ATLANTIC RICHFIELD CO /DE
10-Q, 2000-11-14
PETROLEUM REFINING
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

1-1196
(Commission file number)


ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)


 Delaware
(State or other jurisdiction of
incorporation or organization)

  23-0371610
(I.R.S. Employer
Identification No.) 		 

 333 South Hope Street
Los Angeles, California
(Address of principal executive offices)

   90071
(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, outstanding as of October 31, 2000: 324,711,290. All of these shares are indirectly owned by BP Amoco p.l.c., and are no longer listed on the New York Stock Exchange, or any other stock exchange. The only equity securities currently listed on the New York and Pacific Stock Exchanges, as of October 31, 2000, are 407,926 shares of $2.80 Preference Shares and 35,997 shares of $3.00 Preference Shares.


PART I. FINANCIAL INFORMATION

ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONSOLIDATED STATEMENT OF INCOME

Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(millions)
Revenues:                      
    Sales and other operating revenues   $ 3,812   $ 3,199   $ 11,434   $ 8,305  
    Sales to related parties    712    224    1,475    580  
    Other revenues    372    119    763    428  
    Interest from related parties    117    —    189    —  
   5,013    3,542    13,861    9,313  
Expenses:                      
    Trade purchases    1,597    1,397    5,482    3,343  
    Trade purchases from related parties.    1,206    21    1,445    54  
    Operating expenses    572    593    1,794    1,753  
    Selling, general and administrative expenses    122    168    391    496  
    Depreciation, depletion and amortization    331    423    1,193    1,334  
    Writedown of oil and gas related assets    246    —    246    —  
    Exploration expenses (including undeveloped leasehold
      amortization) 		   57    100    222    282  
    Taxes other than income taxes    91    117    393    353  
    Interest    112    98    316    288  
    Interest—related parties    21    —    32    —  
    Loss on disposition of Algeria assets    —    175    —    175  
    Unusual items    46    20    685    20  
   4,401    3,112    12,199    8,098  
Income before items below    612    430    1,662    1,215  
Gain on sale of Alaska oil and gas businesses and pipelines    33    —    2,629    —  
Income from continuing operations before income taxes and
   minority interest 		   645    430    4,291    1,215  
Provision for taxes on income    237    87    1,415    382  
Minority interest in earnings of subsidiaries    44    13    83    25  
Income from continuing operations    364    330    2,793    808  
Gain on disposition of discontinued operations, net of income taxes
   (benefit) of $0 and $12 (2000) and $(38) (1999, both periods) 		   3    42    46    42  
Net income   $ 367   $ 372   $ 2,839   $ 850  

The accompanying notes are an integral part of these statements.

1

ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET

September 30, December 31,
2000 1999
(millions)
Assets            
Current assets:            
    Cash and cash equivalents   $ 132   $ 879  
    Short-term investments    192    264  
    Accounts receivable    1,598    1,167  
    Accounts receivable from related parties    98    134  
    Inventories    253    430  
    Prepaid expenses and other current assets    154    184  
          Total current assets    2,427    3,058  
Investments and long-term receivables:            
    Receivable from BP Amoco    3,372    —  
    Investments accounted for on the equity method    1,451    1,508  
    Other investments and long-term receivables    2,322    1,660  
   7,145    3,168  
Net property, plant and equipment    14,857    18,466  
Net assets of discontinued operations    —    67  
Deferred charges and other assets    1,272    1,513  
          Total assets   $ 25,701   $ 26,272  
           
Liabilities and Stockholders’ Equity            
Current liabilities:            
    Notes payable   $ —   $ 1,672  
    Accounts payable    835    830  
    Long-term debt due within one year    57    11  
    Taxes payable    854    420  
    Other    1,094    1,090  
          Total current liabilities    2,840    4,023  
Long-term debt    5,058    5,698  
Deferred income taxes    3,394    3,644  
Dismantlement, restoration and reclamation    326    1,154  
Other deferred liabilities and credits    3,057    2,770  
Minority interest    151    297  
          Total liabilities    14,826    17,586  
Stockholders’ equity:            
    Preference stocks    1    1  
    Common stock    818    817  
    Capital in excess of par value of stock    952    889  
    Retained earnings    9,234    7,091  
    Treasury stock    (227 )  (279 )
    Accumulated other comprehensive income    97    167  
          Total stockholders’ equity    10,875    8,686  
          Total liabilities and stockholders’ equity   $ 25,701   $ 26,272  

The accompanying notes are an integral part of these statements.

2

ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS

Nine Months Ended
September 30,
2000 1999
(millions)
Cash flows from operating activities:            
Income from continuing operations   $ 2,793   $ 808  
Adjustments to reconcile income to net cash provided by operating activities:            
    Gain on sale of Alaskan oil and gas businesses and pipelines    (2,629 )  —  
    Depreciation, depletion and amortization    1,193    1,334  
    Writedown of oil and gas related assets    246    —  
    Dry hole expense and undeveloped leasehold amortization    118    150  
    Loss on disposition of Algeria assets    —    175  
    Net gain on other asset sales    (376 )  (70 )
    Income from equity investments    (43 )  (31 )
    Dividends from equity investments    64    50  
    Minority interest in earnings of subsidiaries    83    25  
    Noncash provisions greater (less) than cash payments    329    (347 )
    Changes in working capital accounts    605    (811 )
    Deferred income taxes    (1,048 )  184  
    Other    84    48  
       Net cash provided by operating activities    1,419    1,515  
Cash flows from investing activities:            
    Proceeds from sale of Alaskan oil and gas businesses and pipelines    6,719    —  
    Receivable from BP Amoco    (3,372 )  —  
    Acquisition of Vastar’s minority interest    (1,585 )  —  
    Additions to fixed assets (including dry hole costs)    (1,623 )  (1,988 )
    Net cash provided (used) by short-term investments    73    (1 )
    Investment in LUKARCO    (188 )  —  
    Proceeds from other asset sales    1,001    732  
    Investments and long-term receivables    (594 )  (168 )
    Other    (67 )  38  
       Net cash provided (used) by investing activities    364    (1,387 )
Cash flows from financing activities:            
    Repayments of long-term debt    (337 )  (826 )
    Proceeds from issuance of long-term debt    74    1,891  
    Net cash used by notes payable    (1,674 )  (439 )
    Dividends paid to BP Amoco     (463 )  —  
    Dividends paid    (234 )  (690 )
    Other    25    35  
       Net cash used by financing activities    (2,609 )  (29 )
Cash flows from discontinued operations    56    (8 )
Effect of exchange rate changes on cash    23    (3 )
Net (decrease) increase in cash and cash equivalents    (747 )  88  
Cash and cash equivalents at beginning of period    879    657  
Cash and cash equivalents at end of period   $ 132   $ 745  

The accompanying notes are an integral part of these statements.

