition of UTP, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
Millions
---------
<S> <C>
Fair value of assets acquired $ 3,745
Cash paid (2,707)
--------
Liabilities assumed $ 1,038
--------
</TABLE>
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 October 1998, through a three-way exchange involving ARCO, Vastar and
Mobil, ARCO disposed of its California heavy crude properties. In the
transaction, an ARCO subsidiary holding the California properties traded the
California properties for Mobil's interests in producing fields and exploration
acreage in the Gulf of Mexico. In connection with the disposition, ARCO recorded
an impairment writedown of $147 million before tax, or $114 million after tax,
that was included in the impairment discussed in Note 10. Vastar then purchased
the ARCO subsidiary holding the Gulf of Mexico properties for $437 million,
including the assumption of $300 million of debt which was repaid in first
quarter 1999.
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 $1 million, $2 million
and $12 million in 1999, 1998 and 1997, respectively.
<PAGE>
Notes to Consolidated Financial Statements
Note 23 Earnings Per Share
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------------
(Millions, except per share amounts) Income Shares Per Share Income Shares Per Share Income Shares Per Share
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Income (loss) from continuing
operations $1,345 $ (655) $1,331
Less: Preference stock dividends (2) (2) (2)
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations available to common
shareholders 1,343 322.3 $4.17 (657) 321.0 $(2.05) 1,329 321.2 $ 4.14
===== ===== =====
Discontinued operations 77 322.3 0.24 1,107 321.0 3.45 558 321.2 1.74
===== ===== =====
Extraordinary item - loss on
extinguishment of debt (118) 321.2 (0.37)
-------------------------------------------------------------------------------------------------------------------------------
Total income available to common
shareholders - basic EPS $1,420 322.3 $4.41 $ 450 321.0 $ 1.40 $1,769 321.2 $ 5.51
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations available to common
shareholders $1,343 322.3 $(657) 321.0 $1,329 321.2
Contingently issuable shares
(primarily options) 3.3 - 2.3
$3.00 Convertible preference stock 0.6 - 0.8
$2.80 Convertible preference stock 2 2.6 - 2 3.1
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations available to common
shareholders 1,345 328.8 $4.09 (657) 321.0 $(2.05) 1,331 327.4 $ 4.07
===== ===== =====
Discontinued operations 77 328.8 0.24 1,107 321.0 3.45 558 327.4 1.70
===== ===== =====
Extraordinary item - loss on
extinguishment of debt (118) 327.4 (0.36)
-------------------------------------------------------------------------------------------------------------------------------
Total income available to common
shareholders and assumed
conversions - diluted EPS(a) $1,422 328.8 $4.33 $ 450 321.0 $1.40 $1,771 327.4 $ 5.41
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) No dilution assumed for 1998 due to antidilutive effect on loss from
continuing operations.
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:
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) Foreign Minimum
on Currency Pension
Millions Securities Translation Liability
--------------------------------------------
<S> <C> <C> <C>
1999
Pre-tax amount $ 492 $ 313 $ 27
Tax (expense) benefit (189) (121) (11)
--------------------------------------------
Net-of-tax amount $ 303 $ 192 $ 16
--------------------------------------------
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)
--------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at December 31 were as follows:
<TABLE>
<CAPTION>
Millions 1999 1998
------------------
<S> <C> <C>
Net unrealized gain
(loss) on investments $ 228 $ (75)
Foreign currency
translation adjustment (30) (222)
Minimum pension liability (31) (47)
------------------
Accumulated other
comprehensive income (loss) $ 167 $ (344)
------------------
</TABLE>
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 $714 million, $225 million and $1.3 billion at December 31, 1999, 1998 and
1997, respectively, and a book value of $342 million.
Note 25 Research and Development
Expenditures for research and development totaled $28 million, $45 million and
$38 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Note 26 Unaudited Quarterly Results
<TABLE>
<CAPTION>
Millions, except per share amounts 1999 1998
------------------
<S> <C> <C>
Sales and other operating revenues
Quarter ended:
March 31 $ 2,415 $ 2,536
June 30 3,047 2,564
September 30 3,423 2,655
December 31 3,616 2,548
------------------
Total $ 12,501 $ 10,303
------------------
Income (loss) from continuing
operations before income
taxes and minority interest
Quarter ended:
March 31 $ 261 $ 190
June 30 524 32
September 30 430 (269)
December 31 701 (1,235)(a, b)
------------------
Total $ 1,916 $ (1,282)
------------------
Net income (loss)
Quarter ended:
March 31 $ 165 $ 220
June 30 313 154
September 30 372 872(c)
December 31 572 (794)(a, b)
------------------
Total $ 1,422 $ 452
------------------
Earned (loss) per share
Quarter ended:
March 31 $ 0.51 $ 0.67
June 30 $ 0.95 $ 0.47
September 30 $ 1.13 $ 2.67
December 31 $ 1.74 $ (2.47)
</TABLE>
(a) See Note 7 of Notes to Consolidated Financial Statements.
(b) Includes $925 impairment writedown.
(c) Includes $998 net gain on disposition of segments.
