SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
dated February 19, 2002
BP p.l.c.
(Translation of registrant's name into English)
BRITANNIC HOUSE, 1 FINSBURY CIRCUS, LONDON, EC2M 7BA, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F |X| Form 40-F
--------------------- ---------------------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No |X|
--------------------- ---------------------
THIS REPORT ON FORM 6-K SHALL BE DEEMED TO BE INCORPORATED BY REFERENCE IN THE
PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE NO.
333-9790) OF BP p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON
FORM F-3 (FILE NO. 333-65996) OF BP p.l.c., THE PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT ON FORM F-3 (FILE NO. 33-39075) OF BP AMERICA INC. AND BP
p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE
NO. 33-20338) OF BP AMERICA INC. AND BP p.l.c., THE PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT ON FORM F-3 (FILE NO. 33-29102) OF THE STANDARD OIL
COMPANY AND BP p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON
FORM S-8 (FILE NO. 33-21868) OF BP p.l.c., THE PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-9020) OF BP p.l.c., THE
PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO.
333-9798) OF BP p.l.c., THE PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON
FORM S-8 (FILE NO. 333-79399) OF BP p.l.c., AND THE PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-34968) OF BP p.l.c., AND THE
PROSPECTUS INCLUDED IN THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO.
333-67206) OF BP p.l.c., AND TO BE A PART THEREOF FROM THE DATE ON WHICH THIS
REPORT IS FURNISHED, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS
SUBSEQUENTLY FILED OR FURNISHED.
Page 2
THE COMBINATION OF BP AND ARCO
Introduction
On April 1, 1999 the Board of BP announced that it had reached agreement on
a proposed combination (the combination) with Atlantic Richfield Company (ARCO)
of Los Angeles.
The agreement relating to the proposed combination (the Combination
Agreement), approved by the boards of both BP and ARCO, provided for all common
shareholders of ARCO, with the exception of BP, ARCO or any of their
subsidiaries, to receive 9.84 BP ordinary shares of US$ 0.25 each in the form of
BP American Depositary Shares (ADSs) or, at the election of the shareholder, BP
ordinary shares, in return for the cancellation of each of their shares (other
than the shares held by CH-Twenty Holdings, LLC, a subsidiary of ARCO) (the
Cancelled ARCO Shares). It also provided for the issue to BP of new common
shares equal in number to the Cancelled ARCO Shares by a newly enlarged ARCO
formed by a statutory merger of Prairie Holdings, Inc. (a direct wholly owned
subsidiary of BP) into and with ARCO. Any right to a fraction of a BP ADS or an
odd lot of less than six BP ordinary shares would be satisfied by a cash
payment. Both ARCO and BP shareholders voted overwhelmingly in favour of the
combination at shareholders' meetings on August 30, 1999 and September 1, 1999,
respectively.
BP and ARCO announced in early November 1999 that they had reached
provisional agreement with the Alaskan State Governor on a package of asset
disposals and other measures designed to secure Alaskan government acceptance
for the proposed combination of the two companies. The provisional agreement was
finalized into an agreement with the State of Alaska (the Alaskan Charter
Agreement) made in early December 1999.
On February 4, 2000 the US Federal Trade Commission (FTC) filed a complaint
in the US District Court (the Court) seeking a preliminary injunction to prevent
closing of the combination. The Attorney Generals for the States of California,
Oregon and Washington (the Western States) also filed complaints with the same
Court. The Attorney General for the State of Alaska joined in the Court
proceedings in support of the combination. On March 15, 2000 it was announced
that the FTC, the Western States, the State of Alaska, ARCO and BP had agreed to
suspend the Court proceedings, pending discussions for a consent order.
On March 15, 2000 ARCO entered into an agreement with Phillips Petroleum
Company (Phillips) for the sale of its Alaskan businesses (see Sale of Alaskan
Businesses below).
On March 15, 2000 BP announced that it was at an advanced stage in
discussions with the FTC on the combination and was hopeful of obtaining a
consent order within a few weeks allowing the Company to close the combination.
On March 23, 2000 BP and ARCO jointly agreed to extend the termination date
of the Combination Agreement from March 31, 2000 to June 30, 2000.
On March 24, 2000 ExxonMobil Corporation (ExxonMobil) filed a Complaint in
State Court, Los Angeles, seeking a preliminary injunction and other relief
against BP, ARCO and Phillips to prevent the sale of ARCO's Alaskan businesses
to Phillips referred to below.
On April 13, 2000 BP, ExxonMobil, ARCO and Phillips announced that they had
reached an agreement (the agreement) to resolve outstanding issues relating to
the ownership and operation of the Prudhoe Bay Unit (PBU) and the Point Thompson
Unit in Alaska. The agreement will align the respective equity interests of BP
Exploration (Alaska) Inc., ExxonMobil and Phillips (as the purchaser of ARCO's
Alaskan businesses) in the Prudhoe Bay Unit, and provides for a single operator
at the PBU.
The aligned oil and gas interests among the major owners will be 26.7 per
cent for BP Exploration (Alaska), 36.8 per cent for ExxonMobil and 36.5 per cent
for Phillips. BP Exploration (Alaska), current operator of the Western Operating
Area in the Prudhoe Bay Unit, will become the single operator. ExxonMobil and BP
Exploration (Alaska) Inc. have also agreed to work towards alignment in the
Point Thomson field area with respective interests of 45 per cent for BP
Exploration and 55 per cent for Exxon Mobil.
Page 3
In addition, the agreement resolved the issues that had resulted in the
Complaint filed by ExxonMobil in State Court, Los Angeles seeking to prevent the
sale of ARCO's Alaskan businesses to Phillips discussed below.
On April 16, 2000 BP and ARCO announced that they had received clearance
from the FTC for the combination of the two companies and the combination was
completed on April 18, 2000.
Sale of Alaskan Businesses
On March 15, 2000 ARCO entered into an agreement to sell its Alaskan
businesses to Phillips for approximately $6.5 billion cash subject to purchase
price adjustments (and up to an additional $500 million based on the prices
realized on production subsequent to December 31, 1999). Under the purchase and
sale agreement, which was amended on April 6, 2000, ARCO agreed to sell all of
the outstanding shares of ARCO Alaska Inc., together with certain other
subsidiaries of ARCO engaged principally in the operation of ARCO's Alaskan
businesses, along with certain pipeline and marine assets associated with the
transport of Alaskan crude oil. The major portion of the sale closed on April
26, 2000. The remainder of the assets were sold during 2000.
Merger agreement with Vastar Resources, Inc.
On May 24, 2000 BP announced that it had entered into a merger agreement
with Vastar Resources, Inc. (Vastar) which provides for the acquisition by BP of
Vastar's publicly-held minority stockholding at a price of $83 per share. The
merger has been approved by the Vastar board, including all the members of the
special committee. Through its combination with ARCO, BP already owned
approximately 81.9 per cent of Vastar. The acquisition of the outstanding
minority stockholders was completed on September 15, 2000.
Page 4
1. Unaudited Pro Forma Condensed Consolidated Income Statement relating to the
Combination of BP and Atlantic Richfield Company
Unaudited Pro Forma Condensed Consolidated Income Statement
The following Unaudited Pro Forma Condensed Consolidated Financial
Information gives pro forma effect to the merger, after giving effect to the pro
forma adjustments described in the accompanying notes. The Unaudited Pro Forma
Condensed Consolidated Income Statement has been prepared from, and should be
read in conjunction with, the historical consolidated financial statements and
notes thereto of BP, which are included in BP's Annual Report on Form 20-F for
the year ended December 31, 2000 (the 2000 Form 20-F) and the historical
Financial Statements of ARCO for the year ended December 31, 2000 which are
included elsewhere in this report on Form 6-K.
The Unaudited Pro Forma Condensed Consolidated Income Statement is provided
for illustrative purposes only and does not purport to represent what the actual
results of operations or the financial position of BP would have been had the
merger of ARCO with a subsidiary of BP occurred on the date assumed, nor is it
necessarily indicative of BP's future operating results.
The Unaudited Pro Forma Condensed Consolidated Income Statement has been
prepared in accordance with UK generally accepted accounting practice (UK GAAP),
which differs in certain respects from US GAAP. Note 43 to the consolidated
financial statements of BP included in the 2000 Form 20-F, which presented
financial information for the years ended December 31, 2000, 1999 and 1998,
provides a description of the principal differences between UK GAAP and US GAAP
as they relate to BP. A reconciliation of the pro forma profit to US GAAP is
included in Note 6 of Notes to the Unaudited Pro Forma Condensed Consolidated
Income Statement.
BP's use of the replacement cost basis for inventory accounting is
explained in Note 1 of Notes to the Unaudited Pro Forma Condensed Consolidated
Financial Information. The replacement cost basis is generally similar to the
LIFO basis.
BP accounted for the merger as an acquisition under UK GAAP and as a
purchase under US GAAP. Under UK GAAP acquisition accounting, the identifiable
assets and liabilities of ARCO are recorded at their fair value on the date of
acquisition. The date of acquisition for determining the cost of acquisition is
the date on which control of ARCO passed to BP, that is April 13, 2000, the date
on which the FTC cleared the transaction and the offer became unconditional. The
cost of acquisition comprises the fair value of BP shares issued together with
the expenses of acquisition. BP has averaged the closing share price and the
(pound)/$ exchange rate for the two working days between the offer becoming
unconditional and the ARCO shares being exchanged for BP shares on April 18,
2000. This average price of (pound)5.2925, has been translated into US dollars
at $1.5857 to (pound)1.00, the average of the closing rates on those two days.
Under US GAAP purchase accounting, the cost of acquisition is based on the
BP share price for a reasonable period before and after the terms of the
acquisition were agreed. BP has averaged the share price and the (pound)/$
exchange rate for three working days straddling the date of the announcement,
that is, March 31, April 1 and April 6, 1999. The London Stock Exchange was
closed for the Easter holiday on April 2 and 5. This average price was
(pound)5.115, which has been translated into US dollars at $1.6049 to
(pound)1.00, the average closing rate on those three days.
The historical financial statements of ARCO have been prepared in
accordance with US GAAP. For purposes of presenting the Unaudited Pro Forma
Condensed Consolidated Income Statement, financial information relating to ARCO
has been adjusted to conform materially with BP's accounting policies under UK
GAAP as described in Note 3 of Notes to the Unaudited Pro Forma Condensed
Consolidated Income Statement. In the historical financial statements for ARCO
the net income of those operations and assets which were required to be sold as
a condition of the agreement of the FTC to the merger are shown as one amount.
Page 5
The pro forma acquisition adjustments reflected in the accompanying
Unaudited Pro Forma Condensed Consolidated Income Statement described in Note 5,
reflect estimates made by BP management and assumptions that it believes to be
reasonable. There are consolidation adjustments in the accompanying Unaudited
Pro Forma Condensed Consolidated Income Statements to eliminate transactions
between ARCO and BP.
ARCO shareholders were entitled to receive, for each share of ARCO common
stock held as of the effective time of the merger, 9.84 BP ordinary shares. Such
BP ordinary shares were delivered in the form of BP ADSs, each of which
represents six BP ordinary shares, or, at the election of ARCO shareholders, BP
ordinary shares. For purposes of the pro forma adjustments within the Unaudited
Pro Forma Condensed Consolidated Income Statement the number of ARCO shares
issued and outstanding on April 17, 2000 (324 million shares) together with the
estimated number of additional shares which may be issued in respect of
outstanding options and contingent stock and on conversion of ARCO preference
stock (15 million shares) have been used, which would result in the issue of
approximately 3,335 million BP ordinary shares.
Page 6
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
For the Year Ended December 31, 2000
The following unaudited pro forma condensed consolidated income statement
for the year ended December 31, 2000 is derived from the historical condensed
consolidated income statements of BP and ARCO for the year then ended, after
giving effect to the pro forma adjustments described in the Notes to the
Unaudited Pro Forma Condensed Consolidated Income Statement. These adjustments
have been determined as if the combination of ARCO and BP took place on January
1, 2000, the first day of the earliest financial period presented in the Pro
Forma Condensed Consolidated Income Statement. The Unaudited Pro Forma Condensed
Consolidated Income Statement has been prepared from, and should be read in
conjunction with, the historical consolidated financial statements and notes
thereto of BP, which are included in the 2000 Form 20-F and the historical
financial statements of ARCO which are included in the 2000 Form 10-K.
