SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________
For the quarterly period ended September 30, 1996
Commission file number 1-1196
________________
ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)
_________________
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 South Flower Street
Los Angeles, California 90071
(Address of principal executive offices) (Zip code)
__________________
(213) 486-3511
(Registrant's telephone number, including area code)
__________________
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $2.50 par value, outstanding as of
September 30, 1996: 160,819,021.
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions except per share amounts) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Sales and other operating revenues,
including excise taxes . . . . . . $5,149 $4,277 $14,643 $12,944
Income from equity investments . . . 31 68 59 223
Interest . . . . . . . . . . . . . . 46 48 147 162
Other revenues . . . . . . . . . . . 53 121 264 327
----- ----- ------ ------
5,279 4,514 15,113 13,656
----- ----- ------ ------
Expenses
Trade purchases. . . . . . . . . . . 2,009 1,494 5,549 4,616
Operating expenses . . . . . . . . . 798 775 2,292 2,230
Selling, general and administrative
expenses . . . . . . . . . . . . . 433 456 1,327 1,308
Depreciation, depletion and
amortization . . . . . . . . . . . 399 386 1,202 1,205
Exploration expenses (including
undeveloped leasehold amortization) 101 138 308 333
Excise taxes . . . . . . . . . . . . 401 405 1,180 1,132
Taxes other than excise and income
taxes. . . . . . . . . . . . . . . 187 168 598 557
Interest . . . . . . . . . . . . . . 160 181 500 581
Unusual items. . . . . . . . . . . . - - 26 -
----- ----- ------ ------
4,488 4,003 12,982 11,962
----- ----- ------ ------
Income before income taxes and
minority interest. . . . . . . . . 791 511 2,131 1,694
Provision for taxes on income. . . . 287 172 768 584
Minority interest in earnings of
subsidiaries . . . . . . . . . . . 25 24 80 82
----- ----- ------ ------
Net Income . . . . . . . . . . . . . . $ 479 $ 315 $ 1,283 $ 1,028
===== ===== ====== ======
Earned per Share . . . . . . . . . . . $ 2.94 $ 1.93 $ 7.86 $ 6.29
===== ===== ====== ======
Cash Dividends Paid per Share of
Common Stock . . . . . . . . . . . . $1.375 $1.475* $ 4.125 $ 4.225*
===== ===== ====== ======
- -----------------
* Dividends include a $.10 per share redemption payment for Common Stock
purchase rights.
</TABLE>
The accompanying notes are an integral part of these statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1996 1995
---- ----
(Millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 1,375 $ 1,537
Short-term investments. . . . . . . . . . . . . . 1,419 1,569
Accounts receivable . . . . . . . . . . . . . . . 1,711 1,684
Inventories . . . . . . . . . . . . . . . . . . . 865 877
Prepaid expenses and other current assets . . . . 319 221
------ ------
Total current assets. . . . . . . . . . . . . . . 5,689 5,888
------ ------
Investments and long-term receivables:
Investments accounted for on the equity method. . 753 711
Other investments and long-term receivables . . . 888 550
------ ------
1,641 1,261
------ ------
Fixed assets:
Property, plant and equipment . . . . . . . . . . 33,669 32,544
Less accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . . 18,082 17,189
------ ------
15,587 15,355
------ ------
Deferred charges and other assets . . . . . . . . . 1,600 1,495
------ ------
Total assets. . . . . . . . . . . . . . . . . . . . $24,517 $23,999
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1996 1995
---- ----
(Millions)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . $ 878 $ 1,174
Accounts payable. . . . . . . . . . . . . . . . 1,147 1,145
Long-term debt due within one year. . . . . . . 1,089 184
Taxes payable, including excise taxes . . . . . 458 303
Accrued interest. . . . . . . . . . . . . . . . 111 153
Other . . . . . . . . . . . . . . . . . . . . . 886 1,004
------ ------
Total current liabilities . . . . . . . . . . . 4,569 3,963
------ ------
Long-term debt. . . . . . . . . . . . . . . . . . 5,663 6,708
Deferred income taxes . . . . . . . . . . . . . . 2,715 2,637
Other deferred liabilities and credits. . . . . . 3,552 3,456
Minority interest . . . . . . . . . . . . . . . . 574 477
Stockholders' equity:
Preference stocks . . . . . . . . . . . . . . . 1 1
Common stock. . . . . . . . . . . . . . . . . . 402 402
Capital in excess of par value of stock . . . . 605 632
Retained earnings . . . . . . . . . . . . . . . 6,433 5,816
Pension liability adjustment. . . . . . . . . . (60) (60)
Foreign currency translation. . . . . . . . . . (39) (17)
Net unrealized gain (loss) on investments . . . 109 (11)
Treasury stock, at cost . . . . . . . . . . . . (7) (5)
------ ------
Total stockholders' equity. . . . . . . . . . . 7,444 6,758
------ ------
Total liabilities and stockholders' equity. . . . $24,517 $23,999
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
(Millions)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $1,283 $1,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . 1,202 1,205