<PAGE>
Supplemental Information (Unaudited)
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, 1999 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 11% 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:
<TABLE>
<CAPTION>
Petroleum Liquids (million barrels) Natural Gas (billion cubic feet)
-----------------------------------------------------------------------------------------------------------
Consolidated Consolidated
---------------------------- ----------------------------
Other Other
U.S. International Total Reserves/1/ Worldwide U.S. International Total Reserves/1/ Worldwide
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves at
January 1, 1997 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
--------------------------------------------------------------------------------------------------------------
Revisions 119 46 165 8 173 59 (58) 1 73 74
Improved recovery 51 4 55 - 55 47 - 47 - 47
Purchases 7 65 72 6 78 137 3 140 416 556
Extensions and
discoveries 121 - 121 - 121 380 - 380 - 380
Production (169) (56) (225) (3) (228) (460) (379) (839) (29) (868)
Consumed - - - - - (80) (11) (91) - (91)
Sales (13) (83) (96) - (96) (42) - (42) - (42)
--------------------------------------------------------------------------------------------------------------
Reserves at
December 31, 1999 2,159 714 2,873 72 2,945 5,158 3,881 9,039 861 9,900
--------------------------------------------------------------------------------------------------------------
Proved developed
reserves:
At January 1, 97 1,828 150 1,978 - 1,978 4,310 1,780 6,090 - 6,090
At December 31, 97 1,821 204 2,025 7 2,032 4,467 1,643 6,110 10 6,120
At December 31, 98 1,582 292 1,874 36 1,910 4,480 2,487 6,967 343 7,310
At December 31, 99 1,562 365 1,927 42 1,969 4,439 2,323 6,762 330 7,092
</TABLE>
/1/Comprises reserves attributable to ARCO's ownership interest in equity
affiliates.
<PAGE>
Supplemental Information (Unaudited)
Included in ARCO's reserves are 100% of the reserves of Vastar, a consoli-
dated subsidiary of which ARCO owned 81.9% at December 31, 1999. Vastar's re-
serves comprised 11% and 51% of U.S. petroleum liquids and natural gas re-
serves, respectively, at December 31, 1999.
During 1999, net reserve additions replaced 129% of worldwide oil-equivalent
production. During the three-year period 1997-1999, ARCO's net reserve additions
replaced 163% of worldwide oil-equivalent production.
Reserve additions in 1999 were spread fairly evenly among: extensions and
discoveries (primarily exploration successes in the Gulf of Mexico deepwater and
Alaska); purchases (primarily in the Malaysia-Thailand Joint Development Area
and a field under a risked service contract in Venezuela); and revisions.
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.
<PAGE>
Supplemental Information (Unaudited)
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved properties $17,112 $11,222 $28,334 $16,348 $11,345 $27,693 $15,845 $6,026 $21,871
Unproved properties 428 1,153 1,581 622 1,142 1,764 365 447 812
-------------------------------------------------------------------------------------------------------------
17,540 12,375 29,915 16,970 12,487 29,457 16,210 6,473 22,683
Accumulated
depreciation,
depletion and
amortization 10,782 5,163 15,945 10,569 4,789 15,358 10,559 2,959 13,518
-------------------------------------------------------------------------------------------------------------
Net capitalized costs 6,758 7,212 13,970 6,401 7,698 14,099 5,651 3,514 9,165
-------------------------------------------------------------------------------------------------------------
Net capitalized costs of
equity affiliates* - 385 385 - 338 338 - 55 55
-------------------------------------------------------------------------------------------------------------
Total $6,758 $7,597 $14,355 $6,401 $8,036 $14,437 $5,651 $3,569 $9,220
-------------------------------------------------------------------------------------------------------------
</TABLE>
*ARCO's share
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.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition
costs:
Proved properties $149 $28 $177 $235 $2,594 $2,829 $92 $224 $316
Unproved properties 14 5 19 72 512 584 100 8 108
Exploration costs 316 159 475 306 376 682 328 332 660
Development costs 875 832 1,707 1,102 1,200 2,302 692 794 1,486
-------------------------------------------------------------------------------------------------------------
Total expenditures 1,354 1,024 2,378 1,715 4,682 6,397 1,212 1,358 2,570
-------------------------------------------------------------------------------------------------------------
Costs incurred of
equity affiliates* - 88 88 - 499 499 - 109 109
-------------------------------------------------------------------------------------------------------------
Total $1,354 $1,112 $2,466 $1,715 $5,181 $6,896 $1,212 $1,467 $2,679
-------------------------------------------------------------------------------------------------------------
</TABLE>
*ARCO's share
<PAGE>
Supplemental Information (Unaudited)
Results of operations from oil and gas producing activities (including
operating overhead) for the three years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
Millions U.S. International Total U.S. International Total U.S. International Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales $1,711 $1,663 $3,374 $1,535 $1,305 $2,840 $1,974 $1,349 $3,323
Transfers 1,379 - 1,379 1,077 - 1,077 2,074 - 2,074
Other 40 131 171 44 75 119 42 45 87
-------------------------------------------------------------------------------------------------------------
3,130 1,794 4,924 2,656 1,380 4,036 4,090 1,394 5,484
Production costs 463 427 890 609 332 941 615 286 901
Production taxes 308 16 324 273 56 329 420 43 463
Exploration expenses 239 148 387 272 357 629 263 245 508
Depreciation, depletion
and amortization 763 676 1,439 651 517 1,168 681 429 1,110
Impairment 8 6 14 180 1,267 1,447 - - -
Other operating expenses 249 168 417 201 244 445 258 247 505
-------------------------------------------------------------------------------------------------------------
Results before
income taxes 1,100 353 1,453 470 (1,393) (923) 1,853 144 1,997
Income tax
expense (benefit) 290 91 381 58 (532) (474) 609 11 620
-------------------------------------------------------------------------------------------------------------
Results of operations
from oil and gas
producing activities 810 262 1,072 412 (861) (449) 1,244 133 1,377
-------------------------------------------------------------------------------------------------------------
Results from equity
affiliates* - 10 10 - (3) (3) - (6) (6)
-------------------------------------------------------------------------------------------------------------
Total $810 $272 $1,082 $412 $(864) $(452) $1,244 $127 $1,371
-------------------------------------------------------------------------------------------------------------
</TABLE>
*ARCO's share
The difference between the above results of operations and the amounts
reported for exploration and production segment net income in Note 2 of Notes to
Consolidated Financial Statements is primarily gains or losses on asset sales,
the exclusion of non-producing exploration and production units (Alaskan
pipelines, technical support), minority interest adjustments and, in 1998,
restructuring costs related to oil and gas operations.
