<PAGE>
1996
---------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
For the fiscal year ended December 31, 1996
Commission file number 1-1196
[LOGO OF ARCO]
ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 South Flower Street, Los Angeles, California 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 486-3511
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- -------------------------------
<S> <C>
Common Stock ($2.50 par value) New York Stock Exchange
Pacific Stock Exchange
Elektronische Borse Schweiz EBS
London Stock Exchange
$3.00 Cumulative Convertible Preference New York Stock Exchange
Stock ($1 par value) Pacific Stock Exchange
$2.80 Cumulative Convertible Preference New York Stock Exchange
Stock ($1 par value) Pacific Stock Exchange
Three year 9% Exchangeable Notes due
September 15, 1997 New York Stock Exchange
Twenty year 10 7/8% Debentures Due
July 15, 2005 New York Stock Exchange
Thirty year 9 7/8% Debentures Due
March 1, 2016 New York Stock Exchange
Twenty-five year 9 1/8% Debentures Due
March 1, 2011 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on December 31, 1996, based on the closing price on the New York
Stock Exchange composite tape on that date, was $21,611,653,327.
Number of shares of Common Stock, $2.50 par value, outstanding as of December
31, 1996: 161,082,043.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be filed
with the Securities and Exchange Commission within 120 days after December 31,
1996 are incorporated by reference under Part III.
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<C> <S> <C>
1. and 2. Business and Properties...................................... 1
Corporate History and Organization......................... 1
Financial Information about Industry Segments.............. 2
Upstream................................................... 2
Worldwide Exploration and Production Operations.......... 2
Worldwide Coal Operations................................ 6
Downstream................................................. 7
Refining and Marketing................................... 7
Transportation........................................... 8
Chemicals................................................ 9
Equity Interest in Lyondell................................ 10
Capital Program............................................ 10
Patents.................................................... 11
Competition................................................ 11
Human Resources............................................ 11
Research and Development................................... 11
Environmental Matters...................................... 12
3. Legal Proceedings............................................ 14
4. Submission of Matters to a Vote of Security Holders.......... 17
----------------
Executive Officers of the Registrant......................... 18
Description of Capital Stock................................. 21
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995..................................................... 24
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 26
6. Selected Financial Data...................................... 26
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
8. Financial Statements and Supplementary Data.................. 37
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 60
PART III
10. Directors and Executive Officers of the Registrant........... 60
11. Executive Compensation....................................... 60
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
13. Certain Relationships and Related Transactions............... 60
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 60
</TABLE>
(i)
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
CORPORATE HISTORY AND ORGANIZATION
Atlantic Richfield Company ("ARCO" or the "Company") was incorporated in
1870 under the laws of Pennsylvania as The Atlantic Refining Company. Atlantic
Petroleum Storage Company, a predecessor to The Atlantic Refining Company,
began operations in 1866. The Company's principal executive offices are at 515
South Flower Street, Los Angeles, California 90071 (Telephone (213) 486-3511).
ARCO's present name was adopted subsequent to the merger of Richfield Oil
Corporation into The Atlantic Refining Company in 1966. In 1969, Sinclair Oil
Corporation was merged into ARCO. In 1977, The Anaconda Company was merged
into a wholly-owned subsidiary of ARCO and, on December 31, 1981, that
subsidiary was merged into ARCO. On May 7, 1985, ARCO was reincorporated in
the State of Delaware. Unless indicated otherwise, the terms "ARCO" or the
"Company" as used herein refer to Atlantic Richfield Company or Atlantic
Richfield Company and one or more of its consolidated subsidiaries.
ARCO, including its subsidiaries, constitutes one of the largest integrated
enterprises in the petroleum industry. ARCO conducts operations in two
business segments: resources and products.
ARCO's resources segment, known as its "upstream" operations, includes the
exploration, development and production of petroleum, which includes petroleum
liquids (crude oil, condensate and natural gas liquids ("NGLs")) and natural
gas, the purchase and sale of petroleum liquids and natural gas, and the
mining and sale of coal. ARCO's products segment, or its "downstream"
operations, includes the refining and transportation of petroleum and
petroleum products, the marketing of petroleum products on the U.S. West Coast
and the worldwide manufacture and sale of chemical products.
ARCO's corporate structure is a complex of wholly-owned and majority-owned
subsidiaries and various divisions or units of the parent company, ARCO, that
have been delineated or defined for various operational reasons. Many of the
wholly-owned subsidiaries are formed to conduct ARCO's numerous international
operations. The principal majority-owned subsidiaries are ARCO Chemical
Company ("ARCO Chemical") and Vastar Resources, Inc. ("Vastar"). ARCO Chemical
was formed in July 1987, and it sold just under 20% of its common stock to the
public in October 1987; ARCO currently owns 82.7% of ARCO Chemical. Vastar was
formed in September 1993, and in July 1994 sold under 20% of its common stock
to the public; ARCO currently owns 82.3% of Vastar. Vastar is the primary
vehicle through which ARCO conducts natural gas and, to a lesser extent oil,
exploration, production and marketing in the Lower 48 States (the "Lower 48").
ARCO's principal subsidiaries are ARCO Chemical, Vastar, ARCO Alaska, Inc. (a
wholly-owned subsidiary through which ARCO conducts its Alaska operations) and
ARCO Transportation Alaska, Inc. (a wholly-owned subsidiary through which ARCO
holds its interest in the Trans Alaska Pipeline System ("TAPS")).
ARCO also owns a 49.9% equity interest in Lyondell Petrochemical Company
("Lyondell"), which operates petrochemical processing and petroleum refining
businesses. ARCO originally sold just over 50% of Lyondell's common stock
("Lyondell Common Stock") to the public in January 1989; in August 1994, ARCO
received net proceeds of approximately $958 million from the sale of its 9%
Exchangeable Notes due September 1997 (the "Exchangeable Notes"). The
Exchangeable Notes are exchangeable at maturity, at ARCO's option, into shares
of Lyondell Common Stock, of which ARCO currently holds 39,921,400 shares, or
cash with an equal value. The number of shares or amount of such cash will be
determined based on a formula that takes into account the market price of
Lyondell Common Stock at maturity of the Exchangeable Notes. If ARCO elects to
deliver shares of Lyondell Common Stock upon maturity of the Exchangeable
Notes, ARCO's equity interest in Lyondell will be substantially reduced or
eliminated, depending on the market price of Lyondell Common Stock at such
time. See Notes 10 and 20 of Notes to Consolidated Financial Statements on
pages 47 and 55.
1
<PAGE>
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to Note 5 of Notes to Consolidated Financial Statements on
page 44 for segment information concerning sales and other operating revenues,
earnings, total assets and additional information for certain operations of
the Company.
UPSTREAM
WORLDWIDE EXPLORATION AND PRODUCTION OPERATIONS
General
ARCO conducts its worldwide oil and gas exploration and production
operations primarily in the United States, the United Kingdom, Indonesia,
China, Algeria, Dubai and Qatar.
Reserves
Estimated net quantities of ARCO's proved oil and gas reserves at December
31, 1996 were as follows:
<TABLE>
<CAPTION>
NATURAL GAS
PETROLEUM LIQUIDS (BILLION CUBIC
(MILLION BARRELS) FEET)
---------------------- ----------------------
U.S. INTERNATIONAL U.S. INTERNATIONAL
----- ------------- ----- -------------
<S> <C> <C> <C> <C>
Proved reserves................... 2,112(a) 409 4,776(c) 3,347
Proved developed reserves......... 1,828(b) 150 4,310(d) 1,780
</TABLE>
- --------
(a) Includes 115 million barrels ("MMB") attributable to Vastar.
(b) Includes 88 MMB attributable to Vastar.
(c) Includes 2,224 billion cubic feet ("BCF") attributable to Vastar.
(d) Includes 1,801 BCF attributable to Vastar.
Reference is made to Supplemental Information, Oil and Gas Producing
Activities, beginning on page 57, for additional information concerning oil
and gas producing activities and estimates of proved oil and gas reserves.
Production
Net quantities of petroleum liquids and natural gas produced by ARCO were as
follows:
<TABLE>
<CAPTION>
NATURAL GAS
PETROLEUM LIQUIDS (MILLION CUBIC FEET
(BARRELS PER DAY) PER DAY)
YEARS ENDED --------------------- ---------------------
DECEMBER 31, U.S.(a) INTERNATIONAL U.S.(b) INTERNATIONAL
- ------------ ------- ------------- ------- -------------
<S> <C> <C> <C> <C>
1996............................... 559,300 66,100 1,044 730
1995............................... 583,100 66,800 999 557
1994............................... 591,300 72,800 960 511
</TABLE>
- --------
(a) Includes 48,800, 45,300, and 43,500 barrels per day produced by Vastar in
1996, 1995, and 1994, respectively.
(b) Includes 872, 810, and 782 million cubic feet per day ("MMCFD") produced
by Vastar in 1996, 1995, and 1994, respectively.
2
<PAGE>
Average sales prices and average production costs per unit of petroleum
liquids and natural gas were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
U.S. INTERNATIONAL U.S. INTERNATIONAL U.S. INTERNATIONAL
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Average sales price
(including transfers)
per barrel of petroleum
liquids produced....... $16.22 $19.02 $12.17 $15.96 $10.43 $14.56
Average lifting cost per
equivalent barrel of
production............. 3.89 4.14 3.73 3.98 4.05 3.52
Average sales price per
thousand
cubic feet ("MCF") of
natural gas produced... 1.80 2.54 1.35 2.56 1.76 2.51
</TABLE>
Delivery Commitments
ARCO has various long-term natural gas sales contracts covering the majority
of its production in Indonesia, the United Kingdom North Sea, and China,
substantially all of which are reservoir specific. While annual delivery
requirements may vary under these contracts, delivery obligations under the
agreements are essentially limited to producible reserves from specific
fields.
In the Lower 48, Vastar has various long-term natural gas sales contracts
under which Vastar has contracted to deliver approximately 460 MMCFD in 1997.
Such obligation is presently the maximum requirement and declines to less than
103 MMCFD by 2003. The majority of these contracts are either index-based and
present little or no price risk, or are reservoir-dedicated, and present no
obligation to deliver if production from these reservoirs ceases. Vastar can
satisfy its existing natural gas delivery commitments from the gross natural
gas production controlled by Vastar, including proprietary production, royalty
gas, call rights on third party gas and gas obtained through joint operating
agreements. Vastar's total proprietary natural gas production was 872 MMCFD in
1996. There have been no instances in the last three years in which Vastar was
unable to meet its natural gas delivery commitments. Vastar also has
additional long-term contracts with certain cogeneration facilities pursuant
to which it delivered an average of 80 MMCFD in 1996. These contracts have an
average contract term of approximately 19 years, for which an average 13 years
remain. In 1996, the average price of gas sold under these contracts was
approximately $2.49 per MCF.
Exploration and Drilling Activity
The following table shows the number of wells drilled to completion by the
Company:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
U.S.(a) INTERNATIONAL U.S.(b) INTERNATIONAL U.S.(c) INTERNATIONAL
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net productive
exploratory wells
drilled................ 28 2 17 8 12 3
Net dry exploratory
wells drilled.......... 48 7 37 13 29 5
Net productive
development wells
drilled................ 332 23 315 12 245 11
Net dry development
wells drilled.......... 33 -- 30 -- 27 1
</TABLE>
- --------
(a) Includes 17, 29, 156, and 25 wells, respectively, drilled by Vastar.
(b) Includes 15, 26, 133, and 23 wells, respectively, drilled by Vastar.
(c) Includes 11, 25, 89, and 11 wells, respectively, drilled by Vastar.
The Company's current activities, as of December 31, 1996, were as follows:
<TABLE>
<CAPTION>
U.S. INTERNATIONAL
---- -------------
<S> <C> <C>
Gross wells in process of drilling (including wells
temporarily suspended)..................................... 55 10
Net wells in process of drilling (including wells
temporarily suspended)..................................... 33 5
Waterflood projects in process.............................. 2 --
Enhanced oil recovery operations............................ 13 1
</TABLE>
3
<PAGE>
The following table shows the approximate number of productive wells at
December 31, 1996:
<TABLE>
<CAPTION>
OIL GAS
--------------------------- ---------------------
U.S.(a)(b) INTERNATIONAL(c) U.S.(d) INTERNATIONAL
---------- ---------------- ------- -------------
<S> <C> <C> <C> <C>
Total gross productive
wells.................. 11,312 518 3,325 231
Total net productive
wells.................. 5,546 205 1,586 65
</TABLE>
- --------
(a) Includes approximately 1,542 gross and 311 net multiple completions for
ARCO, of which there are 268 gross and 136 net multiple completions for
Vastar.
(b) Includes approximately 1,455 gross and 709 net wells, respectively,
attributable to Vastar.
(c) Includes approximately 85 gross and 39 net multiple completions.
(d) Includes approximately 2,529 gross and 1,261 net wells, respectively,
attributable to Vastar.
As of December 31, 1996, the Company's holdings of petroleum rights acreage
(including options and exploration rights) were as follows (in thousands):
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------- -------------
NET GROSS NET GROSS
----- ----- ------ ------
<S> <C> <C> <C> <C>
U.S.
Alaska.............................................. 207 373 725 1,114
Lower 48(a)......................................... 1,353 2,609 3,017 5,231
----- ----- ------ ------
Total U.S......................................... 1,560 2,982 3,742 6,345
International......................................... 147 394 33,369 48,313
----- ----- ------ ------
Total............................................. 1,707 3,376 37,111 54,658
===== ===== ====== ======
</TABLE>
- --------
(a) Includes 1,021 net developed acreage, 1,659 gross developed acreage, 2,737
net undeveloped acreage and 4,062 gross undeveloped acreage, respectively,
held by Vastar.
Alaska
Approximately 62% of ARCO's worldwide petroleum liquids production came from
ARCO's interests in Alaska, primarily in the Prudhoe Bay, Kuparuk River and
the Greater Point McIntyre Area fields on the North Slope of Alaska. ARCO's
net liquids production from Alaska in 1996 decreased 6% to 387,500 barrels per
day. ARCO's interests in Alaska included net proved reserves of 1,847 million
barrels of oil equivalent at December 31, 1996.
ARCO operates the eastern half of the Prudhoe Bay field and has a 21.87%
working interest in the oil rim production from the field and a 42.56% working
interest in the gas cap production. ARCO's net petroleum liquids production
from the Prudhoe Bay field averaged 210,900 barrels per day in 1996, compared
to 226,600 barrels per day in 1995.
ARCO is the sole operator of the Kuparuk River field and holds a 55.2%
working interest in the field. Its share of production from the field was
130,500 net barrels per day of petroleum liquids during 1996, compared to
140,700 net barrels per day during 1995. The Kuparuk Large Scale Enhanced Oil
Recovery project started full operations in September 1996 and is expected to
add 35,000 to 40,000 barrels of oil to daily gross production by 1999. NGLs,
obtained from the Prudhoe Bay field, are injected into existing wells in the
Kuparuk River field in order to recover additional barrels of oil and offset
natural field decline. ARCO estimates that this project will result in an
additional 200 million gross barrels (97 million net barrels to ARCO) of
incremental oil from the Kuparuk River field.
In 1996, ARCO announced that the Alpine field, west of the Kuparuk River
field, is commercial. ARCO added 65 million barrels of net reserves for
primary recovery from its 56% working interest in the Alpine field.
ARCO has established working interests in four of five Greater Point
McIntyre Area fields as follows: 30.1% in Point McIntyre, 40.0% in Lisburne,
and 50.0% in both West Beach and North Prudhoe Bay State. Additionally, ARCO
4
<PAGE>
has a working interest in the Niakuk field, which is currently being
negotiated among the owners of that field. All five of the fields are
processed through the Lisburne Production Facility, which ARCO operates.
During 1996, liquids processed through the Lisburne Production Facility
averaged 207,000 gross barrels per day, or 51,000 net barrels per day.
All of ARCO's petroleum liquids shipped from the North Slope fields are
transported to market through TAPS to terminal facilities at Valdez, and from
there to west coast locations by ARCO's ocean-going tankers.
Lower 48
During 1996, ARCO's consolidated Lower 48 operations had net production of
380 BCF of natural gas (including consumption) and 63 MMB of petroleum liquids
as compared to 359 BCF and 62 MMB in 1995, respectively. Exploration,
development and purchases (net of sales) replaced 124% of 1996 production on a
barrel-of-oil-equivalent ("BOE") basis.
The primary vehicle for ARCO's Lower 48 exploration and production
operations is Vastar, of which ARCO owns 82.3%. Vastar, headquartered in
Houston, Texas, is engaged in the exploration for and the development,
production and marketing of natural gas and crude oil in selected major
producing basins in the Gulf of Mexico, the Gulf Coast, the San Juan
Basin/Rockies and the Midcontinent areas. For additional information about
Vastar, a copy of Vastar's 1996 Annual Report to Stockholders and 1996 Annual
Report on Form 10-K can be obtained by writing to Manager, Investor Relations,
Vastar Resources, Inc., 15375 Memorial Drive, Houston, Texas 77079. Vastar's
telephone number is (713) 584-6000.
ARCO's other Lower 48 operations accounted for reserves at December 31, 1996
of 575 MMBOE, of which 85% were petroleum liquids. In 1996 net production from
ARCO's other Lower 48 interests was 54 MMB of oil equivalent, down slightly
from 55 MMB in 1995.
International
ARCO's international operations include both exploration and production.
ARCO's 1996 international production of petroleum liquids averaged 66,100
barrels per day, and came primarily from Indonesia and the North Sea. Natural
gas production averaged 730 MMCFD. Natural gas production from the United
Kingdom sector of the North Sea accounted for 45% and the Pagerungan and the
Offshore Northwest Java natural gas fields in Indonesia accounted for 43% of
ARCO's 1996 international natural gas production.
ARCO's net proved reserves from international interests at December 31, 1996
were 967 MMBOE.
Natural gas production from ARCO's Yacheng-13 field, situated in the South
China Sea, began on January 1, 1996. This gross $1.1 billion project,
developed with two partners, consists of two offshore production platforms,
onshore receiving facilities, the world's second longest subsea pipeline, the
480-mile pipeline to Black Point, near Hong Kong, and a 60-mile pipeline to
Sanya on Hainan Island. Ultimate production is expected to be more than 300
gross MMCFD. ARCO is the operator of, and has a 34.3% working interest in, the
Yacheng-13 field. During 1996, ARCO's net production was 69.3 MMCFD.
In 1996, ARCO signed an agreement with Sonatrach, the Algerian state oil
company, to undertake a major enhanced oil recovery ("EOR") project in the
Rhourde El Baguel oil field. ARCO made a one-time $225 million acquisition
payment to Sonatrach. In addition, the agreement provides for ARCO to make an
investment of over $1.3 billion in the project. Under the production sharing
contract, ARCO will receive up to 49% of the project's annual production. ARCO
believes its EOR efforts should yield over 500 million incremental barrels of
crude oil equivalent over the 25-year life of the project and increase
production rates from the current 25,000 barrels per day to a peak of 125,000
barrels per day within the next five years. ARCO began receiving production on
July 1, 1996.
5
<PAGE>
Recent Developments
Exploration activities by an ARCO operated consortium in which ARCO holds a
27.5% interest led to the discovery of an oil field called Al-Rayyan, in the
Persian Gulf offshore Qatar, from which production commenced in late 1996.
Delineation and appraisal of the discovery continues. ARCO, along with its co-
venturers, is currently negotiating with the governments of Qatar and Dubai a
contractual framework for the supply of natural gas to Dubai from the huge
Qatar North field, which is located in close proximity to the Al-Rayyan field.
In early 1997, ARCO finalized a joint venture with LUKOIL, Russia's largest
oil company, to pursue exploration and production projects in the Commonwealth
of Independent States ("CIS"). The joint venture entity, LUKARCO, is owned 54%
by LUKOIL and 46% by ARCO. LUKARCO may invest up to $5 billion in various
projects over the next 18 years; ARCO has agreed to provide most of the
financing to LUKARCO. The first investment will be in the Caspian Pipeline
Consortium, a multi-party $2 billion project to construct a 900-mile pipeline
from the Tengiz oil field in Kazakstan to the Black Sea via Russia. LUKARCO
will hold a 12.5% interest, which will obligate LUKARCO to fund 25% of the
construction costs. In addition to the joint venture participation, ARCO owns
approximately 8% of LUKOIL's total equity as a result of ARCO's purchase of
convertible bonds in public offerings in 1995 and 1996.
ARCO is conducting delineation drilling to appraise a discovery it made in
eastern Indonesia. Appraisal efforts are being conducted to determine whether
the discovery, called Wiriagar, holds the necessary 6 to 7 trillion cubic feet
of gas to support a two-train liquefied natural gas facility.
WORLDWIDE COAL OPERATIONS
ARCO has interests in nine surface and underground coal mines in the western
United States and in northeastern Australia.
In the United States, during 1996, ARCO owned and operated two surface mines
in Wyoming's Powder River Basin, Black Thunder and Coal Creek, and an
underground mine, West Elk, in western Colorado. Total U.S. coal shipments for
1996 were 52 million tons of coal.
In December 1996, a subsidiary of ARCO acquired a 65% interest in Canyon
Fuel Company, a limited liability company that owns three mines--SUFCO,
Skyline and Soldier Creek--located in Utah's Uinta Basin. At December 31,
1996, ARCO's net investment at cost was $411 million. The three mines are
estimated to contain approximately 270 million tons of economically
recoverable coal reserves.
In Queensland, Australia, ARCO has interests in three mines in the Bowen
Basin: Curragh, Gordonstone and Blair Athol. ARCO operates and holds an
effective 87% interest in Curragh, an 80% interest in Gordonstone and a non-
operating 31.4% interest in Blair Athol. As a result of the unanticipated
geological complexity of the Curragh mine, ARCO is studying several options,
which may include scaling back the level of operations at the mine. ARCO's net
share of total shipments in 1996 from Australian operations was 11 million
tons, of which 4.4 million tons was from Curragh.
As of December 31, 1996, ARCO had long-term contracts to supply U.S. utility
companies with steam coal from its Black Thunder, Coal Creek and West Elk
mines and from its interest in Canyon Fuel Company. These contracts have
various termination dates with the longest contract extending to December 31,
2017. It is anticipated that these contracts will require approximately 70% of
planned production from these six U.S. coal mines in 1997. Approximately 80%
of planned 1997 production in Australia is committed under long-term
arrangements. Future revenues from these contracts in the U.S. and Australia
can be affected by periodic reopeners that adjust sales prices based on
prevailing market conditions.
In total, ARCO shipped 63 million tons of coal during 1996 and had 1,669
million tons of recoverable coal reserves as of December 31, 1996. Reference
is made to Supplemental Information, Coal Operations on page 59 for further
information concerning reserves and shipments of coal.
6
<PAGE>
DOWNSTREAM
REFINING AND MARKETING
ARCO operates two U.S. petroleum refineries on the west coast, the Los
Angeles Refinery in Carson, California and the Cherry Point Refinery near
Ferndale, Washington. Both of these refineries are accessible to major supply
sources and major markets through ocean-going tankers, pipelines and other
transportation facilities.
The combined annual average operable crude distillation capacities of these
two refineries, as measured pursuant to the standards of the American
Petroleum Institute, are shown in the following table:
<TABLE>
<CAPTION>
ANNUAL AVERAGE OPERABLE
CRUDE DISTILLATION
CAPACITY
(BARRELS PER DAY)
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Los Angeles Refinery.................................... 260,000 237,000 237,000
Cherry Point Refinery................................... 200,500 185,000 185,000
------- ------- -------
Total................................................. 460,500 422,000 422,000
======= ======= =======
</TABLE>
ARCO's crude oil refinery runs and petroleum products manufactured at its
refining facilities were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------- ------- -------
(EQUIVALENT BARRELS PER
DAY)
<S> <C> <C> <C>
Crude oil refinery runs................................. 452,700 438,800 408,300
======= ======= =======
Petroleum products manufactured:
Gasoline.............................................. 214,800 217,400 206,700
Jet fuels............................................. 105,700 101,300 88,800
Distillate fuels...................................... 66,000 70,700 71,900
Other (a)............................................. 100,500 82,700 66,600
------- ------- -------
Total (b)........................................... 487,000 472,100 434,000
======= ======= =======
</TABLE>
- --------
(a) Includes chemical products, petroleum coke (green and calcined) and
feedstocks, sulfur, middle-of-barrel specialties and changes in unfinished
stocks.
(b) Total manufactured petroleum products volumes exceed total crude oil runs
as a result of the expansion of petroleum product through rearrangement of
molecular structure and refinery blending of oxygenates.
In 1996, the long-term crude oil supply agreement with Tosco Corporation
expired. ARCO received an average of 20,000 barrels per day of refined product
under this agreement in 1996.
In connection with its refining operations, ARCO produces calcined coke and
operates electric cogeneration facilities.
ARCO markets gasoline and other refined petroleum products to both consumers
and resellers. Gasoline is marketed under the ARCO(R) trademark through
independent dealers and distributors and directly to motorists at branded
retail outlets located in Arizona, California, Nevada, Oregon and Washington.
ARCO also sells gasoline to unbranded resellers. NGLs are sold directly to
end-use customers and the Watson Cogeneration Facility, which is 51% owned by
ARCO, and are also marketed through distributors. Jet fuels are sold directly
to airlines and the United States Department of Defense. Calcined coke is sold
to U.S. and international industrial consumers. Cargo and bulk sales of
petroleum products are also made to commercial and industrial consumers, and
certain products are marketed through other channels.
As of December 31, 1996, there were 1,514 branded retail outlets, which
included franchisee and Company-operated am/pm(R) convenience stores and
SMOGPROS(R) Service Centers, and traditional service stations.
7
<PAGE>
In June 1996, ARCO and the other California gasoline marketers were required
to meet California Air Resources Board ("CARB") specifications standards for
automobile gasolines available for retail sale in California. In order to meet
the more stringent CARB standards with 100% of the gasoline produced at the
Los Angeles Refinery, ARCO completed in 1995 the necessary modifications and
upgrades at the refinery. The cost to meet both Environmental Protection
Agency ("EPA") and CARB standards was approximately $500 million.