Dry hole expense and undeveloped leasehold amortization 157 185
Minority interest in earnings of subsidiaries. . . . . 80 82
Net gain on asset sales. . . . . . . . . . . . . . . . (42) (12)
Income from equity investments . . . . . . . . . . . . (59) (223)
Dividends from equity investments. . . . . . . . . . . 56 67
Cash payments greater than noncash provisions. . . . . (182) (171)
Deferred income taxes. . . . . . . . . . . . . . . . . 37 51
Changes in accounts receivable, inventories
and accounts payable. . . . . . . . . . . . . . . . . 85 (76)
Changes in other working capital accounts. . . . . . . (67) (164)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (16) (70)
----- -----
Net cash provided by operating activities. . . . . . 2,534 1,902
----- -----
Cash flows from investing activities:
Additions to fixed assets (including dry hole costs) . (1,617) (1,233)
Net cash provided by short-term investments. . . . . . 135 1,113
Investment in LUKoil convertible bonds . . . . . . . . (89) (250)
Proceeds from asset sales. . . . . . . . . . . . . . . 49 61
Other. . . . . . . . . . . . . . . . . . . . . . . . . (14) (100)
----- -----
Net cash used by investing activities. . . . . . . . (1,536) (409)
----- -----
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . (236) (1,085)
Proceeds from issuance of long-term debt . . . . . . . 111 150
Net cash used by notes payable . . . . . . . . . . . . (302) (372)
Dividends paid . . . . . . . . . . . . . . . . . . . . (666) (681)
Treasury stock purchases . . . . . . . . . . . . . . . (57) (36)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (10) (17)
----- -----
Net cash used by financing activities. . . . . . . . (1,160) (2,041)
----- -----
Effect of exchange rate changes on cash. . . . . . . . . - 2
----- -----
Net decrease in cash and cash equivalents. . . . . . . . (162) (546)
Cash and cash equivalents at beginning of period . . . . 1,537 1,394
----- -----
Cash and cash equivalents at end of period . . . . . . . $1,375 $ 848
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Basis of Presentation.
The foregoing financial information is unaudited and has been prepared
from the books and records of Atlantic Richfield Company ("ARCO" or the
"Company"). Certain previously reported amounts have been restated to
conform to classifications adopted in 1996. In the opinion of the Company,
the financial information reflects all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations in conformity with generally accepted
accounting principles.
NOTE B. Investments.
At September 30, 1996 and 1995, investments were primarily composed of
U.S. Treasury securities, corporate debt instruments, and municipal
securities and were principally included in short-term investments.
Maturities generally ranged from one day to 23 months. At September 30,
1996, all investments were classified as available-for-sale ("AFS"); there
were no investments considered held-to-maturity ("HTM"). AFS investments
were reported at fair value, with unrealized holding gains and losses, net
of tax, reported as a separate component of stockholders' equity.
The following summarizes investments in securities, principally debt
securities, as of September 30:
<TABLE>
<CAPTION>
1996 1995
--------- ----------------
Millions AFS AFS HTM
--- --- ---
<S> <C> <C> <C>
Aggregate fair value . . . . . . . . $2,173 $1,953 $ 215
Gross unrealized holding losses. . . 14 22 -
Gross unrealized holding gains . . . (195) (15) -
----- ----- -----
Amortized cost . . . . . . . . . . . $1,992 $1,960 $ 215
</TABLE>
Investment activity for the nine-month periods ended September 30 was as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- -----------------
Millions AFS AFS HTM
--- --- ---
<S> <C> <C> <C>
Gross purchases . . . . . . . . . . . $3,635 $2,605 $1,293
Gross sales . . . . . . . . . . . . . 1,405 1,901 -
Gross maturities. . . . . . . . . . . 2,680 751 2,320
</TABLE>
For the three-and nine-month periods ended September 30, 1996 and 1995,
gross realized gains and losses were insignificant and were determined by
the specific identification method.
- 5 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Inventories.
Inventories at September 30, 1996 and December 31, 1995 comprised the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Millions)
<S> <C> <C>
Crude oil and petroleum products. . . . . . . . $ 177 $ 184
Chemical products . . . . . . . . . . . . . . . 400 423
Other products. . . . . . . . . . . . . . . . . 40 32
Materials and supplies. . . . . . . . . . . . . 248 238
------- -------
Total . . . . . . . . . . . . . . . . . . . . $ 865 $ 877
======= =======
</TABLE>
NOTE D. Capital Stock.
Detail of the Company's capital stock was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Thousands)
<S> <C> <C>
$3.00 Cumulative convertible preference stock,
par $1 . . . . . . . . . . . . . . . . . . . $ 62 $ 66
$2.80 Cumulative convertible preference stock,
par $1 . . . . . . . . . . . . . . . . . . . 684 731
Common stock, par $2.50. . . . . . . . . . . . 402,199 402,199
------- -------
Total. . . . . . . . . . . . . . . . . . . . $402,945 $402,996
======= =======
</TABLE>
NOTE E. Capitalization of Interest.