3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A.       Accounting Policies.

             The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain previously reported amounts have been restated to conform to classifications adopted in 2000. Unless otherwise stated, the Notes to Consolidated Financial Statements exclude discontinued operations. In the opinion of the Company, the consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation.

             For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 1999.

Note B.       Merger of ARCO into BP Amoco.

             On April 18, 2000, the combination of BP Amoco p.l.c. (BP Amoco) and ARCO was completed pursuant to the terms of the merger agreement dated March 31, 1999, as amended through March 8, 2000 (Merger Agreement). The Merger Agreement, approved by the boards of both BP Amoco and ARCO, provided for all common shareholders of ARCO, with the exception of BP Amoco, ARCO or any of their subsidiaries, to receive 9.84 BP Amoco ordinary shares of US$ 0.25 each in the form of BP Amoco American Depositary Shares (ADSs) or, at the election of the shareholder, BP Amoco ordinary shares, in return for the cancellation of each of their shares (other than the shares held by CH-Twenty Holdings, LLC, a subsidiary of ARCO) (the Cancelled ARCO Shares). It also provided for the issue to BP Amoco of new common shares equal in number to the Cancelled ARCO Shares by a newly enlarged ARCO formed by a statutory merger of Prairie Holdings, Inc. (a direct wholly owned subsidiary of BP Amoco) into and with ARCO. Any right to a fraction of a BP Amoco ADS or an odd lot of less than six BP Amoco ordinary shares was satisfied by a cash payment. Both ARCO and BP Amoco shareholders voted overwhelmingly in favor of the combination at shareholders’ meetings on August 30, 1999 and September 1, 1999, respectively. In addition, the outstanding ARCO common stock was delisted from the New York Stock Exchange (NYSE) and other exchanges on which it had been listed.

             ARCO’s outstanding shares of $2.80 and $3.00 Preference Stock remain listed on the NYSE. Pursuant to the Merger Agreement, each share of $2.80 Preference Stock was converted into the right to receive 7.872 ADRs and each share of $3.00 Preference Stock was converted into the right to receive 22.304 ADRs. ARCO remains a reporting company within the meaning of the Securities and Exchange Act of 1934.

Note C.       Relationship with BP Amoco and Other Related Party Transactions.

             Sales to and purchases from BP Amoco or its subsidiaries consisted primarily of the sale or purchase of petroleum liquids and natural gas. Sales to Southern Company Energy Marketing (SCEM), an equity affiliate of Vastar Resources, Inc. (Vastar) consisted of sales of natural gas produced by Vastar. Vastar sold its interest in SCEM in September, 2000.

             Sales to related parties were as follows:

Three Months Ended September 30, Nine Months
Ended September 30,
2000 1999 2000 1999
(millions)
BP Amoco   $ 419   $ —   $ 599   $ —  
Southern Company Energy Marketing    268    224    814    580  
Other    25    —    62    —  
  $ 712   $ 224   $ 1,475   $ 580  

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

             Purchases from related parties were as follows:

Three Months Ended September 30, Nine Months
Ended September 30,
2000 1999 2000 1999
(millions)
BP Amoco   $ 1,179   $ —   $ 1,364   $ —  
Southern Company Energy Marketing    22    21    71    54  
Other    5    —    10    —  
  $ 1,206   $ 21   $ 1,445   $ 54  

             ARCO and its subsidiaries join with BP America, Inc. (BP America) , a subsidiary of BP Amoco, in filing a consolidated federal income tax return. ARCO and BP America are parties to a tax sharing agreement which requires ARCO as a member of BP America’s consolidated tax group to pay its share of the group’s federal income taxes and certain state and local taxes to BP America. ARCO’s share of these taxes is generally the amount of federal income tax it would have to pay if ARCO and its subsidiaries filed tax returns as a separate tax group.

Note D.       Comprehensive Income.

             Comprehensive income comprises net income plus all other changes in equity from nonowner sources. ARCO’s comprehensive income for the three- and nine-month periods ended September 30, 2000 and 1999 was as follows:

Three Months Ended September 30, Nine Months
Ended September 30,
2000 1999 2000 1999
(millions)
Net income   $ 367   $ 372   $ 2,839   $ 850  
Other comprehensive income:                      
    Net unrealized gain (loss) on investments (a)    64    (114 )  78    101  
    Foreign currency translation adjustment    (71 )  23    (148 )  207  
Comprehensive income   $ 360   $ 281   $ 2,769   $ 1,158  

______________

             Accumulated nonowner changes in equity (accumulated other comprehensive income) at September 30, 2000 and December 31, 1999 were as follows:

September 30, 2000 December 31, 1999
(millions)
Net unrealized gain on investments   $ 306   $ 228  
Foreign currency translation adjustment    (178 )  (30 )
Minimum pension liability    (31 )  (31 )
       Accumulated other comprehensive income   $ 97   $ 167  

Note E.       Sale of Alaskan Oil and Gas Businesses and Pipelines.

             In the second quarter of 2000 ARCO completed the sale of its Alaskan operations, comprising oil and gas production, crude oil marine transportation and related crude oil inventory, for proceeds totaling approximately $6.1 billion and realized an after-tax gain of approximately $1.8 billion. The net book value of those assets at the

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

time of the sale was approximately $3.2 billion. The gain on the inventory portion of the sale included a $69 million after-tax gain from LIFO inventory liquidation. The results of the Alaskan oil and gas producing and marine transportation operations through the dates of sale are included in ARCO’s three-month and six-month results ended June 30, 2000.

             In the third quarter of 2000 ARCO completed the sale of its Alaskan pipeline operations, thereby completing the sale of all Alaskan operations mandated by the Federal Trade Commission in obtaining approval for the merger of ARCO and BP Amoco. ARCO received proceeds of $308 million and recorded an after-tax loss of $23 million in the third quarter of 2000. The results of the Alaskan pipeline operations through the date of sale are included in ARCO’s three-month and nine-month results ended September 30, 2000.

             The following table sets forth the operating results for the Alaskan oil and gas producing, pipeline and marine transportation businesses included in ARCO’s financial statements for the periods indicated.

Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
(millions)
Revenues:                      
    Sales and other operating revenues*   $ 33   $ 483   $ 1,029    1,214  
          Total revenues    33    492    1,034    1,246  
Expenses:                      
    Operating expenses    13    91    146    275  
    Depreciation, depletion and amortization    5    94    135    280  
    Exploration expenses    —    10    23    41  
    Taxes other than income taxes    1    58    110    162  
    Interest    11    9    38    26  
       Total expenses    30    262    452    784  
Income from continuing operations before income taxes and minority
   interest 		  $ 3   $ 230   $ 582   $ 462  
*Before elimination of intercompany transfers   $ 1   $ 424   $ 861 $ 968  

Note F.       Interim Segment Information.