Total refined petroleum product sales, which include insignificant sales to
ARCO Chemical and Lyondell, for the periods indicated, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------- ------- -------
(EQUIVALENT BARRELS PER
DAY)
<S> <C> <C> <C>
Petroleum product sales:
Gasoline.............................................. 266,400 256,800 253,800
Jet fuels............................................. 117,000 106,200 97,600
Distillate fuels...................................... 69,000 69,100 73,500
Other(a).............................................. 80,700 61,800 53,000
------- ------- -------
Total................................................. 533,100 493,900 477,900
======= ======= =======
</TABLE>
- --------
(a) Includes heavy fuel oils, NGLs, calcined and green coke.
Total petroleum product sales differ from total petroleum products
manufactured due to the consumption of some products as refinery fuel, the
exchange of products with other companies, change in inventory levels, and the
purchase and resale of products not manufactured by ARCO.
Recent Developments
In 1994, ARCO acquired a 9.9% interest in China's third largest refiner,
Zhenhai Refining and Chemical Company ("ZRCC"). In late 1996, ARCO purchased
an additional interest in ZRCC. The newly issued convertible bonds, when
converted, will give ARCO a 20% interest in ZRCC, which has a modern refinery
complex.
In addition, in 1996, ARCO entered into a joint venture project to produce
and upgrade heavy oil from the Orinoco region of Venezuela. Subject to certain
governmental approvals, the initial $2 billion phase of the project is
expected to be operational by 2001. ARCO will be a 30% owner.
In early 1997, ARCO announced plans to build a 400 million pound-per-year
polypropylene manufacturing facility to be constructed adjacent to the Los
Angeles Refinery. ARCO estimates the $300 million plant will be operational in
1999.
TRANSPORTATION
ARCO's transportation business includes ownership interests in pipelines in
Alaska, ownership interests in and operations of pipelines and terminalling
facilities in the Lower 48, and the operation of 10 ocean-going U.S. flag
tankers.
In Alaska, ARCO has a 22.3% weighted average undivided ownership interest in
TAPS. TAPS consists of an 800-mile pipeline system used to transport petroleum
liquids from the North Slope of Alaska to the port of Valdez in south-central
Alaska. In addition, ARCO owns approximately 22% of the stock of Alyeska
Pipeline Service Company ("Alyeska"), which was established to design,
construct, operate and maintain TAPS for the owners. ARCO's undivided interest
in TAPS is proportionately consolidated for financial reporting purposes. TAPS
1996 total throughput averaged approximately 1,436,000 barrels per day.
In the Lower 48, ARCO manages facilities for transportation and terminalling
of petroleum liquids, refined petroleum products, petrochemicals and natural
gas. In 1995, ARCO and Phillips Petroleum Company formed the
8
<PAGE>
Seaway Pipeline Company ("Seaway"), a joint venture. ARCO has ownership
interests in petroleum liquids pipeline systems that include gathering lines
serving producing fields in California, New Mexico, Oklahoma, Texas and Utah,
and common carrier trunk lines extending from dock facilities and producing
areas to refineries and terminals. These pipelines moved petrochemicals and
refined petroleum products for all shippers (including ARCO) that properly
tendered these materials for transportation. In addition, ARCO owns or leases
and operates terminals that provide a variety of terminalling and
transportation services both to third-party customers and ARCO.
ARCO has reorganized management responsibility for its transportation
business, which will result in a change in segment reporting of those
operations in 1997. ARCO Alaska Transportation, Inc. will be included with
exploration and production. ARCO Marine, Inc. will be included in refining and
marketing.
CHEMICALS
The Company's chemicals operation consists of the businesses owned by ARCO
Chemical. ARCO currently owns 80,000,001 shares of common stock of ARCO
Chemical, which represent 82.7% of the outstanding shares.
ARCO Chemical is an international manufacturer and marketer of chemicals
used in a broad range of consumer products. ARCO Chemical's core product is
propylene oxide ("PO"), which it produces through two distinct process
technologies based on indirect oxidation (peroxidation) processes that yield
co-products. One process yields tertiary butyl alcohol ("TBA") as the co-
product; the other process yields styrene monomer ("SM") as the co-product.
The two technologies are mutually exclusive such that either a dedicated
PO/TBA plant or a dedicated PO/SM plant must be built. ARCO Chemical's other
major products include PO derivatives, which include polyols and propylene
glycols ("PG"), TBA derivatives, which include methyl tertiary butyl ether
("MTBE") and ethyl tertiary butyl ether ("ETBE"). In September 1996, ARCO
Chemical sold its plastics business and, as a result, no longer manufactures
SM derivatives, but will continue to produce SM.
In 1995, ARCO Chemical began marketing toluene di-isocyanate ("TDI"),
obtained under long-term supply agreements with Rhone-Poulenc. TDI and polyols
are combined to manufacture polyurethanes. In 1996, ARCO purchased Olin
Corporation's TDI and aliphatic di-isocyanate ("ADI") businesses, including
TDI and ADI production facilities located in Lake Charles, Louisiana and
related assets and technology.
ARCO Chemical's principal chemical facilities are located in: Bayport, Texas
(PO, TBA and various derivatives including PG); Channelview, Texas (PO, SM and
various derivatives including polyols and MTBE); Rotterdam, the Netherlands
(PO, TBA and various derivatives including PG, propylene glycol ethers and
MTBE); Fos-sur-Mer, France (PO, TBA and various derivatives including PG,
polyols and MTBE); Lake Charles, Louisiana (TDI and ADI); and a joint venture
in Chiba, Japan (PO and SM). Other production facilities include polyols at
South Charleston and Institute, West Virginia, Rieme, Belgium, Kaohsiung,
Taiwan, and Anyer, West Java, Indonesia. ARCO Chemical owns a majority equity
interest in a second PO/SM plant at Channelview, Texas. The two equity
investors in the plant, which are limited partners, each take a substantial
portion of the SM output of the plant through long-term processing agreements.
In 1996, ARCO Chemical's Board of Directors gave final approval for the
construction of a new PO/SM plant at Rotterdam, scheduled for completion in
fourth quarter 1999, and for expansion of the Channelview, Texas PO/SM
capacity by early 1998.
The following table shows ARCO Chemical's worldwide production capacity (in
millions of pounds per year, except where otherwise noted) for PO, SM and
certain key derivatives:
<TABLE>
<CAPTION>
PRODUCT U.S. INTERNATIONAL
------- ------ -------------
<S> <C> <C>
PO 2,335 1,360
Polyols 725 590
PG 565 345
SM 2,570 790
TDI 250 --
MTBE--Bbls/day 30,000 28,500
</TABLE>
9
<PAGE>
Capacities shown are the production capacities that, as of December 31,
1996, ARCO Chemical believes it can obtain based upon plant design and subject
to certain onstream factors, product mix and other variable factors.
Capacities shown include the full capacity of joint-venture facilities. Plants
can and have exceeded these capacities for extended periods of time. In
addition, ARCO Chemical currently has processing arrangements at a third party
facility pursuant to which it has the capacity to produce an additional 12,000
barrels per day of MTBE or ETBE.
In addition to raw material purchase agreements and product sales or
processing agreements with unrelated third parties, ARCO Chemical has
agreements with ARCO and Lyondell which provide for, among other things, the
purchase, sale and processing of various products and feedstocks. ARCO
Chemical sells MTBE at contract prices to ARCO for use in the production of
the Company's reformulated gasolines. ARCO and ARCO Chemical have entered into
long-term sales agreements providing for delivery of fixed quantities of MTBE.
Lyondell provides ARCO Chemical with a portion of the feedstocks purchased for
use at ARCO Chemical's manufacturing facilities in Texas. Lyondell also
provides certain plant services at these facilities. ARCO Chemical in turn
provides certain supplies and services to Lyondell. ARCO Chemical is also a
party to certain service agreements and other arrangements with the Company
and Lyondell.
For additional information about ARCO Chemical, a copy of ARCO Chemical's
1996 Annual Report to Stockholders and 1996 Annual Report on Form 10-K can be
obtained by writing to Manager, Investor Relations, ARCO Chemical Company,
3801 West Chester Pike, Newtown Square, Pennsylvania 19073-2387. ARCO
Chemical's telephone number is (610) 359-2000.
EQUITY INTEREST IN LYONDELL
ARCO owns a 49.9% equity interest in Lyondell, which is accounted for on the
equity method. Lyondell is a manufacturer and marketer of petrochemicals and,
through its participation interest in LYONDELL-CITGO Refining Company Ltd.
("LCR"), of refined petroleum products. Prior to 1989, Lyondell was a wholly-
owned subsidiary of ARCO. In August 1994, ARCO completed an offering of
Exchangeable Notes due 1997 which can be exchanged at maturity into Lyondell
Common Stock or, at ARCO's option, cash of an equal value. If ARCO elects to
deliver shares of Lyondell Common Stock at maturity, ARCO's equity interest in
Lyondell will be substantially reduced or eliminated. ARCO currently owns 39.9
million shares of Lyondell Common Stock. See Notes 10 and 20 of Notes to
Consolidated Financial Statements on pages 47 and 55.
For the year ended December 31, 1996, Lyondell recorded total revenues of
approximately $248 million from sales to ARCO Chemical. Lyondell also provides
certain plant services at ARCO Chemical's Texas facilities. ARCO Chemical in
turn provides certain supplies and services to Lyondell. See "Downstream--
Chemicals." In addition, Lyondell currently purchases certain of its crude
oil, natural gas and NGLs requirements from ARCO and Vastar at prices based on
prevailing market prices. During 1996, Lyondell paid ARCO and its consolidated
subsidiaries an aggregate of $17 million under these agreements, arrangements
and transactions and received an aggregate of $318 million, principally from
sales of product to ARCO Chemical.
For additional information about Lyondell, a copy of Lyondell's 1996 Annual
Report to Stockholders and 1996 Annual Report on Form 10-K can be obtained by
writing to Investor Relations, Lyondell Petrochemical Company, One Houston
Center, 1221 McKinney Street, Houston, Texas 77010. Lyondell's telephone
number is (713) 652-7200.
CAPITAL PROGRAM
The Company's capital expenditures for additions to fixed assets (including
dry hole costs) totaled approximately $2.1 billion in 1996. In addition, 1996
capital expenditures included $1.2 billion for various investments including
ARCO Chemical's investments in a TDI manufacturing facility, ARCO's investment
in Canyon Fuel Company and investments in convertible bonds issued by ZRCC and
LUKOIL. The capital program for additions to fixed assets is budgeted at
$3.4 billion for 1997. The levels of future capital expenditures may be
affected by business conditions in the industry, particularly possible changes
in prices of and demand for crude oil, natural gas and petroleum products.
Changes in the tax laws, the imposition of and changes in federal and state
clean air and clean fuel requirements, and other changes in environmental
rules and regulations may also affect future capital expenditures.
10
<PAGE>
PATENTS
ARCO owns numerous patents, many of which are available for license to the
petroleum industry, and is itself a licensee under certain patents which are
available generally to the industry. The Company's operations are not
dependent upon any particular patent or patents or upon any exclusive patent
rights.
COMPETITION
The petroleum industry is competitive in all its phases, including
manufacturing, distribution and marketing of petroleum products and
petrochemicals. Methods of competition for new sources of supply include
finding and developing such sources and competition in bidding for leases
which may contain such sources and the acquisition of producing properties.
Competitive factors in manufacturing, distribution and marketing include
price, methods and reliability of delivery, product quality, new product
development and, with respect to consumer products, advertising and sales
promotion.
Crude oil and natural gas supplies are currently abundant relative to demand
in the worldwide markets for those commodities. Market prices are typically
volatile as a result of uncertainties caused by world events. ARCO's emphasis
on the cost-efficient exploration and development of petroleum resources and
on innovative marketing strategies make the Company well situated to compete
in this environment.
In the refining, marketing and manufacturing segment of the industry,
refining operations that yield a higher proportion of high-margin products and
marketing operations that put a premium on high volume and innovation are of
primary importance.
The U.S. coal mines primarily serve competitive U.S. markets, where the
availability of specific transportation arrangements, primarily rail
transportation, are often a key element in competition because transportation
costs are a significant component of the delivered price of coal. Almost all
of the Company's U.S. coal customers are electric utilities. The Company's
Australian mines are export-oriented, largely to Japan, and face worldwide
competition from Canadian, Indonesian, South African, U.S. and other
Australian producers.
Key competitive factors in the chemicals markets include research and
development, product price, quality, reliability of supply, technical support,
customer service and potential substitute materials.
The Company ranked as the sixth largest U.S. based oil company on the basis
of revenues in the most recent Fortune 500 list of U.S. industrial companies.
HUMAN RESOURCES
As of December 31, 1996, ARCO had approximately 22,800 full-time equivalent
employees, of whom approximately 15% were represented by collective bargaining
agents.
RESEARCH AND DEVELOPMENT
ARCO engages in research for new and improved products and methods for
operating its businesses principally at two facilities located at Newtown
Square, Pennsylvania and Plano, Texas. Total research and development expenses
were $106 million, $104 million and $109 million in 1996, 1995 and 1994,
respectively.
11
<PAGE>
ENVIRONMENTAL MATTERS
Site Remediation
The Company is subject to federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), and the
Superfund Amendments and Reauthorization Act of 1986 and the Resource
Conservation Recovery Act of 1976 ("RCRA"), which may require the Company to
remove or mitigate the effects on the environment of the disposal or release
of certain chemical, mineral and petroleum substances at various sites,
including the restoration of natural resources located at these sites and
damages for loss of use and non-use values. The Company is currently
participating in environmental assessments and cleanups under these laws at
federal Superfund and state-managed sites, as well as other clean-up sites,
including service stations, refineries, terminals, chemical facilities, third
party landfills, former nuclear processing facilities, sites associated with
discontinued operations and sites that were formerly owned by ARCO. The
Company may in the future be involved in additional environmental assessments
and cleanups, including the restoration of natural resources and damages for
loss of use and non-use values. The ultimate amount of the future costs
associated with such environmental assessments and cleanups is indeterminable
due to such factors as the unknown nature and/or extent of contaminants at
many sites, the unknown timing, extent and method of the remedial actions
which may be required and the determination of the Company's liability in
proportion to other responsible parties. In addition, environmental loss
contingencies include claims for personal injuries allegedly caused by
exposure to toxic materials manufactured or used by ARCO. The Company
continues to estimate the amount of these costs in periodically establishing
reserves based on progress made in determining the magnitude of remediation
costs, experience gained from sites on which remediation has been completed,
the timing, extent and method of remedial actions required by the applicable
governmental authorities and an evaluation of the amount of the Company's
liability considered in light of the liability and financial wherewithal of
the other responsible parties. As the scope of the Company's obligation
becomes more clearly defined, there may be changes in these estimated costs,
which might result in future charges against the Company's earnings.
The Company's environmental remediation reserve of $577 million at December
31, 1996 covers federal Superfund and state-managed sites as well as other
clean-up sites, including service stations, refineries, terminals, chemical
facilities, third-party landfills, former nuclear processing facilities, sites
associated with discontinued operations and sites formerly owned by ARCO. The
Company has been named a potentially responsible party ("PRP") for 117 sites.
The number of PRP sites in and of itself does not represent a relevant measure
of liability, because the nature and extent of environmental concerns vary
from site to site and the Company's share of responsibility varies from sole
responsibility to very little responsibility. The Company reviews all of the
PRP sites along with other sites as to which no claims have been asserted, in
estimating the amount of accrual. The Company's future costs for these sites
could exceed the amount reserved by as much as $600 million.
Approximately 45% of the reserve relates to sites associated with the
Company's discontinued operations, primarily mining activities in the states
of Montana, Utah and New Mexico. Another significant component relates to
currently and formerly owned chemical, nuclear processing, and refining and
marketing facilities, and other sites that received wastes from these
facilities. The Company is also the subject of certain material legal
proceedings described below under the caption "Material Environmental
Litigation." The remainder relates to sites with reserves ranging from
$1 million to $10 million per site. No one site represents more than 10% of
the total reserve. Substantially all amounts reserved are expected to be paid
out over the next five to six years.
Clean Air
The Federal Clean Air Act Amendments of 1990 (the "1990 Clean Air Act
Amendments") and various state and local laws and regulations impose certain
air quality requirements. Among other things, the 1990 Clean Air Act
Amendments effectively require the manufacture and sale of reformulated and
oxygenated gasolines in areas not meeting specified air quality standards. The
EPA wintertime oxygenate gasoline program became effective in the fall of
1993. The EPA reformulated gasoline requirements became effective January 1,
1995 for the nine U.S. cities, including Los Angeles and San Diego, and other
areas with the worst ozone pollution. The CARB's specifications for
reformulated
12
<PAGE>
gasoline, which are stricter than the EPA requirements, became effective for
retail sales on and after June 1, 1996. To comply with the EPA air quality
requirements and CARB standards, in 1995 ARCO completed major modifications at
its Los Angeles Refinery. The Company does not anticipate any material adverse
effect upon its consolidated financial position as a result of compliance with
such environmental laws and regulations.
In 1993 the South Coast Air Quality Management District ("AQMD"), which sets
air quality standards for a five county area of southern California, including
Los Angeles County, adopted regulations requiring phased reductions of certain
pollutants. By 2003 the Los Angeles Refinery and the Wilmington calciner will
be required to achieve cumulative reductions from 1992 levels of oxides of
nitrogen (NOx) of 63% and oxides of sulfur (SOx) of 83%. As part of the
regulations, AQMD created a Regional Clean Air Incentives Market ("RECLAIM")
program under which regulated firms can earn credits for achieving emission
reductions below targeted levels. Those credits may then be bought and sold.
The Los Angeles Refinery plans to achieve the requisite levels of emission
reductions by a combination of reductions and acquisitions of credits,
substantial amounts of which have already been purchased. The AQMD is
currently considering modifications to the RECLAIM program, but nothing has
yet been finalized.
Environment-Related Expenditures
For the past three years, the Company's environment-related expenditures
have been comprised of both capital expenditures and operating expenses.
Environment-related capital expenditures include the cost of projects to
reduce and/or eliminate pollution and contamination in the future and the cost
of modifications to the Company's manufacturing facilities necessary to comply
with the aforementioned federal, state and local air quality laws and
regulations. Environment-related operating costs include both costs to
eliminate, control or dispose of, pollutants, as well as costs to remediate
previously contaminated sites. Sites are remediated using a variety of
techniques, including on-site stabilization, bioremediation, soil removal,
pump and treat and other methods as deemed appropriate for each specific site.
For the past three years, the Company's environment-related capital
expenditures have averaged approximately $225 million per year. The Company
anticipates environment-related capital expenditures of approximately
$170 million and $175 million for 1997 and 1998, respectively. For the past
three years, the Company's operating expenses for the remediation of
previously contaminated properties either compelled or likely to be compelled
in the foreseeable future by government or third parties have averaged
approximately $110 million per year. Cash payments for site remediation have
averaged $120 million per year over the same period. The Company's operating
expenses also include ongoing costs of controlling or disposing of pollutants.
For the past three years, the Company estimates that its operating expenses
related to these ongoing costs have averaged approximately $230 million per
year.
In addition to the reserve for environmental remediation costs, the Company
has also accrued, as of December 31, 1996, $950 million for the estimated
cost, net of salvage value, of dismantling facilities as required by contract,
regulation or law, and the estimated costs of restoration and reclamation of
land associated with such facilities.
Material Environmental Litigation
Pursuant to the authority provided under Superfund, the State of Montana has
asserted claims against ARCO for compensation for damage to natural resources
up to the maximum amount allowed by 42 United States Code (S)9607. These
alleged damages, arising out of ARCO's or its predecessors' alleged
activities, include restoration and compensable damages, assessment costs, and
prejudgment interest. On December 12, 1983, a lawsuit, styled Montana v. ARCO,
ex rel., (Case No. CV-83-317-HLN-PGH) was filed in the United States District
Court for the District of Montana. The claim, as of January 1, 1997, was for
damages of $764 million for alleged injuries to natural resources resulting
from mining and mineral processing operations. ARCO is contesting this demand.
In addition, on January 21, 1997, the court granted the Confederated Salish
and Kootenai Tribes of the Flathead Reservation ("Tribes"), a limited form of
intervention in Montana v. ARCO. The Tribes, as alleged trustees, have
asserted claims against ARCO for alleged injury to and loss of natural
resources located in the Clark Fork River Basin in southwest Montana. The
United States Department of Interior also stated an intention to make a claim
for natural resource damages in the Clark Fork River Basin.
13
<PAGE>
On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO
(amended October 15, 1992), styled U.S. v. ARCO, et al. (Case No. CV-89-039-
BU-PGH), in the United States District Court for the District of Montana, for
oversight costs at several of the Upper Clark Fork River Basin Superfund
sites. Litigation is proceeding on both the EPA's claims (in the approximate
amount of $80 million) and ARCO's counterclaims against various federal
agencies. (In the counterclaims, ARCO seeks contributions from the federal
agencies for remediation costs and for any natural resource damage liability
ARCO might incur in Montana v. ARCO.)
ARCO and its subsidiary, Atlantic Richfield Hanford Company ("ARHCO"), and
several other companies who have served as government contractors at the
Hanford Nuclear Reservation in south central Washington State are named as
defendants in a consolidated complaint in the United States District Court for
the Eastern District of Washington, titled In re Hanford Nuclear Reservation
Litigation (CY-91-3015-AAM). In October 1994, the Department of Energy
determined that the government will indemnify ARCO and ARHCO for any judgment
or settlement in the action pursuant to the contract between ARHCO and the
Atomic Energy Commission and the provisions of the Price-Anderson Act.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking
compensatory and punitive damages and injunctions were filed by the State of
Alaska, the United States, and private plaintiffs against Exxon, Alyeska, and
Alyeska's owner companies (including ARCO Transportation Alaska, Inc.).
Alyeska and its owner companies have settled the civil damage claims by
federal and state governments and the lawsuits by private plaintiffs. Certain
issues relating to liability for the spill remain unresolved between the Exxon
companies, on the one hand, and Alyeska and its owner companies, on the other
hand.
On November 21, 1990, ARCO filed a complaint in Los Angeles County Superior
Court, Atlantic Richfield Company v. AETNA Casualty and Surety Company of
America, et al. (Case No. BC 015575), seeking recovery under numerous
insurance policies in effect at times during past years for certain
environmental expenses incurred by ARCO. The claims arise from the activities
of ARCO and its predecessor companies, including The Anaconda Company, at
sites and locations throughout the United States. ARCO has settled with most
of the insurance company defendants. ARCO expects that a trial against the
remaining defendants will begin in 1997.
Conclusion
Environmental concerns, including the minimization and prevention of
environmental contamination from ongoing operations, and the cost-effective
remediations of existing contaminated sites, continue to be vital factors in
the Company's future planning. See Note 13 of Notes to Consolidated Financial
Statements on page 49, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS
THE COMPANY
On June 7, 1989, the City of New York, the New York City Housing Authority,
and the New York City Health and Hospitals Corporation brought suit in the
Supreme Court of the State of New York for the County of New York (Case No.
14365/89) against six alleged former lead pigment manufacturers or their
successors (including ARCO as successor to International Smelting and Refining
Company ("IS&R"), a former subsidiary of The Anaconda Company), and the Lead
Industries Association ("LIA"), a trade association. Plaintiffs seek to
recover damages in excess of $50 million including (i) past and future costs
of abating lead-based paint from housing owned by New York City and the New
York City Housing Authority; (ii) other costs associated with dealing with the
presence of lead-based paint in that housing and privately-owned housing; and
(iii) any amounts paid by the City or the Housing Authority to tenants because
of injuries caused by the ingestion of lead-based paint. Plaintiffs also seek
punitive damages and attorney fees. The trial court dismissed all of
plaintiffs' claims other than their fraud claim. Plaintiffs appealed the
dismissal of their claims for restitution and indemnification and on June 27,
1996, the appellate court unanimously reversed the trial court's order.
14
<PAGE>
On January 24, 1996, ARCO (as successor to IS&R) was added as a defendant to
a class action suit pending in the United States District Court for the
Southern District of New York, German, et al. v. Federal Home Loan Mortgage
Corp., et al. (Case No. 93 Civ 6941), by plaintiff intervenors Naquan and
Naiya Thomas, minors, and their mother and guardian Kaii Henry. The complaint
in intervention names as defendants, in addition to ARCO, eight alleged former
processors of lead pigment and lead paint, the LIA, the City of New York and
its Housing Authority, and the owner of the building where plaintiffs reside.
Plaintiffs seek on behalf of themselves, and a purported class of children
under seven and pregnant women residing in dwellings in the City of New York
containing or presumed to contain lead paint, injunctive relief from all
defendants including orders to abate lead paint and to contribute to court-
administered funds to pay for abatement and medical monitoring and treatment.
The complaint alleges causes of action against the lead pigment defendants and
the LIA for negligence, strict products liability, fraud and
misrepresentation, breach of express and implied warranty, nuisance,
conspiracy, concert of action, and enterprise and market share liability. The
City of New York, its Housing Authority, and the owner of the building where
plaintiffs reside have filed cross-claims against ARCO, the other alleged
former processors of lead pigment and paint, and the LIA seeking
indemnification against or contribution toward any liability they (cross-
claimants) may have to plaintiffs.
On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to
a purported class action suit pending in the Court of Common Pleas in Cuyahoga
County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case
No. 236835), which seeks on behalf of the three named plaintiffs, and all
other persons similarly situated in the state of Ohio, money damages for
injuries allegedly suffered from exposure to lead paint, punitive damages, and
an order requiring defendants to remove and abate all lead paint applied to
any building in Ohio. The suit names as defendants, in addition to ARCO, the
LIA and 16 companies alleged to have participated in the manufacture and sale
of lead pigments and paints and includes causes of action for strict product
liability, negligence, breach of warranty, fraud, nuisance, restitution,
negligent infliction of emotional distress, and enterprise, market share and
alternative liability. The trial court dismissed the complaint. The court of
appeals reversed and remanded the case to the Court of Common Pleas.
On August 29, 1995, a purported class action was filed in the United States
District Court for the Eastern District of Louisiana, Jefferson v. Lead
Industries Association, Inc. (Case No. 95-2885), which seeks compensatory and
punitive damages on behalf of the named plaintiff and all Louisiana parents of
children who attained a blood lead level equal to or greater than 25
micrograms per deciliter before the age of six. The named defendants are ARCO
(as successor to IS&R), the LIA, NL Industries, Inc., Sherwin-Williams Co.,
SCM Corporation, Glidden Co., and Fuller-O'Brien Corporation. The complaint
states as theories of recovery strict liability, negligence, failure to warn,
fraud, and breach of express and implied warranty. The complaint also asserts
that the manufacturer of the lead pigment in any particular paint cannot be
determined by chemical analysis or any other means, and that plaintiff,
therefore, may rely upon market share and civil conspiracy to establish
defendants' liability. On June 3, 1996, the trial court dismissed the case.
