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, 1997
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, 1997: 320,755,072.
<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) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Sales and other operating revenues . $4,553 $4,748 $14,184 $13,463
Other revenues . . . . . . . . . . . 149 130 511 470
----- ----- ------ ------
4,702 4,878 14,695 13,933
----- ----- ------ ------
Expenses
Trade purchases. . . . . . . . . . . 1,914 2,009 6,136 5,549
Operating expenses . . . . . . . . . 1,221 999 3,318 2,891
Selling, general and administrative
expenses . . . . . . . . . . . . . 279 232 801 728
Depreciation, depletion and
amortization . . . . . . . . . . . 433 399 1,277 1,202
Exploration expenses (including
undeveloped leasehold amortization) 113 101 329 308
Taxes other than income taxes. . . . 177 187 585 598
Interest . . . . . . . . . . . . . . 133 160 307 500
Unusual items. . . . . . . . . . . . 175 - 175 26
----- ----- ------ ------
4,445 4,087 12,928 11,802
----- ----- ------ ------
Income before gain on investee stock
transaction. . . . . . . . . . . . . 257 791 1,767 2,131
Gain on sale of Lyondell Petrochemical
Company stock. . . . . . . . . . . . 633 - 633 -
----- ----- ------ ------
Income before income taxes, minority
interest and extraordinary item. . . 890 791 2,400 2,131
Provision for taxes on income. . . . . 370 287 849 768
Minority interest in earnings of
subsidiaries . . . . . . . . . . . . 4 25 44 80
----- ----- ------ ------
Net income before extraordinary item . 516 479 1,507 1,283
Extraordinary loss on extinguishment
of debt (net of income taxes of
$74 million) . . . . . . . . . . . . - - (118) -
----- ----- ------ ------
Net Income . . . . . . . . . . . . . . $ 516 $ 479 $ 1,389 $ 1,283
===== ===== ====== ======
Earned per Share
Income before extraordinary item . . $ 1.57 $ 1.47 $ 4.59 $ 3.93
Extraordinary loss . . . . . . . . . - - (.36) -
----- ----- ------ ------
Net income . . . . . . . . . . . . . $ 1.57 $ 1.47 $ 4.23 $ 3.93
===== ===== ====== ======
Cash Dividends Paid per Share of
Common Stock . . . . . . . . . . . . $.7125 $.6875 $2.1125 $2.0625
===== ===== ====== ======
</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,
1997 1996
---- ----
(Millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 665 $ 1,460
Short-term investments. . . . . . . . . . . . . 230 784
Accounts receivable . . . . . . . . . . . . . . 1,511 1,936
Inventories . . . . . . . . . . . . . . . . . . 1,065 995
Prepaid expenses and other current assets . . . 328 258
------ ------
Total current assets. . . . . . . . . . . . . . 3,799 5,433
------ ------
Investments and long-term receivables:
Investments accounted for on the equity method. 1,193 1,174
Other investments and long-term receivables . . 1,916 1,188
------ ------
3,109 2,362
------ ------
Net property, plant and equipment . . . . . . . . 16,652 16,195
Deferred charges and other assets . . . . . . . . 1,663 1,725
------ ------
Total assets. . . . . . . . . . . . . . . . . . . $25,223 $25,715
====== ======
</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,
1997 1996
---- ----
(Millions)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable . . . . . . . . . . . . . . . $ 1,816 $ 1,157
Accounts payable. . . . . . . . . . . . . . 1,054 1,443
Long-term debt due within one year. . . . . 178 1,102
Taxes payable . . . . . . . . . . . . . . . 653 438
Other . . . . . . . . . . . . . . . . . . . 1,216 1,163
------ ------
Total current liabilities . . . . . . . . . 4,917 5,303
------ ------
Long-term debt. . . . . . . . . . . . . . . . 4,336 5,593
Deferred income taxes . . . . . . . . . . . . 2,930 2,884
Other deferred liabilities and credits. . . . 3,620 3,450
Minority interest . . . . . . . . . . . . . . 715 684
Stockholders' equity:
Preference stocks . . . . . . . . . . . . . 1 1
Common stock. . . . . . . . . . . . . . . . 807 403
Capital in excess of par value of stock . . 625 628
Retained earnings . . . . . . . . . . . . . 6,902 6,592
Equity adjustments. . . . . . . . . . . . . 370 177
------ ------
Total stockholders' equity. . . . . . . . . 8,705 7,801
------ ------
Total liabilities and stockholders' equity. . $25,223 $25,715
====== ======
</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,
-----------------
1997 1996
---- ----
(Millions)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $1,389 $1,283
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . 1,277 1,202
Gain on sale of Lyondell Petrochemical
Company common stock . . . . . . . . . . . . . . (291) -
Dry hole expense and undeveloped leasehold
amortization . . . . . . . . . . . . . . . . . . 131 157
Net gain on asset sales. . . . . . . . . . . . . . (48) (42)
Income from equity investments . . . . . . . . . . (139) (59)
Dividends from equity investments. . . . . . . . . 78 56
Minority interest in earnings of subsidiaries. . . 44 80
Cash payments (greater) less than noncash
provisions. . . . . . . . . . . . . . . . . . . 203 (182)
Extraordinary loss on extinguishment of debt . . . 118 -
Deferred income taxes. . . . . . . . . . . . . . . (124) 37
Changes in working capital accounts. . . . . . . . (227) 10
Other. . . . . . . . . . . . . . . . . . . . . . . 37 (8)
----- -----
Net cash provided by operating activities. . . . 2,448 2,534
----- -----
Cash flows from investing activities:
Additions to fixed assets (including dry hole costs) (1,974) (1,617)
Net cash provided by short-term investments. . . . 549 135
Investment in LUKARCO. . . . . . . . . . . . . . . (201) -
Investment in LUKOIL convertible bonds . . . . . . - (89)
Proceeds from asset sales. . . . . . . . . . . . . 76 49
Other. . . . . . . . . . . . . . . . . . . . . . . (83) (14)
----- -----
Net cash used by investing activities. . . . . . (1,633) (1,536)
----- -----
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . (1,684) (236)
Proceeds from issuance of long-term debt . . . . . 267 111
Net cash provided (used) by notes payable. . . . . 701 (302)
Dividends paid . . . . . . . . . . . . . . . . . . (680) (666)
Treasury stock purchases . . . . . . . . . . . . . (205) (57)
Other. . . . . . . . . . . . . . . . . . . . . . . 4 (10)
----- -----
Net cash used by financing activities. . . . . . (1,597) (1,160)
----- -----
Effect of exchange rate changes on cash. . . . . . . (13) -
----- -----
Net decrease in cash and cash equivalents. . . . . . (795) (162)
Cash and cash equivalents at beginning of period . . 1,460 1,537
----- -----
Cash and cash equivalents at end of period . . . . . $ 665 $1,375
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Accounting Policies.
