<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 June 30, 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 June 30,
1999: 322,325,575.
<PAGE>
PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Millions except per share amounts)
Revenues
<S> <C> <C> <C> <C>
Sales and other operating revenues............... $3,047 $2,564 $5,462 $5,100
Other revenues................................... 173 90 309 200
------ ------ ------ ------
3,220 2,654 5,771 5,300
------ ------ ------ ------
Expenses
Trade purchases.................................. 1,179 1,071 1,979 2,057
Operating expenses............................... 594 559 1,160 1,094
Selling, general and administrative expenses..... 176 202 328 385
Depreciation, depletion and amortization......... 428 326 911 678
Impairment of oil and gas properties............. - 110 - 110
Exploration expenses (including undeveloped
leasehold amortization)........................ 108 126 182 275
Taxes other than income taxes.................... 116 122 236 276
Interest......................................... 95 106 190 203
------ ------ ------ ------
2,696 2,622 4,986 5,078
------ ------ ------ ------
Income from continuing operations before
income taxes and minority interest............... 524 32 785 222
Provision (benefit) for taxes on income............ 202 (37) 295 10
Minority interest in earnings of subsidiary........ 9 5 12 14
------ ------ ------ ------
Income from continuing operations.................. 313 64 478 198
Income from discontinued operations, net of
income taxes of $43 and $89 (1998)............... - 90 - 176
------ ------ ------ ------
Net Income......................................... $ 313 $ 154 $ 478 $ 374
====== ====== ====== ======
Earned per Share
Basic
Continuing operations.......................... $ .97 $ .19 $ 1.48 $ .61
Discontinued operations........................ - .29 - .55
------ ------ ------ ------
Net income..................................... $ .97 $ .48 $ 1.48 $ 1.16
====== ====== ====== ======
Diluted
Continuing operations.......................... $ .95 $ .19 $ 1.46 $ .60
Discontinued operations........................ - .28 - .54
------ ------ ------ ------
Net income..................................... $ .95 $ .47 $ 1.46 $ 1.14
====== ====== ====== ======
Cash Dividends Paid per Share of Common Stock...... $.7125 $.7125 $1.425 $1.425
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Millions)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents....................... $ 640 $ 657
Short-term investments.......................... 259 260
Accounts receivable............................. 1,245 1,002
Inventories..................................... 487 475
Prepaid expenses and other current assets....... 159 317
------- -------
Total current assets............................ 2,790 2,711
------- -------
Investments and long-term receivables:
Investments accounted for on the equity method.. 1,264 1,235
Other investments and long-term receivables..... 1,199 831
------- -------
2,463 2,066
------- -------
Net property, plant and equipment................. 18,964 18,762
Net assets of discontinued operations............. 51 339
Deferred charges and other assets................. 1,413 1,321
------- -------
Total assets...................................... $25,681 $25,199
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
(Millions)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable.................................. $ 1,451 $ 2,403
Accounts payable............................... 802 976
Long-term debt due within one year............. 174 399
Taxes payable.................................. 821 634
Other.......................................... 927 1,285
------- -------
Total current liabilities...................... 4,175 5,697
Long-term debt................................... 5,870 4,332
Deferred income taxes............................ 3,314 3,318
Dismantlement, restoration and reclamation....... 1,104 1,058
Other deferred liabilities and credits........... 2,904 2,955
Minority interest................................ 269 259
------- -------
Total liabilities.............................. 17,636 17,619
------- -------
Stockholders' equity:
Preference stocks.............................. 1 1
Common stock................................... 815 815
Capital in excess of par value of stock........ 860 863
Retained earnings.............................. 6,608 6,589
Treasury stock................................. (294) (344)
Accumulated other comprehensive income (loss).. 55 (344)
------- -------
Total stockholders' equity..................... 8,045 7,580
------- -------
Total liabilities and stockholders' equity....... $25,681 $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>
Six Months Ended
June 30,
-----------------
1999 1998
------- -------
<S> <C> <C>
(Millions)
Cash flows from operating activities:
Net income....................................................................... $ 478 $ 198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization....................................... 911 678
Impairment of oil and gas properties........................................... - 110
Dry hole expense and undeveloped leasehold amortization........................ 82 138
Net gain on asset sales........................................................ (47) (23)
Income from equity investments................................................. (21) (32)
Dividends from equity investments.............................................. 27 4
