ITEM 3. LEGAL PROCEEDINGS
THE COMPANY
On March 23, 1979, in the case of Van Vranken, et al. v. Atlantic Richfield, two California service station dealers purporting to represent a class of all resellers of gasoline, aviation fuels, butane and propane sued the Company in the United States District Court for the Northern District of California (Case No. C-79-0627-SW) for allegedly willfully violating the Department of Energy's ("DOE") 1973-1981 price regulations by unlawfully inflating its costs of crude oil eligible for recovery. On March 25, 1986, the District Court certified the plaintiffs as representatives of the class. In September 1993, the United States Court of Appeals for the Federal Circuit affirmed, without opinion, the trial court's judgment against ARCO. In October 1994, the Court of Appeals denied the Company's request for reconsideration. The parties have settled the case and the settlement has been approved by the District Court.
On June 7, 1989, the City of New York, the New York City Housing Authority and the New York City Health and Hospitals Corporation brought suit in the Supreme Court of the State of New York for the County of New York (Case No. 14365/89) against six alleged former lead pigment manufacturers or their successors (including ARCO as successor to International Smelting and Refining Company ("IS&R"), a former subsidiary of The Anaconda Company), and the Lead Industries Association ("LIA"), a trade association. Plaintiffs seek to recover damages in excess of $50 million including (i) past and future costs of abating lead-based paint from housing owned by New York City and the New York City Housing Authority; (ii) other costs associated with dealing with the presence of lead-based paint in that housing and privately owned housing; and (iii) any amounts paid by the City or the Housing Authority to tenants because of injuries caused by the ingestion of lead-based paint. Plaintiffs also seek punitive damages and attorney fees. The court has dismissed plaintiffs' negligence and strict liability claims and, pursuant to stipulation, dismissed with prejudice plaintiffs' claims for indemnification arising from third-party personal injury claims resolved before March 15, 1993, and dismissed without prejudice claims for indemnification brought after that date. On June 2, 1994, the trial court entered an order dismissing plaintiffs' remaining claims for restitution and indemnification, from which plaintiffs noticed an appeal on June 20, 1994. Plaintiffs' only remaining claim in the trial court is their fraud claim.
On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to a purported class action suit pending in the Court of Common Pleas in Cuyahoga County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case No. 236835), which seeks on behalf of the three named plaintiffs, and all other persons similarly situated in the state of Ohio, money damages for injuries allegedly suffered from exposure to lead paint, punitive damages, and an order requiring defendants to remove and abate all lead paint applied to any building in Ohio. The suit names as defendants, in addition to ARCO, the LIA and 16 companies alleged to have participated in the manufacture and sale of lead pigments and paints and includes causes of action for strict product liability, negligence, breach of warranty, fraud, nuisance, restitution, negligent infliction of emotional distress, and enterprise, market share and alternative liability. On July 29, 1993, the Court entered an order granting defendants' motion to dismiss the complaint on the grounds that Ohio law does not recognize market share, enterprise, or alternative liability causes of action in this case. On December 8, 1994, the Ohio State Court of Appeals reversed the final court's rulings on market share and alternative liability and affirmed its ruling on enterprise liability. On January 13, 1995, defendants' motion asking the Court of Appeals to reconsider its decision was denied.
In addition, the Company is a defendant in several lawsuits brought by individuals that allege injury from exposure to lead paint. These cases, in the aggregate, are not material to the financial condition of the Company.
ENVIRONMENTAL PROCEEDINGS
As discussed under the caption "Environmental Matters," ARCO is currently participating in environmental assessments and cleanups at numerous operating and non-operating sites under Superfund and comparable state laws, RCRA and other state and local laws and regulations, and pursuant to third party indemnification requests, and is the subject of material legal proceedings relating to certain of these sites. See "Environmental Matters--Material Environmental Litigation." Set forth below is a description, in accordance with SEC rules, of certain fines and penalties imposed by governmental agencies in respect of environmental rules and regulations.
ARCO Chemical has discovered that certain organic waste material is situated in the soil and ground water at portions of its Monaca, Pennsylvania (Beaver Valley) plant. In 1994, ARCO Chemical entered into a Consent Order and Agreement (the "Consent Agreement") with the Pennsylvania Department of Environmental Resources ("PADER") pursuant to which ARCO Chemical and PADER agreed upon a work plan for testing and remedial process design with regard to the conditions at the plant. Under the terms of the Consent Agreement, ARCO Chemical paid civil penalties totaling $363,000 in 1994. Under the terms of the Consent Agreement, ARCO Chemical must pay an additional penalty of $63,000 each year until the commencement of active remediation at the plant, after which the amount of such annual penalty shall be reduced based on the extent of remediation commenced at the plant. ARCO Chemical has an agreement with Beazer East, Inc., the successor to Koppers Inc. (the previous owner of the Beaver Valley plant), whereby Beazer East, Inc. agreed to pay for approximately 50 percent of the cost of the remediation.
ARCO and Snyder Oil Corporation received Notices of Violation ("NOV") from the United States Environmental Protection Agency Region VIII alleging that certain equipment at the Riverton Dome Gas Plant had been installed and operated without permits required by the Clean Air Act's Prevention of Significant Deterioration regulations. ARCO's NOV related to the period of time during which ARCO owned and operated the plant; Snyder's related to the period of time after it purchased the plant from ARCO. ARCO and Snyder entered into a consent decree with the United States to settle these claims; the decree has now been entered by the court. The decree assessed the penalty against both ARCO and Snyder without specifying an allocation between the two; pursuant to the indemnity provisions of the purchase and sale agreement between it and Snyder, ARCO paid Snyder's portion of the penalty also; the civil penalty agreed to in the decree totalled $875,000.
In January 1994, the California Air Resources Board ("CARB") requested information regarding any failure by a terminal, within the period starting January 1, 1992 and ending December 31, 1993, to meet CARB's minimum additive injection standards for gasoline. CARB's regulations require monthly records at each terminal of the volume of each grade of gasoline, the volume of additive injected, and the minimum volume of additive required, as a way of monitoring compliance. Although some terminals' monthly records showed less than the minimum amount of additive injected during one month in 1992, the other terminals' monthly records demonstrated compliance with CARB's minimum additive injection rules. Nonetheless, CARB has obtained the daily additive injection records from each terminal. These daily records were not maintained in a manner designed to measure compliance, because CARB's regulations required monthly, not daily, record keeping. If CARB is able to use these daily records to measure compliance for the last two years, ARCO believes that CARB may impose penalties for failure to comply; in such event, ARCO would negotiate with CARB the amount of such penalty.
On January 17, 1994, Southern California experienced a major earthquake that caused widespread property damage and major disruptions to utilities and highways. Certain of ARCO's assets located in the region experienced varying degrees of damage. A common carrier crude oil pipeline suffered ruptures, one of which was involved in a fire of unknown origin. In addition, there was one person injured, property damage, and oil spills into the Santa Clara and Los Angeles Rivers. Each of the Los Angeles District Attorney and the State of California Attorney General have notified the Company that pursuant to various state statutes, some of which impose liability without fault, penalties and damages in excess of $100,000 may be imposed on the Company. Negotiations are currently in progress. A class action lawsuit has been filed seeking damages in excess of $10 million plus punitive damages on behalf of individuals alleged to have been injured in the pipeline ruptures.
In addition to the matters reported herein, from time to time, certain of the Company's operating divisions and subsidiaries receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Such alleged violations may become the subject of enforcement actions or other legal proceedings and may involve monetary sanctions of $100,000 or more (exclusive of interest and costs).
TAX MATTERS
On December 23, 1994, the Internal Revenue Service issued a Notice of Deficiency for income tax relating to tax years 1983 through 1988. The Notice was issued shortly in advance of the expiration of the applicable statute of limitations. The aggregate amount of income tax asserted on the face of the Notice is $537 million plus interest. ARCO has paid to the Internal Revenue Service the amount of tax (and interest) that it believes is due and intends to file a petition in the U.S. Tax Court in March 1995 challenging the balance of the additional federal income tax set forth in the Notice.
OTHER LITIGATION
The Company and its subsidiaries are defendants in numerous suits in which they are not covered by insurance which involve smaller amounts than the matters described above. Although the legal responsibility and financial impact in respect to such litigation cannot be ascertained, it is not anticipated that these suits will result in the payment by the Company or its subsidiaries of monetary damages which in the aggregate would be material in relation to the net assets of the Company and its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1994.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of February 27, 1995.
- -------- (a) Division names used in the descriptions of business experience of executive officers of the Company are the names which were in effect at the time such officers held such positions. In some instances, divisions have been combined or reorganized and, accordingly, activities thereof are presently conducted under different division names.
(b) The By-Laws of the Company provide that each officer shall hold office until the officer's successor is elected or appointed and qualified or until the officer's death, resignation or removal by the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock is included in order to facilitate incorporation by reference of such description in filings by the Company under the federal securities laws.
Certain statements under this heading are summaries of provisions of the Certificate of Incorporation of ARCO, as adopted upon the reincorporation of the Company into a Delaware corporation on May 7, 1985, and do not purport to be complete. A copy of the Restated Certificate of Incorporation, as of June 27, 1994, is filed as an exhibit hereto. The summaries make use of certain terms defined in the Certificate of Incorporation and are qualified in their entirety by reference thereto.
The term "$3.00 Preference Stock" refers to the Company's $3.00 Cumulative Convertible Preference Stock, par value $1 per share. The term "$2.80 Preference Stock" refers to the Company's $2.80 Cumulative Convertible Preference Stock, par value $1 per share. The term "Preferred Stock" refers to the Company's Preferred Stock, par value $.01 per share; this class of Preferred Stock was authorized by stockholders on May 3, 1993. The term "Common Stock" refers to the Company's Common Stock, par value $2.50 per share.