Basis of Presentation.
The foregoing financial information is unaudited and has been prepared
from the books and records of the Company. Certain previously reported
amounts have been restated to conform to classifications adopted in 1997.
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.
Environmental Remediation.
Effective January 1, 1997, the Company adopted Statement of Position
("SOP") 96-1, "Environmental Remediation Liabilities," issued by the
Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants. The provisions include standards affecting
the measurement, recognition and disclosure of environmental remediation
liabilities. The effect of adopting the provisions of SOP 96-1 in the
first quarter of 1997 was a decrease in the Company's net income for the
first nine months of 1997 of $30 million, or $.09 per share.
Derivative Instruments.
The Company uses a variety of derivative instruments, both financial
and commodity based, to minimize the effects 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.
The conditions to be met for a derivative instrument to qualify as a
hedge are the following: (1) the item to be hedged exposes the Company to
price or interest rate risk; (2) the derivative reduces the risk exposure
and is designated as a hedge at the time the derivative contract is entered
into; and (3) at the inception of the hedge and throughout the hedge period
there is a high correlation between changes in the market value of the
derivative instrument and the fair value of the underlying items being
hedged.
Deferral accounting is used for the following types of transactions
(providing 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 or anticipated foreign
currency commitments. Under the deferral method of accounting, gains and
losses are deferred and included in other assets or accrued liabilities
until the designated underlying item is recognized in income. Recognized
gains and losses under the deferral method are recorded in sales and other
operating revenues, other revenues or trade purchases depending on the
underlying item associated with the derivative instrument. 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.
- 5 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Accounting Policies (continued).
Derivative Instruments (continued).
The accrual method of accounting is used for interest rate swap
agreements entered into by the Company which convert the interest rate on
variable rate debt to a fixed rate. Under the accrual method, each net
payment or receipt due or owed under the derivative instrument is
recognized in income during the period to which the payment or receipt
relates. Amounts to be paid or received under these agreements are
recognized as an adjustment to interest expense. The related amounts
payable to, or receivable from, the counter-parties 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 of
accounting, whereby gains and losses associated with changes in fair value
of a derivative instrument are recognized currently in income or
stockholders' equity, is used for the following derivative instruments:
foreign currency forward and option contracts associated with anticipated
future cash flows from 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 each method of accounting used by the Company the cash flows
related to any recognized gains or losses associated with derivative
instruments are reported as cash flows from operations.
If a derivative instrument designated as a hedge is terminated prior
to expected maturity, gains or losses are deferred and included in income
when the underlying hedged item is recognized in income.
When the designated item associated with a derivative instrument
matures, is sold, extinguished or terminated, gains or losses are
recognized as part of the gain or loss on sale or settlement of the
underlying item. When a derivative instrument is associated with an
anticipated transaction that is no longer expected to occur, the gain or
loss on the derivative is recognized immediately in income.
NOTE B. Investments.
At September 30, 1997 and 1996, investments were primarily composed of
U.S. Treasury securities and corporate debt instruments and were
principally included in short-term investments. Maturities generally
ranged from one day to 20 months. At September 30, 1997, all investments
were classified as available-for-sale); there were no investments
considered held-to-maturity. Investments were reported at fair value, with
unrealized holding gains and losses, net of tax, reported in a separate
component of stockholders' equity.
- 6 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE B. Investments (continued).
The following summarizes investments in securities, at September 30:
<TABLE>
<CAPTION>
Millions 1997 1996
---- ----
<S> <C> <C>
Aggregate fair value . . . . . . . . . . . $2,017 $2,515
Gross unrealized holding losses. . . . . . 1 14
Gross unrealized holding gains . . . . . . (1,104) (195)
----- -----
Amortized cost . . . . . . . . . . . . . . $ 914 $2,334
===== =====
</TABLE>
Investment activity for the nine-month periods ended September 30 was
as follows:
<TABLE>
<CAPTION>
Millions 1997 1996
---- ----
<S> <C> <C>
Gross purchases. . . . . . . . . . . . . . $5,175 $3,635
Gross sales. . . . . . . . . . . . . . . . 1,637 1,405
Gross maturities . . . . . . . . . . . . . 4,494 2,680
</TABLE>
For the three-and nine-month periods ended September 30, 1997 and
1996, gross realized gains and losses were insignificant and were
determined by the specific identification method.
NOTE C. Inventories.
Inventories at September 30, 1997 and December 31, 1996 comprised the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Millions)
<S> <C> <C>
Crude oil and petroleum products . . . . . . . . $ 255 $ 204
Chemical products. . . . . . . . . . . . . . . . 481 488
Other products . . . . . . . . . . . . . . . . . 51 48
Materials and supplies . . . . . . . . . . . . . 278 255
------ ------
Total. . . . . . . . . . . . . . . . . . . . . $ 1,065 $ 995
====== ======
</TABLE>
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE D. Long-term Debt.
During the second quarter of 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, or $.36 per share, against net
income, after tax of $74 million.