Minority interest in earnings of subsidiaries.................................. 12 14
Cash payments greater than noncash provisions.................................. (177) (99)
Changes in working capital accounts............................................ (411) (339)
Other.......................................................................... (49) 5
------- -------
Net cash provided by operating activities.................................... 805 654
------- -------
Cash flows from investing activities:
Union Texas Petroleum acquisition.............................................. - (2,646)
Additions to fixed assets (including dry hole costs)........................... (1,393) (1,612)
Net cash (used) provided by short-term investments............................. (11) 8
Investment in LUKARCO.......................................................... (51) (32)
Proceeds from asset sales...................................................... 629 1,135
Other.......................................................................... 51 (35)
------- -------
Net cash used by investing activities........................................ (775) (3,182)
------- -------
Cash flows from financing activities:
Repayments of long-term debt................................................... (580) (155)
Proceeds from issuance of long-term debt....................................... 1,887 153
Net cash (used) provided by notes payable...................................... (898) 2,930
Dividends paid................................................................. (459) (459)
Other.......................................................................... 26 14
------- -------
Net cash (used) provided by financing activities............................. (24) 2,483
------- -------
Cash flows from discontinued operations.......................................... (8) 123
Effect of exchange rate changes on cash.......................................... (15) 1
------- -------
Net increase (decrease) in cash and cash equivalents............................. (17) 79
Cash and cash equivalents at beginning of period................................. 657 434
------- -------
Cash and cash equivalents at end of period....................................... $ 640 $ 513
======= =======
</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- and six-month
periods ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
(Millions) 1999 1998 1999 1998
---------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income......................................... $ 313 $ 154 $ 478 $ 374
Other comprehensive income:
Net unrealized gain (loss) on investments (a) 104 (333) 215 (519)
Foreign currency translation adjustment.......... (9) (46) 184 (50)
----- ----- ----- -----
Comprehensive income (loss)........................ $ 408 $(225) $ 877 $(195)
===== ===== ===== =====
</TABLE>
(a) Primarily consists of tax-effected changes in the fair value of ARCO's
investment in LUKOIL, which had a fair value of approximately $582 million
at June 30, 1999, compared to a fair value of approximately $225 million at
December 31, 1998. The unrealized pretax gain in the LUKOIL investment at
June 30, 1999, was $239 million.
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at June 30, 1999 and December 31, 1998 was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- -----------
<S> <C> <C>
(Millions)
Net unrealized gain on investments.......... $ 140 $ (75)
Foreign currency translation adjustment..... (38) (222)
Minimum pension liability................... (47) (47)
----- -----
Accumulated other comprehensive income.... $ 55 $(344)
===== =====
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Interim Segment Information.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
- --------------------------------
Exploration Refining & All
(Millions) & Production Marketing Other Unallocated Total
------------ --------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues......... $ 1,549 $ 1,819 $ 12 $ 3 $ 3,383
Intersegment revenues...... (333) - (1) (2) (336)
------- ------- ------ ------- -------
Total...................... $ 1,216 $ 1,819 $ 11 $ 1 $ 3,047
======= ======= ====== ======= =======
Income from continuing
operations................. $ 174 $ 206 $ 24 $ (91) $ 313
------- ------- ------ ------- -------
Net income................. $ 174 $ 206 $ 24 $ (91) $ 313
======= ======= ====== ======= =======
Segment assets............. $18,336 $ 4,248 $ 935 $ 2,162 $25,681
======= ======= ====== ======= =======
December 31, 1998
- -----------------
Segment assets............. $18,203 $ 3,826 $1,119 $ 2,051 $25,199
======= ======= ====== ======= =======
Three Months Ended June 30, 1998
- --------------------------------
Exploration Refining & All
(Millions) & Production Marketing Other Unallocated Total
------------ --------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues......... $ 1,368 $ 1,432 $ 39 $ 14 $ 2,853
Intersegment revenues...... (262) - (21) (6) (289)
------- ------- ------ ------- -------
Total...................... $ 1,106 $ 1,432 $ 18 $ 8 $ 2,564
======= ======= ====== ======= =======
Income from continuing
operations................. $ 17 $ 97 $ 29 $ (79) $ 64
Income from discontinued
operations................. - - - 90 90
------- ------- ------ ------- -------
Net income................. $ 17 $ 97 $ 29 $ 11 $ 154
======= ======= ====== ======= =======
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Interim Segment Information (Continued).
