<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, 2000 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, outstanding as of July 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 July 31, 2000, are 434,342 shares of $2.80
Preference Shares and 36,551 shares of $3.00 Preference Shares.
================================================================================
<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,
-------------------- --------------------
(MILLIONS) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Sales and other operating revenues............................... $ 3,778 $ 2,856 $ 7,622 $ 5,106
Sales to related parties........................................ 522 191 763 356
Other revenues................................................... 199 173 391 309
Interest from related parties .................................. 72 -- 72 --
--------- --------- --------- ---------
4,571 3,220 8,848 5,771
--------- --------- --------- ---------
Expenses
Trade purchases.................................................. 2,145 1,162 3,885 1,946
Trade purchases from related parties ............................ 217 17 239 33
Operating expenses............................................... 621 594 1,222 1,160
Selling, general and administrative expenses..................... 131 176 269 328
Depreciation, depletion and amortization......................... 375 428 862 911
Exploration expenses (including undeveloped leasehold
amortization).................................................. 65 108 165 182
Taxes other than income taxes.................................... 125 116 302 236
Interest......................................................... 94 95 204 190
Interest-- related parties ...................................... 11 -- 11 --
Unusual items.................................................... 639 -- 639 --
--------- --------- --------- ---------
4,423 2,696 7,798 4,986
--------- --------- --------- ---------
Income before gain on sale of Alaskan oil and gas businesses........ 148 524 1,050 785
Gain on sale of Alaskan oil and gas businesses...................... 2,596 -- 2,596 --
--------- --------- --------- ---------
Income from continuing operations before income taxes and minority
interest......................................................... 2,744 524 3,646 785
Provision for taxes on income....................................... 907 202 1,178 295
Minority interest in earnings of subsidiary......................... 25 9 39 12
--------- --------- --------- ---------
Income from continuing operations................................... 1,812 313 2,429 478
Income from discontinued operations, net of income taxes of $12..... 43 -- 43 --
--------- --------- --------- ---------
Net Income ......................................................... $ 1,855 $ 313 $ 2,472 $ 478
========= ========= ========= =========
</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,
(MILLIONS) 2000 1999
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................................................... $ 225 $ 879
Short-term investments.......................................................... 169 264
Accounts receivable............................................................. 1,376 1,167
Accounts receivable from related parties........................................ 230 134
Inventories..................................................................... 242 430
Prepaid expenses and other current assets....................................... 180 184
---------- ------------
Total current assets............................................................ 2,422 3,058
---------- ------------
Investments and long-term receivables:
Investments accounted for on the equity method.................................. 1,660 1,508
Receivable from BP Amoco ....................................................... 5,474 --
Other investments and long-term receivables..................................... 2,043 1,660
---------- ------------
9,177 3,168
---------- ------------
Net property, plant and equipment.................................................. 14,355 18,466
Net assets of discontinued operations.............................................. -- 67
Deferred charges and other assets.................................................. 1,228 1,513
---------- ------------
Total assets....................................................................... $ 27,182 $ 26,272
========== ============
</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,
(MILLIONS) 2000 1999
--------- -------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable..................................................................... $ -- $ 1,672
Accounts payable.................................................................. 805 830
Taxes payable..................................................................... 1,894 420
Long-term debt due within one year................................................ 42 11
Other............................................................................. 883 1,090
--------- -------------
Total current liabilities......................................................... 3,624 4,023
Long-term debt....................................................................... 5,595 5,698
Deferred income taxes................................................................ 2,927 3,644
Dismantlement, restoration and reclamation........................................... 640 1,154
Other deferred liabilities and credits............................................... 3,062 2,770
Minority interest.................................................................... 335 297
--------- -------------
Total liabilities................................................................. 16,183 17,586
--------- -------------
Stockholders' equity:
Preference stocks................................................................. 1 1
Common stock...................................................................... 818 817
Capital in excess of par value of stock........................................... 973 889
Retained earnings................................................................. 9,330 7,091
Treasury stock.................................................................... (227) (279)
Accumulated other comprehensive income............................................ 104 167
--------- -------------
Total stockholders' equity........................................................ 10,999 8,686
--------- -------------
Total liabilities and stockholders' equity........................................... $ 27,182 $ 26,272
========= =============
</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,
---------------------
(MILLIONS) 2000 1999
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations....................................................... $ 2,429 $ 478
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of Alaskan operations................................................... (2,596) --
Depreciation, depletion and amortization............................................. 862 911
Dry hole expense and undeveloped leasehold amortization.............................. 86 82
Net gain on other asset sales........................................................ (85) (47)
Income from equity investments....................................................... (43) (21)
Dividends from equity investments.................................................... 46 27
Minority interest in earnings of subsidiaries........................................ 39 12
Noncash provisions greater (less) than cash payments................................. 414 (177)
Deferred income taxes................................................................ (683) (17)
Other changes in working capital accounts............................................ 1,758 (411)
Other................................................................................ (61) (32)
--------- ----------
Net cash provided by operating activities.......................................... 2,166 805
--------- ----------
Cash flows from investing activities:
Proceeds from sale of Alaskan operations............................................. 5,824 --
Receivable from BP Amoco............................................................. (5,474) --
Additions to fixed assets (including dry hole costs)................................. (1,172) (1,393)
Net cash provided (used)by short-term investments................................... 89 (11)
Investment in LUKARCO................................................................ (136) (51)
Proceeds from other asset sales...................................................... 243 629
Investments and long-term receivables................................................ (362) 14
Other................................................................................ (4) 37
--------- ----------
Net cash used by investing activities.............................................. (992) (775)
--------- ----------
Cash flows from financing activities:
Repayments of long-term debt......................................................... (104) (580)
Proceeds from issuance of long-term debt............................................. 92 1,887
Net cash used by notes payable....................................................... (1,674) (898)
Dividends paid....................................................................... (232) (459)
Other................................................................................ 20 26
--------- ----------
Net cash used by financing activities.............................................. (1,898) (24)
--------- ----------
Cash flows from discontinued operations................................................. 53 (8)
Effect of exchange rate changes on cash................................................. 17 (15)
--------- ----------
Net decrease in cash and cash equivalents............................................... (654) (17)
Cash and cash equivalents at beginning of period........................................ 879 657
--------- ----------
Cash and cash equivalents at end of period.............................................. $ 225 $ 640
========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. ACCOUNTING POLICIES.
