ARCO CHEMICAL CO, 10-K, 1996-02-29

ARCO CHEMICAL CO
10-K, 1996-02-29
INDUSTRIAL ORGANIC CHEMICALS

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[LOGO OF ARCO CHEMICAL COMPANY APPEARS HERE]

ARCO Chemical Company

ANNUAL REPORT ON FORM 10-K
1995

<PAGE>

1995

FORM 10-K

----------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]

For the fiscal year ended December 31, 1995

Commission file number 1-9678

ARCO CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 51-0104393
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3801 WEST CHESTER PIKE, NEWTOWN SQUARE, PENNSYLVANIA 19073-2387
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (610) 359-2000

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE

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. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 1, 1996, based on the closing price on the New York
Stock Exchange composite tape on that date, was $856,964,775.

Number of shares of Common Stock, $1.00 par value, outstanding at December 31,
1995: 96,488,880.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995
(incorporated by reference under Part III).
<PAGE>

TABLE OF CONTENTS

PART I
<TABLE>
<CAPTION>
PAGE
ITEM ----
<C> <S> <C>
1. and 2. Business and Properties...................................... 1
General Development of Business............................ 1
Industry Segment and Geographic Disclosure................. 1
Summary Description of Business and Products............... 1
Sales and Marketing........................................ 4
Joint Ventures and Other Arrangements...................... 4
Research and Development................................... 4
Raw Materials.............................................. 5
Competition................................................ 5
Properties and Production Facilities....................... 6
Patents, Trade Names, and Trademarks....................... 7
Environmental Matters...................................... 7
Human Resources............................................ 8
3. Legal Proceedings............................................ 8
4. Submission of Matters to a Vote of Security Holders.......... 9
---------------------------
Executive Officers of the Company............................ 10
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 12
6. Selected Financial Data...................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
8. Financial Statements......................................... 19
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
10. Directors and Executive Officers of the Registrant........... 41
11. Executive Compensation....................................... 41
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
13. Certain Relationships and Related Transactions............... 41
PART IV
14. Exhibits and Reports on Form 8-K............................. 41
</TABLE>

(i)
<PAGE>

PART I

ITEMS 1. AND 2.BUSINESS AND PROPERTIES

GENERAL DEVELOPMENT OF BUSINESS

ARCO Chemical Company (the Company) is a Delaware corporation with principal
executive offices at 3801 West Chester Pike, Newtown Square, Pennsylvania
19073-2387 (telephone no. 610-359-2000). The Company is the successor to
certain portions of the ARCO Chemical Division of Atlantic Richfield Company
(ARCO), a Delaware corporation. On June 9, 1987, ARCO transferred
substantially all the assets and liabilities of the oxygenates and
polystyrenics businesses of the then ARCO Chemical Division to the Company in
exchange for 80,000,001 shares of common stock. On October 5, 1987, the
Company completed an initial public offering of 19,550,000 shares of common
stock. As of February 1, 1996, ARCO's 80,000,001 shares represented
approximately 82.9 percent of the outstanding shares of common stock. See Item
13.

Prior to October 5, 1987, the Company and ARCO entered into a number of
agreements for the purpose of defining the ongoing relationship between them.
These agreements were developed in connection with the establishment of the
Company by ARCO, and, therefore, were not the result of arm's-length
negotiations between independent parties. For additional information relating
to certain continuing relationships between the Company and ARCO, including
potential conflicts of interest, see Item 13 and Note 3 of Notes to
Consolidated Financial Statements.

INDUSTRY SEGMENT AND GEOGRAPHIC DISCLOSURE

The Company operates in one industry segment. Reference is made to Note 4 of
Notes to Consolidated Financial Statements for disclosure of financial
information by geographic location.

SUMMARY DESCRIPTION OF BUSINESS AND PRODUCTS

The Company, including its subsidiaries, is a leading international
manufacturer and marketer of intermediate chemicals and specialty products
used in a broad range of consumer goods. The Company'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.
<PAGE>

Following is a list of certain of the Company's principal products, the
forms in which they are sold, and typical end uses.