Three Months Ended September 30, 2000
Exploration & Production Refining & Marketing Other Operations Unallocated Items
Total
(millions)
Sales and other operating revenues, including
   sales to related parties 		   $ 1,641    $ 2,747    $ 137    $ 1    $ 4,526  
Intersegment revenues    —    —    (1 )  (1 )  (2 )
    Total   $ 1,641   $ 2,747   $ 136   $ —   $ 4,524  
                          
Income from continuing operations*    255    57    27    25    364  
Income from discontinued operations**    —    —    —    3    3  
Net income   $ 255   $ 57   $ 27   $ 28   $ 367  
                          
Segment assets   $ 13,167   $ 4,220   $ 731   $ 7,583   $ 25,701  
                          
December 31, 1999                           
Segment assets   $ 18,752   $ 4,695   $ 916   $ 1,909   $ 26,272  

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Three Months Ended September 30, 1999
Exploration & Production Refining & Marketing Other Operations Unallocated Items
Total
(millions)
Sales and other operating revenues, including
   sales to related parties 		   $ 1,882    $ 1,959    $ 8    $ 2    $ 3,851  
Intersegment revenues    (424 )  —    (1 )  (3 )  (428 )
    Total   $ 1,458   $ 1,959   $ 7   $ (1 ) $ 3,423  
                          
Income (loss) from continuing operations   $ 183   $ 182   $ 25   $ (60 ) $ 330  
Income from discontinued operations**    —    —    —    42    42  
Net income (loss)   $ 183   $ 182   $ 25   $ (18 ) $ 372  

______________

Nine Months Ended September 30, 2000
Exploration & Production Refining & Marketing Other Operations Unallocated Items
Total
(millions)
Sales and other operating revenues,
   including sales to related parties 		    $ 5,964     $ 7,414     $ 383     $ 7     $ 13,768  
Intersegment revenues    (853 )  —    (2 )  (4 )  (859 )
    Total   $ 5,111   $ 7,414   $ 381   $ 3   $ 12,909  
                          
Income from continuing operations*    2,988    188    46    (429 )  2,793  
Income from discontinued operations**    —    —    —    46    46  
Net income (loss)   $ 2,988   $ 188   $ 46   $ (383 ) $ 2,839  

Nine Months Ended September 30, 1999
Exploration & Production Refining & Marketing Other Operations Unallocated Items
Total
(millions)
Sales and other operating revenues,
   including sales to related parties. 		    $ 4,735     $ 5,084     $ 37     $ 7     $ 9,863  
Intersegment revenues.    (968 )  —    (3 )  (7 )  (978 )
    Total   $ 3,767   $ 5,084   $ 34   $ —   $ 8,885  
                          
Income from continuing operations   $ 446   $ 517   $ 73   $ (228 ) $ 808  
Income from discontinued operations**    —    —    —    42    42  
Net income   $ 446   $ 517   $ 73   $ (186 ) $ 850  

______________

             

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

             With the sale of ARCO’s remaining Australian coal assets in the second quarter of 2000, the disposition of ARCO’s discontinued operations was completed.

             The amortization associated with a gain deferred in conjunction with the sale of the chemicals operations had a favorable impact of approximately $8 million and $11 million after tax on Refining and Marketing earnings in the third quarter of 2000 and 1999, respectively. The after-tax favorable impact for the first nine months of 2000 and 1999 was approximately $31 million and $38 million, respectively.

Note G.       Investments.

             At September 30, 2000 and 1999, investments in debt securities were primarily composed of U.S. Treasury securities and corporate debt instruments. Maturities generally ranged from three months to ten years. These investments were classified as short or long term depending on maturity. ARCO’s investments in LUKOIL common stock and Zhenhai Refining and Chemical Company convertible bonds were included in other investments and long-term receivables. At September 30, 2000 and 1999, all investments were classified as available-for-sale and were reported at fair value, with unrealized holding gains and losses, net of tax, reported in accumulated other comprehensive income.

             The following summarizes investments in securities at September 30:

2000 1999
(millions)
Aggregate fair value   $ 1,621   $ 1,142  
Gross unrealized holding losses    7    6  
Gross unrealized holding gains    (494 )  (45 )
Amortized cost   $ 1,134   $ 1,103  

             Investment activity for the nine-month periods ended September 30 was as follows:

2000 1999
(millions)
Gross purchases   $ 6,044   $ 16,330  
Gross sales    133    708  
Gross maturities    5,909    15,567  

             Gross realized gains and losses were determined by the specific identification method and for the three-and nine-month periods ended September  30, 2000 and 1999, were insignificant.

Note H.       Inventories.

             Inventories at September 30, 2000 and December 31, 1999 comprised the following:

September 30, 2000 December 31, 1999
(millions)
Crude oil and petroleum products   $ 31 * $ 199  
Aluminum products    72    —  
Other products    25    26  
Materials and supplies    125    205  
    Total   $ 253   $ 430  

______________

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note I.       Capital Stock.

             Detail of the Company’s capital stock was as follows:

September 30, 2000 December 31, 1999
(thousands)
$3.00 Cumulative convertible preference stock, par $1   $ 39   $ 41  
$2.80 Cumulative convertible preference stock, par $1    462    493  
Common stock, par $2.50    818,277    816,673  
    Total   $ 818,778   $ 817,207  

Note J.       Capitalization of Interest.

             Interest expense excluded capitalized interest of $25 million and $45 million, respectively, for the three-month periods ended September 30, 2000 and 1999, and $64 million and $133 million, respectively, for the nine-month periods ended September 30, 2000 and 1999.

Note K.       Unusual Items.

             Through September 30, 2000 the company recorded as unusual items $685 million before tax ($46 million in the third quarter 2000) in conjunction with the merger into BP Amoco (See Note B), comprised of the following:


Six Months Ended 6/30/00		 Three Months Ended 9/30/00 Nine Months Ended 9/30/00
(millions)
Personnel terminations   $ 311   $ 36   $ 347  
Facilities closure    100    (12 )  88  
Stock-related compensation    98    —    98  
Merger costs    77    10    87  
UK shutdown costs    44    —    44  
Other shutdown costs    9    12    21  
  $ 639   $ 46   $ 685  

             Personnel termination costs for the six months ended June 30, 2000 relate to the severance of approximately 1,800 employees, primarily at the corporate headquarters, a technical support center in Texas, and various operating units worldwide. This did not include costs related to the termination of foreign national employees. During the quarter ended September 30, 2000, approximately 330 terminations related to Vastar employees were added to unusual items; approximately 145 terminations related to pipeline operations sold during the quarter were removed from unusual items and reported as part of the net gain on asset sales. As a result there was a net increase of $36 million in termination costs reported as unusual items. This represents specific employee terminations identified as of September 30, 2000; further charges may be necessary in future periods if additional terminations beco me known.