The plaintiff has appealed the decision.
In addition, the Company is a defendant in several lawsuits brought by
individuals that allege injury from exposure to lead paint. Such cases, in the
aggregate, are not material to the financial condition of the Company.
On June 27, 1995, three former ARCO Alaska, Inc. employees filed an action
in the Alaska Superior Court in Anchorage, titled Tesch, et al. v. ARCO
Alaska, Inc. (Case No. 3AN-95-3320-CI), purporting to represent a class of all
ARCO Alaska, Inc. employees classified as exempt from overtime pay
requirements within the preceding three years. The plaintiffs claim that they
and other exempt employees were not actually exempt under Alaska law from
overtime pay and are entitled to pay for unpaid overtime and penalties in an
unstated amount. On May 7, 1996, the court denied plaintiffs' motion for class
certification and allowed further discovery. The plaintiffs recently filed a
motion for reconsideration of the May 7, 1996 ruling denying certification.
Employees of Alyeska in which ARCO Transportation Alaska, Inc. owns
approximately 22%, have filed two other purported class actions making similar
claims against Alyeska.
On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et al.
(Case No. 700810) was brought in the Superior Court of California for the
County of San Diego against ARCO and eight other refiner-marketers of CARB
reformulated gasoline. The plaintiffs allege that the defendants conspired to
restrict the supply, and thereby to raise
15
<PAGE>
the price of CARB gasoline in violation of California state antitrust and
unfair competition law. The plaintiffs seek to recover treble damages,
restitution, attorneys fees, and injunctive relief on behalf of themselves and
a purported class of California residents who bought CARB gasoline after March
1, 1996 other than for resale.
ENVIRONMENTAL PROCEEDINGS
As discussed under the caption "Environmental Matters," ARCO is currently
participating in environmental assessments and cleanups at numerous operating
and non-operating sites under Superfund and comparable state laws, RCRA, and
other state and local laws and regulations, and pursuant to third party
indemnification requests, and is the subject of material legal proceedings
relating to certain of these sites. See "Environmental Matters--Material
Environmental Litigation." Set forth below is a description, in accordance
with SEC rules, of certain fines and penalties imposed by governmental
agencies in respect of environmental rules and regulations.
Certain organic waste material is contained in the soil and ground water at
the site of the company's Monaca, Pennsylvania ("Beaver Valley") plant. In
1994, ARCO Chemical entered into a Consent Order and Agreement (the "Consent
Agreement") with the Pennsylvania Department of Environmental Protection
("PADEP") pursuant to which ARCO Chemical and PADEP agreed upon a work plan
for testing and remedial process design with regard to the conditions at the
Beaver Valley site. Under the terms of the Consent Agreement, ARCO Chemical
paid civil penalties totaling $363,000 in 1994. In addition, ARCO Chemical is
paying a penalty of $63,000 each year until the commencement of active
remediation at the Beaver Valley site, after which the amount of such annual
penalty shall be reduced based on the extent of remediation commenced at the
site. ARCO Chemical has an agreement with Beazer East, Inc., the successor to
Koppers Inc. (the previous owner of the Beaver Valley plant), whereby Beazer
East, Inc. agreed to pay for approximately 50% of the cost of the remediation.
ARCO Chemical sold the Beaver Valley plant assets to NOVA Chemicals Inc.
("NOVA") as of September 30, 1996, but currently retains ownership of the
Beaver Valley land, substantial portions of which are being leased to NOVA.
NOVA will assume ownership of such portions of the Beaver Valley land after
the occurrence of certain defined events. ARCO Chemical has retained
responsibility for the work plan and for certain additional remediation of the
Beaver Valley land that may be required by PADEP pursuant to the Pennsylvania
Land Recycling and Environmental Remediation Standards Act.
On January 17, 1994, southern California experienced a major earthquake that
caused widespread property damage and major disruptions to utilities and
highways. Certain of ARCO's assets located in the region experienced varying
degrees of damage. A common carrier crude oil pipeline suffered ruptures, one
of which was involved in a fire of unknown origin. In addition, there was one
person injured, property damage, and oil spills into the Santa Clara and Los
Angeles Rivers. Each of the Los Angeles District Attorney and the State of
California Attorney General have notified the Company that pursuant to various
state statutes, some of which impose liability without fault, penalties and
damages in excess of $100,000 may be imposed on the Company. A settlement has
tentatively been reached. A class action lawsuit has been filed seeking
damages in excess of $10 million plus punitive damages on behalf of
individuals alleged to have been injured in the pipeline ruptures.
On October 11, 1995, Vastar, on behalf of, and with ARCO's knowledge and
full cooperation, met with the United States EPA to apprise the EPA of certain
results obtained from Vastar's internal self-evaluation and audit program. The
results conveyed to EPA concern the Prevention of Significant Deterioration
("PSD") permit program under the federal Clean Air Act at Vastar's Ignacio
Blanco Fruitland ("IBF") coal degasification facilities. Through its self-
evaluation and audit program, Vastar previously determined that a PSD permit
may have been required for construction and operation of certain equipment at
the IBF operations due to unanticipated levels of carbon monoxide emissions.
Under federal law, EPA has the power to seek injunctive relief and civil
penalties for violations of the federal Clean Air Act. Liability for failure
to obtain a PSD permit under the Clean Air Act can be imposed without regard
to willfulness or negligence. Vastar has sought the benefits of EPA's
"Voluntary Environmental Self-Policing and Self-Disclosure Interim Policy
Statement," which may allow Vastar to avoid any punitive penalties, although
EPA may seek to recover what it considers to be the economic benefit of
noncompliance. Vastar has advised ARCO that on October 27, 1995, the company
made a written submittal to the EPA pursuant to the Interim Policy Statement.
In January 1997, the U.S. Department of Justice, acting on behalf of the EPA,
and the company agreed to settle the matter. Under the terms of the
settlement, Vastar agreed to pay a $137,949 civil penalty. In addition, ARCO,
the previous owner of the natural
16
<PAGE>
gas compression facilities, agreed to pay a $519,463 civil penalty. Under the
terms of the settlement, the finalization of which is subject to certain minor
conditions precedent, neither Vastar nor ARCO admitted liability with respect
to the matter. The stipulation of settlement between the United States and
ARCO has been entered in the U.S. District Court for the District of Colorado
and the $519,463 ARCO civil penalty has been paid. In connection with the
conveyance of the IBF facilities from ARCO to Vastar, Vastar agreed to
indemnify ARCO against certain claims or liabilities to which ARCO could be
subject relating to ARCO's historical ownership and operation of the
facilities. Pursuant to such agreement, Vastar has reimbursed ARCO for the
amount of the ARCO civil penalty.
In addition to the matters reported herein, from time to time, certain of
the ARCO's operating divisions and subsidiaries receive notices from federal,
state or local governmental entities of alleged violations of environmental
laws and regulations pertaining to, among other things, the disposal, emission
and storage of chemical and petroleum substances, including hazardous wastes.
Such alleged violations may become the subject of enforcement actions or other
legal proceedings and may involve monetary sanctions of $100,000 or more
(exclusive of interest and costs).
TAX MATTERS
In 1994, the Internal Revenue Service issued a Notice of Deficiency for
income tax relating to tax years 1983 through 1988. During 1996, the Company
has made significant progress in substantiating its position to refute the
claims originally asserted on the face of the Notice. ARCO has paid to the
Internal Revenue Service the amount of tax (and interest) that it believes is
due under the Notice and timely filed a petition in the U.S. Tax Court
challenging the balance.
OTHER LITIGATION
The Company and its subsidiaries are defendants in numerous suits in which
they are not covered by insurance which involve smaller amounts than the
matters described above. Although the legal responsibility and financial
impact in respect to such litigation cannot be ascertained, it is not
anticipated that these suits will result in the payment by the Company or its
subsidiaries of monetary damages which in the aggregate would be material in
relation to the net assets of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
----------------
17
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of February 24,
1997.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST
RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b)
---------------------- ---------------------------------------------
<S> <C>
Mike R. Bowlin, 54 Mr. Bowlin has been Chairman of the Board since July 1995,
Chairman of the Board, Chief Executive Officer since July 1994, President of ARCO
Chief Executive Officer since June 1993 and a director since June 1992. He served as
and President Executive Vice President (June 1992-May 1993) and Senior Vice
President of ARCO (August 1985-June 1992), President of ARCO
International Oil and Gas Company (November 1987-June 1992),
President of ARCO Coal Company (August 1985-July 1987), Se-
nior Vice President of International Oil and Gas Acquisitions
(July 1987-November 1987), a Vice President of ARCO (October
1984-July 1985) and a Vice President of ARCO Oil and Gas Com-
pany (April 1981-December 1984). He has been an officer of
the Company since 1984.
Anthony G. Fernandes, 51 Mr. Fernandes has been an Executive Vice President of ARCO
Executive Vice and a director since September 1994. He served as a Senior
President and Director Vice President of ARCO and President of ARCO Coal Company
(September 1990-September 1994), Vice President and Control-
ler of ARCO (July 1987-September 1990), a Vice President of
ARCO Oil and Gas Company (January 1985-July 1987) and a Vice
President of Anaconda Minerals (May 1981-January 1985). He
has been an officer of the Company since 1987.
Marie L. Knowles, 50 Mrs. Knowles has been an Executive Vice President and the
Executive Vice Chief Financial Officer of ARCO and a director since July
President, Chief 1996. She served as a Senior Vice President of ARCO and Pres-
Financial Officer and ident of ARCO Transportation Company (June 1993- July 1996),
Director Vice President and Controller of ARCO (July 1990-May 1993),
Vice President of Finance, Control and Planning of ARCO In-
ternational Oil and Gas Company (July 1988-July 1990), and
Assistant Treasurer of Banking of ARCO (October 1986-July
1988). She has been an officer of the Company since 1990.
William E. Wade, Jr., 54 Mr. Wade has been an Executive Vice President of ARCO and a
Executive Vice director since June 1993. He served as a Senior Vice Presi-
President and Director dent of ARCO (May 1987-May 1993), President of ARCO Oil and
Gas Company (October 1990-May 1993), President of ARCO Alas-
ka, Inc. (July 1987-July 1990), a Vice President of ARCO
(1985-1987) and a Vice President of ARCO Exploration Company
(1981-1985). He has been an officer of the Company since
1985.
H. L. Bilhartz, 50 Mr. Bilhartz has been a Senior Vice President of ARCO since
Senior Vice President July 1990 and President of ARCO Exploration and Production
Technology since June 1994. He served as President of ARCO
Alaska, Inc. (July 1990-May 1994), a Vice President of ARCO
(June 1987-July 1990), President of ARCO Coal Company (July
1987-July 1990), Vice President and Managing Director for
ARCO British Limited and ARCO Netherlands in London (1985-
1987), Vice President of Finance, Control and Planning of
ARCO International Oil and Gas Company (1984-1985) and Vice
President and District Manager for ARCO Oil and Gas Company
(1983-1984). He has been an officer of the Company since
1987.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST
RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b)
---------------------- ---------------------------------------------
<S> <C>
John B. Cheatham IV, 48 Mr. Cheatham has been a Senior Vice President of ARCO and
Senior Vice President President of ARCO International Oil and Gas Company since De-
cember 1995. He was Senior Vice President, Operations and New
Business Development (November 1993-November 1995) and Se-
nior Vice President, New Business Ventures (November 1992-No-
vember 1993) of ARCO International Oil and Gas Company and
Senior Vice President, Eastern District (August 1991-November
1992) and Vice President, Southeastern District (November
1989-August 1991) of ARCO Oil and Gas Company. He has been an
officer of the Company since 1995.
Terry G. Dallas, 46 Mr. Dallas has been a Senior Vice President of ARCO since
Senior Vice President November 1996 and Treasurer since January 1994. He was a Vice
and Treasurer President of ARCO (June 1993-November 1996), the Vice
President, Corporate Planning (June 1993-January 1994), and
Assistant Treasurer, Corporate Finance of ARCO (1990-1993)
and Manager, Finance, Control and Planning, ARCO British,
Ltd. (1988-1990). He has been an officer of the Company since
1993.
Kenneth R. Dickerson, 61 Mr. Dickerson has been Senior Vice President, External
Senior Vice President Affairs/Environment, Health and Safety of ARCO since July
1988. He served as Vice President and General Tax Officer
(October 1985-June 1988) and Deputy General Counsel--
Resources of ARCO (September 1983-October 1985) and Associate
General Counsel of ARCO Oil and Gas Company (September 1982-
September 1983). He has been an officer of the Company since
1985.
John H. Kelly, 42 Mr. Kelly has been a Senior Vice President, Human Resources
Senior Vice President of ARCO since January 1997. He was Vice President, Corporate
Units Human Resources of ARCO (June 1993-January 1997) and
Vice President, Human Resources of ARCO Oil and Gas Company
(February 1992-June 1993). He has been an officer of the Com-
pany since 1993.
Stephen R. Mut, 46 Mr. Mut has been a Senior Vice President of ARCO since Sep-
Senior Vice President tember 1994 and President of ARCO Global Energy Ventures
since August 1996. He was President of ARCO Coal Company
(September 1994-August 1996) and Senior Vice President of Op-
erations of ARCO International Oil and Gas Company (1991-
1994). He has been an officer of the Company since 1994.
William C. Rusnack, 52 Mr. Rusnack has been a Senior Vice President of ARCO since
Senior Vice President July 1990 and President of ARCO Products Company since June
1993. He was President of ARCO Transportation Company (July
1990-May 1993), Vice President, Corporate Planning of ARCO
(June 1987-July 1990) and Senior Vice President, Marketing
and Employee Relations of ARCO Oil and Gas Company (1985-
1987). He has been an officer of the Company since 1987.
J. Kenneth Thompson, 45 Mr. Thompson has been a Senior Vice President of ARCO and
Senior Vice President President of ARCO Alaska, Inc. since June 1994. He was a Vice
President of ARCO and a Vice President of ARCO Exploration
and Production Technology (June 1993-June 1994) and as Senior
Vice President, Western District of ARCO Oil and Gas Company
(January 1990-June 1993). He has been an officer of the Com-
pany since 1994.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST
RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b)
---------------------- ---------------------------------------------
<S> <C>
Bruce G. Whitmore, 52 Mr. Whitmore has been the Senior Vice President, General
Senior Vice President, Counsel and Corporate Secretary of ARCO since December 1994.
General Counsel and He served as Vice President and General Counsel of ARCO Chem-
Corporate Secretary ical Company (October 1990-December 1994) and as Associate
General Counsel, Finance and Corporate Affairs of ARCO (June
1986-September 1990). He has been an officer of the Company
since 1994.
Allan L. Comstock, 53 Mr. Comstock has been a Vice President and Controller of ARCO
Vice President and since June 1993. He was a Vice President of ARCO Chemical
Controller Company (October 1989-June 1993) and General Auditor of ARCO
(November 1985-October 1989). He has been an officer of the
Company since 1993.
</TABLE>
- --------
(a) Division names used in the descriptions of business experience of
executive officers of the Company are the names which were in effect at
the time such officers held such positions. In some instances, divisions
have been combined or reorganized and, accordingly, activities thereof are
presently conducted under different division names.
(b) The By-Laws of the Company provide that each officer shall hold office
until the officer's successor is elected or appointed and qualified or
until the officer's death, resignation or removal by the Board of
Directors.
20
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock is included in
order to facilitate incorporation by reference of such description in filings
by the Company under the federal securities laws.
Certain statements under this heading are summaries of provisions of the
Restated Certificate of Incorporation of ARCO, dated June 27, 1994, and do not
purport to be complete. The summaries make use of certain terms defined in the
Certificate of Incorporation and are qualified in their entirety by reference
thereto.
The term "$3.00 Preference Stock" refers to the Company's $3.00 Cumulative
Convertible Preference Stock, par value $1 per share. The term "$2.80
Preference Stock" refers to the Company's $2.80 Cumulative Convertible
Preference Stock, par value $1 per share. The term "Preferred Stock" refers to
the Company's Preferred Stock, par value $.01 per share; this class of
Preferred Stock was authorized by stockholders on May 3, 1993. The term
"Common Stock" refers to the Company's Common Stock, par value $2.50 per
share.
The following is a summary of the capital stock of ARCO as of December 31,
1996.
<TABLE>
<CAPTION>
SHARES SHARES
AUTHORIZED OUTSTANDING
----------- -----------
<S> <C> <C>
$3.00 Preference Stock.......................... 78,089 60,759
$2.80 Preference Stock.......................... 833,776 673,855
Preferred Stock................................. 75,000,000 --
Common Stock.................................... 600,000,000 161,082,043*
</TABLE>
- --------
* Excludes treasury stock.
Certain Open Market Stock Purchases. Pursuant to the 1985 Executive Long-
Term Incentive Plan, as amended on February 24, 1997 (the "Amended LTIP"),
officers and key employees are eligible to receive shares of Common Stock upon
exercises of stock options, surrender of dividend share credits, and upon
grants of Restricted Stock. Pursuant to the compensation program for outside
directors, as amended in November 1996, outside directors are eligible to
receive shares of Common Stock upon grants of Restricted Stock, including
Restricted Stock granted in lieu of some or all of their cash compensation for
serving as directors and in connection with the termination of the Outside
Directors Retirement Plan. Pursuant to the Company's Capital Accumulation
Plans, employees are eligible to receive Common Stock in satisfaction of
employer and employee contributions thereunder. ARCO may satisfy these
obligations by issuing new shares of Common Stock. From time to time ARCO may
also purchase Common Stock on the open market and contribute it to treasury to
provide for current and future obligations to deliver Common Stock under each
of these plans; in addition, ARCO may purchase Common Stock on the open market
and contribute it to treasury in satisfaction of its obligations upon
conversion of the $3.00 Preference Stock and the $2.80 Preference Stock.
Power of Board to Determine Terms of Preferred Stock. Under the Certificate
of Incorporation, as amended following approval by stockholders on May 3,
1993, the Board is authorized to issue, at any time or from time to time, one
or more series of Preferred Stock at its discretion. In addition, the Board
has the power to determine all designations, powers, preferences and the
rights of such stock and any qualifications, limitations and restrictions,
including but not limited to: (i) the designation of series and numbers of
shares; (ii) the dividend rights, if any; (iii) the rights upon liquidation or
distribution of the assets of the Company, if any; (iv) the conversion or
exchange rights, if any; (v) the redemption provisions, if any; and (vi) the
voting rights, if any. No shares of Preferred Stock have been issued.
So long as the Preference Stocks are outstanding, and only for that period
of time, the rights of the Preferred Stock are subordinate to the rights of
the holders of Preference Stocks.
Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80
Preference Stock are entitled to receive cumulative dividends at the annual
rate of $3.00 per share and $2.80 per share, respectively, payable quarterly,
before cash dividends are paid on the Preferred Stock, if any, and the Common
Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock
rank on a parity as to dividends. After provision for payment in full of
cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference
Stocks, and the payment in full of cumulative
21
<PAGE>
dividends on the outstanding Preferred Stock, if any, dividends may be paid on
the Common Stock as the Board of Directors may deem advisable, within the
limits and from the sources permitted by law.
Conversion Rights. Each share of $3.00 Preference Stock is convertible, at
the option of the holder, into six and eight-tenths (6.8) shares of Common
Stock of the Company at any time, and each share of $2.80 Preference Stock is
convertible, at the option of the holder, into two and four-tenths (2.4)
shares of Common Stock of the Company at any time. These conversion rates are
subject to adjustment as set forth in the Certificate of Incorporation. Shares
of Preferred Stock would be convertible, if at all, on such terms as were
designated by the Board of Directors.
Voting Rights. The holders of $3.00 Preference Stock are entitled to eight
votes per share; holders of $2.80 Preference Stock are entitled to two votes
per share; and holders of Common Stock are entitled to one vote per share.
Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote
cumulatively for directors; holders of Common Stock have no cumulative voting
rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together
as one class, except as provided by law and except as to certain matters which
require a vote by the holders of $3.00 Preference Stock or by the holders of
$2.80 Preference Stock as a separate class as set forth below.
The Certificate of Incorporation provides that if the Company shall be in
default with respect to dividends on the $3.00 Preference Stock in an amount
equal to six quarterly dividends, the number of directors of the Company shall
be increased by two at the first annual meeting thereafter, and at such
meeting and at each subsequent annual meeting until all dividends on the $3.00
Preference Stock shall have been paid in full, the holders of the $3.00
Preference Stock shall have the right, voting as a class, to elect such two
additional directors. The Certificate of Incorporation contains identical
provisions with respect to the $2.80 Preference Stock.
The Certificate of Incorporation provides that the Company shall not,
without the assent of the holders of two-thirds of the then outstanding shares
of $3.00 Preference Stock, (a) change any of the terms of the $3.00 Preference
Stock in any material respect adverse to the holders, or (b) authorize any
prior ranking stock; and that the Company shall not, without the assent of the
holders of a majority of the then outstanding shares of $3.00 Preference
Stock, (1) authorize any additional $3.00 Preference Stock or stock on a
parity with it; (2) sell, lease or convey all or substantially all of the
property or business of the Company; or (3) become a party to a merger or
consolidation unless the surviving or resulting corporation will have
immediately after such merger or consolidation no stock either authorized or
outstanding (except such stock of the Company as may have been authorized or
outstanding immediately before such merger or consolidation of such stock of
the surviving or resulting corporation as may be issued upon conversion
thereof or in exchange therefor) ranking as to dividends or assets prior to or
on a parity with the $3.00 Preference Stock or the stock of the surviving or
resulting corporation issued upon conversion thereof or in exchange therefor.
The Certificate of Incorporation contains identical provisions with respect to
the $2.80 Preference Stock.
The holders of Preferred Stock, if any, would have such voting rights, if
any, as were designated by the Board.
Redemption Provisions. The $3.00 Preference Stock is redeemable at the
option of the Company as a whole or in part at any time on at least thirty
days' notice at $82 per share plus accrued dividends to the redemption date.
The $2.80 Preference Stock is redeemable at the option of the Company as a
whole or in part at any time on at least thirty days' notice at $70 per share
plus accrued dividends to the redemption date. The holders of Preferred Stock,
if any, would have such redemption provisions, if any, as were designated by
the Board.
Liquidation Rights. In the event of liquidation of the Company, the holders
of $3.00 Preference Stock and holders of $2.80 Preference Stock will be
entitled to receive, before any payment to holders of Common Stock, $80 per
share and $70 per share, respectively, together in each case with accrued and
unpaid dividends. Shares of $3.00 Preference Stock and shares of $2.80
Preference Stock will rank on a parity as to assets of the Company upon its
liquidation. Subject to the rights of creditors and the holders of $3.00
Preference Stock and $2.80 Preference Stock, the holders of Common Stock are
entitled pro rata to the assets of the Company upon its liquidation. The
holders of Preferred Stock, if any, would have such liquidation rights, if
any, as were designated by the Board.
Preemptive Rights. No holders of shares of capital stock of the Company have
or will have any preemptive rights to acquire any securities of the Company.
22
<PAGE>
Liability to Assessment. The shares of Common Stock are fully paid and non-
assessable.
Prohibition of Greenmail. Article VII of the Certificate of Incorporation
provides in general that any direct or indirect purchase by the Company of any
of its voting stock (or rights to acquire voting stock) known to be
beneficially owned by any person or group which holds more than 3% of a class
of its voting stock and which has owned the securities being purchased for
less than two years must be approved by the affirmative vote of at least 66
2/3% of the votes entitled to be cast by the holders of the voting stock. Such
approval shall not be required with respect to any purchase by the Company of
such securities made (i) at or below fair market value (based on average New
York Stock Exchange closing prices over the preceding 90 days) or (ii) as part
of a Company tender offer or exchange offer made on the same terms to all
holders of such securities and complying with the Securities Exchange Act of
1934 or (iii) in a Public Transaction (as defined).
Rights to Purchase Common Stock. On July 24, 1995, the Board of Directors of
the Company declared a dividend of one common share purchase right (a "Right")
for each outstanding share of Common Stock, par value $2.50 per share (the
"Common Shares"), of the Company. The dividend was paid on August 18, 1995 to
the stockholders of record on that date. Each Right entitled the registered
holder to purchase from the Company one Common Share at a price of $400.00 per
share (the "Purchase Price"), subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement between the Company and
First Chicago Trust Company of New York, as Rights Agent.
The Rights will be evidenced by and will be transferred with the Common
Share certificates until the Distribution Date. The Distribution Date is
defined as the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 15% or more of the outstanding Common Shares (an
"Acquiring Person") or (ii) 10 business days following the commencement of, or
announcement of an intention to make, a tender or exchange offer, the
consummation of which would result in a person or group becoming an Acquiring
Person. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights will be issued.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on August 18, 2005 unless redeemed prior to that date by the Company.
The Purchase Price payable, and the number of Common Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution.
In the event that any person becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person and its
affiliates and associates (which will thereafter be void), will have the right
to receive, upon exercise of each Right, that number of Common Shares having a
market value of two times the Purchase Price. If, after the Distribution Date,
the Company is acquired in a merger or other business combination with, or 50%
or more of its consolidated assets or earning power are sold to, the Acquiring
Person, each holder of a Right will have the right to receive, upon exercise
of each Right, that number of shares of common stock of the acquiring company
with a market value of two times the Purchase Price.
At any time after an Acquiring Person crosses the 15% threshold and prior to
the acquisition by such person of 50% or more of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by the Acquiring Person), in whole or in part, at an
exchange ratio of one Common Share per Right.
The Board of Directors of the Company may redeem the Rights in whole, but
not in part, at a price of $.01 per Right prior to the acquisition by an
Acquiring Person of 15% or more of the outstanding Common Shares. The terms of
the Rights may be amended by the Board of Directors of the Company without the
consent of the holders of the Rights, except that after any person becomes an
Acquiring Person no such amendment may adversely affect the interests of the
other holders of the Rights.
A copy of the Rights Agreement is filed as an exhibit hereto. This summary
description of the Rights is qualified in its entirety by reference thereto.