The following is a summary of the capital stock of ARCO as of December 31, 1994.
- -------- * Excludes treasury stock.
Certain Treasury Stock Purchases. From time to time ARCO may purchase Common Stock on the open market and contribute it to treasury in order to satisfy its obligations upon conversion of the $3.00 and $2.80 Preference Stocks and upon exercise of stock options. In addition, in connection with ARCO's Capital Accumulation and Savings Plans, ARCO may from time to time purchase Common Stock on the open market and contribute it to treasury pending delivery of Common Stock in satisfaction of employer and employee contributions thereunder.
Power of Board to Determine Terms of Preferred Stock. Under the Certificate of Incorporation, as amended following approval by stockholders on May 3, 1993, the Board is authorized to issue, at any time or from time to time, one or more series of Preferred Stock at its discretion. In addition, the Board has the power to determine all designations, powers, preferences and the rights of such stock and any qualifications, limitations and restrictions, including but not limited to: (i) the designation of series and numbers of shares; (ii) the dividend rights, if any; (iii) the rights upon liquidation or distribution of the assets of the Company, if any; (iv) the conversion or exchange rights, if any; (v) the redemption provisions, if any; and (vi) the voting rights, if any.
So long as the Preference Stocks are outstanding, and only for that period of time, the rights of the Preferred Stock are subordinate to the rights of the holders of Preference Stocks.
Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80 Preference Stock are entitled to receive cumulative dividends at the annual rate of $3.00 per share and $2.80 per share, respectively, payable quarterly, before cash dividends are paid on the Preferred Stock, if any, and the Common Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock rank on a parity as to dividends. After provision for payment in full of cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference Stocks, and the payment in full of cumulative dividends on the outstanding Preferred Stock, if any, dividends may be paid on the Common Stock as the Board of Directors may deem advisable, within the limits and from the sources permitted by law.
Conversion Rights. Each share of $3.00 Preference Stock is convertible, at the option of the holder, into six and eight-tenths (6.8) shares of Common Stock of the Company at any time, and each share of $2.80 Preference Stock is convertible, at the option of the holder, into two and four-tenths (2.4) shares of Common Stock of the Company at any time. These conversion rates are subject to adjustment as set forth in the Certificate of Incorporation. Shares of Preferred Stock would be convertible, if at all, on such terms as were designated by the Board of Directors.
Voting Rights. The holders of $3.00 Preference Stock are entitled to eight votes per share; holders of $2.80 Preference Stock are entitled to two votes per share; and holders of Common Stock are entitled to one vote per share. Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote cumulatively for directors; holders of Common Stock have no cumulative voting rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together as one class, except as provided by law and except as to certain matters which require a vote by the holders of $3.00 Preference Stock or by the holders of $2.80 Preference Stock as a separate class as set forth below.
The Certificate of Incorporation provides that if the Company shall be in default with respect to dividends on the $3.00 Preference Stock in an amount equal to six quarterly dividends, the number of directors of the Company shall be increased by two at the first annual meeting thereafter, and at such meeting and at each subsequent annual meeting until all dividends on the $3.00 Preference Stock shall have been paid in full, the holders of the $3.00 Preference Stock shall have the right, voting as a class, to elect such two additional directors. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock.
The Certificate of Incorporation provides that the Company shall not, without the assent of the holders of two-thirds of the then outstanding shares of $3.00 Preference Stock, (a) change any of the terms of the $3.00 Preference Stock in any material respect adverse to the holders, or (b) authorize any prior ranking stock; and that the Company shall not, without the assent of the holders of a majority of the then outstanding shares of $3.00 Preference Stock, (1) authorize any additional $3.00 Preference Stock or stock on a parity with it; (2) sell, lease or convey all or substantially all of the property or business of the Company; or (3) become a party to a merger or consolidation unless the surviving or resulting corporation will have immediately after such merger or consolidation no stock either authorized or outstanding (except such stock of the Company as may have been authorized or outstanding immediately before such merger or consolidation of such stock of the surviving or resulting corporation as may be issued upon conversion thereof or in exchange therefor) ranking as to dividends or assets prior to or on a parity with the $3.00 Preference Stock or the stock of the surviving or resulting corporation issued upon conversion thereof or in exchange therefor. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock.
The holders of Preferred Stock, if any, would have such voting rights, if any, as were designated by the Board.
Redemption Provisions. The $3.00 Preference Stock is redeemable at the option of the Company as a whole or in part at any time on at least thirty days' notice at $82 per share plus accrued dividends to the redemption date. The $2.80 Preference Stock is redeemable at the option of the Company as a whole or in part at any time on at least thirty days' notice at $70 per share plus accrued dividends to the redemption date. The holders of Preferred Stock, if any, would have such redemption provisions, if any, as were designated by the Board.
Liquidation Rights. In the event of liquidation of the Company, the holders of $3.00 Preference Stock and holders of $2.80 Preference Stock will be entitled to receive, before any payment to holders of Common Stock, $80 per share and $70 per share, respectively, together in each case with accrued and unpaid dividends. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock will rank on a parity as to assets of the Company upon its liquidation. Subject to the rights of creditors and the holders of $3.00 Preference Stock and $2.80 Preference Stock, the holders of Common Stock are
entitled pro rata to the assets of the Company upon its liquidation. The holders of Preferred Stock, if any, would have such liquidation rights, if any, as were designated by the Board.
Preemptive Rights. No holders of shares of capital stock of the Company have or will have any preemptive rights to acquire any securities of the Company.
Liability to Assessment. The shares of Common Stock are fully paid and non- assessable.
Prohibition of Greenmail. Article VII of the Certificate of Incorporation provides in general that any direct or indirect purchase by the Company of any of its voting stock (or rights to acquire voting stock) known to be beneficially owned by any person or group which holds more than 3 percent of a class of its voting stock and which has owned the securities being purchased for less than two years must be approved by the affirmative vote of at least 66 2/3 percent of the votes entitled to be cast by the holders of the voting stock. Such approval shall not be required with respect to any purchase by the Company of such securities made (i) at or below fair market value (based on average New York Stock Exchange closing prices over the preceding 90 days) or (ii) as part of a Company tender offer or exchange offer made on the same terms to all holders of such securities and complying with the Securities Exchange Act of 1934 or (iii) in a Public Transaction (as defined).
Rights to Purchase Common Stock. On May 27, 1986, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of Common Stock to the stockholders of record on June 9, 1986 (the "Record Date"). Each Right entitles the registered holder to purchase from the Company one share of Common Stock at a price of $200 per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Morgan Guaranty Trust Company of New York, as Rights Agent (the "Rights Agent").
The Rights were issued on the Record Date. Thereafter, as long as the Rights are attached to the Common Stock, the Company will issue one Right with each share of Common Stock that shall become outstanding so that all such shares will have attached Rights.
The Rights are attached to all Common Stock certificates representing outstanding Common Stock, and no separate certificates evidencing Rights ("Right Certificates") have been distributed. Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons acquired, or obtained the right to acquire, beneficial ownership of 20 percent or more of the outstanding shares of Common Stock (an "Acquiring Person") or (ii) 10 days following the earlier of the commencement of, or the announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 30 percent or more of the outstanding shares of Common Stock (the earlier of such dates described in (i) and (ii) above being called the "Distribution Date"), the Rights are evidenced by such Common Stock certificate with a copy of the Summary of Rights attached thereto. The date of announcement of the existence of an Acquiring Person referred to in clause (i) above is hereinafter referred to as the "Shares Acquisition Date." The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), Common Stock certificates issued after the Record Date upon transfer or issuance of Common Stock contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates evidencing Common Stock outstanding as of the Record Date, even without a copy of the Summary of Rights attached thereto, will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, Right Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will expire on June 9,1996, unless earlier redeemed by the Company as described below.
The Purchase Price payable, and the number of shares of Common Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of the Common Stock, (ii) upon the grant to holders of the Common Stock of certain rights or warrants to subscribe for Common Stock or convertible securities at less than the current market price of the Common Stock or (iii) upon the distribution to holders of the Common Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends out of earnings or retained earnings at a rate not in excess of 125 percent of the rate of the last cash dividend theretofore paid or dividends payable in Common Stock) or of subscription rights or warrants (other than those referred to above).
In the event that the Company were to be acquired in a merger or other business combination transaction, or more than 50 percent of its assets or earning power were sold, proper provision would be made so that each holder of a Right would thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the Right. In the event that the Company were to be the surviving corporation in a merger with an Acquiring Person and its Common Stock were not changed or exchanged, or in the event that an Acquiring Person were to engage in one of a number of self- dealing transactions or certain other events occur while there is an Acquiring Person (e.g., a reverse stock split), as specified in the Rights Agreement, proper provision would be made so that each holder of a Right (except as provided below) would thereafter have the right to receive upon exercise that number of shares of Common Stock of the Company having a market value of two times the exercise price of the Right. Upon the occurrence of any of the events described in the preceding sentence, any Rights that are or were at any time on or after the earlier of (a) the Shares Acquisition Date and (b) the Distribution Date beneficially owned by an Acquiring Person will immediately become null and void, and no holder of such Rights will have any right with regard to such Rights from and after such occurrence.
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1 percent in such Purchase Price. No fractional shares will be issued and in lieu thereof, an adjustment in cash will be made based on the market price of the Common Stock on the last trading date prior to the date of exercise.
At any time prior to the time that a person or group of affiliated or associated persons has acquired beneficial ownership of 20 percent or more of the outstanding Common Stock, the Company may redeem the Rights in whole, but not in part, at a price of $0.10 per Right (the "Redemption Price"). Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company will make announcement thereof, and upon such election, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
While the distribution of the Rights was not, and the issuance of Rights thereafter is not, taxable to plan participants or the Company, stockholders may recognize taxable income if the Rights become exercisable.