The standardized measure of discounted estimated future net cash flows related
to proved oil and gas reserves at December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
Billions U.S. International Total U.S. International Total U.S. International Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows $53.6 $24.6 $78.2 $21.9 $16.2 $38.1 $36.7 $ 16.6 $53.3
Future development and
production costs 16.8 7.8 24.6 13.0 7.6 20.6 15.0 7.1 22.1
Future income tax
expense 12.9 5.8 18.7 2.3 2.9 5.2 7.3 3.5 10.8
-------------------------------------------------------------------------------------------------------------
Future net cash flows 23.9 11.0 34.9 6.6 5.7 12.3 14.4 6.0 20.4
10% annual discount 11.9 5.0 16.9 2.7 2.7 5.4 6.5 2.8 9.3
-------------------------------------------------------------------------------------------------------------
Standardized measure of
discounted future net
cash flows 12.0 6.0 18.0 3.9 3.0 6.9 7.9 3.2 11.1
-------------------------------------------------------------------------------------------------------------
Standardized measure of
discounted future net
cash flows of equity
affiliates* - 0.5 0.5 - 0.1 0.1 - 0.1 0.1
-------------------------------------------------------------------------------------------------------------
Total $12.0 $6.5 $18.5 $3.9 $3.1 $7.0 $7.9 $3.3 $11.2
-------------------------------------------------------------------------------------------------------------
</TABLE>
*ARCO's share
<PAGE>
Supplemental Information (Unaudited)
Primary changes in the standardized measure of discounted estimated future net
cash flows for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Billions 1999 1998 1997
----------------------------
<S> <C> <C> <C>
Sales and transfers of oil
and gas, net of
production costs $(3.7) $(2.7) $(4.0)
Extensions, discoveries
and improved recovery,
less related costs 1.6 0.5 0.9
Revisions of estimates of
reserves proved in prior
years: Quantity estimates 0.9 - 0.7
Net changes in price and
production costs 17.0 (11.3) (8.4)
Purchases/sales (0.1) 3.1 0.5
Other (0.5) (0.6) (0.7)
Accretion of discount 1.0 1.7 2.4
Development costs incurred
during the period 1.7 2.3 1.5
Net change in
income taxes (6.4) 2.8 2.3
------------------------------
Net change $11.5 $(4.2) $(4.8)
------------------------------
</TABLE>
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 pre-tax 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. Benchmark prices used in preparing the
Supplemental Oil and Gas Information were $25.60, $12.05, and $17.64 for the
years ended December 31, 1999, 1998 and 1997, respectively.
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.
<PAGE>
2(b) FINANCIAL INFORMATION FOR THE ATLANTIC RICHFIELD COMPANY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
(MILLIONS EXCEPT PER SHARE AMOUNTS)
REVENUES
Sales and other operating revenues $3,993 $2,415
Other revenues 201 136
--------- ---------
4,194 2,551
--------- ---------
EXPENSES
Trade purchases 1,685 800
Operating expenses 600 566
Selling, general and administrative expenses 136 152
Depreciation, depletion and amortization 484 483
Exploration expenses (including undeveloped leasehold amortization) 100 74
Taxes other than income taxes 177 120
Interest 110 95
--------- ---------
3,292 2,290
--------- ---------
Income before income taxes and minority interest 902 261
Provision for taxes on income 271 93
Minority interest in earnings of subsidiaries 14 3
--------- ---------
NET INCOME $617 $165
========= =========
EARNED PER SHARE BASIC $1.91 $0.51
========= =========
DILUTED $1.87 $0.51
========= =========
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $.7125 $.7125
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents $1,007 $879
Short-term investments 253 264
Accounts receivable 1,406 1,301
Inventories 385 430
Prepaid expenses and other current assets 199 184
----------- -------------
Total current assets 3,250 3,058
----------- -------------
Investments and long-term receivables:
Investments accounted for on the equity method 1,579 1,508
Other investments and long-term receivables 1,883 1,660
----------- -------------
3,462 3,168
----------- -------------
Net property, plant and equipment 18,173 18,466
Net assets of discontinued operations 68 67
Deferred charges and other assets 1,578 1,513
----------- -------------
Total assets $26,531 $26,272
=========== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
2000 1999
--------- -----------
(MILLIONS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $1,488 $1,672
Accounts payable 883 830
Taxes payable 578 420
Long-term debt due within one year 11 11
Other 903 1,090
-------- ----------
Total current liabilities 3,863 4,023
-------- ----------
Long-term debt 5,599 5,698
Deferred income taxes 3,643 3,644
Dismantlement, restoration and reclamation 1,174 1,154
Other deferred liabilities and credits 2,711 2,770
Minority interest 309 297
-------- ----------
Total liabilities 17,299 17,586
-------- ----------
Stockholders' equity
Preference stocks 1 1
Common stock 818 817
Capital in excess of par value of stock 918 889
Retained earnings 7,476 7,091
Treasury stock (272) (279)
Accumulated other comprehensive income 291 167
-------- ----------
Total stockholders' equity 9,232 8,686
-------- ----------
Total liabilities and stockholders' equity $26,531 $26,272
======== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- ---------
(MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $617 $165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 484 483
Dry hole expense and undeveloped leasehold amortization 53 21
Net gain on asset sales (71) (14)
Income from equity investments (26) (7)
Dividends from equity investments 24 20
Minority interest in earnings of subsidiaries 14 3
Cash payments greater than noncash provisions (86) (125)
Deferred income taxes (47) (5)
Changes in working capital accounts (72) (296)
Other (34) (43)
-------- --------
Net cash provided by operating activities 856 202
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (including dry hole costs) (619) (760)
Net cash provided by short-term investments 7 5
Proceeds from asset sales 446 577
Investments and long-term receivables (75) (2)
Other (38) 27
-------- --------
Net cash used by investing activities (279) (153)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (35) (549)
Proceeds from issuance of long-term debt -- 634
Net cash provided (used) by notes payable (186) 202
Dividends paid (232) (229)
Other 16 13
-------- ---------
Net cash provided (used) by financing activities (437) 71
-------- ---------
Cash flows from discontinued operations (8) 21
Effect of exchange rate changes on cash (4) (8)
-------- ---------
Net increase in cash and cash equivalents 128 133
Cash and cash equivalents at beginning of period 879 657
-------- ---------
Cash and cash equivalents at end of period $1,007 $790
======== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
NOTE A. ACCOUNTING POLICIES.