             Additionally, approximately 150 terminations were identified related to Alaskan oil and gas operations sold in the second quarter 2000. These costs were included as part of the net gain on sale of those operations.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

             The following table summarizes the liabilities related to the terminations that resulted from ARCO’s merger into BP Amoco:

Terminations Short-term Benefits (a) Funded
Long-term
Benefits (b)		 Unfunded
Long-term
Benefits (c)		 Total
(millions)
                          
Reported as unusual items    1,985   $ 112   $ 186   $ 49   $ 347  
Reported with gain on sale of assets    295    13    34    —    47  
       Total    2,280   $ 125   $ 220   $ 49   $ 394  

______________

             Through September 30, 2000, approximately 1,150 employees have been terminated and approximately $44 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. The remaining severance and ancillary benefits are expected to be paid by the second quarter 2002.

             A reserve of $100 million was established for office space and facilities, primarily in Los Angeles, that will be vacated with no future economic benefit. The unusual items charge was reduced by $12 million during the third quarter 2000, as a result of a reassessment, including Vastar office space in Houston. Cash payments will be made through the remaining terms of the leases, the longest (and largest) of which extends to 2012.

             The charge of $98 million for stock-related compensation related to compensation benefits from contingent restricted stock and dividend share credits on stock options granted to executives and key employees. The benefits, which ordinarily would have been reported as compensation expense in future periods, were accelerated upon the change of control of the company. See the company’s Annual Report on Form 10-K for the year ended December 31, 1999 for additional information on contingent restricted stock and dividend share credits.

             Merger costs represent costs directly related to the consummation of the merger, primarily for investment and legal consultants.

             The remainder of the unusual items charge is comprised of shutdown costs (such as foreign national terminations and other location-specific costs) for offices in the United Kingdom and other worldwide locations.

             Through December 31, 1999, the company had previously established reserves totaling $251 million for the costs of terminating 1,250 employees. $103 million related to short-term benefits such as severance payments and ancillary benefits such as relocation and outplacement; $148 million related to pension and other postretirement benefits. Through September 30, 2000, approximately 1,200 employees have been terminated and approximately $97 million of severance and ancillary benefits have been paid and charged against the short-term benefit accrual. The remaining employees will terminate under the 2000 merger change of control severance program with the previously established reserves deemed adequate.

             Through December 31, 1999, the company established a $90 million provision for the termination of 357 employees resulting from the integration of UTP into ARCO’s operations. As of September 30, 2000, ARCO had terminated 355 of the employees and had paid out a total of $85 million in severance benefits.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note L.       Income Taxes.

             Provision (benefit) for taxes on income:

Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
(millions)
Federal:                      
    Current   $ 507   $ (128 ) $ 1,920   $ 37  
    Deferred    (329 )  197    (879 )  228  
   178    69    1,041    265  
Foreign:                      
    Current    58    32    277    144  
    Deferred    (8 )  (5 )  (86 )  (55 )
   50    27    191    89  
State:                      
    Current    37    (18 )  266    17  
    Deferred    (28 )  9    (83 )  11  
   9    (9 )  183    28  
       Total   $ 237   $ 87   $ 1,415   $ 382  

             Reconciliation of provision for taxes on income with tax at federal statutory rate:

Three Months Ended September 30,
2000 1999


Amount		 Percent of Pretax Income

Amount		 Percent of Pretax Income
(millions)
Income from continuing operations before income taxes and
   minority interest 		   $ 645    100.0    $ 430    100.0  
                     
Tax at federal statutory rate   $ 226    35.0   $ 150    (35.0 )
Increase (reduction) in taxes resulting from:                      
    Subsidiary stock transactions    (55 )  (8.5 )  (22 )  (5.1 )
    Taxes on foreign income in excess of statutory rate    98    15.2    3    0.7  
    State income taxes (net of federal effect)    6    0.9    (6 )  (1.4 )
    Tax credits    (23 )  (3.6 )  (42 )  (9.8 )
    Other    (15 )  (2.3 )  4    0.8  
Provision for taxes on income   $ 237    36.7   $ 87    20.2  

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Nine Months Ended September 30,
2000 1999


Amount 		Percent of Pretax Income

Amount 		Percent of Pretax Income
(millions)
Income from continuing operations before income taxes and
   minority interest 		   $ 4,291    100.0    $ 1,215    100.0  
                     
Tax at federal statutory rate   $ 1,502    35.0   $ 425    35.0  
Increase (reduction) in taxes resulting from:                      
    Sale of Alaskan operations    (213 )  (5.0 )  —    —  
    Subsidiary stock transactions    (55 )  (1.3 )  (22 )  (1.8 )
    Taxes on foreign income in excess of statutory rate    67    1.6    46    3.8  
    State income taxes (net of federal effect)    119    2.8    18    1.5  
    Tax credits    (78 )  (1.8 )  (92 )  (7.6 )
    Other    73    1.7    7    0.5  
Provision for taxes on income   $ 1,415    33.0   $ 382    31.4  

Note M.       Discontinued Operations.

             In the second quarter 2000, ARCO disposed of its remaining coal assets in Australia. As part of the acquisition of UTP, ARCO sold UTP’s petrochemical business to Williams Energy Services in March 1999.

Note N.       Earned Per Share.

             Earnings per share has been omitted from the Consolidated Statement of Income because ARCO has no publicly held common stock. BP Amoco holds 100% of the common stock outstanding, and none of ARCO’s other securities are convertible into ARCO common stock.

Note O.       Supplemental Income Statement Information.

             Taxes other than income taxes comprised the following:

Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
(millions)
Production/severance   $ 45   $ 64   $ 210   $ 156  
Property    25    32    86    101  
Other    21    21    97    96  
    Total   $ 91   $ 117   $ 393   $ 353  
12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note P.       Supplemental Cash Flow Information.