During the third quarter of 1997, ARCO retired its 10.25% Eurobonds
which had a face value of $250 million and were due in 2000.
In September 1997, ARCO's 9% Exchangeable Notes due September 15,
1997, with an outstanding principal amount of $988 million were redeemed
through exchange of Lyondell Petrochemical Company ("Lyondell") common
stock owned by ARCO.
NOTE E. Capital Stock.
Detail of the Company's capital stock was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Thousands)
<S> <C> <C>
$3.00 Cumulative convertible preference
stock, par $1 . . . . . . . . . . . . . . . $ 57 $ 61
$2.80 Cumulative convertible preference
stock, par $1 . . . . . . . . . . . . . . . 629 674
Common stock, par $2.50 . . . . . . . . . . . 806,616 402,715
------- -------
Total . . . . . . . . . . . . . . . . . . . $807,302 $403,450
======= =======
</TABLE>
The Company's Board of Directors authorized a two-for-one stock
split effective June 13, 1997, in the form of a 100 percent stock dividend.
The par value of the additional shares of common stock issued in connection
with the stock split was credited to common stock and charged against
retained earnings. All per share data have been adjusted to reflect the
stock split.
NOTE F. Stockholders' Equity Adjustments.
Adjustments to stockholders' equity at September 30, 1997 and December
31, 1996 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Millions)
<S> <C> <C>
Minimum pension liability. . . . . . . . . . $ (28) $ (28)
Treasury stock, at cost. . . . . . . . . . . (131) (1)
Net unrealized gain on investments . . . . . 679 225
Foreign currency translation . . . . . . . . (150) (19)
---- ----
Total. . . . . . . . . . . . . . . . . . . $ 370 $ 177
==== ====
</TABLE>
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE G. Capitalization of Interest.
Interest expense excluded capitalized interest of $13 million and $9
million, respectively, for the three-month periods ended September 30, 1997
and 1996, and $31 million and $21 million, respectively, for the nine-month
periods ended September 30, 1997 and 1996.
NOTE H. Unusual Items.
The unusual item in the third quarter of 1997 was the before-tax
charge of $175 million for a restructuring program at ARCO Chemical
Company. Activities related to the restructuring program are expected to
continue through the end of 1998. The restructuring charge included $75
million of personnel-related costs, $23 million of exit costs and $77
million related to the review of certain assets, including $52 million of
valuation adjustments.
Personnel costs included severance, pension enhancements and other
ancillary costs for the reduction of approximately 630 employees in
manufacturing, commercial, research and administrative activities. Exit
costs included costs of canceling long-term contracts and leases related to
certain production, sales and administrative facilities. As of September
30, 1997, the number of terminations and the amount of payments was not
significant.
NOTE I. Income Taxes.
Provision for taxes on income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
Federal:
Current . . . . . . . . . . . . . $395 $189 $725 $526
Deferred. . . . . . . . . . . . . (84) 19 (70) 29
--- --- --- ---
311 208 655 555
--- --- --- ---
Foreign:
Current . . . . . . . . . . . . . 24 41 91 106
Deferred. . . . . . . . . . . . . (29) 1 (34) 8
--- --- --- ---
(5) 42 57 114
--- --- --- ---
State:
Current . . . . . . . . . . . . . 84 37 157 99
Deferred. . . . . . . . . . . . . (20) - (20) -
--- --- --- ---
64 37 137 99
--- --- --- ---
Total . . . . . . . . . . . . $370 $287 $849 $768
=== === === ===
</TABLE>
- 9 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note I. Income Taxes (continued).
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1997 1996
------------------ ------------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions)
<S> <C> <C> <C> <C>
Income before income taxes, minority
interest and extraordinary item . . $ 890 100.0 $ 791 100.0
===== ===== ===== =====
Tax at federal statutory rate . . . . $ 311 35.0 $ 277 35.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion. . . . . . . . . (12) (1.3) (5) (0.6)
Subsidiary/investee stock
transactions . . . . . . . . . . . 79 8.9 - -
Taxes on foreign income in excess
of statutory rate. . . . . . . . . (19) (2.1) 22 2.8
State income taxes (net of federal
effect). . . . . . . . . . . . . . 42 4.7 24 3.0
Tax credits . . . . . . . . . . . . (26) (2.9) (23) (2.9)
Other . . . . . . . . . . . . . . . (5) (0.7) (8) (1.0)
----- ----- ----- -----
Provision for taxes on income . . . . $ 370 41.6 $ 287 36.3
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1997 1996
------------------ -----------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions)
<S> <C> <C> <C> <C>
Income before income taxes, minority
interest and extraordinary item . . $2,400 100.0 $2,131 100.0
===== ===== ===== =====
Tax at federal statutory rate . . . . $ 840 35.0 $ 746 35.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion. . . . . . . . . (33) (1.4) (10) (0.5)
Subsidiary/investee stock
transactions . . . . . . . . . . . 35 1.5 - -
Taxes on foreign income in excess
of statutory rate. . . . . . . . . 9 0.4 45 2.1
State income taxes (net of federal
effect). . . . . . . . . . . . . . 89 3.7 64 3.0
Tax credits . . . . . . . . . . . . (77) (3.2) (69) (3.2)
Other . . . . . . . . . . . . . . . (14) (0.6) (8) (0.4)
----- ----- ----- -----
Provision for taxes on income . . . . $ 849 35.4 $ 768 36.0
===== ===== ===== =====
</TABLE>
- 10 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. 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,
------------------
1997 1996*
---- ----
(Millions of Shares)
<S> <C> <C>
Average number of common shares outstanding . . . . . 320.7 321.6
Common stock equivalents. . . . . . . . . . . . . . . 7.4 5.0
----- -----
Total. . . . . . . . . . . . . . . . . . . . . . . 328.1 326.6
===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996*
---- ----
(Millions of Shares)
<S> <C> <C>
Average number of common shares outstanding . . . . . 321.3 321.6
Common stock equivalents. . . . . . . . . . . . . . . 6.7 5.0
----- -----
Total. . . . . . . . . . . . . . . . . . . . . . . 328.0 326.6
===== =====
* Restated to give affect to stock split (Note E).