Interest expense excluded capitalized interest of $9 million and $14
million, respectively, for the three-month periods ended September 30, 1996
and 1995, and $21 million and $39 million, respectively, for the nine-month
periods ended September 30, 1996 and 1995.
- 6 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE F. Income Taxes.
Provision for taxes on income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
Federal:
Current . . . . . . . . . . . . . . $189 $114 $526 $387
Deferred. . . . . . . . . . . . . . 19 14 29 37
--- --- --- ---
208 128 555 424
--- --- --- ---
Foreign:
Current . . . . . . . . . . . . . . 41 27 106 83
Deferred. . . . . . . . . . . . . . 1 (3) 8 6
--- --- --- ---
42 24 114 89
--- --- --- ---
State:
Current . . . . . . . . . . . . . . 37 17 99 63
Deferred. . . . . . . . . . . . . . - 3 - 8
--- --- --- ---
37 20 99 71
--- --- --- ---
Total . . . . . . . . . . . . . . $287 $172 $768 $584
=== === === ===
</TABLE>
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note F. Income Taxes (Continued).
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1996 1995
----------------- ----------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions)
<S> <C> <C> <C> <C>
Income before income taxes and
minority interest. . . . . . . . . . $ 791 100.0 $ 511 100.0
==== ===== ==== =====
Tax at federal statutory rate. . . . . $ 277 35.0 $ 179 35.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion . . . . . . . . (5) (0.6) (14) (2.7)
Taxes on foreign income in excess
of statutory rate. . . . . . . . 22 2.8 23 4.5
State income taxes (net of federal
effect). . . . . . . . . . . . . 24 3.0 13 2.5
Tax credits. . . . . . . . . . . . (23) (2.9) (19) (3.7)
Other. . . . . . . . . . . . . . . (8) (1.0) (10) (1.9)
---- ----- ---- -----
Provision for taxes on income. . . . . $ 287 36.3 $ 172 33.7
==== ===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1996 1995
------------------ ----------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------ ------ ------
(Millions)
<S> <C> <C> <C> <C>
Income before income taxes and
minority interest. . . . . . . . . . $2,131 100.0 $1,694 100.0
===== ===== ===== =====
Tax at federal statutory rate. . . . . $ 746 35.0 $ 593 35.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion . . . . . . . . (10) (0.5) (51) (3.0)
Taxes on foreign income in excess
of statutory rate. . . . . . . . 45 2.1 62 3.7
State income taxes (net of federal
effect). . . . . . . . . . . . . 64 3.0 46 2.7
Tax credits. . . . . . . . . . . . (69) (3.2) (54) (3.2)
Other. . . . . . . . . . . . . . . (8) (0.4) (12) (0.7)
---- ----- ----- -----
Provision for taxes on income. . . . . $ 768 36.0 $ 584 34.5
==== ===== ===== =====
</TABLE>
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE G. Earned Per Share.
Earned per share is based on the average number of common shares
outstanding during each period, including common stock equivalents that
consist of certain outstanding options and all outstanding convertible
securities.
The information necessary for the calculation of earned per share is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1996 1995
---- ----
(Millions of Shares)
<S> <C> <C>
Average number of common shares outstanding. . . . 160.8 160.8
Common stock equivalents . . . . . . . . . . . . . 2.5 2.6
----- -----
Total. . . . . . . . . . . . . . . . . . . . . . 163.3 163.4
===== =====
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
(Millions of Shares)
<S> <C> <C>
Average number of common shares outstanding. . . . 160.8 160.8
Common stock equivalents . . . . . . . . . . . . . 2.5 2.6
----- -----
Total. . . . . . . . . . . . . . . . . . . . . . 163.3 163.4
===== =====
</TABLE>
NOTE H. Supplemental Income Statement Information.
Taxes other than excise and income taxes comprised the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
Production/severance . . . . . . . . $108 $ 81 $316 $264
Property . . . . . . . . . . . . . . 38 45 131 138
Other. . . . . . . . . . . . . . . . 41 42 151 155
--- --- --- ---
Total. . . . . . . . . . . . . . . $187 $168 $598 $557
=== === === ===
</TABLE>
- 9 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE I. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the nine months
ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
(Millions)
<S> <C> <C>
Gross sales and maturities of short-term investments . $2,289 $3,388
Gross purchases of short-term investments. . . . . . . (2,154) (2,275)
----- -----
Net cash provided by short-term investments. . . . . . $ 135 $1,113
===== =====
Gross proceeds from issuance of notes payable. . . . . $4,603 $6,267
Gross repayments of notes payable. . . . . . . . . . . (4,905) (6,639)
----- -----
Net cash used by notes payable . . . . . . . . . . . . $ (302) $ (372)
===== =====
Gross noncash provisions charged to income . . . . . . $ 231 $ 332
Cash payments of previously accrued items. . . . . . . (413) (503)
----- -----
Cash payments greater than noncash provisions. . . . . $ (182) $ (171)
===== =====
</TABLE>
Interest paid during the nine-month periods ended September 30, 1996 and
1995 was $542 million and $642 million, respectively.