BASIS OF PRESENTATION.
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 would be 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 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 New York Stock Exchange. 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.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. The
sales to other related parties primarily included sales to Southern Company
Energy Marketing, an equity affiliate of Vastar Resources, Inc. (Vastar) and
consisted of natural gas produced by Vastar.
Sales to related parties were as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
(MILLIONS) 2000 1999 2000 1999
-------- ------- --------- --------
<S> <C> <C> <C> <C>
BP Amoco....................................................... $ 180 $ -- $ 180 $ --
Southern Company Energy Marketing.............................. 319 191 546 356
Other.......................................................... 23 -- 37 --
-------- ------- --------- --------
$ 522 $ 191 $ 763 $ 356
======== ======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Purchases from related parties were as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- -----------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
BP Amoco.................................................. $ 185 $ -- $ 185 $ --
Southern Company Energy Marketing......................... 27 17 49 33
Other..................................................... 5 -- 5 --
------- ------- -------- --------
$ 217 $ 17 $ 239 $ 33
======= ======= ======== ========
</TABLE>
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.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
six-month periods ended June 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
(MILLIONS) 2000 1999 2000 1999
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Net income..................................................... $ 1,855 $ 313 $ 2,472 $ 478
Other comprehensive income:
Net unrealized gain (loss) on investments (a)............... (115) 104 14 215
Foreign currency translation adjustment..................... (72) (9) (77) 184
-------- ------- --------- --------
Comprehensive income .......................................... $ 1,668 $ 408 $ 2,409 $ 877
======== ======= ========= ========
</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 $735
million at June 30, 2000, compared to a fair value of approximately $714
million at December 31, 1999. The unrealized pretax gain in the LUKOIL
investment at June 30, 2000, was $393 million.
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at June 30, 2000 and December 31, 1999 was as follows:
(MILLIONS) JUNE 30, DECEMBER 31,
2000 1999
--------- --------------
Net unrealized gain on investments............... $ 242 $ 228
Foreign currency translation adjustment.......... (107) (30)
Minimum pension liability........................ (31) (31)
--------- -------------
Accumulated other comprehensive income........... $ 104 $ 167
========= =============
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE E. SALE OF ALASKAN OPERATIONS
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 totalling approximately $5.8
billion and realized an after-tax gain of approximately $1.8 billion. The net
book value of those assets at the 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.
The following table sets forth the operating results for the Alaskan oil
and gas producing and marine transportation businesses included in ARCO's
financial statements for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
(MILLIONS) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Sales and other operating revenues*.......................... $ 191 $ 346 $ 811 $ 584
------- ------- ------- -------
Total revenues............................................... 204 349 827 591
------- ------- ------- -------
Expenses
Operating expenses........................................... 13 57 67 116
Depreciation, depletion and amortization..................... 22 73 97 152
Exploration expenses......................................... 6 19 23 31
Taxes other than income taxes................................ 19 52 101 96
------- ------- ------- -------
Total expenses............................................ 60 201 288 395
------- ------- ------- -------
Income from continuing operations before income taxes and
minority interest........................................... $ 144 $ 148 $ 539 $ 196
======= ======= ======= =======
*Before elimination of intercompany transfers.................. $ 179 $ 302 $ 749 $ 491
======= ======= ======= =======
</TABLE>
--------------
NOTE F. INTERIM SEGMENT INFORMATION.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------------------
(MILLIONS) EXPLORATION REFINING & ALL
& PRODUCTION MARKETING OTHER UNALLOCATED TOTAL
-------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues........... $ 1,932 $ 2,418 $ 6 $ 144 $ 4,500
Intersegment revenues........................ (197) -- (1) (2) (200)
-------------- ------------ --------- ------------ ----------
Total........................................ $ 1,735 $ 2,418 $ 5 $ 142 $ 4,300
============== ============ ========= ============ ==========
Income from continuing operations before
gain on sale of Alaskan operations........ $ 317 $ 61 $ 5 $ (386) $ (3)
Gain on sale of Alaskan operations........... 1,815 -- -- -- 1,815
-------------- ------------ --------- ------------ ----------
Income from continuing operations............ 2,132 61 5 (386) 1,812
Income from discontinued operations.......... -- -- -- 43 43
-------------- ------------ --------- ------------ ----------
Net income................................... $ 2,132 $ 61 $ 5 $ (343) $ 1,855
============== ============ ========= ============ ==========
Segment assets............................... $ 14,274 $ 4,386 $ 995 $ 7,527 $ 27,182
============== ============ ========= ============ ==========
December 31, 1999
---------------------
Segment assets............................... $ 18,752 $ 4,695 $ 916 $ 1,909 $ 26,272
============== ============ ========= ============ ==========
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------
(MILLIONS) EXPLORATION REFINING & ALL
& 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
============== ============ ========= ============ ==========
Net income.................................. $ 174 $ 206 $ 24 $ (91) $ 313
============== ============ ========= ============ ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------------------
(MILLIONS) EXPLORATION REFINING & ALL
& PRODUCTION MARKETING OTHER UNALLOCATED TOTAL