The terms of the Rights may be amended by the Board of Directors of the Company and the Rights Agent, provided that the amendment does not adversely affect the interests of the holders of Rights.
The Rights have certain antitakeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by its Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors at a time when the Rights are redeemable.
A copy of the Rights Agreement is filed as an exhibit hereto. This summary description of the Rights is qualified in its entirety by reference thereto.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prices in the foregoing table are from the New York Stock Exchange composite tape. On February 27, 1995 the high price per share was $109 3/8 and the low price per share was $108 5/8.
As of December 31, 1994, the approximate number of holders of record of Common Stock of ARCO was 100,000. The principal markets in which ARCO's Common Stock is traded are listed on the cover page.
The quarterly dividend rate for Common Stock was increased to $1.375 per share in January 1991. On January 23, 1995, a dividend of $1.375 per share was declared on Common Stock, payable on March 15, 1995 to stockholders of record on February 17, 1995. Future cash dividends will depend on earnings, financial conditions and other factors; however, the Company presently expects that dividends will continue to be paid.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for ARCO:
- -------- (1) See Note 2 of Notes to Consolidated Financial Statements regarding unusual items on page 39.
(2) Includes after-tax gain of $273 million from issuance of stock by Vastar Resources, Inc.
(3) Includes a net provision of $312 million after tax related to reorganization of Lower 48 oil and gas operations, companywide work force reduction, and the writedown of certain assets.
ARCO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating results in 1994 improved compared to 1993 as a result of approximately $250 million after tax in first-year savings from ARCO's cost reduction program, higher earnings from ARCO's chemical interests in Lyondell Petrochemical Company (Lyondell) and ARCO Chemical Company (ARCO Chemical), and higher natural gas sales volumes. These improvements were partially offset by lower crude oil and natural gas prices and reduced refining and marketing margins.
Earnings from Operations
Operations in 1993, compared to 1992, benefited from improved margins and higher gasoline sales volumes in ARCO's West Coast refining and marketing operations, higher coal sales volumes and higher natural gas prices. These benefits were more than offset by lower crude oil prices and volumes, lower natural gas volumes, higher exploration and selling, general and administrative (SG&A) expenses and lower after-tax earnings from transportation operations.
Special Items After Tax
RESULTS OF CONSOLIDATED OPERATIONS
REVENUES
The sale of ARCO's Brazilian marketing operations in December 1993 resulted in reduced operating revenues in 1994. At the same time, increased crude oil trading and natural gas marketing activity, higher chemical prices and volumes, natural gas volumes and excise taxes were offset by lower crude oil prices and volumes, and lower prices for refined products and natural gas. In 1993, increased natural gas marketing volumes and higher refined and chemical products sales volumes and natural gas prices were more than offset by lower crude oil prices, crude oil and natural gas volumes, decreased crude oil trading volumes and lower refined and chemical products prices.
The increase in income from equity investments in 1994 primarily reflected Lyondell's higher earnings. ARCO has a 49.9% equity interest in Lyondell.
The fluctuations in other revenues primarily reflected the impact of asset sales.
EXPENSES
The sale of ARCO's Brazilian marketing operations resulted in reduced trade purchases in 1994. At the same time, increased crude oil trading and natural gas marketing activity were offset by lower crude oil and natural gas prices. In 1993, lower crude oil trading prices and volumes and lower purchased volumes of finished refined products and chemical feedstocks resulted in reduced trade purchases. This reduction was partially offset by higher natural gas marketing volumes and prices.
As a result of ARCO's cost reduction program, lease and other operating costs in oil and gas operations and refining and marketing operations were lower in 1994. These reductions were partially offset by higher operating costs as a result of increased production volumes for coal operations and ARCO Chemical, and by higher operating costs associated with the response to
ARCO
findings of regulatory and owner company reviews of the Trans Alaska Pipeline System (TAPS). Litigation-related accruals, higher compensation and contract personnel costs associated with downstream and coal operations and higher maintenance costs, including turnarounds at three chemical plants, resulted in higher operating costs in 1993. Partially offsetting these increases were lower lease and other operating costs in oil and gas operations.
The decline in exploration expense in 1994 reflected reduced activity as part of ARCO's cost reduction program, particularly in Alaska and the Lower 48. The increase in 1993 reflected higher dry hole costs in Alaska and increased activity overseas, partially offset by decreased activity in the Lower 48.
Selected Expenses
The sale of ARCO's Brazilian marketing operations and lower personnel costs in oil and gas operations resulted in reduced SG&A expenses in 1994. Higher compensation expense and higher delivery and advertising costs increased SG&A expenses in 1993.
The sale of ARCO's Brazilian marketing operations also resulted in reduced taxes other than excise and income taxes in 1994. The decrease in 1993, compared to 1992, primarily resulted from lower production taxes related to lower crude oil prices and volumes.
Excise taxes increased in 1994 as a result of the full-year effect in 1994 of the fourth quarter 1993 increase in federal excise taxes and a mandatory assumption of the collection responsibility for excise taxes on diesel fuel. The increase in 1993 primarily resulted from the fourth quarter 1993 federal excise tax increase, the full-year effect in 1993 of increased state excise taxes in 1992 and higher refined products sales volumes.
Depreciation, depletion and amortization (DD&A) decreased in 1994 reflecting the absence of a $73 million accrual for plugging and abandonment of onshore wells recorded in 1993. This was partially offset by increased depreciation associated with the first full year of operation of the Gordonstone mine. The decrease in DD&A in 1993 resulted from the sale of Lower 48 oil and gas properties, partially offset by the $73 million plug and abandonment accrual.
Personnel reductions associated with ARCO's cost reduction program were reported as unusual items in 1994. The fourth quarter 1993 reorganization of ARCO's Lower 48 oil and gas operations is reflected in unusual items expense and included $554 million before tax for writedowns for sale or other disposition of oil and gas properties and excess office space, in addition to charges for work force reductions. The 1992 unusual items comprised a settlement on assets nationalized by Iran and recognition of a previously deferred portion of the gain from the 1989 sale of a majority interest in Lyondell, partially offset by a charge related to the withdrawal by ARCO Chemical from a Korean joint venture.
GAIN ON ISSUANCE OF STOCK BY VASTAR RESOURCES, INC.
On July 5, 1994, Vastar Resources, Inc. (Vastar) consummated the sale of
ARCO
17,250,000 shares of its common stock to the public at an initial offering price of $28 per share. Prior to the offering, Vastar was a wholly owned subsidiary of ARCO. At December 31, 1994, ARCO owned 80,000,001 shares of Vastar's common stock, which represented 82.3% of Vastar's outstanding common stock. ARCO realized an after-tax gain of $273 million as a result of the initial public offering by Vastar. Vastar's results are included in ARCO's Lower 48 results in the oil and gas segment.
INCOME TAXES
ARCO's effective tax rate was 28.3% in 1994, compared to 51.6% in 1993 and 35.6% in 1992. The lower effective tax rate in 1994 reflected recognition of a foreign deferred tax asset, increased net foreign tax credits, a refund of paid foreign taxes and an increase in other tax credits. The higher effective tax rate in 1993 reflected increased taxes on foreign income and the effect of the 1993 federal tax rate increase on deferred taxes.
ACCOUNTING CHANGES
The 1992 results included a net after-tax charge of $392 million, or $2.43 per share, for the cumulative effect of the adoption of two new accounting standards related to non-pension postretirement benefits and income taxes.
RESULTS OF SEGMENT OPERATIONS
OIL AND GAS
Lower exploration and operating expenses and higher natural gas volumes were partially offset by lower crude oil prices and volumes and lower natural gas prices in 1994.
In 1993, the effect of lower crude oil prices and volumes, natural gas volumes and higher dry hole expense was partially offset by higher natural gas prices and lower depletion and lease operating costs.
Oil and Gas Special Items After Tax
PETROLEUM LIQUIDS PRODUCTION
Worldwide petroleum liquids volumes decreased in 1994 and 1993 as a result of Lower 48 property divestitures and natural field declines. In 1994,
increased volumes resulting from the expanded gas handling system (GHX-2) at Prudhoe Bay and new volumes from the Point McIntyre field, which began production in October 1993, were partially offset by natural field decline in Alaska from the Prudhoe Bay and Kuparuk River fields.
NATURAL GAS PRODUCTION
ARCO's international natural gas production grew in 1994 as a result of the new Pagerungan and Offshore Northwest Java Sea fields in Indonesia and a full year of production from the Orwell and Murdoch fields in the United Kingdom North Sea. International natural gas
ARCO
operations in 1993 were favorably impacted by a full year of production from the Pickerill field in the U.K. North Sea, new production from the Orwell and Murdoch fields in the U.K. North Sea, which began in late 1993, and the Java Sea field in Indonesia.
U.S. natural gas production growth in 1994 came primarily from Vastar's Mustang Island 805 field in the Gulf of Mexico and fields in the San Juan Basin. The sale of Lower 48 properties and natural field declines reduced domestic natural gas production in 1993.
COAL
Revenues from record volumes in 1994 were more than offset by lower international coal prices, the reopening to current market prices of a major sales contract in the U.S. and unfavorable foreign exchange rate movements. Improved earnings in 1993 reflected higher sales volumes as a result of strong electric utility demand and reduced East Coast supply as a result of a mine workers strike. The 1993 results included a benefit of approximately $10 million after tax associated with a change in the accrued estimated loss on the sale of the Coal Resources of Queensland mine, which was completed in January 1993.