             Following is supplemental cash flow information for the nine months ended September 30, 2000 and 1999:

Nine Months Ended September 30,
2000 1999
(millions)
Gross sales and maturities of short-term investments   $ 98   $ 153  
Gross purchases of short-term investments    (25 )  (154 )
Net cash provided (used) by short-term investments   $ 73   $ (1 )
           
Gross proceeds from issuance of notes payable   $ 3,697   $ 9,526  
Gross repayments of notes payable.    (5,371 )  (9,965 )
Net cash used by notes payable   $ (1,674 ) $ (439 )
           
Gross noncash provisions charged to income   $ 801   $ 168  
Cash payments of previously accrued items    (472 )  (515 )
Cash payments less (greater) than noncash provisions   $ 329   $ (347 )
           
Interest paid   $ 327   $ 258  
Income taxes paid   $ 1,845   $ 472  

             Changes in working capital accounts for the nine-month periods ended September 30, 2000 and 1999 were as follows:

Nine Months Ended September 30,
2000 1999
(millions)
Changes in working capital—Increase (decrease) to cash:            
    Accounts receivable   $ (116 ) $ (232 )
    Inventories    184    38  
    Accounts payable    102    (259 )
    Other working capital    435    (358 )
       Total   $ 605   $ (811 )

Note Q.       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 also 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).

             Lawsuits, including purported class actions and actions by governmental entities, are pending or threatened against ARCO and others seeking damages, abatement of the housing units, and compensation for medical problems

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 1998, ARCO entered two consent decrees, settling all of the natural resources damage claims of the United States and the tribes and the bulk of such claims of the State of Montana. Remaining for disposition are the State’s claims for $206 million of restoration damages at three sites.

             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:

             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 130 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:

             The environmental remediation accrual is updated annually, at a minimum, and at September 30, 2000, was $788 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 $550 million.

             Approximately 60% 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. One site represented 11% of the total accrual. No other site represented more than 7% of the total accrual. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. Substantially all amounts accrued are expected to be paid out over the next 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.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

             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 R.       Sale of Certain Lower 48 Pipeline Assets.

             In order to obtain approval for the ARCO merger with BP Amoco, the Federal Trade Commission required that ARCO sell certain Lower 48 pipeline assets. The sale of those assets was completed in August 2000 for proceeds totaling approximately $317 million and recorded an after-tax gain on the sale of approximately $7 million in the third quarter of 2000. The net book value of the Lower 48 pipeline assets sold was approximately $304 million.

Note S.       Merger Agreement between ARCO and Vastar Resources, Inc.

             On September 15, 2000, Vastar’s common stock minority shareholders approved the merger agreement between ARCO and Vastar. Following the approval, 18,252,609 shares were purchased by ARCO at a price of $83 per share for a total purchase price of $1,585 million (including $70 million primarily for the buyout of employee stock options then outstanding. Vastar is now a 100% owned subsidiary of ARCO.

15

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter 2000 vs. Third Quarter 1999

             On April 18, 2000 ARCO was merged into BP Amoco p.l.c. (BP Amoco). ARCO is now a wholly owned subsidiary of BP Amoco. See Note B of notes to consolidated financial statements for a further discussion of the merger.

Consolidated Earnings

             Net income decreased to $367 million in the third quarter of 2000, compared to $372 million in the third quarter of 1999. Operating results excluding special items decreased to $402 million, compared to $511 million in the 1999 third quarter. The decrease in third quarter operating results was the result of higher crude oil and natural gas prices being more than offset by lower refined products margins and significantly lower production volumes that resulted primarily from the sale of the Alaskan crude oil producing properties in the second quarter of 2000, and higher interest expense.

             The 2000 third quarter special items included gains totalling approximately $240 million after tax consisting of the sale of Vastar’s interest in a joint venture, the receipt of stock from demutualization of an insurance company in which ARCO was a mutual participant, and the recognition of a deferred tax benefit associated with Vastar, offset by charges of $275 million after tax primarily for the impairment of oil and gas properties, additional personnel termination costs and future environmental remediation. The third quarter also included gains totalling $20 million after tax for Federal Trade Commission mandated sales of ARCO’s Alaskan pipelines and certain Lower 48 pipelines.

             The 1999 third quarter included net after-tax charges of $139 million for special items, consisting of a loss on the disposition of Algeria assets, an increase in the restructuring cost reserves, charges for future environmental remediation and merger costs, partially offset by tax adjustments.

After-tax Segment Earnings

2000 1999
Net Income Less:
Special
Items
(Charge)Benefit		 Operating Results Net Income Less:
Special
Items
(Charge)Benefit		 Operating Results
(millions)
Exploration and production   $ 242   $ (157 ) $ 399   $ 183   $ (177 ) $ 360  
Refining and marketing    57    (17 )  74    182    (2 )  184  
Other operations    20    —    20    25    5    20  
Interest expense    (94 )  —    (94 )  (70 )  —    (70 )
Other unallocated expenses    119    116    3    10    (7 )  17  
Income from continuing operations before
   gain on sale of Alaskan businesses and
   pipelines and discontinued operations 		   344    (58 )  402    330    (181 )  511  
Gain on sale of Alaskan businesses and
   pipelines 		   20    20    —    —    —    —  
Discontinued operations    3    3    —    42    42    —  
Net income   $ 367   $ (35 ) $ 402   $ 372   $ (139 ) $ 511  

Exploration and Production

             The increase in ARCO’s third quarter 2000 operating results from worldwide oil and gas exploration and production operations resulted from higher crude oil and natural gas prices and lower operating, depreciation, depletion, and amortization (DD&A) and exploration expenses being largely offset by significantly lower petroleum liquids production. The lower production volumes, operating and DD&A expenses primarily resulted from the sale

16

of the Alaskan oil producing properties in the second quarter of 2000. International exploration expense declined $39 million before tax primarily as a result of lower writeoffs for dryholes.

             The 2000 third quarter included special item charges of $290 million after tax primarily for the impairment of oil and gas properties in Venezuela and additional severance reserves, partially offset by a gain on the sale of Vastar’s interest in a joint venture.

             In the third quarter of 2000 the company wrote down the value of several Latin American oil fields by $246 million before tax. Production rates from the fields over the past several years have been lower than anticipated, and seismic and drilling evaluations indicated significantly lower reserves in place than originally estimated. Therefore, the company has written down these fields and related assets to estimated fair value.

             The 1999 third quarter included a special item charge of $175 million after tax for the loss on the sale of a portion of ARCO’s interest in the Rhourde El Baguel field in Algeria.