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
- ------------------------------
Exploration Refining & All
(Millions) & Production Marketing Other Unallocated Total
------------ --------- ----- ----------- ------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues............. $ 2,853 $ 3,125 $ 29 $ 5 $ 6,012
Intersegment revenues........... (544) - (2) (4) (550)
------ ------ ----- ------ -----
Total........................... $ 2,309 $ 3,125 $ 27 $ 1 $ 5,462
====== ====== ===== ===== =====
Income from continuing
operations..................... $ 263 $ 335 $ 48 $ (168) $ 478
------ ------ ----- ----- -----
Net income...................... $ 263 $ 335 $ 48 $ (168) $ 478
====== ====== ===== ===== ======
</TABLE>
Six Months Ended June 30, 1998
- ------------------------------
<TABLE>
<CAPTION>
Exploration Refining & All
(Millions) & Production Marketing Other Unallocated Total
------------ --------- ----- ----------- ------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues.............. $ 2,906 $ 2,784 $ 79 $ 16 $ 5,785
Intersegment revenues........... (624) (12) (40) (9) (685)
------ ------ ---- ----- ------
Total........................... $ 2,282 $ 2,772 $ 39 $ 7 $ 5,100
====== ====== ==== ===== ======
Income from continuing
operations...................... $ 199 $ 116 $ 53 $ (170) $ 198
Income from discontinued
operations...................... - - - 176 176
------ ------ ---- ----- ------
Net income...................... $ 199 $ 116 $ 53 $ 6 $ 374
====== ====== ==== ===== ======
</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 June 31, 1999, the income from and net assets of
discontinued operations are included with unallocated items in the segment
presentation above.
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 $18 million and $27 million after tax on
Refining and Marketing earnings in the second quarter and first six months of
1999, respectively.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE D. Investments.
At June 30, 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 nine 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 June 30, 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 June 30:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
(Millions)
Aggregate fair value.................................................... $ 1,468 $1,058
Gross unrealized holding losses......................................... 14 7
Gross unrealized holding gains.......................................... (242) (148)
------- ------
Amortized cost.......................................................... $ 1,240 $ 917
======= ======
Investment activity for the six-month periods ended June 30 was as follows:
1999 1998
------- ------
(Millions)
Gross purchases......................................................... $10,906 $7,191
Gross sales............................................................. 776 267
Gross maturities........................................................ 9,938 6,920
</TABLE>
Gross realized gains and loss were determined by the specific identification
method and for the three- and six-month periods ended June 30, 1999 and 1998,
were insignificant.
NOTE E. Inventories.
Inventories at June 30, 1999 and December 31, 1998 comprised the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
(Millions)
Crude oil and petroleum products.............................................. $ 228 $ 220
Other products................................................................ 27 24
Materials and supplies........................................................ 232 231
----- -----
Total....................................................................... $ 487 $ 475
===== =====
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE F. Capital Stock.
Detail of the Company's capital stock was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
(Thousands)
$3.00 Cumulative convertible preference stock, par $1............ $ 49 $ 52
$2.80 Cumulative convertible preference stock, par $1............ 551 573
Common stock, par $2.50.......................................... 815,240 814,673
-------- --------
Total.......................................................... $815,840 $815,298
======== ========
</TABLE>
NOTE G. Capitalization of Interest.
Interest expense excluded capitalized interest of $49 million and $21
million, respectively, for the three-month periods ended June 30, 1999 and 1998,
and $88 million and $37 million, respectively, for the six-month periods ended
June 30, 1999 and 1998.
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> <C>
1,212 $93 $90 $56 $239
</TABLE>
(a) Severance payments and ancillary benefits such as relocation and
outplacement.
(b) Net increase in pension benefits to be paid from assets of
qualified plans.
(c) Net increase in non-qualified pension benefits and other
postretirement benefits to be paid from Company funds.
Through June 30, 1999, approximately 850 employees have been terminated and
approximately $50 million ($24 million in the second quarter of 1999) 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. The remaining
severance and ancillary benefits are expected to be paid by first quarter 2001.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE H. Restructuring Programs (continued).
Union Texas Petroleum Holdings, Inc. (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 from the integration of UTP into ARCO's operations. At June 30, 1999,
331 employees have been terminated and a total of $76 million in severance
benefits has been paid. The remaining severance benefits are expected to be paid
by first quarter 2000. The group of employees terminated included U.S. citizens
employed in exploration and production operations and corporate headquarters
personnel.
NOTE I. Income Taxes.
Provision (benefit) for taxes on income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
----- ----- ----- -----
(Millions)
<S> <C> <C> <C> <C>
Federal:
Current............... $ 124 $ (35) $ 165 $ (45)
Deferred.............. 20 22 31 49
----- ----- ----- -----
144 (13) 196 4
----- ----- ----- -----
Foreign:
Current............... 67 (3) 112 25
Deferred.............. (33) (26) (50) (36)
----- ----- ----- -----
34 (29) 62 (11)
----- ----- ----- -----
State:
Current............... 23 3 35 11
Deferred.............. 1 2 2 6
----- ----- ----- -----
24 5 37 17
----- ----- ----- -----
Total................ $ 202 $ (37) $ 295 $ 10
===== ===== ===== =====
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note I. Income Taxes (continued).