23
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES
OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "safe harbor" provisions
contained in Section 27A of the Private Securities Litigation Reform Act and
is including this statement in its 1996 Form 10-K in order to do so.
From time to time ARCO's management may wish to make forward-looking
statements to inform more fully existing and potential security holders
regarding various matters, including without limitation, projections regarding
future income, oil and gas production, production and sales volumes of refined
petroleum products and petrochemicals, replacement of oil and gas reserves,
capital spending, as well as predictions as to the timing and success of
specific projects. Such forward-looking statements are generally accompanied
by words such as estimate, project, predict, or expect, that convey the
uncertainty of future events or outcomes.
The factors identified in this statement are believed to be important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward
looking statement made by or on behalf of the Company. Unpredictable or
unknown factors not discussed herein could also have material adverse effects
on forward looking projections. The Company does not intend to update these
cautionary statements.
UPSTREAM FACTORS AFFECTING PERFORMANCE
Volatility and Level of Crude Oil and Gas Prices
The Company's projections as to the level of future earnings are based on
certain assumptions as to the future prices of crude oil and natural gas.
These price assumptions are used for planning purposes and the Company expects
they will change over time. Any substantial or extended decline in the actual
prices of crude oil and natural gas could have a material adverse effect on
the Company's financial position, results of operations and on quantities of
crude oil and natural gas reserves that may be economically produced. These
prices historically have been volatile and may vary based on factors affecting
commodities markets generally, such as political instability in producing
regions, changes in market demand, and fluctuations in political, regulatory
and economic climates throughout the world.
Ability to Maintain Production Rates and Replace Reserves
Projecting future rates of oil and gas production is inherently imprecise.
Producing oil and gas reservoirs generally have declining production rates.
Production rates depend on a number of factors, including crude oil prices,
market demand, and the political, economic and regulatory climate.
The other major factor affecting production rates is the Company's ability
to replace depleting reservoirs with new reserves through enhanced recovery,
acquisition or exploration success. Exploration success is impossible to
predict particularly over the short term, where results vary widely year to
year; moreover, the ability to replace reserves over an extended period
depends not only on the total volumes found, but on the cost of finding and
developing such reserves. Depending on the general crude oil price
environment, the Company's finding and development costs may not justify the
use of resources to produce such reserves. There can be no assurances as to
the level or timing of success, if any, that the Company will be able to
achieve in acquiring or finding and developing additional reserves.
DOWNSTREAM FACTORS AFFECTING PERFORMANCE
A substantial proportion of the Company's total income for the foreseeable
future is expected to come from operations downstream of oil and gas
production and sale, chiefly refining and marketing of gasoline and other
products and chemical operations. It is possible that the Company could meet
its projections for upstream operations and still fail to meet overall
projections made in various forward looking statements.
24
<PAGE>
Products
The Company conducts significant refining and marketing operations in the
five western states of the U.S. Results of these operations will be
significantly affected by changes in the volumes sold and the prices received
on those volumes. These, in turn, are influenced by such factors as the
general economic condition of the western states, which affects the overall
demand for gasoline and other refined products, the actions taken by
competitors, including both pricing and the expansion and retirement of
refining capacity in response to market conditions, environmental regulations
issued by the state and federal government, including particularly regulations
dealing with gasoline composition and characteristics. Overall profitability
of the Company's refining and marketing operations depends heavily on the
margin between the price of crude oil and/or purchased products and the sales
price of products produced and/or purchased. These margins may fluctuate
depending upon changes in the price of crude oil and the relative
supply/demand balance for products. Political constraints either in the form
of express legal requirements or general political pressure may also limit the
margins otherwise available to the Company. Projections as to the level of
future earnings are dependent on the Company's ability to produce and sell the
volumes of refined products and to achieve the margins on which those
projections are based. Products volumes and margins historically have been
volatile and may vary with factors such as the national and regional economy,
market demand, regulatory changes, the price of crude oil, and the ability of
regional refiners and the Company to provide a sufficient supply of refined
products.
Chemical Operations
ARCO derives a material portion of its net income from the chemical
operations of its affiliates. Results of its chemical operations are
influenced by changes in the cost of raw materials, the availability of
substitutes, changes in the supply/demand balance, and actions taken by
competitors to increase or decrease their production volumes. Earnings with
respect to chemical operations typically are cyclical and show marked
responses to changes in the overall economic climate. Projections as to the
level of future earnings are dependent on achieving the volumes and margins
for chemicals on which those projections are based. Volumes and margins for
these petrochemical products are strongly influenced by national and world
economic growth, market demand, the availability of substitutes, regulatory
changes, the cost of raw materials, and the worldwide capacity to produce
these petrochemical products.
EFFECT OF POLITICAL AND REGULATORY INSTABILITY ON COMPANY'S OPERATIONS
The Company's ability to conduct acquisition, exploration, development and
production of oil and gas interests is dependent on the political and
regulatory climate in the particular geographic regions where the properties
are located. The Company's ability to negotiate and implement specific
projects in a timely and favorable manner may be impacted by political
considerations unrelated to or beyond the control of the Company. Political
instability may result in insurgencies and military operations that could
interfere with the Company's operating facilities located throughout the
world. Possible political and regulatory actions by governments may affect
future results in unpredictable ways.
OPERATING HAZARDS
The Company's drilling operations are subject to various hazards common to
the industry, including explosions, fires, and uncontrollable flows of oil and
gas. They are also subject to the additional hazards of marine operations,
such as capsizing, collision and damage or loss from severe weather
conditions. Similarly, the Company's refining and petrochemical operations are
subject to explosions, fires, and damage from severe weather conditions.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -------------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
-------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Market price per share
High................. $142 1/2 $128 $123 $119 7/8 $115 3/8 $116 5/8 $117 7/8 $115 19/64
Low.................. $126 3/4 $114 3/8 $112 1/2 $107 1/2 $104 1/4 $106 3/8 $109 $100 1/2
Cash dividends per
share................. $1.375 $1.375 $1.375 $1.375 $1.375 $1.475* $1.375 $1.375
$3.00 Cumulative Con-
vertible Preference
Stock:
Market price per share
High................. $873 $822 3/4 $822 $778 3/8 $745 $771 $778 1/2 $761 5/8
Low.................. $873 $794 $812 5/8 $748 1/2 $744 1/2 $738 $765 $708
Cash dividends per
share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75
$2.80 Cumulative Con-
vertible Preference
Stock:
Market price per share
High................. $337 1/2 $305 1/8 $290 1/2 $283 5/8 $274 1/2 $276 $280 $274
Low.................. $303 5/8 $277 $270 1/2 $260 $249 1/8 $256 $266 3/4 $242
Cash dividends per
share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
</TABLE>
- --------
*Dividends include a $0.10 per share redemption payment for Common Stock
purchase rights.
Prices in the foregoing table are from the New York Stock Exchange composite
tape. On February 24, 1997 the high price per share was $127 7/8 and the low
price per share was $126 5/8.
As of December 31, 1996, the approximate number of holders of record of
Common Stock of ARCO was 88,400. The principal markets in which ARCO's Common
Stock is traded are listed on the cover page.
The quarterly dividend rate for Common Stock was increased to $1.375 per
share in January 1991. On January 27, 1997, a dividend of $1.375 per share was
declared on Common Stock, payable on March 14, 1997 to stockholders of record
on February 14, 1997. Future cash dividends will depend on earnings, financial
conditions and other factors; however, the Company presently expects that
dividends will continue to be paid.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for ARCO:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996(1) 1995(2) 1994(1)(3) 1993(4) 1992(5)
------- ------- ---------- ------- -------
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues.. $18,592 $15,819 $15,035 $17,189 $17,503
Income before changes in accounting
principles......................... 1,663 1,376 919 269 1,193
Net income.......................... 1,663 1,376 919 269 801
Earned per share before changes in
accounting principles.............. 10.18 8.42 5.63 1.66 7.39
Earned per share.................... 10.18 8.42 5.63 1.66 4.96
Cash dividends per common share..... 5.50 5.60 5.50 5.50 5.50
Total assets........................ 25,715 23,999 24,563 23,894 24,256
Long-term debt and capital lease
obligations........................ 5,593 6,708 7,198 7,089 6,227
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements regarding unusual
items on page 44.
(2) Dividends include a $0.10 per share redemption payment for Common Stock
purchase rights.
(3) Includes after-tax gain of $273 million from issuance of stock by Vastar
Resources, Inc.
(4) Includes charges of $404 million after tax related to the writedown for
sale or other disposition of oil and gas properties and excess office
space, and the costs associated with the elimination of approximately
1,300 positions.
(5) Includes a net after-tax benefit of $211 million related to a settlement
with Iran, the recognition of a portion of the gain from the sale of
Lyondell Petrochemical Company common stock, partially offset by a charge
resulting from ARCO Chemical Company's withdrawal from a joint venture.
26
<PAGE>
ARCO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
Earnings from Operations
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $1,663 $1,376 $919
Special items (benefit) charge - (45) (40)
------ ------ ----
Operating Results $1,663 $1,331 $879
====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Special items after tax
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Insurance settlements $(47) $(82) $ -
Restructuring charges 19 - 210
Gain on issuance of subsidiary stock - - (273)
Future environmental remediation 19 30 48
Other, net 9 7 (25)
---- ---- -----
Total (benefit) charge $ - $(45) $ (40)
==== ==== =====
</TABLE>
ARCO's 1996 earnings were 21% higher than 1995 earnings which, in turn,
were 50% higher than 1994 earnings. The 1996 operating results benefited from
higher crude oil and natural gas prices, increased natural gas volumes, higher
refining and marketing volumes, and lower exploration and interest expense.
3 Bar Graphs Showing Average Crude Oil Sales Prices for 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Average Crude Oil Sales Prices (per barrel) 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. including Vastar $10.44 $12.31 $16.36
International $15.16 $16.26 $19.60
</TABLE>
3 Bar Graphs Showing Average Natural Gas Sales Prices for 1994, 1995 and 1996
<TABLE>
<CAPTION>
Average Natural Gas Sales Prices
(per thousand cubic feet) 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. including Vastar $1.76 $1.35 $1.80
International $2.51 $2.56 $2.54
</TABLE>
These combined benefits were partially offset by lower earnings from ARCO's
chemical interests. 1996 cost savings from ARCO's efforts to achieve a low-cost
operating structure exceeded $450 million after tax, compared to the benchmark
year of 1993.
In 1995, operating results benefited from higher ARCO Chemical Company
earnings, higher crude oil prices, cost savings resulting from ARCO's 1993 and
1994 restructurings, and higher earnings from ARCO's equity interest in Lyondell
Petrochemical Company. These benefits were partially offset by lower refining
and marketing margins and lower domestic natural gas prices. 1995 cost savings
totaled $330 million after tax, compared to the benchmark year of 1993.
Results of Segment Operations
<TABLE>
<CAPTION>
Exploration and Production
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $1,271 $683 $405
Special items (benefit) charge (15) (23) 75
------ ---- ----
Operating results $1,256 $660 $480
====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Special items after tax
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Restructuring charges $ - $ - $66
Asset sales - (9) (6)
Asset impairment - 12 -
Other, net (15) (26) 15
---- ---- ---
Total (benefit) charge $(15) $(23) $75
==== ==== ===
</TABLE>
Higher crude oil and natural gas prices, growth in natural gas volumes and
lower exploration expenses combined to benefit earnings in 1996.
In 1995, earnings reflected the effect of higher crude oil prices, higher
natural gas volumes and reduced operating expenses, partially offset by lower
domestic natural gas prices and higher exploration expenses.
27
<PAGE>
ARCO
MANAGEMENT'S DISCUSSION
<TABLE>
<CAPTION>
Petroleum Liquids Production
Barrels/day - net 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Prudhoe Bay 181,200 200,500 214,800
Kuparuk River 130,500 140,700 147,200
Greater Point McIntyre 50,100 45,000 36,000
Alaska NGLs 25,700 27,400 23,200
Lower 48, including Vastar 171,800 169,500 170,100
International 66,100 66,800 72,800
------- ------- -------
Total 625,400 649,900 664,100
======= ======= =======
</TABLE>
Worldwide petroleum liquids production decreased in both 1996 and 1995 as a
result of natural field declines. In Alaska, increased production from the
Greater Point McIntyre fields was more than offset by production declines in the
Prudhoe Bay and Kuparuk River fields. Internationally, new production volumes
from the Rhourde El Baguel field in Algeria in the latter half of 1996 and the
Blenheim field in the United Kingdom in 1995 were more than offset by decreases
in volumes received from Indonesian production sharing contracts in both years.
<TABLE>
<CAPTION>
Natural Gas Production
Million cubic feet/day - net 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S., including Vastar 1,044 999 960
United Kingdom 330 265 286
Indonesia 311 270 206
China 69 - -
Other international 20 22 19
----- ----- -----
Total 1,774 1,556 1,471
===== ===== =====
</TABLE>
U.S. natural gas production growth in 1996 and 1995 came primarily from
Vastar Resources, Inc.'s fields in the San Juan Basin and the Gulf of Mexico.
In 1996, international natural gas production was higher as a result of the
startup of the Yacheng-13 field in the South China Sea and higher production in
the United Kingdom and Indonesia. A full year of production from the Gawain
field contributed to the increase in United Kingdom natural gas sales.
1 Pie Chart Showing Production for 1996
<TABLE>
<CAPTION>
Production (thousand barrels of oil equivalent per day) 1996
----
<S> <C>
Alaska 392.9
Lower 48 340.4
International 187.8
</TABLE>
Production from Indonesian natural gas fields in 1996 and 1995 grew as a
result of greater contract takes by purchasers. Unseasonably warm weather in
late 1995 contributed to the decline in United Kingdom natural gas sales.
In 1996, a number of projects were started that will contribute growth to
ARCO's exploration and production operations. ARCO became a partner with
Sonatrach in Rhourde El Baguel, Algeria's second largest oil field. This added
218 million barrels of oil to ARCO's reserves. In Alaska, the Alpine field west
of the Kuparuk River field on the North Slope should start production in 2000.
ARCO added 65 million barrels of proved reserves for primary recovery from
Alpine. In eastern Indonesia, ARCO is drilling the sixth delineation well to
appraise the Wiriagar gas discovery's potential for a large liquefied natural
gas project.
3 Bar Graphs Showing Natural Gas Growth for 1994, 1995 and 1996
<TABLE>
<CAPTION>
Natural Gas Growth (million cubic feet per day) 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Gas 960 999 1,044
International Gas 511 557 730
</TABLE>
28
<PAGE>
ARCO
<TABLE>
<CAPTION>
Coal
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $ 60 $ 75 $ 70
Special items (benefit) charge - 10 -
------ ----- -----
Operating results $ 60 $ 85 $ 70
====== ===== =====
Worldwide shipments (tons) 62.5 57.6 49.6
</TABLE>
Record production in the U.S. in 1996 was more than offset by lower average
U.S. coal prices, higher worldwide operating and maintenance costs, and the
exchange rate effect of a stronger Australian currency. U.S. volumes were up
13% in 1996 as production increased at all U.S. mines. Australian volumes were
8% lower because of equipment down time and labor-related interruptions.
Due to the unanticipated geological complexity of ARCO's Curragh mine in
Australia, the current cost of recovering coal is significantly more than
originally estimated. Therefore, the Company is studying several options to
improve profitability and efficiency which may include scaling back the level of
operations at the mine. Total shipments from the mine were 5 million tons in
1996.
In December 1996, a subsidiary of ARCO acquired a 65% interest in Canyon
Fuel Company, a limited liability company which owns three mines in Utah. The
mines produced 9.4 million tons in 1996 and have estimated recoverable reserves
of 270 million tons. At December 31, 1996, ARCO's net investment at cost was
$411 million. The results of the acquired mines were not included in
ARCO's 1996 consolidated net income. The pro forma effect of including the
earnings from the acquired mines was immaterial to ARCO's consolidated net
income in 1996.
1 Pie Chart Showing Operating Results for 1996
<TABLE>
<CAPTION>
Operating Results (millions) 1996
----
<S> <C>
Exploration and production $1,256
Coal $ 60
Refining and marketing $ 270
Transportation $ 161
ARCO Chemical $ 320
Lyondell $ 53
</TABLE>
In 1995, worldwide production increases and higher coking and export steam
coal prices for Australian production were partially offset by lower average
U.S. prices. Earnings included a net charge of $10 million, primarily related to
the impact on deferred taxes of an Australian tax rate increase.
<TABLE>
<CAPTION>
Refining and Marketing
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $ 260 $ 177 $ 195
Special items (benefit) charge 10 23 80
----- ----- -----
Operating results $ 270 $ 200 $ 275
===== ===== =====
</TABLE>
Operating results in 1996 reflected higher refined product prices and sales
volumes, partially offset by the impact of higher crude oil prices, higher
prices and volumes of purchased refined products and increased operating costs.
The increased operating costs were associated with maintenance turnarounds and
charges for environmental and other remediation. Refined products were purchased
from third parties to supplement ARCO's refinery production.
29
<PAGE>
ARCO
MANAGEMENT'S DISCUSSION
The Company's margins in 1996 were highest in the second and third quarters
and declined in the fourth quarter, reflecting rising oil prices and declining
products prices. The declining product prices resulted primarily from extremely
competitive conditions in the Los Angeles area in the 1996 fourth quarter. As a
result, the Company had an after-tax loss of $8 million for the quarter,
compared to after-tax earnings of $53 million for the 1995 fourth quarter.
Margins remained weak in January 1997.
In 1995, the impact of higher crude oil costs more than offset increased sales
prices and volumes and lower operating expenses.
<TABLE>
<CAPTION>
Petroleum Products Sales
Thousand barrels/day 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gasoline 266.4 256.8 253.8
Jet 117.0 106.2 97.6
Distillate 69.0 69.1 73.5
Other 80.7 61.8 53.0
----- ----- -----
Total 533.1 493.9 477.9
===== ===== =====
</TABLE>
The 1996 special items included an after-tax charge of $10 million related to
environmental and other remediation. The 1995 special items included charges
related to terminating certain contractual agreements and future environmental
remediation. The 1994 special items included charges related to personnel
reductions and future environmental remediation.
1 Pie Chart Showing Petroleum Products Sales for 1996
<TABLE>
<CAPTION>
Petroleum Products Sales (thousand barrels/day) 1996
----
<S> <C>
Gasoline 266.4
Jet 117.0
Distillate 69.0
Other 80.7
</TABLE>
ARCO was able to achieve higher sales in 1996 and 1995 by a combination of
increased refining capacity resulting from modifications and debottlenecking
projects necessary to make reformulated gasolines and increased refined products
purchases. The increase in other sales in 1996 reflected the sale of
intermediate products as a result of turnarounds.
<TABLE>
<CAPTION>
Transportation
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $ 141 $ 193 $ 172
Special items (benefit) charge 20 (3) 20
----- ----- -----
Operating results $ 161 $ 190 $ 192
===== ===== =====
</TABLE>
The operating results reflected lower Trans Alaska Pipeline System (TAPS)
tariff revenues and a 6% decrease in TAPS volumes compared to 1995. In 1995,
increased volumes and earnings from the commercial pipeline and terminal
businesses in the Lower 48 nearly offset declines in earnings from TAPS.
The 1996 transportation results included a net after-tax charge of
approximately $20 million for the writedown of ARCO's interest in the Point
Arguello Pipeline and a TAPS tariff refund of $14 million (reflected as a
benefit in ARCO's exploration and production special items), partially offset by
a gain on a pipeline interest sale.
The 1994 results included net charges of approximately $20 million after
tax related to personnel reductions, a loss on the sale of Midcontinent product
pipelines, and costs associated with the Southern California earthquake,
partially offset by a tax credit.
30
<PAGE>
ARCO
<TABLE>
<CAPTION>
Chemicals
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ARCO Chemical
Net income (reported) $ 348 $ 508 $ 269
ARCO's share* 320 460 265
</TABLE>
*Reflects ARCO's share of ARCO Chemical net income after segment adjustments,
primarily for interest expense and minority interest.
ARCO Chemical's earnings declined in 1996 primarily as a result of
significantly lower styrene monomer (SM) margins. The SM margins were lower as
sale prices decreased more than raw material costs. SM sale prices declined
significantly versus the 1995 period as production from increased industry
capacity depressed SM market prices.
In 1995, ARCO Chemical's earnings reflected higher margins for propylene
oxide (PO) and its derivatives and SM. The margin improvements were primarily
attributable to higher prices, which more than offset increased costs of raw
materials. Both prices and margins for SM decreased in the second half of 1995
as worldwide demand declined, reversing the trend during the early part of 1995.
ARCO Chemical reported that its 1994 results included an after-tax charge
of $19 million for corporate restructuring and a $12 million benefit from
insurance proceeds.
In 1996, ARCO Chemical undertook actions to focus on its core PO and
derivatives businesses. ARCO Chemical sold its plastics business in September
1996, and purchased an isocyanates business in December 1996. ARCO Chemical
announced plans to build a PO/SM plant in Rotterdam, Netherlands, and expand its
existing PO/SM capacity in Channelview, Texas.
<TABLE>
<CAPTION>
Lyondell Petrochemical Company
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (reported) $ 126 $ 389 $ 223
ARCO's equity income 53 194 111
</TABLE>
ARCO has a 49.9% interest in Lyondell. Lyondell's net income declined in
1996 primarily because of lower olefins margins resulting from higher feedstock
costs. Lyondell's results in 1995 benefited from higher olefins margins and
increases in its polymers business following the acquisition of additional
capacity in 1995 and strong aromatics performance at LYONDELL-CITGO refinery.
The strong performance in the olefins and polymers markets in the first nine
months of 1995 was followed by a sharp market decline in the latter part of the
year.
<TABLE>
<CAPTION>
Unallocated Expenses and Other
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Unallocated net benefit (expense) $ 4 $ 94 $ (57)
</TABLE>
The net benefits in 1996, and to a greater extent in 1995, were from
insurance settlements related to certain past environmental expenses. In 1996,
the net benefit was also lower due to final charges for previously reported
personnel reductions, and less interest income from short-term investments. The
insurance settlements, the absence of charges for personnel reductions and other
items, and lower insurance and corporate staff expense resulted in a net after-
tax benefit in 1995, compared to a net after-tax expense in 1994.
31
<PAGE>
ARCO
MANAGEMENT'S DISCUSSION
Results of Consolidated Operations
<TABLE>
<CAPTION>
Revenues
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales and other operating revenues (excluding
excise taxes)
Upstream $ 9,774 $ 8,898 $ 8,632
Downstream 11,682 10,511 9,362
Intersegment eliminations (2,864) (3,590) (2,959)
------- ------- -------
Total $18,592 $15,819 $15,035
======= ======= =======
</TABLE>
In 1996, higher crude oil and natural gas prices, increased natural gas
marketing activity and higher natural gas production volumes were partially
offset by decreased crude oil trading activity.
Sales to third parties of natural gas (produced and purchased volumes)
increased to 3.8 billion cubic feet per day in 1996, up from 2.8 billion cubic
feet per day in 1995. The majority of the increase was generated by Vastar,
where natural gas revenues increased from $1.3 billion in 1995 to $2.5 billion
in 1996. The remainder of the increase came from international production in the
South China Sea, North Sea and offshore Indonesia. Sales to third parties of
petroleum liquids (both produced and purchased volumes) were down 42,200 barrels
per day, compared to 1995.
In downstream businesses, higher refined products prices and volumes were
partially offset by a decline in chemical products prices and volumes. ARCO
Chemical sales and other operating revenues declined $327 million in 1996.
1 Bar Graph Showing Crude Oil Refinery Runs for 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Crude oil refinery runs (thousand barrels/day) 408 439 453
</TABLE>
In 1995, higher crude oil prices and increased sales volumes for coal were
partially offset by decreased crude oil trading activity and lower domestic
natural gas prices. Sales to third parties of petroleum liquids (both produced
and purchased volumes) were down 90,200 barrels per day, compared to 1994.
In downstream businesses, the 1995 revenues reflected higher prices and
sales volumes for chemical and refined products. ARCO Chemical sales and other
operating revenues increased $859 million in 1995, compared to 1994.
1 Pie Chart Showing Revenues for 1996
<TABLE>
<CAPTION>
Revenues (millions) 1996
----
<S> <C>
Upstream $ 9,774
Downstream $11,682
</TABLE>
Other revenues declined in 1996 primarily because of lower equity earnings
from Lyondell, lower benefits from insurance settlements and a lower average
balance of short-term investments.
Other revenues were higher in 1995 primarily because of insurance
settlements and higher equity earnings from Lyondell.
32
<PAGE>
ARCO
<TABLE>
<CAPTION>
Expenses
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Trade purchases $ 7,949 $ 6,116 $ 5,961
Operating expenses 3,953 3,790 3,797
SG&A expenses 1,018 1,029 1,003
Exploration expenses 413 523 455
------- ------- -------
Total $13,333 $11,458 $11,216
======= ======= =======
Percent of operating revenues 71.7% 72.4% 74.6%
</TABLE>
In 1996, trade purchases were higher as a result of increased natural gas
marketing activity and higher third-party purchases of refined products. Natural
gas marketing purchases increased to 2.1 billion cubic feet per day in 1996, up
from 1.3 billion cubic feet per day in 1995. Prices for purchased volumes of
natural gas, crude oil and refined products were also higher in 1996.
In 1995, trade purchases increased as a result of higher chemical feedstock
costs and crude oil prices, partially offset by decreased crude oil trading
activity. Crude oil trading purchases decreased 73,300 barrels per day in 1995,
compared to 1994.
ARCO's 1996 operating expenses reflected higher oil and gas lease operating
and other support costs for new international operations, partially offset by
lower operating costs in Alaska. In addition, refining and marketing and coal
operating expenses were higher in 1996. The higher refining and marketing
expenses were associated with maintenance turnarounds, marketing improvements
and charges for environmental and other remediation. The higher coal expenses
were associated with increased production volumes and maintenance.
The 1995 operating expenses were lower in the following areas: domestic
exploration and production - lease operating and other support; refining and
marketing - maintenance, outside services and personnel; transportation -
maintenance; and insurance costs. The lower maintenance expense was related to
the level of scheduled refinery turnarounds and less required work on the Trans
Alaska Pipeline in 1995. ARCO Chemical tolling costs associated with toluene di-
isocyanate sales, which began in 1995, partially offset the reductions.