Basis of Presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Certain previously reported amounts
have been restated to conform to classifications adopted in 2000. Unless
otherwise stated, the Notes to Consolidated Financial Statements exclude
discontinued operations. In the opinion of the Company, the consolidated
financial statements reflect all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the annual report on Form 10-K for the year ended
December 31, 1999.
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, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
(MILLIONS) 2000 1999
----- -----
<S> <C> <C>
Net income $617 $165
Other comprehensive income:
Net unrealized gain on investments (a) 129 111
Foreign currency translation adjustment (5) 193
----- -----
Comprehensive income $741 $469
===== =====
</TABLE>
--------------
(a) Primarily consists of changes in the fair value of ARCO's investment in
LUKOIL, which had a fair value of approximately $928 million at March 31, 2000,
compared to a fair value of approximately $714 million at December 31, 1999. The
unrealized pretax gain in the LUKOIL investment at March 31, 2000, was $586
million.
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
(MILLIONS) 2000 1999
-------- -----------
<S> <C> <C>
Net unrealized gain on investments $357 $228
Foreign currency translation adjustment (35) (30)
Minimum pension liability (31) (31)
-------- -----------
Accumulated other comprehensive income $291 $167
======== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED--(CONTINUED)
NOTE C. INTERIM SEGMENT INFORMATION.
<TABLE>
<CAPTION>
(MILLIONS) EXPLORATION REFINING
& & ALL
MARCH 31, 2000 PRODUCTION MARKETING OTHER UNALLOCATED TOTAL
-------------- ----------- --------- ----- ----------- ------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues $2,391 $2,249 $8 $2 $4,650
Intersegment revenues (655) -- (1) (1) (657)
----------- --------- ----- ----------- ------
Total $1,736 $2,249 $7 $1 $3,993
========== ========= ===== =========== ======
Net income $601 $70 $14 $(68) $617
========== ========= ===== =========== ======
Segment assets $18,941 $4,680 $935 $1,975 $26,531
========== ========= ===== =========== ======
DECEMBER 31, 1999
-----------------
Segment assets $18,752 $4,695 $916 $1,909 $26,272
========== ========= ===== =========== ======
MARCH 31, 1999
--------------
Sales and other
operating revenues $1,304 $1,306 $17 $1 $2,628
Intersegment revenues (211) -- (1) (1) (213)
----------- --------- ----- ----------- ------
Total $1,093 $1,306 $16 $-- $2,415
========== ========= ===== =========== ======
Net income $89 $129 $24 $(77) 165
========== ========= ===== =========== ======
</TABLE>
For first quarter ended March 31, 2000 discontinued operations consisted of
one remaining unsold coal mine in Australia. For the first quarter ended March
31, 1999 discontinued operations consisted of the Company's Australian coal
operations and the operations of Union Texas Petrochemicals. At December 31,
1999 and March 31, 2000, the net assets of discontinued operations are included
with unallocated items in the segment presentation above.
The amortization associated with a gain deferred in conjunction with the sale
of the chemicals operations had a favorable impact of approximately $12 million
and $10 million after tax on Refining and Marketing earnings in the first
quarter 2000 and 1999, respectively.
NOTE D. INVESTMENTS.
At March 31, 2000 and 1999, investments in debt securities were primarily
composed of U.S. Treasury securities and corporate debt instruments. Maturities
generally ranged from three days to 10 years. These investments were 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 March 31, 2000 and 1999, all
investments were classified as available-for-sale and were reported at fair
value, with unrealized holding gains and losses, net of tax, reported in
accumulated other comprehensive income.
The following summarizes investments in securities at March 31:
<TABLE>
<CAPTION>
(MILLIONS) 2000 1999
------- ------
<S> <C> <C>
Aggregate fair value $1,808 $869
Gross unrealized holding losses 11 14
Gross unrealized holding gains (592) (73)
------- ------
Amortized cost $1,227 $810
======= ======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED--(CONTINUED)
NOTE D. INVESTMENTS (CONTINUED)
Investment activity for the three months ended March 31 was as follows:
<TABLE>
<CAPTION>
(MILLIONS) 2000 1999
------ ------
<S> <C> <C>
Gross purchases $4,736 $2,285
Gross sales 13 445
Gross maturities 4,628 2,078
</TABLE>
Gross realized gains and losses were insignificant and were determined by the
specific identification method.