ARCO historical
---------- ------------------------------------- ---------
BP Continuing BP
historical Operations Pro Forma Pro Forma
UK GAAP US GAAP Adjustment UK GAAP Adjustments UK GAAP
---------- ------- ---------- ---------- ----------- ----------
$ $ $ $ $ $
(Millions, except per share amounts)
(Note 1) (Note 2) (Note 4) (Note 5)
Turnover....................................... 150,851 17,006 -- 17,006 (1,896)(a) 165,961
Less: Joint ventures........................... 13,339 343 187(a) 530 -- 13,869
------- ------- ------- ------- ------- -------
Group turnover................................. 137,512 16,663 (187) 16,476 (1,896) 152,092
Replacement cost of sales...................... 112,102 14,216 (214)(b) 14,002 (878)(b) 125,226
Production taxes............................... 1,936 161 -- 161 1 (c) 2,098
------- ------- ------- ------- ------- -------
Gross profit................................... 23,474 2,286 27 2,313 (1,019) 24,768
Distribution and administration expenses....... 7,837 850 (48)(c) 802 72 (d) 8,711
Exploration expense............................ 460 241 -- 241 (14)(e) 687
------- ------- ------- ------- ------- -------
15,177 1,195 75 1,270 (1,077) 15,370
Other income................................... 548 1,079 (338)(d) 741 (318)(f) 971
------- ------- ------- ------- ------- -------
Group replacement cost operating profit (loss). 15,725 2,274 (263) 2,011 (1,395) 16,341
Share of profits of joint ventures............. 688 -- 152 (e) 152 -- 840
Share of profits of associated undertakings.... 774 -- 23 (f) 23 3 (g) 800
------- ------- ------- ------- ------- -------
Total replacement cost operating profit (loss). 17,187 2,274 (88) 2,186 (1,392) 17,981
Profit (loss) on sale of fixed assets
and businesses and termination of operations. 238 2,678 303 (g) 2,981 (2,933)(h) 286
Restructuring costs............................ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Replacement cost profit (loss) before
interest and tax............................. 17,425 4,952 215 5,167 (4,325) 18,267
Inventory holding gains (losses)............... 779 -- 42 (h) 42 -- 821
------- ------- ------- ------- ------- -------
Historical cost profit (loss)
before interest and tax...................... 18,204 4,952 257 5,209 (4,325) 19,088
Interest expense............................... 1,610 647 82 (i) 729 (401)(i) 1,938
------- ------- ------- ------- ------- -------
Profit (loss) before taxation.................. 16,594 4,305 175 4,480 (3,924) 17,150
Taxation....................................... 4,454 1,497 248 (j) 1,745 (1,042)(j) 5,157
------- ------- ------- ------- ------- -------
Profit (loss) after taxation................... 12,140 2,808 (73) 2,735 (2,882) 11,993
Income from operations sold as required by FTC -- 298 -- 298 -- 298
Minority shareholders' interest (MSI).......... 109 80 -- 80 (117)(k) 72
------- ------- ------- ------- ------- -------
Profit (loss) for the year..................... 12,031 3,026 (73) 2,953 (2,765) 12,219
------- ------- ------- ------- ------- -------
Dividend requirements on preference shares 2 -- -- -- -- 2
------- ------- ------- ------- ------- -------
Profit (loss) for the year
applicable to ordinary shares................ 12,029 3,026 (73) 2,953 (2,765) 12,217
======= ======= ======= ======= ======= =======
Profit (loss) per ordinary share
Profit (loss) for the year.................. 0.6189 9.1708 0.5365
Replacement cost profit (loss) before
exceptional items......................... 0.5800 3.1180 0.4994
======= ======= =======
Average number outstanding of ordinary
shares (in millions)......................... 19,436 322 3,335 22,771
======== ======== ======= =======
Reconciliation of replacement cost results
Profit (loss) for the year..................... 12,031 2,953 (2,765) 12,219
Inventory holding (gains) losses............... (779) (42) -- (821)
------- ------- ------- -------
Replacement cost profit (loss) for the year.... 11,252 2,911 (2,765) 11,398
Exceptional items net of tax and MSI........... 22 (1,907) 1,859 (26)
------- ------- ------- -------
Replacement cost profit (loss) before
exceptional items............................ 11,274 1,004 (906) 11,372
======== ======== ======= =======
The Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information are an integral part of the statement.
Page 7
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT
Note 1--Replacement cost profit
Operating profit is a UK GAAP measure of trading performance. It excludes
profits and losses on the sale or termination of operations and fundamental
restructuring costs, interest expense and taxation.
BP determines operating profit on a replacement cost basis, which
eliminates the effect of inventory holding gains and losses. For the oil and gas
industry, the price of crude oil can vary significantly from period to period,
hence the value of crude oil (and products) also varies. As a consequence, the
amount that would be charged to cost of sales on a FIFO basis of inventory
valuation would include the effect of oil price fluctuations on oil and products
inventories. BP therefore charges cost of sales with the average cost of
supplies incurred during the period rather than the historical cost of supplies
on a FIFO basis. For this purpose, inventories at the beginning and end of the
period are valued at the average cost of supplies incurred during the period
rather than at their historical cost. These valuations are made quarterly by
each business unit, based on local oil and product price indices applicable to
their specific inventory holdings, following a methodology that has been
consistently applied by BP for many years. Operating profit on the replacement
cost basis is used by BP management as the primary measure of business unit
trading performance, and BP management believes that this measure assists
investors to assess the group's underlying trading performance from period to
period.
Replacement cost is not a US GAAP measure. The major US oil companies apply
the LIFO basis of inventory valuation. The LIFO basis is not permitted under UK
GAAP. The LIFO basis eliminates the effect of price fluctuations on crude oil
and product inventory except where an inventory drawdown occurs in a period. BP
management believes that, where inventory volumes remain constant or increase in
a period, operating profit on the LIFO basis will not differ materially from
operating profit on BP's replacement cost basis.
Where an inventory drawdown occurs in a period, cost of sales on a LIFO
basis will be charged with the historical cost of the inventory drawn down,
whereas BP's replacement cost basis charges cost of sales at the average cost of
supplies for the period. To the extent that the historical cost on the LIFO
basis of the inventory drawn down is lower than the current cost of supplies in
the period, operating profit on the LIFO basis will be greater than operating
profit on BP's replacement cost basis. To the extent that the historical cost on
the LIFO basis of the inventory drawn down is greater than the current cost of
supplies in the period, operating profit on the LIFO basis will be lower than
operating profit on BP's replacement cost basis.
Replacement cost profit before exceptional items excludes profits and
losses on the sale or termination of operations and fundamental restructuring
costs, which are defined by UK GAAP. This is the measure of profit used by the
BP board of directors in setting targets for and monitoring performance within
BP. BP's management believes this indicator provides the most relevant and
useful measure for investors because it most accurately reflects underlying
trading performance.
Note 2--Reclassification
Reclassifications have been made to the ARCO historical financial
information presented under US GAAP to conform to BP's presentation under UK
GAAP.
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP's accounting policies under UK GAAP
ARCO prepares its financial statements in accordance with US GAAP. For
purposes of preparing the Unaudited Pro Forma Condensed Consolidated Income
Statement, the financial statements of ARCO have been restated to conform with
BP accounting policies under UK GAAP by giving effect to the adjustments
described below.
Page 8
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP's accounting policies under UK GAAP (continued)
Consolidation basis
Under US GAAP, ARCO's interest in a cogeneration facility is
proportionately consolidated, whereas under UK GAAP the joint venture would be
equity accounted.
Inventory accounting
ARCO carries inventories at the lower of current market value or cost. Cost
is determined under the LIFO method for the majority of inventories of crude oil
and petroleum products. The costs of remaining inventories are determined
predominantly on an average cost basis.
BP carries inventories at the lower of cost or net realizable value. Cost
to BP is determined using the FIFO method. Cost of sales determined on a FIFO
basis is adjusted to a replacement cost basis, i.e., to reflect the average cost
of supplies incurred during the period, by excluding inventory holding gains and
losses.
Deferred taxation
Under the UK GAAP restricted liability method, deferred taxation is only
provided for where timing differences are expected to reverse in the foreseeable
future. For US GAAP under the liability method, deferred taxation is provided
for temporary differences between the financial reporting basis and the tax
basis of assets and liabilities at enacted tax rates.
Exceptional items
Under UK GAAP, certain exceptional items are shown separately on the face
of the income statement after operating profit. These items are profits or
losses on the sale or closure of businesses and fixed assets and fundamental
restructuring charges. Under US GAAP, these items other than for discontinued
operations are classified as operating income or expenses.
Equity accounting
UK GAAP requires the investor's share of operating profit or loss,
exceptional items, interest expense and taxation of associated undertakings and
joint ventures to be shown separately from those of the group. For US GAAP, the
after-tax profits or losses (i.e. operating results after exceptional items,
interest expense and taxation) are included in the income statement as a single
line item.
UK GAAP requires the investor's share of the gross assets and gross
liabilities of joint ventures to be shown on the face of the balance sheet,
whereas under US GAAP the net investment is included as a single line item.
Provisions
UK GAAP requires provisions for decommissioning and environmental
liabilities to be determined on a discounted basis if the effect of the time
value of money is material.
Provisions for decommissioning are recognized in full, on a discounted
basis, at the commencement of oil and natural gas production. UK GAAP also
requires the capitalization as a tangible fixed asset and subsequent
depreciation of an amount equivalent to the provision.
The unwinding of the discount, which represents a period-by-period cost, is
included within interest expense. Under US GAAP (i) environmental liabilities
are discounted only where the timing and amounts of payments are fixed and
reliably determinable and (ii) provisions for decommissioning are provided for
on a unit-of-production basis over field lives.
Page 9
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Note 3--Significant differences between ARCO's accounting policies under US GAAP
and BP's accounting policies under UK GAAP (continued)
Business combinations
US GAAP requires the recognition of a deferred tax asset or liability for
the tax effects of differences between the assigned values and the tax bases of
assets acquired and liabilities assumed in a purchase business combination,
whereas under UK GAAP no such deferred tax asset or liability is recognized.
Under US GAAP the deferred tax asset or liability is amortized over the same
period as the assets and liabilities to which it relates.
US GAAP requires certain reorganization and integration costs to be
incurred as part of a purchase business combination to be recognized as
liabilities assumed and included in the allocation of the acquisition cost. UK
GAAP does not generally permit recognition of these costs as part of the
accounting for the business combination.
Note 4--UK GAAP adjustments to historical ARCO income statements
The adjustments to restate the income statements of ARCO for the year ended
December 31, 2000 to conform with BP accounting policies under UK GAAP are set
out below.
For the year
ended
December 31,
Increase (decrease) in caption heading 2000
-------------------------------------- ------------
$
(Millions)
Consolidation basis
Turnover: Joint ventures................... 187
Replacement cost of sales.................. (85)
Distribution and administration expenses... (48)
Share of profits of joint ventures......... 54
Profit for the period...................... --
Inventory accounting
Replacement cost of sales.................. 64
Inventory holding gains (losses)........... 42
Profit for the period...................... (22)
Deferred taxation
Replacement cost of sales.................. 15
Taxation................................... 83
Profit for the period...................... (98)
Exceptional items
Other income............................... (303)
Profit (loss) on the sale of fixed assets and
businesses and termination of operations... 303
Profit for the period...................... --
Equity accounting
Other income............................... (35)
Share of profits of joint ventures......... 98
Share of profits of associated undertakings 23
Interest expense........................... 42
Taxation................................... 44
Profit for the period...................... --
Provisions
Replacement cost of sales.................. (87)
Interest expense........................... 40
Profit for the period...................... 47
Business combinations
Replacement cost of sales.................. (121)
Taxation................................... 121
Profit for the period...................... --
Page 10
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Note 4--UK GAAP adjustments to historical ARCO income statements (Continued)
These adjustments may be summarized by caption heading as set out below.
For the year
ended
December 31,
2000
------------
$
(Millions)
(a) Turnover: Joint ventures
Consolidation basis...................... 187
=======
(b) Replacement cost of sales
Consolidation basis...................... (85)
Inventory accounting..................... 64
Provisions............................... (87)
Business combinations.................... (121)
Deferred taxation........................ 15
-------
(214)
=======
(c) Distribution and administration expenses
Consolidation basis...................... (48)
=======
(d) Other income
Exceptional items........................ (303)
Equity accounting........................ (35)
-------
(338)
=======
(e) Share of profits of joint ventures
Consolidation basis...................... 54
Equity accounting........................ 98
-------
152
=======
(f) Share of profits of associated undertakings
Equity accounting........................ 23
=======
(g) Profit (loss) on sale of fixed assets and businesses
and termination of operations
Exceptional items........................ 303
=======
(h) Inventory holding gains (losses)
Inventory accounting..................... 42
=======
(i) Interest expense
Equity accounting........................ 42
Provisions............................... 40
-------
82
=======
(j) Taxation
Deferred taxation........................ 83
Equity accounting........................ 44
Business combinations.................... 121
-------
248
=======
Page 11
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Note 5--Pro Forma adjustments to the consolidated income statements
The Unaudited Pro Forma Condensed Consolidated Income Statements give
effect to the pro forma adjustments set out below.
