<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
________________
For the quarterly period ended March 31, 1999 Commission file number 1-1196
________________
ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)
_________________
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 South Hope Street Los Angeles, California 90071
(Address of principal executive offices) (Zip code)
__________________
(213) 486-3511
(Registrant's telephone number, including area code)
__________________
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $2.50 par value, outstanding as of March 31,
1999: 321,952,768.
<PAGE>
PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------- -----------
(Restated)
(Millions except per share amounts)
Revenues
<S> <C> <C>
Sales and other operating revenues............. $2,415 $2,536
Other revenues................................. 136 110
------ ------
2,551 2,646
------ ------
Expenses
Trade purchases................................ 800 986
Operating expenses............................. 566 535
Selling, general and administrative expenses... 152 183
Depreciation, depletion and amortization....... 483 352
Exploration expenses (including undeveloped
leasehold amortization)...................... 74 149
Taxes other than income taxes.................. 120 154
Interest....................................... 95 97
------ ------
2,290 2,456
------ ------
Income from continuing operations before
income taxes and minority interest............. 261 190
Provision for taxes on income.................... 93 47
Minority interest in earnings of subsidiaries.... 3 9
------ ------
Income from continuing operations................ 165 134
Income from discontinued operations, net of
income taxes of $0 (1999) and $46 (1998)....... - 86
------ ------
Net Income....................................... $ 165 $ 220
====== ======
Earned per Share
Basic
Continuing operations........................ $ .51 $ .42
Discontinued operations...................... - .27
------ ------
Net income................................... $ .51 $ .69
====== ======
Diluted
Continuing operations........................ $ .51 $ .41
Discontinued operations...................... - .26
------ ------
Net income................................... $ .51 $ .67
====== ======
Cash Dividends Paid per Share of Common Stock.... $.7125 $.7125
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
(Millions)
Assets
Current assets:
Cash and cash equivalents........................ $ 790 $ 657
Short-term investments........................... 248 260
Accounts receivable.............................. 1,018 1,002
Inventories...................................... 489 475
Prepaid expenses and other current assets........ 228 317
------- -------
Total current assets............................. 2,773 2,711
------- -------
Investments and long-term receivables:
Investments accounted for on the equity method... 1,223 1,235
Other investments and long-term receivables...... 1,023 831
------- -------
2,246 2,066
------- -------
Net property, plant and equipment.................. 18,942 18,762
Net assets of discontinued operations.............. 64 339
Deferred charges and other assets.................. 1,338 1,321
------- -------
Total assets....................................... $25,363 $25,199
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -------------
<S> <C> <C>
(Millions)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable................................... $ 2,564 $ 2,403
Accounts payable................................ 830 976
Long-term debt due within one year.............. 199 399
Taxes payable................................... 828 634
Other........................................... 897 1,285
------- -------
Total current liabilities....................... 5,318 5,697
------- -------
Long-term debt.................................... 4,618 4,332
Deferred income taxes............................. 3,279 3,318
Dismantlement, restoration and reclamation........ 1,082 1,058
Other deferred liabilities and credits............ 2,958 2,955
Minority interest................................. 262 259
------- -------
Total liabilities............................... 17,517 17,619
------- -------
Stockholders' equity:
Preference stocks............................... 1 1
Common stock.................................... 815 815
Capital in excess of par value of stock......... 858 863
Retained earnings............................... 6,525 6,589
Treasury stock.................................. (313) (344)
Accumulated other comprehensive income (loss)... (40) (344)
------- -------
Total stockholders' equity...................... 7,846 7,580
------- -------
Total liabilities and stockholders' equity........ $25,363 $25,199
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
(Millions) (Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations....................... $ 165 $ 134
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation, depletion and amortization.................. 483 352
Dry hole expense and undeveloped leasehold amortization... 21 63
Net gain on asset sales................................... (14) (21)
Income from equity investments............................ (7) (8)
Dividends from equity investments......................... 20 1
Minority interest in earnings of subsidiaries............. 3 9
Cash payments greater than noncash provisions............. (125) (47)
Deferred income taxes..................................... (5) 21
Changes in working capital accounts....................... (296) (160)
Other..................................................... (43) 41
----- -----
Net cash provided by operating activities................ 202 385
----- -----
Cash flows from investing activities:
Additions to fixed assets (including dry hole costs)...... (760) (755)
Net cash provided (used) by short-term investments........ 5 (8)
Proceeds from asset sales................................. 577 45
Investments and long-term receivables..................... (2) (17)
Other..................................................... 27 (25)
----- -----
Net cash used by investing activities.................... (153) (760)
----- -----
Cash flows from financing activities:
Repayments of long-term debt.............................. (549) (52)
Proceeds from issuance of long-term debt.................. 634 68
Net cash provided by notes payable........................ 202 570
Dividends paid............................................ (229) (229)
Other..................................................... 13 10
----- -----
Net cash provided by financing activities................ 71 367
----- -----
Cash flows from discontinued operations..................... 21 52
Effect of exchange rate changes on cash..................... (8) 1
----- -----
Net increase in cash and cash equivalents................... 133 45
Cash and cash equivalents at beginning of period............ 657 434
----- -----
Cash and cash equivalents at end of period.................. $ 790 $ 479
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Accounting Policies.