NOTE E. INVENTORIES.
Inventories at March 31, 2000 and December 31, 1999 comprised the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(MILLIONS) 2000 1999
---------- ------------
<S> <C> <C>
Crude oil and petroleum products $159 $199
Other products 25 26
Materials and supplies 201 205
---------- -----------
Total $385 $430
========== ===========
</TABLE>
NOTE F. CAPITAL STOCK.
Detail of the Company's capital stock was as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
(THOUSANDS)
$3.00 Cumulative convertible reference stock, par $1 $39 $41
$2.80 Cumulative convertible preference stock, par $1 470 493
Common stock, par $2.50 818,070 816,673
--------- ------------
Total $818,579 $817,207
========= ============
</TABLE>
NOTE G. CAPITALIZATION OF INTEREST.
Interest expense excludes capitalized interest of $36 million and $39 million
for the three-month periods ended March 31, 2000 and 1999, respectively.
NOTE H. RESTRUCTURING PROGRAMS.
Through December 31, 1999, the company had established reserves totalling $251
million for the costs of terminating 1,250 employees. $103 million related to
short-term benefits such as severance payments and ancillary benefits such as
relocation and outplacement; $148 million related to pension and other
postretirement benefits.
Through March 31, 2000, approximately 1,200 employees have been terminated and
approximately $88 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.
UNION TEXAS PETROLEUM HOLDINGS, INC. (UTP) RESTRUCTURE.
Through December 31, 1999, the company established a $90 million provision for
the termination of 357 employees resulting from the integration of UTP into
ARCO's operations. As of March 31, 2000, ARCO had terminated 355 of the
employees and had paid out a total of $83 million in severance benefits.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED--(CONTINUED)
NOTE I. INCOME TAXES.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
Provision for taxes on income: MARCH 31,
------------------
2000 1999
------- ------
(MILLIONS)
<S> <C> <C>
Federal:
Current $144 $41
Deferred 14 11
------- ------
158 52
------- ------
Foreign:
Current 135 45
Deferred (61) (17)
------- ------
74 28
------- ------
State:
Current 39 12
Deferred -- 1
------- ------
39 13
------- ------
Total $271 $93
======= ======
</TABLE>
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2000 1999
----------------- -----------------
PERCENT PERCENT
OF OF
PRETAX PRETAX
(MILLIONS) AMOUNT INCOME AMOUNT INCOME
------- ------- ------- --------
<S> <C> <C> <C> <C>
Income before income taxes and
minority interest $902 100.0 $261 100.0
======= ======= ======= ========
Tax at federal statutory rate $316 35.0 $91 35.0
Increase (reduction) in taxes
resulting from:
Taxes on foreign income (less) greater
than statutory rate (40) (4.4) 21 8.0
State income taxes (net of federal
effect) 25 2.8 8 3.1
Tax credits (29) (3.2) (24) (9.2)
Other (1) (0.2) (3) (1.3)
------- ------- ------- --------
Provision for taxes on income $271 30.0 $93 35.6
======= ======= ======= ========
</TABLE>
NOTE J. DISCONTINUED OPERATIONS.
In 1999, ARCO disposed of its interests in two Australian coal mines and its
stake in the Clermont coal deposit in Australia. At March 31, 2000, the carrying
value of the remaining Australian assets, consisting of one coal mine, was $68
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).
As part of the acquisition of UTP, ARCO determined it would sell UTP's
petrochemical business. In March 1999, Arco sold Union Texas Petrochemicals to
Williams Energy Services.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED--(CONTINUED)
NOTE J. DISCONTINUED OPERATIONS (CONTINUED).
Revenues and income from discontinued operations for the three months ended
March 31, 2000 and 1999 were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Revenues:
Coal operations $26 $26
UTP petrochemical -- 24
---- ----
Total $26 $50
==== ====
Net income:
Coal operations $-- $--
UTP petrochemical -- --
---- ----
Total $-- $--
==== ====
</TABLE>
NOTE K. EARNED PER SHARE.
The information necessary for the calculation of earned per share is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
---------------------------
INCOME SHARES PER SHARE
-------- -------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income $ 617.0
Less: Preference stock dividends (.4)
-------
Net income available to common stockholders--basic
EPS 616.6 323.4 $ 1.91
=======
Effect of dilutive securities:
Contingently issuable shares (primarily options) 2.9
Convertible preference stock .4 2.8
------- -------
Net income available to common stockholders and
assumed conversions--diluted EPS $ 617.0 329.1 $ 1.87
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------------
INCOME SHARES PER SHARE
------- ------- ---------
<S> <C> <C> <C>
Net income $ 165.4
Less: Preference stock dividends (.5)
-------
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
======= ======= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED--(CONTINUED)
NOTE L. SUPPLEMENTAL INCOME STATEMENT INFORMATION.
Taxes other than income taxes comprised the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Production/severance $96 $40
Property 36 35
Other 45 45
---- ----
Total $177 $120
==== ====
</TABLE>
NOTE M. SUPPLEMENTAL CASH FLOW INFORMATION.