REFINING AND MARKETING
The 1994 results were negatively impacted by reduced U.S. West Coast margins and the absence of earnings from Brazil, partially offset by reduced operating costs. The 1994 special items included after-tax charges related to personnel reductions and future environmental remediation costs. The 1993 special items comprised primarily litigation-related accruals, a loss associated with the sale of the Brazilian marketing subsidiaries and the effect of the increase in the federal tax rate on deferred taxes. The 1992 special items included a charge of approximately $40 million after tax primarily for environmental costs related to previously divested operations.
ARCO's U.S. West Coast sales volumes were relatively unchanged for the three years ended December 31, 1994.
TRANSPORTATION
The 1994 results included charges of approximately $20 million after tax related to personnel reductions, a loss on the sale of midcontinent product pipelines, and costs associated with the Southern California earthquake, partially offset by a tax credit. The 1993 earnings declined as a result of lower TAPS earnings and the effect of the federal tax rate increase, partially offset by higher commercial pipeline earnings.
INTERMEDIATE CHEMICALS AND SPECIALTY PRODUCTS
After-tax earnings for ARCO's intermediate chemicals and specialty products segment were $265 million in 1994, $239 million in 1993 and $210 million
ARCO
in 1992. The segment consists of ARCO Chemical, an 83.3% owned subsidiary. ARCO Chemical reported that its 1994 results included an after-tax charge of $19 million for corporate restructuring and a $12 million benefit from insurance proceeds. ARCO Chemical's reported net income in 1993 included a $10 million after-tax loss on early debt retirement and net benefits of $20 million from lower income taxes. The 1992 results included $56 million before tax for a charge resulting from ARCO Chemical's withdrawal from a joint venture in Korea.
ARCO Chemical's reported net income was higher in 1994, compared to 1993, primarily as a result of higher sales volumes in ARCO Chemical's core products, propylene oxide (PO) and derivatives and styrene monomer (SM), and higher SM margins, partially offset by the effects of a weaker methyl tertiary butyl ether (MTBE) market. In 1993, increased sales volumes in ARCO Chemical's core products worldwide were offset by higher fixed costs associated with a new plant, lower MTBE margins, primarily in Europe, and lower overall PO and derivatives margins as a result of lower U.S. PO derivatives prices and continued weakness in the European economy.
LYONDELL PETROCHEMICAL COMPANY
ARCO's 49.9% equity share of Lyondell's net income was $111 million for 1994, $13 million for 1993 and $8 million for 1992. Lyondell's results in 1994 reflected improved olefins and methanol margins and increased olefins sales volumes. This more than offset lower earnings from Lyondell's approximate 90% participation interest in LYONDELL-CITGO Refining Company Ltd. (LCR), which was affected by poor industry conditions as well as downtime for major maintenance turnarounds in the fourth quarter. LCR took over Lyondell's operation of the Houston, Texas, refinery in July 1993. Lyondell's results in 1993 improved as a result of higher margins attained through the processing of greater volumes of Venezuelan crude oil.
UNALLOCATED EXPENSES AND OTHER
Unallocated expenses and other was a net after-tax expense of $57 million in 1994 and $140 million in 1993 compared to a net after-tax benefit of $25 million in 1992. Reductions in corporate staff expense, increased foreign tax credits and a tax refund resulted in lower unallocated expenses in 1994. In addition, increased interest income on short-term investments was more than offset by reimbursement of money market losses in certain employee benefit plans and charges for personnel reductions at ARCO's corporate headquarters. The increase in unallocated expenses in 1993 reflected the absence of a $111 million after-tax gain recognized in 1992 and discussed below, increased compensation, higher charges for future environmental remediation, and lower net investment income. In 1992, unallocated expenses and other included the recognition of a $111 million after-tax gain representing a previously deferred portion of the gain from the 1989 sale of a majority interest in Lyondell, partially offset by increased corporate expenses and charges for future environmental remediation.
ARCO
FINANCIAL POSITION AND LIQUIDITY
The net cash used in investing activities in 1994 included expenditures for additions to fixed assets (including dry hole costs) of $1,658 million and a net increase in short-term investments of $768 million, partially offset by proceeds from asset sales of $167 million. The net cash used in financing activities in 1994 included proceeds of $1,275 million from the issuance of long-term debt, primarily 9% Exchangeable Notes and $453 million from issuance of common stock by Vastar, offset by repayments of long-term debt of $796 million and dividend payments of $885 million.
Cash and cash equivalents and short-term investments totaled $4.4 billion at year-end 1994 and short-term borrowings were $1.5 billion. Working capital was $429 million higher at the end of 1994, primarily reflecting an increase in short-term investments, partially offset by an increase in long-term debt due within one year. At December 31, 1994, ARCO had unused bank credit facilities totaling $3.2 billion and ARCO Chemical had an unused bank credit facility totaling $300 million, while Vastar had fully utilized its $1.05 billion revolving credit facility with an interest rate of 6.15%. Vastar's revolving line of credit is available until November 30, 1996.
On August 8, 1994, ARCO issued 39.9 million 9% Exchangeable Notes (the Notes) due September 15, 1997, at a price of $24.75 per Note. ARCO realized proceeds of approximately $958 million. At maturity, holders will receive shares of Lyondell common stock, or at ARCO's option, cash with an equal value in exchange for the principal amount of the Notes. The number of shares or the amount of such cash will be determined using a formula based on the price of Lyondell common stock at the maturity of the Notes.
ARCO's 1995 capital spending program includes $1.9 billion for additions to fixed assets. Future capital expenditures remain subject to business conditions affecting the industry, particularly changes in price and demand for crude oil, natural gas and petroleum products. Changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements, and other changes in environmental rules and regulations may also affect future capital expenditures.
It is expected that future cash requirements for capital expenditures, dividends and debt repayments will come from cash generated from operating activities, existing cash balances, and future financings.
ENVIRONMENTAL MATTERS
ARCO is subject to federal, state and local environmental laws and regulations which require the Company to remove or mitigate the effect on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites.
ARCO
Environmental Reserve
The amount reserved represents the estimated undiscounted costs which ARCO will incur to complete the remediation of sites with known contamination. In view of the uncertainties associated with estimating these costs, such as differences of opinion between ARCO and various regulatory agencies with respect to the appropriate method for remediating contaminated sites, uncertainty as to the extent of contamination at various sites, and uncertainty regarding ARCO's ultimate share of costs at various sites, it is possible that actual costs could exceed the amount reserved by as much as $1 billion. See Note 12 to Consolidated Financial Statements regarding environmental matters.
In addition to the provision for environmental remediation costs, $848 million has been accrued for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and the estimated costs of restoration and reclamation of land associated with such facilities.
RISK MANAGEMENT
ARCO utilizes derivative instruments for risk management purposes. The Company uses simple, non-leveraged derivative instruments denominated in major currencies with highly liquid secondary markets. The derivative instruments are placed with major international financial institutions whose creditworthiness is continually monitored. Hedging strategies are reviewed and approved by senior management before being implemented. Policy controls limit the maximum dollar amount of positions that can be taken at any given time.
To minimize the effects of interest rate and foreign currency fluctuations, the Company enters into the following transactions using derivatives: 1) foreign currency forward and swap contracts; 2) interest rate swaps; and 3) financial futures contracts and OTC Treasury options which are limited to investment portfolio hedging, alteration of portfolio duration and changing asset mix.
The Company and its subsidiaries engage in hedging strategies involving forward and futures contracts, swaps and options to hedge part of their crude oil and natural gas production to minimize the effects of commodity price fluctuations. In 1994, Vastar entered into a series of commodity swaps covering approximately 50% of its natural gas production for March through December. Vastar realized a $42 million pre-tax gain as a result of these swaps.
EFFECTS OF INFLATION
While the annual rate of inflation remained moderate during the three-year period ended December 31, 1994, ARCO continued to experience certain inflationary effects. ARCO will benefit by using current, inflated dollars to satisfy its debt obligations and other monetary liabilities.
In addition, it is estimated that the replacement cost of ARCO's property, plant, equipment and inventory is greater than the historical cost reflected in the financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.
Financial statements with respect to unconsolidated subsidiaries and 50 percent owned companies are omitted per Rule 3-09(a) of Regulation S-X.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Atlantic Richfield Company
We have audited the accompanying consolidated balance sheets of Atlantic Richfield Company as of December 31, 1994 and 1993, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1994 and the related financial statement schedule listed in the index on page 34 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atlantic Richfield Company as of December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for income taxes, postretirement benefits other than pensions and postemployment benefits in 1992.
COOPERS & LYBRAND L.L.P.
Los Angeles, California February 10, 1995
ARCO CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
See Notes on pages 39 through 50.
ARCO CONSOLIDATED BALANCE SHEET
The Company follows the successful efforts method of accounting for oil and gas producing activities.
See Notes on pages 39 through 50.
ARCO CONSOLIDATED STATEMENT OF CASH FLOWS
(a) Includes noncash unusual items of $347, $659 and ($149) in 1994, 1993 and 1992, respectively.
See Notes on pages 39 through 50.
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING POLICIES
ARCO's accounting policies conform to generally accepted accounting principles, including the "successful efforts" method of accounting for oil and gas producing activities.
Principles of Consolidation
The consolidated financial statements include the accounts of all subsidiaries, ventures and partnerships in which a controlling interest is held, including at December 31, 1994, ARCO Chemical Company (ACC), of which ARCO owned 83.3% of the outstanding shares, and Vastar Resources, Inc. (Vastar), of which ARCO owned 82.3% of the outstanding shares. ARCO also consolidates its interests in undivided interest pipeline companies and in oil and gas and coal mining joint ventures. ARCO uses the equity method of accounting for companies where its ownership is between 20% and 50% and for other ventures and partnerships in which less than a controlling interest is held.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit and marketable securities other than equity securities, maturing within three months of purchase. Cash equivalents are stated at cost, which approximates market value.