Basis of Presentation.
The foregoing financial information is unaudited and has been prepared from
the books and records of the Company. Certain previously reported amounts have
been restated to conform to classifications adopted in 1999. Unless otherwise
stated, the Notes to Consolidated Financial Statements exclude discontinued
operations. In the opinion of the Company, the financial information reflects
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations in
conformity with generally accepted accounting principles.
NOTE B. Comprehensive Income.
Comprehensive income comprises net income plus all other changes in equity
from nonowner sources. ARCO's comprehensive income for the three-month periods
ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(Millions) 1999 1998
--------- ------
<S> <C> <C>
Net income.................................. $ 165 $ 220
Other comprehensive income:
Net unrealized gain (loss) on investments (a) 111 (186)
Foreign currency translation adjustment... 193 (4)
----- -----
Comprehensive income........................ $ 469 $ 30
===== =====
</TABLE>
(a) Primarily consists of changes in the fair value of ARCO's investment in
LUKOIL, which had a fair value of approximately $411 million at March 31,
1999, compared to a fair value of approximately $225 million at December
31, 1998. The unrealized pretax gain in the LUKOIL investment at March
31, 1999, was $69 million.
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at March 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
(Millions)
Net unrealized gain (loss) on investments......... $ 36 $ (75)
Foreign currency translation adjustment........... (29) (222)
Minimum pension liability......................... (47) (47)
----- -----
Accumulated other comprehensive income (loss)... $ (40) $(344)
===== =====
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Interim Segment Information.
<TABLE>
<CAPTION>
March 31, 1999
- --------------
Exploration Refining & All
(Millions) & Production Marketing Other Unallocated Total
------------ --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues..... $ 1,304 $ 1,306 $ 17 $ 2 $ 2,629
Intersegment revenues... (211) - (1) (2) (214)
------- ------- ------ ------ -------
Total................... $ 1,093 $ 1,306 $ 16 $ - $ 2,415
======= ======= ====== ====== =======
Income from continuing
operations............. $ 89 $ 129 $ 24 $ (77) $ 165
Income from discontinued
operations............. - - - - -
------- ------- ------ ------ -------
Net income.............. $ 89 $ 129 $ 24 $ (77) $ 165
======= ======= ====== ====== =======
Segment assets.......... $18,168 $ 4,124 $ 922 $2,149 $25,363
======= ======= ====== ====== =======
December 31, 1998
-----------------
Segment assets.......... $18,203 $ 3,826 $1,119 $2,051 $25,199
======= ======= ====== ====== =======
March 31, 1998
- --------------
(Restated)
Exploration Refining & All
(Millions) & Production Marketing Other Unallocated Total
------------ --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues..... $ 1,538 $ 1,352 $ 40 $ 2 $ 2,932
Intersegment revenues... (361) (12) (21) (2) (396)
------- ------- ------ ------ -------
Total................... $ 1,177 $ 1,340 $ 19 $ - $ 2,536
======= ======= ====== ====== =======
Income from continuing
operations............. $ 182 $ 19 $ 24 $ (91) $ 134
Income from discontinued
operations............. - - - 86 86
------- ------- ------ ------ -------
Net income.............. $ 182 $ 19 $ 24 $ (5) $ 220
======= ======= ====== ====== =======
</TABLE>
The Company's coal and chemical operations have been reported as
discontinued since March 31, 1998 and June 30, 1998, respectively. Accordingly,
at December 31, 1998 and March 31, 1999, the income from and net assets of
discontinued operations are included with unallocated items in the segment
presentation above. The prior period has been restated to conform to the current
presentation.
The amortization and recognition of imputed interest associated with a gain
deferred in conjunction with the sale of the chemicals operations had a
favorable impact of approximately $10 million after tax on Refining and
Marketing earnings in the first quarter 1999.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE D. Investments.
At March 31, 1999 and 1998, investments in debt securities were primarily
composed of U.S. Treasury securities and corporate debt instruments. Maturities
generally ranged from one day to 10 years. ARCO's investments in LUKOIL common
stock and Zhenhai Refining and Chemical Company convertible bonds were included
in other investments and long-term receivables. At March 31, 1999 and 1998, all
investments were classified as available-for-sale and were reported at fair
value, with unrealized holding gains and losses, net of tax, reported in
accumulated other comprehensive income (loss).
The following summarizes investments in securities at March 31:
<TABLE>
<CAPTION>
(Millions) 1999 1998
------- -------
<S> <C> <C>
Aggregate fair value.......................................... $ 869 $1,675
Gross unrealized holding losses............................... 14 2
Gross unrealized holding gains................................ (73) (684)
------ ------
Amortized cost................................................ $ 810 $ 993
====== ======
Investment activity for the three months ended March 31 was as follows:
(Millions) 1999 1998
------ ------
Gross purchases............................................... $2,285 $4,802
Gross sales................................................... 445 124
Gross maturities.............................................. 2,078 4,598
</TABLE>
Gross realized gains and losses were insignificant and were determined by the
specific identification method.