-------------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues.......... $ 4,323 $ 4,667 $ 14 $ 238 $ 9,242
Intersegment revenues....................... (853) -- (1) (3) (857)
-------------- ------------ --------- ------------ -----------
Total....................................... $ 3,470 $ 4,667 $ 13 $ 235 $ 8,385
============== ============ ========= ============ ===========
Income from continuing operations before
gain on sale of Alaskan operations....... $ 918 $ 131 $ 19 $ (454) $ 614
Gain on sale of Alaskan operations.......... 1,815 -- -- -- 1,815
-------------- ------------ --------- ------------ -----------
Income from continuing operations........... 2,733 131 19 (454) 2,429
Income from discontinued operations......... -- -- -- 43 43
-------------- ------------ --------- ------------ -----------
Net income.................................. $ 2,733 $ 131 $ 19 $ (411) $ 2,472
============== ============ ========= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------
(MILLIONS) EXPLORATION REFINING & ALL
& 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
============== ============= ========= ============= ==========
Net income.................................. $ 263 $ 335 $ 48 $ (168) $ 478
============== ============= ========= ============= ==========
</TABLE>
For the second quarter ended June 30, 2000 discontinued operations
consisted of an adjustment to the estimated loss provision recorded prior to
second quarter 2000 for the net loss on the sale of ARCO's U.S. and Australian
coal assets. With the sale of ARCO's remaining Australian assets in the second
quarter of 2000 the disposition of ARCO's U.S. and Australian coal assets was
completed.
The amortization associated with a gain deferred in conjunction with the
sale of the chemicals operations had a favorable impact of approximately $17
million and $18 million after tax on Refining and Marketing earnings in the
second quarter 2000 and 1999, respectively. The after-tax favorable impact for
the first six months of 2000 and 1999 was approximately $37 million and $27
million, respectively.
NOTE G. INVESTMENTS.
At June 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 10 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 June 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 (loss).
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following summarizes investments in securities, at June 30:
(MILLIONS) 2000 1999
--------- --------
Aggregate fair value............................... $ 1,533 $ 1,468
Gross unrealized holding losses.................... 11 14
Gross unrealized holding gains..................... (404) (242)
--------- --------
Amortized cost..................................... $ 1,140 $ 1,240
========= ========
Investment activity for the six-month periods ended June 30 was as
follows:
(MILLIONS) 2000 1999
---------- ----------
Gross purchases.................................... $ 5,943 $ 10,906
Gross sales........................................ 26 776
Gross maturities................................... 5,909 9,938
Gross realized gains and loss were determined by the specific
identification method and for the three- and six-month periods ended June 30,
2000 and 1999, were insignificant.
NOTE H. INVENTORIES.
Inventories at June 30, 2000 and December 31, 1999 comprised the
following:
JUNE 30, DECEMBER 31,
(MILLIONS) 2000 1999
--------- -------------
Crude oil and petroleum products................... $ 7* $ 199
Aluminum products.................................. 73 --
Other products..................................... 26 26
Materials and supplies............................. 136 205
--------- -------------
Total........................................... $ 242 $ 430
========= =============
--------------
* Includes a $96 million credit for a temporary gain on LIFO liquidation.
Consistent with the company's historical practice, this amount has not
been recognized in income because inventory levels are expected to
increase by December 31, 2000, resulting in minimal or no gain on
liquidation for the full year.
NOTE I. CAPITAL STOCK.
Detail of the Company's capital stock was as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(THOUSANDS) 2000 1999
------------ --------------
<S> <C> <C>
$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
=========== =============
</TABLE>
NOTE J. CAPITALIZATION OF INTEREST.
Interest expense excluded capitalized interest of $3 million and $49
million, respectively, for the three-month periods ended June 30, 2000 and 1999,
and $39 million and $88 million, respectively, for the six-month periods ended
June 30, 2000 and 1999.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE K. UNUSUAL ITEMS.
The company recorded as unusual items $639 million before tax in
conjunction with the merger into BP Amoco (See Note B), comprised of the
following:
($ MILLIONS)
Personnel terminations............................................ $311
Facilities closure................................................ 100
Stock-related compensation........................................ 98
Merger costs...................................................... 77
UK shutdown costs................................................. 44
Other shutdown costs.............................................. 9
------
$639
======
Personnel termination costs 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 accrual did not
include costs related to the termination of foreign national employees. This
represents specific employee terminations identified as of June 30, 2000;
further charges may be necessary in future periods if additional terminations
become known.
The following table summarizes the liabilities related to the
terminations that resulted from ARCO's merger into BP Amoco:
(MILLIONS)
FUNDED UNFUNDED
SHORT-TERM LONG-TERM LONG-TERM
BENEFITS (a) BENEFITS (b) BENEFITS (C) TOTAL
-------------- ------------ ------------- --------
$98 $171 $42 $311
--------------
(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, 2000, approximately 300 employees have been terminated
and approximately $5 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. 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.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 June 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.
UNION TEXAS PETROLEUM HOLDINGS, INC. (UTP) RESTRUCTURE.
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 June 30, 2000, ARCO had terminated 355 of the
employees and had paid out a total of $83 million in severance benefits.
NOTE L. INCOME TAXES.