Average Oil and Gas Prices

2000 1999
U.S.            
    Petroleum liquids—per barrel (bbl)            
       Alaska   $ —   $ 13.32  
       Lower 48, including Vastar   $ 25.88   $ 16.85  
       Composite average price   $ 25.88   $ 14.49  
    Natural gas—per thousand cubic feet (mcf)   $ 3.74   $ 2.25  
International            
    Petroleum liquids—per bbl   $ 23.10   $ 16.68  
    Venezuela crude oil—per bbl   $ 13.50   $ 8.47  
    Natural gas (excluding LNG)—per mcf   $ 2.45   $ 2.09  
    Indonesia liquefied natural gas (LNG)—per mcf   $ 5.54   $ 3.53  

Petroleum Liquids and Natural Gas Production

2000 1999
Net Production*         
U.S.            
    Petroleum liquids—bbl/day            
       Alaska    —    291,200  
       Vastar    74,500    62,500  
       Other Lower 48    51,500    82,700  
          Total    126,000    436,400  
    Natural gas—mcf/day    1,249,200    1,222,000  
           
    Barrels of oil equivalent—(BOE)/day    334,200    640,100  
           
International            
    Petroleum liquids—bbl/day    114,000    163,600  
    Natural gas—mcf/day    855,800    997,600  
    BOE/day    256,600    329,800  
           
          Total net production—BOE/day    590,800    969,900  

______________

             The significant decline in U.S. petroleum liquids production resulted from the sale of Alaskan producing properties in the second quarter of 2000. The increase in Vastar’s petroleum liquids production in the third quarter of 2000 resulted from the startup of production from the Mississippi Canyon 764 block in the second quarter of 2000.

17

The decline in other Lower 48 petroleum liquids production primarily reflected the sale of ARCO Long Beach, Inc. in the second quarter of 2000.

             The decline in international petroleum liquids production primarily reflected lower United Kingdom and Indonesian volumes. The decrease in United Kingdom volumes resulted from the sale of oil fields in the second quarter of 2000. The Indonesian decrease resulted from the impact of higher crude oil prices on production sharing contracts.

             All international geographic areas experienced lower natural gas production in the third quarter of 2000, while the increase in U.S. natural gas production reflected Vastar’s 5% growth in production, compared to the third quarter 1999. Vastar’s increased production resulted from the startup of the Main Pass 264 Block in 2000 as well as increased production from other fields that were operating in 1999.

Refining and Marketing

             The decline in third quarter 2000 earnings primarily resulted from lower margins. Higher product prices were more than offset by higher crude oil costs and higher purchased finished product prices and volumes. Third quarter 2000 results included special items charges of $17 million for litigation and future environmental remediation costs. The 10% increase in gasoline sales volumes required the company to buy refined product on the spot market, as the company’s two refineries were operating near capacity during the quarter.

             The amortization and recognition of imputed interest associated with the deferral of part of the pretax gain on the sale of the ARCO Chemical interest in 1998 had a net favorable impact of approximately $8 million and $11 million after tax on refining and marketing earnings in the third quarter of 2000 and 1999, respectively. See the company’s Annual Report on Form 10-K for the year ended December 31, 1999 for a further discussion of the deferred gain.

Other Operations

             Other operations included earnings from Lower 48 pipeline operations and an aluminum rolling facility. The 1999 earnings included special items of $5 million primarily from the sale of pipeline assets.

Discontinued Operations

             Earnings from discontinued operations in the third quarter of 2000 consisted of a special item benefit resulting from a revision of the estimated loss on the sale of ARCO’s U. S. and Australian coal operations. In the second quarter of 2000 ARCO sold its one remaining mine in Australia thereby completing the sale of all of its assets of discontinued operations.

18

Consolidated Revenues

  2000   1999  
  (millions)  
Sales and other operating revenues (including sales to related parties)      
    Exploration and production   $ 1,641   $ 1,882  
    Refining and marketing    2,747    1,959  
    Other    138    10  
    Intersegment eliminations    (2 )  (428 )
           
       Total   $ 4,524   $ 3,423  

             The decrease in exploration and production sales revenues resulted primarily from significantly lower petroleum liquids production, which resulted from the sale of the company’s Alaskan oil and gas operations and significant reduction in domestic crude oil marketing activity (sales and purchases of non proprietary production), partially offset by higher crude oil and natural gas prices. Refining and marketing sales revenues increased primarily because of higher light product prices, which reflected the increased in crude oil prices, compared to the same quarter in the prior year.

             Other revenues increased in the third quarter of 2000 reflecting a $213 million gain from sale of Vastar’s interest in SCEM and a $77 million gain from the sale of stock to the public by an insurance company in which ARCO was a mutual participant.

Consolidated Expenses

             The increased trade purchases and trade purchases from related parties in the third quarter of 2000 reflected the purchases of Alaskan crude oil by the refining and marketing operations as third party purchases following the sale of ARCO’s Alaskan oil and gas operations to Phillips Petroleum. Prior to the sale of the Alaskan operations those purchases were eliminated as intercompany transactions in the consolidated financial statements. In addition, trade purchases reflected the effect of increased crude oil prices and higher gasoline purchases by the company’s refining and marketing operations.

             Selling, general and administrative (SG&A) expenses in the third quarter of 2000 primarily reflected lower corporate administrative expenses and lower SG&A associated with international exploration and production operations.

             The lower third quarter 2000 exploration expense primarily resulted from lower writeoffs for dryholes associated with international exploration and production.

             DD&A expense in the third quarter of 2000 declined primarily as a result of the sale of the Alaskan oil and gas producing operations in April 2000.

             Taxes other than excise and income did not reflect the increase in crude oil prices, as the crude oil price increase was offset by lower production volumes resulting primarily from the sale of the company’s Alaskan oil and gas producing operations.

             The higher interest expense in the third quarter 2000 primarily resulted from lower capitalized interest as a result of the sale of ARCO’s interest in an oil field in Algeria in the second quarter of 2000 and the completion of projects in the U.K. and Latin America that were ongoing in the third quarter of 1999.

             Related party interest is associated with the net amount of funds advanced by BP Amoco primarily for ARCO’s United Kingdom oil and gas producing operations.

             The unusual items in the third quarter of 2000 represented additional charges for the costs associated with the BP Amoco merger, primarily employee terminations at Vastar.

19

Income Taxes

             The Company had an effective tax rate of 36.7% in the third quarter of 2000, compared to 20.2% in the 1999 third quarter. The effective tax rate in 2000 was slightly higher than the statutory rate primarily as a result of foreign taxes in excess of the statutory rate being nearly offset by a lower effective tax rate associated with the sale of a portion of the Alaskan oil and gas operations and various tax credits and other benefits.

Nine-Month Period Ended September 30, 2000 vs. Same Nine-Month Period 1999

Consolidated Earnings

             Net income increased to $2,839 million, up from $850 million reported for the first nine months of 1999. Operating results excluding special items increased to $1,442 million, compared to $985 million for the first nine months of 1999. The increase in operating results primarily reflected significantly higher crude oil and natural gas prices, partially offset by lower refining and marketing margins and lower crude oil production volumes resulting from the sale of Alaskan oil and gas producing properties in the second quarter of 2000.