Acquisition-related adjustments
The acquisition-related adjustments reflect the actual impact on the ARCO
UK GAAP historical profit and loss account of the fair values that were
attributed to its assets and liabilities at the date of acquisition. The
adjustments therefore eliminate certain credits and charges recognized by ARCO
in its historical results which had already been reflected by BP in the form of
fair value adjustments to the assets and liabilities acquired. The adjustments
are mainly in respect of environmental charges, impairment charges, transaction
costs, profit on sale of businesses and loss on retirement of debt.
Consolidation
The consolidation adjustments eliminate the impact on the profit and loss
account of transactions occurring between BP and ARCO since the date of the
acquisition. In the period prior to the acquisition, such amounts are not
considered material and therefore no adjustment is made.
Amortization
The depreciation and amortization rates for the fair value adjustments to
tangible fixed assets and goodwill are set out below.
Depreciation: Exploration & Production assets have been depreciated on a
unit-of-production basis. Refining & Marketing assets have been depreciated over
15 years (refineries) and 10 years (marketing assets).
Goodwill: Amortized over a period of 10 years.
Minority shareholders' interest
The adjustment to minority shareholders' interest represents the share of
the other pro forma adjustments attributable to minority shareholders.
Page 12
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Note 5--Pro Forma adjustments to the consolidated income statements (Continued)
The pro forma adjustments to restate the income statements of ARCO for the
year ended December 31, 2000 to conform with BP accounting policies under UK
GAAP are set out below.
For the year
ended
December 31,
Increase (decrease) in caption heading 2000
-------------------------------------- ------------
$
(Millions)
Acquisition-related adjustments
Turnover .................................. 63
Replacement cost of sales.................. (747)
Exploration expense........................ (7)
Other income............................... (74)
Share of profits of associated undertakings 3
Profit (loss) on sale of fixed assets and..
businesses and termination of operations... (2,933)
Interest expense........................... (108)
Taxation................................... (1,042)
Profit for the period...................... (1,037)
Consolidation
Turnover .................................. (1,959)
Replacement cost of sales.................. (1,978)
Production taxes........................... 1
Distribution and administration expenses... 72
Exploration expense........................ (7)
Other income............................... (244)
Interest expense........................... (291)
Profit for the period...................... --
Amortization
Replacement cost of sales.................. 1,847
Profit for the period...................... (1,847)
Minority shareholders' interest
Interest expense........................... (2)
Minority shareholders' interest............ (117)
Profit for the period...................... 119
Page 13
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
These adjustments may be summarized by caption heading as set out below.
For the year
ended
December 31,
2000
------------
$
(Millions)
(a) Turnover
Acquisition-related adjustment............ 63
Consolidation............................. (1,959)
-------
(1,896)
=======
(b) Replacement cost of sales
Acquisition-related adjustment............ (747)
Consolidation............................. (1,978)
Amortization.............................. 1,847
-------
(878)
=======
(c) Production taxes
Consolidation............................. 1
=======
(d) Distribution and administration expenses
Consolidation............................. 72
=======
(e) Exploration expense
Acquisition-related adjustment............ (7)
Consolidation............................. (7)
-------
(14)
=======
(f) Other income
Acquisition-related adjustment............ (74)
Consolidation............................. (244)
-------
(318)
=======
(g) Share of profits of associated undertakings
Acquisition-related adjustment............ 3
=======
(h) Profit (loss) on sale of fixed assets and businesses
and termination of operations............
Acquisition-related adjustment............ (2,933)
=======
(i) Interest expense
Acquisition-related adjustment............ (108)
Consolidation............................. (291)
Minority shareholders' interest........... (2)
-------
(401)
=======
(j) Taxation
Acquisition-related adjustment............ (1,042)
=======
(k) Minority shareholders' interest
Minority shareholders' interest........... (117)
=======
Page 14
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Consideration
ARCO shareholders received for each share of ARCO common stock held as of
April 17, 2000, 9.84 BP ordinary shares. Such BP ordinary shares were delivered
in the form of BP ADSs or, at the election of a holder of ARCO common stock, BP
ordinary shares. For purposes of determining the consideration for the
transaction the number of ARCO shares issued and outstanding on 17 April 2000
(324 million shares), together with the estimated number of additional shares
which may be issued in respect of outstanding options and contingent stock and
on conversion of ARCO preference stock (15 million shares), have been used,
which would result in the issue of approximately 3,335 million BP ordinary
shares. The total consideration for the acquisition was $27,506 million,
including acquisition expenses of $79 million. Stamp duty reserve tax of $295
million paid on the issue of ADSs has been treated as a share issue expense and
charged against the Share Premium Account.
The cost of acquisition has been determined as follows:
$
(Millions)
Issue of 3,335 million BP ordinary shares at
(pound)5.2925 ($8.39) per share............................. 27,992
Less: amounts receivable on issue of shares under option...... 565
-------
27,427
Acquisition expenses.......................................... 79
-------
27,506
=======
Note 6--Significant differences between UK GAAP and US GAAP
The Unaudited Pro Forma Condensed Consolidated Income Statement has been
prepared in accordance with UK GAAP, which differs in certain respects from US
GAAP.
The main differences between UK GAAP and US GAAP that are relevant to BP's
Unaudited Pro Forma Condensed Consolidated Income Statement are set out below.
For US GAAP the cost of acquisition has been determined as follows:
At March
31, 2000
---------
$
(Millions)
Issue of 3,335 million BP ordinary shares
at (pound)5.115 ($8.21) per share............................ 27,386
Less: amounts receivable on issue of shares under option....... 565
-------
26,821
Acquisition expenses........................................... 79
-------
26,900
=======
Page 15
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Group consolidation
Investments in entities over which the Group does not exercise control
(associates and joint ventures) are accounted for by the equity method.
UK GAAP requires the consolidated financial statements to show separately
the Group proportion of operating profit or loss, exceptional items, inventory
holding gains or losses, interest expense and taxation of associated
undertakings and joint ventures. In addition the turnover of joint ventures
should be disclosed. For US GAAP the after tax profits or losses (i.e. operating
results after exceptional items, inventory holding gains or losses, interest
expense and taxation) are included in the income statement as a single line
item.
Where the Group conducts activities through a joint arrangement that is not
carrying on a trade or business in its own right the Group accounts for its own
assets, liabilities and cash flows of the activity measured according to the
terms of the arrangement. For the Group this method of accounting applies to
certain oil and natural gas activities and undivided interests in pipelines. US
GAAP allows these activities to be accounted for by proportional consolidation,
which is equivalent to UK GAAP.
Income statement
The income statement prepared under UK GAAP shows sub-totals for
replacement cost profit before interest and tax, historical cost profit before
interest and tax and profit after taxation. These line items are not recognized
under US GAAP.
Exceptional items
Under UK GAAP certain exceptional items are shown separately on the face of
the income statement after operating profit. These items are profits or losses
on the sale of businesses and fixed assets and fundamental restructuring
charges. Under US GAAP these items are classified as operating income or
expenses.
Provisions
UK GAAP requires that the amount recognised as a provision should be an
estimate of the expenditure required to settle the obligation at the balance
sheet date. Provisions for decommissioning, environmental liabilities and
onerous contracts should be determined on a discounted basis if the effect of
the time value of money is material.
Under US GAAP if the probable cost of settling the obligation is within a
range of estimated amounts and no amount within the range appears to be a more
likely outcome than any other amount in the range, the minimum amount in the
range should be accrued. Also under US GAAP (i) environmental liabilities are
discounted only where the timing and amounts of payments are fixed and reliably
determinable and (ii) provisions for decommissioning are provided on a
unit-of-production basis over field lives.
Deferred taxation
Under the UK GAAP restricted liability method, deferred taxation is only
provided where timing differences are expected to reverse in the foreseeable
future. Under US GAAP deferred taxation is provided for temporary differences
between the financial reporting basis and the tax basis of the Group's assets
and liabilities at enacted tax rates.
US GAAP requires the recognition of a deferred tax asset or liability for
the tax effects of differences between the assigned values and the tax bases of
assets acquired and liabilities assumed in a purchase business combination,
whereas under US GAAP no such deferred tax asset or liability is recognized.
Under US GAAP the deferred tax asset or liability is amortized over the same
period as the assets and liabilities to which it relates.
The adjustments for depreciation and deferred taxation arise from the
difference between the UK GAAP and US GAAP bases for deferred taxation.
Page 16
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Continued)
Note 6--Significant differences between UK GAAP and US GAAP (Continued)
Sale and leaseback
The sale and leaseback of the Amoco building in Chicago, Illinois in 1998
is treated as a sale for UK GAAP whereas for US GAAP it is treated as a
financing transaction.
A provision was recognized under UK GAAP in 1999 to cover the likely
shortfall on rental income from subletting the Chicago office building. As the
original sale and leaseback was not treated as a sale for US GAAP the provision
has been reversed for US GAAP.
Under UK GAAP the profit arising on the sale and operating leaseback of
certain railcars in 1999 is taken to income in the period in which the
transaction occurs. Under US GAAP this profit is not recognized immediately but
amortized over the term of the operating lease.
Goodwill
The goodwill recognized on the acquisition of ARCO in 2000 for US GAAP is
higher than for UK GAAP. The additional deferred tax liability recognized for US
GAAP is reflected in a corresponding increase in goodwill. This increase is
partly offset by the lower consideration for US GAAP compared with UK GAAP as a
result of using BP share prices on different dates to determine the respective
considerations.
Debt retirement charges
Under US GAAP charges arising on the early retirement of debt would be
shown as an extraordinary item. Under UK GAAP they are included within interest
expense.
Page 17
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT (Concluded)
Note 6--Significant differences between UK GAAP and US GAAP (Concluded)
For the year
ended
December 31,
Profit for the Period 2000
--------------------- ------------
$
(Millions)except per share
and ADS amounts)
Profit (loss) from continuing operations as 12,219
reported under UK GAAP.........................
Adjustments
Depreciation charge......................... (946)
Decommissioning and environmental expense... (346)
Onerous property leases..................... (42)
Interest expense............................ 201
Deferred taxation........................... (619)
Other....................................... 60
-------
Profit (loss) for the year from continuing
operations as adjusted 10,527
Dividend requirements on preference shares..... 2
-------
Profit (loss) for the period from continuing 10,525
operations applicable to ordinary shares as adjusted to
accord with US GAAP............................
-------
Profit (loss) for the period from continuing
operations as adjusted:
Per ordinary share
Basic....................................... 0.46
Diluted..................................... 0.46
=======
Per ADS
Basic....................................... 2.76
Diluted..................................... 2.76
=======
Proft per ordinary share on a US GAAP basis
BP ARCO BP
---------- ---------- ---------
Year ended December 31, 2000 Historical Historical Pro Forma
---------------------------- ---------- ---------- ---------
$ $ $
(millions, except per share and ADS amounts)
Profit for the year applicable to common 10,348 3,026 10,525
(ordinary) shares......................... ======== ========= ========
Profit for the year:
Per common (ordinary) share
Basic.................................. 0.53 9.40 0.46
Diluted................................ 0.53 9.20 0.46
Per ADS
Basic.................................. 3.18 2.76
Diluted................................ 3.18 2.76
======== ========
Average number of common (ordinary)
shares outstanding (in millions)
Basic.................................. 19,436 322 22,771
Assuming dilution...................... 19,581 329 22,916
======== ======== ========
Page 18
Following the acquisition of ARCO by BP, ARCO no longer engages in significant
hedging activity using derivative instruments. Accordingly, the impact of SFAS
No. 133 will not be material to stand-alone ARCO financial statements.
Page 19
2. Financial Statements of Atlantic Richfield Company for year ended December
31, 2000 including the Report of the Independent Accountants and Consent of
Indpendent Accountants.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Atlantic Richfield Company
We have audited the accompanying consolidated balance sheet of Atlantic
Richfield Company as of December 31, 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. Our audits also included the financial statement schedule for year ended
December 31, 2000. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Richfield Company at
December 31, 2000 and the consolidated results of operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information for the year ended December 31, 2000 set forth therein.
Ernst & Young L.L.P.