Provision (benefit) for taxes on income:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ----------------
(MILLIONS) 2000 1999 2000 1999
-------- --------- -------- -------
Federal:
Current.................... $ 1,269 $ 124 $ 1,413 $ 165
Deferred................... (564) 20 (550) 31
-------- --------- -------- -------
705 144 863 196
-------- --------- -------- -------
Foreign:
Current.................... 84 67 219 112
Deferred................... (17) (33) (78) (50)
-------- --------- -------- -------
67 34 141 62
-------- --------- -------- -------
State:
Current.................... 190 23 229 35
Deferred................... (55) 1 (55) 2
-------- --------- -------- -------
135 24 174 37
-------- --------- -------- -------
Total...................... $ 907 $ 202 $ 1,178 $ 295
======== ========= ======== =======
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2000 1999
-------------------- ---------------------
PERCENT
OF PERCENT
PRETAX OF PRETAX
(MILLIONS) AMOUNT INCOME AMOUNT INCOME
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Income from continuing operations before income taxes and
minority interest................................................. $ 2,744 100.0 $ 524 100.0
========= ======== ========= ==========
Tax at federal statutory rate..................................... $ 960 35.0 $ 183 35.0
Increase (reduction) in taxes resulting from:
Sale of Alaskan operations..................................... (213) (7.8) -- --
Taxes on foreign income in excess of statutory rate............ 9 0.3 22 4.2
State income taxes (net of federal effect)..................... 88 3.2 16 3.1
Tax credits.................................................... (26) (0.9) (26) (5.0)
Other.......................................................... 89 3.3 7 1.2
--------- -------- --------- ----------
Provision for taxes on income.................................... $ 907 33.1 $ 202 38.5
========= ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2000 1999
-------------------- ---------------------
PERCENT
OF PERCENT
PRETAX OF PRETAX
(MILLIONS) AMOUNT INCOME AMOUNT INCOME
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Income from continuing operations before income taxes and
minority interest................................................. $ 3,646 100.0 $ 785 100.0
========= ========= ========= ==========
Tax at federal statutory rate..................................... $ 1,276 35.0 $ 275 35.0
Increase (reduction) in taxes resulting from:
Sale of Alaskan operations..................................... (213) (5.8) -- --
Taxes on foreign income in excess of statutory rate............ (31) (0.9) 43 5.5
State income taxes (net of federal effect)..................... 113 3.1 24 3.1
Tax credits.................................................... (55) (1.5) (50) (6.4)
Other.......................................................... 88 2.4 3 0.4
--------- --------- --------- ----------
Provision for taxes on income..................................... $ 1,178 32.3 $ 295 37.6
========= ========= ========= ==========
</TABLE>
NOTE M. DISCONTINUED OPERATIONS.
In the second quarter of 2000, ARCO disposed of its remaining coal assets
in Australia. As part of the acquisition of UTP, ARCO sold the UTP 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.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE O. SUPPLEMENTAL INCOME STATEMENT INFORMATION.
Taxes other than income taxes comprised the following:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -----------------
(MILLIONS) 2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Production/severance................. $ 69 $ 52 $ 165 $ 92
Property............................. 25 34 61 69
Other................................ 31 30 76 75
-------- -------- ------- --------
Total............................. $ 125 $ 116 $ 302 $ 236
======== ======== ======= ========
</TABLE>
NOTE P. SUPPLEMENTAL CASH FLOW INFORMATION.
Following is supplemental cash flow information for the six months ended
June 30, 2000 and 1999:
SIX MONTHS ENDED
JUNE 30,
--------------------
(MILLIONS) 2000 1999
--------- ---------
Gross sales and maturities of short-term investments..... $ 114 $ 45
Gross purchases of short-term investments................ (25) (56)
--------- ---------
Net cash (used) provided by short-term investments....... $ 89 $ (11)
========= =========
Gross proceeds from issuance of notes payable............ $ 3,697 $ 6,206
Gross repayments of notes payable........................ (5,371) (7,104)
--------- ---------
Net cash used by notes payable.......................... $ (1,674) $ (898)
========= =========
Gross noncash provisions charged to income............... $ 718 $ 104
Cash payments of previously accrued items................ (304) (281)
--------- ---------
Cash payments greater (less) than noncash provisions..... $ 414 $ (177)
========= =========
Interest paid............................................ $ 216 $ 176
========= =========
Income taxes paid........................................ $ 204 $ 286
========= =========
Changes in working capital accounts for the six-month periods ended June
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
(MILLIONS) 2000 1999
---------- ----------
<S> <C> <C>
Changes in working capital--increase (decrease) to cash:
Accounts receivable........................................................ $ 116 $ (137)
Inventories................................................................ 209 (14)
Accounts payable........................................................... 23 (173)
Taxes payable.............................................................. 1,540 125
Other working capital...................................................... (130) (212)
---------- ----------
Total.................................................................... $ 1,758 $ (411)
========== ==========
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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:
o Remove or mitigate the effects on the environment at various sites
from the disposal or release of certain substances;
o Perform restoration work at such sites; and
o 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 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:
o Nature and extent of contamination;
o Timing, extent and method of the remedial action;
o ARCO's proportional share of costs; and
o Financial condition of other responsible parties.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The environmental remediation accrual is updated annually, at a minimum,
and at June 30, 2000, was $758 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.
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 ALASKAN PIPELINE ASSETS
In August 2000 ARCO completed the sale of its Alaskan pipeline assets for
proceeds totaling approximately $300 million and expects to record an after-tax
gain on the sale of approximately $31 million in the third quarter of 2000. The
net book value of the Alaskan pipeline assets at June 30, 2000 was approximately
$260 million.
NOTE S. MERGER AGREEMENT BETWEEN ARCO AND VASTAR RESOURCES, INC.