Following is supplemental cash flow information for the three months ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Gross sales and maturities of
short-term investments $13 $15
Gross purchases of short-term
investments (6) (10)
---- ----
Net cash provided by short-term
investments $7 $5
==== ====
Gross proceeds from issuance
of notes payable $3,697 $3,737
Gross repayments of notes payable (3,883) (3,535)
---- ----
Net cash provided (used) by notes
payable $(186) $202
==== ====
Gross noncash provisions charged to
income $38 $37
Cash payments of previously accrued
items (124) (162)
---- ----
Cash payments greater than noncash
provisions $(86) $(125)
==== ====
Interest paid $84 $101
==== ====
Income taxes paid $90 $98
==== ====
</TABLE>
Changes in working capital accounts for the three-month periods ended March
31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Increase (decrease) to cash
Accounts receivable $(126) $(16)
Inventories 35 (16)
Accounts payable 56 (146)
Other working capital (37) (118)
---- ----
Total $(72) $(296)
==== ====
</TABLE>
<PAGE>
NOTE N. OTHER COMMITMENTS AND CONTINGENCIES
ARCO has commitments, including those related to the acquisition, construction
and development of facilities, all made in the normal course of business.
ARCO has also 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).
Lawsuits, including purported class actions and actions by governmental
entities, are pending or threatened against ARCO and others 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 1998, ARCO entered two consent decrees, settling
all of the natural resources damage claims of the United States and the tribes
and the bulk of such claims of the State of Montana. Remaining for disposition
are the State's claims for $206 million of restoration damages at three sites.
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:
o Remove or mitigate the effects on the environment at various sites from the
disposal or release of certain substances;
o Perform restoration work at such sites; and
o Pay damages for loss of use and non-use values.
The federal agencies involved with the sites included the Department of the
Interior, Department of Justice and Environmental Protection Agency.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federal- and state-managed sites as well as other clean-up sites including
service stations, refineries, terminals, third-party landfills, former nuclear
processing facilities, sites associated with discontinued operations and sites
previously owned by ARCO or predecessors. This comprises 130 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:
o Nature and extent of contamination;
o Timing, extent and method of remedial action;
o ARCO's proportional share of costs; and
o Financial condition of other responsible parties.
The environmental remediation accrual is updated annually, at a minimum, and
at March 31, 2000, was $686 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 $550 million.
Approximately 60% 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. One
site represented 11% of the total accrual. No other site represented more than
7% of the total accrual. The remainder related to other sites with reserves
ranging from $1 million to $10 million per site. Substantially all amounts
accrued are expected to be paid out over the next 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED--(CONTINUED)
NOTE N. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
Although any ultimate liability arising from any of the matters described
herein could result in significant expenses or judgments that, if aggregated and
assumed to occur within a single fiscal 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 O. SUBSEQUENT EVENTS
MERGER OF ARCO INTO BP AMOCO P.L.C. AND CHANGE OF CONTROL OF ARCO
On April 18, 2000, the combination of BP Amoco p.l.c. (BP Amoco) and ARCO was
completed by the merger of Prairie Holdings, Inc. (a subsidiary of BP Amoco)
with and into ARCO, pursuant to the terms of the merger agreement dated March
31, 1999, as amended through March 8, 2000 (Merger Agreement). Pursuant to the
Merger Agreement, each share of outstanding common stock of ARCO (save for any
such shares owned by BP Amoco, ARCO or any subsidiary of BP Amoco or ARCO) was
converted into the right to receive 1.64 BP Amoco American Depositary Receipts
(ADRs) or, subject to the timely receipt of elections therefor, 9.84 BP Amoco
Ordinary Shares. In addition, the outstanding ARCO common stock was delisted
from the New York Stock Exchange and other exchanges on which it had been
listed.
ARCO's outstanding shares of $2.80 and $3.00 Preference Stock remain listed on
the New York Stock Exchange. Pursuant to the Merger Agreement, each share of
$2.80 Preference Stock was converted into the right to receive 7.872 ADRs and
each share of $3.00 Preference Stock was converted into the right to receive
22.304 ADRs. ARCO remains a reporting company within the meaning of the
Securities and Exchange Act of 1934.
In connection with the merger, on April 18, 2000, ARCO issued 324,711,290
shares of common stock to BP Amoco. Later on April 18, 2000, BP Amoco
transferred all such shares to BP America, Inc., a wholly owned subsidiary of BP
Amoco, so that BP Amoco owns indirectly all of the currently outstanding common
stock of ARCO. As the holder of all the outstanding common stock of ARCO, none
of which is publicly traded, BP Amoco is the controlling shareholder of ARCO.
Included in the merger agreement was a provision requiring BP Amoco to keep in
place for two years following the merger ARCO's change of control severance
programs. The benefits associated with those programs will result in ARCO
recording later in the year a potentially significant charge for ARCO employees
who are terminated in the next two years as a result of the merger. In addition,
there will be charges for other merger related costs.
SALE OF ALASKAN BUSINESSES
On March 15, 2000 ARCO entered into an agreement to sell its Alaskan
businesses to Phillips Petroleum Company (Phillips) for approximately $6.5
billion cash subject to purchase price adjustments (plus up to an additional
$500 million based on the prices realized on production subsequent to December
31, 1999). Under the purchase and sale agreement, which was amended on April 6,
2000, ARCO agreed to sell all of the outstanding shares of ARCO Alaska, Inc.,
together with certain other subsidiaries of ARCO engaged principally in the
operation of ARCO's Alaskan businesses, along with certain pipeline and marine
assets associated with the transport of Alaskan crude oil. The major portion of
the sale closed on April 26, 2000. The remainder of the assets are expected to
be transferred upon receipt of governmental approvals.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER OF ARCO INTO BP AMOCO P.L.C. AND CHANGE OF CONTROL OF ARCO
On April 18, 2000, the combination of BP Amoco and ARCO was completed. ARCO
became a wholly owned subsidiary of BP Amoco. As indirect owner of all of the
outstanding shares of common stock of ARCO, BP Amoco is the controlling
shareholder of ARCO. (See Note O. to the financial statements and Item 5
beginning on page 18 of this Report on Form 10-Q).