Reconciliation of provision for taxes on income with tax at federal statutory
rate:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1999 1998
---- ----
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
-------- ------- -------- -------
(Millions)
<S> <C> <C> <C> <C>
Income before income taxes and minority
interest..................................... $524 100.0 $ 32 100.0
==== ===== ==== ======
Tax at federal statutory rate.................. $183 35.0 $ 11 35.0
Increase (reduction) in taxes resulting from:
Subsidiary stock transactions................ - - (44) (137.5)
Taxes on foreign income in excess of
statutory rate............................. 22 4.2 20 62.5
State income taxes (net of federal effect). 16 3.1 3 9.4
Tax credits.................................. (26) (5.0) (28) (87.5)
Other........................................ 7 1.2 1 3.1
---- ----- ---- ------
Provision (benefit) for taxes on income........ $202 38.5 $(37) (115.0)
==== ===== ==== ======
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
-------- ------- -------- -------
(Millions)
<S> <C> <C> <C> <C>
Income before income taxes and minority
interest..................................... $785 100.0 $222 100.0
==== ===== ==== =====
Tax at federal statutory rate.................. $275 35.0 $ 78 35.0
Increase (reduction) in taxes resulting from:
Subsidiary stock transactions................ - - (57) (25.7)
Taxes on foreign income in excess of
statutory rate............................. 43 5.5 40 18.0
State income taxes (net of federal effect). 24 3.1 11 5.0
Tax credits.................................. (50) (6.4) (59) (26.6)
Other........................................ 3 0.4 (3) (1.2)
---- ----- ---- -----
Provision for taxes on income . . . . . . . . $295 37.6 $ 10 4.5
==== ===== ==== =====
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Discontinued Operations.
In the 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 June 30, 1999, the
carrying value of the remaining Australian assets was $51 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.
Revenues and income from discontinued operations for the three months and
six months ended June 30, 1999 and 1998 were:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- ------------------
1999 1998 1999 1998
------ ----- ----- -----
(Millions)
<S> <C> <C> <C> <C>
Revenues:
ARCO Chemical................. $ - $ 766 $ - $1,700
Coal operations............... 17 91 43 232
UTP petrochemicals............ - - 24 -
----- ----- ----- ------
$ 17 $ 857 $ 67 $1,932
===== ===== ===== ======
Net income:
ARCO Chemical................. $ - $ 90 $ - $ 166
Coal operations............... - - - 10
UTP petrochemicals............ - - - -
----- ----- ----- ------
$ - $ 90 $ - $ 176
===== ===== ===== ======
</TABLE>
12
<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 Three Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Income Shares Per share Income Shares Per share
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(Millions, except per share amounts)
Income from continuing operations..... $313 $ 64
Less: Preference stock dividends...... (1) (1)
---- ----
Income from continuing operations
available to common stockholders -
basic EPS........................... 312 322.2 $0.97 63 321.0 $ 0.19
===== =====
Income from discontinued operations,
net of tax.......................... - - 90 321.0 0.29
---- ----- ---- ===== ------
Net income available to common
stockholders - basic EPS............ 312 322.2 $0.97 153 321.0 $ 0.48
===== ======
Effect of dilutive securities:
Contingently issuable shares
(primarily options)................. 3.4 3.0
Convertible preference stock.......... 1 3.3 1 3.6
---- ----- ---- -----
Net income available to common
stockholders and assumed
conversions - diluted EPS........... 313 328.9 $0.95 154 327.6 $ 0.47
===== =====
Income from discontinued
operations, net of tax.............. - - (90) 327.6 (0.28)
---- ----- ---- ===== ------
Income from continuing operations
available to common stockholders
and assumed conversions -
diluted EPS......................... $313 328.9 $0.95 $ 64 327.6 $ 0.19
==== ===== ===== ==== ===== ======
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Earned Per Share (continued).