ARCO and Vastar entered into a merger agreement, dated May 24, 2000. The
agreement provides for the acquisition by ARCO of Vastar's publicly-held
minority stockholding at a price of $83 per share. The merger has been approved
by the Vastar board of directors. The merger is contingent on the approval by
the holders of at least two-thirds of the Vastar shares not held by ARCO at a
meeting scheduled for late summer 2000.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2000 VS. SECOND 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 increased in the second quarter of 2000 to $1,855 million, up
from $313 million reported in the second quarter of 1999. Operating results
excluding special items increased to $457 million, compared to $302 million in
the 1999 second quarter. The increase in operating results primarily reflected
higher natural gas prices and lower exploration expenses partially offset by
lower refining and marketing margins. While crude oil prices were considerably
higher than the second quarter 1999, that impact was essentially offset by
substantially lower production volumes that resulted primarily from the sale of
the Alaskan crude oil producing properties in the second quarter of 2000.
Interest income on proceeds from the Alaskan asset sale was the primary reason
for the improvement in unallocated operating results.
The 2000 second quarter special items included an after-tax gain of $1.8
billion 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 $460 million after tax consisting
primarily of charges associated with the costs related to the merger with BP
Amoco and future environmental remediation costs offset by a net gain on other
asset sales. Charges related to the merger included executive and employee
termination costs, facility abandonment costs and outside consultants. The 1999
second quarter included a net benefit of $11 million after tax from special
items.
AFTER-TAX SEGMENT EARNINGS
<TABLE>
<CAPTION>
2000
-------------------------------------------------
LESS:
SPECIAL ITEMS
(CHARGE) OPERATING
(MILLIONS) NET INCOME BENEFIT RESULTS
--------------- --------------- ---------------
<S> <C> <C> <C>
Exploration and production........................... $ 317 $ (52) $ 369
Refining and marketing............................... 61 (64) 125
Other operations..................................... 5 (14) 19
Interest expense..................................... (80) -- (80)
Other unallocated expenses........................... (306) (330) 24
--------------- --------------- ---------------
Income from continuing operations before gain on
sale of Alaskan operations........................ (3) (460) 457
Gain on sale of Alaskan operations................... 1,815 1,815 --
Discontinued operations.............................. 43 43 --
--------------- --------------- ---------------
Net income........................................ $ 1,855 $ 1,398 $ 457
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------
LESS:
SPECIAL ITEMS
(CHARGE) OPERATING
(MILLIONS) NET INCOME BENEFIT RESULTS
--------------- --------------- ---------------
<S> <C> <C> <C>
Exploration and production........................... $ 174 $ 5 $ 169
Refining and marketing............................... 206 -- 206
Other operations..................................... 24 -- 24
Interest expense..................................... (71) -- (71)
Other unallocated expenses........................... (20) 6 (26)
--------------- --------------- ---------------
Net income........................................ $ 313 $ 11 $ 302
=============== =============== ===============
</TABLE>
17
<PAGE>
EXPLORATION AND PRODUCTION
ARCO's earnings from worldwide oil and gas exploration and production
operations in the second quarter of 2000 were impacted by higher natural gas
prices and the sale of the Alaskan oil and gas producing operations on April 28,
2000. Higher crude oil prices were offset by significantly lower production
volumes that primarily resulted from the sale of the Alaskan oil producing
properties. The results in the 2000 second quarter also included charges of $132
million after tax associated with the costs of employee terminations and the
closing of offices in England and Texas, partially offset by a net gain of $80
million after tax from the sale of various assets which included ARCO Long
Beach, Inc. and various international oil and gas properties. Depreciation,
depletion and amortization expense was $60 million lower primarily as a result
of the sale of the Alaskan oil and gas producing operations. Exploration expense
declined $44 million primarily as a result of lower writeoffs for dryholes and
lower other exploration expenses associated with ARCO's international oil and
gas operations.
AVERAGE OIL AND GAS PRICES
2000 1999
---------- ----------
U.S.
Petroleum liquids--per barrel (bbl)
Alaska............................................. $ 22.21 $ 10.44
Lower 48, including Vastar......................... $ 23.07 $ 13.59
Composite average price............................ $ 23.01 $ 11.43
Natural gas--per thousand cubic feet (mcf)............ $ 3.03 $ 1.85
International
Petroleum liquids composite average--per bbl....... $ 20.90 $ 12.88
Venezuela crude oil--per bbl....................... $ 10.85 $ 3.95
Natural gas (excluding LNG)--per mcf............... $ 2.02 $ 2.03
Indonesia LNG--per mcf............................. $ 5.05 $ 3.03
PETROLEUM LIQUIDS AND NATURAL GAS PRODUCTION
Net Production
2000 1999
----------- -----------
U.S.
Petroleum liquids--bbl/day
Alaska........................................... 102,200 316,700
Vastar........................................... 72,500 59,700
Other Lower 48................................... 57,900 85,600
----------- -----------
Total.......................................... 232,600 462,000
----------- -----------
Natural gas--mcf/day............................... 1,205,000 1,259,000
Barrels of oil equivalent--(BOE)/day*.............. 433,500 671,900
International
Petroleum liquids--bbl/day......................... 128,000 150,000
Natural gas--mcf/day............................... 1,119,700 1,033,300
BOE/day............................................ 314,600 322,200
Total net production--BOE/day...................... 748,100 994,100
--------------
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
The decline in Alaskan petroleum liquids production reflected the sale of
the Alaskan oil and gas producing operations in April 2000. The increase in
Vastar's petroleum liquids production resulted from the startup of
production from the Mississippi Canyon 764 block in the second quarter of 2000.