NOTE E. Inventories.
Inventories at March 31, 1999 and December 31, 1998 comprised the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
(Millions)
Crude oil and petroleum products..... $ 226 $ 220
Other products....................... 27 24
Materials and supplies............... 236 231
----- -----
Total.............................. $ 489 $ 475
===== =====
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE F. Capital Stock.
Detail of the Company's capital stock was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
(Thousands)
$3.00 Cumulative convertible preference stock, par $1..... $ 50 $ 52
$2.80 Cumulative convertible preference stock, par $1..... 564 573
Common stock, par $2.50................................... 814,921 814,673
-------- --------
Total................................................... $815,535 $815,298
======== ========
</TABLE>
NOTE G. Capitalization of Interest.
Interest expense excludes capitalized interest of $39 million and $16 million
for the three-month periods ended March 31, 1999 and 1998, respectively.
NOTE H. Restructuring Programs.
During 1998, ARCO recorded pretax charges of $229 million for the costs of
eliminating over 1,200 positions, primarily exploration and production technical
support, international exploration and production support operations and the
corporate headquarters. The following table summarizes the liabilities related
to the 1998 restructuring program, including $11 million transferred from the
1997 program to cover those people who had not yet terminated under the 1997
program and became eligible for the 1998 program:
<TABLE>
<CAPTION>
($ 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 such as relocation and outplacement.
(b) Net increase in pension benefits to be paid from assets of qualified
plans.
(c) Net increase in non-qualified pension benefits and other
postretirement benefits to be paid from Company funds.
Through March 31, 1999, approximately 590 employees have been terminated and
approximately $41 million of severance and ancillary benefits have been paid and
charged against the accrual. Payments made do not necessarily correlate to the
number of terminations due to the ability of terminees to defer receipt of
certain payments.
UTP Restructure.
As part of the purchase price allocation for the purchase of UTP in 1998, the
company established a $78 million provision for the termination of 357 employees
resulting
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE H. Restructuring Programs (continued).
from the integration of UTP into ARCO's operations. At March 31, 1999, 299
employees have been terminated and a total of $68 million in severance benefits
has been paid. The group of employees terminated included U.S. citizens
employed in exploration and production operations and corporate headquarters
personnel.
NOTE I. Income Taxes.
<TABLE>
<CAPTION>
Provision for taxes on income: Three Months Ended
March 31,
---------
1999 1998
---------- ---------
(Millions) (Restated)
<S> <C> <C>
Federal:
Current................................................................................... $ 41 $ (10)
Deferred.................................................................................. 11 27
------ ------
52 17
------ ------
Foreign:
Current................................................................................... 45 28
Deferred.................................................................................. (17) (10)
------ ------
28 18
------- ------
State:
Current................................................................................... 12 8
Deferred.................................................................................. 1 4
------ ------
13 12
------- ------
Total.................................................................................... $ 93 $ 47
====== ======
</TABLE>
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
--------- ---------
Percent of Percent of
Pretax Pretax
Amount Income Amount Income
--------- -------- --------- ---------
(Millions) (Restated)
<S> <C> <C> <C> <C>
Income from continuing operations before
income taxes and minority interest.................................. $ 261 100.0 $ 190 100.0
===== ====== ====== ======
Tax at federal statutory rate........................................ $ 91 35.0 $ 67 35.0
Increase (reduction) in taxes resulting from:
Subsidiary stock transaction........................................ - - (13) (6.8)
Taxes on foreign income in excess of
statutory rate..................................................... 21 8.0 20 10.5
State income taxes (net of federal
effect)............................................................ 8 3.1 8 4.2
Tax credits......................................................... (24) (9.2) (31) (16.3)
Other............................................................... (3) (1.3) (4) (1.9)
----- ------ ------ ------
Provision for taxes on income........................................ $ 93 35.6 $ 47 24.7
===== ====== ====== ======
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Discontinued Operations.
In first quarter 1999, ARCO disposed of its interests in two Australian coal
mines. ARCO disposed of its 80% interest in the Gordonstone coal mine and its
31.4% interest in the Blair Athol Joint Venture. At March 31, 1999, the
carrying value of the remaining Australian assets was $64 million and was
included in net assets of discontinued operations on the balance sheet.
Beginning in January 1999, ARCO suspended depreciation on the Australian coal
assets (1998 annual depreciation was $23 million). In 1998, ARCO recorded a $92
million provision for the estimated loss on the disposal of the U.S. and
Australian coal assets.
As part of the acquisition of UTP, ARCO determined it would sell UTP's
petrochemical business. In March 1999, ARCO sold the UTP petrochemical business
to Williams Energy Services. At March 31, 1999, the carrying value of UTP's net
petrochemical assets, which included a $33 million after-tax provision for loss
on the sale of UTP's assets, was zero.
Revenues and income from discontinued operations for the three months ended
March 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
(Millions)
Revenues:
ARCO Chemical....... $ - $ 934
Coal operations..... 26 141
UTP petrochemical... 24 -
-------- ------
Total............. $ 50 $1,075
======== ======
Net income:
ARCO Chemical....... $ - $ 76
Coal operations..... - 10
UTP petrochemical... - -
-------- ------
Total............. $ - $ 86
======== ======
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Earned Per Share.
