<PAGE>
1998
----------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
March 17, 1999
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
[No Fee Required]
For the fiscal year ended December 31, 1998 Commission file number 1--1196
[LOGO OF ARCO]
Atlantic Richfield Company
(Exact name of registrant as specified in its charter)
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 South Flower Street, Los Angeles, California 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 486-3511
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- -------------------------------
<S> <C>
Common Stock ($2.50 par value) New York Stock Exchange
Pacific Exchange, Inc.
Elektronische Borse Schweiz EBS
London Stock Exchange
$3.00 Cumulative Convertible Preference New York Stock Exchange
Stock ($1 par value) Pacific Exchange, Inc.
$2.80 Cumulative Convertible Preference New York Stock Exchange
Stock ($1 par value) Pacific Exchange, Inc.
Twenty year 10 7/8% Debentures Due July
15, 2005 New York Stock Exchange
Thirty year 9 7/8% Debentures Due March
1, 2016 New York Stock Exchange
Twenty-five year 9 1/8% Debentures Due
March 1, 2011 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on December 31, 1998, based on the closing price on the New York
Stock Exchange composite tape on that date, was $21,221,156,300.
Number of shares of Common Stock, $2.50 par value, outstanding as of December
31, 1998: 321,315,367.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be filed
with the Securities and Exchange Commission within 120 days after December 31,
1998 are incorporated by reference under Part III.
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Item Page
---- ----
<C> <S> <C>
1. and 2. Business and Properties....................................... 1
The Company................................................. 1
Review of 1998.............................................. 1
Worldwide Exploration and Production Operations............. 2
Refining and Marketing...................................... 9
All Other Operations........................................ 10
Discontinued Operations..................................... 11
Capital Program............................................. 11
Patents..................................................... 11
Competition................................................. 12
Human Resources............................................. 12
Research and Development.................................... 12
Environmental Matters....................................... 13
3. Legal Proceedings............................................. 17
4. Submission of Matters to a Vote of Security Holders........... 20
----------------
Executive Officers of the Registrant.......................... 21
Description of Capital Stock.................................. 23
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 27
6. Selected Financial Data....................................... 28
7. and 8. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Financial Statements and
Supplementary Data............................................ 29
Index to Consolidated Financial Statements and Financial
Statement Schedule.......................................... 29
Independent Accountant's Report............................. 30
Operating Review............................................ 31
Results of Segment Operations.............................. 32
Consolidated Statement of Income........................... 35
Results of Consolidated Operations......................... 36
Consolidated Balance Sheet................................. 38
Consolidated Statement of Cash Flows....................... 39
Analysis of Cash Flows and Financial Condition............. 40
Market-Sensitive Instruments and Risk Management........... 41
Consolidated Statement of Changes in Stockholders' Equity.. 43
Safe Harbor for Forward-Looking Statements................. 44
Year 2000 Issue............................................ 45
Notes to Consolidated Financial Statements................. 46
Supplemental Information (Unaudited)....................... 60
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 64
</TABLE>
(i)
<PAGE>
TABLE OF CONTENTS--(Continued)
PART III
<TABLE>
<CAPTION>
Item Page
---- ----
<C> <S> <C>
10. Directors and Executive Officers of the Registrant.................. 64
11. Executive Compensation.............................................. 64
12. Security Ownership of Certain Beneficial Owners and Management...... 64
13. Certain Relationships and Related Transactions...................... 64
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 64
</TABLE>
(ii)
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
THE COMPANY
The company began operations in 1866 as the Atlantic Petroleum Storage
Company. The company's present name, Atlantic Richfield Company (ARCO), was
adopted in 1966 after Richfield Oil Corporation was merged into the company.
Sinclair Oil Corporation was merged into ARCO in 1969. ARCO acquired the
Anaconda Company in 1977. ARCO became a Delaware corporation in 1985. ARCO's
principal executive offices are currently at 515 South Flower Street, Los
Angeles, California 90071 (Telephone 213-486-3511). During 1999 the principal
executive offices will be moved to the ARCO Center, 333 South Hope Street,
Los Angeles, California 90071. The telephone number will remain the same. You
can find additional information about ARCO on our website at www.arco.com.
ARCO is a global oil and gas enterprise operating in two segments,
exploration and production (E&P) and refining and marketing (R&M). Its upstream
exploration and production operations are focused primarily in Alaska, the Gulf
of Mexico and the Midcontinent in the United States (largely through its 82%
owned subsidiary, Vastar Resources, Inc. (Vastar)), China, Indonesia, the
United Kingdom North Sea, Algeria and Venezuela. The Alaska oil production is
integrated with ARCO's downstream refining and marketing operations in the
western United States. These include two refineries, branded consumer marketing
outlets in six western states and British Columbia, a marine fleet, and
supporting pipelines and terminals.
You will find financial information about our two segments in Note 2 of Notes
to Consolidated Financial Statements on page 47.
REVIEW OF 1998
Disposal of coal operations
As part of ARCO's strategy to focus on its core hydrocarbon businesses, ARCO
disposed of its U.S. coal operations to Arch Coal in June 1998. These included
its Black Thunder and Coal Creek mines in Wyoming, its West Elk mine in
Colorado, and its 65% interest in three mines in Utah for a total consideration
of approximately $1.1 billion. In early 1999, ARCO sold two of its coal
properties in Australia, the Blair Athol mine for $226.5 million and the
Gordonstone mine for $150 million. During the third quarter of 1998, ARCO
recorded a net after-tax charge of $92 million in connection with its
divestiture of its coal businesses.
Disposal of chemical operations
On July 28, 1998, ARCO completed the sale of its 80,000,001 shares of ARCO
Chemical stock to its former subsidiary, Lyondell Petrochemical Company for
$57.75 per share, or for total cash proceeds of approximately $4.6 billion. The
sale was pursuant to a public tender offer by Lyondell for all of the
outstanding shares of ARCO Chemical stock. ARCO recorded a net after-tax gain
of $1.1 billion in the third quarter of 1998.
Acquisition and disposition of certain E&P operations
On June 29, 1998, ARCO purchased the outstanding common stock of Union Texas
Petroleum Holdings, Inc. (UTP) for a purchase price of approximately
$2.5 billion, or $29 per share. ARCO also purchased substantially all, or
1,649,500 shares out of 1,750,000 shares outstanding, of UTP's 7.14% Series A
Cumulative Preferred Stock for approximately $200 million, or $122 per share.
The preferred stock becomes redeemable in 2008. ARCO made both purchases
pursuant to public tender offers for the two classes of equity securities. UTP
was a U.S.-based oil and gas company with substantially all of its oil and gas
producing operations conducted outside of the U.S. Following the completion of
the tender offers, UTP ceased to be a public company and ceased filing reports
with the SEC under the 1934 Securities Exchange Act effective July 30, 1998.
1
<PAGE>
The results of operations of UTP have been included in the consolidated
financial statements of ARCO beginning July 1, 1998. As a result of lower
expected crude oil prices, ARCO announced in January 1999 that it had taken an
after-tax charge of $507 million for the impairment of oil and gas assets
acquired from UTP. This charge was part of ARCO's total impairment charge of
$925 million after-tax for 1998. The impairment charge was largely based on
ARCO's downward revision of its price expectations for West Texas Intermediate
crude oil: $15 per barrel for 1999, $16 for 2000 and $17 for 2001 and beyond.
The principal assets acquired from UTP include properties in the United
Kingdom North Sea, Indonesia and Venezuela. ARCO also acquired interests in
three oil concessions in the Badin area of Pakistan, the Alpine field in Alaska
and a 41.67% interest in the Geismar petrochemical plant in Louisiana. ARCO has
entered into an agreement to sell the petrochemical operations, and expects to
close the sale by March 31, 1999.
In October 1998, through a three-way transaction involving ARCO, Vastar and
Mobil Exploration & Producing U.S. Inc., ARCO disposed of its California heavy
crude oil properties in the San Joaquin Valley. In the three-way transaction,
an ARCO subsidiary holding the California properties traded them for Mobil's
interests in 23 producing fields and exploration acreage in the Gulf of Mexico.
The California properties had average production of 37,000 barrels per day
(BPD) in October 1998, and accounted for proved reserves of 148 MMBOE. In
connection with the disposition of the heavy crude oil properties, ARCO took an
impairment writedown of $114 million after-tax in 1998. ARCO then sold the ARCO
subsidiary to Vastar for a net purchase price of approximately $437 million
comprised of cash and the assumption of $300 million of indebtedness to ARCO.
The indebtedness matures in 2003. Vastar added approximately 60 MMBOE of proved
reserves as a result of this acquisition.
Global cost reduction program
In October 1998, ARCO announced it was undertaking a worldwide cost reduction
program designed to reduce (1) upstream and downstream operating and support
costs; (2) exploration spending; and (3) costs for the corporate center and
support services. In connection with this cost reduction program, ARCO is
increasing its focus on its core exploration and production areas, and plans to
divest non-strategic assets, which the company believes will facilitate the
cost reductions.
ARCO estimates that these cost reductions will save $350 million in 1999 and
rise to annual cost savings of $500 million by 2000. ARCO took a $170 million
net after-tax charge in the 1998 fourth quarter for these cost reductions. ARCO
is also reducing capital spending (additions to fixed assets) by at least 25%
to $2.7 billion. See "Capital Program" at page 11.
WORLDWIDE EXPLORATION AND PRODUCTION OPERATIONS
General
ARCO conducts its worldwide oil and gas exploration and production operations
primarily in the United States, China, Indonesia, the United Kingdom North Sea,
Algeria and Venezuela.
2
<PAGE>
Reserves
Proved oil and gas reserves at December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Petroleum Liquids Natural Gas
(Million barrels) (Billion cubic feet)
------------------------ ------------------------
U.S.(a) International(b) U.S.(c) International(d)
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Proved reserves......... 2,043 799 5,117 4,727
Proved developed re-
serves................. 1,582 328 4,480 2,830
</TABLE>
--------
(a)Includes 185 million barrels (MMB) proved and 109 MMB developed
attributable to Vastar.
(b) Includes 61 MMB proved and 36 MMB developed attributable to the
equity interest in the LUKARCO joint venture.
(c)Includes 2,590 billion cubic feet (BCF) proved and 2,071 BCF
developed attributable to Vastar.
(d) Includes 401 BCF proved and 344 BCF developed attributable to the
equity interest in the LUKARCO joint venture.
You can find additional information concerning oil and gas producing
activities and estimates of proved oil and gas reserves under the caption
Supplemental Information, Oil and Gas Producing Activities, beginning on
page 60.
Production
Production Volumes
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Natural Gas
Petroleum Liquids (Million cubic feet
(Barrels per day) per day)
--------------------- ---------------------
Years Ended
December 31, U.S.(a) International U.S.(b) International
------------ ------- ------------- ------- -------------
<S> <C> <C> <C> <C>
1998............................. 527,600 123,200 1,175 929
1997............................. 557,900 82,600 1,066 844
1996............................. 564,500 66,100 1,044 730
</TABLE>
--------
(a) Includes 50,100, 50,700 and 48,800 barrels per day produced by Vastar in
1998, 1997, and 1996, respectively.
(b) Includes 988, 882 and 872 million cubic feet per day (MMCFD) produced by
Vastar in 1998, 1997, and 1996, respectively.
Average sales prices and production costs
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996
------------------- -------------------- --------------------
U.S. International U.S. International U.S. International
----- ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Average sales price
(including transfers)
per barrel of petroleum
liquids produced....... $9.43 $11.07 $15.63 $18.20 $16.07 $19.02
Average lifting cost per
equivalent barrel of
production............. 3.34 3.73 3.85 4.07 3.86 4.14
Average sales price per
thousand cubic feet
(MCF) of natural gas
produced............... 1.82 2.54 2.04 2.64 1.80 2.54
</TABLE>
3
<PAGE>
Exploration and Drilling Activity
Wells drilled to completion
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
U.S.(a) International U.S.(b) International U.S.(c) International
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net productive
exploratory wells
drilled................ 32 10 33 3 28 2
Net dry exploratory
wells drilled.......... 29 10 27 10 48 7
Net productive
development wells
drilled................ 573 27 563 23 332 23
Net dry development
wells drilled.......... 37 -- 37 -- 33 --
</TABLE>
--------
(a)Includes 23, 16, 187, and 35 wells, respectively, drilled by Vastar.
(b)Includes 18, 15, 162, and 27 wells, respectively, drilled by Vastar.
(c)Includes 17, 29, 156, and 25 wells, respectively, drilled by Vastar.
Current drilling activities, as of December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. International
---- -------------
<S> <C> <C>
Gross wells in process of drilling (including wells
temporarily suspended).................................. 51 18
Net wells in process of drilling (including wells
temporarily suspended).................................. 34 7
Waterflood projects in process........................... 4 --
Enhanced oil recovery operations......................... 63 3
</TABLE>
Number of productive wells at December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Oil Gas
--------------------------- ---------------------
U.S.(a)(b) International(c) U.S.(d) International
---------- ---------------- ------- -------------
<S> <C> <C> <C> <C>
Total gross productive
wells.................... 9,458 763 3,679 642
Total net productive
wells.................... 3,930 296 1,820 162
</TABLE>
--------
(a) Includes approximately 1,688 gross and 352 net multiple completions
for ARCO, of which there are 402 gross and 184 net multiple
completions for Vastar.
(b) Includes approximately 1,536 gross and 774 net wells, respectively,
attributable to Vastar.
(c) Includes approximately 89 gross and 36 net multiple completions.
(d) Includes approximately 2,851 gross and 1,473 net wells, respectively,
attributable to Vastar.
4
<PAGE>
Petroleum rights acreage as of December 31, 1998(a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Developed Undeveloped
Acreage Acreage
----------- --------------
Net Gross Net Gross
----- ----- ------ -------
(thousands)
<S> <C> <C> <C> <C>
U.S.
Alaska........................................... 208 341 984 1,618
Lower 48(b)...................................... 1,888 3,224 3,123 4,960
----- ----- ------ -------
Total U.S...................................... 2,096 3,565 4,107 6,578
International...................................... 295 669 64,027 123,787
----- ----- ------ -------
Total.......................................... 2,391 4,234 68,134 130,365
===== ===== ====== =======
</TABLE>
--------
(a) Includes options and exploration rights.
(b) Includes 1,539 net developed acreage, 2,468 gross developed acreage,
2,815 net undeveloped acreage and 4,243 gross undeveloped acreage,
respectively, held by Vastar.
Delivery Commitments
ARCO has various long-term natural gas sales contracts covering the majority
of its production in Indonesia, the United Kingdom North Sea, and China. ARCO's
various annual delivery obligations under these contracts are substantially
limited to producible reserves from specific fields.
In the Lower 48, Vastar has various long-term natural gas sales contracts. In
connection with the formation in 1997 of Southern Company Energy Marketing L.P.
(SCEM), a strategic alliance limited partnership with the Southern Company,
Vastar entered into a gas purchase and sale agreement with SCEM. The primary
term expires December 31, 2007 and the prices are market-based. The contract
covers substantially all of the gas produced and owned or controlled by Vastar.
Excluded from this contract is gas which Vastar is committed to deliver under
certain longer-term gas marketing contracts with cogeneration facilities
pursuant to which Vastar delivered an average of 72 MMCFD in 1998. These long-
term contracts have an average remaining contract term of approximately
12 years. In 1998, the average price of gas sold under these contracts was
approximately $2.62 per MCF. There have been no instances in the last three
years in which Vastar was unable to meet any significant natural gas delivery
commitment.
Alaska
Approximately 53% of ARCO's worldwide petroleum liquids production came from
ARCO's interests in Alaska, primarily in the Prudhoe Bay, Greater Kuparuk Area
and the Greater Point McIntyre Area fields on the North Slope of Alaska. ARCO's
net liquids production from Alaska in 1998 decreased 8% to 346,700 BPD. ARCO's
interests in Alaska included net proved reserves of 1,857 MMBOE at December 31,
1998.
ARCO operates the eastern half of the Prudhoe Bay field and has a 21.87%
working interest in the oil rim production from the field and a 42.56% working
interest in the gas cap production. ARCO's net petroleum liquids production
from the Prudhoe Bay field averaged 175,300 BPD in 1998, compared to 198,500
BPD in 1997.
ARCO is the sole operator in the Greater Kuparuk Area, which includes the
Kuparuk River field and three satellite fields. ARCO holds a 55.2% working
interest in each of these fields. ARCO's share of production from the Kuparuk
River field was 123,000 net BPD of petroleum liquids during 1998, compared to
128,200 net BPD during 1997. The Kuparuk Large Scale Enhanced Oil Recovery
(EOR) Project, which began operations in September 1996, added 15,000 net
barrels of oil to daily production by the end of 1998. EOR production is
expected to increase further in 1999.
ARCO has working interests in five of six Greater Point McIntyre Area fields
as follows: 30.1% in Point McIntyre, 40.0% in Lisburne, and 50.0% in both West
Beach and North Prudhoe
5
<PAGE>
Bay State. ARCO also has a working interest in the West Niakuk field; ARCO is
currently negotiating the precise amount of its interest with the other owners
of that field. All six of the fields are processed through the Lisburne
Production Center, which ARCO operates. During 1998, liquids processed through
the Lisburne Production Center averaged 169,700 gross BPD, or 41,500 net BPD.
ARCO has several projects underway in Alaska that it expects will stop the
decline in Alaska production after 1999. The $150 million Prudhoe Bay Miscible
Injectant Expansion (MIX) project is designed to add 50 million gross barrels
of petroleum liquids to ultimate field recovery and 20,000 net BPD of petroleum
liquids production in late 1999. ARCO and its partners approved MIX in 1997 and
expect it to become operational in 1999. ARCO commenced development of the
Alpine field in 1998 and expects production to start up in mid 2000 at a gross
rate of 40,000 BPD. Following its acquisition of an additional 22% working
interest from UTP, ARCO has a 78% working interest in the field. A $44 million
EOR project currently underway at Greater Point MacIntyre is expected to be
completed by the end of 1999.
ARCO also began production from four satellite fields at the end of 1997 and
during 1998. Three of these satellite fields are in the Greater Kuparuk Area:
Tarn, Tabasco, and West Sak. The Tarn field began production in July 1998, only
nine months after receiving approval for development. Production also began
from the Tabasco field, with a single producing well on-line. Additional
drilling in Tabasco is underway. West Sak contributed production throughout
1998. Midnight Sun, the first satellite field in the Prudhoe Bay area, started
up in the fourth quarter of 1998. Net production from these four satellite
fields in 1998 averaged 6,100 BPD.
ARCO transports all of the petroleum liquids produced from the North Slope
fields to market through the Trans Alaska Pipeline System (TAPS), an 800-mile
pipeline system that ties the North Slope of Alaska to the port of Valdez in
south central Alaska. ARCO has a 22.2% weighted average undivided ownership
interest in TAPS. ARCO also owns approximately 22% of the stock of Alyeska
Pipeline Service Company, which constructed and now operates TAPS for the
owners. ARCO's undivided interest in TAPS is proportionately consolidated in
the Alaska E&P operations for financial reporting purposes. TAPS 1998
throughput averaged approximately 1,207,000 BPD. ARCO operates six ocean-going
tankers that ship the liquids from Valdez to West Coast locations.
Lower 48
ARCO's consolidated Lower 48 operations had net production of 417 BCF of
natural gas (including consumption) and 66 MMB of petroleum liquids in 1998 as
compared to 385 BCF and 66 MMB in 1997. ARCO replaced 45% of Lower 48 1998
production on a BOE basis through its exploration and development activities
and purchases (net of sales).
The primary vehicle for ARCO's Lower 48 exploration and production operations
is Vastar, of which ARCO owns 82%. Vastar, headquartered in Houston, Texas,
explores for, develops, produces and markets natural gas and petroleum liquids
in major producing basins in the Gulf of Mexico, the Gulf Coast, the San Juan
Basin/Rockies and the Midcontinent areas. You can obtain additional information
about Vastar, a copy of Vastar's 1998 Annual Report to Stockholders and 1998
Annual Report on Form 10-K by writing to Manager, Investor Relations, Vastar
Resources, Inc., 15375 Memorial Drive, Houston, Texas 77079. Vastar's telephone
number is (281) 584-6000.
After the disposition of its California heavy crude oil properties in the San
Joaquin Valley in October 1998, ARCO's Lower 48 assets (other than Vastar)
consist of oil and gas producing assets in the Permian Basin of west Texas and
southeast New Mexico. These assets accounted for reserves at December 31, 1998
of 338 MMBOE, of which 72% were petroleum liquids. In 1998 net production from
ARCO's other Lower 48 interests was 31 MMBOE, down from 57 MMBOE in 1997. ARCO
announced in February 1999 that it and Chevron U.S.A. Production Company will
pursue a combination of their oil and gas producing assets in the Permian
Basin. If final agreement is reached, each company will own 50% of the joint
venture.
6
<PAGE>
International
ARCO expanded its international exploration and production operations in 1998
with the acquisition of UTP in June 1998. Production from former UTP interests
in the United Kingdom North Sea, Indonesia and Venezuela was included in ARCO's
consolidated financial statements beginning July 1, 1998. ARCO's 1998
international petroleum liquids production averaged 123,200 BPD, up from 82,600
BPD in 1997. Natural gas production in 1998 averaged 929 MMCFD, up from 844
MMCFD in 1997. ARCO's net proved reserves from its international interests at
December 31, 1998 were 1,587 MMBOE.
Principal properties acquired from UTP in the United Kingdom North Sea are
the 15.5% working interest in the Alba oil field, which has been producing
since 1994, the 9.42% unit interest in the Britannia gas field, which began
production in 1998, the 20% working interest in the Piper and Claymore fields
and a 25% working interest in the Sean fields.
During 1998, ARCO and its partners continued development of the Shearwater
gas condensate field in the Central Graben; start-up is expected in 2000.
In September 1998, ARCO and Mobil entered into an agreement to combine
offshore operations in the Southern North Sea through the creation of a joint
venture in which each company will have a 50% interest. The partners expect to
reduce operating costs and to make new, smaller fields economically attractive
to develop using existing infrastructure. The interests currently held by each
company in the individual Southern North Sea assets and licenses will remain
unchanged. Details of the Southern Gas Basin combination are under negotiation
between the two companies.
In Indonesia, ARCO's acquisition of UTP gave ARCO its entry into the
liquefied natural gas (LNG) business. The new Indonesian operations consist
primarily of a 37.81% working interest in the East Kalimantan joint venture
that produces natural gas and, to a lesser extent, oil and condensate from the
Sanga Sanga block. Substantially all the natural gas produced by the joint
venture is supplied to a liquefaction plant at Bontang Bay, pursuant to long-
term contracts with Pertamina, the Indonesian national oil company. The Bontang
plant converts the gas into LNG in parallel processing units called "trains."
Seven trains are currently in operation and an eighth is under construction.
ARCO's 1998 production from all Indonesian interests totaled 423 MMCFD.
During 1998, estimated gross resources in the giant Tangguh field increased
to 14.4 trillion cubic feet (TCF). ARCO will operate the Wiriagar, Berau and
Muturi fields that will feed gas to the Tangguh project. The planned two-train
LNG production facility will be operated by an Indonesian company that will be
jointly owned by Pertamina and the participants in those production sharing
contracts that will supply gas to the plant. ARCO and Pertamina are jointly
marketing the LNG.
ARCO's Venezuelan operations consist of risked service contracts covering six
blocks and an interest in a joint venture to produce and upgrade heavy oil.
Under a risked service contract, the contractor is responsible for providing
capital and technology for the redevelopment of the fields along with costs of
operating existing production. In exchange for providing and funding overall
operation and field development, the contractor is paid a per barrel service
fee to cover reimbursement of costs plus profit. There are two components to
the fees, which include (i) a set fee for contractual baseline production and
(ii) a fee for incremental production. The fee for incremental production is
based on a sliding scale incentive mechanism, which is indexed to a basket of
international oil prices and overall field profitability. The Venezuelan
government maintains full ownership of all hydrocarbons in the fields.
ARCO acquired from UTP interests in two risked service contracts covering the
Desarrollo Zulia Occidente (DZO) contract area (a 100% interest) and the
Boqueron contract area (a 60% interest). In acquiring DZO, ARCO assumed a
potential liability for making payments of up to a maximum of $15 million
annually for six years. Because this potential liability is based primarily on
oil prices achieving levels substantially higher
7
<PAGE>
than today's prices, ARCO considers it a remote possibility that these payments
will ever be made. ARCO also signed risked service contracts covering the Kaki
(56%), Maulpa (56%) and LL-652 (18%) blocks, as well as the La Vela exploration
block. ARCO is the operator of the DZO and Boqueron blocks.
Proved reserves and production quantities for Venezuelan operations are
recorded based on ARCO's net working interest in each of the contract areas,
"net" meaning reserves excluding royalties and interests owned by others per
the contractual arrangements. Total production from ARCO's interests from the
date of initial involvement was 6,099,000 barrels, or 16,700 barrels per day on
a full-year basis. Production for the fourth quarter of 1998 averaged 32,000
barrels per day. These properties represented 166 MMBOE of net proved reserves
at December 31, 1998.
With the fall in worldwide crude prices, ARCO recorded a $190 million
impairment to the capitalized cost of the DZO unit. ARCO is in discussions with
the Venezuelan government on the terms of the DZO unit contract to improve the
profitability under current oil prices. ARCO's long-term work program and
investment in the DZO unit depend on the results of these discussions.
ARCO's other interest in Venezuela consists of a 30% interest in the Hamaca
joint venture to produce and upgrade extra heavy oil from the Orinoco Belt. As
a result of the current low price environment, activities on the Hamaca project
are progressing, but at a slower pace, by agreement of the parties.
In China, ARCO operates the Yacheng--13 gas field, from which ARCO obtained
net production of 133 MMCFD during 1998, down from 142 MMCFD in 1997.
In August 1998, ARCO acquired a 25% interest in a major natural gas project
in the Malaysia-Thailand Joint Development Area (JDA) in the Gulf of Thailand.
ARCO purchased a 50% interest in the Triton Energy Limited subsidiaries that
held Triton's interest in the JDA for a cash payment of $150 million and an
agreement to fund half the development costs until first commercial production,
up to a maximum of $377 million. Triton continues to hold a 25% interest in the
JDA, and the other 50% is owned by the Malaysian national oil company Petronas.
ARCO's operations in Algeria consist of the EOR project currently under
development in the Rhourde El Baguel field. Under its agreements with
Sonatrach, the Algerian state oil company, ARCO will receive up to 49% of the
project's annual production. For 1998, ARCO reported net production of 21,100
BPD.
ARCO also holds a 46% interest in LUKARCO, a joint venture with the Russian
oil company LUKOIL that holds a 54% interest. LUKARCO was formed in February
1997 to facilitate joint oil and gas investment in Russia and other countries
in the Commonwealth of Independent States. The LUKARCO joint venture holds a 5%
interest in the joint venture operating the Tengiz oil field in Kazakhstan, a
12.5% interest in the Caspian Pipeline Consortium (CPC), a multi-party effort
to build a 900-mile pipeline from the Tengiz field to the Black Sea via Russia,
and a 60% interest in the Yalama block in the Caspian Sea offshore of
Azerbaijan. Under the terms of the joint venture arrangement, ARCO has agreed
to provide financing to LUKARCO covering most of the costs of any projects
approved by ARCO. ARCO is obligated to fund LUKARCO's 25% share of the
construction costs of the CPC pipeline. In addition to the joint venture
interest, ARCO owns 8% of LUKOIL's total equity, which at December 31, 1998 was
valued at $225 million. See Note 24 of Notes to Consolidated Financial
Statements on page 59.
8
<PAGE>
REFINING AND MARKETING
ARCO's downstream operations include its two refineries on the West Coast,
branded retail gasoline outlets in six western states and British Columbia,
transportation operations including pipelines and terminals in California and a
marine fleet of ocean-going tankers, and a polypropylene plant under
construction at the Los Angeles Refinery complex.
ARCO's two U.S. petroleum refineries are the Los Angeles Refinery in Carson,
California and the Cherry Point Refinery near Ferndale, Washington. Both of
these refineries have easy access to major supply sources and major markets
through ocean-going tankers, pipelines and other transportation facilities.
Refinery Capacity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Average Operable
Crude Distillation
Capacity(a)
(Barrels per day)
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Los Angeles Refinery.................................. 260,000 260,000 260,000
Cherry Point Refinery................................. 202,000 202,000 200,500
------- ------- -------
Total............................................... 462,000 462,000 460,500
======= ======= =======
</TABLE>
--------
(a) Measured pursuant to standards of the American Petroleum Institute.