Oil and Gas Unproved Property Costs
Unproved property costs are capitalized and amortized on a composite basis, considering past success experience and average property life. In general, costs of properties surrendered or otherwise disposed of are charged to accumulated amortization. Costs of successful properties are transferred to developed properties.
Fixed Assets
Fixed assets are recorded at cost and are written off on either the unit-of- production or straight-line method based on the expected lives of individual assets or groups of assets.
Upon disposal of assets depreciated on an individual basis, residual cost less salvage is included in current income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage is charged against accumulated depreciation.
Dismantlement, Restoration and Reclamation Costs
The estimated costs, net of salvage value, of dismantling facilities or projects with limited lives or facilities that are required to be dismantled by contract, regulation or law, and the estimated costs of restoration and reclamation associated with oil and gas and mining operations are accrued during production and classified as a long-term liability. Such costs are taken into account in determining the cost of production in all operations, except oil and gas production, in which case such costs are considered in determining depreciation, depletion and amortization.
Environmental Remediation
Environmental remediation costs are accrued as operating expenses based on the estimated timing and extent of remedial actions required by applicable governmental authorities and the amount of ARCO's liability in consideration of the proportional liability and financial wherewithal of other responsible parties. Estimated liabilities are not discounted to present value.
Reclassifications
Certain previously reported amounts have been restated to conform to classifications adopted in 1994.
NOTE 2 UNUSUAL ITEMS
During 1994, ARCO announced a restructuring program under which approximately 2,400 positions were eliminated. The program covered all operating units, excluding Lower 48 oil and gas operations, along with the corporate headquarters. ARCO provided as unusual items $347 million before tax, consisting primarily of personnel costs (pension enhancements, severance and other ancillary costs) associated with the terminations.
Approximately $155 million of the accrual related to severance and other ancillary costs that will be paid from Company funds over the next two years. Approximately $110 million related to enhanced pension benefits which will be paid from the assets of qualified pension plans, not from Company funds. An additional $60 million related to enhanced non-qualified pension benefits and postretirement benefits other than pensions which are currently unfunded. These benefits will be paid after retirement and over the remaining lives of the recipients; as such, it will not be practical to track the actual payments of these benefits.
In 1993, ARCO announced a reorganization of its Lower 48 oil and gas operations. ARCO provided as unusual items a pretax charge of $659 million, of which $554 million related to the writedown for sale or other disposition of oil and gas
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
properties and excess office space. In addition, amounts of $65 million, $35 million, and $5 million, respectively, were accrued for severance and ancillary costs, enhanced qualified pension benefits, and enhanced non-qualified pension benefits related to the elimination of approximately 1,300 positions.
Through December 31, 1994, approximately 1,400 and 1,300 employees have been terminated under the 1994 and 1993 programs, respectively. Approximately $41 million and $47 million, respectively, of severance and ancillary benefits have been paid and charged against the 1994 and 1993 accruals. Payments do not necessarily correlate with the number of terminations due to the ability of employees to defer receipt of certain payments.
In 1992, ARCO recognized a pretax benefit of $149 million from the settlement with Iran related to Company assets that had been nationalized in the late 1970s. ARCO also recognized a pretax benefit of $178 million related to a portion of the gain from the 1989 sale of a majority interest in Lyondell Petrochemical Company (Lyondell) which was previously deferred as the amount equal to ARCO's guarantee of certain Lyondell notes. When Lyondell repaid the notes in 1992, ARCO was released from its guarantee and accordingly recognized the gain. ARCO also recognized a pretax charge of $56 million resulting from ACC's withdrawal from the YUKONG ARCO Chemical Ltd. joint venture in Korea. The net benefit related to 1992 unusual items was $211 million after tax.
NOTE 3 ACCOUNTING CHANGES
Effective January 1, 1994, ARCO adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires investments to be carried at fair value, unless they are considered held-to-maturity securities. The effect of adopting SFAS No. 115 had no impact on 1994 net income.
Effective January 1, 1992, ARCO adopted SFAS Nos. 106, 109 and 112. The cumulative effect of adopting SFAS No. 106 resulted in a charge of $435 million, or $2.70 per share, to 1992 earnings, net of income tax effects of approximately $262 million. The cumulative effect of adopting SFAS No. 109 resulted in a benefit of $43 million, or $0.27 per share. There was no cumulative effect of adopting SFAS No. 112. Excluding the cumulative effects, the effect of adopting SFAS Nos. 106, 109 and 112 was not material to 1992 net income.
NOTE 4 SEGMENT INFORMATION
ARCO operates primarily in the Resources (upstream) and Products (downstream) segments. The Resources segment includes oil and gas operations, which comprise the exploration, development and production of petroleum, including petroleum liquids (crude oil, condensate and natural gas liquids) and natural gas; the purchase and sale of petroleum liquids and natural gas; and the mining and sale of coal. The Products segment includes the refining and transportation of petroleum and petroleum products; the marketing of petroleum products; and the manufacture and sale of intermediate chemicals and specialty products, including propylene oxide and derivatives, styrene monomer, tertiary butyl alcohol, and methyl tertiary butyl ether.
Segment information for the years ended December 31, 1994, 1993 and 1992 was as follows:
Intersegment sales were made at prices approximating current market values. Intersegment sales included in sales and other operating revenues were as follows:
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) Net of minority interest.
(a) Excludes undeveloped leasehold amortization of $67, $98, and $110, respectively, included in exploration expense.
International operations are conducted principally in the following geographic regions: Oil and gas - United Kingdom, Asia Pacific and Dubai; Coal - Australia; Intermediate chemicals and specialty products - Europe and Asia Pacific; Refining and marketing - Brazil (marketing only). The Brazilian operations were sold in December 1993.
(a) Includes income (losses) of equity affiliates, principally Asian joint ventures, of $2, $(2), and $(18), in 1994, 1993 and 1992, respectively. (b) Includes gain from settlement on assets nationalized by Iran (Note 2).
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 TAXES
Taxes other than excise and income taxes for the years ended December 31, 1994, 1993 and 1992 comprised the following:
The components of the provision for taxes on income for the years ended December 31, 1994, 1993 and 1992 were as follows:
The deferred tax benefit in 1993 primarily resulted from book accruals associated with the Lower 48 reorganization and work force reductions. The major components of the net deferred tax liability as of December 31, 1994 and 1993 were as follows:
ARCO has foreign loss carryforwards of $290 million which begin expiring in 1995. The valuation allowance was $102 million at December 31, 1992.
The domestic and foreign components of income before income taxes, minority interest and cumulative effect of changes in accounting principles, and a reconciliation of income tax expense with tax at the effective federal statutory rate for the years ended December 31, 1994, 1993 and 1992 were as follows:
NOTE 6 INVENTORIES
Inventories are recorded when purchased, produced or manufactured and are stated at the lower of cost or market. In 1994, approximately 86% of inventories, excluding
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
materials and supplies, were determined by the last-in, first-out (LIFO) method. Materials and supplies and other non-LIFO inventories are determined predominantly on an average cost basis.
Total inventories at December 31, 1994 and 1993 comprised the following categories:
The excess of the current cost of inventories over book value was approximately $253 million and $228 million at December 31, 1994 and 1993, respectively.
NOTE 7 LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 comprised the following:
(a) Weighted average 4.5% at December 31, 1994.
Maturities and sinking fund obligations for the five years subsequent to December 31, 1994 are as follows (millions of dollars): 1995 - $630; 1996 - $1,234; 1997 - $1,275; 1998 - $177; 1999 - $139. No material amounts of long- term debt are collateralized by Company assets.
In 1993, Vastar borrowed $1.25 billion principal amount under a $1.25 billion unsecured, variable rate (6.15% at December 31, 1994), revolving-term credit agreement available until 1996. During 1994, the maximum principal amount under the credit agreement was reduced to $1.05 billion. The agreement contains restrictions which, among other things, require Vastar to maintain certain financial ratios and restrict encumbrance of assets.
In August 1994, ARCO issued 39.9 million 9% Exchangeable Notes (Notes) due September 15, 1997 at a price of $24.75 per note. At maturity, holders will receive, in exchange for the principal amount of the Notes, shares of Lyondell stock, or at ARCO's option, cash with an equal value. The number of shares or the amount of such cash will be determined using a formula based on the price of Lyondell common stock at the maturity of the Notes.
At December 31, 1994 and 1993, approximately $360 million and $355 million, respectively, of long-term debt was denominated in foreign currencies. To reduce the exposure to foreign currency fluctuations, ARCO entered into a swap agreement on an 18 billion yen debt issue due in 1996 which fixes the principal balance at $102 million with an effective interest rate of 8.14%.
ARCO periodically enters into interest rate swap agreements with the objective of managing interest rate risk by converting the interest rate on variable rate debt to a fixed rate. The fixed rate is accrued and charged to interest expense through the term of the interest rate swap agreement. At December 31, 1994, ARCO had outstanding interest rate swaps on two loans totalling 300 million Dutch guilders (approximately $172 million) due in 1997. Both swaps mature in 1997 when the related debt becomes due. The swaps effectively changed both loans' floating interest rates to fixed rates of 5.7% and 6.71%. ARCO intends to hold the swaps until maturity.
NOTE 8 SHORT-TERM BORROWINGS AND BANK CREDIT FACILITIES
Notes payable consist primarily of commercial paper issued to a variety of financial investors and institutions and any amounts outstanding under ARCO or ACC credit facilities. The weighted average interest rate on notes payable outstanding at December 31, 1994 and 1993 was 6.1% and 4.3%, respectively.