<TABLE>
<CAPTION>
PRODUCT FORM TYPICAL USES
- ------- ---- ------------
<S> <C> <C>
Propylene oxide PO Polyether polyols (polyols), propylene
(PO) glycols, ethers, and surfactants
Polyols Combined with isocyanates, such as
TDI, for polyurethane applications
such as flexible foam for seat
cushions, bedding and carpet
underlay; and coatings, adhesives,
sealants, and elastomers
Propylene glycols (PG) Unsaturated polyester resins; food,
cosmetic, and pharmaceutical
applications; automotive coolants and
aircraft deicers
Propylene glycol ethers Coatings and paints, cleaning
(PGE) and PGE acetates compounds, solvents, and inks
Butanediol, Engineering resins, fibers, solvents,
Tetrahydrofuran (THF) and resins, coatings and polyurethanes
N-Methyl
Pyrrolidone (NMP)
Toluene diisocyanate TDI Combined with polyols to manufacture
(TDI) polyurethanes
Tertiary butyl Methyl tertiary butyl Gasoline additives to enhance octane
alcohol ether (MTBE) and reduce emissions
(TBA) and ethyl tertiary butyl
ether
(ETBE)
Gasoline-grade TBA (GTBA) Octane enhancer
Styrene monomer SM Acrylonitrile-butadiene-styrene (ABS)
(SM) resins,
polystyrene, expandable polystyrene,
rubber components, and polyester
resins
DYLITE(R) expandable Hot and cold drink cups, packaging,
polystyrene (EPS) building and roof insulation, and
flotation devices
DYLENE(R) polystyrene Disposable food service applications
DYLARK(R) engineering Automotive instrument panel structures
resin and headliners
</TABLE>

Propylene Oxide and Derivatives

Propylene oxide is a commodity chemical that the Company consumes directly
or delivers to the merchant market through processing or sales agreements for
further conversion by its customers into derivative products, including
polyols for polyurethane applications, propylene glycols and PGEs, and various
other chemical products. Sales and other operating revenues for PO and
derivatives constituted 45 percent, 48 percent, and 46 percent, respectively,
of the Company's total 1995, 1994, and 1993 sales and other operating
revenues. In the aggregate, the Company consumed approximately 54 percent of
its PO production in 1995 for production of derivatives. See Item 7 for
additional discussion.

Based on published data, worldwide demand for PO was approximately 7.8
billion pounds in 1995. Approximately 90 percent of that volume was consumed
in the manufacture of three derivative families of products: polyols, PG, and
PGE.

The largest of the derivative families is polyols, which are used in the
manufacture of polyurethanes. Within the polyurethane industry, the largest
market for polyols is in flexible foams, which are produced when polyols are
reacted with isocyanates, such as TDI. Isocyanates are not derivatives of PO.
Polyols and isocyanates are also used in coating, adhesive, sealant and
elastomer applications.

In January 1995, the Company entered into long-term agreements under which
Rhone-Poulenc supplies TDI, which the Company markets to customers. Adding TDI
to the list of products sold by the Company complements the Company's existing
line of polyols products and strengthens its position as a chemical supplier
to the polyurethanes market.

2
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Propylene glycols are principally used as an intermediate chemical to
produce unsaturated polyester resins. Propylene glycols have low toxicity and
are also used in food, cosmetic, and pharmaceutical applications and in
automotive coolants and aircraft deicers. Propylene glycol ethers and acetates
are low-toxicity, high-performance solvents. Past studies have indicated that
these materials generally have safer toxicological profiles than their
ethylene oxide-based counterparts.

Butanediol is an intermediate chemical having diverse applications in
engineering resins, elastomers, and solvents. In 1990, the Company
commercialized acquired technology that produces butanediol from allyl
alcohol, a PO derivative.

Tertiary Butyl Alcohol and Derivatives

Tertiary butyl alcohol is the major co-product of one of the Company's two
PO process technologies. The Company utilizes most of its TBA, combined with
methanol, to make MTBE, a gasoline blending component that enhances octane and
reduces emissions. The Company also has the capability of producing ETBE, an
alternative gasoline blending component. ETBE is manufactured from TBA and
ethanol and has a lower vapor pressure than MTBE or ethanol. Sales and other
operating revenues for TBA and derivatives constituted 27 percent, 30 percent,
and 35 percent, respectively, of the Company's total 1995, 1994, and 1993
sales and other operating revenues. See Item 7 for additional discussion.