Los Angeles, CA
March 14, 2001
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated March 14,
2001, with respect to the consolidated financial statements of Atlantic
Richfield Company as of and for the year ended December 31, 2000 included in
this Form 6-K in the following Registration Statements:
Registration Statement on Form F-3 (File No. 333-9790) of BP Amoco p.l.c.;
Registration Statements on Form F-3 (File Nos. 33-39075 and 33-20338) of BP
America Inc. and BP Amoco p.l.c.;
Registration Statement on Form F-3 (File No. 33-29102) of The Standard Oil
Company and BP Amoco p.l.c.; and
Registration Statements on Form S-8 (File Nos. 33-21868, 333-9020,
333-9798, 333-79399 and 333-34968) of BP Amoco p.l.c.
/S/ ERNST & YOUNG L.L.P.
-----------------------
Chicago, IL Ernst & Young L.L.P.
February 19, 2002
Page 20
Consolidated Statement of Income
Millions, except per share
amounts 2000
---------------------------------------------------
REVENUES
Sales and other operating
revenues $ 14,993
Sales to related parties 2,507
Other revenues 893
Interest from related party 305
------------
Total revenues 18,698
------------
EXPENSES
Trade purchases 6,725
Trade purchases from related
parties 2,667
Operating expenses 2,685
Selling, general and
administrative expenses 513
Exploration expenses
(including undeveloped
leasehold amortization) 303
Depreciation, depletion and
amortization 1,617
Impairment of oil and gas
properties 286
Taxes other than income taxes 471
Interest 426
Interest - related party 53
Loss on disposition of Algeria
assets -
Restructuring costs 742
------------
Total expenses 16,488
------------
Income (loss) before items
below 2,210
Gain on sale of Alaska oil and
gas businesses and pipelines 2,588
------------
Income (loss) from continuing
operations before income
taxes,
minority interest and
extraordinary item 4,798
Provision (benefit) for taxes
on income 1,629
Minority interest in earnings
of subsidiaries 80
------------
Income (loss) from continuing
operations before
extraordinary item 3,089
Gain on disposition of
discontinued operations, net
of income taxes (benefit) of $(1) 89
------------
Income before extraordinary
item 3,178
Extraordinary loss on
extinguishment of debt, net
of income taxes of $91 152
------------
Net income $ 3,026
------------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
Page 21
Consolidated Balance Sheet
Millions 2000
-------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 92
Short-term investments 202
Accounts receivable 1,185
Accounts receivable from related parties 90
Inventories 374
Prepaid expenses and other current assets 125
--------
Total current assets 2,068
--------
Investments and long-term receivables:
Receivable from BP 3,597
Investments accounted for on the equity method 1,484
Other investments and long-term receivables 1,660
--------
Total investments and long-term receivables 6,741
--------
Net property, plant and equipment 14,721
Net assets of discontinued operations -
Deferred charges and other assets 1,420
--------
Total assets $ 24,950
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -
Accounts payable 1,073
Taxes payable 522
Long-term debt due within one year 304
Other 1,062
--------
Total current liabilities 2,961
--------
Long-term debt 4,090
Deferred income taxes 3,376
Dismantlement, restoration and reclamation 312
Environmental reserves 943
Other deferred liabilities and credits 2,186
Minority interest 150
--------
Total liabilities 14,018
--------
Stockholders' equity:
Preference stocks 1
Common stock, $2.50 par value; shares issued 327,436,320
shares outstanding 324,711,290 (2000) 818
Capital in excess of par value of stock 959
Retained earnings 9,420
Treasury stock (217)
Accumulated other comprehensive income (loss) (49)
--------
Total stockholders' equity 10,932
--------
Total liabilities and stockholders' equity $ 24,950
--------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 22
Consolidated Statement of Cash Flows
Millions 2000
---------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations and
extraordinary item $ 2,937
Adjustments to reconcile income to net cash
provided by operating activities:
Gain on sale of Alaskan oil and gas businesses and
pipelines (2,588)
Net gain on other asset sales (466)
Depreciation, depletion and amortization 1,617
Impairment of oil and gas properties 286
Dry-hole expense and undeveloped leasehold
amortization 133
Loss on Algeria asset disposal -
Income from equity investments (47)
Dividends from equity investments 78
Noncash provisions greater (less) than cash
payments 618
Minority interest in earnings of subsidiaries 80
Deferred income taxes (977)
Extraordinary loss on extinguishment of debt 152
Changes in working capital accounts 644
Other (156)
--------
Net cash provided by operating activities 2,311
--------
ASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Alaskan oil and gas
businesses and pipelines 6,803
Proceeds from other asset sales 1,494
Receivable from BP (3,597)
Additions to fixed assets, including dry-hole costs (2,078)
Acquisition of Vastar's minority interest (1,618)
Net proceeds from sale of ARCO Chemical and U.S.
coal assets -
Union Texas Petroleum acquisition -
Net cash provided (used) by short-term investments 68
Investment in/advances to LUKARCO (246)
Investments and long-term receivables (307)
Other -
--------
Net cash provided (used) by investing activities 519
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,416)
Proceeds from issuance of long-term debt 94
Net cash provided (used) by notes payable (1,674)
Dividends paid (697)
Treasury stock purchases (7)
Other 13
--------
Net cash provided (used) by financing activities (3,687)
--------
Cash flows from discontinued operations 52
Effect of exchange rate changes on cash 18
--------
Net increase (decrease) in cash and cash
equivalents (787)
Cash and cash equivalents at beginning of year 879
--------
Cash and cash equivalents at end of year $ 92
--------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 23
Consolidated Statement of Changes in Stockholders' Equity
Accumulated
Other
Common Stock Preference Capital in Treasury Stock Comprehensive Retained
Millions Shares Dollars Stock Excess of Par Shares Dollars* Income (loss) Earnings Total
----------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2000 326.7 $817 $1 $889 3.7 $(279) $ 167 $ 7,091 $8,686
-----------------------------------------------------------------------------------------------------------------------------------
Net income 3,026 3,026
Other comprehensive
income:
Unrealized loss on
securities (88) (88)
Foreign currency
translation (158) (158)
Minimum pension
liability 30 30
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income 2,810
Common stock dividends (696) (696)
Preference stock
dividends (1) (1)
Common stock issued 0.5 1 52 53
Treasury stock purchases 0.1 (7) (7)
Treasury stock issued 28 (0.9) 59 87
Cancellation of common
stock shares (324.5) (812) (10) (0.2) 10 (812)
Issuance of common stock
shares to BP 324.7 812 812
-----------------------------------------------------------------------------------------------------------------------------------
Balance December 31,
2000 327.4 $818 $1 $ 959 2.7 $(217) $(49) $9,420 $10,932
===================================================================================================================================
*At cost
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 24
Notes to Consolidated Financial Statements
Note 1 Acquisition of ARCO by BP
On April 18, 2000, BP completed the acquisition of ARCO pursuant to the terms
of the merger agreement dated March 31, 1999, as amended through March 27, 2000
(Merger Agreement). The Merger Agreement, approved by the boards of both BP and
ARCO, provided for all common shareholders of ARCO, with the exception of BP,
ARCO or any of their subsidiaries, to receive 9.84 BP ordinary shares, each in
the form of BP American Depositary Shares (ADSs) or, at the election of the
shareholder, BP ordinary shares, in return for the cancellation of each of their
shares (other than the shares held by CH-Twenty Holdings, LLC, a subsidiary of
ARCO) (the Cancelled ARCO Shares). It also provided for the issue to BP of new
common shares equal in number to the Cancelled ARCO Shares. Any right to a
fraction of a BP ADS or an odd lot of less than six BP ordinary shares was
satisfied by a cash payment. In addition, the outstanding ARCO common stock was
delisted from the New York Stock Exchange (NYSE) and other exchanges on which it
had been listed.
Following the acquisition, ARCO's outstanding shares of $2.80 and $3.00
Preference Stock remained listed on the NYSE. Pursuant to the Merger Agreement,
each share of $2.80 Preference Stock was converted into the right to receive
7.872 ADSs and each share of $3.00 Preference Stock was converted into the right
to receive 22.304 ADSs.
Following the acquisition of ARCO by BP, ARCO became part of the BP Group, and
the ARCO businesses have been structured into business units, some of which were
combined with other businesses of the BP Group. The operations within the BP
Group are managed through four main businesses, Exploration and Production, Gas
and Power, Refining and Marketing and Chemicals. Gas and Power and Chemical
operations are not material for ARCO.
The financial position and results of operations of ARCO should be understood
in the context of this relationship. The financial statements of ARCO reflect
the historical costs to the previous shareholder group and, accordingly, do not
reflect any purchase accounting adjustments related to the acquisition of ARCO
by BP. Significant intercompany accounts and transactions between BP and its
affiliates and ARCO are disclosed as related party transactions in Note 3.
Note 2 Accounting Policies
ARCO's accounting policies conform to accounting principles generally accepted
in the United States, including the "successful efforts" method of accounting
for oil and gas producing activities. Unless otherwise stated, the Notes to
Consolidated Financial Statements exclude discontinued operations.
Principles of Consolidation
The consolidated financial statements include the accounts of all subsidiar-
ies, ventures and partnerships in which a controlling interest is held. ARCO
also consolidates its interests in undivided interest pipeline companies and in
oil and gas joint ventures. ARCO uses the equity method of accounting for
companies where its effective ownership is between 20% and 50% and for other
ventures and partnerships in which a controlling interest is not held.
Revenue Recognition
Revenues are generally recognized upon the passage of title, net of royalties,
if applicable.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as time deposits,
certificates of deposit and marketable securities other than equity securi-
ties, maturing within three months of purchase. Cash equivalents are stated at
cost, which approximates fair value.
Page 25
Notes to Consolidated Financial Statements
Oil and Gas Unproved Property Costs
Unproved property costs are initially capitalized. Significant unproved prop-
erties are not amortized but are periodically assessed for impairment. Other
unproved properties are amortized on a composite basis, considering past suc-
cess 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. Ex-
ploratory wells that find oil and gas reserves which cannot be classified as
proved within one year of discovery and do not continue to qualify as capital-
ized costs are charged to expense as dry-hole costs.
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 value is included in current income. Upon disposal of assets depreciated
on a group basis, unless unusual in nature or amount, residual cost less salvage
value is charged against accumulated depreciation.
Impairment of Long-lived Assets
Long-lived assets are assessed for possible impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
whenever changes in economic or operating conditions indicate the carrying
amount may not be recoverable. If undiscounted future cash flows are less than
the carrying amount, an impairment loss is recognized to the extent the carrying
amount exceeds future discounted cash flows. For proved oil and gas properties,
the assessment is performed on an individual field basis and is based on the
company's price forecast used for economic decision making.
Dismantlement, Restoration and Reclamation Costs
The estimated costs, net of salvage value, of dismantling facilities or projects
with limited lives or that are required to be dismantled by contract, regulation
or law, and the estimated costs of restoration and reclamation associated with
oil and gas operations are accrued during production and classified as a
long-term liability. Such costs are taken into account 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 liability and financial wherewithal of other responsible parties. Estimated
liabilities are not discounted to present value.
Stock-based Compensation
Employee stock options are accounted for under the intrinsic value method pre-
scribed by Accounting Principles Board Opinion (APB) No. 25.
Earnings per Share
Earnings per share for 2000 has been omitted from ARCO's financial statements
because ARCO had no publicly held common stock after ARCO's acquisition by BP on
April 18, 2000.
Page 26
Notes to Consolidated Financial Statements
Basic earnings per share was based on the average number of common shares
outstanding during each period. Diluted earnings per share included as out-
standing certain contingently issuable shares, primarily stock options and
convertible preference stock.
Use of Estimates
The preparation of financial statements in conformity with accounting princi-
ples generally accepted in the United States requires management to make esti-
mates and assumptions that affect the reported amounts of assets and liabili-
ties and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Derivative Instruments
Prior to the acquisition of ARCO by BP, the company used a variety of derivative
instruments, both financial and commodity based, to minimize the market risks of
commodity price, interest rate and foreign currency fluctuations. The company
did not hold or issue derivative instruments for trading purposes and was not a
party to leveraged instruments. All derivative instruments were off-balance
sheet instruments; however, net receivable or payable positions related to
derivative instruments were carried on the balance sheet. The nature of the
transaction underlying a risk management strategy, primarily whether or not the
instrument qualified as a hedge, determined which accounting method was used.
In order to qualify for hedge accounting, the derivative instrument must be
effective as a hedge and designated as such.