Refinery runs and petroleum products manufactured
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------
1998 1997 1996
------- ------- -------
(Equivalent barrels per
day)
<S> <C> <C> <C>
Crude oil refinery runs............................... 449,600 452,200 452,700
======= ======= =======
Petroleum products manufactured:
Gasoline............................................ 225,800 224,200 214,800
Jet fuels........................................... 92,000 106,700 105,700
Distillate fuels.................................... 76,600 73,100 66,000
Other(a)............................................ 93,400 85,300 100,500
------- ------- -------
Total(b).......................................... 487,800 489,300 487,000
======= ======= =======
</TABLE>
--------
(a) Includes chemical products, natural gas liquids (NGLs), petroleum coke
(green and calcined) and feedstocks, sulfur, middle-of-barrel
specialties and changes in unfinished stocks.
(b) Total manufactured petroleum products volumes exceed total crude oil
runs as a result of the expansion of petroleum product through
rearrangement of molecular structure and refinery blending of
oxygenates.
9
<PAGE>
In October 1998, ARCO and Itochu Corporation entered into a $200 million
joint venture for the production and marketing of polypropylene resin. ARCO has
a two-thirds interest and Itochu has a one-third interest in the 200,000 metric
ton manufacturing plant currently under construction at the Los Angeles
Refinery complex. Feedstock for the new polypropylene facility, the only one on
the West Coast, will be supplied by the Los Angeles Refinery under the joint
venture agreement.
In connection with its refining operations, ARCO also produces calcined coke
and operates electric cogeneration facilities.
ARCO markets its gasoline under the ARCO(R) trademark. ARCO sells its
gasoline at ARCO branded retail outlets located in Arizona, California, Nevada,
Oregon, Utah and Washington, and in British Columbia. The company currently has
more than 1,700 branded retail outlets, which include franchisee and company-
operated am/pm(R) convenience stores and SmogPros(R) Service Centers, and
traditional service stations. ARCO's am/pm franchises make up about 60% of the
retail outlets which are full scale convenience stores that also sell gasoline.
ARCO also sells gasoline to dealers and resellers who do not use the ARCO brand
in connection with retail sales.
ARCO markets jet fuel, calcined coke and NGLs to end-users and resellers.
ARCO sells jet fuels directly to airlines and the United States Department of
Defense. The company sells its calcined coke to U.S. and international
industrial consumers. ARCO sells NGLs directly to end-use customers including
the Watson Cogeneration Facility, which is 51% owned by ARCO; ARCO also markets
NGLs through distributors. ARCO sells certain of its petroleum products through
cargo and bulk sales to commercial and industrial consumers.
Refined petroleum product sales
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
(Equivalent barrels per
day)
<S> <C> <C> <C>
Petroleum product sales:
Gasoline............................................ 307,100 281,900 266,400
Jet fuels........................................... 102,800 117,300 117,000
Distillate fuels.................................... 80,600 76,600 69,000
Other(a)............................................ 72,700 68,000 80,700
------- ------- -------
Total(b).......................................... 563,200 543,800 533,100
======= ======= =======
</TABLE>
--------
(a) Includes heavy fuel oils, NGLs, calcined and green coke.
(b) The total of petroleum product sales differs from the total of
petroleum products manufactured because of a number of factors: the
consumption of some products as refinery fuel, the exchange of
products with other refiners, changes in levels of product inventory,
and the purchase and sale of petroleum products not manufactured by
ARCO.
ARCO's marine fleet consists of eight tankers. Six transport crude oil from
Valdez to Cherry Point, Washington and Long Beach, California and two transport
clean fuels products. ARCO has under construction three double-hulled tankers;
the first is scheduled for delivery in 2000, and the remaining two by 2002.
ALL OTHER OPERATIONS
ARCO's other operations during 1998 included its pipeline operations in the
Lower 48 and its aluminum rolling mill operations. You can find more details in
Results of Segment Operations--Other Operations, on page 33.
10
<PAGE>
DISCONTINUED OPERATIONS
ARCO's discontinued operations consisted of its interests in chemical and
coal businesses.
In July 1998, ARCO sold all of its 80,000,001 shares of ARCO Chemical stock
to its other former chemical business, Lyondell Petrochemical Company.
ARCO reduced its interest in ARCO Chemical in 1987, when ARCO Chemical
Company sold just under 20% of its stock to the public. ARCO disposed of its
interest in Lyondell Petrochemical Company in three transactions: the 1989 sale
of just over 50% of its Lyondell stock to the public, the 1994 sale of three-
year notes exchangeable into its Lyondell stock at maturity, and the 1997
transfer of its remaining Lyondell stock to the noteholders.
ARCO's consolidated financial statements reflect its interest in Lyondell
through September 1997 and its interest in ARCO Chemical through July 1998
under Income From Discontinued Operations on page 34.
ARCO's interest in the Geismar petrochemical plant acquired from UTP was
classified as a discontinued operation because ARCO determined to dispose of
the operation at the time it purchased UTP. ARCO has entered into an agreement
to sell the operation, and expects to complete the sale by March 31, 1999.
In 1997, ARCO announced its intent to divest its coal operations. You can
find a description of the June 1998 disposition of ARCO's U.S. coal operations
and of the sale of two of ARCO's Australian coal properties in the first
quarter of 1999 on page 1. ARCO intends to sell its remaining Australian coal
interests in the Curragh and Clermont mines. The income from and net assets of
ARCO's coal operations are included in ARCO's historical financial statements
under discontinued operations.
You can find more details regarding disposition of all these assets on page
1, under Gain on Disposition of Discontinued Operations on page 34, and in Note
4 of Notes to Consolidated Financial Statements on page 49.
CAPITAL PROGRAM
ARCO's capital program includes spending for additions to fixed assets and
other capital expenditures. During 1998, the company spent approximately
$3.6 billion for additions to fixed assets. For 1999 ARCO plans to spend $2.7
billion on additions to fixed assets, a 25% reduction from 1998 spending.
Key expenditures in 1999 will include continued development of the Alpine
field on the North Slope of Alaska, the Shearwater gas condensate field in the
United Kingdom North Sea, and the Villano oil field in Ecuador. In downstream
operations, the expenditures primarily relate to construction of two new
double-hulled marine tankers and completion of the West Coast's
first polypropylene plant at ARCO's Los Angeles Refinery.
ARCO's current long-range plans for capital spending may change during 1999
and thereafter, depending on whether and for how long the current low price
levels for crude oil and natural gas continue. Other factors that may affect
ARCO's future spending plans are changes in the tax laws, changes in clean air
and clean fuel requirements, and changes in other environmental rules and
regulations.
PATENTS
ARCO owns numerous patents, many of which it makes generally available for
license to others in the petroleum industry. ARCO itself is a licensee under
certain patents that are available generally to the industry. ARCO's operations
are not dependent upon any particular patent or patents or upon any exclusive
patent rights.
11
<PAGE>
COMPETITION
ARCO faces intense competition from a number of companies in both its E&P and
R&M operations. Several of its competitors are larger and have substantially
greater resources. In many areas outside the United States ARCO may be in
competition with state owned or sponsored companies for upstream exploration
and development projects. No single competitor, or small group of competitors,
dominates either of ARCO's operating segments.
Upstream, ARCO competes with numerous other companies in the oil and gas
industry to locate and obtain new sources of oil and gas and to produce that
oil and gas in a cost-effective and efficient manner. Bidding for leases and
acquiring producing properties is characterized by intense competition. ARCO
believes its expertise in geological and geophysical technology enables it to
compete effectively in property acquisition, exploration and development in
those geographic areas where it is focusing its efforts. Another major
competitive factor is a company's cost structure for producing oil and gas.
ARCO believes its cost structure enables it to compete on a cost effective
basis in those areas of geographic focus.
Major factors affecting the profitability of the oil and gas industry are the
general price levels for crude oil and natural gas, which have typically been
volatile as a result of fluctuations in world, and sometimes local, economic
conditions and political events. Prices for these commodities are currently at
or near historic lows when adjusted for inflation. Worldwide inventories are
high relative to worldwide demand, which has been adversely affected in the
recent past by the financial malaise in Asia and its effect on economic growth
in Asia and other developing nations, as well as increases in crude oil
production from OPEC and other countries.
Downstream, ARCO competes with numerous companies in both its refining
operations and its retail gasoline marketing. Key competitive methods include
refining operations that yield a greater proportion of high-margin products,
technological expertise in developing new products that meet environmental
specifications, and marketing operations that put a premium on high volume and
innovation. ARCO's refineries are among the most efficient in the industry and
it has been an industry leader in developing reformulated gasoline. It has also
sought to be a leader in low cost, high volume retail marketing and
distribution, combining convenience stores and standardized automotive services
with gasoline delivery to spread station site costs and increase revenue.
ARCO ranked as the seventh largest U.S.-based oil company on the basis of
revenues in the most recent Fortune 500 list of U.S. industrial companies.
HUMAN RESOURCES
As of December 31, 1998, ARCO had approximately 18,400 full-time equivalent
employees, of whom approximately 12% were represented by collective bargaining
agents.
RESEARCH AND DEVELOPMENT
ARCO engages in research for new and improved products and methods for
operating its businesses principally at facilities located at Plano, Texas.
Total research and development expenses were $32 million, $38 million and
$25 million in 1998, 1997 and 1996, respectively.
12
<PAGE>
ENVIRONMENTAL MATTERS
Site Remediation
ARCO is subject to federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (CERCLA or Superfund), and the Superfund
Amendments and Reauthorization Act of 1986 and the Resource Conservation
Recovery Act of 1976 (RCRA). These regulations require ARCO to do some or all
of the following:
. Remove or mitigate the effects on the environment at various sites from the
disposal or release of certain substances;
. Perform restoration work at such sites; and
. Pay damages for loss of use and non-use values.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in environmental assessments and cleanups under
these laws at federal and state-managed sites, as well as other clean-up sites,
including service stations, refineries, terminals, third party landfills,
former nuclear processing facilities, sites associated with discontinued
operations and sites that were formerly owned by ARCO or its predecessors. This
comprises 125 sites for which ARCO has been named a potentially responsible
party (PRP), along with other sites for which no claims have been asserted. The
number of PRP sites in and of itself is not a relevant measure of liability
because the nature and extent of environmental concerns varies by site and
ARCO's responsibility varies from sole responsibility to very little
responsibility. Future costs depend on unknown factors such as:
. Nature and extent of contamination;
. Timing, extent and method of remedial action;
. ARCO's proportional share of costs; and
. Financial condition of other responsible parties.
The environmental remediation accrual is updated annually, at a minimum, and
at December 31, 1998 was $870 million.
The amount accrued represents the estimated undiscounted costs that ARCO will
incur to complete the remediation of sites with known contamination. In view of
the uncertainties associated with estimating these costs (such as differences
of opinion between ARCO and various regulatory agencies with respect to the
appropriate method for remediating contaminated sites, uncertainty as to the
extent of contamination at various sites, and uncertainty regarding ARCO's
ultimate share of costs at various sites), it is possible that actual costs
could exceed the amount accrued by as much as $500 million. This estimate was
determined by applying Monte Carlo analysis to estimated site maximums on a
portfolio basis. Monte Carlo simulation is an analytical tool that uses
computer generated iterations to determine a range of probable outcomes for a
project or a portfolio of projects. ARCO's specific use of Monte Carlo analysis
involved determining a range of liability outcomes for our portfolio of active
sites. See Note 15 of Notes to Consolidated Financial Statements regarding
environmental matters.
Approximately 54% of the reserve relates to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of Montana,
Utah and New Mexico. Another significant component relates to currently and
formerly owned nuclear processing, and refining and marketing facilities, and
other sites that received wastes from these facilities. The remainder relates
to sites with reserves ranging from $1 million to $10 million per site. No one
site represents more than 10% of the total accrual. Substantially all amounts
reserved are expected to be paid out over the next five to six years. ARCO is
also the subject of certain material legal proceedings described below under
the caption "Material Environmental Litigation."
Clean Air
The Federal Clean Air Act Amendments of 1990 (the 1990 Clean Air Act
Amendments) and various state and local laws and regulations impose certain air
quality requirements. Among other things, the 1990 Clean Air Act Amendments
effectively require the manufacture and sale of
13
<PAGE>
reformulated and oxygenated gasolines in areas not meeting specified air
quality standards. The Environmental Protection Agency (EPA) wintertime
oxygenate gasoline program became effective in the fall of 1993. The EPA
reformulated gasoline requirements became effective January 1, 1995 for the
nine U.S. cities, including Los Angeles and San Diego, and other areas with the
worst ozone pollution. The specifications for reformulated gasoline of the
California Air Resources Board (CARB), which are stricter than the EPA
requirements, became effective for retail sales on and after June 1, 1996. To
comply with the EPA air quality requirements and CARB standards, in 1995 ARCO
completed major modifications at its Los Angeles Refinery.
In 1993 the South Coast Air Quality Management District (AQMD), which sets
air quality standards for a five-county area of Southern California, including
Los Angeles County, adopted regulations requiring phased reductions of certain
pollutants. By 2003 the Los Angeles Refinery and the Wilmington calciner will
be required to achieve cumulative reductions from 1992 levels of oxides of
nitrogen (NOx) of 63% and oxides of sulfur (SOx) of 83%. As part of the
regulations, AQMD created a Regional Clean Air Incentives Market (RECLAIM)
program under which regulated firms can earn credits for achieving emission
reductions below targeted levels. Those credits may then be bought and sold.
The Los Angeles Refinery plans to achieve the requisite levels of emission
reductions by a combination of reductions and acquisitions of credits,
substantial amounts of which have already been purchased. The AQMD is currently
considering modifications to the RECLAIM program, but nothing has yet been
finalized.
Environment-Related Expenditures
For the past three years, the company's environment-related expenditures have
been comprised of both capital expenditures and operating expenses.
Environment-related capital expenditures include the cost of projects to reduce
and/or eliminate pollution and contamination in the future and the cost of
modifications to the company's manufacturing facilities necessary to comply
with the aforementioned federal, state and local air quality laws and
regulations. Environment-related operating costs include both costs to
eliminate, control or dispose of, pollutants, as well as costs to remediate
previously contaminated sites. Sites are remediated using a variety of
techniques, including on-site stabilization, bioremediation, soil removal, pump
and treat and other methods as deemed appropriate for each specific site.
For the past three years, the company's environment-related capital
expenditures have averaged approximately $169 million per year. The company
anticipates environment-related capital expenditures of approximately
$240 million and $220 million for 1999 and 2000, respectively. For the past
three years, the company's operating expenses for the remediation of previously
contaminated properties either compelled or likely to be compelled in the
foreseeable future by government or third parties have averaged approximately
$170 million per year. Cash payments for site remediation have averaged
$106 million per year over the same period. The company's operating expenses
also include ongoing costs of controlling or disposing of pollutants. For the
past three years, the company estimates that its operating expenses related to
these ongoing costs have averaged approximately $207 million per year.
In addition to the reserve for environmental remediation costs, the company
has also accrued, as of December 31, 1998, $1.1 billion for the estimated cost,
net of salvage value, of dismantling facilities as required by contract,
regulation or law, and the estimated costs of restoration and reclamation of
land associated with such facilities.
Material Environmental Litigation
Pursuant to the authority provided under Superfund, the State of Montana has
asserted claims against ARCO for compensation for damage to natural resources
up to the maximum amount allowed by 42 United States Code (S)9607. These
alleged damages, arising out of ARCO's or its predecessors' alleged activities,
include restoration and compensable damages, assessment costs, and prejudgment
interest. On December 12, 1983, a lawsuit, styled Montana v. ARCO (Case No. CV-
83-317-HLN-PGH), was filed in the United States District Court for the District
14
<PAGE>
of Montana. At the time trial commenced on March 3, 1997, the State's claim was
for damages of $767 million for alleged injuries to natural resources resulting
from mining and mineral processing operations. In addition, the Confederated
Salish and Kootenai Tribes of the Flathead Reservation (Tribes) were granted a
limited form of intervention in Montana v. ARCO. The Tribes, as alleged
trustees, have asserted claims against ARCO for alleged injury to and loss of
natural resources located in the Clark Fork River Basin in southwest Montana.
The United States Department of Interior also has stated an intention to make a
claim for natural resource damages in the Clark Fork River Basin. In 1998 ARCO
agreed to the terms of two consent decrees, under which ARCO has agreed to pay
$135 million for settlement of $561 million of the State's natural resource
damage claims relating to the Clark Fork River Basin (excluding only the
State's claims for restoration at three sites), $86 million primarily for
remediation at the Stream Side Tailings Operable Unit (SSTOU) in the Clark Fork
Basin, including a civil penalty of $1.8 million, and $20 million to resolve
natural resource damage claims by the Tribes and the United States. All of
these settlements are subject to court approval.
On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO,
styled U.S. v. ARCO, et al. (Case No. CV-89-039-BU-PGH), in the United States
District Court for the District of Montana, for oversight costs at several of
the Upper Clark Fork River Basin Superfund sites. Litigation is proceeding on
both the EPA's claims (in the approximate amount of $90 million, including
$14.7 million pertaining to the SSTOU) and ARCO's counterclaims against various
federal agencies. In the counterclaims, ARCO seeks contributions from the
federal agencies for remediation costs and for any natural resource damage
liability ARCO might incur in Montana v. ARCO. The proposed settlements in
Montana v. ARCO, described above, will resolve the claims and counterclaims in
U.S. v. ARCO pertaining to the SSTOU and should provide a framework for
possible future settlement of the remaining claims.
ARCO and its subsidiary, Atlantic Richfield Hanford Company (ARHCO), and
several other companies who have served as government contractors at the
Hanford Nuclear Reservation in south central Washington State are named as
defendants in a consolidated complaint in the United States District Court for
the Eastern District of Washington, titled In re Hanford Nuclear Reservation
Litigation (CY-91-3015-AAM). In October 1994, the Department of Energy (DOE)
determined that the government will indemnify ARCO and ARHCO for any judgment
or settlement in the action pursuant to the contract between ARHCO and the
Atomic Energy Commission and the provisions of the Price-Anderson Act. On
April 4, 1997, ARCO was served with a new complaint making allegations similar
to those already pending in the litigation, filed by six individual Native
Americans in the United States District Court for the Western District of
Washington, purportedly on behalf of classes of Native Americans living near
the Hanford Nuclear Reservation. The DOE has indicated that it will indemnify
ARCO and ARHCO with respect to this new action as well. This action has been
transferred to the United States District Court for the Eastern District of
Washington. On August 21, 1998, the court issued a ruling that, if upheld on
appeal, should result in the dismissal of ARHCO and ARCO from the case.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking
compensatory and punitive damages and injunctions were filed by the State of
Alaska, the United States, and private plaintiffs against Exxon, Alyeska, and
Alyeska's owner companies (including ARCO which has a 22% interest). Alyeska
and its owner companies have settled the civil damage claims by federal and
state governments and the lawsuits by private plaintiffs. Certain issues
relating to liability for the spill remain unresolved between the Exxon
companies, on the one hand, and Alyeska and its owner companies, on the other
hand.
On November 21, 1990, ARCO filed a complaint in the Superior Court of
California for the County of Los Angeles, Atlantic Richfield Company v. AETNA
Casualty and Surety Company of America, et al. (Case No. BC 015575), seeking
recovery under numerous insurance policies in effect at times
15
<PAGE>
during past years for certain environmental expenses incurred by ARCO. The
claims arise from the activities of ARCO and its predecessor companies,
including The Anaconda Company, at sites and locations throughout the United
States. ARCO has settled with most of the insurance company defendants.
Environmental Matters Relating to International Operations
ARCO's international operations, which are primarily located in China,
Indonesia, the United Kingdom North Sea, Algeria and Venezuela, are conducted
in accordance with internationally acceptable environmental standards and are
also subject to foreign laws covering environmental matters, as well as to
contractual obligations relating to dismantlement and abandonment. To date,
ARCO has not incurred any significant expenditures for environmental
remediation, is not involved in any environmental cleanup, and has not reserved
any amount for environmental remediation, relating to its operations in China,
Indonesia, the United Kingdom North Sea, Algeria and Venezuela. ARCO has
accrued approximately $180 million related to decommissioning and abandonment
of its production facilities in the United Kingdom North Sea. This amount is
part of the total of $1.1 billion accrued by ARCO for the estimated cost of
dismantling all of its facilities as required by contract, regulation or law,
and for the estimated costs of restoration and reclamation of land associated
with such facilities. The foreign environmental laws and regulations have not
had, and are not presently expected to have, a material adverse effect on
ARCO's financial results or position.
Conclusion
Environmental concerns, including the minimization and prevention of
environmental contamination from ongoing operations, and the cost-effective
remediations of existing contaminated sites, continue to be vital factors in
the company's future planning. See Note 15 of Notes to Consolidated Financial
Statements on page 53, and "Environmental Matters" on page 13.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company
On June 7, 1989, the City of New York, the New York City Housing Authority,
and the New York City Health and Hospitals Corporation brought suit in the
Supreme Court of the State of New York for the County of New York (Case
No. 14365/89) against six alleged former lead pigment manufacturers or their
successors (including ARCO as successor to International Smelting and Refining
Company (IS&R), a former subsidiary of The Anaconda Company), and the Lead
Industries Association (LIA), a trade association. Plaintiffs sought to recover
damages in excess of $50 million including (i) past and future costs of abating
lead-based paint from housing owned by New York City and the New York City
Housing Authority (Housing Authority); (ii) other costs associated with dealing
with the presence of lead-based paint in that housing and privately-owned
housing; and (iii) any amounts paid by the City or the Housing Authority to
tenants because of injuries caused by the ingestion of lead-based paint.
Plaintiffs also seek punitive damages and attorney's fees. As a result of
various court rulings, the plaintiffs' only remaining claims are for fraud and
restitution and indemnity. Recently, two stipulated dismissals have further
narrowed the case. The City of New York and the New York City Health and
Hospitals Corporation entered into a stipulated order dismissing with prejudice
all of their pending claims against ARCO and the other defendants. The
remaining plaintiff, the Housing Authority, then entered into another
stipulated order dismissing its claims as to all the Housing Authority
properties except for two housing projects. The Housing Authority initially
sought relief for 322 housing projects.
On January 24, 1996, ARCO (as successor to IS&R) was added as a defendant to
a class action suit pending in the United States District Court for the
Southern District of New York, German, et al. v. Federal Home Loan Mortgage
Corp., et al. (Case No. 93 Civ 6941), by plaintiff intervenors Naquan and Naiya
Thomas, minors, and their mother and guardian Kaii Henry. The complaint in
intervention names as defendants, in addition to ARCO, eight alleged former
processors of lead pigment and lead paint, the LIA, the City of New York and
its Housing Authority, and the owner of the building where plaintiffs reside.
Plaintiffs seek on behalf of themselves, and a purported class of children
under seven and pregnant women residing in dwellings in the City of New York
containing or presumed to contain lead paint, injunctive relief from all
defendants including orders to abate lead paint and to contribute to court-
administered funds to pay for abatement and medical monitoring and treatment.
The complaint alleges causes of action against the lead pigment defendants and
the LIA for negligence, strict product liability, fraud and misrepresentation,
breach of express and implied warranty, nuisance, conspiracy, concert of
action, and enterprise and market share liability. The City of New York, its
Housing Authority, and the owner of the building where plaintiffs reside have
filed cross-claims against ARCO, the other alleged former processors of lead
pigment and paint, and the LIA seeking indemnification against or contribution
toward any liability they (cross-claimants) may have to plaintiffs. On
November 12, 1998, the court dismissed without prejudice the claims in this
lawsuit brought against the lead pigment manufacturers, including ARCO. The
court ruled that the claims against the pigment manufacturers should not have
been joined to this lawsuit.
On November 25, 1998, ARCO (as successor to IS&R) was named as a defendant in
a purported class action suit, Sabater, et al. v. Lead Industries Association,
et al. (Case No. 25533/98), filed in the Supreme Court of the State of New York
for the County of Bronx by the mothers of four minor plaintiffs. The complaint
also names the LIA and eight former lead pigment/paint manufacturers. The
plaintiffs seek, on behalf of themselves and a purported class of children age
six and under residing in dwellings in the City of New York containing or
presumed to contain lead paint, compensatory damages and injunctive relief from
all defendants, including orders requiring defendants to contribute to a court-
administered fund to pay for (i) notification to class members of the dangers
of lead-based paint, (ii) abatement of properties where class members reside
and to pay for temporary relocation during abatement, (iii) medical monitoring,
including screening,
17
<PAGE>
testing, diagnosing, and treating of class members, and (iv) attorney fees. The
complaint alleges causes of action against the defendants for negligence,
strict products liability, conspiracy, concert of action, and enterprise and
market share liability.
On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to a
purported class action suit pending in the Court of Common Pleas in Cuyahoga
County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case
No. 236835), which seeks on behalf of the three named plaintiffs, and all other
persons similarly situated in the state of Ohio, money damages for injuries
allegedly suffered from exposure to lead paint, punitive damages, and an order
requiring defendants to remove and abate all lead paint applied to any building
in Ohio. The suit names as defendants, in addition to ARCO, the LIA and 16
companies alleged to have participated in the manufacture and sale of lead
pigments and paints and includes causes of action for strict product liability,
negligence, breach of warranty, fraud, nuisance, restitution, negligent
infliction of emotional distress, and enterprise, market share and alternative
liability.
In addition, the company is a defendant in several lawsuits brought by
individuals that allege injury from exposure to lead paint. Such cases, in the
aggregate, are not material to the financial condition of the company.
In 1993, natural gas royalty owners filed an action in Zapata County, Texas
titled Stanley Marshall, et al. v. ARCO (Case No. 3217). The plaintiffs claimed
breach of lease, breach of Texas Railroad Commission rules and regulations,
conversion, and fraud. On September 8, 1997, a jury found in favor of the
plaintiffs and on March 19, 1998, the trial court entered the Second Modified
Judgment on the verdict awarding $3.8 million in actual damages, $50 million in
exemplary damages, $13.4 million in attorney's fees and $1.7 million in pre-
judgment interest. ARCO has appealed this judgment to the Court of Appeals for
the Fourth District of Texas in San Antonio.
On June 7, 1994, a purported class action was filed by several individuals in
United States District Court in Pittsburgh, Pennsylvania against ARCO and
Babcock & Wilcox Company (B & W) on behalf of persons "estimated to be in the
thousands" who lived or worked in Apollo and Parks Township, Pennsylvania, and
areas downwind of those places, from 1957 to the present. The suit, Hall, et
al. v. Babcock & Wilcox Company, et al. (Case No. 94-0951), claims that the
plaintiffs and alleged class members were exposed to releases of radioactive
and other toxic substances from two nuclear materials processing facilities
that have contaminated the air, soil, and surface and ground water in those
communities. The suit seeks damages for death and personal injury, diminution
in property values, costs of decontamination of property, injunctive relief
requiring defendants to establish a fund for medical monitoring, and punitive
damages. ARCO has been sued as the former owner of Nuclear Materials and
Equipment Corporation (NUMEC), the original owner and operator of the Apollo
and Parks Township facilities from March 1967 to November 1971. On
September 17, 1998, the jury in a trial of eight "test-case" plaintiffs' claims
returned a verdict of $33.7 million jointly and severally against ARCO and B &
W and another $2.8 million just against B & W. On September 24, 1998, these
eight test-case plaintiffs withdrew their claim for punitive damages against
ARCO. ARCO and B & W have filed motions for judgment in their favor or for a
new trial. The claims of other plaintiffs remain for trial or other
disposition.
On April 13, 1995, a lawsuit was filed in United States District Court for
the Central District of California titled ARCO, et al. v. UNOCAL (Case No. 95-
2379-KMW-JRx). ARCO and five other refiners sought a declaration that UNOCAL's
U.S. Patent No. 5,288,393 (the '393 patent) is invalid and unenforceable. The
'393 patent purports to cover a substantial portion of the reformulated
gasoline compositions that were required by the State of California when the
Phase II regulations of the California Air Resources Board (CARB) went into
effect in March 1996. In the same lawsuit, UNOCAL filed a claim for
infringement of the '393 patent against ARCO and the five other refiners. On
July 15, 1997, the first phase of trial commenced and on October 14, 1997, the
jury
18
<PAGE>
found in UNOCAL's favor on the issues of whether ARCO and the other refiners
had infringed the '393 patent and whether that patent is valid. The jury also
found that ARCO had produced approximately 149 million gallons of infringing
gasoline during the first five months of production. On November 3, 1997, the
jury found that each refiner owed UNOCAL $.0575 for each gallon of gasoline
that infringed on UNOCAL's patent. On September 29, 1998, the court issued a
judgment in favor of UNOCAL for $10.3 million (including prejudgment interest)
against ARCO for infringing gallons during the first five months of production
and for $1.5 million joint and several against ARCO and the other five refiners
for UNOCAL's attorneys fees. ARCO and the other five refiners have appealed the
decision to the Court of Appeals for the Federal Circuit.