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1994, ARCO and certain wholly owned subsidiaries had committed bank credit facilities of approximately $3.3 billion. At December 31, 1994, $115 million was borrowed under these committed facilities.
ACC maintains its own credit facility, not guaranteed by ARCO, under which it may borrow up to $300 million. At December 31, 1994, there were no borrowings against the ACC credit facility.
At December 31, 1994, ARCO had letters of credit outstanding totalling approximately $330 million.
NOTE 9 INTEREST EXPENSE
Interest expense for the years ended December 31, 1994, 1993 and 1992 comprised the following:
NOTE 10 FOREIGN CURRENCY TRANSACTIONS
Foreign exchange transactions resulted in a net loss of $12 million in 1994 and net gains of $22 million and $1 million in 1993 and 1992, respectively.
NOTE 11 FIXED ASSETS
Property, plant and equipment, and related accumulated depreciation, depletion and amortization at December 31, 1994 and 1993 were as follows:
Expenses for maintenance and repairs for 1994, 1993 and 1992 were $525 million, $509 million and $513 million, respectively.
NOTE 12 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.
At December 31, 1994 and 1993, there were contingent liabilities primarily with respect to guarantees of securities of other issuers of approximately $75 million and $111 million, respectively, of which approximately $41 million was indemnified at December 31, 1993.
Following the March 1989 EXXON VALDEZ oil spill, Alyeska Pipeline Service Company (Alyeska) and Alyeska's owner companies were the subject of numerous lawsuits by the State of Alaska, the United States and private plaintiffs. ARCO Transportation Alaska, Inc. (ATA) owns approximately 21% of Alyeska. Alyeska and its owner companies have settled the federal and state claims and all but a handful of the lawsuits by private plaintiffs. Certain issues relating to the liability for the spill remain unresolved between the Exxon companies and Alyeska and its owner companies.
ARCO and former producers of lead pigments have been named as defendants in cases filed by a municipal housing authority, a purported class and several individuals seeking damages and injunctive relief as a consequence of the presence of lead-based paint in certain housing units. ARCO is also the subject or party to a number of other pending or threatened legal actions.
In January 1995, the State of Montana presented to ARCO a revised demand for damages of $635 million based on alleged injuries to natural resources resulting from ARCO's mining and mineral processing businesses formerly operated by Anaconda, ARCO's predecessor, in Montana. ARCO is contesting the amount of this demand.
ARCO is subject to other loss contingencies pursuant to federal, state and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, including the restoration of natural resources located at these sites and damages for loss of use and non-use values. ARCO is currently participating in environmental assessments and cleanups under these laws at federal Superfund and state-managed sites, as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. ARCO may in the future be involved in additional environmental
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assessments and cleanups, including the restoration of natural resources and damages for loss of use and non-use values. The amount of such future costs will depend on such factors as the unknown nature and extent of contamination at many sites, the unknown timing, extent and method of the remedial actions which may be required and the determination of ARCO's liability in proportion to other responsible parties. In addition, environmental loss contingencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO.
ARCO continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the magnitude of remediation costs, experience gained from sites on which remediation has been completed, the timing and extent of remedial actions required by the applicable governmental authorities and an evaluation of the amount of ARCO's liability considered in light of the liability and financial wherewithal of the other responsible parties. At December 31, 1994, the environmental remediation accrual was $670 million. As the scope of ARCO's obligations becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against ARCO's earnings.
ARCO's environmental remediation accrual covers federal Superfund and state- managed sites as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. ARCO has been named a potentially responsible party (PRP) for 126 sites. The number of PRP sites in and of itself does not represent a relevant measure of liability, because the nature and extent of environmental concerns varies from site to site and ARCO's share of responsibility varies from sole responsibility to very little responsibility. ARCO reviews all of the PRP sites, along with other sites as to which no claims have been asserted, in estimating the amount of the accrual. ARCO's future costs at these sites could exceed the amount accrued by as much as $1 billion.
Approximately half of the accrual related to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 15 percent of the total accrual. Substantially all amounts accrued are expected to be paid out over the next five to six years.
Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various insurance companies and other third parties. These claims have not been resolved. Due to the uncertainty as to ultimate recovery from these parties, ARCO has neither recorded any asset nor reduced any liability in anticipation of such recovery.
Although any ultimate liability arising from any of the matters described herein could result in significant expenses or judgments that, if aggregated and assumed to occur within a single fiscal year, would be material to ARCO's results of operations, the likelihood of such occurrence is considered remote. On the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on ARCO's consolidated financial statements.
The operations and consolidated financial position of ARCO continue to be affected from time to time in varying degrees 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 13 RETIREMENT PLANS
ARCO and its subsidiaries have defined benefit pension plans to provide pension benefits to substantially all employees. The benefits are based on years of service and the employee's compensation, primarily during the last three years of service. ARCO's funding policy is to make annual contributions as required by applicable regulations. ARCO accrues pension costs based on an actuarial valuation for each plan and funds the plans through contributions to trust funds that are kept apart from Company funds.
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the plans' funded status and amounts recognized in the balance sheet at December 31, 1994 and 1993:
Pension costs related to ARCO-sponsored plans, on a pre-tax basis, including amortization of unfunded projected benefit obligations for the years ended December 31, 1994, 1993 and 1992 were as follows:
In addition to this pension benefit, in 1994 and 1993 ARCO recorded $143 million and $61 million, respectively, before tax as additional pension cost in connection with the work force reductions in those years.
ARCO's assumptions used as of December 31, 1994, 1993 and 1992 in determining the pension cost and pension liability were as follows:
NOTE 14 OTHER POSTRETIREMENT BENEFITS
ARCO and its subsidiaries sponsor defined postretirement benefit plans to provide other postretirement benefits to substantially all employees who retire with ARCO having rendered the required years of service, along with their spouses and eligible dependents. Health care benefits are provided primarily through comprehensive indemnity plans. Currently, ARCO pays approximately 80% of the cost of such plans, but has the right to modify the cost-sharing provisions at any time. Life insurance benefits are based primarily on the employee's final compensation and are also partially paid for by retiree contributions, which vary based upon coverage chosen by the retiree.
ARCO's current policy is to fund the cost of postretirement health care and life insurance plans on a pay-as-you-go basis.
The following table sets forth the plans' combined postretirement benefit liability as of December 31, 1994 and 1993:
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARCO charges postretirement benefit costs as accrued, based on actuarial calculations for each plan. Net annual postretirement benefit costs for the years ended December 31, 1994, 1993 and 1992 included the following components:
In addition to the cost above, in 1994 and 1993, ARCO recorded $24 million and $9 million, respectively, before tax as additional postretirement benefit expense in connection with workforce reductions.
The significant assumptions used in determining postretirement benefit cost and the accumulated postretirement benefit obligation were as follows:
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care trend rate) for the health plans is 10% for 1992 to 1996, 8% for 1997 to 2001, and 6% thereafter. The effect of a one- percentage-point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1994, by approximately 12%, and the aggregate of the service and interest cost components of net annual postretirement benefit cost by approximately 14%.
NOTE 15 STOCKHOLDER'S EQUITY
Detail of ARCO's capital stock as of December 31, 1994 and 1993 was as follows:
Changes in preference stocks outstanding in 1994, 1993 and 1992 were due to conversions. The $3.00 cumulative convertible preference stock is convertible into 6.8 shares of common stock. The $2.80 cumulative convertible preference stock is convertible into 2.4 shares of common stock. Common stock is subordinate to the preference stocks for dividends and assets. The $3.00 and $2.80 preference stocks may be redeemed at the option of ARCO for $82 and $70 per share, respectively.
ARCO has authorized 75,000,000 shares of preferred stock, $.01 par, of which none were issued or outstanding at December 31, 1994.
The balance in ARCO's common stock at December 31, 1994, 1993 and 1992 was $402 million.
Detail of changes in treasury stock in 1994, 1993 and 1992 was as follows:
The net decrease in capital in excess of par value of stock in 1994, 1993 and 1992 of $14 million, $15 million and $12 million, respectively, was due primarily to the conversion of preference stock to common stock.
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1994, shares of ARCO's authorized and unissued common stock were reserved as follows:
Under ARCO's incentive compensation plans, awards of ARCO's common stock may be made to officers, outside directors and key employees.
NOTE 16 EARNED PER SHARE
Earned per share is based on the average number of common shares outstanding during each period including common stock equivalents that consist of certain outstanding options and all outstanding convertible securities. The average shares used in the calculation of earned per share for the years ended December 31, 1994, 1993 and 1992 were 163.2 million, 162.4 million and 161.5 million, respectively.
NOTE 17 STOCK OPTIONS
Options to purchase shares of ARCO's common stock have been granted to executives, outside directors and key employees. These options become exercisable in varying installments and expire ten years after the date of grant. Transactions during 1994, 1993 and 1992 were as follows:
NOTE 18 SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the years ended December 31, 1994, 1993 and 1992:
NOTE 19 LEASE COMMITMENTS
Capital lease obligations are recorded at the present value of future rental payments. The related assets are amortized on a straight-line basis.
At December 31, 1994, future minimum rental payments due under leases were as follows:
Minimum future rental income under noncancellable subleases at December 31, 1994 amounted to $108 million.
Operating lease net rental expense for the years ended December 31, 1994, 1993 and 1992 was as follows:
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No restrictions on dividends or on additional debt or lease financing exist under ARCO's lease commitments. Under certain conditions, options and obligations exist to purchase certain leased properties.
NOTE 20 LYONDELL PETROCHEMICAL COMPANY
Lyondell is engaged in the manufacture and marketing of basic commodity chemicals, including ethylene, propylene, methanol and aromatics, and, through its approximately 90% interest in LYONDELL-CITGO Refining Company, the refining and marketing of petroleum products.