FIRST QUARTER 2000 VS. FIRST QUARTER 1999
CONSOLIDATED EARNINGS
The $452 million increase in net income in the first quarter of 2000 reflected
higher crude oil prices, and to a lesser extent, higher U.S. natural gas prices.
These factors were partially offset by lower crude oil and natural gas
production volumes, as well as higher operating and exploration expense and
lower earnings from the refinery and marketing segment.
A net special items benefit in the first quarter 2000 totalled $34 million and
consisted of net gains on asset sales, partially offset by a provision
associated with a patent lawsuit, BP Amoco merger costs and charges for future
environmental remediation.
For the first quarter of 1999, net special items charges totaled $7 million
and consisted primarily of charges for future environmental remediation.
AFTER-TAX SEGMENT EARNINGS
<TABLE>
<CAPTION>
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
Exploration and production $601 $89
Refining and marketing 70 129
Other operations 14 24
Interest expense (79) (70)
Other unallocated expenses 11 (7)
---- ----
Net income $617 $165
==== ====
</TABLE>
EXPLORATION AND PRODUCTION
ARCO's earnings from worldwide oil and gas exploration and production
operations in the first quarter 2000 were significantly impacted by higher crude
oil prices and, to a lesser extent, higher U.S. natural gas prices and lower
operating expenses. These factors were partially offset by lower crude oil and
natural gas production volumes and increased exploration expense. Operating
expenses were $17 million lower in the first quarter of 2000, compared to the
same period in 1999. The earnings in the first quarter of 2000 included a
special item benefit of $58 million after tax from assets sales. There were no
special items in the first quarter of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
AVERAGE OIL & GAS PRICES
<TABLE>
<CAPTION>
2000 1999
---- ----
(MILLIONS)
<S> <C> <C>
U.S.
Petroleum liquids--per barrel (bbl)
Alaska $20.32 $6.07
Lower 48, including Vastar $23.34 $9.75
Composite average price $21.28 $7.17
Natural gas--per thousand
cubic feet(mcf) $2.18 $1.60
International
Petroleum liquids composite
average--per bbl $22.08 $9.16
Venezuela crude oil--per bbl $12.00 $3.17
Natural gas (excluding LNG)--per mcf $2.36 $2.47
Indonesia LNG $4.78 $2.31
</TABLE>
PETROLEUM LIQUIDS AND NATURAL GAS PRODUCTION
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Production
U.S.
Petroleum liquids--bbl/day
Alaska 307,300 345,100
Vastar 66,800 55,900
Other Lower 48 75,700 92,200
Total 449,800 493,200
Natural gas--mcf/day 1,258,300 1,359,800
Barrels of oil equivalent (BOE)/day* 659,500 719,800
International
Petroleum liquids--bbl/day 138,700 179,100
Natural gas--mcf/day 1,261,400 1,228,600
BOE/day 349,000 383,900
Total net production BOE/day 1,008,500 1,103,700
</TABLE>
--------------
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
In 2000, the reduction in U.S. petroleum liquids production primarily resulted
from natural field declines in Alaska and the effect of higher crude oil prices
on the ARCO Long Beach , Inc. production contract. The decreased international
petroleum liquids volumes primarily reflected lower Indonesian, Tunisian and
United Kingdom North Sea production volumes. The Indonesian decrease resulted
from the impact of higher crude oil prices on production sharing contracts. The
decreased Tunisian production reflected the sale of the Ashtart field, which was
effective January 1, 2000. The decrease in United Kingdom North Sea production
resulted from natural field decline.
The increase in international natural gas volumes in 2000 primarily reflected
higher production in Indonesia and the Yacheng 13 field in China offset by a net
decrease in United Kingdom North Sea production of approximately 30 million
cubic feet per day due to natural field decline. The first quarter 2000 decrease
in U.S. natural gas volumes reflected lower production from Vastar Resources,
Inc. (Vastar), which is 81.9 % owned by ARCO. The lower Vastar production
resulted from natural field declines and asset sales during the last nine months
of 1999.
ARCO's exploration and production earnings and petroleum liquids production
will decline significantly with the sale of Alaskan businesses to Phillips (see
Sale of Alaskan businesses).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
REFINING AND MARKETING
In the first quarter of 2000, refining and marketing earnings decreased
primarily as a result of the establishment of a reserve for a patent lawsuit and
higher refinery turnaround costs. In addition, higher crude oil costs were
mostly, but not completely, offset by increased retail marketing prices and
volumes.
The amortization 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 $12 million and $10 million after tax on refining and marketing
earnings in the first quarter of 2000 and 1999, respectively. See the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 for a further
discussion of the deferred gain.
WEST COAST PETROLEUM PRODUCTS SALES
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
VOLUMES (BARRELS/DAY)
Gasoline 341,100 310,000
Jet 103,900 98,500
Distillate 86,900 87,900
Other 51,700 59,100
------- -------
Total 583,600 555,500
======= =======
</TABLE>
OTHER OPERATIONS
The 2000 and 1999 results from ARCO's other operations included the earnings
from Lower 48 pipeline operations and an aluminum rolling facility. The lower
pipeline earnings reflected a decrease in volumes for the Seaway pipeline and
losses incurred on the Olympic Pipeline.