On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et al.
(Case No. 700810) was brought in the Superior Court of California for the
County of San Diego against ARCO and eight other refiner-marketers of CARB
reformulated gasoline. The plaintiffs allege that the defendants conspired to
restrict the supply, and thereby to raise the price, of CARB gasoline in
violation of California state antitrust and unfair competition law. The
plaintiffs seek to recover treble damages, restitution, attorneys fees, and
injunctive relief. The court has certified a class of California residents who
bought CARB gasoline after March 1, 1996 other than for resale. On October 17,
1997, the court granted the defendants' motion for summary judgment. On January
23, 1998, the court granted the plaintiffs' motion for a new trial. The
defendants have appealed from the order granting a new trial, and the
plaintiffs have cross-appealed from the summary judgment. On January 23, 1998,
the case of Gilley v. Atlantic Richfield, et al., [Case No. CV UU132BTM (RBB)]
was filed in the United States District Court for the Southern District of
California. The case, which is brought on behalf of a purported class of
wholesale purchasers of CARB gasoline including lessee and contract gasoline
dealers, claims violations of federal antitrust laws based upon factual
allegations that are essentially the same as those contained in the Aguilar
complaint. On October 22, 1998, ARCO was served with a complaint filed in the
Superior Court of California for the County of Sacramento entitled Cal-Tex
Citrus Juice, et al. v. Atlantic Richfield Company, et al. (Case No.
98AS05227). The complaint is purportedly on behalf of a class of all direct or
indirect purchasers of California diesel fuel between March 19, 1996 and
December 31, 1997 against all California refiners of California diesel fuel.
The complaint alleges violations of various state statutes by the defendants'
alleged conspiracy to fix prices of California diesel fuel and seeks treble
damages and restitution.
On May 6, 1998, two purported class actions were filed in the Court of
Chancery of the State of Delaware in New Castle County, Squyres v. Barry, et
al. (Case No. 16357NC) and McMullen v. Union Texas Petroleum, et al. (Case
No. 16358NC), against Union Texas Petroleum Company (UTP), individual directors
of UTP, Kohlberg Kravis Roberts and Co. (KKR), and ARCO relating to ARCO's
acquisition and merger of UTP. On July 28, 1998, a purported class action was
filed in the United States District Court for the Central District of
California, Squyres v. Whitmire, et al. (Case No. 98-6085), against the same
defendants, except ARCO. The suits are brought by individual shareholders of
UTP on behalf of all holders of UTP common stock and seek rescission of the
transaction, damages for the allegedly inadequate consideration being paid by
ARCO for the UTP shares, and attorneys' fees and costs. In the Delaware
actions, the plaintiffs assert that the individual director defendants and KKR,
as UTP's largest shareholder, breached fiduciary duties to other shareholders
and that ARCO aided and abetted the alleged breach of duty. In the California
case, the plaintiffs allege that the defendants violated the Securities
Exchange Act of 1934.
On June 26, 1998, a purported class action was filed in the Court of Chancery
of the State of Delaware in New Castle County, McMullin v. Beran, et al. (Case
No. 16493NC) against ARCO, Lyondell Petrochemical Company, ARCO Chemical
Company, and the individual directors of ARCO Chemical relating to the
acquisition of ARCO Chemical by Lyondell. The suit is brought by an individual
shareholder of ARCO Chemical
19
<PAGE>
on behalf of all common stockholders, other than defendants, and seeks
rescission of the transaction, damages for the allegedly inadequate
consideration being paid by Lyondell for the shares, and attorneys' fees and
costs. The plaintiff alleges that ARCO and the individual directors of ARCO
Chemical, who are alleged to be dominated and controlled by ARCO, breached
fiduciary duties to the minority shareholders.
Environmental Proceedings
As discussed under the caption "Environmental Matters," ARCO is currently
participating in environmental assessments and cleanups at numerous operating
and non-operating sites under Superfund and comparable state laws, RCRA, and
other state and local laws and regulations, and pursuant to third party
indemnification requests, and is the subject of material legal proceedings
relating to certain of these sites. See "Environmental Matters--Material
Environmental Litigation," beginning on page 14.
In addition to the matters reported herein, from time to time, certain of
ARCO's operating divisions and subsidiaries receive notices from federal, state
or local governmental entities of alleged violations of environmental laws and
regulations pertaining to, among other things, the disposal, emission and
storage of chemical and petroleum substances, including hazardous wastes. Such
alleged violations may become the subject of enforcement actions or other legal
proceedings and may involve monetary sanctions of $100,000 or more (exclusive
of interest and costs).
Other Litigation
The company and its subsidiaries are defendants in numerous suits in which
they are not covered by insurance which involve smaller amounts than the
matters described above. Although the legal responsibility and financial impact
in respect to such litigation cannot be ascertained, it is not anticipated that
these suits will result in the payment by the company or its subsidiaries of
monetary damages which in the aggregate would be material in relation to the
net assets of the company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
----------------
20
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
SEC rules require the designation by the company of its officers who are
deemed "executive officers" for purposes of the proxy rules and insider
reporting rules. The employees named below are ARCO's executive officers as of
February 22, 1999. Designations for operating units have changed over time;
names given are those in effect at time position was held.
<TABLE>
- -----------------------------------------------------------------------------------------------
<S> <C>
Mike R. Bowlin, 56 Mr. Bowlin has been Chairman of the Board of ARCO since July
Chairman of the Board 1995, Chief Executive Officer since July 1994, and a director
and Chief Executive since June 1992. He served as President (June 1993-January
Officer 1998), an Executive Vice President (June 1992-May 1993) and a
Senior Vice President of ARCO (August 1985-June 1992), President
of ARCO International Oil and Gas Company (November 1987-June
1992), President of ARCO Coal Company (August 1985-July 1987), a
Senior Vice President of International Oil and Gas Acquisitions
(July 1987-November 1987), a Vice President of ARCO (October
1984-July 1985) and a Vice President of ARCO Oil and Gas Company
(April 1981-December 1984). He has been an officer of the
company since 1984.
- -----------------------------------------------------------------------------------------------
Michael E. Wiley, 48 Mr. Wiley has been President and Chief Operating Officer of ARCO
President and Chief since October 1998. He was an Executive Vice President of ARCO
Operating Officer (March 1997-September 1998) and a director (June 1997-May 1998).
He served as Chief Executive Officer of Vastar (January 1994-
March 1997) and President (September 1993-March 1997). Prior to
the formation of Vastar, he was Senior Vice President of ARCO
(June 1993-June 1994), President of ARCO Oil and Gas Company
(June-October 1993) and Vice President of ARCO and Manager of
ARCO Exploration and Production Technology (1991-1993). He has
been an officer of the company since 1997. He also serves as
Chairman of the Board of Vastar.
- -----------------------------------------------------------------------------------------------
Marie L. Knowles, 52 Mrs. Knowles has been an Executive Vice President and the Chief
Executive Vice President Financial Officer of ARCO since July 1996. She was a director of
and Chief Financial ARCO (July 1996-May 1998). She served as a Senior Vice President
Officer of ARCO and President of ARCO Transportation Company (June 1993-
July 1996), Vice President and Controller of ARCO (July 1990-May
1993), Vice President of Finance, Control and Planning of ARCO
International Oil and Gas Company (July 1988-July 1990), and
Assistant Treasurer of Banking of ARCO (October 1986-July 1988).
She has been an officer of the company since 1990. She also
serves as a Director of Vastar.
- -----------------------------------------------------------------------------------------------
J. Kenneth Thompson, 47 Mr. Thompson has been an Executive Vice President of ARCO since
Executive Vice President January 1998. He was a Senior Vice President of ARCO and
President of ARCO Alaska, Inc. (June 1994-January 1998). He was
a Vice President of ARCO and a Vice President of ARCO
Exploration and Production Technology (June 1993-June 1994) and
a Senior Vice President, Western District of ARCO Oil and Gas
Company (January 1990-June 1993). He has been an officer of the
company since 1993.
- -----------------------------------------------------------------------------------------------
Donald R. Voelte, Jr., 46 Mr. Voelte has been an Executive Vice President since October
Executive Vice President 1998. He served as a Senior Vice President of ARCO (April 1997-
September 1998). He previously worked for the Mobil Corporation
for 22 years. His most recent position was President of Mobil
Oil Company's New Exploration and Producing Ventures (1994-April
1997). He has been an officer of the company since 1997.
- -----------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------
<S> <C>
Terry G. Dallas, 48 Mr. Dallas has been a Senior Vice President of ARCO since
Senior Vice President November 1996 and Treasurer since January 1994. He was a Vice
and Treasurer President of ARCO (June 1993-November 1996), the Vice President,
Corporate Planning (June 1993-January 1994), and Assistant
Treasurer, Corporate Finance of ARCO (1990-1993) and Manager,
Finance, Control and Planning, ARCO British, Ltd. (1988-1990).
He has been an officer of the company since 1993. He also serves
as a Director of Vastar.
- ---------------------------------------------------------------------------------------------
John H. Kelly, 44 Mr. Kelly has been a Senior Vice President, Human Resources of
Senior Vice President ARCO since January 1997. He was Vice President, Human Resources
of ARCO (June 1993-January 1997). He served as Vice President,
Human Resources of ARCO Oil and Gas Company (August 1991-June
1993). He has been an officer of the company since 1993.
- ---------------------------------------------------------------------------------------------
Kevin O. Meyers, 44 Mr. Meyers has been a Senior Vice President of ARCO since July
Senior Vice President 1998 and President of ARCO Alaska, Inc. since February 1998. He
was Senior Vice President, Prudhoe Bay Unit of ARCO Alaska, Inc.
(January 1996-January 1998) and the Vice President, Engineering
and Technology of ARCO International Oil and Gas Company
(February 1994-December 1995). He has been an officer of the
company since 1998.
- ---------------------------------------------------------------------------------------------
Roger E. Truitt, 53 Mr. Truitt has been a Senior Vice President of ARCO and
Senior Vice President President of ARCO Products Company since November 1997. He was
Senior Vice President, Asia Region, ARCO International Oil and
Gas Company (November 1994-November 1997), a Senior Vice
President of ARCO Products Company (January 1994-November 1994)
and a Vice President of ARCO International Oil and Gas Company
(December 1991-December 1993). He has been an officer of the
company since 1997.
- ---------------------------------------------------------------------------------------------
Bruce G. Whitmore, 54 Mr. Whitmore has been the Senior Vice President, General Counsel
Senior Vice President, and Corporate Secretary of ARCO since December 1994. He served
General Counsel and as Vice President and General Counsel of ARCO Chemical Company
Corporate Secretary (October 1990-December 1994) and as Associate General Counsel,
Finance and Corporate Affairs of ARCO (June 1986-September
1990). He has been an officer of the company since 1994.
- ---------------------------------------------------------------------------------------------
Allan L. Comstock, 55 Mr. Comstock has been a Vice President and Controller of ARCO
Vice President and since June 1993. He was a Vice President of ARCO Chemical
Controller Company (October 1989-June 1993) and General Auditor of ARCO
(November 1985-October 1989). He has been an officer of the
company since 1993.
- ---------------------------------------------------------------------------------------------
Dennis D. Schiffel, 55 Mr. Schiffel has been the Vice President, Corporate Planning of
Vice President ARCO since November 1998. He was the Vice President, Investor
Relations, of ARCO (1996-1998), the Vice President, Finance,
Planning and Control of ARCO International Oil and Gas Company
(1992-1996). He has been an officer of the company since 1998.
- ---------------------------------------------------------------------------------------------
Beverly L. Thelander, 43 Ms. Thelander has been the Vice President, Communications,
Vice President Public Affairs and Investor Relations since November 1998. She
served as Vice President of Wholesale Marketing, Distribution
and Supply for ARCO Products Company (September 1996-October
1998), Vice President of Finance, Planning and Control of ARCO
Transportation Company (January 1994-August 1996), and
Controller of ARCO Products Company (October 1991-December
1993). She has been an officer of the company since 1998.
- ---------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the company's capital stock is included in order
to facilitate incorporation by reference of such description in filings by the
company under the federal securities laws.
Certain statements under this heading are summaries of provisions of the Re-
stated Certificate of Incorporation of ARCO, dated June 27, 1994, and do not
purport to be complete. The summaries make use of certain terms defined in the
Certificate of Incorporation and are qualified in their entirety by reference
thereto.
The term "$3.00 Preference Stock" refers to the company's $3.00 Cumulative
Convertible Preference Stock, par value $1 per share. The term "$2.80
Preference Stock" refers to the company's $2.80 Cumulative Convertible
Preference Stock, par value $1 per share. The term "Preferred Stock" refers to
the company's Preferred Stock, par value $.01 per share; this class of
Preferred Stock was authorized by stockholders on May 3, 1993. The term "Common
Stock" refers to the company's Common Stock, par value $2.50 per share.
Capital stock as of December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Shares
Authorized Outstanding
----------- -----------
<S> <C> <C>
$3.00 Preference Stock.............................. 78,089 51,608
$2.80 Preference Stock.............................. 833,776 573,336
Preferred Stock..................................... 75,000,000 --
Common Stock........................................ 600,000,000 321,315,367*
</TABLE>
--------
* Excludes treasury stock.
Certain Open Market Stock Purchases. Pursuant to the 1985 Executive Long-Term
Incentive Plan, as amended through February 22, 1999 (the LTIP), officers and
key employees are eligible to receive shares of Common Stock upon exercises of
stock options, surrender of dividend share credits, and upon grants of
Restricted Stock. Pursuant to the compensation program for outside directors,
effective January 1, 1998, outside directors are eligible to receive shares of
Common Stock upon grants of Restricted Stock, including Restricted Stock
granted in lieu of some or all of their cash compensation for serving as
directors and in connection with the termination of the Outside Directors
Retirement Plan. Pursuant to the company's Capital Accumulation Plans,
employees are eligible to receive Common Stock in satisfaction of employer and
employee contributions thereunder. ARCO may satisfy these obligations by
issuing new shares of Common Stock. From time to time ARCO may also purchase
Common Stock on the open market and contribute it to treasury to provide for
current and future obligations to deliver Common Stock under each of these
plans; in addition, ARCO may purchase Common Stock on the open market and
contribute it to treasury in satisfaction of its obligations upon conversion of
the $3.00 Preference Stock and the $2.80 Preference Stock.
Power of Board to Determine Terms of Preferred Stock. Under the Certificate
of Incorporation, as amended following approval by stockholders on May 3, 1993,
the Board is authorized to issue, at any time or from time to time, one or more
series of Preferred Stock at its discretion. In addition, the Board has the
power to determine all designations, powers, preferences and the rights of such
stock and any qualifications, limitations and restrictions, including but not
limited to: (i) the designation of series and numbers of shares; (ii) the
dividend rights, if any; (iii) the rights upon liquidation or distribution of
the assets of the company, if any; (iv) the conversion or exchange rights, if
any; (v) the redemption provisions, if any; and (vi) the voting rights, if any.
No shares of Preferred Stock have been issued.
So long as the Preference Stocks are outstanding, and only for that period of
time, the
23
<PAGE>
rights of the Preferred Stock are subordinate to the rights of the holders of
Preference Stocks.
Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80
Preference Stock are entitled to receive cumulative dividends at the annual
rate of $3.00 per share and $2.80 per share, respectively, payable quarterly,
before cash dividends are paid on the Preferred Stock, if any, and the Common
Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock
rank on a parity as to dividends. After provision for payment in full of
cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference
Stocks, and the payment in full of cumulative dividends on the outstanding
Preferred Stock, if any, dividends may be paid on the Common Stock as the Board
of Directors may deem advisable, within the limits and from the sources
permitted by law.
Conversion Rights. Each share of $3.00 Preference Stock is convertible, at
the option of the holder, into 13.6 shares of Common Stock of the company at
any time, and each share of $2.80 Preference Stock is convertible, at the
option of the holder, into 4.8 shares of Common Stock of the company at any
time. These conversion rates are subject to adjustment as set forth in the
Certificate of Incorporation. Shares of Preferred Stock would be convertible,
if at all, on such terms as would have been designated by the Board of
Directors.
Voting Rights. The holders of $3.00 Preference Stock are entitled to sixteen
votes per share; holders of $2.80 Preference Stock are entitled to four votes
per share; and holders of Common Stock are entitled to one vote per share.
Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote
cumulatively for directors; holders of Common Stock have no cumulative voting
rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together
as one class, except as provided by law and except as to certain matters which
require a vote by the holders of $3.00 Preference Stock or by the holders of
$2.80 Preference Stock as a separate class as set forth below.
The Certificate of Incorporation provides that if the company shall be in
default with respect to dividends on the $3.00 Preference Stock in an amount
equal to six quarterly dividends, the number of directors of the company shall
be increased by two at the first annual meeting thereafter, and at such meeting
and at each subsequent annual meeting until all dividends on the $3.00
Preference Stock shall have been paid in full, the holders of the $3.00
Preference Stock shall have the right, voting as a class, to elect such two
additional directors. The Certificate of Incorporation contains identical
provisions with respect to the $2.80 Preference Stock.
The Certificate of Incorporation provides that the company shall not, without
the assent of the holders of two-thirds of the then outstanding shares of $3.00
Preference Stock, (a) change any of the terms of the $3.00 Preference Stock in
any material respect adverse to the holders, or (b) authorize any prior ranking
stock; and that the company shall not, without the assent of the holders of a
majority of the then outstanding shares of $3.00 Preference Stock,
(1) authorize any additional $3.00 Preference Stock or stock on a parity with
it; (2) sell, lease or convey all or substantially all of the property or
business of the company; or (3) become a party to a merger or consolidation
unless the surviving or resulting corporation will have immediately after such
merger or consolidation no stock either authorized or outstanding (except such
stock of the company as may have been authorized or outstanding immediately
before such merger or consolidation of such stock of the surviving or resulting
corporation as may be issued upon conversion thereof or in exchange therefor)
ranking as to dividends or assets prior to or on a parity with the $3.00
Preference Stock or the stock of the surviving or resulting corporation issued
upon conversion thereof or in exchange therefor. The Certificate of
Incorporation contains identical provisions with respect to the $2.80
Preference Stock.
The holders of Preferred Stock, if any, would have such voting rights, if
any, as would have been designated by the Board.
Redemption Provisions. The $3.00 Preference Stock is redeemable at the option
of the company as a whole or in part at any time on at least thirty days'
notice at $82 per share plus
24
<PAGE>
accrued dividends to the redemption date. The $2.80 Preference Stock is
redeemable at the option of the company as a whole or in part at any time on at
least thirty days' notice at $70 per share plus accrued dividends to the
redemption date. The holders of Preferred Stock, if any, would have such
redemption provisions, if any, as would have been designated by the Board.
Liquidation Rights. In the event of liquidation of the company, the holders
of $3.00 Preference Stock and holders of $2.80 Preference Stock will be
entitled to receive, before any payment to holders of Common Stock, $80 per
share and $70 per share, respectively, together in each case with accrued and
unpaid dividends. Shares of $3.00 Preference Stock and shares of
$2.80 Preference Stock will rank on a parity as to assets of the company upon
its liquidation. Subject to the rights of creditors and the holders of $3.00
Preference Stock and $2.80 Preference Stock, the holders of Common Stock are
entitled pro rata to the assets of the company upon its liquidation. The
holders of Preferred Stock, if any, would have such liquidation rights, if any,
as would have been designated by the Board.
Preemptive Rights. No holders of shares of capital stock of the company have
or will have any preemptive rights to acquire any securities of the company.
Liability to Assessment. The shares of Common Stock are fully paid and non-
assessable.
Prohibition of Greenmail. Article VII of the Certificate of Incorporation
provides in general that any direct or indirect purchase by the company of any
of its voting stock (or rights to acquire voting stock) known to be
beneficially owned by any person or group which holds more than 3% of a class
of its voting stock and which has owned the securities being purchased for less
than two years must be approved by the affirmative vote of at least 66 2/3% of
the votes entitled to be cast by the holders of the voting stock. Such approval
shall not be required with respect to any purchase by the company of such
securities made (i) at or below fair market value (based on average New York
Stock Exchange closing prices over the preceding 90 days) or (ii) as part of a
company tender offer or exchange offer made on the same terms to all holders of
such securities and complying with the Securities Exchange Act of 1934 or (iii)
in a Public Transaction (as defined).
Rights to Purchase Common Stock. On July 24, 1995, the Board of Directors of
the company declared a dividend of one common share purchase right (a "Right")
for each outstanding share of Common Stock, par value $2.50 per share (the
"Common Shares"), of the company. The dividend was paid on August 18, 1995 to
the stockholders of record on that date. Each Right entitled the registered
holder to purchase from the company one Common Share at a price of $400.00 per
share (the "Purchase Price"), subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement between the company and First
Chicago Trust Company of New York, as Rights Agent.
The Rights will be evidenced by and will be transferred with the Common Share
certificates until the Distribution Date. The Distribution Date is defined as
the earlier to occur of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding Common Shares (an "Acquiring
Person") or (ii) 10 business days following the commencement of, or
announcement of an intention to make, a tender or exchange offer, the
consummation of which would result in a person or group becoming an Acquiring
Person. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights will be issued.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on August 18, 2005 unless redeemed prior to that date by the company.
The Purchase Price payable, and the number of Common Shares or other securities
or property issuable, upon exercise of the Rights are subject to adjustment
from time to time to prevent dilution.
In the event that any person becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person and its
affiliates and associates (which will thereafter be void), will have the right
to receive,
25
<PAGE>
upon exercise of each Right, that number of Common Shares having a market value
of two times the Purchase Price. If, after the Distribution Date, the company
is acquired in a merger or other business combination with, or 50% or more of
its consolidated assets or earning power are sold to, the Acquiring Person,
each holder of a Right will have the right to receive, upon exercise of each
Right, that number of shares of common stock of the acquiring company with a
market value of two times the Purchase Price.
At any time after an Acquiring Person crosses the 15% threshold and prior to
the acquisition by such person of 50% or more of the outstanding Common Shares,
the Board of Directors of the company may exchange the Rights (other than
Rights owned by the Acquiring Person), in whole or in part, at an exchange
ratio of one Common Share per Right.
The Board of Directors of the company may redeem the Rights in whole, but not
in part, at a price of $.01 per Right prior to the acquisition by an Acquiring
Person of 15% or more of the outstanding Common Shares. The terms of the Rights
may be amended by the Board of Directors of the company without the consent of
the holders of the Rights, except that after any person becomes an Acquiring
Person no such amendment may adversely affect the interests of the other
holders of the Rights.
A copy of the Rights Agreement is filed as an exhibit hereto. This summary
description of the Rights is qualified in its entirety by reference thereto.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- -------- ---------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Market price per share
High................. $72 7/16 $81 5/16 $82 1/4 $84 11/16 $87 1/4 $86 15/16 $75 5/8 $69 3/8
Low.................. $62 7/8 $56 1/4 $74 $70 3/8 $74 $67 3/8 $63 11/16 $62 3/16
Cash dividends per
share................. $0.7125 $0.7125 $0.7125 $0.7125 $0.7125 $0.7125 $0.7125 $0.6875
$3.00 Cumulative
Convertible Preference
Stock:
Market price per share
High................. $900 $ -- $1,047 1/8 $ -- $1,040 $ -- $977 1/2 $864 1/2
Low.................. $900 $ -- $1,006 1/2 $ -- $1,040 $ -- $930 $864 1/2
Cash dividends per
share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75
$2.80 Cumulative
Convertible Preference
Stock:
Market price per share
High................. $340 $386 1/2 $388 3/4 $392 $408 $408 $361 3/4 $330
Low.................. $310 $288 $355 $346 1/4 $362 1/2 $331 3/16 $307 $300
Cash dividends per
share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
</TABLE>
Prices in the foregoing table are from the New York Stock Exchange composite
tape. On February 22, 1999 the high price per share was $57 1/4 and the low
price per share was $56.
As of December 31, 1998, the approximate number of holders of record of
Common Stock of ARCO was approximately 81,700. The principal markets in which
ARCO's Common Stock is traded are listed on the cover page.
The quarterly dividend rate for Common Stock was increased to $0.7125 per
share effective June 13, 1997. On January 25, 1999, a dividend of $0.7125 per
share was declared on Common Stock, payable on March 15, 1999 to stockholders
of record on February 15, 1999. Future cash dividends will depend on earnings,
financial conditions and other factors; however, the company presently expects
that dividends will continue to be paid.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for ARCO:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
(Restated except for net income 1998(1)(2) 1997(1) 1996 1995(3) 1994(4)
and cash dividends) ---------- ------- ------- ------- -------
(Millions except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales and other operating
revenues......................... $10,303 $14,340 $14,094 $10,995 $11,132
Income (loss) from continuing
operations....................... (655) 1,331 1,261 685 514
Earnings (loss) per share from
continuing operations (basic)(5). (2.05) 4.14 3.92 4.27 2.85
Earnings (loss) per share from
continuing operations
(diluted)(5)(6).................. (2.05) 4.07 3.86 4.22 2.81
Net income........................ 452 1,771 1,663 1,376 919
Cash dividends per common
share(5)......................... 2.85 2.825 2.75 2.80 2.75
Total assets...................... 25,199 22,425 22,703 20,934 21,415
Long-term debt and capital lease
obligations...................... 4,332 3,619 4,745 5,813 6,293
</TABLE>
--------
(1) See Notes 6 and 7 of Notes to Consolidated Financial Statements
regarding restructuring costs and an extraordinary item in 1997.
(2) Includes $925 million after tax impairment of oil and gas properties.
(3) Dividends include a $0.05 per share redemption payment for Common
Stock purchase rights.
(4) Includes after-tax gain of $273 million from issuance of stock by
Vastar Resources, Inc. and a $210 million after-tax charge for the
costs associated with the elimination of approximately 2,400 positions
company wide.
(5) Restated for the effect of 100% stock dividend issued June 13, 1997.
(6) No dilution assumed for 1998 due to antidilutive effect on loss from
continuing operations.
28
<PAGE>
ITEMS 7. AND 8. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS and FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
Schedule
No. Page
--- ----
<C> <S> <C>
Independent Accountants' Report............................... 30
Financial Statements:
Consolidated Statement of Income............................ 35
Consolidated Balance Sheet.................................. 38
Consolidated Statement of Cash Flows........................ 39
Consolidated Statement of Changes in Stockholders' Equity... 43
Notes to Consolidated Financial Statements.................. 46
Supplemental Information.................................... 60
Supporting Financial Statement Schedule Covered by the
Foregoing Independent Accountants' Report:
II Valuation and Qualifying Accounts........................... 72
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown
in the financial statements or related notes.
Financial statements with respect to unconsolidated subsidiaries and 50%
owned companies are omitted per Rule 3-09(a) of Regulation S-X.
29
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders
of Atlantic Richfield Company
In our opinion, the consolidated financial statements listed in the
accompanying index appearing on pages 35, 38, 39 and 43 present fairly, in all
material respects, the financial position of Atlantic Richfield Company and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index appearing on page 72 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, CA
February 12, 1999
30
<PAGE>
ARCO
OPERATING REVIEW
[PHOTO APPEARS HERE]
During 1998, ARCO took the following actions in line with its strategy to focus
on the oil and gas business: (1) sold its interest in ARCO Chemical Company and
its U.S. coal assets; (2) completed a tender offer for all of the common stock
of Union Texas Petroleum Holdings, Inc. (UTP), which strengthened its presence
in the North Sea, Indonesia, Venezuela, and Alaska; and (3) enhanced its
position in the Gulf of Mexico by swapping its heavy oil properties in
California for assets in the Gulf.
The Operating Review that follows explains the major changes in ARCO's
key businesses as related to prices, production volumes, sales, and
expenses for the years 1998 and 1997. Discontinued operations,
unallocated expenses, and other operations, which include Lower 48
pipelines and aluminum, are also examined. The consolidated results of
these operations are examined in relation to the Consolidated
Statement of Income on page 35.
31
<PAGE>
ARCO
RESULTS OF SEGMENT OPERATIONS
Exploration & Production
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (616) $1,347 $1,329
Special items charge (benefit) 1,002 - (7)
---------------------------
Operating results $ 386 $1,347 $1,322
===========================
</TABLE>
ARCO's goal is to increase its international production significantly, stabilize
production in Alaska after 1999, and increase its Lower 48 production modestly.