</TABLE>
- 11 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Earned Per Share (continued).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share." SFAS No. 128 requires companies to adopt its provisions for fiscal
years ending after December 15, 1997 and requires restatement of all prior
period earnings per share ("EPS") data presented. Earlier application is
not permitted. A company is permitted to disclose pro forma EPS amounts
computed using SFAS No. 128 in periods prior to required adoption.
Accordingly, the pro forma EPS data for the three-and-nine-month periods
ended September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
1997 1996*
-------------- --------------
Millions, except per share amounts Shares EPS Shares EPS
------ --- ------ ---
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . . . . 322.2 $1.60 321.6 $1.49
Diluted EPS. . . . . . . . . . . . . 327.2 $1.58 327.4 $1.47
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1997 1996*
-------------- --------------
Millions, except per share amounts Shares EPS Shares EPS
------ --- ------ ---
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . . . . 321.9 $4.31 321.6 $3.99
Diluted EPS. . . . . . . . . . . . . 327.2 $4.24 325.9 $3.94
* Restated to give affect to stock split (Note E).
</TABLE>
NOTE K. Supplemental Income Statement Information.
Taxes other than income taxes comprised the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
Production/severance . . . . . . . $ 92 $108 $297 $316
Property . . . . . . . . . . . . . 47 38 140 131
Other. . . . . . . . . . . . . . . 38 41 148 151
--- --- --- ---
Total . . . . . . . . . . . . . $177 $187 $585 $598
=== === === ===
</TABLE>
- 12 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the nine months
ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996
---- ----
(Millions)
<S> <C> <C>
Gross sales and maturities of short-term
investments . . . . . . . . . . . . . . . . . . $ 1,696 $ 2,289
Gross purchases of short-term investments . . . . (1,147) (2,154)
------ ------
Net cash provided by short-term investments . . . $ 549 $ 135
====== ======
Gross proceeds from issuance of notes payable . . $ 7,307 $ 4,603
Gross repayments of notes payable . . . . . . . . (6,606) (4,905)
------ ------
Net cash provided (used) by notes payable . . . . $ 701 $ (302)
====== ======
Gross noncash provisions charged to income. . . . $ 592 $ 231
Reserve reversal from partial tax audit
settlements . . . . . . . . . . . . . . . . . . (145) -
Cash payments of previously accrued items . . . . (244) (413)
------ ------
Cash payments (greater) less than noncash
provisions . . . . . . . . . . . . . . . . . . $ 203 $ (182)
====== ======
Changes in working capital - Increase (decrease)
to cash:
Accounts receivable . . . . . . . . . . . . . . . $ 400 $ 73
Inventories . . . . . . . . . . . . . . . . . . . (77) (27)
Accounts payable. . . . . . . . . . . . . . . . . (388) 26
Other working capital . . . . . . . . . . . . . . (162) (62)
------ ------
Total . . . . . . . . . . . . . . . . . . . . . $ (227) $ 10
====== ======
</TABLE>
Interest paid during the nine-month periods ended September 30, 1997
and 1996 was $509 million and $542 million, respectively.
Income taxes paid during the nine-month periods ended September 30,
1997 and 1996 were $709 million and $648 million, respectively.
- 13 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE M. Gain on Sale of Lyondell Stock.
On September 15, 1997, ARCO used shares of Lyondell common stock to
redeem its 9% Exchangeable Notes with an outstanding principal amount of
$988 million. On September 25, 1997, ARCO agreed to sell its remaining
383,000 shares of Lyondell common stock in a privately negotiated
transaction. ARCO realized an aggregate pre-tax gain of $633 million or
approximately $291 million after-tax on the two transactions.
NOTE N. Other Commitments and Contingencies.
ARCO has commitments, including those related to the acquisition,
construction and development of facilities, all made in the normal course
of business.
Following 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 22%). 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, two purported
classes and several individuals seeking damages and injunctive relief as a
consequence of the presence of lead-based paint in certain housing units.
ARCO is also the subject of or party to a number of other pending or
threatened legal actions.
The State of Montana is seeking recovery from ARCO of $764 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. 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.
- 14 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (continued).
ARCO continues to estimate the amount of these costs in periodically
establishing reserves based on progress made in determining the magnitude
of remediation costs, experience gained from sites on which remediation has
been completed, the timing and extent of remedial actions required by the
applicable governmental authorities and an evaluation of the amount of
ARCO's liability considered in light of the liability and financial
wherewithal of the other responsible parties. At September 30, 1997, the
environmental remediation and environmental loss contingencies accrual was
$787 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.
ARCO's environmental remediation accrual 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 117 sites. The number of PRP
sites in and of itself is not a relevant measure of liability, because the
nature and extent of environmental concerns varies by site and ARCO's share
of responsibility varies from sole responsibility to very little
responsibility. ARCO reviews all 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 for remediation at these sites could exceed
the amount accrued by as much as $600 million.
Approximately 55% 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. 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 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.
- 15 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1997 vs. Third Quarter 1996
Consolidated Earnings
Excluding a net after-tax benefit of $85 million for special items,
net income declined $48 million in the third quarter of 1997, compared to
net income of $479 million in the third quarter 1996. The earnings decline
primarily reflected lower crude oil prices, foreign exchange-related costs
associated with ARCO Chemical Company ("ARCO Chemical") operations and
lower coal sales volumes and prices. Partially offsetting these declines
were higher earnings from ARCO's equity interest in Lyondell Petrochemical
Company ("Lyondell") and lower interest expense.
The special item benefits in the third quarter of 1997 included an
after-tax gain of approximately $290 million from the settlement of 9%
Notes due September 15, 1997, with Lyondell common stock, in addition to
tax-related adjustments. The benefits were partially offset by charges for
restructuring and other actions at ARCO Chemical of $95 million, net of
tax and minority interest, and charges of approximately $140 million after
tax for future environmental remediation and reclamation related to both
current operations and to natural resource damage liabilities in the state
of Montana associated with previously discontinued mining operations.