Deferral accounting was used for the following types of transactions (if the
instrument qualified as a hedge): future crude oil and natural gas production;
fixed-price crude oil and natural gas purchase and sale commitments; U.S. dol-
lar-denominated debt issued by a foreign subsidiary; debt denominated in a
foreign currency; and anticipated foreign currency commitments. Under this
method, deferred gains and losses were included in other assets or accrued li-
abilities until the designated underlying item was recognized in income. Rec-
ognized gains and losses were recorded in sales and other operating revenues,
other revenues or trade purchases depending on the underlying item associated
with the derivative. Instruments typically used in these transactions were crude
oil and natural gas swap and price collar contracts and some foreign currency
swap, forward and option contracts.
The accrual method of accounting was used for interest rate swap agreements
entered into by the company which convert the interest rate on fixed-rate debt
to a variable rate. Under the accrual method, each net payment or receipt due or
owed under the derivative was recognized in income in the period to which the
payment or receipt relates. Amounts to be paid/received under these agreements
were recognized as an adjustment to interest expense. The related amounts
payable to/receivable from the counterparties were included in other accrued
liabilities.
The fair value method of accounting was used for any derivative instrument
that did not qualify as a hedge. The fair value method, whereby gains and losses
associated with changes in fair value of a derivative instrument were recognized
currently in income or in accumulated other comprehensive income, was used for
the following derivative instruments: foreign currency forward and option
contracts associated with anticipated future cash flows related to overseas
operations, and foreign currency swap contracts associated with
foreign-denominated intercompany debt with maturities exceeding one year.
Changes in fair value of all transactions accounted for under this method were
recognized currently in income and reported as other revenues.
Under all methods of accounting, the cash flows related to any recognized
gains or losses associated with derivative instruments were reported as cash
flows from operations.
Page 27
Notes to Consolidated Financial Statements
If a derivative instrument designated as a hedge was terminated prior to
expected maturity, gains or losses were deferred and included in income when the
underlying hedged item was recognized in income.
When the designated item associated with a derivative instrument matured, was
sold, extinguished or terminated, gains or losses were recognized as part of the
gain or loss on sale or settlement of the underlying item. When a derivative
instrument was associated with an anticipated transaction that was no longer
expected to occur, the gain or loss on the derivative was recognized immediately
in income.
Note 3 Relationship with BP and Other Related Party Transactions
Following the acquisition of ARCO by BP on April 18, 2000, BP and certain of its
affiliates began providing certain senior management services, legal services,
tax services, risk management and various other corporate services to ARCO. The
incremental cost of these services is not material and is not included in the
financial statements of ARCO.
ARCO participates in BP's cash management system, where the bank sends daily
notification of checks presented for payment. BP transfers funds from other
sources to cover the checks presented for payment. This program generally
results in book overdrafts as a result of checks outstanding. At December 31,
2000, these book overdrafts have been reclassified to accounts payable.
Sales to and purchases from BP or its subsidiaries consisted primarily of the
sale or purchase of petroleum liquids and natural gas. The sales to other
related parties primarily included sales to Southern Company Energy Marketing
(SCEM), an equity affiliate of Vastar Resources, Inc. (Vastar) and consisted of
sales of natural gas produced by Vastar. Vastar sold its interest in SCEM in
September, 2000.
Sales to related parties for the year ended December 31, 2000 were as follows:
(millions) 2000
--------------------------------------------------------
BP $ 1,600
Southern Company Energy Marketing 820
Other 87
--------
$ 2,507
========
Purchases from related parties for the year ended December 31, 2000 were as
follows:
(millions) 2000
--------------------------------------------------------
BP $ 2,586
Southern Company Energy Marketing 71
Other 10
--------
$ 2,667
========
ARCO and its subsidiaries will join with BP America Inc. (BP America), a
subsidiary of BP, in filing a consolidated federal income tax return for periods
subsequent to the acquisition of ARCO by BP. ARCO and BP America are parties to
a tax sharing agreement which requires ARCO as a member of BP America's
consolidated tax group to pay its share of the group's federal income taxes and
certain state and local taxes to BP America. ARCO's share of these taxes is
generally the amount of federal income tax it would have to pay if ARCO and its
subsidiaries filed tax returns as a separate tax group.
Page 28
Notes to Consolidated Financial Statements
ARCO entered into a long-term deposit agreement with BP America in which the
initial deposit consisted of the proceeds from the sale of the Alaskan oil and
gas businesses. Subject to the provisions of early termination the funds will
continue to be on deposit until January 1, 2002. In September 2000, ARCO
withdrew $1.5 billion to purchase Vastar's publicly held minority stockholding.
The interest rate is tied to the LIBOR rate or such other rate as may be agreed
between the parties.
Note 4 Sale of Alaskan Operations
In the second quarter of 2000 ARCO completed the sale of its Alaskan operations,
comprising oil and gas production, crude oil marine transportation and related
crude oil inventory, for proceeds totaling approximately $6.2 billion and
realized an after-tax gain of approximately $1.8 billion. The net book value of
those assets at the time of the sale was approximately $3.2 billion. The gain on
the inventory portion of the sale included a $69 million after-tax gain from
LIFO inventory liquidation. The results of the Alaskan oil and gas producing and
marine transportation operations through the dates of sale are included in
ARCO's twelve-month results ended December 31, 2000.
In the third quarter of 2000 ARCO sold its Alaskan pipeline operations,
thereby completing the sale of all Alaskan operations mandated by the Federal
Trade Commission in obtaining approval for the acquisition of ARCO by BP. ARCO
received proceeds of $308 million and recorded an after-tax loss of $34 million.
The results of the Alaskan pipeline operations through the date of sale are
included in ARCO's twelve-month results ended December 31, 2000.
The following table sets forth the operating results for the Alaskan oil and
gas producing, pipeline and marine transportation businesses included in ARCO's
financial statements for the year ended December 31, 2000.
(millions) 2000
----------------------------------------------------------------------
Revenues
Sales and other operating revenues* $ 1,209
-------
Total revenues 1,034
-------
Expenses
Operating expenses 146
Depreciation, depletion and amortization 135
Exploration expenses 23
Taxes other than income taxes 110
Interest 38
-------
Total expenses 452
-------
Income from continuing operations before income taxes
and minority interest $ 582
=======
* Before elimination of intercompany transfers $ 861
=======
Note 5 Sale of Certain Lower 48 Pipeline Assets
In order to obtain approval for the acquisition of ARCO by BP, the Federal Trade
Commission also required that ARCO sell certain Lower 48 pipeline assets. The
sale of those assets was completed in August 2000 for net proceeds totaling
approximately $314 million and ARCO recorded an after-tax gain on the sale of
approximately $8 million in the third quarter of 2000. The net book value of the
Lower 48 pipeline assets sold was approximately $304 million.
Page 29
Notes to Consolidated Financial Statements
Note 6 Merger Agreement between ARCO and Vastar
On September 15, 2000, Vastar's common stock minority shareholders approved the
merger agreement between ARCO and Vastar. Following the approval, 18,252,609
shares of Vaster common stock were purchased by ARCO at a price of $83 per share
for a total purchase price of $1,618 million (including $103 million primarily
for the buyout of employee stock options then outstanding). Vastar is now a 100%
owned subsidiary of ARCO.
Note 7 Segment Information
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." ARCO has
two reportable segments: exploration and production (E&P) and refining and
marketing (R&M). The segments were determined based upon types of products
produced/sold by each segment. Segment performance is evaluated based upon net
income, excluding interest expense.
The E&P segment is an aggregation of several business units engaged in one or
more of the following: the worldwide exploration, development and production of
petroleum liquids (crude oil, condensate and natural gas liquids) and natural
gas; the purchase and sale of petroleum liquids and natural gas, and prior to
the sale discussed in Note 4, the transportation via pipeline of petroleum
liquids within the State of Alaska. The company's investments in the LUKARCO
joint venture and LUKOIL common stock are included in the E&P segment as well.
The R&M segment comprises the refining of crude oil, primarily from the North
Slope of Alaska; the marketing of petroleum products, primarily in the West
Coast region of the U.S.; and, prior to the sale discussed in Note 4, the
transportation of petroleum liquids and petroleum products via ocean-going
tankers, primarily between Alaska and the West Coast. The company's equity
investment in Zhenhai Refining and Chemical Company is included in the R&M
segment as well.
Revenue from other operating segments is attributable to the pipeline
transportation and storage of petroleum liquids and petroleum products in the 48
contiguous United States and operations of an aluminum business.
Page 30
Notes to Consolidated Financial Statements
Intersegment sales were made at prices approximating current market value.
Segment Information
Exploration Refining & Unallocated
Millions & Production Marketing All Other Items Totals
----------------------------------------------------------------------------------------
Sales and other operating revenue:
U.S. $ 5,480 $ 10,157 $ 510 $ - $ 16,147
International 2,132 74 - 5 2,211
Intersegment revenues (853) - - (5) (858)
-----------------------------------------------------------
Total 6,759 10,231 510 - 17,500
Income from equity
affiliates 41 (4) 10 - 47
Interest revenue 70 40 5 365 480
Interest expense - - - 479 479
Depreciation, depletion
and amortization 1,331 260 19 7 1,617
Income tax expense
(benefit) 1,660 156 33 (220) 1,629
Net income (loss) (b) 3,400 271 47 (692)(a) 3,026
Investment in equity
affiliates 1,233 206 60 (15) 1,484
Property, plant and
equipment (net):
U.S. 5,525 2,725 424 53 8,727
International 5,968 26 - - 5,994
Additions to fixed
assets 1,714 334 30 - 2,078
Segment assets 14,367 4,427 836 5,320 24,950
--------
(a) Includes: gain on disposition of discontinued operations of $89, and
extraordinary loss of $152.
(b) Includes gain/(loss) on sale of Alaska oil and gas businesses and pipelines
of $1,809, $(6), and $8, allocated to E&P, R&M and other, respectively.
Page 31
Notes to Consolidated Financial Statements
Note 8 Discontinued Operations
In the second quarter of 2000, ARCO disposed of its remaining coal assets in
Australia. Upon the sale of those assets, a provision originally established in
1998 for the estimated loss on sale of U.S. and Australian coal assets was
reduced resulting in an after-tax gain of $89 million.
Revenues and net income from discontinued coal operations during the year
ended December 31, 2000 were as follows:
Millions 2000
---------------------------------
Revenues $ 56
Net income $ -
======
Gain on disposition: 89
======
Page 32
Notes to Consolidated Financial Statements
Note 9 Restructuring Costs
During 2000 the company recorded restructuring costs of $742 million before tax
in conjunction with the merger into BP (See Note 1), comprised of the following:
Personnel terminations................................................. $366
Facilities closure..................................................... 88
Stock-related compensation............................................. 98
Merger costs........................................................... 101
UK shutdown costs...................................................... 58
Other shutdown costs................................................... 31
----
$742
====
Personnel termination costs relate to the severance of approximately 2,050
employees, primarily at the corporate headquarters and Vastar, a technical
support center in Texas, and various operating units worldwide. This did not
include costs related to the termination of foreign national employees. This
represents specific employee terminations identified as of December 2000;
further charges may be necessary in future periods if additional terminations
become known.
Additionally, approximately 700 terminations were identified related to
Alaskan oil and gas and lower 48 pipeline operations sold during 2000. These
costs were included as part of the net gain on sale of those operations.
The following table summarizes the charges related to the terminations that
resulted from ARCO's merger into BP:
Funded Unfunded
Short-term Long-term Long-term
($ millions) Terminations Benefits(a)Benefits(b) Benefits(c)Total
-------------------------------------------------------------------------------
Reported as
restructuring costs.... 2,050 $118 $199 $49 $366
Reported with gain on
sale of assets......... 700 30 66 -- 96
----- ---- ---- --- ----
Total.................. 2,750 $148 $265 $49 $462
===== ==== ==== === ====
--------
(a) Severance payments and ancillary benefits such as relocation and
outplacement.
(b) Net increase in pension benefits to be paid from assets of qualified
plans.
(c) Net increase in non-qualified pension benefits and other postretirement
benefits to be paid from Company funds.
Through December 31, 2000, approximately 1,530 employees have been terminated
and approximately $84 million of severance and ancillary benefits have been paid
and charged against the accrual. Payments made do not necessarily correlate to
the number of terminations due to the ability of terminees to defer receipt of
certain payments. The remaining severance and ancillary benefits are expected to
be paid by the second quarter 2002.
A reserve of $88 million was established for office space and facilities,
primarily in Los Angeles and Houston, that will be vacated with no future
economic benefit. Cash payments will be made through the remaining terms of the
leases, the longest (and largest) of which extends to 2012.
Page 33
Notes to Consolidated Financial Statements
The charge of $98 million for stock-related compensation related to
compensation benefits from contingent restricted stock and dividend share
credits on stock options granted to executives and key employees. The benefits,
which ordinarily would have been reported as compensation expense in future
periods, were accelerated upon the change of control of the company.