During 1998, ARCO's total production on an oil-equivalent barrel basis grew to
1,008,700 barrels per day (b/d), and international production to 285,300 b/d.
ARCO's exploration & production operating results in 1998 were
significantly impacted by lower crude oil prices and, to a lesser extent, higher
exploration expenses. The impact of lower natural gas prices was essentially
offset by increased natural gas production. The former UTP properties purchased
at the end of the second quarter of 1998 contributed to a 4% increase in
production volumes for the year and a 12% increase for the fourth quarter,
compared to fourth quarter 1997. The added revenues from that production were
more than offset by the depreciation, depletion, and amortization (DD&A), which
included the allocated purchase price, and the operating costs associated with
those properties.
In 1998, special items included after-tax charges of $925 million for the
impairment of oil and gas properties, including $507 million related to former
UTP properties. See page 37 of the "Results of Consolidated Operations" for a
further discussion of the impairment. Special items also included after-tax
charges of $107 million primarily for employee termination costs associated with
restructuring. These charges were partially offset by tax-related benefits of
approximately $30 million.
In 1997, higher natural gas prices and continued growth in international
natural gas volumes improved operating results. These factors were partially
offset by higher operating and DD&A expenses associated with increased
production, and higher exploration expense.
Petroleum Liquids Production
<TABLE>
<CAPTION>
Barrels/day - net 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Prudhoe Bay* 175,300 198,500 210,800
Kuparuk River 123,000 128,200 130,500
Other Alaska* 48,400 50,500 51,400
Lower 48, including Vastar 180,900 180,700 171,800
International 130,400 82,600 66,100
-----------------------------
Total 658,000 640,500 630,600
=============================
</TABLE>
* Includes NGLs
In 1998, increased petroleum liquids production primarily reflected 36,700
barrels per day contributed by the former UTP properties, partially offset by
natural field decline in Alaskan fields.
Average Petroleum Liquids Sales Prices
- ------------------------------------------------------------------------------
per barrel
[BAR GRAPH APPEARS HERE]
U.S., including Vastar International
$ 7.50 $ 7.50
98 $ 9.43 $11.07
97 $15.63 $18.20
96 $16.07 $19.02
In a transaction consummated in October 1998, ARCO exchanged California
heavy crude oil properties producing approximately 37,000 barrels per day for
Gulf of Mexico exploration acreage and producing properties, which were
transferred to Vastar Resources, Inc. (Vastar). Production from the Gulf
properties is expected to average 180 million cubic feet of gas equivalent per
day, net of divestitures, in 1999.
ARCO has begun development of the Tarn and Alpine fields and other
satellite discoveries. Alpine and the satellite discoveries will help stabilize
production in Alaska after 1999.
In 1997, increased petroleum liquids production in the Lower 48 partially
offset a net decrease in production from Alaskan fields, primarily Prudhoe Bay.
The 25% increase in international petroleum liquids production reflected
increased contributions from Algeria and Qatar along with new production from
interests in Tunisia and Kazakhstan. These volumes were partially offset by
natural field decline in Indonesia. The overall increase in petroleum liquids
production offset the decline in average petroleum liquids prices.
Natural Gas Production
<TABLE>
<CAPTION>
Million cubic feet/day - net 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S., including Vastar 1,175 1,066 1,044
=======================
International
United Kingdom 369 368 330
Indonesia 293 314 311
Indonesia LNG 98 - -
China 133 142 69
Other 36 20 20
-----------------------
Total International 929 844 730
=======================
</TABLE>
The 1998 growth in international natural gas production primarily reflected
167 million cubic feet per day (mmcf/d) contributed from former UTP properties,
partially offset by declines of approximately 80 mmcf/d associated with ARCO's
other properties, primarily a 53 mmcf/d decline from Indonesia. Indonesian
volumes fell due to the severe effect of the Asian financial crisis on
Indonesia's economy.
32
<PAGE>
RESULTS OF SEGMENT OPERATIONS
ARCO
Average Natural Gas Sales Prices
- ------------------------------------------------------------------------------
per thousand cubic feet
[BAR GRAPH APPEARS HERE]
U.S., including Vastar International
$1.50 $1.50
98 $1.82 $2.54
97 $2.04 $2.64
96 $1.80 $2.54
In 1997, international natural gas production increased 16%, reflecting
increased production from the Yacheng 13 field in the South China Sea and from
fields in the United Kingdom.
Refining & Marketing
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 281 $ 325 $ 287
Special items charge (benefit) - 38 12
-----------------------
Operating results $ 281 $ 363 $ 299
=======================
</TABLE>
ARCO's goal is to increase the profitability and market share of its refining &
marketing operations. In 1998, ARCO expanded the refining & marketing cost
reduction program which was initiated in 1997. In 1998, a special items charge
of $13 million for personnel reductions associated with the cost reduction
program was offset by favorable legal settlements. The 1997 special items charge
primarily related to personnel reductions associated with the cost reduction
program.
The decline in operating results in 1998 primarily resulted from lower
light product margins. Jet fuel imports from Asia into the West Coast marketing
area led to changes in product mix for refineries on the West Coast. This change
increased the supply of gasoline and diesel, causing margins to decline as
gasoline and diesel prices fell more than crude oil prices during the year.
The 1998 net income includes approximately $20 million associated with the
recognition of part of the deferred pre-tax gain on the sale of ARCO's chemical
interest. (See "Gain on Disposition of Discontinued Operations" on page 34.)
In 1997, improved operating results for ARCO's refining & marketing
operations reflected higher margins and sales volumes. Increased sales volumes
more than offset the higher operating and selling expenses.
Petroleum Products Sales
<TABLE>
<CAPTION>
Thousand barrels/day 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gasoline 308.7 281.9 266.4
Jet 102.8 117.3 117.0
Distillate 80.6 76.6 69.0
Other 72.7 68.0 80.7
-----------------------
Total 564.8 543.8 533.1
=======================
</TABLE>
ARCO has had steady growth in sales volumes over the past three years. In
order to support its growing market volumes, refined products were purchased
from third parties to supplement ARCO's refinery production in 1997 and 1998.
Margins on the sale of purchased products are lower than on products produced.
The decline in jet fuel sales reflected both a change in the production mix and
a turnaround at ARCO's Cherry Point refinery in the third quarter of 1998. The
higher volume of other sales in 1996 reflected the sale of intermediate
products, produced in larger quantity as a result of turnarounds that limited
gasoline production.
Other Operations
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 111 $ 82 $ 87
Special items charge (benefit) (8) 7 6
------------------------
Operating results $ 103 $ 89 $ 93
========================
</TABLE>
Results from ARCO's other operations included the earnings from Lower 48
pipeline operations and an aluminum rolling facility. The increase in 1998
earnings, compared to 1997 and 1996, primarily reflected improved operating
results from the 50%-owned Seaway pipeline joint venture in the midcontinent.
The 1998 special items included gains from pipeline asset sales, partially
offset by pipeline restructuring charges. The 1997 special items included
restructuring charges for Lower 48 pipeline operations. The 1996 special items
included a net after-tax charge for the writedown of ARCO's interest in the
Point Arguello Pipeline, partially offset by a gain on a pipeline sale.
Unallocated Items
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Unallocated net expense $(228) $(177) $ (54)
Interest expense (203) (246) (388)
Income from discontinued operations 179 267 402
Gain on disposition of discontinued operations 928 291 -
Extraordinary loss on extinguishment of debt - (118) -
--------------------------
Total $ 676 $ 17 $ (40)
==========================
</TABLE>
33
<PAGE>
RESULTS OF SEGMENT OPERATIONS
ARCO
In 1998, unallocated net expense primarily included charges of $143 million
after tax for future environmental remediation, charges of $48 million after tax
for restructurings, and interest revenue.
In 1997, unallocated net expense primarily included charges of $179 million
after tax for future environmental remediation and reclamation, charges of
$11 million after tax for restructurings, tax benefits related to affiliate
stock transactions and interest revenue.
The environmental charges in 1998 and 1997 related both to current
operations and natural resource damage liabilities in the state of Montana
associated with previously discontinued mining operations. In 1997, ARCO adopted
a new environmental accounting standard and accrued the company's estimate of
post-remediation monitoring costs.
In 1998, the decrease in after-tax interest expense included interest on a
tax refund of $94 million. In 1997, the decrease in after-tax interest expense
included reversals of reserves for tax-related interest of $89 million.
Extraordinary Loss On Extinguishment of Debt
The company incurred a loss of $192 million before tax, or $118 million after
tax, on early retirement of long-term debt during 1997. The early retirements
resulted in a pretax reduction in interest expense of approximately $100 million
in 1998.
Gain on Disposition of Discontinued Operations
ARCO Chemical
In July 1998, ARCO sold its entire interest in ARCO Chemical to Lyondell
Petrochemical Company (Lyondell), an unrelated third party following the
disposition discussed below, for cash proceeds of $4.6 billion. After deferral
of $313 million of the pretax gain as discussed below, ARCO recorded a net
after-tax gain of $1.1 billion.
Previously, the company entered into a 10-year purchase agreement with ARCO
Chemical providing for the delivery of fixed quantities of methyl tertiary butyl
ether (MTBE) at a fixed price approximating the then-market price. Over the last
several years the spot market price of MTBE has declined; however, provision for
loss on the contract was not necessary because ARCO Chemical was a consolidated,
majority-owned subsidiary of the company. ARCO believes that, at the date of
sale of ARCO Chemical to Lyondell, the pricing terms were above-market as
compared to similar toll-based contracts.
The above-market MTBE contract value was reflected in the sale price of the
company's interest in ARCO Chemical. As a result, ARCO has deferred $313 million
of the pre-tax gain on sale of the ARCO Chemical interest. This deferral
represents the estimated discounted present value of the difference over the
remaining term of the contract between the contract price and the spot market
price for MTBE. ARCO does not expect that the above-market differential will
decrease over the remaining term.
The deferral will be amortized over the remaining term of the contract on a
straight-line basis. The amortization and recognition of imputed interest will
have a net favorable impact of approximately $10 million after tax per quarter
on earnings of the refining and marketing segment through the end of the
contract in 2002.
Coal
In June 1998, for cash consideration of approximately $1.1 billion, ARCO
disposed of its U.S. coal operations in a transaction with Arch Coal (Arch).
Operations disposed of included the Black Thunder and Coal Creek mines in
Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest in three mines
in Utah. The Colorado and Utah mines were sold outright. ARCO contributed its
Wyoming coal operations and Arch transferred various of its coal operations into
a new joint venture that is 99% owned by Arch and 1% owned by ARCO.
As of February 1999, ARCO has sold its interests in two Australian
coal mines. ARCO sold its 80% interest in the Gordonstone coal mine and its
31.4% interest in the Blair Athol Joint Venture and has recorded a $92 million
provision for the estimated loss on the disposal of the U.S. and Australian coal
assets. The recognition of the disposition of U.S. operations has been deferred
(by reducing net assets of discontinued operations) until the disposition of the
remaining Australian coal assets is completed and the actual loss can be
determined.
UTP Petrochemical
At the time of the UTP acquisition, ARCO determined the UTP petrochemical
operations would be divested as soon as possible. Accordingly, $33 million after
tax has been accrued as the estimated loss on disposal of the petrochemical
assets.
Lyondell
In September 1997, all of ARCO's 9% Exchangeable Notes due September 15, 1997,
with an outstanding principal amount of $988 million, were redeemed with
Lyondell common stock owned by ARCO. ARCO then sold its remaining Lyondell
shares in a privately negotiated transaction. ARCO realized an aggregate pretax
gain of $633 million, or $291 million after tax, on the two transactions.
Income From Discontinued Operations
<TABLE>
<CAPTION>
Net income (loss) - millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
ARCO Chemical $ 170 $ 92 $ 288
Coal operations 9 56 60
Lyondell - 119 54
UTP petrochemical operations - - -
-----------------------
Total $ 179 $ 267 $ 402
=======================
</TABLE>
See Note 4 to Consolidated Financial Statements regarding discontinued
operations.
34
<PAGE>
ARCO
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
December 31,
Millions, except per share amounts 1998 1997/(a)/ 1996/(a)/
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Sales and other operating revenues $10,303 $14,340 $14,094
Other revenues 506 417 486
-----------------------------------
Total revenues 10,809 14,757 14,580
-----------------------------------
EXPENSES
Trade purchases 3,959 6,405 6,463
Operating expenses 2,735 2,654 2,268
Selling, general and administrative expenses 772 816 737
Depreciation, depletion and amortization 1,535 1,446 1,322
Impairment of oil and gas properties 1,447 - -
Exploration expenses (including undeveloped
leasehold amortization) 629 508 413
Taxes other than income taxes 506 640 683
Interest 259 343 582
Restructuring costs 249 67 26
-----------------------------------
Total expenses 12,091 12,879 12,494
-----------------------------------
Income (loss) from continuing operations
before income taxes, minority interest
and extraordinary item (1,282) 1,878 2,086
Provision (benefit) for taxes on income (651) 504 786
Minority interest in earnings of subsidiaries 24 43 39
-----------------------------------
Income (loss) from continuing operations before
extraordinary item (655) 1,331 1,261
Income from discontinued operations, net of
income taxes of $113 (1998), $74 (1997) and
$155 (1996) 179 267 402
Gain on disposition of discontinued operations, net
of income taxes of $1,620 (1998) and $342 (1997) 928 291 -
-----------------------------------
Income before extraordinary item 452 1,889 1,663
Extraordinary loss on extinguishment of debt,
net of income taxes of $74 - 118 -
-----------------------------------
Net income $ 452 $ 1,771 $ 1,663
===================================
Earnings per share:
Continuing operations
Basic $ (2.05) $ 4.14 $ 3.92
Diluted $ (2.05) $ 4.07 $ 3.86
Net income
Basic $ 1.40 $ 5.51 $ 5.17
Diluted $ 1.40 $ 5.41 $ 5.09
Weighted average equivalent shares outstanding:
Basic 321.0 321.2 321.7
Diluted 321.0 327.4 326.5
</TABLE>
(a) Restated for discontinued operations with no effect on net income.
See Notes on pages 46 through 59.
35
<PAGE>
ARCO
RESULTS OF CONSOLIDATED OPERATIONS
ARCO's 1998 operating results were down primarily because of lower crude oil
prices along with higher exploration expenses. The lower crude oil prices
reduced operating income by nearly $800 million.
In 1997, ARCO's earnings increase primarily reflected higher natural gas
prices and volumes, lower interest expense and higher refined product margins.
Partially offsetting factors were higher DD&A and exploration expenses.
Earnings from Consolidated Operations
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $ (655) $1,331 $1,261
Special items (benefit) charge 1,055 (2) -
------------------------------
Operating results $ 400 $1,329 $1,261
==============================
<CAPTION>
Special items after tax
- ------------------------------------------------------------------------------
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Impairment of oil and gas properties 925 - -
Tax-related benefits (153) (248) -
Environmental charges 145 184 19
Restructuring charges 172 40 19
Other, net (34) 22 (38)
------------------------------
Total (benefit) charge $1,055 $ (2) $ -
==============================
</TABLE>
Revenues
The decline in exploration & production revenues in 1998 resulted primarily from
lower petroleum liquids prices and natural gas marketing activity. Effective
September 1997, Vastar contributed certain of its natural gas marketing
operations to a joint venture with Southern Energy, Inc. The joint venture is
accounted for on the equity method. As a result of the transfer of those
operations, the natural gas marketing sales and purchases volumes for 1998 were
significantly lower compared to 1997 and 1996.
The 1997 exploration & production revenues reflected higher natural gas
production volumes and prices, partially offset by decreased natural gas
marketing activity.
Sales and Other Operating Revenues
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration & production $ 5,934 $ 9,548 $ 9,355
Refining & marketing 5,484 6,856 6,940
Other operations 172 195 223
Intersegment eliminations (1,287) (2,259) (2,424)
-------------------------------
Total $10,303 $14,340 $14,094
===============================
</TABLE>
Natural Gas Trade Sales and Purchases Volumes
<TABLE>
<CAPTION>
Million cubic feet/day 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales
Marketing 427 1,804 2,049
Production 2,104 1,910 1,774
-----------------------------
Total trade sales 2,531 3,714 3,823
Marketing purchases 497 1,865 2,132
=============================
</TABLE>
The decline in refining & marketing sales revenues in 1998 resulted from
lower refined products prices, only partially offset by increased gasoline sales
volumes. In 1997, increased refining and marketing sales volumes were more than
offset by the expiration near the end of 1996 of a crude-oil-for-refined-product
exchange agreement.
Other Revenues
Other revenues increased in 1998, primarily reflecting increased equity earnings
from ARCO's pipeline operations and proceeds from pipeline asset sales. Other
revenues declined in 1997 primarily because of less interest income on a lower
average balance of short-term investments.
Expenses
In 1998, trade purchases were lower primarily as a result of lower crude oil
prices and the transfer of Vastar's natural gas marketing operations to the
Vastar-Southern Energy, Inc. joint venture. ARCO's 1997 trade purchases were
lower, compared to 1996, primarily as a result of decreased natural gas
marketing activity, partially offset by increased purchases of refined products.
In 1998, operating expenses increased because of added expenses from UTP
and a $91 million provision associated with the exchange of California heavy
crude oil properties. Charges for
[PHOTO APPEARS HERE]
36
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
ARCO
future environmental remediation and reclamation declined to $234 million before
tax. Natural gas marketing delivery charges declined following the transfer of
operations to the Vastar-Southern joint venture.
In 1997, operating expenses included charges of $300 million before tax for
future environmental remediation and reclamation and costs associated with
increased production from Rhourde El Baguel in Algeria and other new field
production.
The environmental charges in 1998 and 1997 related both to current
operations and to natural resource damage liabilities in the state of Montana
associated with previously discontinued mining operations. In 1997, these
charges also related to the adoption of a new environmental accounting standard.
The higher DD&A expense in 1998 reflected the inclusion of the DD&A of
former UTP operations in the third and fourth quarters of 1998. The higher DD&A
in 1997 reflected new crude oil and natural gas production from international
operations.
In the fourth quarter of 1998, after a year-long decline in crude oil
prices, ARCO determined that part of the oil price decline that had taken place
was permanent. Accordingly, ARCO revised its official crude oil price forecast
used for economic decision making during the 4th quarter of 1998. This forecast
is based on a West Texas Intermediate (WTI) benchmark price of $15/bbl in 1999,
$16/bbl in 2000, and $17/bbl in 2001, with 2% escalation thereafter. While
current crude oil prices are below $15/bbl, many oil industry expert forecasts
consider crude oil prices in the $12/bbl range to be unusually low and
inappropriate for economic decision making. ARCO used a benchmark price of
$12.05/bbl in preparing its December 31, 1998 Supplemental Oil & Gas
Information.
In accordance with SFAS 121, ARCO performed an impairment review to
determine whether any of ARCO's oil and gas properties were impaired based on
the new crude oil price forecast. Net undiscounted cash flows before tax were
calculated and compared to the net book value on a field-by-field basis. This
included cash flows from proved developed, proved undeveloped and potential oil
and gas reserves, which included both producing and non-producing reserves. The
potential reserves were calculated on a risk-weighted basis to include the
uncertainties associated with field size, reservoir performance, technological
development and commercial risk. Significant downward revisions of these oil
and gas reserves could result in material impairment provisions in future years.
Where appropriate, contracted prices were used but did not materially impact the
result. For those fields where the net book value exceeded the net undiscounted
cash flows before tax, the discounted future cash flows before tax were
calculated using a 10% discount rate factor. This resulted in a pre-tax
impairment charge of $1.4 billion. ARCO tested a downside case using WTI
benchmark crude oil prices of $1/bbl lower than each year of its official
forecast. ARCO believes that prices below $14/bbl are not sustainable and like
most commodities will cycle around their historical midpoints. The impaired
properties included former UTP properties in Pakistan, Venezuela and the U.K.
North Sea, as well as other ARCO properties in California, the U.K. North Sea,
North Africa and the Middle East.
In 1998 and 1997, ARCO's international exploration operations incurred
increased geological and geophysical expense and dry hole costs. Vastar had
higher exploration expenses of $35 million in 1998 primarily resulting from
increased dry hole expense associated with deepwater drilling activity.
Taxes other than income taxes decreased in 1998 and 1997 primarily as the
result of the impact of lower crude oil prices and, to a lesser extent, lower
volumes on U.S. production taxes.
The decrease in interest expense in 1998 primarily reflected increased
capitalized interest compared to 1997. In 1997, the reversal of reserves for
tax-related interest which resulted from the partial resolution of certain
federal and state income tax audits and reduction in long-term debt resulted in
a decline in interest expense, compared to 1996.
In 1998, $229 million of the restructuring charges related to costs of
eliminating 1,212 positions specifically identified as of December 31, 1998. The
entire 1997 charge was for personnel-related costs. See Note 7 to Consolidated
Financial Statements regarding restructuring costs. In 1996, restructuring
charges were final charges for previously reported personnel reductions, the
majority of which were reported in 1994.
Income Taxes
The company had a tax benefit in 1998 reflecting the company's loss from
continuing operations. The company had an effective tax rate of 26.8% in 1997
and 37.7% in 1996. The lower effective tax rate in 1997, compared to 1996,
primarily reflected the net effect of affiliate stock transactions.
[PHOTO APPEARS HERE]
37
<PAGE>
CONSOLIDATED BALANCE SHEET ARCO
<TABLE>
<CAPTION>
December 31,
Millions 1998 1997/(a)/
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 657 $ 434
Short-term investments 260 222
Accounts receivable 1,002 929
Inventories 475 456
Prepaid expenses and other current assets 317 204
---------------------
Total current assets 2,711 2,245
---------------------
Investments and long-term receivables:
Investments accounted for on the equity method 1,235 763
Other investments and long-term receivables 831 1,820
---------------------
Total investments and long-term receivables 2,066 2,583
---------------------
Net property, plant and equipment 18,762 13,560
Net assets of discontinued operations 339 2,777
Deferred charges and other assets 1,321 1,260
---------------------
Total assets $25,199 $22,425
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,403 $ 1,456
Accounts payable 976 948
Taxes payable 634 308
Long-term debt due within one year 399 164
Other 1,285 953
---------------------
Total current liabilities 5,697 3,829
---------------------
Long-term debt 4,332 3,619
Deferred income taxes 3,318 2,661
Dismantlement, restoration and reclamation 1,058 966
Other deferred liabilities and credits 2,955 2,430
Minority interest 259 240
---------------------
Total liabilities 17,619 13,745
---------------------
Stockholders' equity:
Preference stocks 1 1
Common stock, $2.50 par value;
shares issued 325,902,559 (1998), 322,719,890 (1997)
shares outstanding 321,315,367 (1998), 320,369,895 (1997) 815 807
Capital in excess of par value of stock 863 640
Retained earnings 6,589 7,054
Treasury stock (344) (170)
Accumulated other comprehensive income (loss) (344) 348
---------------------
Total stockholders' equity 7,580 8,680
---------------------
Total liabilities and stockholders' equity $25,199 $22,425
=====================
</TABLE>
(a) Restated for discontinued operations
See Notes on pages 46 through 59.
38
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS ARCO
<TABLE>
<CAPTION>
December 31,
Millions 1998 1997/(a)/ 1996/(a)/
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ (655) $ 1,213 $ 1,261
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,535 1,446 1,322
Impairment of oil and gas properties 1,447 - -
Dry hole expense and undeveloped leasehold
amortization 303 235 209
Extraordinary loss on extinguishment of debt - 118 -
Income from equity investments (78) (19) (22)
Dividends from equity investments 37 26 29
Noncash provisions greater (less) than cash
payments 184 61 (203)
Minority interest in earnings of subsidiaries 24 43 39
Net gain on asset sales (61) (49) (35)
Deferred income taxes (539) 112 (44)
Changes in working capital accounts 307 183 158
Other 58 2 (27)
-----------------------------------
Net cash provided by operating activities 2,562 3,371 2,687
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Union Texas Petroleum acquisition (2,707) - -
Additions to fixed assets, including dry hole
costs (3,551) (2,655) (1,854)
Net proceeds from sale of ARCO Chemical and
U.S. coal assets 3,988 - -
Net cash provided (used) by short-term investments (33) 558 753
Investment in/advances to LUKARCO (59) (227) -
Investment in LUKOIL and Zhenhai securities - - (218)
Proceeds from asset sales 207 182 47
Investments and long-term receivables (242) (202) (115)
Other (73) 6 4
-----------------------------------
Net cash used by investing activities (2,470) (2,338) (1,383)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (503) (1,558) (832)
Proceeds from issuance of long-term debt 536 254 680
Net cash provided by notes payable 912 521 99
Dividends paid (917) (908) (887)
Treasury stock purchases (32) (256) (57)
Other 50 43 146
-----------------------------------
Net cash provided (used) by financing activities 46 (1,904) (851)
-----------------------------------
Cash flows from discontinued operations 85 (16) (381)
Effect of exchange rate changes on cash - (5) 4
-----------------------------------
Net increase (decrease) in cash and cash
equivalents 223 (892) 76
Cash and cash equivalents at beginning of year 434 1,326 1,250
-----------------------------------
Cash and cash equivalents at end of year $ 657 $ 434 $ 1,326
===================================
</TABLE>
(a) Restated for discontinued operations
See Notes on pages 46 through 59.
39
<PAGE>
ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITIONS ARCO
1998 Cash Inflows - (millions)
- ------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
ARCO Chemical and U.S. coal asset sales $3,988
Operations $2,562
Short-term debt issuance $ 912
Long-term debt issuance $ 536
Asset sales $ 207
In light of current oil prices, ARCO has taken a hard look at all of its
projects and reaffirmed its intention to pursue those projects that are key to
its focus areas. However, even in focus areas, ARCO may defer some projects
that require a more positive market outlook. Accordingly, ARCO's 1999 capital
spending program includes $2.7 billion for additions to fixed assets, compared
to $3.6 billion in 1998. Future capital expenditures remain subject to business
conditions affecting the industry, as well as changes in environmental rules and
regulations and the tax laws.
Cash and cash equivalents and short-term investments totaled $917 million
at year-end 1998, short-term borrowings were $2.4 billion and long-term debt due
within one year was $399 million.
Beginning in 1997 and continuing through the end of 1998, the company
utilized increased short-term borrowing in lieu of increased long-term borrowing
(other than long-term debt assumed in connection with the UTP acquisition). As a
result, the company has been in a working capital deficit position (currently $3
billion at December 31, 1998). Depending upon the revenues earned and cash
received from the sale of assets during 1999, the company may increase total
indebtedness during the course of the year.
On January 27, 1999, ARCO filed a Form S-3 Registration Statement for the
issuance of up to $1.5 billion of debt securities as determined by market
conditions. The net proceeds from the sale of debt securities will be used for
general corporate purposes, primarily the replacement of short-term debt with
1999 Budgeted Adds to Fixed Assets - (millions)
- ------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
International oil & gas $ 950
Vastar $ 695
Alaska $ 475
Other Lower 48 $ 105
Refining & marketing $ 400
Other $ 75
1998 Cash Outflows - (millions)
- ------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Adds to fixed assets $3,551
UTP acquisition $2,707
Dividends $ 917
Repayment of long-term debt $ 503
Other $ 439
long-term debt. The proceeds may also be used for capital expenditures, the
retirement of maturing debt, and other corporate purposes. Such long-term
financing may not necessarily reduce or eliminate the working capital deficit.
At December 31, 1998, ARCO had unused committed bank credit facilities
totaling $3.0 billion.
The company believes it has adequate resources and liquidity to fund future
cash requirements for working capital, capital expenditures, dividends and debt
repayments with cash generated from operations, existing cash balances,
additional short- and long-term borrowing, and the sale of assets.
Effective June 13, 1997, ARCO had a 2-for-1 stock split in the form of a
100% stock dividend and a 4% increase in the quarterly dividend.
In November 1998, Vastar filed with the SEC a Form S-3 Registration
Statement for the issuance of up to $300 million of debt securities. As of
December 31, 1998, no debt securities had been issued. Vastar had a revolving
credit facility of $1.1 billion with an effective interest rate of 5.6% during
the year. As of December 31, 1998, $320 million was outstanding under the
facility.
[PHOTO APPEARS HERE]
40
<PAGE>
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT ARCO
The following discussion of the company's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
At December 31, 1998 the company holds a variety of financial instruments,
derivative instruments, and derivative-commodity instruments that are sensitive
to changes in interest rates, foreign exchange rates and commodity prices.