DISCONTINUED OPERATIONS
In June of 1998, ARCO disposed of its U.S. coal operations. As of March 1999,
ARCO sold its interests in three Australian coal mines. ARCO sold its 80%
interest in the Gordonstone coal mine, its 31.4% interest in the Blair Athol
Joint Venture and its stake in the Clermont coal deposit. At March 31, 2000, the
Company's discontinued operations consisted of one remaining coal mine in
Australia.
In March 1999, ARCO sold its wholly owned subsidiary, Union Texas
Petrochemicals obtained during the 1998 acquisition of Union Texas Petroleum
Holdings, Inc.
ARCO had no earnings from discontinued operations in the first quarter of
2000, because income or loss from the remaining Australian coal operation is
being deferred as part of net assets from discontinued operations on the balance
sheet at March 31, 2000.
CONSOLIDATED REVENUES
<TABLE>
<CAPTION>
2000 1999
(MILLIONS) ---- ----
<S> <C> <C>
SALES AND OTHER OPERATING REVENUES
Exploration and production $2,391 $1,304
Refining and marketing 2,249 1,306
Other 10 18
Intersegment eliminations (657) (213)
----- -----
Total $3,993 $2,415
===== =====
</TABLE>
The increase in exploration and production sales and other operating revenues
resulted primarily from higher crude oil prices and, to a much lesser extent,
higher domestic natural gas prices. Refining and marketing sales and other
operating revenues increased primarily because of higher refined products
prices, and to a lesser extent, higher gasoline volumes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
CONSOLIDATED EXPENSES
Trade purchases were higher in the first quarter of 2000 primarily as a result
of higher crude oil prices and, to a lesser extent, higher purchased volumes of
finished refined products.
The increase in operating expenses in the first quarter of 2000 reflected
refining and marketing expenses associated with the establishment of a reserve
for a patent lawsuit and higher refinery turnaround costs. These factors were
partially offset by a decline in exploration and production and Lower 48
pipeline operating expenses related to the Company's cost reduction programs.
The lower selling, general and administrative expenses in 2000 were primarily
in the corporate (unallocated) and refining and marketing segments and resulted
from the Company's cost reduction programs.
The increase in exploration expense in the first quarter 2000 resulted from
higher dry hole expense due to the write-off of two offshore wells (one
deepwater well and one shelf well).
The increase in taxes other than income taxes in 2000 primarily resulted from
the impact of higher crude oil prices on U.S. production taxes, partially offset
by lower production volumes.
INCOME TAXES
The Company's effective tax rate was 30.0% in the first quarter 2000, compared
to 35.6% in the 1999 first quarter. The effective tax rate in the first quarter
of 2000 was lower than the federal statutory rate, primarily as a result of a
lower effective tax rate associated with the sale of certain foreign properties.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
--------
(MILLIONS) 2000
--------
<S> <C>
Cash flow provided (used) by:
Operations $856
Investing activities $(279)
Financing activities $(437)
</TABLE>
The net cash used by investing activities in the first quarter 2000 included
expenditures for additions to fixed assets of $619 million and proceeds from
asset sales of $446 million (approximately $360 million associated with asset
sales of foreign properties). The Company expects total capital expenditures for
additions to fixed assets to approximate $2.1 billion for the full year 2000.
The budget was revised downward to give effect to the sale of the Alaskan assets
in April 2000.
The net cash used by financing activities in the first quarter of 2000
included repayments of short-term debt of $186 million and dividend payments of
$232 million.
Cash and cash equivalents and short-term investments totaled $1.3 billion, and
short-term borrowings were $1.5 billion at the end of the first quarter of 2000.
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 $613 million at March 31, 2000.
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, cash infusions from ARCO's parent company BP Amoco and
the sale of assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
SALE OF ALASKAN BUSINESSES
On March 15, 2000 ARCO entered into an agreement to sell its Alaskan
businesses to Phillips Petroleum Company (Phillips) for approximately $6.5
billion cash subject to purchase price adjustments (plus up to an additional
$500 million based on the realized prices of production subsequent to December
31, 1999). Proceeds from the sale were advanced to BP Amoco. Under the purchase
and sale agreement, which was amended on April 6, 2000, ARCO agreed to sell all
of the outstanding share of ARCO Alaska, Inc., together with certain other
subsidiaries of ARCO engaged principally in the operation of ARCO's Alaskan
businesses, along with certain pipeline and marine assets associated with the
transport of Alaskan crude oil. The major portion of the sale closed on April
26, 2000. The remainder of the assets are expected to be transferred upon
receipt of governmental approvals.
Included in the merger agreement was a provision requiring BP Amoco to keep in
place for two years following the merger ARCO's change of control severance
programs. The benefits associated with those programs will result in ARCO
recording later in the year a potentially significant charge for ARCO employees
who are terminated in the next two years as a result of the merger. In addition,
there will be charges for other merger related costs.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to adopt
its provisions for all fiscal quarters of all fiscal years beginning after June
15, 2000 (as deferred by SFAS No. 137). Earlier application of all of the
provisions of SFAS No. 133 is permitted, but the provisions cannot be applied
retroactively to financial statements of prior periods. SFAS No. 133
standardizes the accounting for derivative instruments by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The Company has not yet
completed evaluating the impact of the provisions of SFAS No. 133.
--------------
Management cautions against projecting any future results based on present
earnings levels because of economic uncertainties, the extent and form of
existing or future governmental regulations and other possible actions by
governments.
<PAGE>
SIGNATURES
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.
BP AMOCO P.L.C.
(REGISTRANT)
DATED: JULY 3, 2000 /s/ PAULA J CLAYTON
-------------------
P.J. CLAYTON
DEPUTY COMPANY SECRETARY