Income taxes paid during the nine-month periods ended September 30, 1996
and 1995 were $648 million and $614 million, respectively.
- 10 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Summarized Financial Information.
Summarized financial information for Lyondell Petrochemical Company
("Lyondell"), a company in which ARCO owned a 49.9% interest at September
30, 1996, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
Revenues (including sales to ARCO
and ARCO Chemical Company). . . . . $1,247 $1,249 $3,651 $3,793
Sales to ARCO and ARCO Chemical
Company . . . . . . . . . . . . . . 68 81 205 270
Operating income . . . . . . . . . . 71 183 177 642
Income before income taxes . . . . . 55 159 116 576
Net income . . . . . . . . . . . . . 35 100 74 362
---------------------
ARCO's equity in net income of
Lyondell. . . . . . . . . . . . . . 18 49 37 180
Cash dividends received from
Lyondell. . . . . . . . . . . . . . 9 9 27 27
</TABLE>
________________________
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Millions)
<S> <C> <C>
Current assets. . . . . . . . . . . . . . . . . $ 716 $ 678
Noncurrent assets . . . . . . . . . . . . . . . 2,355 1,928
Current liabilities . . . . . . . . . . . . . . 684 750
Long-term debt. . . . . . . . . . . . . . . . . 1,177 807
Other liabilities . . . . . . . . . . . . . . . 244 210
Minority interest . . . . . . . . . . . . . . . 569 459
Stockholders' equity. . . . . . . . . . . . . . 397 380
</TABLE>
- 11 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Other Commitments and Contingencies.
ARCO has commitments, including those related to the acquisition,
construction and development of facilities, all made in the normal course
of business.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits
seeking compensatory and punitive damages and injunctions were filed by the
State of Alaska, the United States and private plaintiffs against Exxon,
Alyeska Pipeline Service Company ("Alyeska") and Alyeska's owner companies
(including ARCO, which owns approximately 21%). Alyeska and its owner
companies have settled the civil damage claims by federal and state
governments and the lawsuits by private plaintiffs. Certain issues
relating to the liability for the spill remain unresolved between the Exxon
companies, on the one hand, and Alyeska and its owner companies.
ARCO and former producers of lead pigments have been named as defendants
in cases filed by a municipal housing authority, three purported classes
and several individuals seeking damages and injunctive relief as a
consequence of the presence of lead-based paint in certain housing units.
ARCO is also the subject or party to a number of other pending or
threatened legal actions.
In October 1995, the State of Montana presented to ARCO a second revised
demand for damages of $713 million based on alleged injuries to natural
resources resulting from ARCO's mining and mineral processing businesses
formerly operated by Anaconda, ARCO's predecessor in Montana. ARCO is
contesting this demand.
ARCO is subject to other loss contingencies pursuant to federal, state
and local environmental laws and regulations. These include possible
obligations to remove or mitigate the effects on the environment of the
disposal or release of certain chemical, mineral and petroleum substances
at various sites, including the restoration of natural resources located at
these sites and damages for loss of use and non-use values. ARCO is
currently participating in environmental assessments and cleanups under
these laws at federal Superfund and state-managed sites, as well as other
clean-up sites. ARCO may in the future be involved in additional
environmental assessments and cleanups, including the restoration of
natural resources and damages for loss of use and non-use values. The
amount of such future costs will depend on such factors as the unknown
nature and extent of contamination, the unknown timing, extent and method
of the remedial actions which may be required and the determination of
ARCO's liability in proportion to other responsible parties. In addition,
environmental loss contingencies include claims for personal injuries
allegedly caused by exposure to toxic materials manufactured or used by
ARCO.
ARCO continues to estimate the amount of these costs in periodically
establishing reserves based on progress made in determining the magnitude
of remediation costs, experience gained from sites on which remediation has
been completed, the timing and extent of remedial actions required by the
applicable governmental authorities and an evaluation of the amount of
ARCO's liability considered in light of the liability and financial where-
withal of the other responsible parties. At September 30, 1996, the
environmental remediation accrual was $613 million. As the scope of ARCO's
obligations becomes more clearly defined, there may be changes in these
estimated costs, which might result in future charges against ARCO's
earnings.
- 12 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Other Commitments and Contingencies (Continued).