The decline in 1996 exploration expense primarily reflected lower dry hole
costs in ARCO's international exploration and production operations. Higher
exploration expenses in 1995 primarily reflected dry hole costs associated with
South China Sea exploration, partially offset by lower exploration costs in
Alaska.
The higher taxes other than income taxes in 1996 primarily reflected the
impact of higher crude oil prices on U.S. production taxes and the impact of
higher crude oil prices and production volumes in the United Kingdom. The
reduction in 1995 primarily reflected the absence of an accrual for certain tax
issues recorded in 1994.
The decline in interest expense in 1996 reflected lower average long-term
debt balances outstanding during the year, compared to prior years.
Unusual items in 1996 were final charges for personnel reductions, the
majority of which were reported as unusual items in 1994.
33
<PAGE>
ARCO
MANAGEMENT'S DISCUSSION
Gain on Issuance of Stock by Vastar Resources, Inc.
In July 1994, Vastar consummated the sale of 17,250,000 shares of its
common stock to the public at an initial offering price of $28 per share. Vastar
was a wholly owned subsidiary of ARCO prior to the offering. ARCO realized an
after-tax gain of $273 million as a result of the initial public offering by
Vastar. At December 31, 1996, ARCO owned 80,000,001 shares of Vastar's common
stock, which represented 82.3% of Vastar's outstanding common stock. Vastar's
results of operations are included in ARCO's Lower 48 results in the exploration
and production segment.
Income Taxes
The Company's effective tax rate was 34.7% in 1996, compared to 31.6% in
1995 and 28.3% in 1994. The higher effective tax rate in 1996 primarily
reflected a decrease in the benefit from the dividends received tax deduction
and the absence of the 1995 foreign deferred tax asset valuation allowance
benefit.
The higher effective tax rate in 1995 primarily reflected the effect of
higher pretax income, without an increase in tax credits compared to 1994.
Financial Condition and Liquidity
Cash and cash equivalents and short-term investments totaled $2.2 billion
at year-end 1996 and short-term borrowings were $1.2 billion. Working capital
was $1.8 billion lower at the end of 1996, primarily reflecting the addition to
current liabilities of the $988 million principal amount of ARCO's 9%
Exchangeable Notes due September 15, 1997, and a decrease in short-term
investments. At maturity, holders of the 9% Exchangeable Notes will receive
shares of Lyondell common
1 Pie Chart Showing Cash Inflows for 1996
<TABLE>
<CAPTION>
Cash Inflows (millions) 1996
----
<S> <C>
Operations $3,405
Long-term debt $ 680
Short-term investments $ 778
Other $ 393
</TABLE>
stock, or at ARCO's option, cash with an equal value in exchange for the
principal amount of the Notes.
At December 31, 1996, ARCO had unused committed bank credit facilities
totaling $3.1 billion and ARCO Chemical had an unused bank credit facility
totaling $300 million. Vastar had an unused revolving credit facility totaling
$1.1 billion.
During 1996, two projects were begun that could lead to growth in ARCO's
exploration and production operations. ARCO entered into a joint venture with
Russia's largest oil company, LUKOIL, to pursue projects in the Commonwealth of
Independent States. The joint venture entity, LUKARCO, of which ARCO owns 46%
and LUKOIL owns 54%, may invest up to $5 billion in various projects over the
next 18 years; ARCO has agreed to provide most of the financing to LUKARCO. The
first investment will be in the Caspian Pipeline Consortium, a $2 billion 900-
mile pipeline project, of which LUKARCO will hold a 12.5% interest.
ARCO also entered into a joint venture to produce and upgrade heavy oil
from the Orinoco region of Venezuela. The initial $2 billion phase of the
project, of which ARCO will hold a 30% interest, is expected to be operational
by 2001.
34
<PAGE>
ARCO
1 Pie Chart Showing Cash Outflows for 1996
<TABLE>
<CAPTION>
Cash Outflows (millions) 1996
----
<S> <C>
Adds to fixed assets $2,141
Long-term debt $ 861
Acquisitions $ 987
Dividends $ 887
Investments in ZRCC and LUKOIL $ 218
Other $ 240
</TABLE>
Capital Expenditures
ARCO's 1997 capital spending program includes $3.4 billion for additions to
fixed assets, which includes spending for the Rhourde El Baguel, Wiriagar and
Alpine projects and a polypropylene project at the Los Angeles refinery.
Future capital expenditures remain subject to business conditions affecting
the industry, particularly changes in price and demand for crude oil, natural
gas and petroleum products. Changes in the tax laws, the imposition of and
changes in federal and state clean air and clean fuel requirements, and other
changes in environmental rules and regulations may also affect future capital
expenditures. In addition, the status of negotiations with foreign sovereign
governments and third parties and approvals by foreign governments may also
affect the timing of future capital expenditures.
1 Pie Chart Showing Additions to Fixed Assets for 1997
<TABLE>
<CAPTION>
Adds to Fixed Assets (millions) 1997
----
<S> <C>
U.S. E&P $ 925
International E&P $1,200
Refining and marketing $ 485
Chemicals $ 455
Other $ 335
</TABLE>
It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will come from cash generated from operating
activities, existing cash balances, and future financings.
Environmental Matters
ARCO is subject to federal, state and local environmental laws and
regulations that require the Company to remove or mitigate the effect on the
environment of the disposal or release of certain chemical, mineral and
petroleum substances at various sites. ARCO is currently participating in
environmental assessments and cleanups at numerous sites under these laws and
may in the future be involved in additional environmental assessments and
cleanups.
<TABLE>
<CAPTION>
Environmental Reserves
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 658 $ 670 $ 648
Charges 49 101 138
Payments (130) (113) (116)
----- ----- -----
Ending balance $ 577 $ 658 $ 670
===== ===== =====
</TABLE>
The amount accrued represents the estimated undiscounted costs that ARCO
will incur to complete the remediation of sites with known contamination. In
view of the uncertainties associated with estimating these costs (such as
differences of opinion between ARCO and various regulatory agencies with respect
to the appropriate method for remediating contaminated
35
<PAGE>
ARCO
MANAGEMENT'S DISCUSSION
sites, uncertainty as to the extent of contamination at various sites, and
uncertainty regarding ARCO's ultimate share of costs at various sites), it is
possible that actual costs could exceed the amount accrued by as much as $600
million.
1 Bar Graph Showing Environmental Charges for 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Environmental Charges (millions) $ 138 $ 101 $ 49
</TABLE>
ARCO's operating expenses include ongoing costs of controlling or
disposing of pollutants. For the past three years, the Company estimates that
its operating expenses related to these ongoing costs have averaged
approximately $230 million per year. See Notes 3 and 13 to Consolidated
Financial Statements regarding environmental matters.
In addition to the provision for environmental remediation costs, $950
million has been accrued for the estimated cost, net of salvage value, of
dismantling facilities as required by contract, regulation or law, and for the
estimated costs of restoration and reclamation of land associated with such
facilities.
Risk Management
To minimize the effects of interest rate and foreign currency fluctuations,
ARCO enters into the following transactions using derivatives: 1) foreign
currency forward, option and swap contracts; 2) interest rate swaps; and 3)
financial futures contracts and over-the-counter Treasury options which are
limited to investment portfolio hedging, alteration of portfolio duration and
changing asset mix.
ARCO and its subsidiaries also engage in hedging strategies involving
forward and futures contracts, swaps and options covering part of its natural
gas and crude oil production to minimize the effects of commodity price
fluctuations. As of December 31, 1996, Vastar had entered into a series of
commodity swaps and natural gas price collar agreements covering approximately
373 million cubic feet per day (mmcfd) of its natural gas production in the
first quarter 1997 and 260 mmcfd in the second through fourth quarters 1997.
Commodity swaps covering approximately 125 mmcfd and 150 mmcfd of Vastar's
natural gas production for 1997 and 1998, respectively, were at an average price
of $1.92 per thousand cubic feet (Mcf) and $2.07 per Mcf, respectively (on a
Henry Hub basis). Another series of commodity swaps, covering approximately 115
mmcfd of its natural gas production in the first quarter 1997 and 85 mmcfd in
the second through fourth quarters 1997, were at an average price of $2.15 per
Mcf during the first quarter 1997 and $1.82 per Mcf (on a Henry Hub basis)
during the period April 1, 1997 through December 31, 1997. The natural gas
price collar agreements, covering an additional 133 mmcfd of its natural gas
production in the first quarter 1997 and 50 mmcfd in the second through fourth
quarters 1997, were at prices between $2.37 and $2.75 per Mcf during the first
quarter 1997 and $2.07 and $2.33 per Mcf, (on a Henry Hub basis) during the
period April 1, 1997 through December 31, 1997. Vastar's 1996 natural gas
production was 871.6 mmcfd.
The Company uses simple, non-leveraged derivative instruments that are
placed with major institutions whose creditworthiness is continually monitored.
Risk management strategies are reviewed and approved by senior management before
being implemented. Policies limit the maximum amount of positions that can be
taken in any given instrument.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
SCHEDULE
NO. PAGE
--- ----
<C> <S> <C>
Independent Accountants' Report............................... 38
Financial Statements:
Consolidated Statement of Income.......................... 39
Consolidated Balance Sheet................................ 40
Consolidated Statement of Changes in Stockholders' Equity. 41
Consolidated Statement of Cash Flows...................... 42
Notes to Consolidated Financial Statements................ 43
Supplemental Information.................................. 57
Supporting Financial Statement Schedule Covered by the
Foregoing Independent Accountants' Report:
II Valuation and Qualifying Accounts......................... 66
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown
in the financial statements or related notes.
Financial statements with respect to unconsolidated subsidiaries and 50%
owned companies are omitted per Rule 3-09(a) of Regulation S-X.
37
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of Atlantic Richfield Company
We have audited the accompanying consolidated balance sheets of Atlantic
Richfield Company as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996 and
the related financial statement schedule listed in the index on page 37 of
this Form 10-K. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Atlantic
Richfield Company as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 12, 1997
38
<PAGE>
ARCO
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
Millions, except per share amounts 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Sales and other operating revenues $18,592 $15,819 $15,035
Other revenues 577 920 647
------- ------- -------
Total revenues 19,169 16,739 15,682
------- ------- -------
EXPENSES
Trade purchases 7,949 6,116 5,961
Operating expenses 3,953 3,790 3,797
Selling, general and administrative expenses 1,018 1,029 1,003
Depreciation, depletion and amortization 1,633 1,641 1,671
Exploration expenses (including undeveloped lease
amortization) 413 523 455
Taxes other than income taxes 800 717 780
Interest 668 750 759
Unusual items 26 - 347
------- ------- -------
Total expenses 16,460 14,566 14,773
------- ------- -------
Income before gain on issuance of stock by
subsidiary 2,709 2,173 909
Gain on issuance of stock by subsidiary - - 459
------- ------- -------
Income before income taxes and minority interest 2,709 2,173 1,368
Provision for taxes on income 941 687 387
Minority interest in earnings of subsidiaries 105 110 62
------- ------- -------
Net income $ 1,663 $ 1,376 $ 919
======= ======= =======
Net income per share $ 10.18 $ 8.42 $ 5.63
======= ======= =======
Weighted average equivalent shares outstanding 163.4 163.4 163.2
======= ======= =======
</TABLE>
See Notes on pages 43 through 56.
39
<PAGE>
ARCO
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
Millions 1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,460 $ 1,537
Short-term investments 784 1,569
Accounts receivable 1,936 1,684
Inventories 995 877
Prepaid expenses and other current assets 258 221
------- -------
Total current assets 5,433 5,888
------- -------
Investments and long-term receivables:
Investments accounted for on the equity method 764 711
Other investments and long-term receivables 1,598 550
------- -------
2,362 1,261
------- -------
Net property, plant and equipment 16,195 15,355
Deferred charges and other assets 1,725 1,495
------- -------
Total assets $25,715 $23,999
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,157 $ 1,174
Accounts payable 1,443 1,145
Long-term debt due within one year 1,102 184
Taxes payable 438 303
Other 1,163 1,157
------- -------
Total current liabilities 5,303 3,963
------- -------
Long-term debt 5,593 6,708
Deferred income taxes 2,884 2,637
Other deferred liabilities and credits 3,450 3,456
Minority interest 684 477
Stockholders' equity:
Preference stocks 1 1
Common stock, $2.50 par value;
shares issued 161,086,174 (1996), 160,879,765 (1995)
shares outstanding 161,082,043 (1996), 160,831,190 (1995) 403 402
Capital in excess of par value of stock 628 632
Retained earnings 6,592 5,816
Equity adjustments 177 (93)
------- -------
Total stockholders' equity 7,801 6,758
------- -------
Total liabilities and stockholders' equity $25,715 $23,999
======= =======
</TABLE>
See Notes on pages 43 through 56.
40
<PAGE>
ARCO
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the year ended December 31,
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PREFERENCE STOCKS
Beginning and end of year $ 1 $ 1 $ 1
====== ====== ======
COMMON STOCK
Beginning of year $ 402 $ 402 $ 402
------ ------ ------
End of year, after issuances $ 403 $ 402 $ 402
====== ====== ======
CAPITAL IN EXCESS OF PAR VALUE
Beginning of year $ 632 $ 647 $ 661
------ ------ ------
End of year, after conversions $ 628 $ 632 $ 647
====== ====== ======
RETAINED EARNINGS
Beginning of year $5,816 $5,342 $5,308
Net income 1,663 1,376 919
Common stock dividends (885) (900) (882)
Preference stock dividends (2) (2) (3)
------ ------ ------
End of year $6,592 $5,816 $5,342
====== ====== ======
EQUITY ADJUSTMENTS
Treasury stock, at cost:
Beginning of year $ (5) $ (5) $ (83)
Conversions 61 39 22
Contributed to benefit plans - - 56
Purchases (57) (39) -
------ ------ ------
End of year $ (1) $ (5) $ (5)
Net unrealized gain (loss) on investments:
Beginning of year $ (11) $ (38) $ -
------ ------ ------
End of year, after adjustments $ 225 $ (11) $ (38)
Pension liability adjustment:
Beginning of year $ (60) $ (20) $ (29)
------ ------ ------
End of year, after adjustments $ (28) $ (60) $ (20)
Foreign currency adjustment:
Beginning of year $ (17) $ (51) $ (133)
------ ------ ------
End of year, after adjustments $ (19) $ (17) $ (51)
------ ------ ------
Total equity adjustments $ 177 $ (93) $ (114)
====== ====== ======
Total stockholders' equity $7,801 $6,758 $6,278
====== ====== ======
</TABLE>
See Notes on pages 43 through 56.
41
<PAGE>
ARCO
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
Millions 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,663 $ 1,376 $ 919
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,633 1,641 1,671
Dry hole expense and undeveloped leasehold
amortization 209 317 251
Minority interest in earnings of subsidiaries 105 110 62
Net gain on asset sales (41) (16) (3)
Gain on issuance of stock by subsidiary - - (459)
Income from equity investments (74) (243) (141)
Dividends from equity investments 77 89 71
Cash payments (greater) less than noncash
provisions (220) (183) 88(a)
Deferred income taxes 11 26 118
Changes in working capital accounts(b) 121 (204) (456)
Other (79) 6 (24)
------- ------- -------
Net cash provided by operating activities 3,405 2,919 2,097
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets, including dry hole
costs (2,141) (1,699) (1,658)
Net cash provided (used) by short-term investments 778 1,500 (768)
Acquisition of businesses (987) - -
Investment in LUKOIL and Zhenhai securities (218) (252) (74)
Proceeds from asset sales 208 66 167
Investments and long-term receivables (104) (73) (5)
Other 85 (92) 169
------- ------- -------
Net cash used by investing activities (2,379) (550) (2,169)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (861) (1,138) (796)
Proceeds from issuance of long-term debt 680 178 1,275
Proceeds from issuance of stock by subsidiary - - 453
Net cash used by notes payable (79) (293) (69)
Dividends paid (887) (902) (885)
Treasury stock purchases (57) (39) -
Treasury stock contributed to benefit plans - - 56
Other 100 (31) (36)
------- ------- -------
Net cash used by financing activities (1,104) (2,225) (2)
------- ------- -------
Effect of exchange rate changes on cash 1 (1) 10
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (77) 143 (64)
Cash and cash equivalents at beginning of year 1,537 1,394 1,458
------- ------- -------
Cash and cash equivalents at end of year $ 1,460 $ 1,537 $ 1,394
======= ======= =======
(a) Includes noncash unusual items of $347.
(b) Changes in working capital - increase (decrease)
to cash:
Accounts receivable $ (235) $ (239) $ (173)
Inventories (96) (75) 117
Accounts payable 279 159 (113)
Other working capital 173 (49) (287)
------- ------- -------
$ 121 $ (204) $ (456)
======= ======= =======
</TABLE>
See Notes on pages 43 through 56.
42
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Accounting Policies
ARCO's accounting policies conform to generally accepted accounting
principles, including the "successful efforts" method of accounting for oil and
gas producing activities.
Principles of Consolidation
The consolidated financial statements include the accounts of all
subsidiaries, ventures and partnerships in which a controlling interest is held,
including ARCO Chemical Company and Vastar Resources, Inc., of which ARCO owned
82.7% and 82.3% of the outstanding shares, respectively, at December 31, 1996.
ARCO also consolidates its interests in undivided interest pipeline companies
and in oil and gas and coal mining joint ventures. ARCO uses the equity method
of accounting for companies where its ownership is between 20% and 50% and for
other ventures and partnerships in which less than a controlling interest is
held.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as time deposits,
certificates of deposit and marketable securities other than equity securities,
maturing within three months of purchase. Cash equivalents are stated at cost,
which approximates fair value.
Oil and Gas Unproved Property Costs
Unproved property costs are capitalized and amortized on a composite basis,
considering past success experience and average property life. In general,
costs of properties surrendered or otherwise disposed of are charged to
accumulated amortization. Costs of successful properties are transferred to
developed properties.
Fixed Assets
Fixed assets are recorded at cost and are written off on either the unit-of-
production or straight-line method based on the expected lives of individual
assets or groups of assets.
Upon disposal of assets depreciated on an individual basis, residual cost less
salvage 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.
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 and mining operations are accrued during production
and classified as a long-term liability. Such costs are taken into account in
determining the cost of production in all operations, except oil and gas
production, in which case such costs are considered in determining depreciation,
depletion and amortization.
Environmental Remediation
Environmental remediation costs are accrued as operating expenses based on the
estimated timing and extent of remedial actions required by applicable
governmental authorities and the amount of ARCO's liability in consideration of
the 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-based
method prescribed by Accounting Principles Board Opinion (APB) No. 25.
Earned per Share
Earned per share is based on the average number of common shares
outstanding during each period including common stock equivalents that consist
of certain outstanding options and all outstanding convertible securities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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.
Research and Development
Expenditures for research and development totaled $106 million, $104 million
and $109 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Reclassifications
The amounts for 1995 and 1994 reflect the exclusion from revenue and expenses
of excise taxes collected on behalf of the U.S. and various states and
reclassifications of delivery and other expenses from selling, general and
administrative expenses to operating expenses to conform with current
classifications. Certain other previously reported amounts have been restated to
conform to classifications adopted in 1996.
43
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 Unusual Items
During 1994, ARCO announced a restructuring program under which approximately
2,400 positions were to be eliminated. The program covered all operating units,
excluding Lower 48 oil and gas operations, along with the corporate
headquarters. In 1994, ARCO provided as unusual items $347 million before tax,
consisting primarily of personnel costs (pension enhancements, severance and
other ancillary costs) associated with the terminations. In 1996, $26 million
was recorded as an unusual item to adjust reserves from the previously estimated
amounts.
The following summarizes the final costs related to the program:
<TABLE>
<CAPTION>
($ Millions) Funded Unfunded
Long-term Long-term Short-term
Terminations Benefits (a) Benefits (b) Benefits (c) Other Total
- ------------ -------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
2,589 $130 $70 $157 $16 $373
</TABLE>
(a) Enhanced pension benefits to be paid from assets of qualified pension plans
after retirement of recipient.
(b) Enhanced non-qualified pension benefits and postretirement medical and life
insurance benefits. Benefits will be paid after retirement over the life of
the recipient.
(c) Severance and other ancillary benefits paid from Company funds.
As of December 31, 1996, all of the accrued short-term benefits have been
paid.
Note 3 Accounting Changes
In October 1996, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP 96-1
requires adoption of its provisions for fiscal years beginning after December
15, 1996. The provisions include standards affecting the measurement,
recognition and disclosure of environmental remediation liabilities. The effect
of initially applying the provisions of SOP 96-1 will be reported as a change in
accounting estimate in the period adopted. ARCO has not yet had sufficient time
to evaluate the impact of the provisions of SOP 96-1.
In the fourth quarter of 1995, ARCO adopted 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." The effect of adopting SFAS No.
121 resulted in a charge of $12 million after tax to 1995 net income.
Effective January 1, 1994, ARCO adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires investments to be
carried at fair value, unless they are considered held-to-maturity securities.
The effect of adopting SFAS No. 115 had no impact on 1994 net income.
Note 4 Public Offering of Vastar Common Stock
In September 1993, ARCO established Vastar Resources, Inc., a wholly owned
subsidiary of ARCO. Effective October 1, 1993, ARCO conveyed to Vastar
beneficial title to certain producing properties together with certain developed
and undeveloped acreage. Vastar is primarily engaged in the exploration for and
the development, production and marketing of natural gas.
In July 1994, Vastar completed an initial public offering of 17,250,000 shares
of its common stock at $28 per share. ARCO recognized an after-tax gain of $273
million from this transaction.
Note 5 Segment Information
ARCO operates primarily in the Resources (upstream) and Products (downstream)
segments. The Resources segment includes worldwide exploration and production
operations, which comprise the exploration, development and production of
petroleum, including petroleum liquids (crude oil, condensate and natural gas
liquids) and natural gas; the purchase and sale of petroleum liquids and natural
gas; and the mining and sale of coal. The Products segment includes the
refining and transportation of petroleum, primarily from the North Slope of
Alaska; the marketing and transportation of petroleum products in the West Coast
region of the United States; and the worldwide manufacture and sale of chemical
products, including propylene oxide and derivatives, styrene monomer, and methyl
tertiary butyl ether.
Segment information for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Resources:
Exploration and production $ 9,021 $ 8,136 $ 7,969
Coal 753 762 663
Products:
Refining and marketing 6,944 5,380 5,012
Transportation 770 821 897
Chemicals 3,955 4,282 3,423
Other 13 28 30
Elimination of intersegment amounts (2,864) (3,590) (2,959)
------- ------- -------
Total $18,592 $15,819 $15,035
======= ======= =======
</TABLE>
44
<PAGE>
ARCO
Intersegment sales were made at prices approximating current market values.
Intersegment sales included in sales and other operating revenues were as
follows:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Resources:
Exploration and production $ 2,207 $ 2,909 $ 2,338
Products:
Refining and marketing 33 21 21
Transportation 424 438 416
Chemicals 179 195 154
Other 21 27 30
------- ------- -------
Total $ 2,864 $ 3,590 $ 2,959
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRETAX SEGMENT EARNINGS
Resources:
Exploration and production $ 2,044 $ 1,061 $ 608
Coal 77 105 95
Products:
Refining and marketing 393 285 303
Transportation 226 297 239
Chemicals 557 838 502
Equity in earnings from Lyondell 53 194 111
Gain on issuance of stock by subsidiary - - 459
Unallocated expenses and other 27 143 (190)
Interest (668) (750) (759)
Income taxes (941) (687) (387)
Minority interest (105) (110) (62)
------- ------- -------
Net income $ 1,663 $ 1,376 $ 919
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
AFTER-TAX SEGMENT EARNINGS
Resources:
Exploration and production(a) $ 1,271 $ 683 $ 405
Coal 60 75 70
Products:
Refining and marketing 260 177 195
Transportation 141 193 172
Chemicals(a) 320 460 265
Equity in earnings from Lyondell 53 194 111
Gain on issuance of stock by subsidiary - - 273
Unallocated expenses and other 4 94 (57)
Interest (446) (500) (515)
------- ------- -------
Net income $ 1,663 $ 1,376 $ 919
======= ======= =======
</TABLE>
(a) Net of minority interest.
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
TOTAL ASSETS
Resources:
Exploration and production $10,288 $ 9,127 $ 9,192
Coal 1,749 1,330 1,381
Products:
Refining and marketing 2,951 2,901 2,841
Transportation 2,082 2,074 2,046
Chemicals 4,394 4,135 3,737
Other 4,251 4,432 5,366
------- ------- -------
Total $25,715 $23,999 $24,563
======= ======= =======
ADDITIONS TO FIXED ASSETS
Resources:
Exploration and production $1,671 $1,179 $ 989
Coal 42 43 57
Products:
Refining and marketing 115 207 376
Transportation 61 64 48
Chemicals 244 195 186
Other 8 11 2
------ ------ ------
Total $2,141 $1,699 $1,658
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
DEPRECIATION, DEPLETION AND AMORTIZATION
Resources:
Exploration and production $ 994 $ 996 $1,043
Coal 89 85 76
Products:
Refining and marketing 212 204 191
Transportation 100 103 104
Chemicals 222 233 235
Other 16 20 22
------ ------ ------
Total $1,633 $1,641 $1,671
====== ====== ======
</TABLE>
ARCO has reorganized management responsibility for its Transportation
operations, which will result in a change in segment reporting of those
operations in 1997. Comparative presentations will be restated.
45
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International operations are conducted principally in the following geographic
regions: Exploration and production - United Kingdom, Asia Pacific, North Africa
and Middle East; Coal - Australia; Chemicals - Western Europe and Asia Pacific.
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTERNATIONAL OPERATIONS
Sales and other operating revenues:
Exploration and production $1,387 $1,169 $1,027
Coal 362 378 336
Chemicals 1,592 1,777 1,210
Other 26 30 32
------ ------ ------
Total $3,367 $3,354 $2,605
====== ====== ======
Net income (loss):
Exploration and production $ 58 $ (43) $ 26
Coal 24 34 29
Chemicals(a) 83 147 70
Other (32) (24) (21)
------ ------ ------
Total $ 133 $ 114 $ 104
====== ====== ======
Total assets:
Exploration and production $3,631 $2,931 $2,792
Coal 877 846 892
Chemicals 1,682 1,845 1,580
Other 1,198 564 299
------ ------ ------
Total $7,388 $6,186 $5,563
====== ====== ======
</TABLE>
(a) Includes income (losses) of equity affiliates, principally Asia Pacific
joint ventures, of $(1), $14, and $2, in 1996, 1995 and 1994, respectively.