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Income Shares Per share Income Shares Per share
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(Millions, except per share amounts)
Income from continuing operations..... $478 $ 198
Less: Preference stock dividends...... (1) (1)
---- -----
Income from continuing operations
available to common stockholders -
basic EPS........................... 477 321.9 $1.48 197 320.8 $ 0.61
===== =====
Income from discontinued operations,
net of tax.......................... - - 176 320.8 0.55
---- ----- ----- ===== ------
Net income available to common
stockholders - basic EPS............ 477 321.9 $1.48 373 320.8 $ 1.16
===== ======
Effect of dilutive securities:
Contingently issuable shares
(primarily options)................. 2.8 3.0
Convertible preference stock.......... 1 3.4 1 3.6
---- ----- ----- -----
Net income available to common
stockholders and assumed
conversions - diluted EPS........... 478 328.1 $1.46 374 327.4 $ 1.14
===== =====
Income from discontinued
operations, net of tax................ - - (176) 327.4 (0.54)
---- ----- ----- ===== ------
Income from continuing operations
available to common stockholders
and assumed conversions -
diluted EPS........................... $478 328.1 $1.46 $ 198 327.4 $ 0.60
==== ===== ===== ===== ===== ======
</TABLE>
14
<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 Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Millions)
Production/severance..... $ 52 $ 55 $ 92 $119
Property................. 34 30 69 70
Other.................... 30 37 75 87
---- ---- ---- ----
Total.................. $116 $122 $236 $276
==== ==== ==== ====
</TABLE>
NOTE M. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the six months ended June
30, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
(Millions)
Gross sales and maturities of short-term investments.. $ 45 $ 134
Gross purchases of short-term investments............. (56) (126)
------- -------
Net cash (used) provided by short-term investments.... $ (11) $ 8
======= =======
Gross proceeds from issuance of notes payable......... $ 6,206 $ 9,987
Gross repayments of notes payable..................... (7,104) (7,057)
------- -------
Net cash (used) provided by notes payable............. $ (898) $ 2,930
======= =======
Gross noncash provisions charged to income............ $ 104 $ 106
Cash payments of previously accrued items............. (281) (205)
------- -------
Cash payments greater than noncash provisions......... $ (177) $ (99)
======= =======
Interest paid......................................... $ 176 $ 205 (a)
======= =======
Income taxes paid..................................... $ 286 $ 140 (a)
======= =======
</TABLE>
(a) Includes amounts paid related to discontinued operations.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE M. Supplemental Cash Flow Information (continued).
Excluded from the Consolidated Statement of Cash Flows for the six months
ended June 30, 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 at
the time of the exchange.
Changes in working capital accounts for the six-month periods ended June
30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
------ ------
<S> <C> <C>
(Millions)
Changes in working capital -
increase (decrease) to cash:
Accounts receivable................ $(137) $ 89
Inventories........................ (14) 2
Accounts payable................... (173) (157)
Other working capital.............. (87) (273)
----- -----
Total............................ $(411) $(339)
===== =====
</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. 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 has 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 United States District Court
for the District of Montana approved two consent decrees. Under the terms of
these decrees, ARCO has paid $135 million, plus interest, 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.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (continued).
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:
. Remove or mitigate the effects on the environment at various sites from
the disposal or release of certain substances;
. Perform restoration work at such sites; and
. Pay damages for loss of use and non-use values.
The Federal agencies involved with the sites include the Department of the
Interior, Department of Justice and Environmental Protection Agency.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
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 comprised 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 environmental assessments
and cleanups. Future costs depend on unknown factors such as:
. Nature and extent of contamination;
. Timing, extent and method of the 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 June 30, 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.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE N. Other Commitments and Contingencies (continued).
Although any ultimate liability arising from any of the matters described
herein could result in significant expenses or judgments that, if aggregated and
assumed to occur within a single fiscal period, would be material to ARCO's
results of operations, the likelihood of such occurrence is considered remote.
On the basis of management's best assessment of the ultimate amount and timing
of these events, such expenses or judgments are not expected to have a material
adverse effect on ARCO's consolidated financial statements.
The operations and consolidated financial position of ARCO continue to be
affected 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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1999 vs. Second Quarter 1998
Income from Continuing Operations
The improvement in income from continuing operations in 1999 primarily
reflected higher refined products margins and crude oil prices, partially offset
by lower natural gas prices.
The 1999 second quarter included a net benefit of $11 million after tax
from special items. The 1998 second quarter special items included net charges
of $78 million after tax consisting primarily of an impairment of a North Sea
natural gas field.
After-tax Segment Earnings
1999 1998
----- -----
(Millions)
Exploration and production............... $ 174 $ 17
Refining and marketing................... 206 97
Other operations......................... 24 29
Interest expense......................... (71) (75)
Other unallocated expenses............... (20) (4)
----- -----
Income from continuing operations...... 313 64
Discontinued operations.................. - 90
----- -----
Net income............................. $ 313 $ 154
===== =====
Exploration and Production
ARCO's earnings from worldwide oil and gas exploration and production
operations in 1999 were impacted by higher crude oil prices. The results in 1998
also included a $75 million after-tax writedown in the value of a North Sea
natural gas field following the unsuccessful resolution of a sales contract
dispute. Exploration expense declined $18 million in 1999 primarily as a result
of lower writeoffs for dryholes by Vastar Resources, Inc. (Vastar). Vastar is
82.1% owned by ARCO.