ARCO's environmental remediation reserve covers federal Superfund and
state-managed sites as well as other clean-up sites, including service
stations, refineries, terminals, chemical facilities, third-party
landfills, former nuclear processing facilities, sites associated with
discontinued operations and sites formerly owned by ARCO. ARCO has been
named a potentially responsible party ("PRP") for 113 sites. The number of
PRP sites in and of itself does not represent a relevant measure of
liability, because the nature and extent of environmental concerns varies
from site to site and ARCO's share of responsibility varies from sole
responsibility to very little responsibility. ARCO reviews all of the PRP
sites, along with other sites as to which no claims have been asserted, in
estimating the amount of the accrual. ARCO's future costs at these sites
could exceed the amount accrued by as much as $700 million.
Approximately 40% of the reserve related to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of
Montana, Utah and New Mexico. Another significant component related to
currently and formerly owned chemical, nuclear processing, and refining and
marketing facilities, and other sites which received wastes from these
facilities. The remainder related to other sites with reserves ranging
from $1 million to $10 million per site. No one site represents more than
10% of the total reserve. Substantially all amounts accrued are expected
to be paid out over the next five to six years.
Claims for recovery of remediation costs already incurred and to be
incurred in the future have been filed against various insurance companies
and other third parties. Most of these claims have been resolved. ARCO
has neither recorded any asset nor reduced any liability in connection with
unresolved claims.
Although any ultimate liability arising from any of the matters
described herein could result in significant expenses or judgments that, if
aggregated and assumed to occur within a single fiscal period, would be
material to ARCO's results of operations, the likelihood of such occurrence
is considered remote. On the basis of management's best assessment of the
ultimate amount and timing of these events, such expenses or judgments are
not expected to have a material adverse effect on ARCO's consolidated
financial statements.
The operations and consolidated financial position of ARCO continue to
be affected from time to time in varying degrees by domestic and foreign
political developments as well as legislation, regulations and litigation
pertaining to restrictions on production, imports and exports, tax
increases, environmental regulations, cancellation of contract rights and
expropriation of property. Both the likelihood of such occurrences and
their overall effect on ARCO vary greatly and are not predictable.
These uncertainties are part of a number of items that ARCO has taken
and will continue to take into account in periodically establishing
reserves.
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1996 vs. Third Quarter 1995
Consolidated Earnings
The earnings increase in 1996 primarily reflected higher crude oil and
natural gas prices, higher refining and marketing margins and volumes,
growing natural gas production and lower exploration and interest expense.
These combined improvements more than offset lower earnings from ARCO's
chemical interests.
In the 1995 third quarter, income benefits associated with insurance
litigation settlements were offset by charges for tax issues and future
environmental remediation.
Revenues
<TABLE>
<CAPTION>
Millions 1996 1995
---- ----
<S> <C> <C>
Sales and other operating revenues
Upstream . . . . . . . . . . . . . . . . . . $2,346 $2,157
Downstream. . . . . . . . . . . . . . . . . 3,499 3,048
Intersegment eliminations. . . . . . . . . . (696) (928)
----- -----
Total. . . . . . . . . . . . . . . . . . . $5,149 $4,277
===== =====
</TABLE>
Higher crude oil and natural gas prices, increased natural gas marketing
activity and higher natural gas production volumes were partially offset by
decreased crude oil trading activity. Third party sales of petroleum
liquids (both produced and purchased volumes) were down 97,300 barrels per
day, compared to the 1995 third quarter.
Third-party sales of natural gas (produced and purchased volumes)
increased to 4.1 billion cubic feet per day in the 1996 third quarter, up
from 2.5 billion cubic feet per day in the 1995 third quarter. The
majority of the increase was generated by Vastar Resources, Inc.
("Vastar"), where natural gas revenues increased from $260 million in the
third quarter 1995 to $613 million in the third quarter 1996. The remainder
of the increase came from international production in the North Sea, South
China Sea and offshore Indonesia.
In downstream businesses, higher refined products prices and volumes and
higher chemical products volumes were partially offset by a net decline in
chemical products prices. Jet fuel and gasoline sales increased by 24,400
barrels per day in the third quarter of 1996, compared to the same period
in 1995.
The decrease in 1996 income from equity investments primarily reflected
a decline in earnings from ARCO's 49.9% equity interest in Lyondell
Petrochemical Company ("Lyondell").
The decrease in 1996 other revenues primarily reflected the recording of
insurance settlements in the third quarter 1995.
Expenses
Trade purchases were higher primarily as a result of increased natural
gas marketing activity and higher third-party purchases of refined
products. The increased third-party purchases primarily resulted from
higher natural gas volumes in the 1996 third quarter,
- 14 -
<PAGE>
compared to the 1995 third quarter. Natural gas marketing purchases
increased to 2.4 billion cubic feet a day in the 1996 third quarter,
up from 1.2 billion cubic feet per day in the same period in 1995. In
addition, prices for purchased volumes of refined products and natural
gas were also higher in 1996. These increased trade purchases were
partially offset by decreased crude oil trading activity.
Worldwide exploration expense totaled $101 million before tax, down
from $138 million in the 1995 third quarter. The decline in 1996
exploration expenses reflected lower dry hole costs in ARCO's international
oil and gas operations, compared to the same period in 1995.