At December 31, 1994, ARCO owned 49.9% of Lyondell common stock outstanding; ARCO accounts for this investment on the equity method. The market value of ARCO's shares of Lyondell common stock, based on the closing quoted market price at December 31, 1994, was $1,033 million.
Summarized financial information for Lyondell was as follows:
(a) Includes $314, $278 and $329 of sales to ARCO in 1994, 1993 and 1992, respectively, which approximated 5%, 4% and 5% of ARCO' purchases in those years.
(b) ARCO's investment in Lyondell comprises 49.9% of Lyondell's stockholders' equity (deficit) plus $72 of dividends received in excess of basis of investment.
NOTE 21 PUBLIC OFFERING OF VASTAR COMMON STOCK
In September 1993, ARCO established Vastar, a wholly owned subsidiary of ARCO. Effective October 1, 1993, ARCO conveyed to Vastar beneficial title to certain producing properties together with certain developed and undeveloped acreage. Vastar is primarily engaged in the exploration for and the development and production of natural gas.
In July 1994, Vastar completed an initial public offering of 17,250,000 shares of its common stock at $28 per share. ARCO recognized an after-tax gain of $273 million from this transaction. At December 31, 1994 ARCO's 80,000,001 shares represent 82.3% of the outstanding common stock.
NOTE 22 INVESTMENTS
At December 31, 1994, investments were composed principally of U.S. Treasury securities, corporate debt instruments, and municipal securities and were included in cash equivalents or short-term investments depending on their maturities, which generally ranged from one day to one year. At December 31, 1994, investments in debt securities classified as held-to-maturity were recorded at amortized cost while investments in debt securities classified as available-for-sale are reported at fair value, with unrealized holding gains and losses, net of tax, reported in a separate component of stockholders' equity. At December 31, 1993, all investments in debt securities were stated at cost, which approximated fair value.
The following summarizes investments in debt securities at December 31, 1994:
For purposes of determining gross realized losses, the cost of available-for- sale securities sold is based upon the specific identification method.
NOTE 23 FINANCIAL INSTRUMENTS AND FAIR VALUE
ARCO does not hold or issue financial instruments for trading purposes.
ARCO enters into various types of foreign currency forward and swap contracts to hedge foreign currency transactions. Foreign currency forward contracts are used predominantly to hedge U.S. dollar denominated debt issued by a foreign subsidiary. A foreign currency swap contract is used to hedge debt denominated in Japanese yen. In addition, ARCO uses a combination of foreign currency forwards and swaps to hedge anticipated future cash flows from overseas operations. These foreign currency contracts generally do not have maturities exceeding one year. Gains and losses on foreign exchange contracts
ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
generally offset gains and losses on assets, liabilities, and transactions being hedged.
At December 31, 1994 and 1993, the total notional amounts of foreign currency contracts (principally European currencies, Australian dollars and Japanese yen) were approximately $760 million and $700 million, respectively.
ARCO also uses various hedging arrangements to reduce exposure to price risk for future crude oil and natural gas transactions. Gains and losses are netted and deferred until realized in sales and other operating revenues as the physical production required by the contracts is delivered. At December 31, 1994 and 1993, the notional amounts of open contracts were not significant.
Explicitly deferred gains and losses arising from hedging activities of anticipated transactions are generally included in the balance sheet as either other current assets or other current liabilities.
At December 31, 1994 and 1993, the carrying and fair values of interest rate swaps were not significant. At December 31, 1994 and 1993, the carrying value and estimated fair value of ARCO's other financial instruments were as follows:
Short-term investments and notes payable were valued at their carrying amounts, which were reasonable estimates of fair value due to the relatively short period to maturity. Investments and long-term receivables were valued at quoted market prices if available. For unquoted investment securities, which were predominantly equity interests in associated entities, the reported fair value was estimated on the basis of financial and other information. The fair value of ARCO's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to ARCO for debt of the same remaining maturities. The fair value of foreign currency contracts and interest rate swaps represented the amount to be exchanged if the existing contracts had been settled at year end and were estimated by obtaining quotes from brokers.
ARCO is exposed to credit risk related to its financial instruments in the event of non-performance by the counterparties. ARCO does not generally require collateral or other security to support these financial instruments. The counterparties to these instruments are major institutions deemed creditworthy by the Company; ARCO does not anticipate nonperformance by the counterparties.
NOTE 24 UNAUDITED QUARTERLY RESULTS
(a) See Note 2.
ARCO SUPPLEMENTAL INFORMATION (UNAUDITED)
Oil and Gas Producing Activities
The Securities and Exchange Commission (SEC) defines proved oil and gas reserves as those estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
ARCO reports reserve estimates to various federal government agencies and commissions. These estimates may cover various regions of crude oil and natural gas classifications within the United States and may be subject to mandated definitions. There have been no reports of total ARCO reserve estimates furnished to federal government agencies or commissions which vary from those reported to the SEC since the beginning of the last fiscal year.
Estimated quantities of ARCO's proved oil and gas reserves were as follows:
Included in ARCO's reserves are 100% of the reserves of Vastar, a consolidated subsidiary of which ARCO owned 82.3% at December 31, 1994. Vastar's reserves comprised 4% and 43% of U.S. petroleum liquids and natural gas, respectively, at December 31, 1994.
ARCO has no long-term supply contracts to purchase from foreign governments or any interest in equity affiliates involved in oil and gas producing activities.
The changes in proved reserves for the years ended December 31, 1992, 1993 and 1994 were as follows:
Significant changes to proved oil and gas reserves during 1994 were due to the addition of reserves from an enhanced oil recovery project at Kuparuk, from the Villano field in Ecuador, and the Trent and Tyne gas fields in the North Sea.
Estimates of petroleum reserves have been made by ARCO engineers. These estimates include reserves in which ARCO holds an economic interest under production-sharing and other types of operating agreements with foreign governments. These estimates do not include probable or possible reserves. Natural gas liquids comprise 12% of petroleum liquid proved reserves.
The sale of natural gas from the North Slope of Alaska, which is not used in providing fuel in North Slope operations or sold to others on the North Slope, is dependent upon construction of a natural gas transportation system or another marketing alternative. Such gas is not included in ARCO's reserves. There are currently several projects under consideration, including the Alaska Natural Gas Transportation System and the Trans Alaska Gas System. However,
ARCO SUPPLEMENTAL INFORMATION (UNAUDITED)
there are a number of regulatory, financial, legal and marketing questions regarding the projects that remain unresolved.
ARCO continues to study various options for marketing North Slope gas. However, ARCO Alaska believes that market conditions are not likely to permit implementation of any large gas sales projects within the foreseeable future.
The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of December 31, 1994, 1993 and 1992 were as follows:
Costs, both capitalized and expensed, incurred in oil and gas producing activities during the three years ended December 31, 1994, 1993 and 1992 were as follows:
Results of operations from oil and gas producing activities (including operating overhead) for the three years ended December 31, 1994, 1993 and 1992 were as follows:
The difference between the above results of operations and the amounts reported for after-tax oil and gas segment earnings in Note 4 of Notes to Consolidated Financial Statements is primarily marketing-related activities, the exclusions of gains on property sales and unusual items related to the oil and gas operations.
ARCO SUPPLEMENTAL INFORMATION (UNAUDITED)
The standardized measure of discounted estimated future net cash flows related to proved oil and gas reserves at December 31, 1994, 1993 and 1992 was as follows:
Primary changes in the standardized measure of discounted estimated future net cash flows for the years ended December 31, 1994, 1993 and 1992 were as follows:
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved.
These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flows to ARCO. Management's investment and operating decisions are based on reserve estimates that include proved reserves prescribed by the SEC as well as probable reserves, and on different price and cost assumptions from those used here.
It should be recognized that applying current costs and prices and a 10% standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves.
Coal Operations
Supplemental operating statistics for the coal operations of ARCO for the three years ended December 31, 1994, 1993 and 1992 were as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 1, 1995, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1994, and which is incorporated herein by reference, except for the material included under the captions "Report of Compensation Committee" and "Performance Graph."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1 and 2. Financial Statements and Financial Statement Schedules: These documents are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules.
3. Exhibits:
3.1 Restated Certificate of Incorporation of Atlantic Richfield Company as of June 27, 1994, filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarterly pe- riod ended June 30, 1994, filed with the Securities and Ex- change Commission (the "Commission") under File No. 1-1196 and incorporated herein by reference.
3.2 By-Laws of Atlantic Richfield Company as amended through Janu- ary 23, 1989, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by reference.
4.1 Rights Agreement dated as of May 27, 1986 between the Company and Morgan Guaranty Trust Company of New York, as Rights Agent, filed as Exhibit 2.1 to the Company's Form 8-A filed with the Commission under File No. 1-1196 on June 3, 1986, and incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between the Company and The Chase Manhattan Bank, N.A., filed as Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly pe- riod ended June 30, 1985, File No. 1-1196, and incorporated herein by reference.
4.3 Indenture, dated as of January 1, 1992, between the Company and The Bank of New York, filed as an exhibit, bearing the same number, to the Company's Registration Statement on Form S-3 (No. 33-44925), filed with the Commission on January 6, 1992, and incorporated herein by reference.
4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities au- thorized under any such instrument does not exceed 10 percent of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commis- sion upon request.
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of the Company on March 26, 1990, and effective on October 1, 1990, filed as Ex- hibit 10.2 to the Company's Form 10-K Report for the year 1990, File No. 1-1196, and incorporated herein by reference.
10.1(b)* Amendment No. 1 to Atlantic Richfield Company Supplementary Executive Retirement Plan effective March 22, 1993, filed as Exhibit 10 to the Company's Form 10-Q Report for the quarterly period ended June 30, 1993, File No. 1-1196, and incorporated herein by reference.