Note 6 Inventories
Inventories are recorded when purchased, produced or manufactured and are
stated at the lower of cost or market. In 1996, approximately 86% 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 comprised the following categories:
<TABLE>
<CAPTION>
Millions 1996 1995
---- ----
<S> <C> <C>
Crude oil and petroleum products $ 204 $ 184
Chemical products 488 423
Other products 48 32
Materials and supplies 255 238
----- -----
Total $ 995 $ 877
===== =====
</TABLE>
The excess of the current cost of inventories over book value was
approximately $293 million and $297 million at December 31, 1996 and 1995,
respectively.
Note 7 Investments
At December 31, 1996 and 1995, investments in debt securities were primarily
composed of U.S. Treasury securities and corporate debt instruments. Maturities
generally ranged from two days to 22 months. These investments were principally
included in short-term investments. ARCO's investments in LUKOIL common stock
and Zhenhai Refining and Chemical Company common stock and convertible bonds
were included in other investments and long-term receivables. At December 31,
1996, all investments were classified as available-for-sale (AFS); there were no
investments considered held-to-maturity (HTM). AFS investments were reported at
fair value, with unrealized holding gains and losses, net of tax, reported in a
separate component of stockholders' equity.
The following summarizes investments at December 31:
<TABLE>
<CAPTION>
AFS
---
Millions 1996 1995
---- ----
<S> <C> <C>
Aggregate fair value $2,311 $2,435
Gross unrealized holding losses 3 30
Gross unrealized holding gains (365) (23)
------ ------
Amortized cost $1,949 $2,442
====== ======
</TABLE>
Investment activity for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- -----------------
Millions AFS AFS HTM
------ ------ ------
<S> <C> <C> <C>
Gross purchases $7,799 $4,517 $1,293
Gross sales 2,371 2,368 -
Gross maturities 5,920 1,830 2,407
Gross transfers - 125 (125)
</TABLE>
Gross realized gains and losses were insignificant and were determined by the
specific identification method.
46
<PAGE>
ARCO
Note 8 Fixed Assets
Property, plant and equipment at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Millions Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Resources:
Exploration and production $20,999 $ 8,305 $19,306 $ 7,634
Coal 1,493 996 1,424 1,005
Products:
Refining and marketing 4,257 2,417 4,179 2,517
Transportation 3,429 1,661 3,397 1,706
Chemicals 4,152 2,622 3,812 2,293
Other 407 194 426 200
------- ------- ------- -------
Total $34,737 $16,195 $32,544 $15,355
======= ======= ======= =======
</TABLE>
Expenses for maintenance and repairs for 1996, 1995 and 1994 were $497
million, $475 million and $525 million, respectively.
Note 9 Short-term Borrowings and Bank Credit Facilities
Notes payable consist primarily of commercial paper issued to a variety of
financial investors and institutions and any amounts outstanding under ARCO or
ARCO Chemical credit facilities. The weighted average interest rate on notes
payable outstanding at December 31, 1996 and 1995, was 5.7% and 6.3%,
respectively.
In 1996, ARCO and certain wholly owned subsidiaries had committed bank credit
facilities of approximately $3.1 billion. At December 31, 1996, there were no
borrowings under these committed facilities.
ARCO Chemical maintains its own credit facility, not guaranteed by ARCO, under
which it may borrow up to $300 million. At December 31, 1996, there were no
borrowings against this credit facility.
At December 31, 1996, ARCO had unused letters of credit totaling approximately
$275 million.
Note 10 Long-term Debt
Long-term debt at December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1996 1995
---- ----
<S> <C> <C>
5-5/8%, due in 1997 $ - $ 10
6-1/8%, due in 1996 - 102
8-1/4%, due in 2022 250 250
8-1/2%, due in 2012 178 178
8-3/4%, due in 2032 198 198
9% exchangeable notes, due in 1997 988 988
9%, due in 2021 286 286
9%, due in 2031 136 136
9-1/8%, due in 2011 300 300
9-1/8%, due in 2031 345 345
9-7/8%, due in 2016 450 450
10-1/4%, due in 2000 250 250
10-7/8%, due in 2005 500 500
Medium-Term Notes - A Series, 8.65%(a) 197 197
Medium-Term Notes - B Series, 8.34%(a) 250 250
ARCO Tresop Notes, 5.47%(a) 224 278
Variable rate, due in 2031, 3.77%(a) 265 265
ARCO Chemical:
9.375%, due in 2005 100 100
9.8%, due in 2020 224 224
9.9%, due in 2000 200 200
10.25%, due in 2010 100 100
French bank loans, 7.3%(a) 55 76
Dutch bank loans 173 187
Vastar:
Revolving credit agreements - 610
Commercial paper, 6.0%(a) 554 -
6.95%, due in 2006 75 -
8-3/4%, due in 2005 149 149
Capitalized lease obligations 27 25
Other 221 244
------ ------
Total, including debt due within one year 6,695 6,898
------ ------
Less:
Debt due within one year 1,102 184
Bonds held in sinking fund - 6
------ ------
Long-term debt $5,593 $6,708
====== ======
</TABLE>
(a) Weighted average of interest rates at December 31, 1996.
Maturities for the five years subsequent to December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Millions 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Maturities $1,102 $175 $132 $458 $612
</TABLE>
47
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 1996, Vastar established a $1.1 billion Commercial
Paper Program for issuance of unsecured notes with maturities of up to 270 days
from the date of issue. Vastar has agreed to maintain credit lines sufficient
to support payment on the notes.
In 1996, Vastar consolidated existing unsecured revolving credit agreements
into a single facility. The commitment under this facility totaled $1.1 billion
and expires March 29, 2001. At December 31, 1996, the facility was unused. The
credit facility is not guaranteed by ARCO. The agreement contains covenants,
the most restrictive of which require Vastar to maintain minimum levels of
tangible stockholders' equity and certain financial ratios and restrict
encumbrance of assets.
In August 1994, ARCO sold 39.9 million 9% Exchangeable Notes (Notes), due
September 15, 1997, at an issue price of $24.75 per note. At maturity of the
Notes, holders will receive, in exchange for the principal amount, shares of
Lyondell stock, or at ARCO's option, cash with an equal value. The number of
shares or the amount of such cash will be determined using a formula based on
the price of Lyondell common stock at the maturity of the Notes.
ARCO periodically enters into interest rate swap agreements with the objective
of managing interest rate risk by converting the interest rate on variable rate
debt to a fixed rate. The fixed rate is accrued and charged to interest expense
through the term of the interest rate swap agreement. All interest rate swaps
are intended to be held until maturity. At December 31, 1996, ARCO Chemical had
outstanding interest rate swaps on two loans of 150 million Dutch guilders each
(approximately $173 million in total) due in 1997. Both swaps mature when the
related debt becomes due. The swaps effectively changed the loans' floating
interest rates to fixed rates of 5.7% and 6.7%, respectively.
At December 31, 1996 and 1995, approximately $230 million and $365 million,
respectively, of long-term debt was denominated in foreign currencies.
No material amounts of long-term debt are collateralized by ARCO assets.
Note 11 Interest
Interest for the years ended December 31 comprised the following:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Long-term debt $579 $637 $634
Short-term debt 83 90 82
Other 28 72 80
---- ---- ----
690 799 796
Capitalized interest (22) (49) (37)
---- ---- ----
Total interest expense $668 $750 $759
==== ==== ====
Total interest paid in cash $675 $780 $766
==== ==== ====
Interest income $193 $212 $201
==== ==== ====
</TABLE>
Note 12 Financial Instruments and Fair Value
ARCO does not hold or issue financial instruments for trading purposes.
ARCO enters into various types of foreign currency forward, option and swap
contracts. Foreign currency forward and option contracts are 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 from overseas operations. Foreign currency swap
contracts are used to minimize foreign exchange exposures related to foreign-
denominated intercompany debt with maturities exceeding one year.
At December 31, 1996, the notional amounts of foreign currency contracts
outstanding (principally involving European currencies and Australian dollars)
were approximately $804 million, with various maturities ranging from 1997 to
2000. At December 31, 1995, the notional amounts of foreign currency contracts
outstanding were approximately $960 million.
Gains and losses on foreign currency forward contracts covering anticipatory
cash flows are recognized currently as other income or expense. Gains and
losses on foreign currency swaps associated with intercompany debt are
recognized currently in income and offset foreign exchange gains and losses on
the underlying intercompany loans. Gains and losses on other foreign currency
contracts are generally deferred and offset the transactions being hedged.
48
<PAGE>
ARCO
ARCO periodically enters into interest rate swaps to manage interest rate
risk. Interest rate swaps are used in conjunction with debt (see Note 10).
ARCO also uses various hedging arrangements to manage the exposure to price
risk for future natural gas and crude oil transactions. Gains and losses
resulting from these transactions are 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 is delivered. During 1996, Vastar
entered into a series of natural gas swap and price collar agreements which at
December 31, 1996, covered 288 million cubic feet per day of its 1997 natural
gas production and 150 million cubic feet per day of its 1998 natural gas
production. These swap agreements will serve as hedges which secure prices on
these volumes at an average price of $1.99 per thousand cubic feet for 1997 and
$2.07 for 1998 (on a Henry Hub basis).
At December 31, the carrying value and estimated fair value of ARCO's
financial instruments are shown as assets (liabilities) in the table below:
<TABLE>
<CAPTION>
1996 1995
------------------- ------------------
Millions Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Non-derivatives:
Short-term investments $ 784 $ 784 $ 1,569 $ 1,569
Equity method investments 764 1,369 711 1,364
Other investments and long-term
receivables 1,598 1,598 550 550
Notes payable (1,157) (1,157) (1,174) (1,174)
Long-term debt, including current
maturities (6,695) (7,213) (6,892) (7,929)
Derivatives:
Foreign currency forwards $ (14) $ (14) $ (6) $ (6)
Foreign currency options 6 6 7 7
Foreign currency swaps (4) (4) 69 69
Interest rate swaps:
Debt (1) (3) (1) (5)
Investments - - (11) (11)
Oil & gas price swaps (21) (21) (21) (21)
Commodity futures (6) (6) (9) (9)
</TABLE>
All derivative instruments are off-balance-sheet instruments; however, net
receivable or payable positions related to derivative instruments are carried on
the balance sheet.
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 by ARCO; ARCO does not anticipate
nonperformance by the counterparties.
Note 13 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.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking
compensatory and punitive damages and injunctions were filed by the State of
Alaska, the United States and private plaintiffs against Exxon, Alyeska Pipeline
Service Company (Alyeska) and Alyeska's owner companies (including ARCO, which
owns approximately 22%). Alyeska and its owner companies have settled the civil
damage claims by federal and state governments and the lawsuits by private
plaintiffs. Certain issues relating to the liability for the spill remain
unresolved between the Exxon companies, on the one hand, and Alyeska and its
owner companies.
49
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARCO and former producers of lead pigments have been named as defendants in
cases filed by a municipal housing authority, three purported classes and
several individuals seeking damages and injunctive relief as a consequence of
the presence of lead-based paint in certain housing units. ARCO is also the
subject of or party to a number of other pending or threatened legal actions.
The State of Montana is seeking recovery from ARCO of $764 million based on
alleged injuries to natural resources resulting from ARCO's mining and mineral
processing businesses formerly operated by Anaconda, ARCO's predecessor in
Montana. ARCO is contesting this demand.
ARCO is subject to other loss contingencies pursuant to federal, state and
local environmental laws and regulations. These include possible obligations to
remove or mitigate the effects on the environment of the disposal or release of
certain chemical, mineral and petroleum substances at various sites, including
the restoration of natural resources located at these sites and damages for loss
of use and non-use values. ARCO is currently participating in environmental
assessments and cleanups under these laws at federal Superfund and state-managed
sites, as well as other clean-up sites. ARCO may in the future be involved in
additional environmental assessments and cleanups. The amount of such future
costs will depend on such factors as the unknown nature and extent of
contamination, the unknown timing, extent and method of remedial actions which
may be required and the determination of ARCO's liability in proportion to other
responsible parties. In addition, environmental loss contingencies include
claims for personal injuries allegedly caused by exposure to toxic materials
manufactured or used by ARCO.
ARCO continues to estimate the amount of these costs in periodically
establishing reserves based on progress made in determining the magnitude of
remediation costs, experience gained from sites on which remediation has been
completed, the timing and extent of remedial actions required by the applicable
governmental authorities and an evaluation of the amount of ARCO's liability
considered in light of the liability and financial wherewithal of the other
responsible parties. At December 31, 1996, the environmental remediation
accrual was $577 million. As the scope of ARCO's obligations becomes more
clearly defined, there may be changes in these estimated costs, which might
result in future charges against ARCO's earnings.
ARCO's environmental remediation accrual covers federal Superfund and state-
managed sites as well as other clean-up sites, including service stations,
refineries, terminals, chemical facilities, third-party landfills, former
nuclear processing facilities, sites associated with discontinued operations and
sites formerly owned by ARCO. ARCO has been named a potentially responsible
party (PRP) for 117 sites. The number of PRP sites in and of itself is not a
relevant measure of liability because the nature and extent of environmental
concerns varies by site and ARCO's share of responsibility varies from sole
responsibility to very little responsibility. ARCO reviews all PRP sites, along
with other sites as to which no claims have been asserted, in estimating the
amount of the accrual. ARCO's future costs at these sites could exceed the
amount accrued by as much as $600 million.
Approximately 45% of the reserve related to sites associated with ARCO's
discontinued operations, primarily mining activities in the states of Montana,
Utah and New Mexico. Another significant component related to currently and
formerly owned chemical, nuclear processing, and refining and marketing
facilities, and other sites which received wastes from these facilities. The
remainder related to other sites with reserves ranging from $1 million to $10
million per site. No one site represents more than 10% of the total accrual.
Substantially all amounts accrued are expected to be paid out over the next five
to six years.
Claims for recovery of remediation costs already incurred and to be incurred
in the future have been filed against various 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
50
<PAGE>
ARCO
occurrence is considered remote. On the basis of management's best assessment of
the ultimate amount and timing of these events, such expenses or judgments are
not expected to have a material adverse effect on ARCO's consolidated financial
statements.
The operations and consolidated financial position of ARCO continue to be
affected from time to time in varying degrees by domestic and foreign political
developments as well as legislation, regulations and litigation pertaining to
restrictions on production, imports and exports, tax increases, environmental
regulations, cancellation of contract rights and expropriation of property. Both
the likelihood of such occurrences and their overall effect on ARCO vary greatly
and are not predictable.
These uncertainties are part of a number of items that ARCO has taken and will
continue to take into account in periodically establishing reserves.
Note 14 Taxes
Taxes other than income taxes for the years ended December 31 comprised the
following:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Property $178 $180 $189
Production/severance 445 343 306
Other 177 194 285
---- ---- ----
Total $800 $717 $780
==== ==== ====
</TABLE>
ARCO has foreign loss carryforwards of $511 million which begin expiring in
1997. The valuation allowance was $104 million at December 31, 1994.
The income tax provision for the years ended December 31 comprised the
following:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $662 $497 $176
Deferred (9) 42 128
---- ---- ----
653 539 304
---- ---- ----
Foreign:
Current 155 108 62
Deferred 24 (40) (19)
---- ---- ----
179 68 43
---- ---- ----
State:
Current 113 56 31
Deferred (4) 24 9
---- ---- ----
109 80 40
---- ---- ----
Total provision for taxes on income $941 $687 $387
==== ==== ====
Total income taxes paid in cash $930 $785 $447
==== ==== ====
</TABLE>
In 1996, a deferred tax expense of $144 million was recorded related to
unrealized investment gains included in stockholders' equity.
Major components of the net deferred tax liability at December 31 were as
follows:
<TABLE>
<CAPTION>
Millions 1996 1995
---- ----
<S> <C> <C>
Depreciation, depletion and amortization $(3,741) $(3,688)
Other (510) (341)
------- -------
Total deferred tax liabilities (4,251) (4,029)
------- -------
Dismantlement and environmental 518 528
Postretirement benefits 330 331
Foreign excess tax basis/loss carryforwards 299 299
Other 350 347
------- -------
Total deferred tax assets 1,497 1,505
------- -------
Valuation allowance (130) (113)
------- -------
Net deferred income tax liability $(2,884) $(2,637)
======= =======
</TABLE>
The domestic and foreign components of income before income taxes and minority
interest, and a reconciliation of income tax expense with tax at the effective
federal statutory rate for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
% Pretax % Pretax % Pretax
Millions Amount Income Amount Income Amount Income
------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes:
Domestic $2,279 84.1 $1,896 87.3 $1,147 83.8
Foreign 430 15.9 277 12.7 221 16.2
------ ----- ------ ----- ------ -----
Total $2,709 100.0 $2,173 100.0 $1,368 100.0
------ ----- ------ ----- ------ -----
Tax at 35% $ 948 35.0 $ 761 35.0 $ 479 35.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion (15) (0.6) (54) (2.5) (31) (2.3)
Taxes on foreign income
in excess of statutory
rate 41 1.5 46 2.1 46 3.4
Foreign deferred tax asset
valuation 28 1.0 (30) (1.4) (30) (2.2)
State income taxes (net of
federal effect) 71 2.6 52 2.4 26 1.9
Tax credits (95) (3.5) (81) (3.7) (84) (6.1)
Other (37) (1.3) (7) (0.3) (19) (1.4)
------ ----- ------ ----- ------ -----
Provision for taxes on income $ 941 34.7 $ 687 31.6 $ 387 28.3
====== ===== ====== ===== ====== =====
</TABLE>
51
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 Retirement Plans
ARCO and its subsidiaries have defined benefit pension plans to provide
pension benefits to substantially all employees. The benefits are based on
years of service and the employee's compensation, primarily during the last
three years of service. ARCO's funding policy is to make annual contributions
as required by applicable regulations. ARCO accrues pension costs based on an
actuarial valuation for each plan and funds the plans through contributions to
trust funds that are kept apart from Company funds.
ARCO's assumptions used as of December 31 in determining the pension cost and
pension liability were as follows:
<TABLE>
<CAPTION>
Percent 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25 7.0 8.25
Rate of salary progression 5.0 5.0 5.0
Long-term rate of return on assets 10.5 10.5 10.5
</TABLE>
Pension costs related to ARCO-sponsored plans, on a pretax basis, for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 79 $ 62 $ 81
Interest cost on projected benefit obligation 198 195 183
Actual (return) loss on plan assets (454) (517) 65
Net amortization and deferral 190 272 (344)
----- ----- -----
Net pension (income) cost $ 13 $ 12 $ (15)
===== ===== =====
</TABLE>
In 1994, ARCO also recorded $143 million before tax as additional pension cost
in connection with work force reductions.
The following table sets forth the plans' funded status and amounts recognized
in the balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Millions Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value
of benefits:
Vested benefits $(2,131) $(213) $(1,965) $(238)
Non-vested benefits (31) (1) (138) (7)
------- ----- ------- -----
Accumulated benefits (2,162) (214) (2,103) (245)
Effect of future
projected salary increases (359) (78) (377) (77)
------- ----- ------- -----
Projected benefit
obligation (PBO) (2,521) (292) (2,480) (322)
Plan assets at fair value,
primarily stocks and bonds 2,895 2 2,637 -
------- ----- ------- -----
PBO (greater) less than
plan assets 374 (290) 157 (322)
Unrecognized net loss 178 123 291 169
Prior service cost not yet
recognized in net periodic
pension cost 136 22 143 23
Remaining unrecognized (asset)
obligation from transition (263) 7 (290) 7
Adjustment for minimum
liability - (76) - (124)
------- ----- ------- -----
Prepaid pension asset
(liability) recognized in
the balance sheet $ 425 $(214) $ 301 $(247)
======= ===== ======= =====
</TABLE>
52
<PAGE>
ARCO
Note 16 Other Postretirement Benefits
ARCO and its subsidiaries sponsor defined postretirement benefit plans which
provide other postretirement benefits to substantially all employees who retire
with ARCO having rendered the required years of service, and to their spouses
and eligible dependents. Health care benefits are provided primarily through
comprehensive indemnity plans or health maintenance organizations (HMO), as
chosen by the employee. Beginning January 1, 1997, ARCO will pay for the cost
of the benchmark HMO with employees responsible for the differential cost, if
any, of their selected option. Previously, ARCO paid approximately 80% of the
cost of a comprehensive indemnity plan. This change resulted in the
unrecognized prior service benefit reflected below. Life insurance benefits are
based primarily on the employee's final compensation and are also partially paid
for by retiree contributions, which vary based upon coverage chosen by the
retiree. ARCO has the right to modify the plans at any time.
ARCO's current policy is to fund the cost of postretirement health care and
life insurance plans on a pay-as-you-go basis.
ARCO accrues postretirement benefit costs based on actuarial calculations for
each plan. Net postretirement benefit costs for the years ended December 31
included the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Life Life Life
Health Insur- Health Insur- Health Insur-
Millions Care ance Total Care ance Total Care ance Total
------ ------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost-benefits
earned during the
period $ 7 $ 3 $ 10 $ 8 $ 2 $ 10 $ 17 $ 4 $ 21
Interest cost
on APBO 32 13 45 49 13 62 54 15 69
Net amortization (13) - (13) - (1) (1) 3 - 3
Net postretirement ---- ---- ---- ---- ---- ---- ---- ---- ----
benefit cost $ 26 $ 16 $ 42 $ 57 $ 14 $ 71 $ 74 $ 19 $ 93
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
In addition to the cost above, in 1994 ARCO recorded $24 million before tax as
additional postretirement benefit expense in connection with work force
reductions.
The significant assumptions used in determining postretirement benefit cost
and the accumulated postretirement benefit obligation (APBO) were as follows:
<TABLE>
<CAPTION>
Percent 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25 7.0 8.25
Rate of salary progression 5.0 5.0 5.0
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care trend rate) for the health plans is 9% for
1995 and 1996, 7% for 1997 to 2001, and 5% thereafter. The assumed trend rate
for 1994 was 10% to 1996; 8% for 1997 to 2001, and 6% thereafter. The effect of
a one-percentage-point increase in the assumed trend rate would increase the
APBO as of December 31, 1996, by approximately $57 million, and the aggregate of
the service and interest cost components of net annual postretirement benefit
cost by approximately $5 million.
The plans' combined postretirement benefit liability at December 31 was as
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Life Life
Health Insur- Health Insur-
Millions Care ance Total Care ance Total
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation (APBO):
Retirees $ (370) $ (153) $ (523) $ (579) $ (160) $ (739)
Employees fully eligible (16) (7) (23) (22) (6) (28)
Other active participants (88) (33) (121) (136) (32) (168)
----- ----- ----- ----- ----- -----
Total APBO (474) (193) (667) (737) (198) (935)
Unrecognized prior service
(benefit) cost (233) 2 (231) - - -
Unrecognized net (gain) loss 65 (13) 52 75 (5) 70
Accrued postretirement ----- ----- ----- ----- ----- -----
benefit cost recognized
in the balance sheet $(642) $(204) $(846) $(662) $(203) $(865)
===== ===== ===== ===== ===== =====
</TABLE>
53
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 Lease Commitments
Capital lease obligations are recorded at the present value of future rental
payments. The related assets are amortized on a straight-line basis.
At December 31, 1996, future minimum rental payments due under leases were as
follows:
<TABLE>
<CAPTION>
Capital Operating
Millions Leases Leases
------- ---------
<S> <C> <C>
1997 $ 3 $ 167
1998 3 175
1999 3 147
2000 3 121
2001 3 66
Later years 71 458
----- -----
Total minimum lease payments 86 $1,134
======
Imputed interest (rates ranging from 9.75% to 12.00%) 59
-----
Present value of minimum lease payments included in
long-term debt $ 27
=====
</TABLE>
Minimum future rental income under noncancellable subleases at December 31,
1996, amounted to $74 million.
Operating lease net rental expense for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Minimum rentals $ 215 $ 225 $ 218
Contingent rentals 2 10 2
Sublease rental income (11) (12) (12)
----- ----- -----
Net rental expense $ 206 $ 223 $ 208
===== ===== =====
</TABLE>
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 18 Stockholders' Equity
Detail of ARCO's capital stock as of December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
$3.00 Cumulative convertible preference stock, par $1:
Shares authorized 78,089 78,089
Shares issued and outstanding 60,759 66,376
Aggregate value in liquidation - (thousands) $4,861 $5,310
$2.80 Cumulative convertible preference stock, par $1:
Shares authorized 833,776 833,776
Shares issued and outstanding 673,855 731,055
Aggregate value in liquidation - (thousands) $47,170 $51,174
Common stock, par $2.50:
Shares authorized 600,000,000 600,000,000
Shares issued 161,086,174 160,879,765
Shares outstanding 161,082,043 160,831,190
Shares held in treasury 4,131 48,575
</TABLE>
Changes in preference stocks outstanding in 1996, 1995 and 1994 were due to
conversions. The $3.00 cumulative convertible preference stock is convertible
into 6.8 shares of common stock. The $2.80 cumulative convertible preference
stock is convertible into 2.4 shares of common stock. Common stock is
subordinate to the preference stocks for dividends and assets. The $3.00 and
$2.80 preference stocks may be redeemed at the option of ARCO for $82 and $70
per share, respectively.
ARCO has authorized 75,000,000 shares of preferred stock, $.01 par, of which
none were issued or outstanding at December 31, 1996.
At December 31, 1996, shares of ARCO's authorized and unissued common stock
were reserved as follows:
<TABLE>
<CAPTION>
Conversions:
<S> <C>
$3.00 Preference stock 413,161
$2.80 Preference stock 1,617,252
Stock option plans 8,153,068
Employee benefit plans 9,974,482
----------
Total 20,157,963
==========
</TABLE>
Under ARCO's incentive compensation plans, awards of ARCO's common stock may
be made to officers, outside directors and key employees.
54
<PAGE>
ARCO
Note 19 Stock Options
Options to purchase shares of ARCO's common stock have been granted to
executives, 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 vest over two years in equal installments.