Worldwide demand for MTBE in 1995 was approximately 375 thousand barrels per
day, based on published data. MTBE demand has increased as a result of the
U.S. Clean Air Act Amendments of 1990 (the Amendments), various state and
local regulations and oxygenate blending programs, and the need for
incremental octane in the U.S. and other countries. In the U.S., the
Amendments set minimum levels for oxygenates, such as MTBE, in gasoline sold
in areas not meeting specified air quality standards. The Amendments currently
affect approximately 40 percent of the U.S. gasoline market.

Styrene Monomer and Derivatives

Styrene is the major co-product of the other of the Company's two PO process
technologies. Styrene is a large-volume commodity chemical produced and traded
worldwide. Based on published data, worldwide demand in 1995 was approximately
37 billion pounds. The major markets include commodity and specialty polymer
applications, such as polystyrene, ABS, EPS and polyester resins, as well as
various rubber industry uses. Sales and other operating revenues for SM and
derivatives constituted 20 percent, 19 percent, and 16 percent, respectively,
of the Company's total 1995, 1994, and 1993 sales and other operating
revenues. The Company utilized about 12 percent of its styrene production in
1995 for the production of derivatives, principally expandable polystyrene and
specialty polymer products that are used in the packaging, insulation and
automotive industries, and a wide range of consumer goods. The balance was
sold in the U.S. merchant market, in selected export markets, or delivered
under processing agreements. See Item 7 for additional discussion.

The Company's major polystyrenics and specialty polymer products are sold
under the Company's trademarks (including DYLITE (R) EPS, DYLENE (R)
polystyrene, and DYLARK (R) engineering resin). The Company's largest volume
polystyrenics product, DYLITE(R) EPS, is a resin that is sold to foam molders
for three major applications: food service, insulation, and protective
packaging. The Company does not use chloroflourocarbons (CFCs) to make
DYLITE (R) EPS. In its various forms, EPS competes with other hydrocarbon-
based polymers and products based on natural materials.

3
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SALES AND MARKETING

In 1995, most of the Company's sales and other operating revenues were
derived from sales to, or processing agreements with, unrelated third parties.
Over the past three years, no single unrelated third-party customer, or any
related party customer, accounted for more than 10 percent of total sales and
other operating revenues in any one year.

The Company delivers products through sales agreements, processing
agreements, and spot sales. The Company purchases limited amounts of MTBE and
SM for resale to the extent that demand for these co-products exceeds the
Company's production. Production levels of co-products are based upon the
demand for PO and the market economics of the co-products.

For several years, the Company has followed the practice of entering into
multi-year PO processing or sales agreements in an effort to mitigate any
adverse impact from competitive factors and economic business cycles on demand
for the Company's PO. The Company has also entered into a number of multi-year
MTBE sales agreements and SM sales and processing agreements.

The Company's sales are made through its own marketing and sales personnel
and through distributors and independent agents. The Company maintains sales
offices or sales representation in the United States, Australia, Austria,
Brazil, Canada, China, Finland, France, Germany, Hong Kong, Indonesia, Italy,
Japan, Mexico, the Netherlands, the Philippines, Russia, Singapore, Spain,
Taiwan, Thailand, and the United Kingdom.

For information about certain data relating to foreign operations and export
sales, see Note 4 of Notes to Consolidated Financial Statements.

JOINT VENTURES AND OTHER ARRANGEMENTS

In January 1995, the Company entered into long-term TDI supply agreements
with Rhone-Poulenc. Effective January 1, 1995, the Company has been entitled
to the entire TDI output of Rhone-Poulenc's two plants in France, which have a
combined annual capacity of approximately 264 million pounds. The Company
markets the TDI principally in Europe and Asia. Adding TDI to the list of
products sold by the Company complements the Company's existing line of
polyols products and strengthens its position as a chemical supplier to the
polyurethanes market. See Note 11 of Notes to Consolidated Financial
Statements.

The world-scale PO/SM plant at the Channelview, Texas complex that was
completed in 1992 (PO/SM II) is owned by the Company together with two equity
investors as limited partners. The limited partners each take a substantial
portion of the SM output of the plant through long-term processing agreements.
The limited partners' SM offtakes are proportionate to their equity interests.
Under the terms of the limited partnership agreement, the Company sold an
additional equity interest to one of the limited partners in 1994. The Company
retains a majority equity interest in the PO/SM plant.

The Company, through an affiliate, has a 50 percent equity interest in Nihon
Oxirane Co., Ltd. (Nihon Oxirane), a joint venture with Sumitomo Chemical Co.,
Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has operated a PO/SM plant
in Chiba, Japan.