To minimize the effects of interest rate and foreign currency fluctuations,
ARCO enters into the following transactions using derivatives: 1) foreign
currency forward, option and swap contracts; 2) interest rate swaps; and 3)
financial futures contracts and over-the-counter Treasury options which are
limited to investment portfolio hedging, alteration of portfolio duration and
changing asset mix. ARCO and its subsidiaries also engage in hedging strategies
involving forward and futures contracts, swaps and options covering part of its
natural gas and crude oil production to minimize the effects of commodity price
fluctuations.
The company uses simple, non-leveraged derivative instruments that are
placed with major institutions whose creditworthiness is continually monitored.
Risk management strategies are reviewed and approved by senior management before
being implemented. Policy controls limit the maximum amount of positions that
can be taken in any given instrument.
In the normal course of business, the company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk and legal risk and are not discussed or quantified in the
following analyses.
Interest Rate Risk
The fair value of the company's cash and short-term investment portfolio and the
fair value of notes payable at December 31, 1998, approximated carrying value.
Given the short-term nature of these instruments, market risk, as measured by
the change in fair value resulting from a hypothetical 10% change in interest
rates, is not material.
The fair value of the company's long-term debt, including current
maturities, was estimated to be $5.5 billion at December 31, 1998, and exceeded
the carrying value by $765 million. Market risk was estimated as the potential
increase in fair value resulting from a hypothetical 10% decrease in the
company's weighted average long-term borrowing rate at December 31, 1998, or
$172 million. Interest rate risk is mitigated by the use of floating rate
instruments, which comprise approximately $400 million of the company's long-
term debt, and a LIBOR-based fixed-to-floating rate swap on $100 million of
long-term debt.
Foreign Exchange Rate Risk
The company has bought foreign currency contracts (principally involving
European currencies) to hedge anticipated foreign currency commitments and
future cash flows from overseas operations with varying maturities ranging from
January 1999 to June 1999.
The hypothetical loss in cash flows of the combined foreign-exchange
positions is estimated to be $52 million. A hypothetical adverse change of 10%
in year-end exchange rates (a strengthening of the U.S. Dollar), is assumed. For
purposes of the estimation, it was also assumed that the exercise of the foreign
currency contracts and the anticipated commitments or future cash flows were
realizable at the same time and at the hypothetical exchange rate. The foreign
currency amounts for the future cash flows were translated to U.S. dollars by
using the hypothetical exchange rate and the cash value of the option,
multiplied by the difference between the hypothetical and strike exchange rates
to the option-contract amount.
At December 31, 1998, approximately $750 million of financial instruments,
primarily short-term debt, were denominated in foreign currencies. Assuming a
hypothetical adverse change of 10% in year-end exchange rates(a weakening of the
U.S. dollar), the fair value of those instruments would increase by $70 million.
Commodity Price Risk
From time to time, the company uses various hedging arrangements, predominantly
natural gas swaps and crude oil futures and options, to manage the company's
exposure to price risk from its natural gas and petroleum liquids production.
These hedging arrangements have the effect of locking in for specified periods
(at predetermined prices or ranges of prices) the prices the company will
receive for the volumes to which the hedge relates. As a result, while these
hedging arrangements are structured to reduce the company's exposure to
decreases in price associated with the hedging commodity, they also limit the
benefit the company might otherwise have received from any price increases
associated with the hedged commodity.
At December 31, 1998, ARCO had entered into a series of crude oil futures
and options contracts and a series of forward natural gas contracts.
41
<PAGE>
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT ARCO
Based on year-end forward prices ARCO had a net liability of $16 million on
those contracts. The hypothetical incremental loss in earnings for the combined
commodity positions at year end is estimated to be $6 million, assuming an
increase in crude oil and natural gas year-end forward prices of 10%.
In order to calculate the hypothetical loss, the relevant parameters of the
commodity contracts are the type of commodity and the delivery price. The
hypothetical loss on the commodity contracts was estimated by calculating the
cash value of the contracts as the difference between the hypothetical and
contract delivery prices, then multiplying it by the contract amount.
Equity Price Risk
Other investments at December 31, 1998, included marketable equity securities
which are recorded at fair value of $336 million, including net unrealized
losses of $75 million. Those securities have exposure to price risk. The
estimated potential loss in fair value resulting from a hypothetical 10%
decrease in prices quoted by stock exchanges is $34 million.
Environmental Matters
ARCO is subject to federal, state and local environmental laws and regulations
that require the company to remove or mitigate the effect on the environment of
the disposal or release of certain chemical, mineral and petroleum substances at
various sites. ARCO is currently participating in environmental assessments and
cleanups at numerous sites under these laws and may in the future be involved in
additional environmental assessments and cleanups.
Environmental Reserves*
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 722 $ 524 $ 600
Charges 234 300 45
Payments (86) (102) (121)
-------------------------
Ending balance $ 870 $ 722 $ 524
=========================
</TABLE>
* Total long-term and short-term liabilities
The amount accrued represents the estimated undiscounted costs that ARCO
will incur to complete the remediation of sites with known contamination. In
view of the uncertainties associated with estimating these costs (such as
differences of opinion between ARCO and various regulatory agencies with respect
to the appropriate method for remediating contaminated sites, uncertainty as to
the extent of contamination at various sites, and uncertainty regarding ARCO's
ultimate share of costs at various sites), it is possible that actual costs
could exceed the amount accrued by as much as $500 million. This estimate was
determined by applying Monte Carlo analysis to estimated site maximums on a
portfolio basis. See Note 15 to Consolidated Financial Statements regarding
environmental matters.
In addition to the provision for environmental remediation costs, $1.1
billion has been accrued for the estimated cost, net of salvage value, of
dismantling facilities as required by contract, regulation or law, and for the
estimated costs of restoration and reclamation of land associated with such
facilities.
Statements of Financial Accounting Standards Not Yet Adopted
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-up Activities."
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. SOP 98-5 states that costs of start-up activities, including
organization costs, should be expensed as incurred. The company has determined
that the adoption of SOP 98-5 will not have a material effect on ARCO's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to adopt
its provisions for all fiscal quarters of all fiscal years beginning after June
15, 1999. Earlier application of all of the provisions of SFAS No. 133 is
permitted, but the provisions cannot be applied retroactively to financial
statements of prior periods. SFAS No. 133 standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. The company has not yet completed evaluating the impact of the
provisions of SFAS No. 133.
42
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ARCO
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Preference Capital in Treasury Stock Comprehensive Retained
Millions Shares Dollars Stock Excess of Par Shares Dollars* Income (loss) Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1996 160.9 $402 $1 $632 0.1 $ (5) $ (88) $5,816 $6,758
==============================================================================================
Net income 1,663 1,663
Other comprehensive income:
Unrealized gain on securities 236 236
Foreign currency translation (2) (2)
Minimum pension liability 32 32
----------------------------------------------------------------------------------------------
Total comprehensive income 1,929
Common stock dividends (885) (885)
Preference stock dividends (2) (2)
Common stock issued 0.2 1 12 13
Treasury stock purchases 0.5 (57) (57)
Treasury stock issued (16) (0.5) 61 45
----------------------------------------------------------------------------------------------
Balance December 31, 1996 161.1 $403 $1 $628 0.1 $ (1) $ 178 $6,592 $7,801
==============================================================================================
Net income 1,771 1,771
Other comprehensive income:
Unrealized gain on securities 381 381
Foreign currency translation (185) (185)
Minimum pension liability (26) (26)
----------------------------------------------------------------------------------------------
Total comprehensive income 1,941
Common stock dividends (906) (906)
Preference stock dividends (2) (2)
100% stock dividend 161.3 403 (403) -
Common stock issued 0.3 1 8 9
Treasury stock purchases 3.5 (256) (256)
Treasury stock issued 4 (1.3) 87 91
Other 2 2
----------------------------------------------------------------------------------------------
Balance December 31, 1997 322.7 $807 $1 $640 2.3 $(170) $ 348 $7,054 $8,680
==============================================================================================
Net income 452 452
Other comprehensive income:
Unrealized gain (loss) on securities (681) (681)
Foreign currency translation (18) (18)
Minimum pension liability 7 7
----------------------------------------------------------------------------------------------
Total comprehensive income (loss) (240)
Common stock dividends (915) (915)
Preference stock dividends (2) (2)
Common stock issued 3.2 8 226 234
Treasury stock purchases 3.2 (249) (249)
Treasury stock issued (3) (.9) 75 72
----------------------------------------------------------------------------------------------
Balance December 31, 1998 325.9 $815 $1 $863 4.6 $(344) $(344) $6,589 $7,580
==============================================================================================
</TABLE>
* At cost
See Notes on pages 46 through 59.
43
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS* ARCO
ARCO's management from time to time may make forward-looking statements to
inform existing and potential security holders regarding various matters. Such
statements are generally accompanied by words such as estimate, project, predict
or expect, that convey the uncertainty of future events or outcomes. These
statements may include projections and estimates concerning the timing and
success of specific projects, the size and timing of cost reductions, the level
of future income, production volumes, size of hydrocarbon resources, ability to
replace reserves and levels of capital spending. Actual results could differ
materially based on numerous factors, including those described below.
Price Volatility, Political, Economic and Regulatory Instability
Volatility in prices and margins affects all of the company's businesses.
Volatility is caused by a number of factors, including changes in market supply
and demand balances and fluctuations in political, regulatory and economic
climates throughout the world.
The ability to operate ARCO's businesses is dependent on the politics and
regulations in the U.S. and in the particular geographic regions where the
company operates. The ability to negotiate and implement specific projects in a
timely and favorable manner may be impacted by political considerations
unrelated to or beyond the control of the company.
Level of Oil and Gas Prices
ARCO's management makes assumptions about the future prices of oil and gas for
various planning, budgetary and accounting disclosure purposes. Management
expects that these assumptions will change over time and actual prices in the
future may differ from these estimates. Any substantial or extended decline in
actual prices could have a material adverse effect on ARCO's financial position
and results of operations, on the quantities of crude oil and natural gas
reserves that economically may be produced and on the quantity of proved
reserves that may be attributed to our properties.
Production Rates and Reserve Replacement
Projecting future rates of oil and gas production is inherently imprecise.
Production rates of oil and gas reservoirs generally decline. Future production
rates can be affected by price volatility and the company's ability to replace
depleting reserves. There can be no assurances (a) as to the level or timing of
success, if any: that the company will have in acquiring or finding and
developing economically recoverable reserves; (b) that estimates of proved
reserves will not be revised in the future; or (c) that the actual quantities
of oil and gas ultimately recovered will not differ from the reserve estimates.
Refining & Marketing
Overall profitability of the company's refining and marketing operations depends
heavily on the margin between the price of crude oil and/or purchased products
and the sales price of products produced and/or purchased. Volumes produced and
margins historically have been volatile and are impacted by market demand,
regulatory changes (particularly environmental regulations regarding gasoline),
the price of crude oil, and the ability of regional refiners and the company to
provide a sufficient supply of refined products.
Operating Hazards
Operations are subject to various hazards common to the industry, including
explosions, fires, uncontrollable spills, and damage from severe weather
conditions.
Year 2000 Risks
The company has described its plans for addressing the Year 2000 issue and made
a number of forward-looking statements regarding its Year 2000 readiness under
the caption "Impact of the Year 2000 Issue." These statements are made on a
number of assumptions: (a) that the company will be able to timely identify and
locate all relevant Year 2000 items; (b) that the company's repair and
replacement program will be timely completed, including work to be performed by
third-party vendors and contractors; and (c) that representations by third
parties regarding their readiness are correct. Actual results could differ
materially if any of these assumptions are incorrect.
Due to the general uncertainty as to the Year 2000 readiness of third
parties and as to the reaction of the general population to any perceived
gasoline shortages, as well as the general interconnectedness of businesses and
their dependency on computers and embedded computer chips, the company cannot
assure its stockholders that its operations and business will not be affected by
a Year 2000 issue.
* The company desires to take advantage of the "safe harbor" provisions
contained in Section 27A of the Securities Act and Section 21B of the Exchange
Act and is including this statement in order to do so.
44
<PAGE>
YEAR 2000 ISSUE ARCO
The Year 2000 issue (Y2K) arises from computer programs and embedded computer
chips being unable to distinguish between the year 1900 and the year 2000,
resulting in system failures or miscalculations that could cause operational
disruptions. Completion of the company's Y2K project in a timely fashion is
expected to reduce the possibility of material disruptions of normal business
operations.
ARCO is addressing the Y2K issue in three major areas: (1) computing
integrity, (2) asset integrity, and (3) commercial integrity. Computing
integrity refers to functionality of information technology, including computer
hardware and software used throughout the company's facilities. Asset integrity
refers to functionality of the company's worldwide exploration and production
[PHOTO APPEARS HERE]
operations, shipping operations, and its refining and marketing operations, all
of which use embedded systems in the automated equipment and associated software
responsible for the movement of product. Commercial integrity refers to the
functionality of non-ARCO operated joint ventures and third party operated
production operations, including the Trans Alaska Pipeline System (TAPS), as
well as third party vendors of goods and services. ARCO is managing the project
internally and is working to assure Y2K readiness by conducting internal audits.
The company has also hired outside consultants to do certain minor audits. The
company's implementation of the Y2K Project has not impacted other technology
projects.
In all three areas, ARCO has identified critical items and prioritized
their remediation based on the likelihood that failure attributable to Y2K
issues would have a material adverse effect on the company's operations.
Critical items are those believed by ARCO that could, in the event of failure,
pose a risk to the health and safety of ARCO employees and other people, cause
damage to the property or the environment, adversely affect revenues, or affect
ARCO's business relationships.
ARCO is addressing its Y2K efforts in four phases: (1) inventory of Y2K
items; (2) assessment of criticality of these items and prioritization of
remediation efforts; (3) evaluation of various remediation strategies; and (4)
the remediation and testing of modifications or new software.
<TABLE>
<CAPTION>
Percent Total expended Total
complete at Expected through estimated
December date of December 31, cost
Areas addressed 31, 1998 completion 1998 (millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computing integrity 70% March 1999 $ 8 $ 12
Asset integrity 50% June 1999 5 10
Commercial integrity 25% June 1999 1 3
---------------------------------------------------------
Total costs $ 14 $25
=========================================================
</TABLE>
This estimate does not include ARCO's potential share of Y2K costs that may be
incurred by partnerships and joint ventures in which the company participates
but is not the operator.
After completion of its Y2K efforts, ARCO will continue to monitor changes
to remediated systems. In addition, ARCO is developing contingency plans to
mitigate any disruption that might occur. Because ARCO has no control over third
party remediation efforts, a large portion of ARCO's contingency planning is
focusing on its external commercial relationships. ARCO is also identifying
alternate sources of software and alternate vendors of goods and services. In
addition, ARCO's contingency planning is focusing in part on existing business
interruption plans to determine their applicability to Y2K items.
ARCO believes that the impact of any Y2K failure will most likely be
localized. However, as a result of the general uncertainty inherent in the Y2K
problem, particularly the possible failure of critical third parties to
successfully address their Y2K problems, ARCO is unable to assess the likelihood
of significant business disruptions in one or more of its locations. Such
disruptions could cause the company to be unable to produce or transport crude
oil or natural gas, or to manufacture and deliver refined products to wholesale
and retail customers. As a result, the company is currently unable to predict
the aggregate financial or other consequences of such interruptions.
The foregoing "Impact of the Year 2000 Issue" contains forward-looking
statements that should be read in conjunction with the disclosures under the
heading "Safe Harbor for Forward-Looking Statements."
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Note 1 Accounting Policies
ARCO's accounting policies conform to generally accepted accounting principles,
including the "successful efforts" method of accounting for oil and gas
producing activities. Unless otherwise stated, the Notes to Consolidated
Financial Statements exclude discontinued operations.
Principles of Consolidation
The consolidated financial statements include the accounts of all subsidiaries,
ventures and partnerships in which a controlling interest is held, including
Vastar Resources, Inc., of which ARCO owned 82.1% of the outstanding shares at
December 31, 1998. ARCO also consolidates its interests in undivided interest
pipeline companies and in oil and gas joint ventures. ARCO uses the equity
method of accounting for companies where its effective ownership is between 20%
and 50% and for other ventures and partnerships in which a controlling interest
is not held.
Revenue Recognition
Revenues are generally recognized upon the passage of title, net of royalties,
if applicable.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as time deposits,
certificates of deposit and marketable securities other than equity securities,
maturing within three months of purchase. Cash equivalents are stated at cost,
which approximates fair value.
Oil and Gas Unproved Property Costs
Unproved property costs are initially capitalized. Significant unproved
properties are not amortized but are periodically assessed for impairment. Other
unproved properties are amortized on a composite basis, considering past success
experience and average property life. In general, costs of properties
surrendered or otherwise disposed of are charged to accumulated amortization.
Costs of successful properties are transferred to developed properties.
Exploratory wells that find oil and gas reserves which cannot be classified as
proved within one year of discovery and do not continue to qualify as
capitalized costs are charged to expense as dry hole costs.
Fixed Assets
Fixed assets are recorded at cost and are written off on either the unit-of-
production or straight-line method based on the expected lives of individual
assets or groups of assets.
Upon disposal of assets depreciated on an individual basis, residual cost less
salvage value is included in current income. Upon disposal of assets depreciated
on a group basis, unless unusual in nature or amount, residual cost less salvage
value is charged against accumulated depreciation.
Long-lived assets are assessed for possible impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, whenever events
indicate the carrying amount may not be recoverable. If undiscounted future cash
flows are less than the carrying amount, an impairment loss is recognized to the
extent the carrying amount exceeds future discounted cash flows. For proved oil
and gas properties, the assessment is performed on an individual field basis.
Dismantlement, Restoration and Reclamation Costs
The estimated costs, net of salvage value, of dismantling facilities or projects
with limited lives or that are required to be dismantled by contract, regulation
or law, and the estimated costs of restoration and reclamation associated with
oil and gas operations are accrued during production and classified as a long-
term liability. Such costs are taken into account in determining depreciation,
depletion and amortization.
Environmental Remediation
Environmental remediation costs are accrued as operating expenses based on the
estimated timing and extent of remedial actions required by applicable
governmental authorities and the amount of ARCO's liability in consideration of
the liability and financial wherewithal of other responsible parties. Estimated
liabilities are not discounted to present value.
Stock-based Compensation
Employee stock options are accounted for under the intrinsic value method
prescribed by Accounting Principles Board Opinion (APB) No. 25.
Earnings per Share
Basic earnings per share is based on the average number of common shares
outstanding during each period. Diluted earnings per share includes as
outstanding certain options and all convertible or potentially issuable
securities as well. All historical earnings per share have been restated to give
effect to the 100% stock dividend effective June 13, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Derivative Instruments
The company uses a variety of derivative instruments, both financial and
commodity based, to minimize the market risks of commodity price, interest rate
and foreign currency fluctuations. The company does not hold or issue derivative
instruments for trading purposes and is not a party to leveraged instruments.
All derivative instruments are off-balance sheet instruments; however, net
receivable or payable positions related to derivative instruments are carried on
the balance sheet. The nature of the transaction underlying a risk management
strategy, primarily whether or not the instrument qualifies as a hedge,
determines which accounting method is used.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
The conditions that must be met for a derivative instrument to qualify as a
hedge are: (1) the item to be hedged exposes the company to price or interest
rate risk; (2) the derivative reduces the risk exposure and is designated as a
hedge at the time the derivative contract is entered into; and (3) at the
inception of the hedge and throughout the hedge period there is a high
correlation between changes in market value of the derivative instrument and
fair value of the underlying items being hedged.
Deferral accounting is used for the following types of transactions (if the
instrument qualifies as a hedge): future crude oil and natural gas production;
fixed-price crude oil and natural gas purchase and sale commitments; U.S.
dollar-denominated debt issued by a foreign subsidiary; debt denominated in a
foreign currency; and anticipated foreign currency commitments. Under this
method, deferred gains and losses are included in other assets or accrued
liabilities until the designated underlying item is recognized in income.
Recognized gains and losses are recorded in sales and other operating revenues,
other revenues or trade purchases depending on the underlying item associated
with the derivative. Instruments typically used in these transactions are crude
oil and natural gas swap and price collar contracts and some foreign currency
swap, forward and option contracts.
The accrual method of accounting is used for interest rate swap agreements
entered into by the company which convert the interest rate on fixed-rate debt
to a variable rate. Under the accrual method, each net payment or receipt due or
owed under the derivative is recognized in income in the period to which the
payment or receipt relates. Amounts to be paid/received under these agreements
are recognized as an adjustment to interest expense. The related amounts payable
to/receivable from the counterparties are included in other accrued liabilities.
The fair value method of accounting is used for any derivative instrument
that does not qualify as a hedge. The fair value method, whereby gains and
losses associated with changes in fair value of a derivative instrument are
recognized currently in income or in accumulated other comprehensive income, is
used for the following derivative instruments: foreign currency forward and
option contracts associated with anticipated future cash flows related to
overseas operations, and foreign currency swap contracts associated with
foreign-denominated intercompany debt with maturities exceeding one year.
Presently, changes in fair value of all transactions accounted for under this
method are recognized currently in income and reported as other revenues.
Under all methods of accounting, the cash flows related to any recognized
gains or losses associated with derivative instruments are reported as cash
flows from operations.
If a derivative instrument designated as a hedge is terminated prior to
expected maturity, gains or losses are deferred and included in income when the
underlying hedged item is recognized in income.
When the designated item associated with a derivative instrument matures,
is sold, extinguished or terminated, gains or losses are recognized as part of
the gain or loss on sale or settlement of the underlying item. When a derivative
instrument is associated with an anticipated transaction that is no longer
expected to occur, the gain or loss on the derivative is recognized immediately
in income.
Reclassifications
Certain previously reported amounts have been restated to conform to
classifications adopted in 1998 or to reflect the company's chemical and coal
operations as discontinued.
Note 2 Segment Information
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." ARCO has
two reportable segments: exploration and production (E&P) and refining and
marketing (R&M). The segments were determined based upon types of products
produced/sold by each segment. Segment performance is evaluated based upon net
income, excluding interest expense.
The E&P segment is an aggregation of several business units engaged in one
or more of the following: the worldwide exploration, development and production
of petroleum liquids (crude oil, condensate and natural gas liquids) and
natural gas; the purchase and sale of petroleum liquids and natural gas; and the
transportation via pipeline of petroleum liquids within the State of Alaska. The
company's investments in the LUKARCO joint venture and LUKOIL common stock are
included in the E&P segment as well.
The R&M segment comprises the refining of crude oil, primarily from the
North Slope of Alaska; the marketing of petroleum products, primarily in the
West Coast region of the U.S.; and the transportation of petroleum liquids and
petroleum products via ocean-going tankers, primarily between Alaska and the
West Coast. The company's equity investment in Zhenhai Refining and Chemical
Company is included in the R&M segment as well.
Revenue from other operating segments is attributable to the pipeline
transportation and storage of petroleum liquids and petroleum products in the 48
contiguous United States.
Intersegment sales were made at prices approximating current market value.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Segment Information
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Exploration Refining & Unallocated
Millions & Production Marketing All Other Items Totals
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenue:
U.S. $ 4,372 $5,457 $ 156 $ 2 $ 9,987
International 1,562 27 - 14 1,603
Intersegment revenues (1,179) (14) (80) (14) (1,287)
----------------------------------------------------------------------
Total 4,755 5,470 76 2 10,303
Income from equity
affiliates 25 19 34 - 78
Interest revenue 18 5 - 96 119
Interest expense - - - 259 259
Depreciation, depletion
and amortization 1,239 252 18 26 1,535
Income tax expense
(benefit) (563) 145 65 (298) (651)
Net income (loss) (616) 281 111 676(a) 452
Investment in equity
affiliates 661 219 344 11 1,235
Property, plant and
equipment (net):
U.S. 7,420 2,939 432 132 10,923
International 7,824 15 - - 7,839
Additions to fixed
assets 3,020 488 38 5 3,551
Segment assets 18,203 3,826 1,119 2,051(b) 25,199
<CAPTION>
1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenue:
U.S. $ 7,918 $6,853 $ 177 $ 3 $14,951
International 1,630 3 - 15 1,648
Intersegment revenues (2,164) (3) (77) (15) (2,259)
----------------------------------------------------------------------
Total 7,384 6,853 100 3 14,340
Income from equity
affiliates 5 8 6 - 19
Interest revenue 12 3 - 99 114
Interest expense - - - 343 343
Depreciation, depletion
and amortization 1,184 226 15 21 1,446
Income tax expense
(benefit) 653 161 47 (357) 504
Net income 1,347 325 82 17(a) 1,771
Investment in equity
affiliates 336 98 329 - 763
Property, plant and
equipment (net):
U.S. 6,734 2,714 470 146 10,064
International 3,496 - - - 3,496
Additions to fixed
assets 2,276 330 46 3 2,655
Segment assets 13,269 3,564 1,149 4,443(b) 22,425
<CAPTION>
1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenue:
U.S. $ 7,968 $6,935 $ 202 $ - $15,105
International 1,387 5 - 21 1,413
Intersegment revenues (2,303) (8) (92) (21) (2,424)
----------------------------------------------------------------------
Total 7,052 6,932 110 - 14,094
Income from equity
affiliates 13 - 9 - 22
Interest revenue 3 1 - 163 167
Interest expense - - - 582 582
Depreciation, depletion
and amortization 1,061 227 18 16 1,322
Income tax expense
(benefit) 767 150 52 (183) 786
Net income (loss) 1,329 287 87 (40)(a) 1,663
Investment in equity
affiliates 94 - 330 - 424
Property, plant and
equipment (net):
U.S. 6,434 2,621 463 183 9,701
International 2,866 - - - 2,866
Additions to fixed
assets 1,684 121 41 8 1,854
Segment assets 11,838 3,380 1,141 6,344(b) 22,703
</TABLE>
(a) Includes: income from discontinued operations of $179, $267 and $402 in
1998, 1997 and 1996, respectively; gain on disposition of discontinued
operations of $928 and $291 in 1998 and 1997, respectively; and
extraordinary loss of $118 in 1997.
(b) Includes assets of discontinued operations of $339 (1998), $2,777 (1997) and
$3,395 (1996).
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Note 3 Acquisition of Union Texas Petroleum Holdings, Inc.
In June 1998, ARCO completed its tender offer for all outstanding common shares
of Union Texas Petroleum Holdings, Inc. (UTP) for approximately $2.5 billion, or
$29 per share in cash. ARCO also purchased in a tender offer 1,649,500 shares of
UTP's 7.14% Series A Cumulative Preferred Stock for approximately $200 million,
or $122 per share in cash. UTP was a U.S.-based, non-integrated oil and gas
company with substantially all of its oil and gas producing operations conducted
outside of the U.S. in the United Kingdom sector of the North Sea, Indonesia and
Pakistan.
The acquisition is being accounted for as a purchase. The results of
operations of UTP are included in the consolidated financial statements of ARCO
as of July 1, 1998. The cost of the acquisition was allocated on the basis of
the estimated fair value of the assets acquired and liabilities assumed and
there are no contingencies or other matters that could affect the allocation of
the purchase cost. The liabilities assumed included employee termination costs
of $78 million and other costs, such as lease and other contract cancellation
costs, totaling $18 million associated with the merging of UTP's businesses into
ARCO's operations. At December 31, 1998, ARCO had terminated 279 of the 357
employees to be terminated and had paid out $52 million against the liability
for severance payments. The remaining cash costs for severance, office lease and
software maintenance contract buyouts totaling $37 million are expected to be
paid out by the end of 2000. In addition, there were $7 million of non-cash
charges. The group of employees terminated included U.S. citizens employed in
exploration and production operations and corporate headquarters personnel.
The following unaudited pro forma summary presents information as if UTP
had been acquired as of the beginning of ARCO's fiscal years 1998 and 1997. The
pro forma amounts include certain adjustments, primarily to recognize
depreciation, depletion and amortization based on the allocated purchase price
of UTP assets, and do not reflect any benefits from economies which might be
achieved from combining operations. The pro forma information does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
companies:
<TABLE>
<CAPTION>
Millions, except per share amounts 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Sales and other operating revenues $10,570 $15,061
====================
Income (loss) from continuing operations before
extraordinary item $ (702) $ 1,372
Income and gains on discontinued operations 1,107 590
Extraordinary loss - (118)
--------------------
Net income $ 405 $ 1,844
====================
Earnings (loss) per share
Basic
Continuing operations $ (2.19) $ 4.27
Discontinued operations 3.45 1.84
Extraordinary loss - (.37)
--------------------
Net income $ 1.26 $ 5.74
====================
Diluted
Continuing operations $ (2.19) $ 4.19
Discontinued operations 3.45 1.80
Extraordinary loss - (.36)
--------------------
Net income $ 1.26 $ 5.63
====================
</TABLE>
Note 4 Discontinued Operations
Coal
In June 1998, ARCO disposed of its U.S. coal operations in a transaction with
Arch Coal. Operations disposed of included the Black Thunder and Coal Creek
mines in Wyoming, the West Elk mine in Colorado, and ARCO's 65% interest in
three mines in Utah. The Colorado and Utah mines were sold outright. ARCO
contributed its Wyoming coal operations and Arch Coal transferred various of its
coal operations into a new joint venture that is 99% owned by Arch Coal and 1%
owned by ARCO.