19
<PAGE>
Average Oil and Gas Prices
U.S. 1999 1998
Petroleum liquids - per barrel (bbl) ---- ----
Alaska..................................... $ 10.44 $ 7.58
Lower 48, including Vastar................. $ 13.59 $ 10.74
Composite average price.................... $ 11.43 $ 8.71
Natural gas - per thousand cubic feet (mcf).. $ 1.85 $ 1.92
International
Petroleum liquids - per bbl.................. $ 12.88 $ 12.11
Venezuela crude oil - per bbl................ $ 3.95 $ -
Natural gas (excluding LNG)- per mcf......... $ 2.03 $ 2.56
Indonesia LNG................................ $ 3.03 $ -
Petroleum Liquids and Natural Gas Production
Net Production
U.S. 1999 1998
Petroleum liquids - bbl/day ---- ----
Alaska..................................... 316,700 339,900
Vastar..................................... 59,700 49,400
Other Lower 48............................. 85,600 138,600
--------- ---------
Total.................................... 462,000 527,900
Natural gas - mcf/day........................ 1,259,000 1,120,500
Barrels of oil equivalent - (BOE)/day* 671,900 714,600
International
Petroleum liquids - bbl/day................... 150,000 84,000
Natural gas - mcf/day......................... 1,033,300 647,800
BOE/day............... 322,200 192,000
Total net production - BOE/day................ 994,100 906,600
___________________
* 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 the absence of production from California properties (other Lower
48) producing exclusively heavy crude oil and natural field declines in Alaska.
The California properties were exchanged for Gulf of Mexico exploration acreage
and properties producing both crude oil and natural gas that were ultimately
transferred to Vastar. The decline in Alaska petroleum liquids production
reflected a 30,500 barrel-per-day decrease in Prudhoe Bay and Kuparuk River
production, partially offset by a 13,700 barrel-per-day increase in production
from the Tarn field which began production in July 1998. 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 30,700 barrels per day in the
second 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 additional
international production from the former UTP properties contributed 355 million
cubic feet per day.
20
<PAGE>
Refining and Marketing
The higher earnings in 1999 resulted from higher margins. Several large
West Coast refineries had unscheduled outages during the quarter resulting in
tightened supply and correspondingly higher product realizations. The higher
product prices were partially offset by higher crude oil costs. The decline in
jet fuel sales reflected reduced sales of jet fuel to the military.
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 is expected to have a net favorable impact of approximately $40 million
after tax on refining and marketing earnings for the full year 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>
Volumes (Barrels/day) 1999 1998
---- ----
<S> <C> <C>
Gasoline............................. 316,200 313,900
Jet.................................. 104,200 111,800
Distillate........................... 79,700 78,100
Other................................ 89,100 89,600
------- -------
Total................................ 589,200 593,400
======= =======
</TABLE>
Other Operations
The 1999 and 1998 results included earnings from Lower 48 pipeline
operations and an aluminum rolling facility. The decline in 1999 earnings
reflected lower pipeline revenues partially offset by lower operating costs
related to the Company's successful efforts at cost reduction.
Discontinued Operations
In the first quarter of 1999 ARCO sold its interests in two Australian coal
mines, Gordonstone and the Blair Athol Joint Venture and sold Union Texas
Petrochemicals Corporation, which ARCO had acquired as part of its purchase of
Union Texas Petroleum Holdings, Inc. in June 1998.
ARCO had no earnings from discontinued operations in the second quarter of
1999. In the second quarter of 1998 after-tax earnings from discontinued
operations totaled $90 million, comprised of earnings from ARCO's interest in
ARCO Chemical Company.
21
<PAGE>
Consolidated Revenues
<TABLE>
<CAPTION>
1999 1998
---- ----
(Millions)
<S> <C> <C>
Sales and other operating revenues
Exploration and production............... $1,549 $1,368
Refining and marketing................... 1,819 1,432
Other.................................... 15 53
Intersegment eliminations................ (336) (289)
------ ------
Total.................................. $3,047 $2,564
====== ======
</TABLE>
The increase in exploration and production sales revenues resulted
primarily from higher petroleum liquids prices and natural gas production
volumes. Refining and marketing sales revenues increased primarily because of
higher refined products prices.
Other Revenues
The increase in other revenues in 1999 primarily reflected an insurance
settlement and gains on asset sales.
Consolidated Expenses
Trade purchases increased in 1999 primarily as a result of the purchase of
finished and unfinished product from third parties while the Cherry Point
Refinery in the state of Washington was shut down for scheduled maintenance
work. The effect on trade purchases of an increase in crude oil prices was
offset by a decline in crude oil marketing volumes.
Operating expenses were higher in 1999 primarily in refining and marketing
operations, reflecting repair and maintenance costs associated with the
scheduled maintenance work at the Cherry Point Refinery.