RESEARCH AND DEVELOPMENT

The Company has its principal research and development facility at Newtown
Square, Pennsylvania, technical centers in Villers Saint Paul, France and
Singapore, and technical facilities in South Charleston, West Virginia and
Monaca, Pennsylvania.

The Company's research and development expenditures for 1995, 1994, and 1993
were $79 million, $76 million, and $72 million, respectively.

4
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RAW MATERIALS

The principal hydrocarbon raw materials purchased by the Company are
propylene, butanes, ethylene, benzene and methanol. The market prices of these
raw materials historically have been related to the price of crude oil and its
principal refinery derivatives and natural gas liquids. These materials are
available in bulk quantities via pipeline or marine vessels. The Company's raw
material requirements are purchased from numerous suppliers in the United
States and Europe, with which the Company has established contractual
relationships, and in the spot market. The Company receives a portion of its
methanol requirements under a cost-based supply arrangement with a third
party. See Item 13 and Note 3 of Notes to Consolidated Financial Statements.

The Company is a large volume consumer of isobutane for chemical production.
The Company has invested in facilities, or entered into processing agreements
with unrelated third parties, to convert the widely available commodity normal
butane to isobutane. The Company is also a large consumer of oxygen for its
PO/TBA plants at Bayport, Texas; Rotterdam, the Netherlands; and Fos-sur-Mer,
France.

In order to assure adequate and reliable sources of supply at competitive
prices and rates, the Company has entered into long-term agreements and other
arrangements with suppliers of raw materials, products, industrial gas and
other utilities. See Note 11 of Notes to Consolidated Financial Statements.

COMPETITION

Competition within the Company's segment of the chemical industry is
significant and is affected by a variety of factors, including quality,
product price, reliability of supply, technical support, customer service, and
potential substitute materials. Capacity share figures for the Company and its
competitors, disclosed below, are based on completed production facilities and
include the full capacity of on-stream joint-venture facilities.

The Company's major worldwide PO competitor is Dow Chemical Company (Dow).
Dow's operations are based on chlorohydrin technology, and Dow is integrated
upstream from chlorine and propylene and downstream into a variety of PO
derivatives. Dow has announced expansions of annual PO capacity at existing
facilities of approximately 575 million pounds in 1996 and an additional 450
million pounds in the 1998-1999 time frame. In late 1994, Texaco Chemical
Company completed and brought on stream a PO/MTBE plant in Texas. Shell has
announced the construction of a PO/SM plant in Singapore, which is scheduled
for completion in 1997. In February 1996, Shell and BASF AG announced plans
for a joint venture to construct a PO/SM plant in Europe, using Shell
technology, with a target completion date in the 1999 time frame. Several
other companies have been attempting to develop commercial PO processes, and
additional PO plants may eventually be built by competitors. The Company has
commenced engineering studies to expand PO capacity at its Channelview, Texas
PO/SM plant by early 1998 and to build a new PO/SM plant at Rotterdam, the
Netherlands, by the year 2000. Both projects are subject to final Board of
Directors approval. Based on published data relating to the PO market, the
Company believes that it has 39 percent and Dow has 31 percent of the total
worldwide capacity for PO. No other producer is believed to have more than 5
percent of worldwide PO capacity.

The Company competes with many polyols producers worldwide, including Dow
and Bayer AG. Based on published data, Dow is believed to have 25 percent of
worldwide polyols capacity while the Company is believed to have 16 percent
and Bayer AG is believed to have 12 percent. No other polyols producer is
believed to have more than 8 percent of worldwide polyols capacity.

The Company has long-term supply agreements for TDI, an isocyanate, which is
reacted with polyols to produce flexible foams. The addition of TDI to the
Company's product portfolio enables the

5
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Company to compete more effectively with other suppliers to the flexible foam
market who offer both polyols and TDI to customers. In the majority of
flexible foam applications, such as furniture, bedding and automotive seating,
there is some competition for foams from substitute materials.

The Company competes with many MTBE producers worldwide; the most
significant is Ibn Zahr (a joint venture 70 percent owned by Saudi Basic
Industries Corp.). Based on published data, the Company believes that it has
12 percent of the total worldwide capacity for MTBE while Ibn Zahr is believed
to have 11 percent. No other producer is believed to have more than 6 percent
of worldwide MTBE capacity. MTBE may face increased competition from
substitute products such as ethanol.