As of February 1999, ARCO has disposed of its interests in two Australian
coal mines. ARCO disposed of its 80% interest in the Gordonstone coal mine and
its 31.4% interest in the Blair Athol Joint Venture. After those dispositions
the carrying value of the remaining Australian assets was $56 million at
February 12, 1999. At December 31, 1998, the carrying value of the Australian
coal assets was $197 million and was included in net assets of discontinued
operations on the balance sheet. Beginning in January 1999, ARCO suspended
depreciation on the Australian coal assets (1998 annual depreciation was $23
million). ARCO has recorded a $92 million provision for the estimated loss on
the disposal of the U.S. and Australian coal assets. A gain of approximately
$200 million on the sale of U.S. coal operations has been deferred (by reducing
the net assets of discontinued operations) until the disposition of the
remaining Australian coal assets is completed in 1999 and the actual loss can be
determined.
Chemical
In July 1998, ARCO tendered its entire interest of 80 million shares of
ARCO Chemical Company common stock to Lyondell Petrochemical Company (Lyondell)
for $57.75 per share, or total cash proceeds of approximately $4.6 billion.
After deferral of $313 million of the pretax gain, ARCO recorded an after-tax
gain of approximately $1.1 billion in the third quarter of 1998 from the sale of
the shares. The deferral represents the estimated discounted present value of
the difference over the remaining term of an above-market MTBE contract between
ARCO and ARCO Chemical and the spot market price for MTBE. The deferral will be
amortized over the remaining term of the contract, ending in 2002, on a
straight-line basis.
As part of the acquisition of UTP, ARCO determined it would sell UTP's
petrochemical business. ARCO expects to complete the sale by March 31, 1999. At
December 31, 1998, the carrying value of these assets was $142 million and was
included in the net assets of discontinued operations on the balance sheet. If
depreciation had not been suspended for the last six months of 1998, the
petrochemical business would have had a loss of $5 million. ARCO has recorded a
$33 million after-tax provision for loss on the sale of the assets.
In September 1997, ARCO disposed of its 49.9% equity interest in Lyondell.
ARCO recorded an after-tax gain of $291 million on the disposition.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Revenues and net income from discontinued operations were as follows:
<TABLE>
<CAPTION>
Millions 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
ARCO Chemical $1,990 $3,726
Coal operations $ 338 $ 637
UTP petrochemical $ 58 $ -
Net income:
ARCO Chemical $ 170 $ 92
Coal operations 9 56
Lyondell - 119
UTP petrochemical - -
-----------------
$ 179 $ 267
=================
</TABLE>
Note 5 Accounting Changes
Effective January 1, 1997, ARCO adopted Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities." The provisions include standards
affecting the measurement, recognition and disclosure of environmental
remediation liabilities. The effect of initially applying the provisions of SOP
96-1 in 1997 was a decrease in net income of $30 million ($0.09 per share).
Note 6 Extraordinary Item
During 1997, ARCO retired debt with a face value of $756 million prior to
maturity. The debt repurchases resulted in an extraordinary charge of $118
million against net income, after tax of $74 million.
Note 7 Restructuring Costs
During 1998, ARCO recorded pretax charges of $229 million for the costs of
eliminating over 1,200 positions related to the downsizing of continuing
operations, primarily E&P technical support, international E&P support
operations and the corporate headquarters. All positions eliminated were
specifically identified prior to December 31, 1998; all terminations are
scheduled to take place prior to December 31, 1999.
The following table summarizes the liabilities related to the 1998
restructuring program, including $11 million transferred from the 1997 program
discussed below:
<TABLE>
<CAPTION>
($ Millions) Funded Unfunded
Short-term Long-term Long-term
Terminations Benefits(a) Benefits(b) Benefits(c) Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,212 $93 $90 $56 $239
</TABLE>
(a) Severance and ancillary benefits, primarily relocation and outplacement
(b) Net increase in pension benefits to be paid from assets of qualified pension
plans
(c) Net increase in non-qualified pension benefits and other postretirement
benefits to be paid from Company funds
Long-term benefits will be paid after retirement over the remaining lives
of the recipients or, for pension benefits, in a lump sum upon election. Long-
term benefits have been accrued in accordance with SFAS No. 88. Severance and
ancillary costs will be paid over the next two years. No significant amounts
have been paid as of December 31, 1998.
In addition, the Company recorded a pretax charge of $20 million related to
office space and facilities that will be vacated with no future economic
benefit. Cash payments will be made through 2005, the remaining term of the
lease.
During 1997, ARCO recorded pretax charges of $67 million for personnel
reductions in refining and marketing operations and corporate headquarters. As
of December 31, 1998, $45 million was paid and $11 million was transferred to
reserves for the 1998 program, with a balance of $11 million to be paid within
the next year. The transfer was necessary because when the 1998 program was
announced, certain employees who had not yet terminated under the 1997 program
became eligible for 1998 program benefits. Approximately 480 employees were
originally planned to terminate under the 1997 program. Approximately 400 people
terminated under the 1997 program, with approximately 80 transferred to the 1998
program.
The 1996 charge of $26 million represents the amount by which the costs of
restructuring actions, originally estimated and recorded in 1994, were
underaccrued, primarily because of additional terminations. Approximately 2,200
employees were originally planned to be terminated under the 1994 plan;
approximately 2,450 were actually terminated.
Note 8 Inventories
Inventories are recorded when purchased, produced or manufactured and are stated
at the lower of cost or market. In 1998, approximately 80% of inventories,
excluding materials and supplies, were determined by the last-in, first-out
(LIFO) method. Materials and supplies and other non-LIFO inventories are
determined predominantly on an average cost basis.
Total inventories at December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Crude oil and petroleum products $ 220 $ 247
Other products 24 24
Materials and supplies 231 185
---------------
Total $ 475 $ 456
===============
</TABLE>
The excess of the current cost of inventories over book value was
approximately $193 million and $240 million at December 31, 1998 and 1997,
respectively.
Note 9 Investments
At December 31, 1998 and 1997, investments in debt securities were primarily
composed of U.S. Treasury securities and corporate debt instruments. Maturities
generally ranged from four days to ten years. These investments are classified
as short or long term depending on maturity. ARCO's investments in LUKOIL common
stock and Zhenhai Refining and Chemical Company convertible bonds were included
in other investments and long-term receivables. At December 31, 1998 and 1997,
all investments were classified as available-for-sale and were reported at fair
value, with unrealized holding gains and losses, net of tax, reported in
accumulated other comprehensive income.
The following summarizes investments at December 31:
<TABLE>
<CAPTION>
Millions 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Aggregate fair value $ 926 $ 1,897
Gross unrealized holding losses 135 1
Gross unrealized holding gains (13) (985)
--------------------
Amortized cost $ 1,048 $ 913
====================
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Investment activity for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
Millions 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Gross purchases $15,118 $ 6,902
Gross sales 463 1,753
Gross maturities 14,520 6,111
</TABLE>
Gross realized gains and losses were insignificant and were determined by
the specific identification method.
Note 10 Fixed Assets
Property, plant and equipment at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
Millions Gross Net Gross Net
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exploration & production $32,072 $15,244 $25,145 $10,230
Refining & marketing 5,450 2,954 5,017 2,714
Other operations 649 432 731 470
Unallocated 1,151 132 332 146
----------------------------------------
Total $39,322 $18,762 $31,225 $13,560
========================================
</TABLE>
Expenses for maintenance and repairs for 1998, 1997 and 1996 were $420
million, $334 million and $338 million, respectively.
In the fourth quarter of 1998, after a year-long decline in crude oil
prices, ARCO determined that part of the oil price decline that had taken place
was permanent. Accordingly, ARCO revised its official crude oil price forecast
used for economic decision making during the fourth quarter of 1998. This
forecast is based on a West Texas Intermediate (WTI) benchmark price of $15/bbl
in 1999, $16/bbl in 2000, and $17/bbl in 2001, with 2% escalation thereafter.
While current crude oil prices are below $15/bbl, many oil industry expert
forecasts consider crude oil prices in the $12/bbl range to be unusually low and
inappropriate for economic decision making. ARCO used a benchmark price of
$12.05/bbl in preparing its December 31, 1998 Supplemental Oil & Gas
Information.
In accordance with SFAS 121, ARCO performed an impairment review to
determine whether any of ARCO's oil and gas properties were impaired based on
the new crude oil price forecast. Net undiscounted cash flows before tax were
calculated and compared to the net book value on a field-by-field basis. This
included cash flows from proved developed, proved undeveloped and potential oil
and gas reserves, which included both producing and non-producing reserves. The
potential reserves were calculated on a risk-weighted basis to include the
uncertainties associated with field size, reservoir performance, technological
development and commercial risk. Where appropriate, contracted prices were used
but did not materially impact the result. For those fields where the net book
value exceeded the net undiscounted cash flows before tax, the discounted future
cash flows before tax were calculated using a 10% discount rate factor. This
resulted in a pre-tax impairment charge of $1.4 billion. ARCO tested a downside
case using WTI benchmark crude oil prices of $1/bbl lower than each year of its
official forecast. ARCO believes that prices below $14/bbl are not sustainable
and like most commodities will cycle around their historical midpoints. The
impaired properties included former UTP properties in Pakistan, Venezuela and
the U.K. North Sea, as well as other ARCO properties in California, the U.K.
North Sea, North Africa and the Middle East.
Note 11 Short-term Borrowings and Bank Credit Facilities
Notes payable consist primarily of ARCO's commercial paper issued to a variety
of financial investors and institutions and any amounts outstanding under ARCO
credit facilities. The weighted average interest rate on notes payable
outstanding at December 31, 1998 and 1997, was 5.6% and 6.7%, respectively.
In 1998 ARCO and certain wholly owned subsidiaries had committed bank
credit facilities of approximately $3.1 billion. At December 31, 1998, there
were $62 million of borrowings under these committed facilities.
At December 31, 1998, ARCO had unused letters of credit totaling
approximately $418 million.
Note 12 Long-term Debt
Long-term debt at December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
8 1/4%, due in 2022 $ 245 $ 245
8 1/2%, due in 2012 178 178
8 3/4%, due in 2032 159 159
9%, due in 2021 209 209
9%, due in 2031 97 97
9 1/8%, due in 2011 253 253
9 1/8%, due in 2031 155 155
9 7/8%, due in 2016 181 181
10 7/8%, due in 2005 410 410
Series A Medium - Term Notes, (b) 8.48% (a) 110 182
Series B Medium - Term Notes, (c) 8.34% (a) 250 250
ARCO Tresop Notes, 5.06%/(a)/ 88 163
Variable rate, due in 2031, 3.28%/(a)/ 265 265
Variable rate, due in 2032, 4.96%/(a)/ 108 108
Vastar:
Commercial paper, 6.0%/(a)/ 219 373
LIBOR Revolving Credit Agreement, 5.6%/(a)/ 320 -
6% Putable/Callable Notes, due in 2010 100 -
6.39%, due in 2008 50 -
6.95%, due in 2006 75 75
6.96%, due in 2007 75 75
8.75%, due in 2005 149 149
Union Texas Petroleum:
6.66%, due in 2002 100 -
7.34%, due in 1999 179 -
7.40%, due in 2038 150 -
8 1/4%, due in 1999 100 -
8 3/8%, due in 2005 125 -
8 1/2%, due in 2007 75 -
Other 306 256
-----------------
Total, including debt due within one year 4,731 3,783
-----------------
Less debt due within one year 399 164
-----------------
Long-term debt $4,332 $3,619
=================
</TABLE>
(a) Weighted average of interest rates at December 31, 1998.
(b) Maturities vary through 2011.
(c) Maturities vary through 2012.
Maturities for the five years subsequent to December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Millions 1999 2000 2001 2002 2003
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturities $ 399 $ 12 $ 76 $ 117 $ 555
</TABLE>
In 1996, Vastar established a $1.1 billion Commercial Paper Program for
issuance of unsecured notes with maturities of up to 270 days from the date of
issue. Vastar has agreed to maintain credit lines sufficient to support payment
on the notes.
In 1996, Vastar consolidated existing unsecured revolving credit agreements
into a single facility. As of December 31, 1998, commitments under this
facility, as amended to date, totaled $1.1 billion. The commitment expires March
31, 2002. During 1998, $320 million of debt was outstanding under this facility.
The credit facility is not guaranteed by ARCO. The agreement contains covenants,
the most restrictive of which require Vastar to
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
maintain certain financial ratios and minimum levels of tangible stockholders'
equity and restrict encumbrance of assets.
In April 1998, Vastar issued $100 million of 6% Putable/Callable Notes due
April 20, 2010 Putable/Callable April 20, 2000. In 1998 Vastar also entered into
an interest rate swap covering the Putable/Callable Notes, which effectively
changed the 6% fixed rate to a floating rate. The effective interest rate paid
on these notes in 1998 was 5.6%. At December 31, 1997, Vastar had no outstanding
interest rate swaps. The financial impact of swaps in 1998 and 1997 was
immaterial.
At December 31, 1998, approximately $247 million of long-term debt was
denominated in foreign currencies. At December 31, 1997, no long-term debt was
denominated in foreign currencies.
No material amounts of long-term debt are collateralized by ARCO assets.
Note 13 Interest
Interest for the years ended December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt $ 322 $ 417 $ 500
Short-term debt 158 86 82
Other/(a)/ (115) (122) 19
-------------------------
365 381 601
Capitalized interest (106) (38) (19)
-------------------------
Total interest expense $ 259 $ 343 $ 582
=========================
Total interest paid in cash $ 248 $ 390 $ 586
=========================
Interest income $ 119 $ 114 $ 167
=========================
</TABLE>
(a) Includes $153 of interest on a tax refund in 1998 and $145 reversal from
partial tax audit settlements in 1997.
Note 14 Financial Instruments and Fair Value
ARCO does not hold or issue financial instruments for trading purposes.
ARCO enters into various types of foreign currency forward, option and
swap contracts. Foreign currency forward and option contracts are used to
minimize foreign exchange exposures associated with U.S. dollar-denominated debt
issued by a foreign subsidiary, anticipated foreign currency commitments and
anticipated future cash flows related to overseas operations. Foreign currency
swap contracts are used to minimize foreign exchange exposures related to
foreign-denominated intercompany debt with maturities exceeding one year.
At December 31, 1998, the notional amounts of foreign currency contracts
outstanding (principally involving European currencies) were approximately $528
million, with various maturities in 1999. At December 31, 1997, the notional
amounts of foreign currency contracts outstanding were approximately $613
million.
Gains and losses on foreign currency forward contracts covering
anticipatory cash flows are recognized currently as other income or expense.
Gains and losses on foreign currency swaps associated with intercompany debt are
recognized currently in income and offset foreign exchange gains and losses on
the underlying intercompany loans. Gains and losses on other foreign currency
contracts are generally deferred and offset the transactions being hedged.
ARCO also uses various hedging arrangements to manage the exposure to
price risk for future natural gas and crude oil transactions. Gains and losses
resulting from these transactions are deferred and included in other assets or
accrued liabilities until realized in sales and other operating revenues as the
physical production required by the contracts is delivered. During 1998, Vastar
entered into a series of natural gas price collar agreements which at December
31, 1998, covered an average of 200 million cubic feet per day of its 1999
natural gas production for the period January 1999 through September 1999. These
agreements will serve as hedges which secure weighted average prices on these
volumes between $2.30 and $2.91 per thousand cubic feet for 1999 (on a Henry Hub
basis).
At December 31, the carrying value and estimated fair value of ARCO's
financial instruments are shown as assets (liabilities) in the table below:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------
Carrying Fair Carrying Fair
Millions Value Value Value Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-derivatives:
Short-term investments $ 260 $ 260 $ 222 $ 222
Equity method investments 1,235 1,176 1,194 1,204
Other investments and long-term
receivables 831 831 1,872 1,872
Notes payable (2,403) (2,403) (1,599) (1,599)
Long-term debt, including current
maturities (4,731) (5,466) (4,602) (5,400)
Derivatives:
Foreign currency forwards $ (1) $ (1) $ (1) $ (1)
Foreign currency options - - 4 4
Foreign currency swaps - - 3 2
Oil and gas options and swaps 40 47 (7) (7)
Oil and gas futures (56) (59) - -
Commodity futures (12) (12) 2 2
Commodity options (2) (2) - -
</TABLE>
1997 amounts include derivative and non-derivative financial instruments
for discontinued operations. Carrying amounts for those instruments were
included with net assets of discontinued operations on the restated balance
sheet.
All derivative instruments are off-balance-sheet instruments; however,
net receivable or payable positions related to derivative instruments are
carried on the balance sheet.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Short-term investments are carried at fair value. The fair value of notes
payable approximates carrying value due to its short-term maturities. Equity
method investments and other investments and long-term receivables were valued
at quoted market prices if available. For unquoted investment securities, the
reported fair value was estimated on the basis of financial and other
information. The fair value of ARCO's long-term debt was estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to ARCO for debt of the same remaining maturities. The fair value of
foreign currency contracts and interest rate swaps represented the amount to be
exchanged if the existing contracts had been settled at year end and was
estimated based on market quotes.
ARCO is exposed to credit risk in the event of nonperformance by the
counterparties. ARCO does not generally require collateral or other security to
support these financial instruments. The counterparties to these instruments are
major institutions deemed creditworthy by ARCO; ARCO does not anticipate
nonperformance by the counterparties.
Note 15 Other Commitments and Contingencies
ARCO has commitments, including those related to the acquisition, construction
and development of facilities, all made in the normal course of business.
Following the March 1989 Exxon Valdez oil spill, numerous federal,
state and private plaintiff lawsuits were brought against Exxon, Alyeska
Pipeline Service Company (Alyeska) and Alyeska's owner companies, including
ARCO, which owns approximately 22%. While all of the federal, state and private
plaitiff lawsuits have been settled, certain issues relating to liability for
the spill remain unresolved between Exxon and Alyeska (including its owner
companies).
ARCO, together with other former producers of lead paint, has been
named in a number of lawsuits, including purported class actions, seeking
compensatory damages, abatement of the housing units, and compensation for
medical problems arising out of the presence of lead-based paint in certain
housing units. ARCO is unable to predict the scope or amount of any such
liability.
The State of Montana, along with the United States and the Salish and
Kootenai Tribes, have been seeking recovery from ARCO for alleged injuries to
natural resources resulting from mining and mineral processing businesses
formerly operated by Anaconda. By November 1998 two consent decrees had been
lodged with the court. ARCO has agreed to pay $135 million for settlement of
$561 million of the State's $767 million natural resource damage claim relating
to the Clark Fork River Basin, $86 million for clean-up and related liabilities
at Silver Bow Creek, and $20 million to resolve claims by the Tribes and the
United States.
ARCO is subject to liability pursuant to various federal, state and
local environmental laws and regulations that require ARCO to do some or all of
the following:
. Remove or mitigate the effects on the environment at various sites from
the disposal or release of certain substances;
. Perform restoration work at such sites; and
. Pay damages for loss of use and non-use values.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federal- and state-managed sites as well as other clean-up sites including
service stations, refineries, terminals, third-party landfills, former nuclear
processing facilities, sites associated with discontinued operations and sites
previously owned by ARCO or predecessors. This comprises 125 sites for which
ARCO has been named a potentially responsible party (PRP), along with other
sites for which no claims have been asserted. The number of PRP sites in and of
itself is not a relevant measure of liability because the nature and extent of
environmental concerns varies by site and ARCO's responsibility varies from sole
responsibility to very little responsibility.
ARCO may in the future be involved in additional assessments and cleanups.
Future costs depend on unknown factors such as:
. Nature and extent of contamination;
. Timing, extent and method of remedial action;
. ARCO's proportional share of costs; and
. Financial condition of other responsible parties.
The environmental remediation accrual is updated annually, at a minimum,
and at December 31, 1998 was $870 million. As these costs become more clearly
defined, they may require future charges against earnings. Applying Monte Carlo
analysis to estimated site maximums on a portfolio basis, ARCO estimates that
future costs could exceed the amount accrued by as much as $500 million.
Approximately 54% of the reserve related to sites associated with
ARCO's discontinued operations, primarily mining activities in the states of
Montana, Utah and New Mexico. Another significant component related to currently
and formerly owned chemical, nuclear processing, and refining and marketing
facilities, and other sites which received wastes from these facilities. The
remainder related to other sites with reserves ranging from $1 million to $10
million per site. No one site represents more than 10% of the total accrual.
Substantially all amounts accrued are expected to be paid out over the next five
to six years.
Claims for recovery of remediation costs already incurred and to be
incurred in the future have been filed against various third parties. Many of
these claims have been resolved. ARCO has neither recorded any asset nor reduced
any liability in connection with unresolved claims.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Although any ultimate liability arising from any of the matters described
herein could result in significant expenses or judgments that, if aggregated and
assumed to occur within a single fiscal year, would be material to ARCO's
results of operations, the likelihood of such occurrence is considered remote.
On the basis of management's best assessment of the ultimate amount and timing
of these events, such expenses or judgments are not expected to have a material
adverse effect on ARCO's consolidated financial statements.
The operations and consolidated financial position of ARCO continue to
be affected by domestic and foreign political developments as well as
legislation, regulations and litigation pertaining to restrictions on
production, imports and exports, tax increases, environmental regulations,
cancellation of contract rights and expropriation of property. Both the
likelihood of such occurrences and their overall effect on ARCO vary greatly and
are not predictable.
These uncertainties are part of a number of items that ARCO has taken
and will continue to take into account in periodically establishing reserves.
Note 16 Taxes
The income tax provision for the years ended December 31 comprised the
following:
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $(189) $ 241 $ 582
Deferred (7) 143 (26)
-----------------------------
(196) 384 556
Foreign:
Current 91 108 140
Deferred (486) (45) (15)
-----------------------------
(395) 63 125
State:
Current (14) 43 108
Deferred (46) 14 (3)
-----------------------------
(60) 57 105
=============================
Provision (benefit) for taxes on income $(651) $ 504 $ 786
=============================
Total income taxes paid in cash $1,417(a) $ 781(a) $ 752
=============================
</TABLE>
(a) Includes cash taxes paid relating to the sale of discontinued operations
A deferred tax benefit of $426 million was recorded in 1998 versus a
$242 million deferred tax expense in 1997 related to unrealized investment
losses and gains included in accumulated other comprehensive income.
Major components of the net deferred tax liability at December 31 were as
follows:
<TABLE>
<CAPTION>
Millions 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Depreciation, depletion and amortization $(4,600) $(3,250)
Other (389) (743)
---------------------
Total deferred tax liabilities (4,989) (3,993)
---------------------
Dismantlement and environmental 664 587
Postretirement benefits 293 295
Foreign excess tax basis/loss carryforwards 107 117
Other 607 333
---------------------
Total deferred tax assets 1,671 1,332
---------------------
Valuation allowance - -
---------------------
Net deferred income tax liability $(3,318) $(2,661)
=====================
</TABLE>
The valuation allowance was $7 million at December 31, 1996.
Taxes other than income taxes for the years ended December 31 comprised the
following:
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Property $ 143 $ 146 $ 144
Production/severance 227 359 401
Other 136 135 138
--------------------------------
Total $ 506 $ 640 $ 683
================================
</TABLE>
ARCO has foreign loss carryforwards of $32 million which begin expiring in
2001.
The domestic and foreign components of income from continuing operations
before income taxes and minority interest, and a reconciliation of income tax
expense with tax at the effective federal statutory rate for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------
% Pretax % Pretax % Pretax
Millions Amount Income Amount Income Amount Income
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes:
Domestic $ 96 7.5 $ 1,647 87.7 $ 1,896 90.9
Foreign (1,378) (107.5) 231 12.3 190 9.1
---------------------------------------------------------------------
Total $(1,282) 100.0 $ 1,878 100.0 $ 2,086 100.0
=====================================================================
Tax at 35% $ (449) (35.0) $ 657 35.0 $ 730 35.0
Increase (reduction) in taxes resulting from:
Taxes on foreign income in excess of statutory rate 32 2.5 21 1.1 84 4.0
Affiliate stock transactions (51) (4.0) (109) (5.8) - -
State income taxes (net of federal effect) (39) (3.0) 37 2.0 68 3.3
Tax credits (123) (9.6) (106) (5.6) (95) (4.6)
Other (21) (1.7) 4 0.1 (1) -
---------------------------------------------------------------------
Provision for taxes on income $ (651) (50.8) $ 504 26.8 $ 786 37.7
=====================================================================
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Note 17 Postretirement Benefit Plans
ARCO and its subsidiaries sponsor numerous postretirement benefit plans. Defined
benefit pension plans (Pension) provide to substantially all employees pension
benefits based on years of service and the employee's compensation, primarily
during the last three years of service. Defined postretirement benefit plans
(Other) provide health care and life insurance benefits to substantially all
employees who retire with ARCO having rendered the required years of service,
and to their spouses and eligible dependents. ARCO pays for the cost of a
benchmark health maintenance organization with employees responsible for the
differential cost, if any, of their selected option. Life insurance benefits are
partially paid for by retiree contributions, which vary based upon coverage
chosen by the retiree. ARCO has the right to terminate or modify the plans at
any time.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
Millions Pension Other Pension Other
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan Obligations
Benefit obligation at January 1 $(2,498) $(588) $(2,495) $(612)
Service cost (53) (7) (53) (7)
Interest cost (173) (39) (174) (40)
Actuarial (loss) gain (96) (4) (18) 17
Benefits paid 311 51 242 54
Special termination benefits (128) (19) - -
Acquisition (185) (24) - -
Divestiture - 14 - -
------------------------------------------
Benefit obligation at December 31 $(2,822) $(616) $(2,498) $(588)
==========================================
Plan Assets
Fair value of assets at January 1 $ 2,710 $ - $ 2,543 $ -
Actual return on assets 264 - 374 -
Company contributions 69 - 35 -
Benefits paid (311) - (242) -
Acquisition 154 - - -
------------------------------------------
Fair value of assets at December 31 $ 2,886 $ - $ 2,710 $ -
==========================================
Funded Status
Assets greater (less) than
obligations $ 64 $(616) $ 212 $(588)
Unrecognized actuarial loss 300 53 195 45
Unrecognized prior service cost
(benefit) 133 (206) 142 (221)
Unrecognized transition obligation (200) - (227) -
------------------------------------------
Total recognized $ 297 $(769) $ 322 $(764)
==========================================
Balance Sheet Recognition
Prepaid benefits $ 459 $ - $ 439 $ -
Accrued liabilities (257) (769) (219) (764)
Intangible asset 20 - 23 -
Accumulated other comprehensive
income 75 - 79 -
------------------------------------------
Total recognized $ 297 $(769) $ 322 $(764)
==========================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation (ABO), and
fair value of plan assets for pension plans with ABO in excess of plan assets
were $285, $247 and $0, respectively, at December 31, 1998, and $245, $219 and
$0, respectively, at December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
Percent Pension Other Pension Other
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions
Discount rate 6.75 6.75 7.0 7.0
Expected return on plan assets 10.5 n/a 10.5 n/a
Rate of salary progression 4.0 4.0 4.0 4.0
</TABLE>
For measurement purposes, a 7 percent annual rate of increase in the per
capita cost of health care benefits was assumed for 1997 to 2001, after which
the rate was assumed to decrease to 5 percent and remain at that level
thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1998
----------------------
Millions Increase Decrease
- -----------------------------------------------------------------------------
<S> <C> <C>
Total of service and interest cost $4.0 $(3.4)
Postretirement benefit obligation $44.0 $(37.4)
</TABLE>
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Benefit Cost
Pension benefits:
Service cost $ 53 $ 53 $ 60
Interest cost 173 174 177
Expected return on plan assets (281) (256) (238)
Amortization of transition asset (27) (27) (27)
Amortization of prior service cost 7 8 8
Recognized actuarial (gain) loss 10 10 24
---------------------------
Net benefit (income) cost $ (65) $ (38) $ 4
===========================
Other postretirement benefits:
Service cost $ 7 $ 7 $ 7
Interest cost 39 40 42
Amortization of prior service cost (benefit) (15) (15) (15)
Recognized actuarial (gain) loss - - 3
---------------------------
Net benefit (income) cost $ 31 $ 32 $ 37
===========================
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Note 18 Lease Commitments
Capital lease obligations are recorded at the present value of future rental
payments. The related assets are amortized on a straight-line basis.