The information necessary for the calculation of earned per share is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
----------------------------------
Income Shares Per share
-------- ------- ---------
(Millions, except per share amounts)
<S> <C> <C> <C>
Income from continuing operations........................... $165.4
Less: Preference stock dividends............................ (.5)
------
Income from continuing operations available to
common stockholders - basic EPS............................ 164.9 321.6 $0.51
=====
Income from discontinued operations, net of tax............. - 321.6 -
------ ===== -----
Net income available to common stockholders - basic EPS..... 164.9 321.6 $0.51
=====
Effect of dilutive securities:
Contingently issuable shares (primarily options)............ 2.2
Convertible preference stock................................ .5 3.4
------ -----
Net income available to common stockholders and
assumed conversions - diluted EPS.......................... 165.4 327.2 $0.51
=====
Income from discontinued operations, net of tax............. - 327.2 -
------ ===== -----
Income from continuing operations available to common
stockholders and assumed conversions - diluted EPS......... $165.4 327.2 $0.51
====== ===== =====
<CAPTION>
Three Months Ended
March 31, 1998
---------------------------------
Income Shares Per share
-------- ------- ---------
<S> <C> <C> <C>
Income from continuing operations........................... $134.4
Less: Preference stock dividends............................ (.5)
------
Income from continuing operation available to
common stockholders - basic EPS............................ 133.9 320.6 $ .42
=====
Income from discontinued operations, net of tax............. 85.7 320.6 .27
------ ===== -----
Net income available to common stockholders - basic EPS...... 219.6 320.6 $ .69
=====
Effect of dilutive securities:
Contingently issuable shares (primarily options)............ 2.9
Convertible preference stock................................ .5 3.7
------ -----
Net income available to common stockholders and
assumed conversions - diluted EPS.......................... 220.1 327.2 $ .67
=====
Income from discontinued operations, net of tax............. (85.7) 327.2 (.26)
------ ===== -----
Income from continuing operations available to common
stockholders and assumed conversions - diluted EPS......... $134.4 327.2 $ .41
====== ===== =====
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Supplemental Income Statement Information.
Taxes other than income taxes comprised the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------
1999 1998
------ ----------
(Restated)
<S> <C> <C>
(Millions)
Production/severance.......................................... $ 40 $ 64
Property...................................................... 35 40
Other......................................................... 45 50
----- -----
Total....................................................... $ 120 $ 154
===== =====
</TABLE>
NOTE M. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the three months ended
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
------- ----------
(Restated)
(Millions)
<S> <C> <C>
Gross sales and maturities of short-term investments... $ 15 $ 64
Gross purchases of short-term investments.............. (10) (72)
------- -------
Net cash provided (used) by short-term investments..... $ 5 $ (8)
======= =======
Gross proceeds from issuance of notes payable.......... $ 3,737 $ 3,960
Gross repayments of notes payable...................... (3,535) (3,390)
------- -------
Net cash provided by notes payable..................... $ 202 $ 570
======= =======
Gross noncash provisions charged to income............. $ 37 $ 67
Cash payments of previously accrued items.............. (162) (114)
------- -------
Cash payments greater than noncash provisions.......... $ (125) $ (47)
======= =======
Interest paid.......................................... $ 101 $ 128 (a)
======= =======
Income paid............................................ $ 98 $ 109 (a)
======= =======
- ----------
(a) Includes amounts paid related to discontinued operations.
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE M. Supplemental Cash Flow Information (continued).
Changes in working capital accounts for the three-month periods ended March
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
------- ----------
(Restated)
<S> <C> <C>
(Millions)
Increase (decrease) to cash
Accounts receivable......... $ (16) $ 108
Inventories................. (16) (61)
Accounts payable............ (146) (194)
Other working capital....... (118) (13)
----- -----
Total..................... $(296) $(160)
===== =====
</TABLE>
NOTE N. Other Commitments and Contingencies.
ARCO has commitments, including those related to the acquisition, construction
and development of facilities, all made in the normal course of business.
Following governmental approvals, construction on the Caspian pipeline project
is scheduled to begin during the second quarter of 1999. ARCO has guaranteed all
of LUKARCO's obligations associated with the Caspian pipeline project, which
amount to 25% of all funding requirements for this project. The current
estimates of total project funding requirements are between $2.2 to $2.4
billion.
Following the March 1989 EXXON VALDEZ oil spill, numerous federal, state and
private plaintiff lawsuits were brought against Exxon, Alyeska Pipeline Service
Company (Alyeska), and Alyeska's owner companies including ARCO, which owns
approximately 22%. While all of the federal, state and private plaintiff
lawsuits have been settled, certain issues relating to the liability for the
spill remain unresolved between Exxon and Alyeska (including its owner
companies).
ARCO, together with other former producers of lead paint have been named in a
number of lawsuits, including purported class actions, seeking damages,
abatement of the housing units, and compensation for medical problems arising
out of the presence of lead-based paint in certain housing units. ARCO is
unable to predict the scope or amount of any such liability.