The Company competes with several SM producers worldwide; among them are Dow
and Shell. Based on published data, Dow is believed to have 10 percent of the
total worldwide SM capacity while the Company and Shell are each believed to
have 8 percent. No other producer is believed to have more than 6 percent of
worldwide SM capacity.

There can be no assurance that the Company will not face additional
competition in the future.

PROPERTIES AND PRODUCTION FACILITIES

The Company's corporate and executive headquarters and its principal
research operations are located at Newtown Square, Pennsylvania. The Company
leases the Newtown Square property from ARCO. See Item 13. The Company's
European headquarters are located in leased facilities in Maidenhead, England,
and the Company's Asia Pacific headquarters are located in leased facilities
in Hong Kong.

Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, rail car, truck, barge, or ship
and can deliver finished products by pipeline, rail car, truck, barge,
isotank, ship, or in drums. The Company charters ships, owns and charters
barges, leases isotanks and owns and leases rail cars for the dedicated
movement of interplant products, products to customers or terminals, or raw
materials to plants, as necessary. The Company leases liquid and bulk storage
and warehouse facilities at terminals in the Americas, in Europe, and in the
Asia Pacific region. In the Rotterdam outer harbor area, the Company operates
an on-site butane storage tank, propylene spheres, pipeline connections, and a
jetty that accommodates deep-draft vessels.

In the United States, the Company produces PO, TBA, PG, and PGE at the
Bayport, Texas plants and PO, SM, MTBE, polyols, and butanediol at the
Channelview, Texas plants. The Channelview plant has the capability to produce
either MTBE or ETBE. Polyols are also produced at the Company's plants in
South Charleston and Institute, West Virginia, which are situated on leased
land. The Company's polystyrenics and specialty polymer plants are located in
Monaca, Pennsylvania and Painesville, Ohio.

In Europe, the Company produces PO, TBA, MTBE, and PG at plants located in
Rotterdam, the Netherlands and Fos-sur-Mer, France. In addition, polyols are
produced at plants located in Rieme, Belgium and Fos-sur-Mer, France, and PGE
is produced at the Rotterdam plant.

In the Asia Pacific region, the Company's PO/SM plant, owned by Nihon
Oxirane, is located in Chiba, Japan. Polyols plants are located in Kaohsiung,
Taiwan and Anyer, West Java, Indonesia. The Anyer plant is owned by P.T. ARCO
Chemical Indonesia, an Indonesian joint venture with P.T.Gema Supra Abadi in
which the Company, through a subsidiary, has a majority interest.

6
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The following table shows the Company's worldwide production capacity (in
millions of pounds per year, except where otherwise noted) for certain key
products:

<TABLE>
<CAPTION>
PRODUCT DOMESTIC FOREIGN TOTAL
------- -------- ------- ------
<S> <C> <C> <C>
PO 2,335 1,335 3,670
Polyols 720 580 1,300
PG 565 345 910
PGE 110 155 265
Butanediol 75 -- 75
MTBE--Bbls/day 30,000 28,500 58,500
SM 2,570 790 3,360
DYLITE (R)/DYLENE (R) resins 445 -- 445
DYLARK (R) resin 70 -- 70
</TABLE>

Capacities shown are the production capacities that the Company believes
could be obtained, as of December 31, 1995, based upon plant design and
subject to certain on-stream factors, product mix, and other variable factors.
Capacities shown include the full capacity of on-stream joint-venture
facilities. Plants can and have exceeded these capacities for extended periods
of time.

The Company also contracts for the manufacture of certain of its products,
from time to time, at third party facilities under supply and processing
agreements. The Company has long-term supply agreements with Rhone-Poulenc for
TDI. These agreements entitle the Company to all of the TDI output of the
supplier's two plants in France with a combined capacity of approximately 264
million pounds per year. Under a processing agreement with a producer located
in Corpus Christi, Texas, the Company has secured additional MTBE capacity
totaling 12,000 bbls/day. The production facility at Corpus Christi, Texas has
the capability for either MTBE or ETBE production.

PATENTS, TRADE NAMES, AND TRADEMARKS

ARCO has granted the Company a license to use "ARCO" in its name and the
ARCO spark design as a logo. This license by ARCO has been granted on a
royalty-free basis, which is consistent with ARCO's practice of licensing its
name and design to its subsidiaries and affiliates. The Company owns and has
licensed from ARCO various domestic and foreign trademarks.