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective on October 1, 1990, filed as Exhibit 10.3 to the Company's Form 10-K Report for the year 1990, File No. 1-1196, and incorporated herein by reference.
10.2(b)* Amendment No. 1 to Atlantic Richfield Company Executive Defer- ral Plan effective July 27, 1992, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1992, File No. 1-1196, and incorporated herein by refer- ence.
10.3* Atlantic Richfield Executive Medical Insurance Plan-Summary Plan Description, as in effect January 1, 1994, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by reference.
10.4(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective on July 1, 1988, filed as Exhibit 10.6 to the Company's Form 10-K Report for the year 1988, File No. 1-1196, and incorporated herein by reference.
10.4(b)* Amendment No. 1 to Atlantic Richfield Company Executive Sup- plementary Savings Plan II as amended and effective on January 1, 1989, filed as Exhibit 10.6(b) to the Company's Form 10-K Report for the year 1989, File No. 1-1196, and incorporated herein by reference.
10.4(c)* Amendment No. 2 to Atlantic Richfield Company Executive SupplementarySavings Plan II as amended and effective on July 1, 1994, filed herewith.
10.5* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised effective January 1, 1994, filed herewith.
10.6* Annual Incentive Plan, as adopted by the Board of Directors of the Company on November 26, 1984, and effective on that date, as amended through February 28, 1994, filed herewith.
10.7* Atlantic Richfield Company's 1985 Executive Long-Term Incen- tive Plan, as adopted by the Board of Directors of the Company on May 28, 1985, and effective on that date, as amended through February 28, 1994, filed herewith.
10.8* Atlantic Richfield Company Executive Life Insurance Plan-Sum- mary Plan Description, as in effect January 1, 1994, filed as an exhibit bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by reference.
10.9* Atlantic Richfield Company Executive Long-Term Disability Plan--Summary Plan Description, as in effect January 1, 1994, filed as an exhibit bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and in- corporated herein by reference.
10.10 Form of Indemnity Agreement adopted by the Board of Directors on January 26, 1987 and executed in February 1987 by the Com- pany and each of its directors and officers, included in Ex- hibit A to the 1987 Proxy Statement (filed with the Commission under File No. 1-1196) and incorporated herein by reference.
10.11 Exchange Agreement between Tosco Corporation and Atlantic Richfield Company dated October 2, 1986, as amended by letter dated November 5, 1986, filed as Exhibit 10.14, to the Company's Form 10-K Report for the year 1986, File No. 1-1196, and incorporated herein by reference.
10.12 Retirement Plan for Outside Directors effective October 1, 1990, as amended March 31, 1993, filed as Exhibit 10 to the Company's Form 10-Q Report for the quarterly period ended March 31, 1993, File No. 1-1196, and incorporated herein by reference.
10.13(a) Stock Option Plan for Outside Directors effective December 17, 1990, filed as Exhibit 10.14 to the Company's Form 10-K Report for the year 1990, File No. 1-1196, and incorporated herein by reference.
10.13(b) Amendment No. 1 to Stock Option Plan for Outside Directors effective June 22, 1992, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1992, File No. 1-1196, and incorporated herein by reference.
10.14 Special Incentive Plan, as adopted by the Board of Directors of the Company on February 28, 1994, and effective on that date, is included in Appendix C of Registrant's Proxy State- ment filed with the Commission under File No. 1-1196 and in- corporated herein by reference.
22 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Corporate Secretary. - -------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K:
No Current Reports on Form 8-K were filed during the quarter ended December 31, 1994, and thereafter through February 28, 1995.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company: Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), and Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), of our report dated February 10, 1995, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California February 28, 1995
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 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
By /s/ Mike R. Bowlin ------------------------------------- Mike R. Bowlin President, Chief Executive Officer and Chief Operating Officer
FEBRUARY 27, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SCHEDULE II
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS OF DOLLARS)
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(See footnotes on following page.)
SCHEDULE II (CONTINUED)
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS OF DOLLARS)
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------- (a) Write-off for uncollectible accounts, net of recoveries.
EXHIBIT INDEX
EXHIBIT: DESCRIPTION
3.1 Restated Certificate of Incorporation of Atlantic Rich- field Company as of June 27, 1994, filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quar- terly period ended June 30, 1994, filed with the Securi- ties and Exchange Commission (the "Commission") under File No. 1-1196 and incorporated herein by reference.
3.2 By-Laws of Atlantic Richfield Company as amended through January 23, 1989, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by refer- ence.
4.1 Rights Agreement dated as of May 27, 1986 between the Company and Morgan Guaranty Trust Company of New York, as Rights Agent, filed as Exhibit 2.1 to the Company's Form 8-A filed with the Commission under File No. 1-1196 on June 3, 1986, and incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between the Company and The Chase Manhattan Bank, N.A., filed as Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1985, File No. 1-1196, and incorporated herein by reference.
4.3 Indenture, dated as of January 1, 1992, between the Com- pany and The Bank of New York, filed as an exhibit, bear- ing the same number, to the Company's Registration State- ment on Form S-3 (No. 33-44925), filed with the Commis- sion on January 6, 1992, and incorporated herein by ref- erence.
4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Ex- change Act of 1934 are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request.
10.1(a) Atlantic Richfield Company Supplementary Executive Re- tirement Plan, as adopted by the Board of Directors of the Company on March 26, 1990, and effective on October 1, 1990, filed as Exhibit 10.2 to the Company's Form 10-K Report for the year 1990, File No. 1-1196, and incorpo- rated herein by reference.
10.1(b) Amendment No. 1 to Atlantic Richfield Company Supplemen- tary Executive Retirement Plan effective March 22, 1993, filed as Exhibit 10 to the Company's Form 10-Q Report for the quarterly period ended June 30, 1993, File No. 1-1196, and incorporated herein by reference.
10.2(a) Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective on October 1, 1990, filed as Ex- hibit 10.3 to the Company's Form 10-K Report for the year 1990, File No. 1-1196, and incorporated herein by refer- ence.
10.2(b) Amendment No. 1 to Atlantic Richfield Company Executive Deferral Plan effective July 27, 1992, filed as an exhib- it, bearing the same number, to the Company's Form 10-K Report for the year 1992, File No. 1-1196, and incorpo- rated herein by reference.
EXHIBIT: DESCRIPTION
10.3 Atlantic Richfield Executive Medical Insurance Plan-Sum- mary Plan Description, as in effect January 1, 1994, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by reference.
10.4(a) Atlantic Richfield Company Executive Supplementary Sav- ings Plan II, as amended, restated and effective on July 1, 1988, filed as Exhibit 10.6 to the Company's Form 10-K Report for the year 1988, File No. 1-1196, and incorpo- rated herein by reference.
10.4(b) Amendment No. 1 to Atlantic Richfield Company Executive Supplementary Savings Plan II as amended and effective on January 1, 1989, filed as Exhibit 10.6(b) to the Company's Form 10-K Report for the year 1989, File No. 1-1196, and incorporated herein by reference.
10.4(c) Amendment No. 2 to Atlantic Richfield Company Executive Supplementary Savings Plan II as amended and effective on July 1, 1994, filed herewith.
10.5 Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised effective January 1, 1994, filed herewith.
10.6 Annual Incentive Plan, as adopted by the Board of Direc- tors of the Company on November 26, 1984, and effective on that date, as amended through February 28, 1994, filed herewith.
10.7 Atlantic Richfield Company's 1985 Executive Long-Term In- centive Plan, as adopted by the Board of Directors of the Company on May 28, 1985, and effective on that date, as amended through February 28, 1994, filed herewith.
10.8 Atlantic Richfield Company Executive Life Insurance Plan-Summary Plan Description, as in effect January 1, 1994, filed as an exhibit bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by reference.
10.9 Atlantic Richfield Company Executive Long-Term Disability Plan-Summary Plan Description, as in effect January 1, 1994, filed as an exhibit bearing the same number, to the Company's Form 10-K Report for the year 1993, File No. 1-1196, and incorporated herein by reference.
10.10 Form of Indemnity Agreement adopted by the Board of Di- rectors on January 26, 1987 and executed in February 1987 by the Company and each of its directors and officers, included in Exhibit A to the 1987 Proxy Statement (filed with the Commission under File No. 1-1196) and incorpo- rated herein by reference.
10.11 Exchange Agreement between Tosco Corporation and Atlantic Richfield Company dated October 2, 1986, as amended by letter dated November 5, 1986, filed as Exhibit 10.14, to the Company's Form 10-K Report for the year 1986, File No. 1-1196, and incorporated herein by reference.
EXHIBIT: DESCRIPTION
10.12 Retirement Plan for Outside Directors effective October 1, 1990, as amended March 31, 1993, filed as Exhibit 10 to the Company's Form 10-Q Report for the quarterly pe- riod ended March 31, 1993, File No. 1-1196, and incorpo- rated herein by reference.
10.13(a) Stock Option Plan for Outside Directors effective Decem- ber 17, 1990, filed as Exhibit 10.14 to the Company's Form 10-K Report for the year 1990, File No. 1-1196, and incorporated herein by reference.
10.13(b) Amendment No. 1 to Stock Option Plan for Outside Directors effective June 22, 1992, filed as an exhibit, bearing the same number, to the Company's Form 10-K Report for the year 1992, File No. 1-1196, and incorporated herein by reference.
10.14 Special Incentive Plan, as adopted by the Board of Directors of the Company on February 28, 1994, and effective on that date, is included in Appendix C of Registrant's Proxy Statement filed with the Commission under File No. 1-1196 and incorporated herein by reference.
22 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.