Upstream Earnings
<TABLE>
<CAPTION>
Millions (after tax) 1996 1995
---- ----
<S> <C> <C>
Oil and Gas. . . . . . . . . . . . . . . . . . . . $285 $116
Coal . . . . . . . . . . . . . . . . . . . . . . . $ 22 $ 10
</TABLE>
Oil and Gas
ARCO's earnings from worldwide oil and gas exploration and production
operations in 1996 benefited from higher crude oil and natural gas prices,
growth in natural gas volumes and lower exploration expense. Included in
the 1995 third quarter results was an unfavorable $9 million adjustment for
tax-related issues.
Average Oil and Gas Prices
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S.
Crude oil - per barrel (bbl)
Alaska . . . . . . . . . . . . . . . . . . . $15.23 $10.70
Lower 48, including Vastar . . . . . . . . . $18.25 $16.18
Composite average price. . . . . . . . . . . $16.10 $12.23
Natural gas - per thousand cubic feet (mcf). . $ 1.71 $ 1.25
International
Crude oil - per bbl. . . . . . . . . . . . . . $19.13 $15.43
Natural gas - per mcf. . . . . . . . . . . . . $ 2.52 $ 2.52
</TABLE>
Petroleum Liquids and Natural Gas Production
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Production
Petroleum liquids - bbl/day . . . . . . . . 548,200 564,200
Natural gas - mcf/day . . . . . . . . . . . 1,032,900 949,300
Barrels of oil equivalent (BOE)/day* . . . 720,300 722,400
International
Petroleum liquids - bbl/day . . . . . . . . 72,700 71,600
Natural gas - mcf/day . . . . . . . . . . . 637,100 459,500
BOE/day . . . . . . . . . . . . . . . . . . 178,900 148,200
-------------
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
</TABLE>
- 15 -
<PAGE>
The reduction in U.S. petroleum liquids production resulted from natural
field declines in Alaska, where declines at the Prudhoe Bay and Kuparuk
River fields were only partially offset by increased production from the
Greater Point McIntyre Area. The small increase in international petroleum
liquids volumes reflected new production from Algeria, substantially offset
by natural field declines in the U.K. and the impact of higher crude oil
prices on production-sharing contracts in Indonesia.
Increases in U.S. natural gas production resulted from continuing growth
in the San Juan Basin production and offshore production in the Gulf of
Mexico. Most of ARCO's U.S. natural gas reserves are owned and produced by
Vastar Resources, Inc., in which ARCO holds an 82.3% interest.
The growth in international natural gas volumes in 1996 came from the
North Sea, including new production from the Gawain field, from ARCO's
Yacheng 13 natural gas field in the South China Sea, and from ARCO's
natural gas fields offshore Indonesia. The North Sea natural gas fields
increased production by approximately 82 million cubic feet per day and
the Yacheng 13 field and offshore Indonesia natural gas fields increased
production by 62 and 38 million cubic feet per day, respectively.
Coal Operations
ARCO's worldwide coal operating results improved in the 1996 third
quarter, compared to the 1995 third quarter. The improved earnings
resulted from higher U.S. and Australian volumes partially offset by volume-
related operating costs, higher maintenance expense and the exchange rate
effect of a stronger Australian currency. U.S. volumes increased 17% and
Australian volumes increased 8%. Due to the increasing geological
complexity of ARCO's Curragh mine in Australia, the coal currently being
recovered is costing significantly more than anticipated. Therefore, the
Company is currently studying several options which may include scaling
back the level of operations at the mine. The 1995 third quarter included
$10 million in after-tax charges primarily related to the impact of an
Australian tax rate increase on deferred taxes.
Downstream Earnings
<TABLE>
<CAPTION>
Millions (after tax) 1996 1995
---- ----
<S> <C> <C>
Refining and marketing . . . . . . . . . . . . . $133 $ 75
Transportation . . . . . . . . . . . . . . . . . $ 44 $ 50
Intermediate chemicals and specialty products. . $ 87 $107
</TABLE>
Refining and Marketing Operations
The higher earnings in the 1996 third quarter resulted from higher
refined product margins and sales volumes, partially offset by the impact
of higher crude oil prices and increased operating costs. Gasoline, jet
fuel and diesel margins were higher in the third quarter of 1996, compared
to the same period in 1995. Inventories of jet fuel and gasoline available
for sale were lower as a result of industry refinery production problems,
particularly in California. The favorable impact of supply tightness on
margins was partially offset by higher crude oil prices. Because of
production problems at a competitor's refinery, demand for jet fuel was
particularly strong in the 1996 third quarter. ARCO was able to operate
its refineries to produce incremental jet fuel volumes to take advantage of
these favorable market conditions. The volume increase in other sales
reflected the sale of intermediate product as a result of turnarounds in
1996. The higher operating costs related primarily to increased volumes
and refinery maintenance expenditures.