Merger costs represent costs directly related to the consummation of the
merger, primarily for investment and legal consultants, which have been paid.
The remainder of the unusual items charge is comprised of shutdown costs (such
as foreign national terminations and other location-specific costs) for offices
in the United Kingdom and other worldwide locations.
Through December 31, 1999, the company had previously established reserves
totaling $251 million for the costs of terminating 1,250 employees. $103 million
related to short-term benefits such as severance payments and ancillary benefits
such as relocation and outplacement; $148 million related to pension and other
postretirement benefits. Through December 31, 2000, approximately 1,200
employees have been terminated and approximately $97 million of severance and
ancillary benefits have been paid and charged against the short-term benefit
accrual. The remaining employees will terminate under the 2000 merger change of
control severance program with the previously established reserves deemed
adequate.
Union Texas Petroleum Holdings, Inc. (UTP) Restructure.
Through December 31, 2000, the company established a $90 million provision for
the termination of 357 employees from the integration of UTP into ARCO's
operations. As of December 31, 2000, ARCO had terminated 355 of the employees
and had paid out a total of $85 million in severance benefits.
Note 10 Inventories
Inventories are recorded when purchased, produced or manufactured and are stated
at the lower of cost or market. In 2000, approximately 75% of inventories,
excluding 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, 2000 comprised the following:
Millions
---------------------------------------------------
Crude oil and petroleum products $ 147
Other products 113
Materials and supplies 114
------
Total $ 374
======
The excess of the current cost of inventories over book value was approximately
$236 million at December 31, 2000.
Note 11 Investments
At December 31, 2000, investments in debt securities were primarily composed
of U.S. Treasury securities and corporate debt instruments. Maturities
generally ranged from one month to ten years. These investments are classified
as short or long term depending on maturity. ARCO's investments in LUKOIL common
stock and Zhenhai Refining and Chemical Company convertible bonds were included
in other investments and long-term receivables. At December 31, 2000 all
investments were classified as available-for- sale and were reported at fair
value, with unrealized holding gains and losses, net of tax, reported in
accumulated other comprehensive income.
Page 34
Notes to Consolidated Financial Statements
The following summarizes investments at December 31 2000:
Millions
--------------------------------------------------------
Aggregate fair value $ 1,395
Gross unrealized holding losses 2
Gross unrealized holding gains (218)
------
Amortized cost $ 1,179
======
Investment activity for the years ended December 31, 2000 was as follows:
Millions
--------------------------------------------------------
Gross purchases $ 6,805
Gross sales 848
Gross maturities 5,910
Gross realized gains and losses were insignificant and were determined by the
specific identification method.
[LOGO OF ARCO]
Note 12 Fixed Assets
Property, plant and equipment at December 31, 2000 was as follows:
2000
Millions Gross Net
---------------------------------------------------------
Exploration & production $22,383 $11,493
Refining & marketing 5,362 2,751
Other operations 618 424
Unallocated 160 53
---------------
Total $28,523 $14,721
===============
Expenses for maintenance and repairs for 2000 was $244 million.
In 2000, ARCO recorded an impairment charge of $286 million before tax
primarily related to several Latin American oil fields along with smaller
impairments of properties in the United States and Europe.
Note 13 Short-term Borrowings and Bank Credit Facilities
Notes payable consist primarily of ARCO's commercial paper issued to a variety
of financial investors and institutions and any amounts outstanding under ARCO
credit facilities. There were no short-term notes payable outstanding at
December 31, 2000. The weighted average interest rate on notes payable
outstanding at December 31, 1999 was 6.0%. In April 2000, following the
acquisition of ARCO by BP, ARCO's $3.0 billion unused committed bank credit
facility was terminated.
Page 35
Notes to Consolidated Financial Statements
Note 14 Long-term Debt
Long-term debt at December 31, 2000 comprised the following:
Millions 2000
------------------------------------------------------------
5.55%, due in 2003 $ 500
5.9%, due in 2009 500
8 1/4%, due in 2022 70
8 1/2%, due in 2012 178
8 3/4%, due in 2032 34
9%, due in 2021 15
9%, due in 2031 28
9 1/8%, due in 2011 253
9 1/8%, due in 2031 28
9 7/8%, due in 2016 36
10 7/8%, due in 2005 410
Series A Medium-Term Notes, (b) 9.37%(a) 77
Series B Medium-Term Notes,(c)(d) 8.18%(a) 250
Variable rate, due in 2032, 4.15%(a) 108
Capital Construction Fund, 7.00%(d) 490
Vastar:
6.39%, due in 2008 50
6 1/2%, due in 2009 299
6.95%, due in 2006 75
6.96%, due in 2007 75
8.75%, due in 2005 150
Union Texas Petroleum:
6.66%, due in 2002 through 2007 100
7.40%, due in 2038 150
8 3/8%, due in 2005 125
8 1/2%, due in 2007 75
Other 318
--------
Total, including debt due within one year 4,394
--------
Less debt due within one year 304
--------
Long-term debt $ 4,090
========
--------
(a) Weighted average interest rate at December 31, 2000.
(b) Maturities vary through 2011.
(c) Maturities vary through 2012.
(d) The Capital Construction Fund is a related party. Maturities vary through
2032.
Maturities for the five years subsequent to December 31, 2000, are as follows:
Millions 2001 2002 2003 2004 2005
----------------------------------------------
Maturities $ 304 $ 135 $ 500 $ 3 $ 685
During 2000, Vastar's $1.1 billion commercial paper program and $1.1 billion
revolving credit facility were terminated.
In April 1998, Vastar issued $100 million of 6% Putable/Callable Notes due
April 20, 2010 Putable/Callable April 20, 2000. In 1998, Vastar also entered
into an interest rate swap covering the Putable/Callable Notes, which
effectively changed the 6% fixed rate to a floating rate. The effective interest
rate paid on these notes, which were redeemed in 2000, was 6.17%. The financial
impact of swaps in 1999 and 1998 was immaterial.
Page 36
Notes to Consolidated Financial Statements
Extraordinary Loss on Extinguishment of Debt
ARCO incurred a loss of $243 million before tax, or $152 after tax, on early
retirement of long-term debt during 2000.
No long-term debt was denominated in a foreign currency at December 31, 2000.
No material amounts of long-term debt are collateralized by ARCO assets.
Note 15 Interest
Interest for the years ended December 31, 2000 comprised the following:
Millions
-------------------------------------------------------
Long-term debt $ 403
Short-term debt 86
Other(a) 56
-------
545
Capitalized interest (66)
-------
Total interest expense $ 479
=======
Total interest paid in cash $ 513
=======
Interest income(b) $ 480
=======
--------
(a) Includes interest to BP of $53 in 2000 and a credit of $153 for interest on
a tax refund in 1998.
(b) Includes $305 of interest income from BP.
Note 16 Financial Instruments and Fair Value
ARCO does not hold or issue financial instruments for trading purposes. Prior to
the acquisition of ARCO by BP, ARCO entered into various types of
foreign currency forward, option and swap contracts. Foreign currency forward
contracts were used to minimize foreign exchange exposures associated with U.S.
dollar-denominated debt issued by a foreign subsidiary, anticipated foreign
currency commitments and anticipated future cash flows related to overseas
operations.
Gains and losses on foreign currency forward contracts covering anticipatory
cash flows were recognized currently as other income or expense. Gains and
losses on foreign currency swaps associated with intercompany debt were
recognized currently in income and offset foreign exchange gains and losses on
the underlying intercompany loans. Gains and losses on other foreign currency
contracts were generally deferred and offset the transactions being hedged.
Prior to the acquisition of ARCO by BP, ARCO also used various hedging
arrangements to manage the exposure to price risk for future natural gas and
crude oil transactions. Gains and losses resulting from those transactions were
deferred and included in other assets or accrued liabilities until realized in
sales and other operating revenues as the physical production required by the
contracts was delivered.
Page 37
Notes to Consolidated Financial Statements
At December 31, 2000 the carrying value and estimated fair value of ARCO's
financial instruments are shown as assets (liabilities) in the table below:
Carrying Fair
Millions Value Value
------------------------------------------------------------------------
Non-derivatives:
Short-term investments $ 202 $ 202
Equity method investments 1,484 1,434
Other investments and long-term
receivables 1,660 1,660
Notes payable -- --
Long-term debt, including current
maturities (4,394) (4,654)
Derivatives:
Foreign currency forwards $ -- $ --
Oil and gas options and swaps -- --
Oil and gas futures -- --
Commodity futures -- --
Commodity options 14 6
Short-term investments are carried at fair value. The fair value of notes
payable approximates carrying value due to its short-term maturities. Equity
method investments and other investments and long-term receivables were valued
at quoted market prices if available. For unquoted investment securities, 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 was
estimated based on market quotes.
ARCO is exposed to credit risk in the event of nonperformance 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; ARCO does not anticipate nonperformance
by the counterparties.
[LOGO OF ARCO]
Note 17 Other Commitments and Contingencies
ARCO has commitments, including those related to the acquisition, construction
and development of facilities, all made in the normal course of business.
ARCO has also guaranteed all of LUKARCO's obligations associated with the
Caspian Pipeline project, which amount to 25% of all funding requirements for
this project. The current estimates of total project funding requirements are
between $2.4 to $2.6 billion.
Following the March 1989 Exxon Valdez oil spill, numerous federal, state and
private plaintiff lawsuits were brought against Exxon (now ExxonMobil), Alyeska
Pipeline Service Company (Alyeska) and Alyeska's owner companies, including ARCO
Transportation Alaska, Inc., owned by ARCO until the FTC- mandated sale to
Phillips Petroleum in April 2000. While all of the federal, state and private
plaintiff lawsuits have been settled, certain issues relating to liability for
the spill remain unresolved between Exxon and Alyeska (including its owner
companies).
Lawsuits, including purported class actions and actions by governmental
entities, are pending or threatened against ARCO and others seeking damages,
abatement of housing units, and compensation for medical problems arising out of
the presence of lead-based paint in certain housing units. ARCO is unable to
predict the scope or amount of any such liability.
The State of Montana, along with the United States and the Salish and Kootenai
Tribes, have been seeking recovery from ARCO for alleged injuries to natural
resources resulting from mining and mineral processing businesses formerly
operated by Anaconda. In 1998, ARCO entered into two consent decrees, which were
approved by the court in 1999,
Page 38
Notes to Consolidated Financial Statements
settling all of the natural resources damage claims of the United States and the
tribes and the bulk of such claims of the State of Montana. Remaining for
disposition are the State's claims for $206 million of restoration damages at
three sites.
ARCO is subject to other loss contingencies pursuant to federal, state and
local environmental laws and regulations that require ARCO to do some or all of
the following:
. Remove or mitigate the effects on the environment at various sites from the
disposal or release of certain substances;
.Perform restoration work at such sites; and .Pay damages for loss of use and
non-use values.
The federal agencies involved with the sites include the Department of the
Interior, Department of Justice and Environmental Protection Agency.
Environmental liabilities include personal injury claims allegedly caused by
exposure to toxic materials manufactured or used by ARCO.
ARCO is currently involved in assessments and cleanups under these laws at
federal- and state-managed sites as well as other clean-up sites including
service stations, refineries, terminals, third-party landfills, former nuclear
processing facilities, sites associated with discontinued operations and sites
previously owned by ARCO or predecessors. This comprises 148 sites for which
ARCO has been named a potentially responsible party (PRP), along with other
sites for which no claims have been asserted. The number of PRP sites in and of
itself is not a relevant measure of liability because the nature and extent of
environmental concerns varies by site and ARCO's responsibility varies from sole
responsibility to very little responsibility.
ARCO may in the future be involved in additional assessments and cleanups.
Future costs depend on unknown factors such as:
.Nature and extent of contamination; .Timing, extent and method of remedial
action; .ARCO's proportional share of costs; and .Financial condition of other
responsible parties.
The environmental remediation accrual is updated annually, at a minimum, and
at December 31, 2000 was $1,098 million (total of short and long-term compo-
nents). During 2000, management of the Company assessed the estimated future
costs to remediate all of the Company's environmental sites and concluded that
its best estimate of the cost to remediate such sites was greater than previ-
ously recorded. As a result the environmental reserve was increased by $521
million during 2000, of which $274 million was recognized during the fourth
quarter. As these costs become more clearly defined, they may require future
charges against earnings.
Approximately 85% of the reserve related to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of Montana,
Utah and New Mexico. Another significant component related to currently and
formerly owned chemical, nuclear processing, and refining and marketing
facilities, and other sites which received wastes from these facilities. One
site represented 13% of the total accrual. No other site represented more than
8% of the total accrual. Substantially all amounts accrued are expected to be
paid out over the next six years.