Depreciation, depletion and amortization (DD&A) expense in 1999 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 an increase in production
for Vastar in 1999.
Income Taxes
The Company had a tax provision of $202 million in the 1999 second quarter,
compared to a net tax benefit of $37 million in the 1998 second quarter. The
increase in the tax provision in 1999 resulted from higher earnings in 1999 and
the absence of tax benefits associated with affiliate stock transactions, which
totaled $44 million in 1998.
22
<PAGE>
Six-Month Period Ended June 30, 1999 vs. Same Six-Month Period 1998
Income from Continuing Operations
The improvement in income from continuing operations for the first six
months of 1999 primarily reflected increased refined products margins and lower
exploration expenses, partially offset by lower petroleum liquids and natural
gas prices.
After-tax Segment Earnings
<TABLE>
<CAPTION>
1999 1998
---- ----
(Millions)
<S> <C> <C>
Exploration and production............. $ 263 $ 199
Refining and marketing................. 335 116
Other operations....................... 48 53
Interest expense....................... (141) (144)
Other unallocated expenses............. (27) (26)
------ ------
Income from continuing operations.... 478 198
Discontinued operations................ - 176
------ ------
Net income........................... $ 478 $ 374
====== ======
</TABLE>
Consolidated Revenues
<TABLE>
<CAPTION>
1999 1998
---- ----
(Millions)
<S> <C> <C>
Sales and other operating revenues
Exploration and production........... $2,853 $2,906
Refining and marketing............... 3,125 2,784
Other................................ 34 95
Intersegment eliminations............ (550) (685)
------ ------
Total.............................. $5,462 $5,100
====== ======
</TABLE>
The decline in exploration and production sales revenues for the first six
months of 1999 resulted primarily from lower petroleum liquids and natural gas
prices, partially offset by higher petroleum liquids and natural gas production
volumes.
For the first six months of 1999 refining and marketing sales revenues
increased primarily because of higher refined products prices.
23
<PAGE>
Consolidated Expenses
Trade purchases for the six months ended June 30, 1999 were lower primarily
as a result of lower petroleum liquids prices.
Operating expenses were higher during the first half of 1999 primarily
reflecting the operating costs associated with former UTP properties now being
operated by ARCO and the repair and maintenance costs associated with the
scheduled maintenance work at the Cherry Point Refinery. These costs were
partially offset by cost savings in the Company's operations associated with its
cost reduction program started in 1998 and the absence of operating costs
associated with certain California properties, which were exchanged for Gulf of
Mexico properties in the fourth quarter of 1998. Those Gulf of Mexico
properties were ultimately transferred to Vastar in the fourth quarter of 1998.
Depreciation, depletion and amortization expense in 1999 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 increased crude oil and natural gas
production for Vastar.
The lower exploration expense for the first six months of 1999 reflected a
decline in geological and geophysical and dryhole expense in Vastar's
exploration operations and ARCO's international exploration operations.
The lower selling, general and administrative expenses in the first six
months of 1999 primarily resulted from the Company's cost reduction program
started in 1998.
The lower taxes other than income taxes in 1999 primarily resulted from the
impact of lower crude oil volumes in Alaska and lower crude oil prices on U.S.
production taxes.
Income Taxes
The Company's effective tax rate was 37.6% for the first six months of
1999, compared to 4.5% for the same period in 1998. The 1999 effective tax rate
approximates the federal statutory rate, reflecting the absence of tax benefits
from affiliate stock transactions, which totaled $57 million in 1998, and lower
tax credits in 1999 than were available in 1998.
Average Oil and Gas Prices
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
U.S.
Petroleum liquids - per bbl
Alaska..................................... $ 8.17 $ 8.95
Lower 48, including Vastar................. $11.66 $11.71
Composite average price.................... $ 9.24 $ 9.92
Natural gas - per mcf........................ $ 1.72 $ 1.91
International
Petroleum liquids - per bbl.................. $10.83 $12.35
Venezuela crude oil - per bbl................ $ 3.47 $ -
Natural gas (excluding LNG) - per mcf........ $ 2.27 $ 2.63
Indonesia LNG................................ $ 2.65 $ -
</TABLE>
24
<PAGE>
Petroleum Liquids and Natural Gas Production
<TABLE>
<CAPTION>
Net Production 1999 1998
---- ----
<S> <C> <C>
U.S.