The Company possesses a body of patented and unpatented technology and trade
secrets relating to its products, processes and the design and operation of
its plants, all of which are valuable to the Company. The Company does not
believe that the loss of any individual patent or trade secret would have a
material adverse effect on its business. The basic patents relating to the
Company's PO/SM and PO/TBA process technologies have expired.

ENVIRONMENTAL MATTERS

The Company (together with the industry in which it operates) is subject to
federal, state, local, and foreign environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters,
and the generation, handling, storage, transportation, treatment, and disposal
of waste materials. The Company and the industry are also subject to other
federal, state, local, and foreign environmental laws and regulations,
including those that require the Company to remove or mitigate the effects of
the disposal or release of certain chemical substances at various sites. It is
impossible to predict precisely what effect these laws and regulations will
have on the Company in the future. Compliance with environmental laws and
regulations could result in significant capital expenditure requirements as
well as other costs and liabilities. Management believes, based upon its past
experience and best assessment of future events, that these environmental
liabilities and costs

7
<PAGE>

will be determined and incurred over an extended period of time, allowing the
Company to fund such liabilities and costs in the ordinary course of business.
See Item 3, "Legal Proceedings" and Note 11 of Notes to Consolidated Financial
Statements.

It is the Company's policy to comply with all environmental laws and
regulations. In some cases, compliance can be achieved only by capital
expenditures. The Company's annual environmental-related capital expenditures
for 1995, 1994, and 1993 were $27 million, $29 million, and $46 million,
respectively. For the years 1996 and 1997, the Company anticipates annual
environmental-related capital expenditures to range from $35 million to $45
million. These figures do not include any environmental-related capital
expenditures associated with construction of new facilities. Environmental-
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 environmental laws and regulations. For the past three years, the
Company's charges for estimated future expenses for remediation have averaged
approximately $12 million per year while actual expenditures have averaged $5
million per year. The Company's operating expenses also include ongoing costs
of controlling or disposing of pollutants. The Company estimates that its
operating expenses related to these ongoing costs were approximately $31
million and $36 million for 1995 and 1994, respectively.

HUMAN RESOURCES

At December 31, 1995, the Company employed approximately 4,460 people
(exclusive of employees of unconsolidated joint ventures). The Company
believes its relationships with its employees are satisfactory. Approximately
23 percent of the Company's domestic employees are represented by local or
national unions.

ITEM 3. LEGAL PROCEEDINGS

ENVIRONMENTAL MATTERS AND RELATED LITIGATION

In December 1993, the U.S. Environmental Protection Agency (the EPA) issued
a Unilateral Administrative Order (the Order) to the Company and other
potentially responsible parties requiring implementation of a remedial
design/remedial action for the Turtle Bayou, Texas site under the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended (Superfund). The Company has raised certain legal defenses against the
enforcement of the Order. In January 1994, the EPA filed a complaint against
the Company and certain other defendants, including ARCO, in the United States
District Court for the Eastern District of Texas seeking recovery of costs of
removal and/or remedial action allegedly incurred or to be incurred by the
federal government. On November 28, 1994, the Company reached an agreement in
principle with the EPA to settle the cost recovery lawsuit. The Company and
ARCO have agreed (i) to pay $1.1 million in reimbursement of past costs
incurred by the federal government and (ii) to perform remedial activities
with respect to a portion of the site. Site remediation is expected to take at
least five years. The parties are negotiating the terms of a consent decree to
embody the settlement. Upon finalization of the consent decree, it is expected
that the Order will be rescinded with respect to the Company.

The Company is currently involved in administrative proceedings or lawsuits
relating to eight other Superfund sites and may in the future be involved in
additional environmental assessments and clean-ups under these laws. The
future costs in connection with such matters cannot be determined with
certainty due to such factors as the unknown magnitude of clean-up costs, the
unknown timing and extent of the remedial actions which may be required, the
determination of the Company's liability in proportion to other potentially
responsible parties, and the extent, if any, to which such costs are
recoverable from insurance.