             Special items for the first nine months of 2000 included the special items reported in the third quarter 2000 results in addition to the following items recorded in the second quarter of 2000: an after-tax gain of $1,815 million on the sale of ARCO’s Alaskan operations (oil and natural gas production, crude oil marine transportation operations and related crude oil inventory), partially offset by net charges of $426 million after tax consisting primarily of charges associated with the costs related to the merger with BP Amoco, future environmental remediation and provisions for litigation, offset by a net gain on other asset sales. Special items for the first nine months of 1999 primarily included the net after-tax charges of $139 million reported in the third quarter 1999 results.

After-tax Segment Earnings

2000 1999
Net
Income		 Less:
Special
Items
(Charge)
Benefit		 Operating
Results		 Net
Income		 Less:
Special
Items
(Charge)
Benefit		 Operating
Results
(millions)
Exploration and production   $ 1,160   $ (151 ) $ 1,311   $ 446   $ (172 ) $ 618  
Refining and marketing    188    (104 )  292    517    (4 )  521  
Other operations    39    (14 )  53    73    5    68  
Interest expense    (253 )  —    (253 )  (211 )  —    (211 )
Other unallocated expenses    (176 )  (215 )  39    (17 )  (6 )  (11 )
Income from continuing operations before gain
   on sale of Alaskan businesses and pipelines
   and discontinued operations 		   958    (484 )  1,442    808    (177 )  985  
Gain on sale of Alaskan businesses and
   pipelines 		   1,835    1,835    —    —    —    —  
Discontinued operations    46    46    —    42    42    —  
Net income   $ 2,839   $ 1,397   $ 1,442   $ 850   $ (135 ) $ 985  

20

Consolidated Revenues

2000 1999
(millions)
Sales and other operating revenues (including sales to related parties)      
    Exploration and production   $ 5,964   $ 4,735  
    Refining and marketing    7,414    5,084  
    Other    390    44  
    Intersegment eliminations    (859 )  (978 )
           
       Total   $ 12,909   $ 8,885  

             The increase in exploration and production sales revenues for the first nine months of 2000 resulted primarily from higher petroleum liquids and natural gas prices, partially offset by significantly lower petroleum liquids production resulting primarily from the sale of the company’s Alaskan oil and gas operations. Refining and marketing sales revenues increased primarily because of higher refined products prices, which reflected the increase in crude oil prices.

Consolidated Expenses

             The increased trade purchases and trade purchases from related parties for the nine months ended September 30, 2000 reflected the purchases of Alaskan crude oil by the refining and marketing operations as third party purchases following the sale of ARCO’s Alaskan oil and gas operations to Phillips Petroleum. Prior to the sale of the Alaskan crude operations those purchases were eliminated as intercompany transactions in the consolidated financial statements. In addition, trade purchases reflected the effect of increased crude oil prices and higher gasoline purchases by the company’s refining and marketing operations.

             DD&A expense in 2000 declined primarily as a result of the sale of the Alaskan oil and gas producing operations in late April 2000.

             The lower exploration expense for the first nine months of 2000 reflected lower writeoffs for dryholes and lower other exploration expenses associated with ARCO’s international oil and gas operations, partially offset by the writeoff of two domestic offshore wells in the first quarter of 2000.

             The lower selling, general and administrative expenses for the first nine months of 2000 primarily resulted from the Company’s cost reduction programs.

             The increase in taxes other than income taxes in 2000 primarily resulted from taxes on international production as the impact of higher crude oil prices on U.S. production taxes was offset by lower production volumes as a result of the sale of the Alaskan oil and gas producing operations.

Income Taxes

             The Company had an effective tax rate of 33.0% for the first nine months of 2000, compared to 31.4% for the first nine months of 1999. An effective tax rate in 2000 lower than the statutory rate primarily reflected a lower effective tax rate associated with the sale of the Alaskan oil and gas operations , partially offset by state income taxes.

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Average Oil and Gas Prices

Nine Months Ended
September 30,
2000 1999
U.S.            
    Petroleum liquids—per bbl            
       Alaska   $ 21.26   $ 9.76  
       Lower 48, including Vastar   $ 24.05   $ 13.40  
       Composite average price   $ 22.64   $ 10.91  
    Natural gas—per mcf   $ 2.98   $ 1.89  

Nine Months Ended
September 30,
2000 1999
International            
    Petroleum liquids—per bbl   $ 22.06   $ 12.87  
    Venezuela crude oil—per bbl   $ 12.12   $ 6.41  
    Natural gas (excluding LNG)—per mcf   $ 2.55   $ 2.22  
    Indonesia liquid natural gas (LNG)—per mcf   $ 5.24   $ 2.94  

Petroleum Liquids and Natural Gas Production

2000 1999
Net Production*      
U.S.            
    Petroleum liquids—bbl/day            
       Alaska    135,900    317,500  
       Vastar    71,300    59,400  
       Other Lower 48    61,700    86,800  
          Total    268,900    463,700  
    Natural gas—mcf/day    1,237,100    1,280,000  
           
    Barrels of oil equivalent—(BOE)/day    475,100    677,000  
           
International            
    Petroleum liquids—bbl/day    115,400    163,800  
    Natural gas—mcf/day    1,008,100    1,091,500  
    BOE/day    283,400    345,800  
           
          Total net production—BOE/day    758,500    1,022,800  

______________

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Liquidity and Capital Resources

2000
(millions)
Cash flow provided (used) by:       
Operations   $ 1,419  
Investing activities   $ 364  
Financing activities   $ (2,609 )

             The net cash used by investing activities in the first nine months of 2000 included an increase in net receivable from BP Amoco of $3.4 billion, $1.6 billion for the acquisition of Vastar’s publicly-held minority stockholding and expenditures for additions to fixed assets of $1.6 billion, offset by proceeds from asset sales of $7.7 billion, including $6.7 billion associated with the sale of the Alaska oil and gas operations.

             The net cash provided by financing activities in the first nine months of 2000 primarily included a decrease of $1.7 billion in the Company’s short-term debt position and dividend payments of $697 million.

             Cash and cash equivalents and short-term investments totaled $324 million. There were no short-term borrowings at September 30, 2000 and long-term debt due within one year was $57 million at the end of the third quarter of 2000.