Transactions during 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
--------------
<S> <C> <C>
Balance, January 1, 1994 3,162,182 $ 104.21
Granted 573,865 101.02
Exercised (75,019) 75.17
Cancelled (87,286) 106.30
--------- ---------
Balance, December 31, 1994 3,573,742 104.26
--------- ---------
Granted 486,598 109.00
Exercised (221,086) 87.31
Cancelled (1,118) 104.22
--------- ---------
Balance, December 31, 1995 3,838,136 105.84
--------- ---------
Granted 550,917 113.21
Exercised (555,163) 92.29
Cancelled (17,179) 116.95
--------- ---------
Balance, December 31, 1996 3,816,711 $ 108.82
========= =========
</TABLE>
A summary of ARCO's fixed stock options as of December 31, 1996 and 1995, was
as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Shares available for option 4,336,357 3,583,446
Options exercisable 3,033,988 3,074,876
Weighted average exercise price of options exercisable $ 108.02 $ 105.77
Weighted average fair value of options granted during
the year $ 51.80 $ 57.26
</TABLE>
At December 31, 1996, exercise prices for options outstanding ranged from
$79.00 to $126.56 and the weighted average remaining contractual life was 5.87
years.
ARCO applies APB 25 in accounting for its fixed stock options. Accordingly, no
compensation cost has been recognized in the financial statements for options
granted. The pro forma impact to both net income and earnings per share from
calculating compensation expense consistent with the fair value method under
SFAS No. 123 was not material for the years ended December 31, 1996 and 1995.
Note 20 Lyondell Petrochemical Company
Lyondell is engaged in the manufacture and marketing of basic commodity
chemicals, including ethylene, propylene, methanol and polymers, and, through
its approximately 90% interest in LYONDELL-CITGO Refining Company Ltd., the
refining and marketing of petroleum products, primarily in the southwestern
United States.
At December 31, 1996, ARCO owned 49.9% of Lyondell common stock outstanding;
ARCO accounts for this investment on the equity method. The market value of
ARCO's shares of Lyondell common stock, based on the closing quoted market price
at December 31, 1996, was $883 million.
Summarized financial information for Lyondell was as follows:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Year ended December 31:
Revenues(a) $5,052 $4,936 $3,857
Operating income 278 706 424
Income before income taxes 196 618 349
Net income 126 389 223
ARCO's equity in net income of Lyondell $ 53 $ 194 $ 111
Cash dividends received from Lyondell $ 36 $ 36 $ 36
At December 31:
Current assets $ 831 $ 678 $ 697
Noncurrent assets 2,445 1,928 966
Current liabilities 771 750 433
Long-term debt 1,194 807 707
Other liabilities 271 210 192
Minority interest 609 459 268
Stockholders' equity(b) 431 380 63
</TABLE>
(a) Includes $318, $325 and $314 of sales to ARCO in 1996, 1995 and 1994,
respectively, which approximated 4%, 5% and 5% of ARCO's purchases in those
years.
(b) ARCO's investment in Lyondell comprises 49.9% of Lyondell's stockholders'
equity plus $72 of dividends received in excess of basis of investment.
Note 21 Foreign Currency Transactions
Foreign currency transactions resulted in net losses of $17 million, $15
million and $12 million in 1996, 1995 and 1994, respectively.
55
<PAGE>
ARCO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 Supplemental Cash Flow Information
The following is supplemental cash flow information for the years ended
December 31:
<TABLE>
<CAPTION>
Millions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Short-term investments:
Gross sales and maturities $ 3,335 $ 4,216 $ 5,952
Gross purchases (2,557) (2,716) (6,720)
----- ----- -----
Net cash provided (used) $ 778 $ 1,500 $ (768)
===== ===== =====
Notes payable:
Gross proceeds $ 5,806 $ 8,058 $ 9,516
Gross repayments (5,885) (8,351) (9,585)
----- ----- -----
Net cash used $ (79) $ (293) $ (69)
===== ===== =====
Gross noncash provisions charged to income $ 295 $ 444 $ 888
Cash payments of previously accrued items (515) (627) (800)
----- ----- -----
Cash payments (greater) less than noncash provisions $ (220) $ (183) $ 88
===== ===== =====
</TABLE>
Note 23 Unaudited Quarterly Results
<TABLE>
<CAPTION>
Millions, except per share amounts 1996 1995
---- ----
<S> <C> <C>
Sales and other operating revenues
Quarter ended:
March 31 $ 4,156 $ 3,894
June 30 4,559 4,046
September 30 4,748 3,872
December 31 5,129 4,007
------ ------
Total $18,592 $15,819
====== ======
Income before income taxes and minority interest
Quarter ended:
March 31 $ 620 $ 534
June 30 720 649
September 30 791 511
December 31 578 479
----- -----
Total $ 2,709 $ 2,173
===== =====
Net income
Quarter ended:
March 31 $ 370 $ 322
June 30 434 391
September 30 479 315
December 31 380 348
----- -----
Total $ 1,663 $ 1,376
===== =====
Earned per share
Quarter ended:
March 31 $ 2.26 $ 1.97
June 30 $ 2.66 $ 2.39
September 30 $ 2.94 $ 1.93
December 31 $ 2.32 $ 2.13
</TABLE>
56
<PAGE>
ARCO
SUPPLEMENTAL INFORMATION (UNAUDITED)
Oil and Gas Producing Activities
The Securities and Exchange Commission (SEC) defines proved oil and gas
reserves as those estimated quantities of crude oil, natural gas, and natural
gas liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
ARCO reports reserve estimates to various federal government agencies and
commissions. These estimates may cover various regions of crude oil and natural
gas classifications within the United States and may be subject to mandated
definitions. There have been no reports of total ARCO reserve estimates
furnished to federal government agencies or commissions which vary from those
reported to the SEC since the beginning of the last fiscal year.
Estimated quantities of ARCO's proved oil and gas reserves were as follows:
<TABLE>
<CAPTION>
Petroleum Liquids Natural Gas
(million barrels) (billion cubic feet)
----------------- --------------------
U.S. Int'l U.S. Int'l
----- ----- ----- -----
<S> <C> <C> <C> <C>
January 1, 1994:
Proved reserves 2,259 206 4,725 3,280
Proved developed reserves 1,804 127 4,190 1,120
December 31, 1994:
Proved reserves 2,246 222 4,615 3,493
Proved developed reserves 1,915 87 4,301 1,142
December 31, 1995:
Proved reserves 2,163 206 4,666 3,683
Proved developed reserves 1,896 92 4,294 1,806
December 31, 1996:
Proved reserves 2,112 409 4,776 3,347
Proved developed reserves 1,828 150 4,310 1,780
</TABLE>
Included in ARCO's reserves are 100% of the reserves of Vastar, a consolidated
subsidiary of which ARCO owned 82.3% at December 31, 1996. Vastar's reserves
comprised 5% and 47% of U.S. petroleum liquids and natural gas reserves,
respectively, at December 31, 1996.
ARCO owns shares of common stock of LUKOIL, a Russian oil company,
representing approximately 8% of LUKOIL's total equity. As of January 1, 1996,
LUKOIL reported western Siberia reserves of approximately 7.9 billion barrels of
oil and 1.5 trillion cubic feet of natural gas. Reserve information subsequent
to that date is not presently available. Eight percent of those reserves would
be 634 million barrels and 122 billion cubic feet, respectively. LUKOIL reserves
are not included in ARCO's totals.
ARCO has no long-term supply contracts to purchase from foreign governments or
any interest in equity affiliates involved in oil and gas producing activities.
The changes in proved reserves for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Petroleum Liquids Natural Gas
(million barrels) (billion cubic feet)
----------------- --------------------
U.S. Int'l U.S. Int'l
---- ----- ---- -----
<S> <C> <C> <C> <C>
Reserves at
January 1, 1994 2,259 206 4,725 3,280
Revisions of estimates 85 (19) 94 31
Improved recovery 90 - 13 -
Purchases of minerals-in-place 11 - 13 82
Extensions and discoveries 21 75 232 291
Production (216) (26) (350) (187)
Consumed in production - - (78) (4)
Sales of minerals-in-place (4) (14) (34) -
----- ---- ----- -----
Reserves at
December 31, 1994 2,246 222 4,615 3,493
----- ---- ----- -----
Revisions of estimates 76 2 184 7
Improved recovery 15 - 8 -
Purchases of minerals-in-place 16 1 78 89
Extensions and discoveries 33 5 252 302
Production (213) (24) (365) (203)
Consumed in production - - (93) (5)
Sales of minerals-in-place (10) - (13) -
----- ---- ----- -----
Reserves at
December 31, 1995 2,163 206 4,666 3,683
----- ---- ----- -----
Revisions of estimates 60 4 103 (94)
Improved recovery 5 - 14 -
Purchases of minerals-in-place 16 218 114 -
Extensions and discoveries 76 5 343 30
Production (205) (24) (382) (267)
Consumed in production (2) - (78) (5)
Sales of minerals-in-place (1) - (4) -
----- ---- ----- -----
Reserves at
December 31, 1996 2,112 409 4,776 3,347
===== ==== ===== =====
</TABLE>
Estimates of petroleum reserves have been made by ARCO engineers. These
estimates include reserves in which ARCO holds an economic interest under
production-sharing and other types of operating agreements with foreign
governments. These estimates do not include probable or possible reserves.
Natural gas liquids comprise 14% of petroleum liquid proved reserves.
Significant changes in 1996 related to a production-sharing agreement signed
with the Algerian national oil company and the discovery of the Alpine field in
Alaska.
57
<PAGE>
ARCO
The sale of natural gas from the North Slope of Alaska, other than that used
in providing fuel in North Slope operations or sold to others on the North
Slope, is dependent upon construction of a natural gas transportation system or
another marketing alternative. Such gas is not included in ARCO's reserves.
ARCO continues to study various options for marketing North Slope gas.
However, ARCO believes that market conditions continue to make implementation of
any large gas sales projects unlikely in the near future.
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and amortization
as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1996
---- ----
Proved Unproved
Properties Properties
----------------- -------------
Millions U.S. Int'l U.S. Int'l
------- ------- ---- -----
<S> <C> <C> <C> <C>
Gross $15,004 $5,245 $257 $297
Accumulated depreciation,
depletion and amortization 9,875 2,638 49 30
------- ------ ---- ----
Net $ 5,129 $2,607 $208 $267
======= ====== ==== ====
<CAPTION>
1995 1995
---- ----
Proved Unproved
Properties Properties
----------------- -------------
Millions U.S. Int'l U.S. Int'l
------- ------- ---- -----
<S> <C> <C> <C> <C>
Gross $14,355 $4,304 $182 $236
Accumulated depreciation,
depletion and amortization 9,215 2,285 42 17
------- ------ ---- ----
Net $ 5,140 $2,019 $140 $219
======= ====== ==== ====
<CAPTION>
1994 1994
---- ----
Proved Unproved
Properties Properties
----------------- -------------
Millions U.S. Int'l U.S. Int'l
------- ------- ---- -----
<S> <C> <C> <C> <C>
Gross $14,353 $3,998 $510 $231
Accumulated depreciation,
depletion and amortization 8,963 2,100 328 8
------- ------ ---- ----
Net $ 5,390 $1,898 $182 $223
======= ====== ==== ====
</TABLE>
Costs, both capitalized and expensed, incurred in oil and gas producing
activities during the three years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
---- ----- ----- ---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition
costs:
Proved properties $ 82 $ 275 $357 $ 56 $ 34 $ 90 $ - $ 1 $ 1
Unproved properties 98 11 109 24 15 39 38 23 61
Exploration costs 277 213 490 212 309 521 180 237 417
Development costs 481 482 963 389 328 717 363 303 666
</TABLE>
Results of operations from oil and gas producing activities (including
operating overhead) for the three years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- ------------------------- -------------------------
Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
----- ------ ------ ----- ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales $1,892 $1,140 $3,032 $1,460 $920 $2,380 $1,421 $ 837 $2,258
Transfers 2,199 - 2,199 1,679 - 1,679 1,456 - 1,456
Other 47 45 92 83 44 127 74 43 117
------ ------ ------ ------ ---- ------ ------ ----- ------
4,138 1,185 5,323 3,222 964 4,186 2,951 880 3,831
Production
costs 1,044 284 1,328 1,021 232 1,253 1,166 198 1,364
Exploration
expenses 238 175 413 212 311 523 277 178 455
Depreciation,
depletion and
amortization 691 276 967 713 251 964 731 275 1,006
Other operating
expenses 277 256 533 218 201 419 251 159 410
------ ------ ------ ------ ---- ------ ------ ----- ------
1,888 194 2,082 1,058 (31) 1,027 526 70 596
Income tax
expense (628) (109) (737) (332) (7) (339) (143) (43) (186)
------ ------ ------ ------ ---- ------ ------ ----- ------
Results of
operations
from
production
activities $1,260 $ 85 $1,345 $ 726 $(38) $ 688 $ 383 $ 27 $ 410
====== ====== ====== ====== ==== ====== ====== ===== ======
</TABLE>
The difference between the above results of operations and the amounts
reported for after-tax exploration and production segment earnings in Note 5 of
Notes to Consolidated Financial Statements is primarily marketing-related
activities, minority interest adjustments, the exclusions of gains on property
sales and unusual items related to the oil and gas operations.
58
<PAGE>
ARCO
SUPPLEMENTAL INFORMATION (UNAUDITED)
The standardized measure of discounted estimated future net cash flows related
to proved oil and gas reserves at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Billions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows $48.8 $17.8 $66.6 $32.5 $12.1 $44.6 $30.6 $11.3 $41.9
Future development and
production costs 14.2 7.3 21.5 13.2 4.4 17.6 13.9 4.3 18.2
Future income tax
expense 12.0 3.2 15.2 6.5 2.5 9.0 5.4 2.3 7.7
----- ---- ----- ----- ---- ----- ----- ---- -----
Future net cash flows 22.6 7.3 29.9 12.8 5.2 18.0 11.3 4.7 16.0
10% annual discount 10.3 3.6 13.9 5.7 2.4 8.1 4.9 2.2 7.1
----- ---- ----- ----- ---- ----- ----- ---- -----
Standardized measure
of discounted future
net cash flows $12.3 $ 3.7 $16.0 $ 7.1 $ 2.8 $ 9.9 $ 6.4 $ 2.5 $ 8.9
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Primary changes in the standardized measure of discounted estimated future net
cash flows for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Billions 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales and transfers of oil and gas, net of
production costs $(3.9) $(2.9) $(2.3)
Extensions, discoveries and improved recovery,
less related costs 1.2 .7 1.0
Revisions of estimates of reserves proved in
prior years:
Quantity estimates .5 .4 .2
Net changes in price and production costs 8.4 1.8 4.6
Purchases/sales 1.0 .1 .1
Other (.4) (.4) (.2)
Accretion of discount 1.5 1.3 .8
Development costs incurred during the period 1.0 .7 .7
Net change in income taxes (3.2) (.7) (1.6)
----- ----- -----
Net change $ 6.1 $ 1.0 $ 3.3
===== ===== =====
</TABLE>
Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves. Future price changes are
considered only to the extent provided by contractual arrangements. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates (adjusted for
permanent differences and tax credits) to estimated future pretax net cash flows
related to proved oil and gas reserves, less the tax basis of the properties
involved.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Estimates of future net
cash flows presented do not represent management's assessment of future
profitability or future cash flows to ARCO. Management's investment and
operating decisions are based on reserve estimates that include proved reserves
prescribed by the SEC as well as probable reserves, and on different price and
cost assumptions from those used here.
It should be recognized that applying current costs and prices and a 10%
standard discount rate does not convey absolute value. The discounted amounts
arrived at are only one measure of the value of proved reserves.
Coal Operations
Supplemental operating statistics for the coal operations of ARCO for the
three years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Coal shipments - thousand tons:
U.S. 51,615 45,853 38,322
International 10,851 11,772 11,235
------ ------ ------
Total 62,466 57,625 49,557
====== ====== ======
Coal reserves - million tons recoverable:
U.S. 1,471 1,265 1,279
International 198 216 227
------ ------ ------
Total 1,669 1,481 1,506
====== ====== ======
Average market price per ton:
U.S. $ 7.58 $ 8.38 $ 8.52
International $33.37 $32.09 $29.90
Composite price $12.06 $13.22 $13.37
</TABLE>
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the Company is included in Part
I. For the other information called for by Items 10, 11, 12 and 13, reference
is made to the Registrant's definitive proxy statement for its Annual Meeting
of Stockholders, to be held on May 5, 1997, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996,
and which is incorporated herein by reference, except for the material
included under the captions "Committee Report on Executive Compensation" and
"Performance Graph."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1 and 2. Financial Statements and Financial Statement Schedules: These
documents are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule.
3. Exhibits:
3.1 Restated Certificate of Incorporation of Atlantic Richfield
Company ("ARCO") as of June 27, 1994, filed with the Securi-
ties and Exchange Commission (the "Commission") as Exhibit 3
to ARCO's report on Form 10-Q for the quarterly period ended
June 30, 1994, under File No. 1-1196 and incorporated herein
by reference.
3.2 By-Laws of ARCO as amended through January 23, 1989, filed
with the Commission as Exhibit 3.2 to ARCO's report on Form
10-K for the year 1993, under File No. 1-1196 and incorporated
herein by reference.
4.1 Rights Agreement dated as of July 24, 1995 between ARCO and
First Chicago Trust Company of New York, as Rights Agent,
filed with the Commission as Exhibit 4 to ARCO's report on
Form 10-Q for the quarterly period ended June 30, 1995, under
File No. 1-1196 and incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on
Form 10-Q for the quarterly period ended June 30, 1985, under
File No. 1-1196 and incorporated herein by reference.
4.3
Indenture, dated as of January 1, 1992, between ARCO and The
Bank of New York, filed with the Commission on January 6, 1992
as Exhibit 4.3 to ARCO's Registration Statement on Form S-3
(No. 33-44925) and incorporated herein by reference.
60
<PAGE>
4.4 Instruments defining the rights of holders of long-term debt
which is not registered under the Securities Exchange Act of
1934 are not filed because the total amount of securities au-
thorized under any such instrument does not exceed 10% of the
consolidated total assets of the Company. The Company agrees
to furnish a copy of any such instrument to the Commission
upon request.
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement
Plan, as adopted by the Board of Directors of ARCO on March
26, 1990 and effective as of October 1, 1990, filed with the
Commission as Exhibit 10.2 to ARCO's report on Form 10-K for
the year 1990, under File No. 1-1196 and incorporated herein
by reference.
10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplemen-
tary Executive Retirement Plan, effective as of March 22,
1993, filed with the Commission as Exhibit 10 to ARCO's report
on Form 10-Q for the quarterly period ended June 30, 1993, un-
der File No. 1-1196 and incorporated herein by reference.
10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplemen-
tary Executive Retirement Plan, effective as of February 28,
1994, filed with the Commission as Exhibit 10.1(c) to ARCO's
report on Form 10-K for the year 1995, under File No. 1-1196
and incorporated herein by reference.
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted
by the Board of Directors of the Company on March 26, 1990 and
effective as of October 1, 1990, filed with the Commission as
Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990,
under File No. 1-1196 and incorporated herein by reference.
10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of July 27, 1992, filed with the
Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Deferral Plan, effective as of February 28, 1994, filed with
the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-
K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.3* Atlantic Richfield Executive Medical Insurance Plan-Summary
Plan Description, effective as of January 1, 1994, filed with
the Commission as Exhibit 10.3 to ARCO's report on Form 10-K
for the year 1993, under File No. 1-1196, and incorporated
herein by reference.
10.4(a)* Atlantic Richfield Company Executive Supplementary Savings
Plan II, as amended, restated and effective as of July 1,
1988, filed with the Commission as Exhibit 10.6(b) to ARCO's
report on Form 10-K for the year 1988, under File No. 1-1196
and incorporated herein by reference.
10.4(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
January 1, 1989, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1989, under File
No. 1-1196 and incorporated herein by reference.
10.4(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
July 1, 1994, filed with the Commission as Exhibit 10.4(c) to
ARCO's report on Form 10-K for the year 1994, under File No.
1-1196 and incorporated herein by reference.
10.4(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
August 5, 1996, filed herewith.
10.5* Atlantic Richfield Company Policy on Financial Counseling and
Individual Income Tax Service, as revised and effective Janu-
ary 1, 1997, filed herewith.
10.6(a)* Annual Incentive Plan, as adopted by the Board of Directors of
ARCO on November 26, 1984, and effective as of that date, as
amended through February 28, 1994, filed with the Commission
as Exhibit 10.6 to ARCO's report on Form 10-K for the year
1994, under File No. 1-1196 and incorporated herein by refer-
ence.
61
<PAGE>
10.6(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of
January 1, 1995, filed with the Commission as Exhibit 10.6(b)
to ARCO's report on Form 10-K for the year 1995, under File
No. 1-1196 and incorporated herein by reference.
10.7* Atlantic Richfield Company's 1985 Executive Long-Term Incen-
tive Plan, as adopted by the Board of Directors of ARCO on May
28, 1985, and effective as of that date, as amended through
February 28, 1994, filed with the Commission as Exhibit 10.7
to ARCO's report on Form 10-K for the year 1994, under File
No. 1-1196 and incorporated herein by reference. The proposed
amendments to the 1985 Executive Long-Term Incentive Plan will
be included in the appendix to the Company's definitive proxy
statement for its Annual Meeting of Stockholders to be held on
May 5, 1997, which will be filed with the Commission within
120 days after December 31, 1996, and is incorporated herein
by reference.
10.8* Atlantic Richfield Company Executive Life Insurance Plan--Sum-
mary Plan Description, effective as of January 1, 1994, filed
with the Commission as Exhibit 10.8 to ARCO's report on Form
10-K for the year 1993, under File No. 1-1196 and incorporated
herein by reference.
10.9(a)* Atlantic Richfield Company Executive Long-Term Disability
Plan--Summary Plan Description, effective as of January 1,
1994, filed with the Commission as Exhibit 10.9 to ARCO's re-
port on Form 10-K for the year 1993, under File No. 1-1196 and
incorporated herein by reference.
10.9(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Long-Term Disability Plan, effective as of February 28, 1994,
filed with the Commission as Exhibit 10.9(b) to ARCO's report
on Form 10-K for the year 1995, under File No. 1-1196 and in-
corporated herein by reference.
10.10 Form of Indemnity Agreement adopted by the Board of Directors
of ARCO on January 26, 1987 and executed in February 1987 by
ARCO and each of its directors and officers, included in Ex-
hibit A to the 1987 Proxy Statement, filed with the Commission
under File No. 1-1196 and incorporated herein by reference.
10.11(a)* Stock Option Plan for Outside Directors effective as of Decem-
ber 17, 1990, filed with the Commission as Exhibit 10.14 to
ARCO's report on Form 10-K for the year 1990, under File No.
1-1196 and incorporated herein by reference.
10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside
Directors, effective as of June 22, 1992, filed with the
Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K
for the year 1992, under File No. 1-1196 and incorporated
herein by reference.
10.12(a)* Deferral Plan for Outside Directors, effective as of October
1, 1990, filed with the Commission as Exhibit 10.13(a) to
ARCO's report on Form 10-K for the year 1995, under File No.
1-1196 and incorporated herein by reference.
10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors,
effective as of July 27, 1992, filed with the Commission as
Exhibit 10.13(b) to ARCO's report on Form 10-K for the year
1995, under File No. 1-1196 and incorporated herein by
reference.
10.13* Special Incentive Plan, as adopted by the Board of Directors
of ARCO on February 28, 1994, and as effective on that date,
is included in Appendix C to the Company's 1994 Proxy
Statement filed with the Commission under File No. 1-1196 and
incorporated herein by reference.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.
- --------
* Management compensatory plans filed as exhibits hereto pursuant to Item
14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K:
No Current Reports on Form 8-K were filed during the quarter ended December
31, 1996, and thereafter through February 24, 1997.
62
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Atlantic Richfield Company: Registration Statement on Form S-8
(No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Post-
Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-
21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8
(No. 33-23639), Post-Effective Amendment No. 4 to Registration Statement on
Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration
Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to
Registration Statement on Form S-8 (No. 33-23640), and Post-Effective
Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), of our
report dated February 12, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Atlantic Richfield Company as
of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996, which report is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 25, 1997
63
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ATLANTIC RICHFIELD COMPANY
By /s/ Mike R. Bowlin
___________________________________
Mike R. Bowlin
Chairman of the Board,
Chief Executive Officer
and President
FEBRUARY 24, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mike R. Bowlin Chairman of the Board, February 24, 1997
____________________________________ Chief Executive Officer and
Mike R. Bowlin President
Principal executive officer
/s/ Anthony G. Fernandes Executive Vice President and February 24, 1997
____________________________________ Director
Anthony G. Fernandes
/s/ Marie L. Knowles Executive Vice President, February 24, 1997
____________________________________ Chief Financial Officer and
Marie L. Knowles Director
Principal financial officer
/s/ William E. Wade, Jr. Executive Vice President and February 24, 1997
____________________________________ Director
William E. Wade, Jr.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Frank D. Boren Director February 24, 1997
____________________________________
Frank D. Boren
/s/ Lodwrick M. Cook Director February 24, 1997
____________________________________
Lodwrick M. Cook
/s/ Richard H. Deihl Director February 24, 1997
____________________________________
Richard H. Deihl
/s/ John Gavin Director February 24, 1997
____________________________________
John Gavin
Director February , 1997
____________________________________
Hanna H. Gray
Director February , 1997
____________________________________
Philip M. Hawley
/s/ Kent Kresa Director February 24, 1997
____________________________________
Kent Kresa
/s/ David T. McLaughlin Director February 24, 1997
____________________________________
David T. McLaughlin
/s/ John B. Slaughter Director February 24, 1997
____________________________________
John B. Slaughter
/s/ Henry Wendt Director February 24, 1997
____________________________________
Henry Wendt
/s/ Allan L. Comstock Vice President and February 24, 1997
____________________________________ Controller
Allan L. Comstock
Principal accounting officer
</TABLE>
65
<PAGE>
SCHEDULE II
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(COLUMN A) (COLUMN B) (COLUMN C) (COLUMN D) (COLUMN E)
- ------------------------------------------------------------------------------
ADDITIONS
----------------
BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE AT
BEGINNING TO TO OTHER FROM CLOSE OF
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES PERIOD
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR 1996
Amounts deducted from
applicable assets:
Accounts receivable....... $ 16 4 -- -- $ 20
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 882 75 -- 7 950
Reduction in force........ 75 -- -- 75 --
Insurance ................ 201 15 -- 47 169
Environmental remediation. 658 49 -- 130 577
Other..................... 201 31 -- 11 221
YEAR 1995
Amounts deducted from
applicable assets:
Accounts receivable....... $ 15 5 -- 4(a) $ 16
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Other investments and
long-term receivables.... 50 -- -- 50 --
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 848 65 -- 31 882
Reduction in force........ 177 -- -- 102 75
Insurance ................ 202 47 -- 48 201
Environmental remediation. 670 101 -- 113 658
Other..................... 249 15 -- 63 201
YEAR 1994
Amounts deducted from
applicable assets:
Accounts receivable....... $ 14 2 -- 1(a) $ 15
Affiliated companies
accounted for on the
equity method............ 8 -- -- -- 8
Other investments and
long-term receivables.... 50 -- -- -- 50
Reserves included in other
deferred liabilities and
credits and other current
liabilities:
Dismantlement, restoration
and reclamation.......... 788 87 -- 27 848
Reduction in force........ 91 179 -- 93 177
Insurance ................ 185 56 -- 39 202
Environmental remediation. 648 138 -- 116 670
Other..................... 326 132 -- 209 249
</TABLE>
- --------
(a) Write-off for uncollectible accounts, net of recoveries.