The State of Montana, along with the United States and the Salish and Kootenai
Tribes, have been seeking recovery from ARCO of alleged injuries to natural
resources resulting from mining and mineral processing businesses formerly
operated by Anaconda. In April 1999 the court approved two consent decrees.
Under the terms of these decrees, ARCO has agreed to pay $135 million for
settlement of $561 million of the State's $767 million natural resource damage
claim relating to the Clark Fork River Basin, $86 million for clean-up and
related liabilities at Silver Bow Creek, and $20 million to resolve claims by
the Tribes and the United States.
ARCO is subject to other loss contingencies pursuant to federal, state and
local environmental laws and regulations that require ARCO to do some or all of
the following:
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (continued).
. Remove or mitigate the effects on the environment at various sites from the
disposal or release of certain substances;
. Perform restoration work at such sites; and
. Pay damages for loss of use and non-use values.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federal- and state-managed sites as well as other clean-up sites including
service stations, refineries, terminals, third-party landfills, former nuclear
processing facilities, sites associated with discontinued operations and sites
previously owned by ARCO or predecessors. This comprises 125 sites for which
ARCO has been named a potentially responsible party (PRP), along with other
sites for which no claims have been asserted. The number of PRP sites in and of
itself is not a relevant measure of liability because the nature and extent of
environmental concerns varies by site and ARCO's share of responsibility varies
from sole responsibility to very little responsibility.
ARCO may in the future be involved in additional assessments and cleanups.
Future costs depend on unknown factors such as:
. Nature and extent of contamination;
. Timing, extent and method of remedial action;
. ARCO's proportional share of costs; and
. Financial condition of other responsible parties.
The environmental remediation accrual is updated annually, at a minimum, and
at March 31, 1999, was $847 million. As these costs become more clearly
defined, they may require future charges against earnings. Applying Monte Carlo
analysis to estimated site maximums on a portfolio basis, ARCO estimates that
future costs could exceed the amount accrued by as much as $500 million.
Approximately 54% of the reserve related to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of Montana,
Utah and New Mexico. Another significant component related to currently and
formerly owned chemical, nuclear processing, and refining and marketing
facilities, and other sites which received wastes from these facilities. The
remainder related to other sites with reserves ranging from $1 million to $10
million per site. No one site represents more than 10% of the total reserve.
Substantially all amounts accrued are expected to be paid out over the next five
to six years.
Claims for recovery of remediation costs already incurred and to be incurred
in the future have been filed against various third parties. Many of these
claims have been resolved. ARCO has neither recorded any asset nor reduced any
liability in connection with unresolved claims.
Although any ultimate liability arising from any of the matters described
herein could result in significant expenses or judgments that, if aggregated and
assumed to occur within a single fiscal year, would be material to ARCO's
results of operations, the likelihood of such occurrence is considered remote.
On the basis of management's best assessment of the ultimate amount and timing
of these events, such expenses or judgments
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (Continued).
are not expected to have a material adverse effect on ARCO's consolidated
financial statements.
The operations and consolidated financial position of ARCO continue to be
affected by domestic and foreign political developments as well as legislation,
regulations and litigation pertaining to restrictions on production, imports and
exports, tax increases, environmental regulations, cancellation of contract
rights and expropriation of property. Both the likelihood of such occurrences
and their overall effect on ARCO vary greatly and are not predictable.
These uncertainties are part of a number of items that ARCO has taken and will
continue to take into account in periodically establishing reserves.
NOTE O. Merger Agreement between ARCO and BP Amoco.
On March 31, 1999, BP Amoco and ARCO reached agreement to combine with each
other in an all-share transaction in which shareholders of ARCO will receive .82
BP Amoco American Depositary Shares for each share of ARCO stock exchanged. The
agreement was approved by both boards of directors.
The transaction is subject to the approval of the shareholders of both BP
Amoco and ARCO and the consent of various state and regulatory authorities,
including the Federal Trade Commission and the European Commission. At the time
the transaction was announced, BP Amoco estimated that the transaction will
close by year-end 1999.
NOTE P. Subsequent Events.
On April 23, 1999, ARCO issued $1 billion of senior debt securities, which
consisted of $500 million of four-year notes with a coupon of 5.55%, due 2003,
and $500 million of 10-year notes with a coupon of 5.90%, due 2009. Net
proceeds from the offering will be used for general corporate purposes and,
principally, for the replacement of short-term debt with long-term debt.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter 1999 vs. First Quarter 1998
Consolidated Earnings
The $31 million increase in income from continuing operations in the first
quarter of 1999 reflected improved refining and marketing margins, due to lower
crude oil prices, and increased retail marketing volumes. These factors were
partially offset by lower exploration and production earnings due to lower crude
oil and natural gas prices, compared to the same period in 1998.
The lower net income in 1999 reflected the absence of earnings from
discontinued operations disposed of in the second and third quarters of 1998.
Those operations included ARCO Coal's U.S. operations and ARCO's entire interest
in ARCO Chemical Company (ARCO Chemical).
For the first quarter of 1999, net special items charges totaled $7 million
and consisted primarily of charges for future environmental remediation.