             The Company believes it has adequate resources and liquidity to fund future cash requirements for working capital, capital expenditures, and debt repayments with cash from operations, existing cash balances, and cash infusions from ARCO’s parent company BP Amoco. With the merger of ARCO and BP Amoco, ARCO is now part of the BP Amoco cash handling management system. All ARCO cash receipts are swept into a BP Amoco bank account daily and all ARCO disbursements are funded by BP Amoco on a daily basis when the ARCO check clears an ARCO bank account.

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 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. Following the merger with BP Amoco, ARCO no longer engages in hedging activity using derivative instruments. Accordingly, the impact of SFAS No. 133 will not be mater ial on stand-alone ARCO financial statements.

             Management cautions against projecting any future results based on present earnings levels because of economic uncertainties, the extent and form of existing or future governmental regulations and other possible actions by governments.

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings.

1.   Reference is made to the disclosure regarding the purported class action against ARCO and Babcock & Wilcox described on page 17 of ARCO’s Report on Form 10-K for the year ended December 31, 1999 and on page 18 of ARCO’s Report on Form 10-Q for the quarter ended March 31, 2000. On October 6, 2000, the Bankruptcy Court denied to confirm that the automatic stay is applicable to stay the claims against ARCO in the Hall case. B&W and ARCO are appealing this ruling to the District Court.

2.   ARCO has been named as a defendant in a number of lawsuits involving the manufacture and use of MTBE as a fuel additive and oxygenate. Several other refiners of gasoline in the United States are defendants in some or all of these cases. Lyondell Chemical Company, f/k/a ARCO Chemical Company, is a defendant in many of these matters. There are potential issues regarding indemnification between ARCO and Lyondell, which are unresolved. Generally, these cases allege product liability, negligence and fraud. Plaintiffs allege that MTBE is unreasonably dangerous and has contaminated groundwater, ultimately leading to contamination of private and public drinking water supplies. They further allege that ARCO knew, or should have known, that MTBE made gasoline more dangerous, fraudulently concealed this hazard, and promoted the use of MTBE in spite of this risk. The cases are:

             South Lake Tahoe Public Utility District (STPUD) vs. ARCO, et al. (Superior Court of the State of California In and For the County of San Francisco, Case No. 999128, filed April 16, 1999) STPUD alleges that MTBE contamination in its drinking water wells has resulted in over $100 million in damage. This case is set for trial in January 2001.

             Communities for a Better Environment (CBE) vs. ARCO, et al. (Superior Court of the State of California In and For the County of San Francisco, Case No. 997103, Second Amended Complaint, filed June 29, 2000) CBE alleges that the environment in California has been damaged by the introduction of MTBE into gasoline. In addition to the legal theories outlined above, CBE includes an action for violation of California’s Unfair Business and Professional Code, Section 17-200.

             City of Santa Monica vs ARCO, et al. (Superior Court of the State of California In and For the County of San Francisco, Case No.  313004, filed June 19, 2000) Santa Monica alleges contamination of its water supply by a number of leaking underground storage tanks, including one owned by ARCO.

             Millet vs. ARCO, et al. (Superior Court of Cumberland County, Maine, Case No. CV-98-367-P-H, filed October 7, 1998) A class action lawsuit brought by a purported class of private well owners in the State of Maine alleging potential or actual damage to their wells. Class certification was denied by the trial court and that denial has been affirmed on appeal. Several individual claims remain.

             Berisha vs. ARCO, et al. (United States District Court for the Southern District of New York, Case No. 00 CIV 1898  [SAS], filed January 14, 2000) A class action lawsuit brought by a purported class of private well owners in the State of New York alleging potential or actual damage to their wells.

             Sutton Farms vs. ARCO, et al. (United States District Court for the Southern District of Florida, Case No. 00-3544, filed September 21, 2000) A class action lawsuit brought in Miami, Florida by a purported class of private and commercial well owners in 34 states alleging potential or actual damage to their wells. This matter has been transferred to the Berisha court in New York for consolidated handling.

             England v. ARCO, et al. (In the Circuit Court of the Third Judicial Circuit, Madison County, Illinois, Case No. 00 L  000331, filed April 11, 2000) A class action lawsuit brought in Madison County, Illinois by a purported class of private well owners in 16 states alleging potential or actual damage to their wells. This matter has been transferred to the Berisha court in New York for consolidated handling.

             No class has been certified in any of these cases.

3.    In January 1998, The Pinal Creek Group, consisting of Cyprus Miami Mining Corporation, Inspiration Consolidated Copper Company (“Inspiration”) and BHP Copper Inc., f/k/a Magna Copper Company, filed an action for declaratory relief, breach of contract and breach of the covenant of good faith and fair dealing against their insurers for failure to provide defense and indemnity coverage for environmental liabilities arising out of the Pinal Creek Site in Arizona. The complaint estimates the cost to remediate the Pinal Creek site exceeds $100 million. The

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action, CV-98-00530, is pending in the Superior Court for the State of Arizona in and for the County of Maricopa. In February 1998, that action was tendered to ARCO on behalf of several insurers whom ARCO had agreed to defend, indemnify and hold harmless in connection with such environmental liabilities as part of its settlements with those insurers in the ARCO v. Aetna, et al., omnibus environmental coverage action. The insurers with whom ARCO made such an agreement are Travelers, Century Indemnity Company, successor to CCI Insurance Company, successor to Insurance Company of North America, successor to Indemnity Insurance Company of North America, and Continental Casualty Company. These policies were issued to Anaconda, which merged with ARCO, and included Inspiration as a named insured. Trial is set for February 4, 2002, with a discovery cut-off of March 30, 2001. Expert discovery is to begin April 30, 2001, and close on June 29, 2001. Motions for s ummary judgment are to be filed by July 31, 2001 and decided by the end of November 2001. The parties are to work to agree on a mediator by March 16, 2001.

4.    Reference is made to the disclosure regarding the case styled U.S. v. ARCO described on page 14 of ARCO’s Report on Form 10-K for the year ended December 31, 1999. As part of U.S. v. ARCO, settlement has been negotiated for claims and counterclaims concerning past and future costs associated with the Rocker site, by which ARCO is to pay $3.4 million. This is in settlement of federal government claims of $3.9  million for past remediation and oversight costs, and an additional $0.9 million for future costs. The settlement was filed with the court during August 2000.

5.   Reference is made to the Company’s 1999 Form 10-K Report for information on other legal proceeding matters reported therein.

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Item 6. Exhibits and Reports on Form 8-K.

             The following Current Reports on Form 8-K were filed during the quarter ended September 30, 1999 and through the date hereof.

   Date of Report   Item No.   Financial Statements

   None

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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:      November 14, 2000       /s/ Charles L. Hall
     
      Charles L. Hall
Assistant Controller
(Duly Authorized Officer and
Principal Accounting Officer)

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