Upstream Earnings
<TABLE>
<CAPTION>
Millions (after tax) 1997 1996
<S> <C> <C>
Exploration and Production . . . . . . . . . . $288 $302
Coal . . . . . . . . . . . . . . . . . . . . . $ 6 $ 22
</TABLE>
Exploration and Production operations
Excluding net after-tax benefits of $22 million for special items
related to a United Kingdom tax rate change and a gain on asset sale,
partially offset by a leasehold writedown, ARCO's earnings from worldwide
oil and gas exploration and production operations declined by $36 million
in 1997. The earnings decline resulted from lower crude oil prices and
higher depreciation expense associated with increased production, partially
offset by growth in international natural gas volumes.
Average Oil and Gas Prices
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
U.S.
Petroleum liquids - per barrel (bbl)
Alaska . . . . . . . . . . . . . . . . . . . $13.26 $15.03
Lower 48, including Vastar . . . . . . . . . $15.77 $17.20
Composite average price. . . . . . . . . . . $14.10 $15.73
Natural gas - per thousand cubic feet (mcf). . $ 1.87 $ 1.71
International
Petroleum liquids - per bbl. . . . . . . . . . $17.30 $18.32
Natural gas - per mcf. . . . . . . . . . . . . $ 2.51 $ 2.52
</TABLE>
- 16 -
<PAGE>
Petroleum Liquids and Natural Gas Production
<TABLE>
<CAPTION>
Net Production 1997 1996
---- ----
<S> <C> <C>
U.S.
Petroleum liquids - bbl/day. . . . . . . . 539,600 553,200
Natural gas - mcf/day. . . . . . . . . . . 1,066,700 1,032,900
Barrels of oil equivalent (BOE)/day* . . . 717,400 725,300
International
Petroleum liquids - bbl/day. . . . . . . . 78,500 72,700
Natural gas - mcf/day. . . . . . . . . . . 760,200 637,100
BOE/day. . . . . . . . . . . . . . . . . . 205,200 178,900
Total net production BOE/day . . . . . . . 922,600 904,200
__________
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
</TABLE>
The reduction in U.S. petroleum liquids production primarily resulted
from natural field decline in the Prudhoe Bay field in Alaska. Increased
international petroleum liquids production reflected new production from
interests in the Ashtart (Tunisia), Tengiz (Kazakhstan) and Al Rayyan
(Qatar) fields along with increased contributions from the Rhourde El
Baguel field in Algeria, partially offset by a decline in volumes received
under Indonesian production sharing contracts.
International natural gas volumes increased 19% in the 1997 third
quarter, compared to the same period in 1996, reflecting increased
production from Yacheng 13, ARCO's South China Sea natural gas field and
from the United Kingdom North Sea. The Yacheng 13 field increased
production by approximately 95 million cubic feet per day and the net
increase in North Sea production was approximately 20 million cubic feet
per day.
Coal Operations
The earnings decline in 1997 primarily reflected decreases in
Australian and U.S. volumes and lower average U.S. and Australian prices,
partially offset by lower operating and depreciation expense resulting from
the reduced production volumes. In the U.S., the lower volumes were due to
Union Pacific shipping delays that will carry over into the fourth quarter
and some difficult geological conditions at our West Elk mine. In
Australia, the lower volumes were due to labor disputes at two of our mines
that will carry over into the fourth quarter.
In April 1997, ARCO announced it is evaluating a likely withdrawal
from its worldwide coal business through the disposition of coal mining
operations in the United States and Australia because they are no longer
considered part of the Company's core business. The method of disposition
is currently under study.
Downstream Earnings
<TABLE>
<CAPTION>
Millions (after tax) 1997 1996
<S> <C> <C>
Refining and marketing. . . . . . . . . . . . . $134 $138
Chemicals . . . . . . . . . . . . . . . . . . . $(23) $ 87
</TABLE>
- 17 -
<PAGE>
Refining and Marketing Operations
The 1997 earnings were essentially flat compared to the near-record
earnings in the third quarter of 1996. Lower margins in 1997 were
substantially offset by increased sales volumes. The integration of the
newly-leased Thrifty Oil Co. gas stations contributed to an increase in
gasoline sales volumes of 10%. The 1997 volume decrease in other products
reflected increased 1996 sales of intermediate product as a result of
turnarounds in that year. The 1997 volume decrease in jet fuel reflected a
decision by ARCO to reduce jet fuel sales in the San Francisco area, while
increasing sales in the Pacific northwest.
West Coast Petroleum Products Sales
<TABLE>
<CAPTION>
Volumes (Barrels/day) 1997 1996
---- ----
<S> <C> <C>
Gasoline. . . . . . . . . . . . . . . . . . . 298,800 271,900
Jet . . . . . . . . . . . . . . . . . . . . . 118,400 131,000
Distillate. . . . . . . . . . . . . . . . . . 76,100 69,900
Other . . . . . . . . . . . . . . . . . . . . 79,300 97,500
------- -------
Total . . . . . . . . . . . . . . . . . . . . 572,600 570,300
======= =======
</TABLE>
Chemicals
ARCO's 82.4% interest in ARCO Chemical Company reflected an after-tax
loss of $23 million, including a $95 million after tax charge for costs
related to a restructuring program and other ARCO Chemical management
actions. Excluding the special items charges, ARCO's interest in ARCO
Chemical contributed earnings of $72 million in the 1997 third quarter,
compared to $87 million after tax in the 1996 third quarter. The 1997
earnings decline primarily represented foreign exchange-related costs
associated with changes in ARCO Chemical's foreign exchange hedging program
during 1997 and unrealized foreign exchange losses as a result of weaker
Asian currencies.