8
<PAGE>

The Company has discovered that certain organic waste material is situated
in the soil and ground water at portions of its Monaca, Pennsylvania (Beaver
Valley) plant. The Company commenced a feasibility study to determine the
technology required to remedy the conditions at the plant. In 1994, the
Company entered into a Consent Order and Agreement (the Consent Agreement)
with the Pennsylvania Department of Environmental Resources (PADER) pursuant
to which the Company and PADER agreed upon a work plan for testing and
remedial process design with regard to the conditions at the plant. Under the
terms of the Consent Agreement, the Company paid civil penalties totalling
$363,000 in 1994 and $63,000 in 1995. Under the terms of the Consent
Agreement, the Company must pay an additional penalty of $63,000 each year
until the commencement of active remediation at the plant, after which the
amount of such annual penalty shall be reduced based on the extent of
remediation commenced at the plant. The Company has an agreement with Beazer
East, Inc., the successor to Koppers Inc. (the previous owner of the Beaver
Valley plant), whereby Beazer East, Inc. agreed to pay for approximately 50
percent of the cost of the remediation.

In addition to the matters reported herein, from time to time the Company
and its subsidiaries become aware of compliance matters relating to, or
receive notices from federal, state or local governmental entities of alleged
violations of, environmental, health and/or safety laws and regulations
pertaining to, among other things, the disposal or discharge of chemical
substances (including hazardous wastes). In some instances, these matters may
become the subject of administrative proceedings or lawsuits and may involve
monetary sanctions of $100,000 or more (exclusive of interest and costs). See
Items 1 and 2, "Business and Properties--Environmental Matters" and Note 11 of
Notes to Consolidated Financial Statements.

OTHER LITIGATION

In addition, the Company and its subsidiaries are involved in a number of
lawsuits, all of which have arisen in the ordinary course of the Company's
business.

The Company is unable to predict the outcome of the foregoing matters, but
does not believe that the ultimate resolution of such matters will have a
material adverse effect on the consolidated financial statements of the
Company.

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 1995.

9
<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the executive officers of the Company as of February 1,
1996.

<TABLE>
<CAPTION>
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A)
------------------------- ------------------------------------------
<S> <C>
Alan R. Hirsig, 56 Mr. Hirsig was elected President and Chief Executive Officer
President, Chief on January 1, 1991. He was elected an officer of the Company
Executive Officer, and on June 22, 1987 and a Director of the Company on November
Director 14, 1989. Previously, Mr. Hirsig was President of the
Company's European operations from July 1984 to December 1990
and a Senior Vice President of the Company from July 1988 to
December 1990.
Morris Gelb, 49 Mr. Gelb was elected an officer of the Company on June 22,
Vice President, 1987. He assumed his current position in September 1991. Pre-
Environmental, viously, he was Vice President, Research and Engineering from
Engineering and September 1986 to September 1991.
Manufacturing Programs
Michael G. Griffith, 54 Mr. Griffith was elected an officer of the Company on May 9,
Vice President, Research 1990. He assumed his current position on that date. Prior to
and Development joining the Company, he was Vice President, Technology of Ow-
ens-Corning Fiberglas Corp. (building products and reinforce-
ments) from January 1989 to May 1990 and Vice President, Re-
search and Development of Owens-Corning Fiberglas Corp. from
1983 to January 1989.
Robert J. Millstone, 52 Mr. Millstone was elected Vice President and General Counsel
Vice President, General of the Company, effective January 1, 1995. Previously, he was
Counsel, and Secretary Associate General Counsel from January 1989 to December 1994.
He has been Secretary of the Company since October 1990.
Marvin O. Schlanger, 47 Mr. Schlanger was elected an officer of the Company on Septem-
Executive Vice ber 1, 1987 and a Director of the Company on November 14,
President, Chief 1989. He assumed his current position in November 1994. Pre-
Operating Officer, and viously, he was Senior Vice President of the Company and
Director President of ARCO Chemical Americas Company from August 1992
to November 1994, Senior Vice President and Chief Financial
Officer from October 1989 to August 1992 and Vice President,
Worldwide Business Management from September 1988 to Septem-
ber 1989.
John A. Shaw, 47 Mr. Shaw was elected an officer of the Company on May 13,
Vice President and 1993. He assumed his current position in January 1995. Previ-
Controller ously, he was Vice President and Treasurer of ARCO Chemical
Company from July 1993 to January 1995 and Vice President,
Planning and Control of the Company's European operations
from July 1987 to July 1993.
Walter J. Tusinski, 48 Mr. Tusinski was elected an officer and a Director of the Com-
Senior Vice President, pany on September 1, 1992. He assumed his current position on
Chief Financial Officer, that date. Previously, he served as Vice President, New Busi-
and Director ness Ventures of ARCO International Oil and Gas Company from
September 1990 to August 1992 and Vice President, Planning
and Control of ARCO Products Company from October 1986 to Au-
gust 1990.
</TABLE>