At December 31, 1998, future minimum rental payments due under leases were
as follows:
<TABLE>
<CAPTION>
Capital Operating
Millions Leases Leases
- ------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 3 $ 177
2000 3 162
2001 3 193
2002 3 153
2003 3 145
Later years 60 369
-------------------------------
Total minimum lease payments 75 $1,199
========
Imputed interest (rates
ranging from 8% to 12%) 51
---------
Present value of minimum
lease payments included in
long-term debt $ 24
===============================
</TABLE>
Minimum future rental income under noncancellable subleases at December 31,
1998, amounted to $69 million.
Operating lease net rental expense for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 189 $ 109 $ 106
Contingent rentals 2 - -
Sublease rental income (20) (11) (11)
-----------------------------
Net rental expense $ 171 $ 98 $ 95
=============================
</TABLE>
No restrictions on dividends or on additional debt or lease financing
exist under ARCO's lease commitments. Under certain conditions, options exist to
purchase certain leased properties.
Note 19 Stock Options
Options to purchase shares of ARCO's common stock have been granted to
executives, outside directors and key employees. The exercise price of each
option is equal to the fair market value of common stock at the date of grant.
These options become exercisable in varying installments and expire 10 years
after the date of grant. Options granted prior to 1997 vest over two years in
equal installments. Options granted subsequently vest equally over three years.
Transactions during 1998, 1997 and 1996 were as follows (restated to give effect
to June 13, 1997 100% stock dividend):
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1996 7,676,272 $ 52.92
Granted 1,101,834 56.61
Exercised (1,110,326) 46.15
Cancelled (34,358) 58.47
-------------------------------
Balance, December 31, 1996 7,633,422 $ 54.41
===============================
Granted 1,414,048 64.47
Exercised (1,022,100) 52.21
Cancelled (18,224) 61.18
-------------------------------
Balance, December 31, 1997 8,007,146 $ 56.45
===============================
Granted 1,862,840 73.73
Exercised (420,012) 49.85
Cancelled (37,647) 69.52
-------------------------------
Balance, December 31, 1998 9,412,327 $ 60.12
===============================
</TABLE>
A summary of ARCO's fixed stock options as of December 31, 1998, 1997 and
1996, was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares available for option 8,523,492 8,247,671 8,672,714
Options exercisable 6,803,228 6,064,856 6,067,976
Weighted average exercise price
of options exercisable $ 56.01 $ 54.58 $ 54.01
Weighted average fair value of
options granted during the year $ 18.96 $ 14.27 $ 25.90
Used to calculate fair value:
Risk-free interest rate 5.57% 6.38% 6.00%
Expected life (years) 10 10 10
Expected volatility 23.06% 18.17% 14.42%
Expected dividends 3.85% 4.29% 0.00%
</TABLE>
At December 31, 1998, exercise prices for options outstanding ranged from
$42.25 to $85.875 and the weighted average remaining contractual life was 5.88
years.
ARCO applies APB No. 25 in accounting for its fixed stock options.
Accordingly, no compensation cost has been recognized for options granted. The
following table reflects pro forma net income and earnings per share had the
Company elected to adopt the fair value method under SFAS No. 123:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 452 $1,771 $1,663
Pro forma $ 440 $1,758 $1,651
Earnings per share (diluted):
As reported $1.40 $ 5.41 $ 5.09
Pro forma $1.36 $ 5.37 $ 5.05
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options would be amortized to expense
over the vesting period, and additional options may be granted in future years.
Beginning in 1997, ARCO awards contingent restricted stock to executives
and key employees. Contingent restricted stock may be converted to performance-
based restricted stock at various multiples depending on attainment of certain
performance criteria over a specified evaluation period. Restricted stock
ultimately issued is subject to a two-year restriction on transfer.
During 1998 and 1997, respectively, 184,488 and 326,688 shares of
contingent restricted stock were awarded at weighted average prices of $74.00
and $64.06, net of forfeitures and retirements, with varying evaluation periods.
During 1998, 135,180 shares of restricted stock were issued at a weighted
average price of $73.93.
During 1998 and 1997, $10 million and $23 million was recognized as
expense for performance-based restricted stock, respectively.
Holders of options granted prior to 1997 accrue dividend share credits
(DSCs) on all shares under option. The amount of DSCs accrued is determined
based upon the quarterly dividend rate and fair market value of ARCO common
stock as of each quarterly record date. Upon exercise of options, holders
receive additional shares of common stock equal to DSCs accumulated. A summary
of ARCO's DSC activity was as follows:
<TABLE>
<CAPTION>
Shares
- -----------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1996 1,695,986
Accrued 343,116
Paid out (396,250)
Cancelled (287)
-----------
Balance, December 31, 1997 1,642,565
-----------
Accrued 316,486
Paid out (166,512)
Cancelled (83)
-----------
Balance, December 31, 1998 1,792,456
===========
</TABLE>
During 1998 and 1997, $11 million and $35 million was recognized as expense
for DSCs, respectively.
Note 20 Stockholders' Equity
Detail of capital stock as of December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
$3.00 Cumulative convertible
preference stock, par $1:
Shares authorized 78,089 78,089
Shares issued and outstanding 51,608 55,941
Aggregate value in liquidation -
(thousands) $ 4,129 $ 4,475
$2.80 Cumulative convertible
preference stock, par $1:
Shares authorized 833,776 833,776
Shares issued and outstanding 573,336 615,653
Aggregate value in liquidation -
(thousands) $ 40,134 $ 43,096
Common stock, par $2.50:
Shares authorized 600,000,000 600,000,000
Shares issued 325,902,559 322,719,890
Shares outstanding 321,315,367 320,369,895
Shares held in treasury 4,587,192 2,349,995
</TABLE>
Changes in preference stocks were due to conversions. The $3.00 cumulative
convertible preference stock is convertible into 13.6 shares of common stock.
The $2.80 cumulative convertible preference stock is convertible into 4.8 shares
of common stock. Common stock is subordinate to the preference stocks for
dividends and assets. The $3.00 and $2.80 preference stocks may be redeemed at
the option of ARCO for $82 and $70 per share, respectively. ARCO has authorized
75,000,000 shares of preferred stock, $.01 par, of which none were issued or
outstanding at December 31, 1998.
At December 31, 1998, shares of ARCO's authorized common stock were
reserved as follows:
<TABLE>
<CAPTION>
<S> <C>
Conversions:
$3.00 Preference stock 701,869
$2.80 Preference stock 2,752,013
Stock option plans 17,935,819
Employee benefit plans 9,974,482
------------
Total 31,364,183
============
</TABLE>
Under ARCO's incentive compensation plans, awards of ARCO's common stock
may be made to officers, outside directors and key employees.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Note 21 Supplemental Cash Flow Information
The following is supplemental cash flow information for the years ended
December 31:
<TABLE>
<CAPTION>
Millions 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term investments:
Gross sales and maturities $ 226 $ 1,784 $ 3,196
Gross purchases (259) (1,226) (2,443)
--------------------------------
Net cash provided (used) $ (33) $ 558 $ 753
================================
Notes payable:
Gross proceeds $ 14,978 $ 7,386 $ 3,850
Gross repayments (14,066) (6,865) (3,751)
--------------------------------
Net cash provided $ 912 $ 521 $ 99
================================
Gross noncash provisions charged to income $ 652 $ 500 $ 261
Reserve reversal from partial tax audit
settlements - (145) -
Cash payments of previously accrued items (468) (294) (464)
--------------------------------
Noncash provisions greater (less) than cash
payments $ 184 $ 61 $ (203)
================================
Changes in working capital - increase (decrease)
to cash:
Accounts receivable $ 19 $ 363 $ (280)
Inventories 8 (63) (31)
Accounts payable (60) (111) 205
Other working capital 340 (6) 264
--------------------------------
$ 307 $ 183 $ 158
================================
</TABLE>
Excluded from the Consolidated Statement of Cash Flows for the year
ended December 31, 1998 was the issuance of 2,725,030 shares of ARCO common
stock to a consolidated subsidiary in exchange for certain property, plant and
equipment owned by the subsidiary. The transaction was recorded at fair market
value.
In conjunction with the acquisition of UTP, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
Millions
- -----------------------------------------------------------------------------
<S> <C>
Fair value of assets acquired $ 3,745
Cash paid (2,707)
---------
Liabilities assumed $ 1,038
=========
</TABLE>
Excluded from the Consolidated Statement of Cash Flows for the year ended
December 31, 1997 was ARCO's use of Lyondell common stock to redeem its 9%
Exchangeable Notes with an outstanding principal amount of $988 million.
In October 1998, through a three-way exchange involving ARCO, Vastar and
Mobil, ARCO disposed of its California heavy crude properties. In the
transaction, an ARCO subsidiary holding the California properties traded the
California properties for Mobil's interests in producing fields and exploration
acreage in the Gulf of Mexico. In connection with the disposition, ARCO recorded
an impairment writedown of $147 million before tax, or $114 million after tax,
that was included in the impairment discussed in Note 10. Vastar then purchased
the ARCO subsidiary holding the Gulf of Mexico properties for $437 million,
including the assumption of $300 million of debt.
Note 22 Foreign Currency Transactions
Foreign currency transactions resulted in net losses of $2 million, $12 million
and $5 million in 1998, 1997 and 1996, respectively.
Note 23 Earnings Per Share
<TABLE>
<CAPTION>
1998 1997 1996
(Millions, except per share amounts) Income Shares Per Share Income Shares Per Share Income Shares Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations $ (655) $1,331 $1,261
Less: Preference stock dividends (2) (2) (2)
----------------------------------------------------------------------------------------
Income (loss) from continuing operations
available to common shareholders $ (657) 321.0 $(2.05) $1,329 321.2 $ 4.14 $1,259 321.7 $ 3.92
Discontinued operations 1,107 321.0 3.45 558 321.2 1.74 402 321.7 1.25
Extraordinary item - loss on
extinguishment of debt (118) 321.2 (0.37)
----------------------------------------------------------------------------------------
Total income available to common
shareholders - basic EPS $ 450 321.0 $ 1.40 $1,769 321.2 $ 5.51 $1,661 321.7 $ 5.17
========================================================================================
Income (loss) from continuing operations
available to common shareholders $ (657) 321.0 $1,329 321.2 $1,259 321.7
Contingently issuable shares (primarily
options) - 2.3 0.6
$3.00 Convertible preference stock - 0.8 0.9
$2.80 Convertible preference stock - 2 3.1 2 3.3
----------------------------------------------------------------------------------------
Income (loss) from continuing operations
available to common shareholders $ (657) 321.0 $(2.05) $1,331 327.4 $ 4.07 $1,261 326.5 $ 3.86
Discontinued operations 1,107 321.0 3.45 558 327.4 1.70 402 326.5 1.23
Extraordinary item - loss on
extinguishment of debt (118) 327.4 (0.36)
----------------------------------------------------------------------------------------
Total income available to common
shareholders and assumed conversions
- diluted EPS/(a)/ $ 450 321.0 $ 1.40 $1,771 327.4 $ 5.41 $1,663 326.5 $ 5.09
========================================================================================
</TABLE>
(a) No dilution assumed for 1998 due to antidilutive effect on loss from
continuing operations
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO
Note 24 Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established new rules for the reporting of
comprehensive income and its components. Comprehensive income comprises net
income plus all other changes in equity from nonowner sources. The new
disclosures had no impact on ARCO's net income, financial position,
stockholders' equity or cash flows.
The related tax effects allocated to each component of other comprehensive
income at December 31 were as follows:
<TABLE>
<CAPTION>
Unrealized Foreign Minimum
Gain (Loss) Currency Pension
Millions on Securities Translation Liability
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Pre-tax amount $(1,107) $ (30) $ 11
Tax (expense) benefit 426 12 (4)
-------------------------------------------
Net-of-tax amount $ (681) $ (18) $ 7
===========================================
1997
Pre-tax amount $ 623 $(299) $ (42)
Tax (expense) benefit (242) 114 16
-------------------------------------------
Net-of-tax amount $ 381 $(185) $ (26)
===========================================
1996
Pre-tax amount $ 379 $ (6) $ 52
Tax (expense) benefit (143) 4 (20)
-------------------------------------------
Net-of-tax amount $ 236 $ (2) $ 32
===========================================
</TABLE>
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at December 31 were as follows:
<TABLE>
<CAPTION>
Millions 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gain (loss) on investments $ (75) $ 606
Foreign currency translation adjustment (222) (204)
Minimum pension liability (47) (54)
--------------------
Accumulated other comprehensive income (loss) $ (344) $ 348
====================
</TABLE>
Unrealized gains (losses) on securities related primarily to changes in the
fair value of ARCO's investment in LUKOIL common stock, which had a fair value
of $225 million, $1.3 billion and $678 million at December 31, 1998, 1997 and
1996, respectively, and a book value of $342 million.
Note 25 Research and Development
Expenditures for research and development totaled $32 million, $38 million and
$25 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Note 26 Unaudited Quarterly Results
<TABLE>
<CAPTION>
Millions, except per share amounts 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Sales and other operating revenues
Quarter ended (restated):
March 31 $ 2,536 $ 3,892
June 30 2,564 3,534
September 30 2,655 3,494
December 31 2,548 3,420
--------------------------
Total $10,303 $14,340
==========================
Income (loss) from continuing operations
before income taxes, minority interest
and extraordinary item
Quarter ended (restated):
March 31 $ 190 $ 601
June 30 32 632
September 30 (269) 268
December 31 (1,235)/(c, d)/ 377
--------------------------
Total $(1,282) $ 1,878
==========================
Net income (loss)
Quarter ended:
March 31 $ 220 $ 483
June 30 154 390/(a)/
September 30 872/(e)/ 516/(b)/
December 31 (794)/(c, d)/ 382/(c)/
--------------------------
Total $ 452 $ 1,771
==========================
Earned per share
Quarter ended:
March 31 $ .67 $ 1.48
June 30 $ .47 $ 1.19
September 30 $ 2.67 $ 1.57
December 31 $ (2.47) $ 1.17
</TABLE>
(a) See Note 6 to Consolidated Financial Statements.
(b) Includes $291 gain on disposition of Lyondell stock.
(c) See Note 7 to Consolidated Financial Statements.
(d) Includes $925 impairment writedown.
(e) Includes $998 net gain on disposition of segments.
59
<PAGE>
SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO
Oil and Gas Producing Activities
The Securities and Exchange Commission (SEC) defines proved oil and gas reserves
as those estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are reserves that
can be expected to be recovered through existing wells with existing equipment
and operating methods.
Petroleum reserves are estimated by ARCO engineers. The estimates include
reserves in which ARCO holds an economic interest under production-sharing and
other types of operating agreements with foreign governments.
Reserves attributable to certain oil and gas discoveries were not
considered proved as of December 31, 1998 due to geological, technical or
economic uncertainties. Proved reserves do not include amounts that may result
from extensions of currently proved areas or from application of enhanced
recovery processes not yet determined to be commercial in specific reservoirs.
Proved reserves also do not include any reserves attributable to ARCO's 8%
interest in LUKOIL, a Russian oil company. Natural gas liquids comprise 13% of
petroleum liquid proved reserves.
ARCO has no long-term supply contracts to purchase petroleum liquids or
natural gas from foreign governments.
The changes in proved reserves for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
Petroleum Liquids (million barrels) Natural Gas (billion cubic feet)
---------------------------------------------------------------------------------------------------
Consolidated Consolidated
---------------------- Other ---------------------- Other
U.S. Int'l Total Reserves/1/ Worldwide U.S. Int'l Total Reserves/1/ Worldwide
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves at January 1, 1996 2,163 206 2,369 -- 2,369 4,666 3,683 8,349 -- 8,349
Revisions 60 4 64 -- 64 103 (94) 9 -- 9
Improved recovery 5 -- 5 -- 5 14 -- 14 -- 14
Purchases 16 218 234 -- 234 114 -- 114 -- 114
Extensions and discoveries 76 5 81 -- 81 343 30 373 -- 373
Production (207) (24) (231) -- (231) (382) (267) (649) -- (649)
Consumed -- -- -- -- -- (78) (5) (83) -- (83)
Sales (1) -- (1) -- (1) (4) -- (4) -- (4)
---------------------------------------------------------------------------------------------------
Reserves at December 31, 1996 2,112 409 2,521 -- 2,521 4,776 3,347 8,123 -- 8,123
===================================================================================================
Revisions 115 60 175 -- 175 187 17 204 -- 204
Improved recovery 10 -- 10 -- 10 28 3 31 -- 31
Purchases 10 25 35 49 84 165 16 181 67 248
Extensions and discoveries 89 55 144 -- 144 308 352 660 -- 660
Production (204) (29) (233) (1) (234) (389) (308) (697) -- (697)
Consumed -- -- -- -- -- (79) (10) (89) -- (89)
Sales (1) -- (1) -- (1) (8) -- (8) -- (8)
---------------------------------------------------------------------------------------------------
Reserves at December 31, 1997 2,131 520 2,651 48 2,699 4,988 3,417 8,405 67 8,472
===================================================================================================
Revisions 72 (13) 59 2 61 33 (95) (62) (1) (63)
Improved recovery 30 -- 30 -- 30 6 5 11 -- 11
Purchases 42 279 321 13 334 74 1,333 1,407 349 1,756
Exchanges (119) -- (119) -- (119) 184 -- 184 -- 184
Extensions and discoveries 88 1 89 -- 89 367 -- 367 -- 367
Production (192) (46) (238) (2) (240) (429) (325) (754) (14) (768)
Consumed -- -- -- -- -- (79) (9) (88) -- (88)
Sales (9) (3) (12) -- (12) (27) -- (27) -- (27)
---------------------------------------------------------------------------------------------------
Reserves at December 31, 1998 2,043 738 2,781 61 2,842 5,117 4,326 9,443 401 9,844
===================================================================================================
Proved developed reserves:
At January 1, 1996 1,896 92 1,988 -- 1,988 4,294 1,806 6,100 -- 6,100
At December 31, 1996 1,828 150 1,978 -- 1,978 4,310 1,780 6,090 -- 6,090
At December 31, 1997 1,821 204 2,025 7 2,032 4,467 1,643 6,110 10 6,120
At December 31, 1998 1,582 292 1,874 36 1,910 4,480 2,487 6,967 343 7,310
</TABLE>
/1/ Comprises reserves attributable to ARCO's ownership interest in equity
affiliates
60
<PAGE>
SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO
Included in ARCO's reserves are 100% of the reserves of Vastar, a
consolidated subsidiary of which ARCO owned 82% at December 31, 1998. Vastar's
reserves comprised 9% and 51% of U.S. petroleum liquids and natural gas
reserves, respectively, at December 31, 1998.
During 1998, net reserve additions replaced 197% of worldwide oil-
equivalent production. During the three-year period 1996-1998, ARCO's net
reserve additions replaced 166% of worldwide oil-equivalent production.
Significant changes in 1998 related to the following:
. The addition of approximately 500 million barrels of oil equivalent
(MMBOE) from the acquisition of UTP;
. The addition of approximately 80 MMBOE associated with risked service
contracts with the government of Venezuela; and
. The exchange of California heavy oil properties for oil and gas
properties in the Gulf of Mexico.
Including contracts acquired with UTP, ARCO is a contractor to an affiliate
of the Venezuelan government under six risked service contracts. ARCO, either
solely or with partners, is responsible for providing capital and technology for
the redevelopment of the fields along with operating existing production. In
exchange for providing and funding overall operation and field development, ARCO
is paid a per-barrel service fee to cover reimbursement of costs plus profit.
There are two components to the fees, which include (1) a set fee for
contractual baseline production and (2) a fee for incremental production. The
fee for incremental production is based on a sliding scale incentive mechanism,
which is indexed to a basket of international oil prices and overall field
profitability.
Proved reserves and production quantities for Venezuelan operations are
recorded based on ARCO's net working interest in each of the contract areas,
"net" meaning reserves excluding royalties and interests owned by others per the
contractual arrangements. The Venezuelan government maintains full ownership of
all hydrocarbons in the fields.
Natural gas from the North Slope of Alaska, other than that used in
providing fuel in North Slope operations or sold to others on the North Slope,
is not presently economically marketable.
ARCO is actively evaluating various technical options for commercializing
North Slope gas. Among the options being studied are the construction of gas
transportation and liquefied natural gas (LNG) manufacturing facilities and the
development of a gas-to-liquids conversion process. ARCO is also working with
the State of Alaska to enhance the fiscal and regulatory climate for the
ultimate commercialization of North Slope gas resources. Significant technical
uncertainties and existing market conditions still preclude gas from such
potential projects being included in ARCO's reserves.
ARCO reports reserve estimates to various federal government agencies and
commissions. These estimates may cover various regions of crude oil and natural
gas classifications within the United States and may be subject to mandated
definitions. There have been no reports since the beginning of the last fiscal
year of total ARCO reserve estimates furnished to federal government agencies or
commissions which vary from those reported to the SEC.
The aggregate amounts of capitalized costs relating to oil and gas
producing activities and the related accumulated depreciation, depletion and
amortization as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------
Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved properties $16,348 $11,345 $27,693 $15,845 $ 6,026 $21,871 $15,004 $ 5,245 $20,249
Unproved properties 622 1,292 1,914 365 447 812 257 297 554
------------------------------------------------------------------------------------------
16,970 12,637 29,607 16,210 6,473 22,683 15,261 5,542 20,803
Accumulated depreciation,
depletion and amortization 10,569 4,789 15,358 10,559 2,959 13,518 9,924 2,668 12,592
------------------------------------------------------------------------------------------
Net capitalized costs 6,401 7,848 14,249 5,651 3,514 9,165 5,337 2,874 8,211
------------------------------------------------------------------------------------------
Net capitalized costs of equity
affiliates* -- 188 188 -- 55 55 -- -- --
------------------------------------------------------------------------------------------
Total $ 6,401 $ 8,036 $14,437 $ 5,651 $ 3,569 $ 9,220 $ 5,337 $ 2,874 $ 8,211
==========================================================================================
</TABLE>
* ARCO's share
61
<PAGE>
SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO
Costs, both capitalized and expensed, incurred in oil and gas producing
activities during the three years ended December 31 are set forth below.
Property acquisition costs represent costs incurred to purchase or lease oil and
gas properties. Exploration costs include costs of geological and geophysical
activity and drilling exploratory wells. Development costs include costs of
drilling and equipping development wells and construction of production
facilities to extract, treat and store oil and gas.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------
Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition costs:
Proved properties $ 235 $2,594 $2,829 $ 92 $ 224 $ 316 $ 82 $ 275 $ 357
Unproved properties 72 662 734 100 8 108 98 11 109
Exploration costs 306 376 682 328 332 660 277 213 490
Development costs 1,102 1,200 2,302 692 794 1,486 481 482 963
------------------------------------------------------------------------------
Total expenditures 1,715 4,832 6,547 1,212 1,358 2,570 938 981 1,919
------------------------------------------------------------------------------
Costs incurred of equity affiliates* -- 349 349 -- 109 109 -- -- --
------------------------------------------------------------------------------
Total $1,715 $5,181 $6,896 $1,212 $1,467 $2,679 $938 $ 981 $1,919
==============================================================================
</TABLE>
* ARCO's share
Results of operations from oil and gas producing activities (including
operating overhead) for the three years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------
Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales $1,535 $ 1,305 $2,840 $1,974 $1,349 $3,323 $1,892 $1,140 $3,032
Transfers 1,077 -- 1,077 2,074 -- 2,074 2,199 -- 2,199
Other 44 75 119 42 45 87 47 45 92
---------------------------------------------------------------------------------
2,656 1,380 4,036 4,090 1,394 5,484 4,138 1,185 5,323
Production costs 609 332 941 615 286 901 587 234 821
Production taxes 273 56 329 420 43 463 457 50 507
Exploration expenses 272 357 629 263 245 508 238 175 413
Depreciation, depletion and
amortization 651 517 1,168 681 429 1,110 691 305 996
Impairment 180 1,267 1,447 -- -- -- -- -- --
Other operating expenses 201 244 445 258 247 505 277 227 504
---------------------------------------------------------------------------------
Results before income taxes 470 (1,393) (923) 1,853 144 1,997 1,888 194 2,082
Income tax expense (benefit) 58 (532) (474) 609 11 620 628 109 737
---------------------------------------------------------------------------------
Results of operations from oil
and gas producing activities 412 (861) (449) 1,244 133 1,377 1,260 85 1,345
---------------------------------------------------------------------------------
Results from equity affiliates* -- (3) (3) -- (6) (6) -- -- --
---------------------------------------------------------------------------------
Total $ 412 $ (864) $ (452) $1,244 $ 127 $1,371 $1,260 $ 85 $1,345
=================================================================================
</TABLE>
* ARCO's share
The difference between the above results of operations and the amounts
reported for exploration & production segment net income in Note 2 of Notes to
Consolidated Financial Statements is primarily restructuring costs related to
the oil and gas operations, the exclusions of non-producing exploration &
production units (Alaskan pipelines, technical support) and minority interest
adjustments.
62
<PAGE>
SUPPLEMENTAL INFORMATION (UNAUDITED) ARCO
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------
Billions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows $21.9 $16.2 $38.1 $36.7 $16.6 $53.3 $48.8 $17.8 $66.6
Future development and
production costs 13.0 7.6 20.6 15.0 7.1 22.1 14.2 7.3 21.5
Future income tax expense 2.3 2.9 5.2 7.3 3.5 10.8 12.0 3.2 15.2
-----------------------------------------------------------------------
Future net cash flows 6.6 5.7 12.3 14.4 6.0 20.4 22.6 7.3 29.9
10% annual discount 2.7 2.7 5.4 6.5 2.8 9.3 10.3 3.6 13.9
-----------------------------------------------------------------------
Standardized measure of discounted
future net cash flows 3.9 3.0 6.9 7.9 3.2 11.1 12.3 3.7 16.0
-----------------------------------------------------------------------
Standardized measure of discounted
future net cash flows of equity
affiliates* -- 0.1 0.1 -- 0.1 0.1 -- -- --
-----------------------------------------------------------------------
Total $ 3.9 $ 3.1 $ 7.0 $ 7.9 $ 3.3 $11.2 $12.3 $ 3.7 $16.0
=======================================================================
</TABLE>
* ARCO's share
Primary changes in the standardized measure of discounted estimated future
net cash flows for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Billions 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and transfers of oil and gas,
net of production costs $ (2.7) $(4.0) $(3.9)
Extensions, discoveries and improved
recovery, less related costs 0.5 0.9 1.2
Revisions of estimates of reserves
proved in prior years:
Quantity estimates -- 0.7 0.5
Net changes in price and
production costs (11.3) (8.4) 8.4
Purchases/sales 3.1 0.5 1.0
Other (0.6) (0.7) (0.4)
Accretion of discount 1.7 2.4 1.5
Development costs incurred
during the period 2.3 1.5 1.0
Net change in income taxes 2.8 2.3 (3.2)
-----------------------------
Net change $ (4.2) $(4.8) $ 6.1
=============================
</TABLE>
Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Future price changes are
considered only to the extent provided by contractual arrangements. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates (adjusted for
permanent differences and tax credits) to estimated future pretax net cash flows
related to proved oil and gas reserves, less the tax basis of the properties
involved.
These estimates are furnished and calculated in accordance with
requirements of the Financial Accounting Standards Board and the SEC. Estimates
of future net cash flows presented do not represent management's assessment of
future profitability or future cash flows to ARCO. Management's investment and
operating decisions are based on reserve estimates that include proved reserves
prescribed by the SEC as well as probable reserves, and on different price and
cost assumptions from those used here.
It should be recognized that applying current costs and prices and a 10%
standard discount rate does not convey absolute value. The discounted amounts
arrived at are only one measure of the value of proved reserves.
63
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the company is included in Part
I. For the other information called for by Items 10, 11, 12 and 13, reference
is made to the Registrant's definitive proxy statement for its Annual Meeting
of Stockholders, to be held on May 3, 1999, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998, and
which is incorporated herein by reference, except for the material included
under the captions "Committee Report on Executive Compensation" and
"Performance Graph."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedules: These
documents are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule.
3. Exhibits:
3.1 Restated Certificate of Incorporation of Atlantic Richfield
Company ("ARCO") as of June 27, 1994, filed with the
Securities and Exchange Commission (the "Commission") as
Exhibit 3 to ARCO's report on Form 10-Q for the quarterly
period ended June 30, 1994, under File No. 1-1196 and
incorporated herein by reference.