The decline in other Lower 48
18
<PAGE>
petroleum liquids production primarily reflected the sale of ARCO Long Beach,
Inc. in the second quarter of 2000. The decreased international petroleum
liquids volumes primarily reflected lower Indonesian and North African
production volumes. The Indonesian decrease resulted from the impact of higher
crude oil prices on production sharing contracts. The decreased North African
production reflected the sale of ARCO's interests in Tunisia and ARCO's 40%
interest in an Algerian oil field.
The increase in international natural gas volumes in 2000 reflected
higher production from the United Kingdom North Sea fields, partially offset by
lower production from Indonesia, which reflected the impact of higher natural
gas prices on production sharing contracts. The 2000 decrease in U.S. natural
gas volumes primarily reflected natural field decline for some of Vastar's
fields.
REFINING AND MARKETING
The decline in second quarter 2000 earnings primarily resulted from lower
margins. Higher product prices were more than offset by higher crude oil costs.
Second quarter 2000 results included special items charges of $64 million for
employee termination costs and future environmental remediation and legal costs.
A net after-tax loss of $52 million on the sale of ARCO Marine, Inc. was offset
by a gain on the sale of Alaskan crude oil inventory sold as part of the sale of
the Alaskan oil and gas producing operations. Increased gasoline sales 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 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 pretax gain on the sale of the ARCO Chemical interest in
1998 had a net favorable impact of approximately $17 million and $18 million
after tax on refining and marketing earnings in the second 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.
WEST COAST PETROLEUM PRODUCTS SALES
<TABLE>
<CAPTION>
VOLUMES (BARRELS/DAY) 2000 1999
--------------------- ---------- ----------
<S> <C> <C>
Gasoline.............................................. 340,100 316,200
Jet................................................... 95,300 104,200
Distillate............................................ 89,600 79,700
Other................................................. 76,500 89,100
---------- ----------
Total................................................. 601,500 589,200
========== ==========
</TABLE>
OTHER OPERATIONS
The 2000 and 1999 results included earnings from Lower 48 pipeline
operations and an aluminum rolling facility. The decline in 2000 earnings
reflected lower pipeline revenues and equity earnings partially offset by lower
operating costs.
DISCONTINUED OPERATIONS
Earnings from discontinued operations in the second 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 U.S. and Australian coal assets.
CONSOLIDATED REVENUES
(MILLIONS) 2000 1999
-------- --------
Sales and other operating revenues
Exploration and production....................... $ 1,932 $ 1,549
Refining and marketing........................... 2,418 1,819
Other............................................ 150 15
Intersegment eliminations........................ (200) (336)
-------- --------
Total.......................................... $ 4,300 $ 3,047
======== ========
19
<PAGE>
The increase in exploration and production sales revenues 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 in the second quarter of 2000 reflected the
purchases of Alaskan crude oil by the refining and marketing operations as third
party and related 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.
Exploration expense declined $43 million in 2000 primarily as a result of
lower writeoffs for dryholes and lower other exploration expenses associated
with ARCO's international oil and gas operations.
Depreciation, depletion and amortization (DD&A) expense in the second
quarter of 2000 declined primarily as a result of the sale of the Alaskan oil
and gas producing operations in late April 2000.
Taxes other than excise and income increased only slightly, as the crude
oil price increase was mostly offset by lower production volumes resulting
primarily from the sale of the company's Alaskan oil and gas operations.
The unusual items in the second quarter of 2000 resulted from charges for
the costs associated with the BP Amoco merger, including executive and employee
terminations, facilities abandonment, and outside consultants. See Note K of
notes to consolidated financial statements for additional information.
INCOME TAXES
The Company's effective tax rate was 33.1% in the second quarter 2000,
compared to 38.5% in the 1999 second quarter. The effective tax rate in the
second quarter of 2000 was lower than the federal statutory rate, primarily as a
result of a lower effective tax rate associated with the sale of the Alaskan oil
and gas operations, partially offset by state income taxes and other items.
SIX-MONTH PERIOD ENDED JUNE 30, 2000 VS. SAME SIX-MONTH PERIOD 1999
CONSOLIDATED EARNINGS
Net income increased to $2,472 million, up from $478 million reported for
the first six months of 1999. Operating results excluding special items
increased to $1,040 million, compared to $474 million for the first six months
of 1999. The increase in operating results primarily reflected higher crude oil
and natural gas prices, partially offset by lower refining and marketing
margins.
Special items for the first six months of 2000 included 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 lawsuits, offset by a
net gain on other asset sales. The first six months of 1999 included a net
benefit of $4 million after tax from special items.
20
<PAGE>
After-tax Segment Earnings
<TABLE>
<CAPTION>
2000
-------------------------------------------------
LESS:
SPECIAL ITEMS
(CHARGE) OPERATING
(MILLIONS) NET INCOME BENEFIT RESULTS
--------------- --------------- ---------------
<S> <C> <C> <C>
Exploration and production........................... $ 918 $ 6 $ 912
Refining and marketing............................... 131 (87) 218
Other operations..................................... 19 (14) 33
Interest expense..................................... (159) -- (159)
Other unallocated expenses........................... (295) (331) 36
--------------- --------------- ---------------
Income from continuing operations before Gain on
sale of Alaskan operations........................ 614 (426) 1,040
Gain on sale of Alaskan operations................... 1,815 1,815 --
Discontinued operations.............................. 43 43 --
--------------- --------------- ---------------
Net income........................................ $ 2,472 $ 1,432 $ 1,040
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------
LESS:
SPECIAL ITEMS
(CHARGE) OPERATING
(MILLIONS) NET INCOME BENEFIT RESULTS
--------------- --------------- ---------------
<S> <C> <C> <C>
Exploration and production........................... $ 263 $ 5 $ 258
Refining and marketing............................... 335 (2) 337
Other operations..................................... 48 -- 48
Interest expense..................................... (141) -- (141)
Other unallocated expenses........................... (27) 1 (28)
--------------- --------------- ---------------
Net income........................................ $ 478 $ 4 $ 474
=============== =============== ===============
</TABLE>
CONSOLIDATED REVENUES
(MILLIONS) 2000 1999
-------- ---------
Sales and other operating revenues
Exploration and production........................... $ 4,323 $ 2,853
Refining and marketing............................... 4,667 3,125
Other................................................ 252 34
Intersegment eliminations............................ (857) (550)
-------- ---------
Total.............................................. $ 8,385 $ 5,462
======== =========
The increase in exploration and production sales revenues for the first
six 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 for the six months ended June 30, 2000
reflected the purchases of Alaskan crude oil by the refining and marketing
operations as third party and related 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 as a result of the sale of the Alaskan oil
and gas producing operations in late April 2000.