Claims for recovery of remediation costs already incurred and to be incurred
in the future have been filed against various third parties. Many of these
claims have been resolved. ARCO has neither recorded any asset nor reduced any
liability in connection with unresolved claims.
Although any ultimate liability arising from any of the matters described
herein could result in significant expenses or judgments that, if aggregated and
assumed to occur within a single fiscal 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.
Page 39
Notes to Consolidated Financial Statements
The operations and consolidated financial position of ARCO continue to be
affected by domestic and foreign political developments as well as legislation,
regulations and litigation pertaining to restrictions on production, imports and
exports, tax increases, environmental regulations, cancellation of contract
rights and expropriation of property. Both the likelihood of such occurrences
and their overall effect on ARCO vary greatly and are not predictable.
These uncertainties are part of a number of items that ARCO has taken and will
continue to take into account in periodically establishing reserves.
Note 18 Taxes
See Note 3 of Notes to Consolidated Financial Statements for discussion of tax
sharing agreement with BP. The income tax provision for the year ended December
31, 2000 comprised the following:
Millions 2000
--------------------------------------------------------------------
Federal:
Current $1,999
Deferred (846)
-------
1,153
Foreign:
Current 363
Deferred (66)
-------
297
State:
Current 244
Deferred (65)
------
179
------
Provision (benefit) for taxes on income $1,629
------
Total income taxes paid in cash(a) $2,362
------
--------
(a) Includes cash taxes paid relating to the sale of discontinued operations.
A deferred tax benefit of $55 million was recorded in 2000, tax related to
unrealized investment gains and losses included in accumulated other
comprehensive income.
Major components of the net deferred tax liability at December 31, 2000 were
as follows:
Millions
--------------------------------------------------------------
Depreciation, depletion and amortization $(4,113)
Other (713)
-------
Total deferred tax liabilities (4,826)
=======
Dismantlement and environmental 513
Postretirement benefits 265
Foreign excess tax basis/loss carryforwards 72
Other 600
-------
Total deferred tax assets 1,450
-------
Valuation allowance -
-------
Net deferred income tax liability $(3,376)
=======
ARCO has federal loss carryforwards of $28 million which begin expiring in 2001
ARCO has foreign loss carryforwards of $46 million, which begin expiring in
2001.
Page 40
Notes to Consolidated Financial Statements
Taxes other than income taxes for the year ended December 31, 2000 comprised
the following:
Millions
--------------------------------------------------------
Property $108
Production/severance 245
Other 118
------
Total $471
======
The domestic and foreign components of income from continuing operations before
income taxes and minority interest, and a reconciliation of income tax expense
with tax at the effective federal statutory rate for the year ended December 31,
2000 were as follows:
-------------------------------------------------------------------
Millions Amount % Pretax Income
-------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $4,094 85.3
Foreign 704 14.7
-------------------------------------------------------------------
Total $4,798 100.0
-------------------------------------------------------------------
Tax at 35% $1,679 35.0
Increase (reduction) in
taxes resulting from:
Taxes on foreign income in
excess of statutory rate 80 1.7
Affiliate stock transactions (55) (1.1)
State income taxes (net
of federal effect) 116 2.4
Tax credits (109) (2.3)
Sale of Alaskan
operations (195) (4.1)
Other 113 2.4
-------------------------------------------------------------------
Provision (benefit) for
taxes on income $1,629 34.0
-------------------------------------------------------------------
Note 19 Employee Benefit Plans
ARCO and its subsidiaries sponsor numerous postretirement benefit plans. Defined
benefit pension plans (Pension) provide to substantially all employees pension
benefits based on years of service and the employee's compensation, primarily
during the last three years of service. Defined postretirement benefit plans
(Other) provide health care and life insurance benefits to substantially all
employees who retire with ARCO having rendered the required years of service,
and to their spouses and eligible dependents. ARCO pays for the cost of a
benchmark health maintenance organization with employees responsible for the
differential cost, if any, of their selected option. Life insurance benefits are
partially paid for by retiree contributions, which vary based upon coverage
chosen by the retiree. ARCO and BP have the right to terminate or modify the
plans at any time.
Page 41
Notes to Consolidated Financial Statements
Millions Pension Other
------------------------------------------------------------------
Plan obligations
Benefit obligation at January 1, 2000 $(2,263) $(574)
Service cost (36) (5)
Interest cost (147) (40)
Actuarial gain (loss) (151) (51)
Benefits paid 856 45
Special termination costs (248) (3)
Curtailment 93 38
Transfer 59 -
Amendment (37) -
Divestiture - -
------------------
Benefit obligation at December 31, 2000 $(1,874) $(590)
------------------
Millions Pension Other
------------------------------------------------------------------
Plan assets
Fair value of assets at January 1, 2000 $ 2,903 $ -
Actual return on assets (102) -
Company contributions 266 -
Benefits paid (856) -
Acquisition - -
Transfer/Divestiture (57) -
------------------
Fair value of assets at December 31, 2000 $ 2,154 $ -
------------------
Funded status
Assets greater (less) than obligations $ 280 $(590)
Unrecognized actuarial (gain) loss 290 60
Unrecognized prior service cost (benefit) 79 (175)
Unrecognized transition obligation (128) -
------------------
Total recognized $ 521 $(705)
------------------
Balance sheet recognition
Prepaid benefits $ 556 $ -
Accrued liabilities (38) (705)
Intangible asset 1 -
Accumulated other comprehensive income 2 -
------------------
Total recognized $ 521 $(705)
------------------
The projected benefit obligation, accumulated benefit obligation (ABO), and fair
value of plan assets for pension plans with ABO in excess of plan assets were
$33, $23 and $0, respectively, at December 31, 2000.
Percent Pension Other
------------------------------------------------------------------
Assumptions
Discount rate 7.5 7.5
Expected return on plan assets 10.0 n/a
Rate of salary progression 4.0 4.0
Page 42
Notes to Consolidated Financial Statements
For measurement purposes, a 7% annual rate of increase in the per capita cost
of health care benefits was assumed for 1997 to 2000, 15% for 2001, and 10% for
2002, after which the rate was assumed to decrease to 5% and remain at that
level thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
Millions Increase Decrease
------------------------------------------------------------
Total of service and interest cost $ 4 $ 3
Postretirement benefit obligation $ 44 $ 37
Million
-------------------------------------------------------------------------
Components of net benefit cost
Pension benefits:
Service cost $ 36
Interest cost 147
Expected return on plan assets (268)
Amortization of transition asset (25)
Amortization of prior service cost 8
Recognized actuarial (gain) loss 7
Curtailment (14)
Settlement 73
Special termination costs 211
--------
Net benefit (income) cost $ 175
--------
Other postretirement benefits:
Service cost $ 5
Interest cost 40
Amortization of prior service cost (benefit) (15)
Curtailment (28)
Recognized actuarial (gain) loss -
--------
Net benefit (income) cost $ 2
--------
Included in pension obligations are liabilities related to non-qualified pen-
sion plans that provide retirement benefits in excess of current Internal Rev-
enue Service maximums. The company also has deferred compensation plans that
permit executives, outside directors and key employees to defer a portion of
their compensation (including bonuses). Amounts deferred accrue interest at a
defined rate and are not included as pension obligations. The liability for
deferred compensation and interest thereon was $638 million at December 31,
2000, and is included in "other deferred liabilities and credits" on the
balance sheet. The liabilities for non-qualified pension plans and deferred
compensation are unfunded based on definitions of generally accepted accounting
standards. However, to assist in funding these liabilities, the company has
invested in corporate-owned life insurance policies. The cash surrender value
of the policies supporting these liabilities was $630 million at December 31,
2000, and is included in "deferred charges and other assets" on the balance
sheet.
[LOGO OF ARCO]
Note 20 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.
Page 43
Notes to Consolidated Financial Statements
At December 31, 2000, future minimum rental payments due under leases were as
follows:
Capital Operating
Millions Leases Leases
----------------------------------------------------------------------------
2001 3 177
2002 3 153
2003 3 142
2004 3 76
2005 3 59
Later years 54 303
----------------
Total minimum lease payments 69 $ 910
-------
Imputed interest (rates ranging from 8% to 12%) 45
--------
Present value of minimum lease payments included in long-
term debt $ 24
----------------
Operating lease net rental expense for the years ended December 31, 2000 was
as follows:
Millions
--------------------------------------------------
Minimum rentals $ 159
Contingent rentals -
Sublease rental income (23)
-------
Net rental expense $ 136
=======
No restrictions on dividends or on additional debt or lease financing exist
under ARCO's lease commitments. Under certain conditions, options exist to
purchase certain leased properties.
Note 21 Stock Options
Options to purchase shares of ARCO's common stock have been granted to exec-
utives, outside directors and key employees. The exercise price of each option
is equal to the fair market value of common stock at the date of grant. These
options become exercisable in varying installments and expire 10 years after the
date of grant. Options granted vest equally over three years. Effective upon
consummation of the merger, all options to purchase ARCO common stock were
converted into options to purchase BP ADSs, pursuant to the merger agreement.
Transactions during 2000, were as follows:
Weighted Average
Exercise Price
-------------------------------------------------------
Balance, January 1, 2000 9,753,655 $ 60.19
------------------------
Granted 1,759,148 68.81
Exercised (329,245) 58.50
Cancelled (10,079) 64.70
Converted to BP ADS options (11,173,479) 61.59
------------------------
Balance, December 31, 2000 - $ -
------------------------
Page 44
Notes to Consolidated Financial Statements
A summary of ARCO's fixed stock options as of December 31, 2000 was as
follows:
Shares available for option -
Options exercisable -
Weighted average exercise price of options
exercisable -
Weighted average fair value of options granted
during the year $24.41
Used to calculate fair value:
Risk-free interest rate 6.42%
Expected life (years) 10
Expected volatility 34.21%
Expected dividends 4.14%
At December 31, 2000, there were no outstanding options to purchase ARCO com-
mon stock.
ARCO applies APB No. 25 in accounting for its fixed stock options. Accord-
ingly, no compensation cost has been recognized for options granted. The fol-
lowing table reflects pro forma net income and earnings per share had the com-
pany elected to adopt the fair value method under SFAS No. 123 for the year
ended December 31, 2000:
Net income:
As reported $3,026
Pro forma $2,989
Earnings per share (diluted):
As reported -
Pro forma -
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options would be amortized to expense over the
vesting period, and additional options may be granted in future years.
ARCO awards contingent restricted stock to executives and key employees.
Contingent restricted stock may be converted to performance-based restricted
stock in various multiples depending on attainment of certain performance
criteria over a specified evaluation period. Restricted stock ultimately issued
is subject to a two-year restriction on transfer.
There were no new grants of contingent restricted stock in 2000. During 2000
107,718 shares of performance-based restricted stock were issued at a weighted
average price of $68.81. As of the date of the merger with BP, restrictions on
all outstanding contingent and performance-based restricted shares were removed.
The removal of these restrictions resulted in restricted stock expense of
$18 million in 2000.
Page 45
Notes to Consolidated Financial Statements
Holders of options granted prior to 1997 accrue dividend share credits
(DSCs) on all shares under option. The amount of DSCs accrued is determined
based upon the quarterly dividend rate and fair market value of ARCO common
stock as of each quarterly record date. Upon exercise of options, holders
receive additional shares of common stock equal to DSCs accumulated. A summary
of ARCO's DSC activity was as follows:
Shares
---------------------------------------
Balance, January 1, 2000 1,734,418
Accrued 71,792
Paid out (148,304)
Conversion to BP ADSs (1,657,906)
----------
Balance, December 31, 2000 --
----------
During 2000, $5 million, was recognized as expense for DSCs. An additional
$80 million of DSC expense was recognized in 2000 due to benefit acceleration
upon change of control of the company.
Note 22 Stockholders' Equity
Detail of capital stock as of December 31, 2000 was as follows:
--------------------------------------------------
$3.00 Cumulative
convertible
preference stock, par $1:
Shares authorized 78,089
Shares issued and
outstanding 35,437
Aggregate value in
liquidation -
(thousands) $ 2,835
$2.80 Cumulative
convertible
preference stock, par $1:
Shares authorized 833,776
Shares issued and
outstanding 402,665
Aggregate value in
liquidation-
(thousands) $ 28,187
Common stock, par $2.50:
Shares authorized 600,000,000
Shares issued 327,436,320
Shares outstanding 324,711,290
Shares held in treasury 2,725,030
Changes in preference stocks were due to conversions. The $3.00 cumulative
convertible preference stock is convertible into 22.304 shares of BP ADSs. The
$2.80 cumulative convertible preference stock is convertible into 7.872 shares
of BP ADSs. Common stock of ARCO, all of which is held indirectly by BP, 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.