For the first quarter of 1998, a special items benefit of $8 million consisted
of a deferred tax benefit, partially offset by charges for future environmental
remediation.
<TABLE>
<CAPTION>
After-tax Segment Earnings
1999 1998
----- -----
(Restated)
(Millions)
<S> <C> <C>
Exploration and production.......... $ 89 $ 182
Refining and marketing.............. 129 19
Other operations.................... 24 24
Interest expense.................... (70) (69)
Other unallocated expenses.......... (7) (22)
----- -----
Income from continuing operations... 165 134
Discontinued operations............. - 86
----- -----
Net income........................ $ 165 $ 220
===== =====
</TABLE>
Exploration and Production
ARCO's earnings from worldwide oil and gas exploration and production
operations in 1999 were significantly impacted by lower crude oil prices and, to
a lesser extent, lower natural gas prices and increased depreciation, depletion
and amortization (DD&A). The increased DD&A reflected the integration of former
UTP operations into ARCO and increased DD&A associated with expanded production
for Vastar Resources, Inc. (Vastar). The lower commodity prices in the 1999
first quarter were partially offset by higher production volumes and a $75
million decrease in exploration expense, primarily associated with international
and Vastar operations. Vastar is 82.1% owned by ARCO.
16
<PAGE>
Average Oil & Gas Prices
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
U.S.
Petroleum liquids - per barrel (bbl)
Alaska........................................ $6.07 $10.26
Lower 48, including Vastar.................... $9.75 $12.68
Composite average price....................... $7.17 $11.10
Natural gas - per thousand cubic feet (mcf)..... $1.60 $ 1.89
International
Petroleum liquids composite average - per bbl $9.16 $12.59
Venezuela crude oil - per bbl................... $3.71 $ -
Natural gas - per mcf........................... $2.47 $ 2.69
Indonesia LNG................................... $2.31 $ -
</TABLE>
Petroleum Liquids and Natural Gas Production
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Net Production
U.S.
Petroleum liquids - bbl/day
Alaska.................................... 345,100 364,100
Vastar.................................... 55,900 51,600
Other Lower 48............................ 92,200 140,500
Total................................... 493,200 556,200
Natural gas - mcf/day. . . . . . . . . . . . 1,359,800 1,091,700
Barrels of oil equivalent (BOE)/day*........ 719,800 738,100
International
Petroleum liquids - bbl/day................. 179,100 83,700
Natural gas - mcf/day. . . . . . . . . . . . 1,228,600 847,600
BOE/day..................................... 383,900 225,000
Total net production BOE/day . . . . . . . . . 1,103,700 963,100
</TABLE>
____________
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
In 1999, the reduction in U.S. petroleum liquids production primarily resulted
from natural field declines in Alaska and the absence of production from
California properties (other Lower 48) producing exclusively heavy crude oil,
which were exchanged for Gulf of Mexico exploration acreage and properties
producing both crude oil and natural gas that were ultimately transferred to
Vastar. The increased international petroleum liquids volumes primarily
reflected production from UTP properties which became part of ARCO's operations
in the third quarter of 1998 and new production from Venezuela, which averaged
31,500 barrels per day in the first quarter of 1999.
The increase in international natural gas volumes in 1999 primarily reflected
production from former UTP properties. The 1999 increase in U.S. natural gas
volumes primarily reflected production from Gulf of Mexico shelf properties
transferred to Vastar in the fourth quarter of 1998. The added international
production from the former UTP properties contributed 336 million cubic feet per
day and ARCO's United Kingdom natural gas fields increased their production by
74 million cubic feet per day. These higher production amounts were partially
offset by a reduction in production from the Yacheng 13 field in China of 34
million cubic feet per day. The reduction in Yacheng 13 production resulted from
the absence of cost recovery barrels, as ARCO had recovered its costs by the
first quarter 1999.
17
<PAGE>
Refining and Marketing
In the 1999 first quarter, refining and marketing earnings increased as a
result of lower crude oil costs and increased retail marketing volumes. Average
gasoline realizations for first quarter 1999 were lower than the corresponding
1998 period. However, higher gasoline realizations came late in the quarter and
were due primarily to production losses from four separate California refinery
incidents, including one at ARCO's Los Angeles Refinery, and the switch from
winter blends, which include added butane and oxygenates, to summer blends, that
causes a 10% reduction in volumes.
The change in jet fuel and distillate volumes in 1999, compared to 1998
reflected the company's decision to produce more distillate and correspondingly
less jet fuel due to more favorable market prices for distillate products in
first quarter 1999.
The amortization and recognition of imputed interest associated with the
deferral of part of the pre-tax gain on the sale of the ARCO Chemical interest
in 1998 had a net favorable impact of approximately $10 million after tax on
refining and marketing earnings in the first quarter of 1999. See the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 for a further
discussion of the deferred gain.
West Coast Petroleum Products Sales
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Volumes (barrels/day)
Gasoline................ 310,000 295,400
Jet..................... 98,500 110,200
Distillate.............. 87,900 77,900
Other................... 59,100 63,400
------- -------
Total................. 555,500 546,900
======= =======
</TABLE>
Other Operations
The 1999 and 1998 results from ARCO's other operations included the earnings
from Lower 48 pipeline operations and an aluminum rolling facility.