66
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
3.1 Restated Certificate of Incorporation of Atlantic Richfield Company
("ARCO") as of June 27, 1994, filed with the Securities and Exchange
Commission (the "Commission") as Exhibit 3 to ARCO's report on Form
10-Q for the quarterly period ended June 30, 1994, under File No. 1-
1196 and incorporated herein by reference.
3.2 By-Laws of ARCO as amended through January 23, 1989, filed with the
Commission as Exhibit 3.2 to ARCO's report on Form 10-K for the year
1993, under File No. 1-1196 and incorporated herein by reference.
4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chi-
cago Trust Company of New York, as Rights Agent, filed with the
Commission as Exhibit 4 to ARCO's report on Form 10-Q for the
quarterly period ended June 30, 1995, under File No. 1-1196 and
incorporated herein by reference.
4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase
Manhattan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on Form
10-Q for the quarterly period ended June 30, 1985, under File No. 1-
1196 and incorporated herein by reference.
4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of
New York, filed with the Commission on January 6, 1992 as Exhibit 4.3
to ARCO's Registration Statement on Form S-3 (No. 33-44925) and incor-
porated herein by reference.
4.4 Instruments defining the rights of holders of long-term debt which is
not registered under the Securities Exchange Act of 1934 are not
filed because the total amount of securities authorized under any such
instrument does not exceed 10% of the consolidated total assets of
the Company. The Company agrees to furnish a copy of any such
instrument to the Commission upon request.
10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as
adopted by the Board of Directors of ARCO on March 26, 1990 and effec-
tive as of October 1, 1990, filed with the Commission as Exhibit 10.2
to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196
and incorporated herein by reference.
10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplementary Execu-
tive Retirement Plan, effective as of March 22, 1993, filed with the
Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quar-
terly period ended June 30, 1993, under File No. 1-1196 and incorpo-
rated herein by reference.
10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplementary
Executive Retirement Plan, effective as of February 28, 1994, filed
with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K
for the year 1995, under File No. 1-1196 and incorporated herein by
reference.
10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the
Board of Directors of the Company on March 26, 1990 and effective as
of October 1, 1990, filed with the Commission as Exhibit 10.3 to
ARCO's report on Form 10-K for the year 1990, under File No. 1-1196
and incorporated herein by reference.
10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of July 27, 1992, filed with the Commission as Ex-
hibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under
File No. 1-1196 and incorporated herein by reference.
10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral
Plan, effective as of February 28, 1994, filed with the Commission as
Exhibit 10.2(c) to ARCO's report on Form 10-K for the year 1995, under
File No. 1-1196 and incorporated herein by reference.
10.3* Atlantic Richfield Executive Medical Insurance Plan-Summary Plan De-
scription, effective as of January 1, 1994, filed with the Commission
as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1993, under
File No. 1-1196, and incorporated herein by reference.
<PAGE>
EXHIBIT DESCRIPTION
10.4(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II,
as amended, restated and effective as of July 1, 1988, filed with
the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for
the year 1988, under File No. 1-1196 and incorporated herein by
reference.
10.4(b)* Amendment No. 1 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
January 1, 1989, filed with the Commission as Exhibit 10.6(b) to
ARCO's report on Form 10-K for the year 1989, under File No. 1-1196
and incorporated herein by reference.
10.4(c)* Amendment No. 2 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of July
1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's
report on Form 10-K for the year 1994, under File No. 1-1196 and
incorporated herein by reference.
10.4(d)* Amendment No. 3 to the Atlantic Richfield Company Executive
Supplementary Savings Plan II, as amended and effective as of
August 5, 1996, filed herewith.
10.5* Atlantic Richfield Company Policy on Financial Counseling and
Individual Income Tax Service, as revised and effective January 1,
1997, filed herewith.
10.6(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO
on November 26, 1984, and effective as of that date, as amended
through February 28, 1994, filed with the Commission as Exhibit 10.6
to ARCO's report on Form 10-K for the year 1994, under File No. 1-
1196 and incorporated herein by reference.
10.6(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January
1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's
report on Form 10-K for the year 1995, under File No. 1-1196 and
incorporated herein by reference.
10.7* Atlantic Richfield Company's 1985 Executive Long-Term Incentive Plan,
as adopted by the Board of Directors of ARCO on May 28, 1985, and ef-
fective as of that date, as amended through February 28, 1994, filed
with the Commission as Exhibit 10.7 to ARCO's report on Form 10-K
for the year 1994, under File No. 1-1196 and incorporated herein by
reference. The proposed amendments to the 1985 Executive Long-Term
Incentive Plan will be included in the appendix to the Company's
definitive proxy statement for its Annual Meeting of Stockholders to
be held on May 5, 1997, which will be filed with the Commission
within 120 days after December 31, 1996, and is incorporated herein
by reference.
10.8* Atlantic Richfield Company Executive Life Insurance Plan--Summary
Plan Description, effective as of January 1, 1994, filed with the
Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the
year 1993, under File No. 1-1196 and incorporated herein by
reference.
10.9(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--
Summary Plan Description, effective as of January 1, 1994, filed
with the Commission as Exhibit 10.9 to ARCO's report on Form 10-K
for the year 1993, under File No. 1-1196 and incorporated herein by
reference.
10.9(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term
Disability Plan, effective as of February 28, 1994, filed with the
Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the
year 1995, under File No. 1-1196 and incorporated herein by
reference.
10.10 Form of Indemnity Agreement adopted by the Board of Directors of ARCO
on January 26, 1987 and executed in February 1987 by ARCO and each
of its directors and officers, included in Exhibit A to the 1987
Proxy Statement, filed with the Commission under File No. 1-1196 and
incorporated herein by reference.
10.11(a)* Stock Option Plan for Outside Directors effective as of December 17,
1990, filed with the Commission as Exhibit 10.14 to ARCO's report on
Form 10-K for the year 1990, under File No. 1-1196 and incorporated
herein by reference.
10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors,
effective as of June 22, 1992, filed with the Commission as Exhibit
10.13(b) to ARCO's report on Form 10-K for the year 1992, under File
No. 1-1196 and incorporated herein by reference.
<PAGE>
EXHIBIT DESCRIPTION
10.12(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990,
filed with the Commission as Exhibit 10.13(a) to ARCO's report on
Form 10-K for the year 1995, under File No. 1-1196 and incorporated
herein by reference.
10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective
as of July 27, 1992, filed with the Commission as Exhibit 10.13(b)
to ARCO's report on Form 10-K for the year 1995, under File No. 1-
1196 and incorporated herein by reference.
10.13* Special Incentive Plan, as adopted by the Board of Directors of ARCO
on February 28, 1994, and as effective on that date, is included in
Appendix C to the Company's 1994 Proxy Statement filed with the Com-
mission under File No. 1-1196 and incorporated herein by reference.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
- -------
* Management compensatory plans filed as exhibits hereto pursuant to Item
14(c) of Form 10-K.
<PAGE>
EXHIBIT 10.4(d)
AMENDMENT NO. 3
TO
ATLANTIC RICHFIELD COMPANY
EXECUTIVE SUPPLEMENTARY SAVINGS PLAN II
__________________________
Pursuant to the resolutions adopted by the Board of Directors on March 25,
1996, the Atlantic Richfield Company Executive Supplementary Savings Plan II
(the "Plan") is amended effective as of August 5, 1996.
Section 6 of the Plan is amended to read as follows:
"SECTION 6. AMOUNT OF BENEFIT
6.1 The amount of an Employee's benefit for each Plan Year shall be
equal to either:
(a) With respect to an Employee who makes the maximum permissible
elective deferral under the Atlantic Richfield Capital
Accumulation Plan II during the Plan Year, an amount equal to the
maximum percentage of the amount of such Employee's Base Pay that
would have been contributed by the Company under the Atlantic
Richfield Capital Accumulation Plan II assuming that there were
no limitations on such contributions imposed by Section 415 of
the Code during the Plan Year; or
(b) With respect to an Employee who does not make the maximum
permissible elective deferral under the Atlantic Richfield
Capital Accumulation Plan II during the Plan Year, an amount
equal to the product of 1.6 times the amount of elective
deferrals made by the Employee under the Atlantic Richfield
Capital Accumulation Plan II during the Plan Year."
Executed this 24th day of July, 1996.
ATTEST: ATLANTIC RICHFIELD COMPANY
/s/ ARMINEH SIMONIAN /s/ JOHN H. KELLY
______________________ By: ___________________________
John H. Kelly
Vice President
Human Resources
<PAGE>
EXHIBIT 10.5
CONFIDENTIAL
------------
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4
A. ELIGIBILITY
-----------
This policy shall be applicable to the executives in salary grade 64E4.
B. EFFECTIVE DATE
--------------
This policy first became effective January 1, 1987. The provisions herein
reflect all modifications made through January 1, 1997, the effective date
of this current policy.
C. DEFINITIONS
-----------
Financial counseling service as used in this statement means professional
(financial, legal and tax) counseling in the broad area of estate building
and estate conservation including, but not necessarily limited to:
o Effective utilization of Company benefit programs;
o Individual capital building methods and tools;
o Income tax planning guideposts and tax shelters;
o Estate conservation and insurance planning;
o Preparation of personal wills and trust agreements;
o Cash flow, commercial banking, leverage and liquidity analysis, and
o Problem analysis and financial trade-offs.
Individual income tax service as used in this statement is specifically
limited to professional assistance in the preparation of the executive's
individual federal, state and/or local income tax returns and support of
such return upon audit.
D. COVERED SERVICES AND ALLOWANCES
-------------------------------
1. The Company will provide the following to eligible executives upon
request to the Manager, Executive Relations:
a. Information regarding the kinds of financial counseling services
provided by nationally known organizations.
b. Information regarding nationally known organizations which provide
professional assistance in the preparation of individual income tax
returns.
c. Information regarding the executive's Company benefits for use by
the selected counseling organization, including a statement of the
extent to which the Company will reimburse the executive for
services of financial and tax counseling organizations.
Page 1
<PAGE>
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4
2. The Company will reimburse eligible executives in accordance with the
following provisions for the services of the organizations they select:
a. Reimbursement for all financial counseling and individual income
tax service rendered during the initial calendar year of the
executive's participation under this policy will generally not
exceed $5,800.
b. Reimbursement for all financial counseling service and individual
income tax service during the calendar year of a participating
executive's termination will generally not exceed $5,800.
c. Reimbursement for follow-up financial counseling and individual
income tax services in any calendar year other than the initial
calendar year of participation or the calendar year immediately
preceding the executive's termination will generally not exceed
$4,200.
d. Any allowance unused in a calendar year may be carried forward to
the next calendar year for use during that period as necessary.
However, no more than the maximum allowance for a given year is
subject to carry forward, i.e., $5,800 for the initial year and
$4,200 for succeeding years.
e. If necessary, the allowance for the year following the current
year may be carried back to cover expenses in the current year
assuming the executive's expected continued eligibility. No more
than one year forward is available for carry back. If an executive
has received reimbursement under the carry back provisions of the
plan at the time of termination of employment, the Company may, at
its discretion, request reimbursement from the executive for any
such amount.
f. A one-time allowance of up to $3,000 for reimbursement of legal
services provided in preparation/updating of personal wills and
trusts is available. However, if an eligible executive relocates
to a different state, an additional allowance of up to $1,500 for
reimbursement of legal services provided in updating personal
wills and trusts to reflect the laws of the new state is
available.
g. The first year allowance of $5,800 will also be available to
change counseling organizations one time during the entire
eligibility period at the executive's discretion, not including
the provisions of f. above. This allowance would include
individual income tax service for that year.
h. If an executive terminates or dies while a participant under this
policy, an allowance of $950 will apply with respect to
individual income tax returns for the last calendar year in which
the executive was in the active service of the Company.
Page 2
<PAGE>
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E4
i. If an executive's employment with the Company ceases other than by
retirement with an immediate retirement allowance, death, or by
agreement with the Company, reimbursement will not be made for any
financial counseling or income tax services performed for the
executive after the date employment terminates.
3. Brokers' fees or promoters' fees are not reimbursable.
4. To obtain reimbursement under this policy, a participating executive
will forward the service organization's invoices with covering
memorandum to the Manager, Executive Relations. The Company's check
will be payable to the executive. The executive is responsible for
payment of the service organization's invoices.
5. Reimbursements will be grossed up in consideration of federal and state
income taxes.
6. The total reimbursement made by the Company will be reported to the
Internal Revenue Service and to other applicable tax jurisdictions as
supplemental payment of compensation. Each reimbursement will be
subject to FICA and withholding at the standard federal and state tax
rates at the time payment is made.
E. NON-ENDORSEMENT
---------------
It is the Company's policy that the decision whether or not to use
financial counseling service and/or income tax service as well as the
selection of organizations to render such services is an individual one.
Therefore, representatives of the Company will not suggest whether or not
an eligible executive should use such services, and will not encourage or
discourage use of any particular organization by an eligible executive.
By application for information outlined in "D" above, and by acceptance and
receipt thereof, any eligible executive shall release and discharge the
Company and any employee or other person who furnishes such information
from any and all liability and responsibility for loss or damage which
said applying executive may suffer as a consequence of receipt or use of
such information.
F. ADMINISTRATION
--------------
All decisions regarding this policy rest entirely with the Company and such
decisions shall be final. The Company reserves the right to modify or
terminate this policy at any time.
Effective: January 1, 1997
Page 3
<PAGE>
CONFIDENTIAL
------------
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3
A. ELIGIBILITY
-----------
This policy shall be applicable to the executives in salary grades 64E2 and
64E3.
B. EFFECTIVE DATE
--------------
This policy first became effective January 1, 1987. The provisions herein
reflect all modifications made through January 1, 1997, the effective date
of this current policy.
C. DEFINITIONS
-----------
Financial counseling service as used in this statement means professional
(financial, legal and tax) counseling in the broad area of estate building
and estate conservation including, but not necessarily limited to:
o Effective utilization of Company benefit programs;
o Individual capital building methods and tools;
o Income tax planning guideposts and tax shelters;
o Estate conservation and insurance planning;
o Preparation of personal wills and trust agreements;
o Cash flow, commercial banking, leverage and liquidity analysis, and
o Problem analysis and financial trade-offs.
Individual income tax service as used in this statement is specifically
limited to professional assistance in the preparation of the executive's
individual federal, state and/or local income tax returns and support of
such return upon audit.
D. COVERED SERVICES AND ALLOWANCES
-------------------------------
1. The Company will provide the following to eligible executives upon
request to the Manager, Executive Relations:
a. Information regarding the kinds of financial counseling services
provided by nationally known organizations.
b. Information regarding nationally known organizations which provide
professional assistance in the preparation of individual income tax
returns.
c. Information regarding the executive's Company benefits for use by
the selected counseling organization, including a statement of the
extent to which the Company will reimburse the executive for
services of financial and tax counseling organizations.
Page 1
<PAGE>
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3
2. The Company will reimburse eligible executives in accordance with the
following provisions for the services of the organizations they select:
a. Reimbursement for all financial counseling and individual income
tax service rendered during the initial calendar year of the
executive's participation under this policy will generally not
exceed $10,600.
b. Reimbursement for all financial counseling service and individual
income tax service during the calendar year of a participating
executive's termination will generally not exceed $10,600.
c. Reimbursement for follow-up financial counseling and individual
income tax services in any calendar year other than the initial
calendar year of participation or the calendar year immediately
preceding the executive's termination will generally not exceed
$6,200.
d. Any allowance unused in a calendar year may be carried forward to
the next calendar year for use during that period as necessary.
However, no more than the maximum allowance for a given year is
subject to carry forward, i.e., $10,600 for the initial year and
$6,200 for succeeding years.
e. If necessary, the allowance for the year following the current
year may be carried back to cover expenses in the current year
assuming the executive's expected continued eligibility. No more
than one year forward is available for carry back. If an executive
has received reimbursement under the carry back provisions of the
plan at the time of termination of employment, the Company may, at
its discretion, request reimbursement from the executive for any
such amount.
f. A one-time allowance of up to $3,000 for reimbursement of legal
services provided in preparation/updating of personal wills and
trusts is available. However, if an eligible executive relocates
to a different state, an additional allowance of up to $1,500 for
reimbursement of legal services provided in updating personal
wills and trusts to reflect the laws of the new state is
available.
g. The first year allowance of $10,600 will also be available to
change counseling organizations one time during the entire
eligibility period at the executive's discretion, not including
the provisions of f. above. This allowance would include
individual income tax service for that year.
h. If an executive terminates or dies while a participant under this
policy, an allowance of $1,250 will apply with respect to
individual income tax returns for the last calendar year in which
the executive was in the active service of the Company.
Page 2
<PAGE>
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3
i. If an executive's employment with the Company ceases other than by
retirement with an immediate retirement allowance, death, or by
agreement with the Company, reimbursement will not be made for any
financial counseling or income tax services performed for the
executive after the date employment terminates.
3. Brokers' fees or promoters' fees are not reimbursable.
4. To obtain reimbursement under this policy, a participating executive
will forward the service organization's invoices with covering
memorandum to the Manager, Executive Relations. The Company's check
will be payable to the executive. The executive is responsible for
payment of the service organization's invoices.
5. Reimbursements will be grossed up in consideration of federal and state
income taxes.
6. The total reimbursement made by the Company will be reported to the
Internal Revenue Service and to other applicable tax jurisdictions as
supplemental payment of compensation. Each reimbursement will be
subject to FICA and withholding at the standard federal and state tax
rates at the time payment is made.
E. NON-ENDORSEMENT
---------------
It is the Company's policy that the decision whether or not to use
financial counseling service and/or income tax service as well as the
selection of organizations to render such services is an individual one.
Therefore, representatives of the Company will not suggest whether or not
an eligible executive should use such services, and will not encourage or
discourage use of any particular organization by an eligible executive.
By application for information outlined in "D" above, and by acceptance and
receipt thereof, any eligible executive shall release and discharge the
Company and any employee or other person who furnishes such information
from any and all liability and responsibility for loss or damage which
said applying executive may suffer as a consequence of receipt or use of
such information.
F. ADMINISTRATION
--------------
All decisions regarding this policy rest entirely with the Company and such
decisions shall be final. The Company reserves the right to modify or
terminate this policy at any time.
Effective: January 1, 1997
Page 3
<PAGE>
CONFIDENTIAL
------------
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1
A. ELIGIBILITY
-----------
This policy shall be applicable to the executives in salary grades 64E0 and
64E1.
B. EFFECTIVE DATE
--------------
This policy first became effective January 1, 1987. The provisions herein
reflect all modifications made through January 1, 1997, the effective date
of this current policy.
C. DEFINITIONS
-----------
Financial counseling service as used in this statement means professional
(financial, legal and tax) counseling in the broad area of estate building
and estate conservation including, but not necessarily limited to:
o Effective utilization of Company benefit programs;
o Individual capital building methods and tools;
o Income tax planning guideposts and tax shelters;
o Estate conservation and insurance planning;
o Preparation of personal wills and trust agreements;
o Cash flow, commercial banking, leverage and liquidity analysis, and
o Problem analysis and financial trade-offs.
Individual income tax service as used in this statement is specifically
limited to professional assistance in the preparation of the executive's
individual federal, state and/or local income tax returns and support of
such return upon audit.
D. COVERED SERVICES AND ALLOWANCES
-------------------------------
1. The Company will provide the following to eligible executives upon
request to the Manager, Executive Relations:
a. Information regarding the kinds of financial counseling services
provided by nationally known organizations.
b. Information regarding nationally known organizations which provide
professional assistance in the preparation of individual income tax
returns.
c. Information regarding the executive's Company benefits for use by
the selected counseling organization, including a statement of the
extent to which the Company will reimburse the executive for
services of financial and tax counseling organizations.
Page 1
<PAGE>
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1
2. The Company will reimburse eligible executives in accordance with the
following provisions for the services of the organizations they select:
a. Reimbursement for all financial counseling and individual income
tax service rendered during the initial calendar year of the
executive's participation under this policy will generally not
exceed $12,000.
b. Reimbursement for all financial counseling service and individual
income tax service during the calendar year of a participating
executive's termination will generally not exceed $12,000.
c. Reimbursement for follow-up financial counseling and individual
income tax services in any calendar year other than the initial
calendar year of participation or the calendar year immediately
preceding the executive's termination will generally not exceed
$8,000.
d. Any allowance unused in a calendar year may be carried forward to
the next calendar year for use during that period as necessary.
However, no more than the maximum allowance for a given year is
subject to carry forward, i.e., $12,000 for the initial year and
$8,000 for succeeding years.
e. If necessary, the allowance for the year following the current
year may be carried back to cover expenses in the current year
assuming the executive's expected continued eligibility. No more
than one year forward is available for carry back. If an executive
has received reimbursement under the carry back provisions of the
plan at the time of termination of employment, the Company may, at
its discretion, request reimbursement from the executive for any
such amount.
f. A one-time allowance of up to $3,000 for reimbursement of legal
services provided in preparation/updating of personal wills and
trusts is available. However, if an eligible executive relocates
to a different state, an additional allowance of up to $1,500 for
reimbursement of legal services provided in updating personal
wills and trusts to reflect the laws of the new state is
available.
g. The first year allowance of $12,000 will also be available to
change counseling organizations one time during the entire
eligibility period at the executive's discretion, not including
the provisions of f. above. This allowance would include
individual income tax service for that year.
h. If an executive terminates or dies while a participant under this
policy, an allowance of $1,550 will apply with respect to
individual income tax returns for the last calendar year in which
the executive was in the active service of the Company.
Page 2
<PAGE>
COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX
SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1
i. If an executive's employment with the Company ceases other than by
retirement with an immediate retirement allowance, death, or by
agreement with the Company, reimbursement will not be made for any
financial counseling or income tax services performed for the
executive after the date employment terminates.
3. Brokers' fees or promoters' fees are not reimbursable.
4. To obtain reimbursement under this policy, a participating executive
will forward the service organization's invoices with covering
memorandum to the Manager, Executive Relations. The Company's check
will be payable to the executive. The executive is responsible for
payment of the service organization's invoices.
5. Reimbursements will be grossed up in consideration of federal and state
income taxes.
6. The total reimbursement made by the Company will be reported to the
Internal Revenue Service and to other applicable tax jurisdictions as
supplemental payment of compensation. Each reimbursement will be
subject to FICA and withholding at the standard federal and state tax
rates at the time payment is made.
E. NON-ENDORSEMENT
---------------
It is the Company's policy that the decision whether or not to use
financial counseling service and/or income tax service as well as the
selection of organizations to render such services is an individual one.
Therefore, representatives of the Company will not suggest whether or not
an eligible executive should use such services, and will not encourage or
discourage use of any particular organization by an eligible executive.
By application for information outlined in "D" above, and by acceptance and
receipt thereof, any eligible executive shall release and discharge the
Company and any employee or other person who furnishes such information
from any and all liability and responsibility for loss or damage which
said applying executive may suffer as a consequence of receipt or use of
such information.
F. ADMINISTRATION
--------------
All decisions regarding this policy rest entirely with the Company and such
decisions shall be final. The Company reserves the right to modify or
terminate this policy at any time.
Effective: January 1, 1997
Page 3
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE OF
VOTING
SECURITIES
OWNED BY
ORGANIZED IMMEDIATE
NAME OF COMPANY UNDER LAWS OF PARENT
--------------- ------------- -------------
<S> <C> <C>
Atlantic Richfield Company (Registrant)........... Delaware
Subsidiaries of Registrant in consolidated
financial statements, as of December 31, 1996:
ARCO Alaska, Inc................................ Delaware 100.0
ARCO Chemical Company........................... Delaware 82.7
ARCO Transportation Alaska, Inc. ............... Delaware 100.0
Vastar Resources, Inc. ......................... Delaware 82.3
</TABLE>
The subsidiaries whose names are not listed above, if considered in the
aggregate as a single subsidiary, would not constitute a significant
subsidiary.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Atlantic Richfield Company: Registration Statement on Form S-8
(No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Post-
Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-
21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8
(No. 33-23639), Post-Effective Amendment No. 4 to Registration Statement on
Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration
Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to
Registration Statement on Form S-8 (No. 33-23640), and Post-Effective
Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), of our
report dated February 12, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Atlantic Richfield Company as
of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996, which report is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,460
<SECURITIES> 784
<RECEIVABLES> 1,936
<ALLOWANCES> 0
<INVENTORY> 995
<CURRENT-ASSETS> 5,433
<PP&E> 34,738
<DEPRECIATION> 18,542
<TOTAL-ASSETS> 25,715
<CURRENT-LIABILITIES> 5,303
<BONDS> 5,593
0
1
<COMMON> 403
<OTHER-SE> 7,397
<TOTAL-LIABILITY-AND-EQUITY> 25,715
<SALES> 18,592
<TOTAL-REVENUES> 19,169
<CGS> 14,335
<TOTAL-COSTS> 14,748
<OTHER-EXPENSES> 26
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 668
<INCOME-PRETAX> 2,709
<INCOME-TAX> 941
<INCOME-CONTINUING> 1,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,663
<EPS-PRIMARY> $10.18
<EPS-DILUTED> $10.18
</TABLE>