- 16 -
<PAGE>
West Coast Petroleum Products Sales
<TABLE>
<CAPTION>
Volumes (Barrels/day) 1996 1995
---- ----
<S> <C> <C>
Gasoline . . . . . . . . . . . . . . . . . . . 271,900 266,000
Jet. . . . . . . . . . . . . . . . . . . . . . 131,000 112,500
Distillate . . . . . . . . . . . . . . . . . . 69,900 71,700
Other. . . . . . . . . . . . . . . . . . . . . 97,500 73,800
------- -------
Total. . . . . . . . . . . . . . . . . . . 570,300 524,000
======= =======
</TABLE>
Transportation Operations
The 1996 results were negatively impacted by lower Trans Alaska Pipeline
System (TAPS) tariff revenues and a 4% decrease in TAPS volumes compared to
the third quarter of 1995.
Intermediate Chemical and Specialty Products
For the intermediate chemicals and specialty products segment,
reflecting ARCO's 82.7% interest in ARCO Chemical Company, the decline in
1996 third quarter earnings primarily reflected lower styrene monomer (SM)
margins, and to a lesser extent, lower propylene oxide (PO) derivative
margins compared to the third quarter of 1995. The lower margins were
partially offset by higher volumes for most products and a lower provision
for environmental clean-up costs. SM selling prices were substantially
lower due to increased industry supply. PO derivative prices were lower as
a result of increased price competition. SM volumes were up 19% and PO
volumes were up 4% in the 1996 third quarter, compared to the 1995 third
quarter. Higher SM volumes resulted from increased contractual offtakes by
SM equity partners and higher export volumes. PO and derivative volumes
increased as a result of customers building their inventories in
anticipation of future price increases.
Equity Affiliate
ARCO earned $18 million from its 49.9% equity interest in Lyondell in
the third quarter of 1996. This compared to $49 million in the third
quarter of 1995. The decline in earnings resulted primarily from lower
petrochemicals margins as a result of higher feedstock costs. Earnings
were also affected by a decline in aromatics prices and the impact of a
fire in a pipe line connected to Lyondell's production facility.
Tax Provision
The effective tax rate was 36.3% in the 1996 third quarter, compared to
33.7% in the third quarter of 1995. The higher 1996 effective tax rate
primarily resulted from a decrease in the dividends received tax deduction.
- 17 -
<PAGE>
Nine-Month Period Ended September 30, 1996 vs. Same Nine-Month Period 1995
Consolidated Earnings
The earnings increase in the first nine months of 1996 primarily
reflected higher crude oil and natural gas prices, higher refining and
marketing margins and volumes, increased natural gas volumes and lower
interest expense. These combined improvements more than offset lower
earnings from ARCO's chemical interests. The impact of higher refining and
marketing margins primarily occurred in the second and third quarters of
1996. Refining and marketing margins declined towards the end of the
third quarter and into the fourth quarter.
The 1995 results included a net after-tax benefit of $10 million
associated with insurance litigation settlements after partial offsets for
environmental and other charges.
Revenues
<TABLE>
<CAPTION>
Millions 1996 1995
---- ----
<S> <C> <C>
Sales and other operating revenues
Upstream . . . . . . . . . . . . . . . . . . $ 6,788 $ 6,597
Downstream. . . . . . . . . . . . . . . . . 9,952 9,066
Intersegment eliminations. . . . . . . . . . (2,097) (2,719)
------ ------
Total. . . . . . . . . . . . . . . . . . . $14,643 $12,944
====== ======
</TABLE>
For the first nine months of 1996 upstream sales and other operating
revenues reflected higher crude oil and natural gas prices, increased
natural gas marketing activity and higher natural gas produced volumes
offset by decreased crude oil trading activity. Third-party sales of
petroleum liquids (both produced and purchased volumes) declined by 94,200
barrels per day in the first nine months of 1996, compared to the same
period in 1995.
Third-party sales of natural gas (produced and purchased volumes)
increased to 3.6 billion cubic feet per day for the first nine months of
1996, up from 2.7 billion cubic feet per day in the same period in 1995.
The majority of the increase was generated by Vastar, where natural gas
revenues increased from $851 million in the first nine months of 1995 to
$1,640 million in the same period in 1996.
For the first nine months of 1996 downstream sales and other operating
revenues increased because of higher refined products prices and volumes,
partially offset by a net decline in chemical products prices and volumes.
Revenues of ARCO Chemical decreased from $3,289 million for the first nine
months of 1995 to $2,976 million for the same period in 1996.
The decrease in income from equity investments for the first nine months
of 1996 primarily reflected a decline in earnings from ARCO's 49.9% equity
interest in Lyondell.
The decrease in other revenues for the first nine months of 1996
primarily reflected the recording of insurance settlements in the second
and third quarters of 1995.