Discontinued Operations
As of March 31, 1999, ARCO has sold its interests in two Australian coal
mines. ARCO sold its 80% interest in the Gordonstone coal mine and its 31.4%
interest in the Blair Athol Joint Venture. ARCO recorded in 1998 a $92 million
provision for the estimated loss on the disposal of the U.S. and Australian coal
assets.
On February 24, 1999, ARCO announced that it had sold Union Texas
Petrochemicals Corporation (UTP Petrochemical) to Williams Energy Services.
ARCO had acquired Union Texas Petrochemical business as part of its purchase of
Union Texas Petroleum Holdings, Inc., in June 1998.
ARCO had no earnings from discontinued operations in 1999, because of the sale
of the U.S. coal and ARCO Chemical operations in 1998. Income or loss from
Australian coal and UTP Petrochemical operations is being deferred as part of
net assets from discontinued operations on the balance sheet at March 31, 1999.
18
<PAGE>
Consolidated Revenues
<TABLE>
<CAPTION>
1999 1998
------ ------
(Millions)
<S> <C> <C>
Sales and other operating revenues
Exploration and production........... $1,304 $1,538
Refining and marketing............... 1,306 1,352
Other................................ 18 42
Intersegment eliminations............ (213) (396)
------ ------
Total.............................. $2,415 $2,536
====== ======
</TABLE>
The decline in exploration and production sales and other operating revenues
resulted primarily from lower crude oil and natural gas prices. Refining and
marketing sales and other operating revenues decreased primarily because of
lower refined products prices, partially offset by higher gasoline volumes.
Consolidated Expenses
Trade purchases were lower in 1999 primarily as a result of lower crude oil
prices.
The small increase in operating expenses in 1999 primarily reflected the
operating costs associated with former UTP properties now being operated by
ARCO, partially offset by approximately $40 million of cost savings in
exploration and production and Lower 48 pipeline operations related to the
Company's cost reduction program announced in 1998.
The lower selling, general and administrative expenses in 1999 primarily
resulted from the Company's cost reduction program.
The higher depreciation, depletion and amortization (DD&A) expense in 1999
primarily reflected the inclusion of DD&A of the former UTP operations, which
became a part of ARCO's operations in the third quarter of 1998, and expanded
production for Vastar in 1999.
The lower taxes other than income taxes in 1999 primarily resulted from the
impact of lower crude oil prices on U.S. production taxes.
Income Taxes
The Company's effective tax rate was 35.6% in the 1999 first quarter, compared
to 24.7% in the 1998 first quarter. The 1999 effective tax rate approximates
the federal statutory rate, reflecting the absence of tax benefits from
affiliate stock transactions, which totaled $13 million in 1998, and lower tax
credits in 1999 than existed in 1998.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
1999
----
(Millions)
<S> <C>
Cash flow provided (used) by:
Operations . . . . . . . . . . . . . . . . . . . $ 202
Investing activities . . . . . . . . . . . . . . $(153)
Financing activities . . . . . . . . . . . . . . $ 71
</TABLE>
19
<PAGE>
The net cash used by investing activities in the first quarter 1999 included
expenditures for additions to fixed assets of $760 million and proceeds from
asset sales of $577 million ($377 million associated with Australian coal asset
sales). The Company expects total capital expenditures for additions to fixed
assets to approximate $2.7 billion for the full year 1999.
The net cash provided by financing activities in the first quarter of 1999
included net proceeds of $202 million from the issuance of short-term debt and
proceeds of $634 million from the issuance of long-term debt primarily by
Vastar. These proceeds were partially offset by repayments of long-term debt of
$549 million and dividend payments of $229 million.
Cash and cash equivalents and short-term investments totaled $1.0 billion, and
short-term borrowings were $2.6 billion at the end of the first quarter of 1999.
Beginning in 1997 and continuing through the first quarter of 1999, the
Company utilized increased short-term borrowing in lieu of increased long-term
borrowing (other than long-term debt assumed in connection with the UTP
acquisition in 1998). As a result the Company is in a working capital deficit
position of approximately $2.7 billion at March 31, 1999. Depending upon the
revenues earned and cash received from the sale of assets during 1999, the
Company may increase total indebtedness during the course of the year.
On April 23, 1999, ARCO issued $1 billion of senior debt securities, which
consisted of $500 million of four-year notes with a coupon of 5.55%, due 2003,
and $500 million of 10-year notes with a coupon of 5.90%, due 2009. Net
proceeds from the offering will be used for general corporate purposes and,
principally, for the replacement of short-term debt with long-term debt.
The Company believes it has adequate resources and liquidity to fund future
cash requirements for working capital, capital expenditures, dividends and debt
repayments with cash from operations, existing cash balances, additional short-
and long-term borrowing, and the sale of assets.
On March 31, 1999, BP Amoco and ARCO reached agreement to combine with each
other in an all-share transaction in which shareholders of ARCO will receive .82
BP Amoco American Depositary Shares for each share of ARCO stock exchanged. The
agreement was approved by both boards of directors.