Page 46
Notes to Consolidated Financial Statements
Note 23 Supplemental Cash Flow Information
The following is supplemental cash flow information for the year ended December
31, 2000:
Millions 2000
-----------------------------------------------------------------
Short-term investments:
Gross sales and maturities $103
Gross purchases (35)
------
Net cash provided (used) $68
------
Notes payable:
Gross proceeds $ 3,697
Gross repayments (5,371)
------
Net cash provided (used) $ (1,674)
------
Gross noncash provisions charged to income $ 1,153
Cash payments of
previously accrued items (535)
------
Noncash provisions greater (less) than
cash payments $ 618
------
Changes in working capital-increase (decrease) to cash:
Accounts receivable $ 93
Inventories 63
Accounts payable 351
Other working capital 137
------
$ 644
------
Note 24 Foreign Currency Transactions
Foreign currency transactions resulted in net losses of $12 million in 2000.
Note 25 Earnings Per Share
Earnings per share for 2000 has been omitted from ARCO's financial statements
because ARCO had no publicly held common stock after ARCO's acquisition by BP on
April 18, 2000.
Note 26 Comprehensive Income
Comprehensive income comprises net income plus all other changes in equity from
nonowner sources.
The related tax effects allocated to each component of other comprehensive
income at December 31, 2000 were as follows:
Unrealized
Gain (Loss) Foreign Minimum
on Currency Pension
Millions Securities Translation Liability
---------------------------------------------------------------
Pre-tax amount $ (143) $ (256) $ 49
Tax (expense) benefit 55 98 (19)
---------------------------------------
Net-of-tax amount $ (88) $ (158) $ 30
---------------------------------------
Page 47
Notes to Consolidated Financial Statements
Accumulated nonowner changes in equity (accumulated other comprehensive income)
at December 31, 2000 were as follows:
Millions
--------------------------------------------------------------
Net unrealized gain (loss) on investments $ 140
Foreign currency translation adjustment (188)
Minimum pension liability (1)
------
Accumulated other comprehensive income (loss) $ (49)
------
Unrealized gains (losses) on securities related primarily to changes in the
fair value of ARCO's investment in LUKOIL common stock, which had a fair value
of $494 million at December 31, 2000 versus a book value was $324 million at
December 31, 2000.
[LOGO OF ARCO]
Note 27 Research and Development
Expenditures for research and development totaled $9 million for the year ended
December 31, 2000.
[LOGO OF ARCO]
Note 28 Unaudited Quarterly Results
Millions, except per share amounts
---------------------------------------------------------------------
Sales and other operating revenues
Quarter ended:
March 31 $ 3,993
June 30 4,300
September 30 4,524
December 31 4,683
--------
Total $ 17,500
--------
Income (loss) from continuing
operations before income taxes, minority
interest and extraordinary item
Quarter ended:
March 31 $ 902
June 30 2,744(a)(b)
September 30 645
December 31 507
--------
Total $ 4,798
--------
Net income (loss) Quarter ended:
March 31 $ 617
June 30 1,855(a)(b)
September 30 367
December 31 187
--------
Total $ 3,026
--------
Earned (loss) per share Quarter ended:
March 31 $ 1.87
June 30 $ -
September 30 $ -
December 31 $ -
(a) Includes gain on sale of Alaskan operations of $2,596 ($1,815 after tax).
Additional smaller amounts were recorded in the third and fourth quarters.
See Note 4 of Notes to Consolidated Financial Statements.
(b) Includes costs related to BP merger of $639 ($391 after tax). Additional
smaller amounts were recorded in the third and fourth quarters. See Note
11 of Notes to Consolidated Financial Statements.
Page 48
Notes to Consolidated Financial Statements
Note 29 Unaudited Subsequent Event
On March 28, 2001, ARCO's Board of Directors announced that it had elected to
redeem all of the outstanding $3.00 and $2.80 Preference Shares on April 27,
2001.
Shareholders of the $3.00 Cumulative Convertible Preference Stock will receive
a total cash payment equal to the market value of 22.304 ADSs, as determined by
the average NYSE closing prices for the BP ADSs on the last four business days
before the April 27th redemption date. The number 22.304 represents the number
of BP ADSs into which each share of the $3.00 Preference Stock is convertible
through April 20, 2001.
Shareholders of the $2.80 Cumulative Convertible Preference Stock will receive
a total cash payment equal to the market value of 7.872 BP ADSs, as determined
by the average NYSE closing prices for the BP ADSs on the last four business
days before the April 27th redemption date. The number 7.872 represents the
number of BP ADSs into which each share of the $2.80 Preference Stock is
convertible through April 20, 2001.
Page 49
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
which 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.
Petroleum reserves are estimated by the Company's engineers. The estimates
include reserves in which ARCO holds an economic interest under production-
sharing and other types of operating agreements with foreign governments.
Reserves attributable to certain oil and gas discoveries were not considered
proved as of December 31, 2000 due to geological, technical or economic
uncertainties. Proved reserves do not include amounts that may result from
extensions of currently proved areas or from application of enhanced recovery
processes not yet determined to be commercial in specific reservoirs. Proved
reserves also do not include any reserves attributable to ARCO's 8% interest in
LUKOIL, a Russian oil company. Natural gas liquids comprise 13% of petroleum
liquid proved reserves.
ARCO has no long-term supply contracts to purchase petroleum liquids or
natural gas from foreign governments.
The most significant activity during 2000 was the sale of all ARCO's Alaskan
oil and gas properties. Changes in proved reserves for the year ended December
31, 2000 were as follows:
Petroleum Liquids (million barrels) Natural Gas (billion cubic feet)
--------------------------------------------------------------------------------------------------------------------------------
Consolidated Consolidated
------------------------- Other -------------------------
U.S. International Total Reserves/1/ Worldwide U.S. International Total Reserves/1/ Worldwide
---------------------------------------------------------------------------------------------------------------------------------
Reserves at
January 1, 2000 2,159 714 2,873 72 2,945 5,158 3,881 9,039 861 9,900
----------------------------------------------------------------------------------------------------------------------------------
Revisions (3) (3) (6) 5 (1) (221) (566) (787) (80) (867)
Improved
recovery 9 21 30 - 30 102 - 102 - 102
Purchases - - - - - 56 - 56 - 56
Extensions and
discoveries 16 2 18 - 18 100 20 120 - 120
Production/Consumed (82) (44) (126) (2) (128) (482) (359) (841) (27) (868)
Sales (1,648) (119)(1,767) - (1,767) (1,872) (25)(1,897) - (1,897)
----------------------------------------------------------------------------------------------------------------------------------
Reserves at
December 31, 2000 451 571 1,022 75 1,097 2,841 2,951 5,792 754 6,546
----------------------------------------------------------------------------------------------------------------------------------
Proved developed
reserves:
At January 1, 2000 1,562 365 1,927 42 1,969 4,439 2,323 6,762 330 7,092
At December 31, 2000 311 322 633 43 676 2,464 1,981 4,445 220 4,665
--------
/1/Comprises reserves attributable to ARCO's ownership interest in equity
affiliates.
Page 50
Supplemental Information (Unaudited)
ARCO is a contractor to an affiliate of the Venezuelan government under six
risked service contracts. ARCO, either solely or with partners, is responsible
for providing capital and technology for the redevelopment of the fields along
with operating existing production. In exchange for providing and funding
overall operation and field development, ARCO is paid a per-barrel service fee
to cover reimbursement of costs plus profit. There are two components to the
fees, which include (1) a set fee for contractual baseline production and (2) a
fee for incremental production. The fee for incremental production is based on a
sliding scale incentive mechanism, which is indexed to a basket of international
oil prices and overall field profitability.
Proved reserves and production quantities for Venezuelan operations are
recorded based on ARCO's net working interest in each of the contract areas,
"net" meaning reserves excluding royalties and interests owned by others per the
contractual arrangements. The Venezuelan government maintains full ownership of
all hydrocarbons in the fields.
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 since the beginning of the last fiscal
year of total ARCO reserve estimates furnished to federal government agencies or
commissions which vary from those reported to the SEC.
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, 2000 were as follows:
----------------------------------------------------------------
Millions U.S. International Total
----------------------------------------------------------------
Proved properties $10,320 $9,193 $19,513
Unproved properties 880 986 1,866
----------------------------------------------------------------
11,200 10,179 21,379
Accumulated
depreciation,
depletion and
amortization 5,676 4,211 9,887
----------------------------------------------------------------
Net capitalized costs 5,524 5,968 11,492
----------------------------------------------------------------
Net capitalized costs of
equity affiliates* - 424 424
----------------------------------------------------------------
Total $5,524 $6,392 $11,916
----------------------------------------------------------------
--------
*ARCO's share
Page 51
Supplemental Information (Unaudited)
Costs, both capitalized and expensed, incurred in oil and gas producing
activities during the year ended December 31, 2000 are set forth below.
Property acquisition costs represent costs incurred to purchase or lease oil and
gas properties. Exploration costs include costs of geological and geophysical
activity and drilling exploratory wells. Development costs include costs of
drilling and equipping development wells and construction of production
facilities to extract, treat and store oil and gas.
----------------------------------------------------------------
Millions U.S. International Total
----------------------------------------------------------------
Property acquisition
costs:
Proved properties $93 $- $93
Unproved
properties 18 - 18
Exploration costs 328 60 388
Development costs 856 501 1,357
----------------------------------------------------------------
Total expenditures 1,295 561 1,856
----------------------------------------------------------------
Costs incurred of
equity affiliates* - 54 54
----------------------------------------------------------------
Total $1,295 $615 $1,910
----------------------------------------------------------------
--------
*ARCO's share
Results of operations from oil and gas producing activities (including operating
overhead) for the year ended December 31, 2000 were as follows:
----------------------------------------------------------------
Millions U.S. International Total
----------------------------------------------------------------
Revenues:
Sales $2,807 $1,937 $4,744
Transfers 749 - 749
----------------------------------------------------------------
3,556 1,937 5,493
Production costs 364 348 712
Production taxes 227 77 304
Exploration expenses 259 44 303
Depreciation,
depletion and
amortization 641 575 1,216
Impairment 9 277 286
Other operating
expenses (income) 116 123 239
----------------------------------------------------------------
Results before
income taxes 1,940 493 2,433
Income tax
expense (benefit) 614 228 842
----------------------------------------------------------------
Results of operations
from oil and gas
producing
activities 1,326 265 1,591
----------------------------------------------------------------
Results from equity
affiliates* - 26 26
----------------------------------------------------------------
Total $1,326 $291 $1,617
----------------------------------------------------------------
--------
*ARCO's share
The difference between the above results of operations and the amounts reported
for exploration and production segment net income in Note 7 of Notes to
Consolidated Financial Statements is primarily gains or losses on asset sales,
the exclusion of non-producing exploration and production units (Alaskan
pipelines, technical support), minority interest adjustments and restructuring
costs related to oil and gas operations.
Page 52
Supplemental Information (Unaudited)
The standardized measure of discounted estimated future net cash flows related
to proved oil and gas reserves at December 31, 2000 was as follows:
----------------------------------------------------------------
Millions U.S. International Total
----------------------------------------------------------------
Future cash inflows $39.0 $19.4 $58.4
Future development and
production costs 8.3 6.4 14.7
Future income tax
expense 10.0 3.6 13.6
----------------------------------------------------------------
Future net cash flows 20.7 9.4 30.1
10% annual discount 8.5 3.7 12.2
----------------------------------------------------------------
Standardized measure of
discounted future net
cash flows 12.2 5.7 17.9
----------------------------------------------------------------
Standardized measure of
discounted future net
cash flows of equity
affiliates* - 0.8 0.8
----------------------------------------------------------------
Total $12.2 $6.5 $18.7
----------------------------------------------------------------
--------
*ARCO's share
Primary changes in the standardized measure of discounted estimated future net
cash flows for the year ended December 31, 2000 were as follows:
Billions
-----------------------------------------------------------------------
Sales and transfers of oil and gas,
net of production costs $(4.4)
Extensions, discoveries and improved recovery,
less related costs 1.4
Revisions of estimates of reserves proved
in prior years:
Quantity estimates (0.8)
Net changes in price and production costs 12.4
Purchases/sales (7.3)
Other (0.4)
Accretion of discount 0.9
Development costs incurred during the period 1.4
Net change in income taxes (3.0)
------
Net change $0.2
------
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 pre-tax 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.
Page 53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BP p.l.c.
(Registrant)
Dated: February 19, 2002 .......................
D. J. PEARL
Deputy Company Secretary