- 18 -
<PAGE>
Expenses
Trade purchases were higher for the first nine months of 1996 primarily
as a result of increased natural gas marketing activity and third-party
purchases of refined products. The increased third-party purchases
primarily resulted from higher natural gas volumes in the 1996 second and
third quarters, compared to the same periods in 1996. Natural gas
marketing purchases increased to 1.9 billion cubic feet a day for the first
nine months in 1996, up from 1.2 billion cubic feet per day in the same
period in 1995. In addition, prices for purchased volumes of natural gas
and refined products were also higher in 1996. These increased trade
purchases were partially offset by decreased crude oil trading activity in
1996.
The lower interest expense reflected lower average long-term debt
balances outstanding in 1996.
The first nine months of 1996 included unusual items of $26 million
before tax related to final charges for previously reported personnel
reductions.
Average Oil & Gas Prices
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S.
Crude oil - per bbl
Alaska. . . . . . . . . . . . . . . . . . . $14.77 $11.13
Lower 48, including Vastar. . . . . . . . . $18.12 $16.25
Composite average price . . . . . . . . . . $15.69 $12.49
Natural gas - per mcf. . . . . . . . . . . . $ 1.65 $ 1.29
International
Crude oil - per bbl . . . . . . . . . . . . . $18.39 $16.31
Natural gas - per mcf . . . . . . . . . . . . $ 2.53 $ 2.56
</TABLE>
Financial Position and Liquidity
<TABLE>
<CAPTION>
Millions 1996
----
<S> <C>
Cash flow provided (used) by:
Operations. . . . . . . . . . . . . . . . . . . $ 2,534
Investing activities. . . . . . . . . . . . . . (1,536)
Financing activities. . . . . . . . . . . . . . $(1,160)
</TABLE>
The net cash used by investing activities in the first nine months of
1996 primarily included expenditures for additions to fixed assets of
$1,617 million.
The net cash used in financing activities in the first nine months of
1996 primarily included dividend payments of $666 million, a decrease of
$302 million in the Company's short-term debt position and repayments of
long-term debt of $236 million.
Cash and cash equivalents and short-term investments totaled $2.8
billion, and short-term borrowings were $900 million at the end of the
third quarter of 1996.
It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will come from cash generated from operating
activities, existing cash balances, and future financings.
- 19 -
<PAGE>
Statements of Financial Accounting Standards Not Yet Adopted
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 requires companies to adopt
its provisions for fiscal years beginning after December 15, 1995. SFAS
No. 123 encourages a fair value-based method of accounting for an employee
stock option or similar equity instrument, but allows continued use of the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board ("APB")No. 25, "Accounting for Stock Issued to Employees."
Companies electing to continue to use APB No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value-based
method of accounting had been applied. ARCO will continue to follow the
provisions of APB No. 25 and accordingly, will make the pro forma
disclosures, if material, required by SFAS No. 123 in its financial
statements for the year ended December 31, 1996.
____________________
Management cautions against projecting any future results based on
present earnings levels because of economic uncertainties, the extent and
form of existing or future governmental regulations and other possible
actions by governments.
- 20 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Reference is made to the disclosure on page 16 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
(hereinafter the "1995 Form 10-K Report") regarding the plant, formerly
owned by ARCO Chemical, located in Monaca, Pennsylvania (Beaver Valley).
ARCO Chemical sold the plant assets to NOVA Chemicals Inc. ("NOVA") as of
September 30, 1996, but retained ownership of the land on which the plant
is located, substantial portions of which are being leased to NOVA. NOVA
will assume ownership of such portions of the site after the occurrence of
certain defined events. ARCO Chemical has retained responsibility for the
work plan and for certain additional remediation of the land that may be
required by PADEP pursuant to the Pennsylvania Land Recycling and
Environmental Remediation Standards Act.
2. Reference is made to the Company's 1995 Form 10-K Report for
information on other legal proceedings matters reported therein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed during the quarter ended
September 30, 1996 and through the date hereof.
- 21 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
(Registrant)
/s/ ALLAN L. COMSTOCK
Dated: November 6, 1996 _______________________________
(signature)
Allan L. Comstock
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
- 22 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and the Consolidated Balance Sheet and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> $ 1,375
<SECURITIES> 1,419
<RECEIVABLES> 1,711
<ALLOWANCES> 0
<INVENTORY> 865
<CURRENT-ASSETS> 5,689
<PP&E> 33,669
<DEPRECIATION> 18,082
<TOTAL-ASSETS> 24,517
<CURRENT-LIABILITIES> 4,569
<BONDS> 5,663
0
1
<COMMON> 402
<OTHER-SE> 7,041
<TOTAL-LIABILITY-AND-EQUITY> 24,517
<SALES> 14,643
<TOTAL-REVENUES> 15,113
<CGS> 10,821
<TOTAL-COSTS> 11,129
<OTHER-EXPENSES> 26
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 500
<INCOME-PRETAX> 2,131
<INCOME-TAX> 768
<INCOME-CONTINUING> 1,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,283
<EPS-PRIMARY> $7.86
<EPS-DILUTED> $7.86
</TABLE>