The transaction is subject to the approval of the shareholders of both BP
Amoco and ARCO and the consent of various state and regulatory authorities. At
the time the transaction was announced, BP Amoco estimated that the transaction
will close by year-end 1999.
Statements of Financial Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to adopt
its provisions for all fiscal quarters of all fiscal years beginning after June
15, 1999. Earlier application of all of the provisions of SFAS No. 133 is
permitted, but the provisions cannot be applied retroactively to financial
statements of prior periods. SFAS No. 133 standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. The Company has not yet completed evaluating the impact of the
provisions of SFAS No. 133.
20
<PAGE>
Impact of Year 2000 Issue
The Company's plans to address the Year 2000 issue are fully described in its
Annual Report on Form 10-K for the year ended December 31, 1998. The following
table is an update of a table contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and shows the Company's progress on
addressing the Year 2000 issue as of March 31, 1999:
<TABLE>
<CAPTION>
Total
expended
through Total
Percent March 31, estimated
complete at Expected date 1999 cost
Areas addressed March 31, 1999 of completion (millions) (millions)
------------------ ----------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Computing integrity 79% (1) June 1999 $ 9 $12
Asset integrity 50% (2) September 1999 6 11
Commercial integrity 27% (3) June 1999 1 4
--- ---
Total costs $16 $27
</TABLE>
________________
(1) Internal mission critical components substantially complete with most of
the remaining work outside of the direct control of ARCO.
(2) Due to additional work being identified in the first quarter the expected
completion date has been adjusted.
(3) Commercial integrity remediation work largely involves contingency planning
which is underway.
The total cost associated with required modifications to achieve Year 2000
compliance is not expected to be material to the Company's financial position.
The approximate total cost of the Year 2000 project is $27 million, an 8%
increase since year-end 1998 due to increased work in 1999, primarily in the
Asset Integrity area, and increased budgets for follow-up work in the year 2000.
This estimate does not include ARCO's potential share of Year 2000 costs that
may be incurred by partnerships and joint ventures in which the Company
participates but is not the operator.
____________________
Management cautions against projecting any future results based on present
earnings levels because of economic uncertainties, the extent and form of
existing or future governmental regulations and other possible actions by
governments.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Reference is made to the disclosure on pages 14 and 15 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (hereinafter,
the "1998 Form 10-K Report") regarding Montana v. ARCO (Case No. CV-83-317-HLN-
PGH) and U.S. v. ARCO (Case No. CV-89-039-BU-PGH). These settlements were
approved by the court on April 19, 1999.
2. Reference is made to the Company's 1998 Form 10-K Report for information
on other legal proceeding matters reported therein.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of stockholders was held on May 3, 1999. The
stockholders elected all the Company's nominees for director, who constitute the
entire Board of Directors. The Stockholders also approved the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors for 1999. The
votes were as follows:
<TABLE>
<CAPTION>
1. Election of Directors.
Votes For Votes Withheld
------------- --------------
<S> <C> <C>
Frank D. Boren 270,371,901 6,180,190
Mike R. Bowlin 270,340,759 6,211,332
John Gavin 270,214,406 6,337,685
Kent Kresa 270,513,052 6,039,039
Arnold G. Langbo 270,439,481 6,112,610
David T. McLaughlin 270,355,429 6,196,662
John B. Slaughter 270,348,646 6,203,445
Gary L. Tooker 270,491,978 6,060,113
Henry Wendt 270,429,842 6,122,249
Gayle E. Wilson 270,287,229 6,264,862
<CAPTION>
2. Appointment of PricewaterhouseCoopers LLP.
<S> <C>
For 273,189,649
Against 2,152,366
Abstain 1,210,076
<CAPTION>
3. Stockholders' proposal requesting the abandonment of ANWR drilling plans.
<S> <C>
For 11,491,110
Against 210,771,399
Abstain 17,738,667
Broker Non-Votes 36,550,915
</TABLE>
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed during the quarter
ended March 31, 1999 and through the date hereof.
<TABLE>
<CAPTION>
Date of Report Item No. Financial Statements
-------------- -------- --------------------
<S> <C> <C>
March 31, 1999 5 None
April 23, 1999 5 None
</TABLE>
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
(Registrant)
Dated: May 6, 1999
/s/ Allan L. Comstock
----------------------------
ALLAN L. COMSTOCK
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 790
<SECURITIES> 248
<RECEIVABLES> 1,018
<ALLOWANCES> 0
<INVENTORY> 489
<CURRENT-ASSETS> 2,773
<PP&E> 39,993
<DEPRECIATION> 21,051
<TOTAL-ASSETS> 25,363
<CURRENT-LIABILITIES> 5,318
<BONDS> 4,618
0
1
<COMMON> 815
<OTHER-SE> 7,030
<TOTAL-LIABILITY-AND-EQUITY> 25,363
<SALES> 2,415
<TOTAL-REVENUES> 2,551
<CGS> 1,969
<TOTAL-COSTS> 2,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> 261
<INCOME-TAX> 93
<INCOME-CONTINUING> 165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