Equity Affiliate
ARCO earned $43 million from its 49.9% equity interest in Lyondell
that it held until September 15, 1997. Following the September 15
settlement of ARCO's 9% Exchangeable Notes with Lyondell common stock and
the private sale of ARCO's remaining Lyondell shares in late September,
ARCO no longer holds any interest in Lyondell. In the third quarter of
1996 ARCO earned $18 million from its equity interest in Lyondell. The
increased earnings in 1997 resulted primarily from stronger petrochemicals
margins and improved results for LYONDELL-CITGO Refining Company Ltd.
("LCR"). LCR's improved performance resulted from the completion of a
refinery upgrade project in February 1997 which provided higher processing
capability for very heavy crude oil.
Consolidated Revenues
<TABLE>
<CAPTION>
Millions 1997 1996
---- ----
<S> <C> <C>
Sales and other operating revenues
Upstream . . . . . . . . . . . . . . . . . . . $2,279 $2,433
Downstream . . . . . . . . . . . . . . . . . . 2,834 2,951
Intersegment eliminations. . . . . . . . . . . (560) (636)
----- -----
Total. . . . . . . . . . . . . . . . . . . . $4,553 $4,748
===== =====
</TABLE>
- 18 -
<PAGE>
In 1997, upstream sales and other operating revenues reflected
decreased natural gas marketing activity and lower coal sales volumes and
prices, partially offset by increased natural gas volumes. Natural gas
marketing sales volumes decreased to 2.6 billion cubic feet per day in the
1997 third quarter, from 3.2 billion cubic feet per day in the 1996 third
quarter. Effective September 1, 1997, Vastar contributed certain of its
natural gas marketing operations to Southern Company Energy Marketing L.P.
("SCEM"). As a result of the transfer of those operations to SCEM, the
natural gas marketing sales and purchases volumes for the third quarter
1997 were lower compared to the same period in 1996. It is anticipated
that the natural gas marketing activity from this point forward will be
reduced relative to periods prior to the transfer.
Downstream sales and other operating revenues primarily decreased
because of lower refined and chemical products prices and the expiration
near the end of 1996 of a crude-oil-for-refined-product exchange agreement
with Tosco, partially offset by higher refined products volumes.
The increase in 1997 other revenues primarily reflected the $25
million earnings increase from ARCO's equity interest in Lyondell and gains
on sales of fixed assets, partially offset by decreased interest income.
Consolidated Expenses
Trade purchases were lower primarily as a result of decreased natural
gas marketing activity. Natural gas marketing purchase volumes decreased
to 1.8 billion cubic feet per day in the 1997 third quarter, from 2.4
billion cubic feet per day in the 1996 third quarter.
Operating expenses were higher in 1997 primarily as a result of
charges for environmental remediation and reclamation.
Selling, general and administrative expenses were higher in 1997 as a
result of rental and other expenses associated with the operation of the
new Thrifty gasoline stations, improvements made at other retailing outlets
not capitalized and increased insurance.
The lower interest expense reflected the reduced level of long-term
debt in the third quarter of 1997, compared to the same period in 1996.
The unusual item in the third quarter of 1997 represented the before-
tax charges for the ARCO Chemical restructuring program, including
personnel-related costs and costs related to exit activities, as well as
charges for asset valuation write downs and liabilities related to certain
assets. The restructuring efforts at ARCO Chemical are expected to
continue through the end of 1998, with the cost reductions substantially in
place by the end of 1998.
Gain on Sale of Lyondell Stock
In September 1997, all of ARCO's 9% Exchangeable Notes due September
15, 1997 with an outstanding principal amount of $988 million were settled
with Lyondell common stock owned by ARCO. ARCO then sold its remaining
Lyondell shares in a privately negotiated transaction in late September.
ARCO realized an aggregate pre-tax gain of $633 million, or approximately
$291 million after tax, on the two transactions.
- 19 -
<PAGE>
Income Taxes
The Company's effective tax rate was 41.6% in the 1997 third quarter,
compared to 36.3% in the 1996 third quarter. The higher effective tax rate
in 1997 primarily reflected taxes associated with the gain recognized on
the settlement of the 9% exchangeable Notes with Lyondell common stock,
partially offset by the elimination of deferred taxes which were provided
in a prior year for a capital stock transaction and an increase in the
dividends received tax deduction. Elimination of the deferred taxes is
expected to continue in future periods. The remaining amount of deferred
taxes that may be eliminated in future periods is approximately $126
million.
Nine-Month Period Ended September 30, 1997 vs. Same Nine-Month Period 1996
Consolidated Earnings
The earnings increase in the first nine months of 1997 primarily
reflected higher crude oil and natural gas prices and natural gas volumes,
higher refined products volumes and increased earnings from ARCO's equity
interest in Lyondell. These combined improvements more than offset lower
refining and marketing and ARCO Chemical margins.
The first nine months of 1997 included an extraordinary loss of $118
million after tax related to early retirement of debt. The impact of the
extraordinary loss was offset by the reversal of reserves for taxes and
related interest which resulted primarily from the partial resolution of
certain federal and state income tax audits. In addition, the first nine
months of 1997 included a net special benefit of $85 million in the 1997
third quarter.
Consolidated Revenues
<TABLE>
<CAPTION>
Millions 1997 1996
---- ----
<S> <C> <C>
Sales and other operating revenues
Upstream. . . . . . . . . . . . . . . . . . . $ 7,887 $ 7,035
Downstream. . . . . . . . . . . . . . . . . . 8,243 8,346
Intersegment eliminations . . . . . . . . . . (1,946) (1,918)
------ ------
Total. . . . . . . . . . . . . . . . . . . . $14,184 $13,463
====== ======
</TABLE>
For the first nine months of 1997 upstream sales and other operating
revenues reflected increased natural gas marketing activity, higher natural
gas and crude oil prices and natural gas volumes. Natural gas marketing
sales volumes increased to 3.0 billion cubic feet per day in the first nine
months of 1997, up from 2.7 billion cubic feet per day in the same period
in 1996.