Petroleum liquids - bbl/day
Alaska.................................... 330,900 351,900
Vastar.................................... 57,800 50,500
Other Lower 48............................ 88,900 139,600
Total................................... 477,600 542,000
Natural gas - mcf/day....................... 1,308,800 1,106,100
Barrels of oil equivalent - (BOE)/day*...... 695,700 726,400
International
Petroleum liquids - bbl/day................. 164,000 83,800
Natural gas - mcf/day....................... 1,162,200 747,200
BOE/day..................................... 357,700 208,300
Total net production - BOE/day.............. 1,053,400 934,700
</TABLE>
__________
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
1999
----
<S> <C>
(Millions)
Cash flow provided (used) by:
Operations..................................... $ 805
Investing activities........................... $ (775)
Financing activities........................... $ (24)
</TABLE>
The net cash used by investing activities in the first six months of 1999
included expenditures for additions to fixed assets of $1.4 billion, offset by
proceeds from asset sales of $629 million primarily associated with the sale of
Australian coal assets and the Union Texas Petrochemicals Corporation.
The net cash provided by financing activities in the first six months of
1999 primarily included a decrease of $900 million in the Company's short-term
debt position, repayments of $580 million of long-term debt and dividend
payments of $459 million, offset by the issuance of $1.9 billion in long-term
debt.
Cash and cash equivalents and short-term investments totaled $899 million,
short-term borrowings were $1.5 billion and long-term debt due within one year
was $174 million at the end of the second 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). While overall short-term borrowings were reduced during
the second quarter of 1999, the Company is still in a working capital deficit
position of approximately $1.4 billion at June 30, 1999.
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.
25
<PAGE>
Statements of Financial Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to adopt
its provisions for all fiscal quarters of all fiscal years beginning after June
15, 2000 (as deferred by SFAS No. 137). Earlier application of all of the
provisions of SFAS No. 133 is permitted, but the provisions cannot be applied
retroactively to financial statements of prior periods. SFAS 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.
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 June 30, 1999:
<TABLE>
<CAPTION>
Total
expended
through Total
Percent June 30, estimated
complete at Expected date 1999 cost
Areas addressed June 30, 1999 of completion (millions) (millions)
--------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Computing integrity 94% (1) September 1999 $11 $14
Asset integrity 68% September 1999 8 12
Commercial integrity 56% (2) September 1999 2 3
--- ---
Total costs $21 $29
</TABLE>
________________
(1) Remaining work outside direct control of ARCO causing adjustment to
completion date.
(2) Completion date adjusted because later than expected start of this phase.
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 $29 million, a 16%
increase since year-end 1998 due to increased work in the Asset Integrity area,
contingency planning 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.
The ARCO Year 2000 due diligence requires that vendors of mission critical
components and providers of mission critical services be solicited concerning
Year 2000 compliance. Many of these third party providers have responded in
writing addressing their understanding of the problem and their commitment to
remediating the Year 2000 problem.
_______________________________
26
<PAGE>
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.
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Reference is made to the disclosure on pages 15 and 16 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 the case of Atlantic Richfield Company v.
AETNA Casualty and Surety Company of America, et al. (Case No. BC 015575). ARCO
now has completed settlements with the insurance company defendants and the case
has been dismissed.
2. Reference is made to the disclosure on page 18 of the Company's 1998 Form
10-K Report regarding Hall, et al. v. Babcock & Wilcox Company, et al. (Case No.
94-0951). On June 29, 1999, the court granted ARCO's and B & W's motions for a
new trial. The claims of the eight test-case plaintiffs and of other plaintiffs
remain for trial or other disposition.
3. Reference is made to the disclosure on page 19 of the Company's 1998 Form
10-K Report regarding Squyres v. Whitmire, et al. (Case No. 98-6085). On July
12, 1999, the court granted the defendants' motion to dismiss without leave to
amend.
4. Reference is made to the Company's 1998 Form 10-K Report for information on
other legal proceedings matters reported herein.
28
<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 June 30, 1999 and through the date hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
March 31, 1999 5 None
April 23, 1999 5 None
29
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
(Registrant)
/s/ Allan L. Comstock
Dated: August 10, 1999 _____________________________
(signature)
Allan L. Comstock
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 640
<SECURITIES> 259
<RECEIVABLES> 1,245
<ALLOWANCES> 0
<INVENTORY> 487
<CURRENT-ASSETS> 2,790
<PP&E> 40,116
<DEPRECIATION> 21,152
<TOTAL-ASSETS> 25,681
<CURRENT-LIABILITIES> 4,175
<BONDS> 5,870
0
1
<COMMON> 815
<OTHER-SE> 7,229
<TOTAL-LIABILITY-AND-EQUITY> 25,681
<SALES> 5,462
<TOTAL-REVENUES> 5,771
<CGS> 4,286
<TOTAL-COSTS> 4,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> 785
<INCOME-TAX> 295
<INCOME-CONTINUING> 478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 478
<EPS-BASIC> 1.48
<EPS-DILUTED> 1.46
</TABLE>