21
<PAGE>
The decreased exploration expense for the first six 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 offshore wells in the first quarter of 2000.
The lower selling, general and administrative expenses for the first six
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's effective tax rate was 32.3% for the first six months of
2000, compared to 37.6% for the same period in 1999. The 2000 effective tax rate
was lower than the federal statutory rate, primarily as a result of a lower
effective tax rate associated with the sale of the Alaskan oil and gas
operations, partially offset by state income taxes.
AVERAGE OIL AND GAS PRICES
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- ---------
U.S.
Petroleum liquids--per bbl
Alaska................................................ $ 21.26 $ 8.17
Lower 48, including Vastar............................ $ 23.14 $ 11.66
Composite average price............................... $ 22.15 $ 9.24
Natural gas--per mcf.................................... $ 2.62 $ 1.72
International
Petroleum liquids--per bbl.............................. $ 21.62 $ 10.83
Venezuela crude oil--per bbl............................ $ 11.40 $ 3.47
Natural gas (excluding LNG)--per mcf.................... $ 2.22 $ 2.27
Indonesia LNG--per mcf.................................. $ 5.08 $ 2.65
PETROLEUM LIQUIDS AND NATURAL GAS PRODUCTION
NET PRODUCTION 2000 1999
--------------- ------------ ------------
U.S.
Petroleum liquids--bbl/day
Alaska....................................... 204,700 330,900
Vastar....................................... 69,700 57,800
Other Lower 48............................... 66,800 88,900
Total...................................... 341,200 477,600
Natural gas--mcf/day........................... 1,232,200 1,308,800
Barrels of oil equivalent--(BOE)/day*.......... 546,600 695,700
International
Petroleum liquids--bbl/day..................... 134,700 164,000
Natural gas--mcf/day........................... 1,190,600 1,162,200
BOE/day........................................ 333,100 357,700
Total net production--BOE/day.................. 879,700 1,053,400
--------------
* Natural gas converted at the ratio of 6 mcf to 1 barrel of liquid.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
(MILLIONS) 2000
----------
Cash flow provided (used) by:
Operations............................................ $ 2,166
Investing activities.................................. $ (992)
Financing activities.................................. $ (1,898)
The net cash used by investing activities in the first six months of 2000
included an increase in net receivable from BP Amoco of $5.5 billion and
expenditures for additions to fixed assets of $1.2 billion, offset by proceeds
from asset sales of $6.1 billion primarily associated with the sale of the
Alaska oil and gas operations.
The net cash provided by financing activities in the first six months of
2000 primarily included a decrease of $1.7 billion in the Company's short-term
debt position and first quarter 2000 dividend payments of $232 million.
Cash and cash equivalents and short-term investments totaled $394
million, there were no short-term borrowings at June 30, 2000 and long-term debt
due within one year was $42 million at the end of the second quarter of 2000.
The Company believes it has adequate resources and liquidity to fund
future cash requirements for working capital, capital expenditures, the proposed
buy-back of Vastar's publicly-held minority stockholding, 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 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.
Management cautions against projecting any future results based on
present earnings levels because of economic uncertainties, the extent and form
of existing or future governmental regulations and other possible actions by
governments.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
1. Reference is made to the disclosure regarding the VASTAR action
described on page 18 of ARCO's Report on Form 10-Q for the quarter ended March
31, 2000. On May 23, 2000, the parties to the stockholder litigation agreed in
principle on a settlement of the litigation, and executed a memorandum of
understanding to reflect the terms of the settlement. The parties agreed that
the $83 per share price approved by Vastar's Board of Directors on May 23, 2000
is fair, adequate and reasonable consideration for the shares of Vastar's common
stock held by the public. The parties also agreed to enter into a settlement
agreement, cooperate in public disclosures related to the settlement, and use
best efforts to gain approval of the settlement from the Delaware courts.
Without any admission of fault by any defendant, the memorandum of understanding
provides for a dismissal of all claims with prejudice and a release in favor of
all defendants of any and all claims that have been or could have been asserted
by the plaintiffs or any members of the purported class. The memorandum of
understanding also provides that the defendants will not oppose an application
by the plaintiffs' counsel to the Delaware court for an aggregate award of fees
and expenses in an amount not to exceed $2.1 million, which will be paid by
Vastar. The settlement is subject to, among other things, completion of
confirmatory discovery by the plaintiffs (which has occurred), execution of a
settlement agreement, final approval of the settlement by the Delaware court,
and completion of the merger.
2. Reference is made to the disclosure regarding the AGUILAR action
described on page 18 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 March 13, 2000, the plaintiffs filed a petition for review by
the California Supreme Court. On May 17, 2000, the California Supreme Court
granted review.