For the first nine months of 1997 downstream sales and other operating
revenues decreased as higher refined products volumes were offset by lower
refined products prices.
- 20 -
<PAGE>
Consolidated Expenses
Trade purchases for the nine months ended September 30, 1997 were
higher primarily as a result of increased natural gas marketing activity
and higher crude oil and natural gas prices. Natural gas marketing
purchase volumes increased to 2.2 billion cubic feet per day in the first
nine months of 1997, up from 1.9 billion cubic feet per day in the first
nine months of 1996.
Operating expenses for the first nine months of 1997 reflected third
quarter 1997 charges of approximately $140 million after tax for future
environmental remediation and reclamation related to both current
operations and to natural resource damage liabilities in the state of
Montana associated with previously discontinued mining operations. In
addition, higher operating costs included charges for future environmental
remediation related to the adoption of a new accounting standard in the
first quarter 1997, and higher lease operating costs associated with
increased production from the Rhourde El Baguel in Algeria and other new
field production and scheduled plant turnaround maintenance expenses at
ARCO Chemical.
For the first nine months ended September 30, 1997, the lower interest
expense reflected the reversal of reserves for tax-related interest which
resulted from the partial resolution of certain federal and state income
tax audits.
The unusual item for the first nine months of 1997 represented the
before-tax charges for the ARCO Chemical restructuring program and other
ARCO Chemical management actions. The unusual item for the first nine
months of 1996 related to final charges for previously reported personnel
reductions.
Income Taxes
The Company's effective tax rate was 35.4% for the first nine months
of 1997, compared to 36.0% for the same period in 1996. The lower effective
tax rate in 1997 primarily reflected the elimination of deferred taxes
which were provided in a prior year associated with a capital stock
transaction but which are no longer required and an increase in the
dividends received tax deduction. Partially offsetting those lower taxes
were taxes associated with the gain recognized on the settlement of the 9%
exchangeable Notes with Lyondell common stock.
Average Oil and Gas Prices
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
U.S.
Petroleum liquids - per bbl
Alaska . . . . . . . . . . . . . . . . . $15.36 $14.67
Lower 48, including Vastar. . . . . . . . $17.03 $17.09
Composite average price . . . . . . . . . $15.90 $15.41
Natural gas - per mcf . . . . . . . . . . . $ 1.97 $ 1.65
International
Petroleum liquids - per bbl . . . . . . . . $18.36 $17.79
Natural gas - per mcf . . . . . . . . . . . $ 2.64 $ 2.53
</TABLE>
- 21 -
<PAGE>
Petroleum Liquids and Natural Gas Production
<TABLE>
<CAPTION>
Net Production 1997 1996
---- ----
<S> <C> <C>
U.S.
Petroleum liquids - bbl/day. . . . . . . . 556,000 563,900
Natural gas - mcf/day. . . . . . . . . . . 1,058,700 1,043,900
Barrels of oil equivalent (BOE)/day* . . . 732,400 737,900
International
Petroleum liquids - bbl/day. . . . . . . . 74,500 66,200
Natural gas - mcf/day. . . . . . . . . . . 830,800 693,300
BOE/day. . . . . . . . . . . . . . . . . . 213,000 181,700
Total net production BOE/day . . . . . . . 945,400 919,600
__________
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
</TABLE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Millions 1997
----
<S> <C>
Cash flow provided (used) by:
Operations. . . . . . . . . . . . . . . . . . . . . $ 2,448
Investing activities. . . . . . . . . . . . . . . . $(1,633)
Financing activities. . . . . . . . . . . . . . . . $(1,597)
</TABLE>
The net cash used by investing activities in the first nine months of
1997 primarily included expenditures for additions to fixed assets of
$1,974 million, partially offset by a reduction in short-term investments.
The net cash used in financing activities in the first nine months of
1997 primarily included repayments of long-term debt of $1,684 million,
dividend payments of $680 million, and treasury stock purchases of $205
million. These uses were partially offset by proceeds of $267 million from
the issuance of long-term debt and an increase of $701 million in the
Company's short-term debt position.
The Company used approximately $800 million in cash in July 1997 to
settle early retirements of debt contracted in the second quarter of 1997.
Also in July the Company used approximately $250 million in cash for
redemption of its 10.25% Eurobonds which were due in 2000.
Cash and cash equivalents and short-term investments totaled $.9
billion, short-term borrowings were $1.8 billion and long-term debt due
within one year was $.2 billion at the end of the third quarter of 1997.
Primarily as a result of the long-term debt redemptions in July and
the increased use of short-term borrowing, the Company is in a working
capital deficit position of approximately $1.1 billion at the end of the
third quarter of 1997. It is expected that future cash requirements for
working capital, capital expenditures, dividends and debt repayments will
come from cash generated from operating activities, existing cash balances,
and future financings.
In September 1997, ARCO surrendered substantially all of its 39.9
million shares of Lyondell common stock in full payment of the $988 million
principal amount of 9% Exchangeable Notes due September 15, 1997.
- 22 -
<PAGE>
Effective June 13, 1997 ARCO had a 2-for-1 stock split and a 4%
increase in the quarterly dividend.
Statements of Financial Accounting Standards Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires companies to adopt its provisions for fiscal
years ending after December 15, 1997 and requires restatement of all prior
period earnings per share ("EPS") data presented. Earlier application is
not permitted. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for EPS. The implementation of SFAS No. 128 is not
expected to have a material effect on the EPS data presented by the
Company. See Note J of notes to the consolidated financial statements.
_______________________________
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.
- 23 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Reference is made to the disclosure on page 14 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
(hereinafter, the "1996 Form 10-K Report") regarding Atlantic Richfield
Company v. AETNA Casualty and Surety Company of America, et al. (Case No.
BC 015575). ARCO expects that a trial against the remaining defendants
will begin in early 1998.