3.2 By-Laws of ARCO as amended through November 23, 1998, filed
with the Commission as Exhibit 3 to ARCO's Current Report on
Form 8-K dated November 23, 1998, under File No. 1-1196 and
incorporated herein by reference.
4.1 Rights Agreement dated as of July 24, 1995 between ARCO and
First Chicago Trust Company of New York, as Rights Agent,
filed with the Commission as Exhibit 4 to ARCO's report on
Form 10-Q for the quarterly period ended June 30, 1995, under
File No. 1-1196 and incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed with the Commission on January 27,
1999 as Exhibit 4.2 to ARCO's Registration Statement on Form
S-3 (No. 333-71293), under File No. 1-1196 and incorporated
herein by reference.
4.3 Indenture, dated as of January 1, 1992, between ARCO and The
Bank of New York, filed with the Commission on January 27,
1999 as Exhibit 4.3 to ARCO's Registration Statement on
Form S-3 (No. 333-71293, under File No. 1-1196) and incorpo-
rated herein by reference.
64
<PAGE>
4.4 Instruments defining the rights of holders of long-term debt
which is not registered under the Securities Exchange Act of
1934 are not filed because the total amount of securities
authorized under any such instrument does not exceed 10% of
the consolidated total assets of the Company. The Company
agrees to furnish a copy of any such instrument to the
Commission upon request.
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement
Plan, as adopted by the Board of Directors of ARCO on March
26, 1990 and effective as of October 1, 1990, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-K for
the year 1990, under File No. 1-1196 and incorporated herein
by reference.
10.1(b)* Amendment No. 1 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of March
22, 1993, filed with the Commission as Exhibit 10 to ARCO's
report on Form 10-Q for the quarterly period ended June 30,
1993, under File No. 1-1196 and incorporated herein by
reference.
10.1(c)* Amendment No. 2 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
February 28, 1994, filed with the Commission as Exhibit
10.1(c) to ARCO's report on Form 10-K for the year 1995, under
File No. 1-1196 and incorporated herein by reference.
10.1(d)* Amendment No. 3 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
August 1, 1997, filed with the Commission as Exhibit 10.1(d)
to ARCO's report on Form 10-K for the year 1997, under File
No. 1-1196 and incorporated herein by reference.
10.1(e)* Amendment No. 4 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of
August 1, 1997, filed with the Commission as Exhibit 10.1 to
ARCO's report on Form 10-Q for the quarterly period ended
September 30, 1998, under File No. 1-1196 and incorporated
herein by reference.
10.1(f)* Amendment No. 5 to the Atlantic Richfield Company
Supplementary Executive Retirement Plan, effective as of May
1, 1997, filed herewith.**
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted
by the Board of Directors of the Company on March 26, 1990 and
effective as of October 1, 1990, filed with the Commission as
Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990,
under File No. 1-1196 and incorporated herein by reference.
10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of July 27, 1992, filed with the
Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of February 28, 1994, filed with
the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-
K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of January 1, 1997, filed with the
Commission as Exhibit 10.2(d) to ARCO's report on Form 10-K
for the year 1997, under File No. 1-1196 and incorporated
herein by reference.
10.2(e)* Amendment No. 4 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of January 1, 1997, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
65
<PAGE>
10.2(f)* Amendment No. 5 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of May 1, 1997, filed herewith.**
10.3(a)* Atlantic Richfield Company Executive Supplementary Savings
Plan II, as amended, restated and effective as of July 1,
1988, filed with the Commission as Exhibit 10.6(b) to ARCO's
report on Form 10-K for the year 1988, under File No. 1-1196
and incorporated herein by reference.
10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
January 1, 1989, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1989, under File
No. 1-1196 and incorporated herein by reference.
10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
July 1, 1994, filed with the Commission as Exhibit 10.4(c) to
ARCO's report on Form 10-K for the year 1994, under File No.
1-1196 and incorporated herein by reference.
10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
August 5, 1996, filed with the Commission as Exhibit 10.4(d)
to ARCO's report on Form 10-K for the year 1996, under File
No. 1-1196 and incorporated herein by reference.
10.4* Atlantic Richfield Company Policy on Financial Counseling and
Individual Income Tax Service, as revised and effective
January 1, 1997, filed herewith.**
10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of
ARCO on November 26, 1984, and effective as of that date, as
amended through February 28, 1994, filed with the Commission
as Exhibit 10.6 to ARCO's report on Form 10-K for the year
1994, under File No. 1-1196 and incorporated herein by
reference.
10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of
January 1, 1995, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1995, under File
No. 1-1196 and incorporated herein by reference.
10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of
February 24, 1997, filed with the Commission as Exhibit
10.5(c) to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.5(d)* Amendment No. 5 to the Atlantic Richfield Company Annual
Incentive Plan, effective as of July 28, 1997, filed with the
Commission as Exhibit 10.3 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
10.5(e)* Amendment No. 6 to the Atlantic Richfield Company Annual
Incentive Plan, effective as of July 28, 1997, filed with the
Commission as Exhibit 10.4 to ARCO's report on Form 10-Q for
the quarterly period ended September 30, 1998, under File No.
1-1196 and incorporated herein by reference.
10.6(a)* Atlantic Richfield Company's 1985 Executive Long-Term
Incentive Plan, as adopted by the Board of Directors of ARCO
on May 28, 1985, and effective as of that date, as amended
through July 28, 1997, filed with the Commission as Exhibit
10.6 to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.6(b)* Amendment No. 10 to the Atlantic Richfield Company 1985
Executive Long-Term Incentive Plan, effective as of July 18,
1997, filed with the Commission as Exhibit 10.5 to ARCO's
report on Form 10-Q for the quarterly period ended September
30, 1998, under File No. 1-1196 and incorporated herein by
reference.
66
<PAGE>
10.6(c)* Amendment No. 11 to the Atlantic Richfield Company 1985
Executive Long-Term Incentive Plan, effective as of July 18,
1997, filed with the Commission as Exhibit 10.6 to ARCO's
report on Form 10-Q for the quarterly period ended September
30, 1998, under File No. 1-1196 and incorporated herein by
reference.
10.7(a)* Atlantic Richfield Company Executive Life Insurance Plan--
Summary Plan Description, effective as of June 28, 1990, filed
with the Commission as Exhibit 10.8 to ARCO's report on Form
10-K for the year 1993, under File No. 1-1196 and incorporated
herein by reference.
10.7(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective July 28, 1997, filed
herewith.**
10.7(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective July 28, 1997, filed
herewith.**
10.7(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Life Insurance Plan, effective May 1, 1997, filed herewith.**
10.8(a)* Atlantic Richfield Company Executive Long-Term Disability
Plan--Summary Plan Description, effective as of January 1,
1994, filed with the Commission as Exhibit 10.9 to ARCO's
report on Form 10-K for the year 1993, under File No. 1-1196
and incorporated herein by reference.
10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective as of February 28, 1994,
filed with the Commission as Exhibit 10.9(b) to ARCO's report
on Form 10-K for the year 1995, under File No. 1-1196 and
incorporated herein by reference.
10.8(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective May 1, 1997, filed
herewith.**
10.9 Amendment No. 6 to the Atlantic Richfield Company Special
Termination Allowance Plan which contains the current change
of control provisions applicable to the Company's executive
management team, including its five most highly compensated
executive officers, effective as of July 28, 1997, filed with
the Commission as Exhibit 10.7 to ARCO's report on Form 10-Q
for the quarterly period ended September 30, 1998, under File
No. 1-1196 and incorporated herein by reference.
10.10 Form of Indemnity Agreement filed with the Commission as
Exhibit 99 to ARCO's Registration Statement on Form S-3 (No.
333-71293) under File No. 1-1196 and incorporated herein by
reference.
10.11(a)* Stock Option Plan for Outside Directors effective as of
December 17, 1990, filed with the Commission as Exhibit 10.14
to ARCO's report on Form 10-K for the year 1990, under
File No. 1-1196 and incorporated herein by reference.
10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside
Directors, effective as of June 22, 1992, filed with the
Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.11(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed with the
Commission as Exhibit 10.10(c) to ARCO's report on Form 10-K
for the year 1997, under File No. 1-1196 and incorporated
herein by reference.
67
<PAGE>
10.11(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed with the
Commission as Exhibit 10.10(d) to ARCO's report on Form 10-K
for the year 1997, under File No. 1-1196 and incorporated
herein by reference.
10.12(a)* Deferral Plan for Outside Directors, effective as of October
1, 1990, filed with the Commission as Exhibit 10.13(a) to
ARCO's report on Form 10-K for the year 1995, under File No.
1-1196 and incorporated herein by reference.
10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors,
effective as of July 27, 1992, filed with the Commission as
Exhibit 10.13(b) to ARCO's report on Form 10-K for the
year 1995, under File No. 1-1196 and incorporated herein by
reference.
10.12(c)* Amendment No. 2 to the Deferral Plan for Outside Directors
effective as of July 22, 1996, filed with the Commission as
Exhibit 10.11(c) to ARCO's report on Form 10-K for the year
1997, under File No. 1-1196 and incorporated herein by
reference.
10.13* Special Incentive Plan, as adopted by the Board of Directors
of ARCO on February 28, 1994, and as effective on that date,
is included in Appendix C to the Company's 1994 Proxy
Statement filed with the Commission under File No. 1-1196 and
incorporated herein by reference.
10.14* 1997 Restricted Stock Plan For Outside Directors effective as
of January 1, 1997, filed with the Commission as Exhibit 10.13
to ARCO's report on Form 10-K for the year 1997, under File
No. 1-1196 and incorporated herein by reference.
21 Subsidiaries of the Registrant.**
23 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney.
27 Financial Data Schedule.**
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.
- --------
* Management compensatory plans filed as exhibits hereto pursuant to Item
14(c) of Form 10-K.
** Previously filed on February 23, 1999.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed during the quarter ended
December 31, 1998, and thereafter through February 22, 1999:
<TABLE>
<CAPTION>
Date of Report Item No. Financial Statements
-------------- -------- --------------------
<S> <C> <C>
November 23, 1998 5 None
January 15, 1999 5 None
January 18, 1999 5 None
January 25, 1999 5 None
</TABLE>
68
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Atlantic Richfield Company: Registration Statement on Form S-3
(No. 333-71293), Registration Statement on Form S-8 (No. 333-33151),
Registration Statement on Form S-8 (No. 33-43830), Registration Statement on
Form S-8 (No. 33-21558), Registration Statement on Form S-8 (No. 333-33153),
Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment
No. 4 to Registration Statement on Form S-8 (No. 33-21160), Post-Effective
Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639),
Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment
No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective
Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-
Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640),
Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment
No. 4 to Registration Statement on Form S-8 (No. 33-21552), and Registration
Statement on Form S-8 (No. 333-33245), of our report dated February 12, 1999,
on our audits of the consolidated financial statements and financial statement
schedule of Atlantic Richfield Company as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, which report is
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 16, 1999
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused the amendment to this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
By *Michael E. Wiley
___________________________________
Michael E. Wiley
President and Chief
Operating Officer
March 16, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*Mike R. Bowlin Chairman of the Board and March 16, 1999
____________________________________ Chief Executive Officer
Mike R. Bowlin
*Marie L. Knowles Executive Vice President and March 16, 1999
____________________________________ Chief Financial Officer
Marie L. Knowles
Principal financial officer
*Frank D. Boren Director March 16, 1999
____________________________________
Frank D. Boren
*John Gavin Director March 16, 1999
____________________________________
John Gavin
*Kent Kresa Director March 16, 1999
____________________________________
Kent Kresa
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*David T. McLaughlin Director March 16, 1999
____________________________________
David T. McLaughlin
*John B. Slaughter Director March 16, 1999
____________________________________
John B. Slaughter
*Gary L. Tooker Director March 16, 1999
____________________________________
Gary L. Tooker
*Henry Wendt Director March 16, 1999
____________________________________
Henry Wendt
*Gayle E. Wilson Director March 16, 1999
____________________________________
Gayle E. Wilson
/s/ Allan L. Comstock Vice President and March 16, 1999
____________________________________ Controller
Allan L. Comstock
Principal accounting officer
</TABLE>
*By: /s/ Allan L. Comstock
____________________________
Allan L. Comstock
(Attorney-in-Fact)
71
<PAGE>
SCHEDULE II
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(millions of dollars)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Column A) (Column B) (Column C) (Column D) (Column E)
- ------------------------------------------------------------------------------
Additions
----------------
Balance at Charged Charged Deductions Balance at
beginning to to other from close of
Description of period income accounts reserves period
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year 1998
Amounts deducted from
applicable assets:
Accounts receivable....... $ 3 $ 2 $ 5
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 966 64 73 45 1,058
Reduction in force........ 73 185 79 206 131
Insurance ................ 158 48 -- 32 174
Environmental remediation. 722 234 -- 86 870
Other..................... 151 363 -- 119 395
Year 1997 (Restated)
Amounts deducted from
applicable assets:
Accounts receivable....... $ 6 -- -- $ 3(a) $ 3
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 909 78 -- 21 966
Reduction in force........ -- 70 12 9 73
Insurance ................ 169 20 -- 31 158
Environmental remediation. 524 300 -- 102 722
Other..................... 213 15 (12) 65 151
Year 1996 (Restated)
Amounts deducted from
applicable assets:
Accounts receivable....... $ 5 $ 1 -- -- $ 6
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 847 68 -- 6 909
Reduction in force........ 69 -- -- 69 --
Insurance ................ 201 15 -- 47 169
Environmental remediation. 600 45 -- 121 524
Other..................... 195 23 -- 5 213
</TABLE>
- --------
(a) Write-off for uncollectible accounts, net of recoveries.
72
<PAGE>
EXHIBIT INDEX
Exhibit Description
3.1 Restated Certificate of Incorporation of Atlantic Richfield Company
("ARCO") as of June 27, 1994, filed with the Securities and Exchange
Commission (the "Commission") as Exhibit 3 to ARCO's report on Form
10-Q for the quarterly period ended June 30, 1994, under File No. 1-
1196 and incorporated herein by reference.
3.2 By-Laws of ARCO as amended through November 23, 1998, filed with the
Commission as Exhibit 3 to ARCO's Current Report on Form 8-K dated
November 23, 1998, under File No. 1-1196 and incorporated herein by
reference.
4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First
Chicago Trust Company of New York, as Rights Agent, filed with the
Commission as Exhibit 4 to ARCO's report on Form 10-Q for the
quarterly period ended June 30, 1995, under File No. 1-1196 and in
corporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed with the Commission on January 27, 1999
as Exhibit 4.2 to ARCO's Registration Statement on Form S-3 (No.
333-71293), under File No. 1-1196 and incorporated herein by
reference.
4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of
New York, filed with the Commission on January 27, 1999 as Exhibit
4.3 to ARCO's Registration Statement on Form S-3 (No. 333-71293,
under File No. 1-1196) and incorporated herein by reference.
4.4 Instruments defining the rights of holders of long-term debt which is
not registered under the Securities Exchange Act of 1934 are not
filed because the total amount of securities authorized under any
such instrument does not exceed 10% of the consolidated total assets
of the Company. The Company agrees to furnish a copy of any such
instrument to the Commission upon request.
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan,
as adopted by the Board of Directors of ARCO on March 26, 1990 and
effective as of October 1, 1990, filed with the Commission as Exhibit
10.2 to ARCO's report on Form 10-K for the year 1990, under File No.
1-1196 and incorporated herein by reference.
10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplementary
Executive Retirement Plan, effective as of March 22, 1993, filed with
the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the
quarterly period ended June 30, 1993, under File No. 1-1196 and
incorporated herein by reference.
10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplementary
Executive Retirement Plan, effective as of February 28, 1994, filed
with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K
for the year 1995, under File No. 1-1196 and incorporated herein by
reference.
10.1(d)* Amendment No. 3 to the Atlantic Richfield Company Supplementary
Executive Retirement Plan, effective as of August 1, 1997, filed with
the Commission as Exhibit 10.1(d) to ARCO's report on Form 10-K for
the year 1997, under File No. 1-1196 and incorporated herein by
reference.
10.1(e)* Amendment No. 4 to the Atlantic Richfield Company Supplementary Execu
tive Retirement Plan, effective as of August 1, 1997, filed with the
Commission as Exhibit 10.1 to ARCO's report on Form 10-Q for the
quarterly period ended September 30, 1998, under File No. 1-1196 and
incorporated herein by reference.
10.1(f)* Amendment No. 5 to the Atlantic Richfield Company Supplementary
Executive Retirement Plan, effective as of May 1, 1997, filed
herewith.**
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the
Board of Directors of the Company on March 26, 1990 and effective as
of October 1, 1990, filed with the Commission as Exhibit 10.3 to
ARCO's report on Form 10-K for the year 1990, under File No. 1-1196
and incorporated herein by reference.
<PAGE>
Exhibit Description
10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of July 27, 1992, filed with the Commission as
Exhibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under
File No. 1-1196 and incorporated herein by reference.
10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of February 28, 1994, filed with the Commission as
Exhibit 10.2(c) to ARCO's report on Form 10-K for the year 1995, under
File No. 1-1196 and incorporated herein by reference.
10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of January 1, 1997, filed with the Commission as
Exhibit 10.2(d) to ARCO's report on Form 10-K for the year 1997, under
File No. 1-1196 and incorporated herein by reference.
10.2(e)* Amendment No. 4 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of January 1, 1997, filed with the Commission as
Exhibit 10.2 to ARCO's report on Form 10-Q for the quarterly period
ended September 30, 1998, under File No. 1-1196 and incorporated
herein by reference.
10.2(f)* Amendment No. 5 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of May 1, 1997, filed herewith.**
10.3(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as
amended, restated and effective as of July 1, 1988, filed with the
Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the
year 1988, under File No. 1-1196 and incorporated herein by reference.
10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of January
1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report
on Form 10-K for the year 1989, under File No. 1-1196 and incorporated
herein by reference.
10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of July 1,
1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on
Form 10-K for the year 1994, under File No. 1-1196 and incorporated
herein by reference.
10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of August
5, 1996, filed with the Commission as Exhibit 10.4(d) to ARCO's report
on Form 10-K for the year 1996, under File No. 1-1196 and incorporated
herein by reference.
10.4* Atlantic Richfield Company Policy on Financial Counseling and
Individual Income Tax Service, as revised and effective January 1,
1997, filed herewith.**
10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on
November 26, 1984, and effective as of that date, as amended through
February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's
report on Form 10-K for the year 1994, under File No. 1-1196 and
incorporated herein by reference.
10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January
1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report
on Form 10-K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of February
24, 1997, filed with the Commission as Exhibit 10.5(c) to ARCO's
report on Form 10-K for the year 1997, under File No. 1-1196 and
incorporated herein by reference.
10.5(d)* Amendment No. 5 to the Atlantic Richfield Company Annual Incentive
Plan, effective as of July 28, 1997, filed with the Commission as
Exhibit 10.3 to ARCO's report on Form 10-Q for the quarterly period
ended September 30, 1998, under File No. 1-1196 and incorporated
herein by reference.
10.5(e)* Amendment No. 6 to the Atlantic Richfield Company Annual Incentive
Plan, effective as of July 28, 1997, filed with the Commission as
Exhibit 10.4 to ARCO's report on Form 10-Q for the quarterly period
ended September 30, 1998, under File No. 1-1196 and incorporated
herein by reference.
<PAGE>
Exhibit Description
10.6(a)* Atlantic Richfield Company's 1985 Executive Long-Term Incentive Plan,
as adopted by the Board of Directors of ARCO on May 28, 1985, and
effective as of that date, as amended through July 28, 1997, filed
with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for
the year 1997, under File No. 1-1196 and incorporated herein by
reference.
10.6(b)* Amendment No. 10 to the Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective as of July 18, 1997, filed with
the Commission as Exhibit 10.5 to ARCO's report on Form 10-Q for the
quarterly period ended September 30, 1998, under File No. 1-1196 and
incorporated herein by reference.
10.6(c)* Amendment No. 11 to the Atlantic Richfield Company 1985 Executive
Long-Term Incentive Plan, effective as of July 18, 1997, filed with
the Commission as Exhibit 10.6 to ARCO's report on Form 10-Q for the
quarterly period ended September 30, 1998, under File No. 1-1196 and
incorporated herein by reference.
10.7(a)* Atlantic Richfield Company Executive Life Insurance Plan--Summary
Plan Description, effective as of June 28, 1990, filed with the
Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year
1993, under File No. 1-1196 and incorporated herein by reference.
10.7(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Life
Insurance Plan, effective July 28, 1997, filed herewith.**
10.7(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Life
Insurance Plan, effective July 28, 1997, filed herewith.**
10.7(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Life
Insurance Plan, effective May 1, 1997, filed herewith.**
10.8(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--
Summary Plan Description, effective as of January 1, 1994, filed with
the Commission as Exhibit 10.9 to ARCO's report on Form 10-K for the
year 1993, under File No. 1-1196 and incorporated herein by
reference.
10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term
Disability Plan, effective as of February 28, 1994, filed with the
Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the
year 1995, under File No. 1-1196 and incorporated herein by
reference.
10.8(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Long-Term
Disability Plan, effective May 1, 1997, filed herewith.**
10.9 Amendment No. 6 to the Atlantic Richfield Company Special Termination
Allowance Plan which contains the current change of control
provisions applicable to the Company's executive management team,
including its five most highly compensated executive officers,
effective as of July 28, 1997, filed with the Commission as Exhibit
10.7 to ARCO's report on Form 10-Q for the quarterly period ended
September 30, 1998, under File No. 1-1196 and incorporated herein by
reference.
10.10 Form of Indemnity Agreement filed with the Commission as Exhibit 99
to ARCO's Registration Statement on Form S-3 (No. 333-71293) under
File No. 1-1196 and incorporated herein by reference.
10.11(a)* Stock Option Plan for Outside Directors effective as of December 17,
1990, filed with the Commission as Exhibit 10.14 to ARCO's report on
Form 10-K for the year 1990, under File No. 1-1196 and incorporated
herein by reference.
10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors,
effective as of June 22, 1992, filed with the Commission as Exhibit
10.13(b) to ARCO's report on Form 10-K for the year 1992, under File
No. 1-1196 and incorporated herein by reference.
10.11(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed with the Commission as
Exhibit 10.10(c) to ARCO's report on Form 10-K for the year 1997,
under File No. 1-1196 and incorporated herein by reference.
<PAGE>
Exhibit Description
10.11(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors
amended effective as of April 1, 1997, filed with the Commission as
Exhibit 10.10(d) to ARCO's report on Form 10-K for the year 1997,
under File No. 1-1196 and incorporated herein by reference.
10.12(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990,
filed with the Commission as Exhibit 10.13(a) to ARCO's report on
Form 10-K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective
as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to
ARCO's report on Form 10-K for the year 1995, under File No. 1-1196
and incorporated herein by reference.
10.12(c)* Amendment No. 2 to the Deferral Plan for Outside Directors effective
as of July 22, 1996, filed with the Commission as Exhibit 10.11(c) to
ARCO's report on Form 10-K for the year 1997, under File No. 1-1196
and incorporated herein by reference.
10.13* Special Incentive Plan, as adopted by the Board of Directors of ARCO
on February 28, 1994, and as effective on that date, is included in
Appendix C to the Company's 1994 Proxy Statement filed with the
Commission under File No. 1-1196 and incorporated herein by
reference.
10.14* 1997 Restricted Stock Plan For Outside Directors effective as of
January 1, 1997, filed with the Commission as Exhibit 10.13 to ARCO's
report on Form 10-K for the year 1997, under File No. 1-1196 and
incorporated herein by reference.
21 Subsidiaries of the Registrant.**
23 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney.
27 Financial Data Schedule.**
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.
- -------
* Management compensatory plans filed as exhibits hereto pursuant to Item
14(c) of Form 10-K.
** Previously filed on February 23, 1999.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Atlantic Richfield Company: Registration Statement on Form S-3
(No. 333-71293), Registration Statement on Form S-8 (No. 333-33151),
Registration Statement on Form S-8 (No. 33-43830), Registration Statement on
Form S-8 (No. 33-21558), Registration Statement on Form S-8 (No. 333-33153),
Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment
No. 4 to Registration Statement on Form S-8 (No. 33-21160), Post-Effective
Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639),
Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment
No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective
Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-
Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640),
Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment
No. 4 to Registration Statement on Form S-8 (No. 33-21552), and Registration
Statement on Form S-8 (No. 333-33245), of our report dated February 12, 1999,
on our audits of the consolidated financial statements and financial statement
schedule of Atlantic Richfield Company as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, which report is
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 16, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Marie L. Knowles, J. Kenneth Thompson, Donald R. Voelte, Jr., Michael E. Wiley,
Bruce G. Whitmore, Terry G. Dallas and Allan L. Comstock, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, in connection with the issuance of any
securities authorized by the Board of Directors of Atlantic Richfield Company
(the "Company") or by the Executive Committee thereof pursuant to due
authorization by such Board for issuance by the Company, (1) to execute and
file, or cause to be filed, with the Securities and Exchange Commission (the
"Commission"), (A) Registration Statements and any and all amendments (including
post-effective amendments) thereto and to file, or cause to be filed, all
exhibits thereto and other documents in connection therewith as required by the
Commission in connection with such registration under the Securities Act of
1933, as amended, and (B) any report or other document required to be filed by
the Company with the Commission pursuant to the Securities Exchange Act of 1934,
as amended, (2) to execute and file, or cause to be filed, any application for
registration or exemption therefrom, any report or any other document required
to be filed by the Company under the Blue Sky or securities laws of any of the
United States, and to furnish any other information required in connection
therewith, (3) to execute and file, or cause to be filed, any application for
registration or exemption therefrom under the securities laws of any
jurisdiction outside the United States, including any reports or other documents
required to be filed subsequent to the issuance of such securities, and (4) to
execute and file, or cause to be filed, any application for listing such
securities on the New York Stock Exchange, the Pacific Stock Exchange, the
London Stock Exchange or any other securities exchange in any other jurisdiction
where any such securities are proposed to be sold, granting to such attorneys-
in-fact and agents, and each of them, full power and authority to do and perform
each and every act required to be done as he or she might or could do in person,
hereby ratifying and confirming all that such attorneys-in-fact and agents, and
each of them, may lawfully do or cause to be done by virtue of this power of
attorney. Each person whose signature appears below may at any time revoke this
power of attorney as to himself or herself only by an instrument in writing
specifying that this power of attorney is revoked as to him or her as of the
date of execution of such instrument or at a subsequent specified date. This
power of attorney shall be revoked automatically with respect to any person
whose signature appears below effective on the date he or she ceases to be a
member of the Board of Directors or an officer of the Company. Any revocation
hereof shall not void or otherwise affect any acts performed by any attorney-in-
fact and agent named herein pursuant to this power of attorney prior to the
effective date of such revocation.
Dated as of January 25, 1999.
Signature Title
--------- -----
/s/ MIKE R. BOWLIN
Chairman of the Board and
_______________________________ Chief Executive Officer
Mike R. Bowlin
Principal executive officer
1
<PAGE>
Signature Title
--------- -----
/s/ MICHAEL E. WILEY
President and Chief
_______________________________ Operating Officer
Michael E. Wiley
/s/ MARIE L. KNOWLES
Executive Vice President
________________________________ and Chief Financial Officer
Marie L. Knowles
/s/ J. KENNETH THOMPSON
________________________________ Executive Vice President
J. Kenneth Thompson
/s/ DONALD R. VOELTE, JR.
________________________________ Executive Vice President
Donald R. Voelte, Jr.
/s/ FRANK D. BOREN
________________________________ Director
Frank D. Boren
/s/ JOHN GAVIN
________________________________ Director
John Gavin
/s/ KENT KRESA
________________________________ Director
Kent Kresa
/s/ ARNOLD G. LANGBO
________________________________ Director
Arnold G. Langbo
2
<PAGE>
Signature Title
--------- -----
/s/ DAVID T. McLAUGHLIN
________________________________ Director
David T. McLaughlin
/s/ JOHN B. SLAUGHTER
________________________________ Director
John B. Slaughter
/s/ GARY L. TOOKER
________________________________ Director
Gary L. Tooker
/s/ HENRY WENDT
________________________________ Director
Henry Wendt
/s/ GAYLE E. WILSON
________________________________ Director
Gayle E. Wilson
/s/ ALLAN L. COMSTOCK
Vice President and
_________________________________ Controller
Allan L. Comstock
Principal accounting officer
3