3. Reference is made to the purported class action styled MCMULLIN V.
BERAN, ET AL. (Case No. 16493NC) filed against ARCO, ET AL. relating to the
acquisition of ARCO Chemical by Lyondell described on page 18 of ARCO's Report
on Form 10-K for the year ended December 31, 1999. The plaintiff has appealed
the order of dismissal to the Delaware Supreme Court, and that court heard
arguments on the appeal on July 25, 2000.
4. Reference is made to the disclosure regarding the cost-recovery action
against ARCO 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. That settlement is due to be filed with the court during August, 2000.
5. On April 26, 2000 the United States District Court for the Central
District of California issued a subpoena for production of records to the grand
jury regarding the Company's compliance with underground storage tank
regulations at retail gasoline facilities. On May 8, 2000, the United States
District Court for the Eastern District of California issued a similar subpoena.
On May 8, 2000 the District Attorney of Stanislaus County, California informed
the Company that the California Regional Water Quality Control Board, Central
Valley Region and the Stanislaus County Department of Environmental Resources
had alleged that the Company had violated California statutes regarding
underground storage tanks, hazardous materials and unlawful business practices.
The Stanislaus District Attorney further advised, however, that no decision had
been made as to the filing of charges, pending discussions with the Company. On
May 17, 2000, the Los Angeles County Department of Public Works informed the
Company that it was investigating the Company's compliance with underground
storage tank regulations at certain of the Company's retail gasoline facilities
in Los Angeles County. On June 6, 2000, the California Attorney General,
pursuant to his statutory investigative powers, issued a subpoena for the
Company's records regarding underground storage tanks. Moreover, the Company is
in the process of conducting a comprehensive audit of all of its underground
storage tank facilities in California, Arizona, Nevada, Oregon, Utah and
Washington.
6. On June 20, 2000, ARCO(as successor to IS&R and Anaconda Lead Products
Company) was named as a defendant in a lawsuit, SPRING BRANCH INDEPENDENT SCHOOL
DISTRICT V. LEAD INDUSTRIES ASSOCIATION, ET AL.(Case No. 2000-31175), filed in
the District Court of Harris County, Texas. The complaint which also names a
trade association and seven other companies as former makers of lead paint or
lead components in paint asserts claims for strict liability, negligence,
fraudulent misrepresentation, negligent misrepresentation and indemnity. It
seeks to impose joint and several liability on defendants under theories of
conspiracy and concert of action for the cost of
24
<PAGE>
abating alleged lead-based paint hazards in the plaintiff's buildings. The
School District seeks compensatory and exemplary damages, attorneys fees and
costs.
On June 30, 2000, ARCO(as successor to IS&R and Anaconda Lead Products
Company) was named as a defendant in a lawsuit, HOUSTON INDEPENDENT SCHOOL
DISTRICT V. LEAD INDUSTRIES ASSOCIATION, ET AL.(Case No. 2000-33725), filed in
the District Court of Harris County, Texas. The complaint which also names a
trade association and seven other companies as former makers of lead paint or
lead components in paint asserts claims for strict liability, negligence,
fraudulent misrepresentation, negligent misrepresentation and indemnity. It
seeks to impose joint and several liability on defendants under theories of
conspiracy and concert of action for the cost of abating alleged lead-based
paint hazards in the plaintiff's buildings. The School District seeks
compensatory and exemplary damages, attorneys fees and costs.
On July 14, 2000, ARCO(named as successor to IS&R) was served as a
defendant in a purported class action lawsuit, MARY LEWIS, ET AL. V. LEAD
INDUSTRIES ASSOCIATION, INC., ET AL.(Case No. COCH09800), filed in the Circuit
Court of Cook County, Illinois. The complaint also names seven other companies
as alleged former manufacturers of lead pigment and a trade association. The
plaintiffs sue as parents of minor children and seek to represent a class for
medical screening of all minors between the ages of six months and six years
residing in Illinois housing built before 1978 and a class for medical
monitoring of certain persons between the ages of six months and twenty years
who resided in pre-1978 Illinois housing before six years of age and who are
found to have a specified blood lead level. The complaint asserts claims for
negligence, strict product liability, violation of the Illinois Consumer Fraud
Act, and fraud. The complaint seeks to impose joint and several liability on
defendants for the creation of medical screening and monitoring funds,
disclosure of research and a public education campaign and attorneys fees.
7. Reference is made to the Company's 1999 Form 10-K Report for
information on other legal proceeding matters reported therein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on July 11, 2000.
The stockholders elected all the Company's nominees for director, who constitute
the entire Board of Directors. The Stockholders also approved the appointment of
Ernst & Young L.L.P. as the Company's independent auditors for 2000. The votes
were as follows:
1. Election of Directors.
VOTES FOR WITHHELD
----------- --------
R. D. Adgern................ 326,381,578 19,488
J. G. Nemeth................ 326,382,586 18,480
J. F. Campbell.............. 326,381,578 19,488
2. Appointment of Ernst & Young L.L.P.
For 326,378,698
Against 8,480
Abstain 13,888
25
<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 or 8-K/A were filed during the
quarter ended June 30, 1999 and through the date hereof.
DATE OF REPORT ITEM NO. FINANCIAL STATEMENTS
-------------- -------- --------------------
April 14, 2000 5 None
April 25, 2000 1 and 4 None
May 11, 2000 4 None
26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC RICHFIELD COMPANY
(Registrant)
Dated: August 11, 2000 /s/ CHARLES L. HALL
------------------------------
Charles L. Hall
ASSISTANT CONTROLLER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
27