2. Reference is made to the disclosure on pages 15 and 16 of the 1996
Form 10-K Report, page 19 of the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 (the "First Quarter Form 10-Q Report")
and page 24 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 (the "Second Quarter Form 10-Q Report") regarding the
case of Aguilar, et al. v. Atlantic Richfield, et al. (Case No. 700810).
On October 17, 1997, the court granted defendants' motion for summary
judgment.
3. Reference is made to the disclosure on page 16 of the 1996 Form 10-
K Report and page 19 of the First Quarter Form 10-Q Report regarding the
site of the Beaver Valley plant formerly owned by ARCO Chemical. In
October 17, 1997, ARCO Chemical and the Pennsylvania Department of
Environmental Protection ("PADEP") entered into a second consent agreement
that acknowledged the completion of remedial investigations pursuant to the
1994 work plan and conditionally approved the proposed remediation methods
at the Beaver Valley site. Final approval of the remediation methods is
subject to PADEP's approval of risk assessment studies to be submitted by
ARCO Chemical. Under the second consent agreement, the monetary penalties
contained in the 1994 consent agreement will be imposed only if ARCO
Chemical fails to meet the deadlines for submitting the risk assessment
studies to PADEP. Following the 1996 sale of the Beaver Valley plant
assets to NOVA Chemicals Inc. ("NOVA"), NOVA agreed to assume ownership of
the leased portions of the Beaver Valley land after ARCO Chemical finalized
the second consent agreement. The process of transferring the land to NOVA
has begun. ARCO Chemical will retain responsibility for the remediation of
the land as required by the second consent agreement.
4. Reference is made to the disclosure on pages 16 and 17 of the 1996
Form 10-K Report regarding Vastar's submission to the Environmental
Protection Agency ("EPA") under the EPA's "Voluntary Environmental Self-
Policing and Self-Disclosure Interim Policy Statement." On September 17,
1997, in connection with a settlement which Vastar reached with the EPA,
Vastar received an Order from the United States District Court for the
District of Colorado terminating the Consent Decree with respect to the
matters and dismissing with prejudice the claims by the United States
against Vastar. Under the terms of the settlement, Vastar has paid a
$137,949 civil penalty This amount represents Vastar's economic benefit of
noncompliance, as the settlement reflected Vastar's avoidance of punitive
penalties under the Interim Policy Statement. This represents the final
resolution of the matter.
5. Reference is made to the disclosure on page 24 of the Second
Quarter Form 10-Q Report regarding Siemens Solar Industries v. Atlantic
Richfield Company (Case No. 94-109092). The court vacated the September 3,
1997 trial date and no new trial date has been set.
6. Reference is made to the disclosure on page 24 of the Second
Quarter Form 10-Q Report regarding a crude oil spill on July 29, 1996. A
settlement has been reached. The criminal complaint was dismissed. An
order for civil compromise was entered by the court. ARCO Pipe Line
Company paid $57,000 to the California Department of Fish and Game as
reimbursement for response costs; and $183,000 to the Long Beach/Los
Angeles County Natural Resources Trust of which a minimum of $60,000 of
this sum is to be used for mitigation.
- 24 -
<PAGE>
7. On April 13, 1995, a lawsuit was filed in United States District
Court for the Central District of California titled ARCO, et al. v. UNOCAL
(Case No. 95-2379-KMW-JRx). ARCO and five other refiners sought a
declaration that UNOCAL's U.S. Patent No. 5,288,393 ("the `393 patent") is
invalid and unenforceable. The `393 patent purports to cover a substantial
portion of the reformulated gasoline compositions that were required by the
State of California when the Phase II regulations of the California Air
Resources Board ("CARB") went into effect in March 1996. In the same
lawsuit, UNOCAL filed a claim for infringement of the `393 patent against
ARCO and the five other refiners. On July 15, 1997, the first phase of
trial commenced and on October 14, 1997, the jury found in UNOCAL's favor
on the issues of whether ARCO and the other refiners had infringed the `393
patent and whether that patent is valid. The jury also found that ARCO had
produced approximately 149 million gallons of infringing gasoline during
the first five months of production. On November 3, 1997, the jury found
that each refiner owed UNOCAL $.0575 for each gallon of gasoline which
infringed on UNOCAL's patent. The court has instructed the parties to
establish a method for updating, through the date of judgment, the volumes
of infringing gallons. The remaining phase of the trial, "inequitable
conduct," will be heard without a jury beginning on December 2, 1997.
Final judgment is expected to be entered in 1998.
8. In 1993, natural gas royalty owners filed an action in Zapata
County, Texas titled Stanley Marshall, et al. v. ARCO (Case No. 3217). The
plaintiffs claimed breach of lease, breach of Texas Railroad Commission
rules and regulations, conversion, and fraud. On September 8, 1997, a jury
found in favor of the plaintiffs, awarding $67.3 million in damages,
comprised of $3.8 million in actual damages, $50 million in exemplary
damages, and $13.5 million in attorneys' fees. The court has not entered a
judgment. ARCO intends to challenge the jury verdict through motions in
the trial court and, if a judgment is entered on that verdict, on appeal.
9. Reference is made to the Company's 1996 Form 10-K Report for
information on other legal proceedings matters reported herein.
Item 5. Other Information.
Stockholder proposals for the 1998 Annual Meeting must be received by
November 17, 1997, to be considered for inclusion in the Company's 1998
proxy statement. Such proposals should be addressed to the Corporate
Secretary. Under the Company's Certificate of Incorporation, notice of any
stockholder nomination for director must be given by mail or by personal
delivery to the Corporate Secretary no later than 120 days in advance of
the annual meeting, or by January 5, 1998 assuming the annual meeting for
1998 will be held May 4, 1998; stockholders wishing to make nominations
should contact the Corporate Secretary as to information required to be
supplied in such notice.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the
quarter ended September 30, 1997 and through the date hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
September 15, 1997 5 None
- 25 -
<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 10, 1997 _____________________________
(signature)
Allan L. Comstock
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
- 26 -
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