10
<PAGE>

11
<PAGE>

PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The common stock is listed on the New York Stock Exchange. The reported high
and low sales prices of the common stock on the New York Stock Exchange (New
York Stock Exchange Composite Tape) from January 1, 1994 through February 16,
1996, inclusive, were:

<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
1994
First Quarter.............................................. 50 1/2 43 1/8
Second Quarter............................................. 48 5/8 43 1/4
Third Quarter.............................................. 51 44 3/8
Fourth Quarter............................................. 49 7/8 43 5/8
1995
First Quarter.............................................. 45 41 3/8
Second Quarter............................................. 47 7/8 44
Third Quarter.............................................. 50 1/8 45 1/2
Fourth Quarter............................................. 50 1/2 47 5/8
1996
First Quarter (through February 16)........................ 52 5/8 49
</TABLE>

On February 16, 1996, the closing price of the common stock was $50 3/4.

As of December 31, 1995, the number of holders of record of common stock of
the Company was 1,649.

The Company has paid quarterly cash dividends as follows:

<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994............................ $0.625 $0.625 $0.625 $0.625
1995............................ $0.625 $0.625 $0.700 $0.700
1996............................ $0.700*
</TABLE>
- --------
* On January 25, 1996, a dividend of $0.70 per share was declared on the
common stock, payable on March 1, 1996 to stockholders of record on February
16, 1996.

The current quarterly dividend rate for the common stock is $0.70 per share.
The declaration and payment of future dividends and the amount thereof will be
dependent on the Company's results of operations, financial condition, cash
requirements, and future prospects as well as on other factors deemed relevant
by the Board of Directors. It is the current intention of the Company to
declare and pay quarterly cash dividends on its common stock.

12
<PAGE>

ITEM 6.SELECTED FINANCIAL DATA

The following table sets forth selected financial information for the
Company:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales and other operating reve-
nues............................. $4,282 $3,423 $3,192 $ 3,100 $2,837
Costs and other operating ex-
penses........................... 3,102 2,586 2,453 2,343 2,283
Income before changes in account-
ing principles................... 508 269 214 197 188
Net income(1)..................... 508 269 214 195 188
Total assets...................... 4,135 3,737 3,502 3,599 3,676
Long-term debt, including current
portion.......................... 912 913 905 1,102 1,173
Dividends per common share........ 2.65 2.50 2.50 2.50 2.50
Earnings per share before changes
in accounting principles......... 5.28 2.80 2.23 2.05 1.96
Earnings per share(1)............. 5.28 2.80 2.23 2.03 1.96
</TABLE>
- --------
(1) Net income in 1992 includes a charge of $2 million, or $.02 per share, for
the net cumulative effect of changes in accounting principles, and a $56
million charge, or $.58 per share, related to the divestiture of a joint
venture in Korea.

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion should be read in connection with the information contained
in the Consolidated Financial Statements and the Notes thereto.

OVERVIEW

The Company manufactures and markets intermediate chemicals and specialty
products, operating in a single industry segment. It conducts business
primarily in the Western Hemisphere, Europe, and the Asia Pacific region.

Each of the Company's two principal manufacturing processes yield its key
product, propylene oxide (PO), and one of two co-products, styrene monomer
(SM) or tertiary butyl alcohol (TBA). The Company also manufactures numerous
derivatives of these products. Among these are methyl tertiary butyl ether
(MTBE), a derivative of TBA used in oxygenated fuels and as an octane
enhancer. Another is polyols, a derivative of PO. In 1995, the Company began
selling toluene diisocyanate (TDI) obtained under long-term supply agreements.
TDI and polyols are combined in the manufacture of polyurethanes.

Net income for 1995 was $508 million compared with $269 million in 1994. Net
income in 1995 increased over 1994 primarily due to improved margins for PO
and derivatives and a significant improvement in SM margins. The margin
improvements were primarily attributable to higher prices, which more than
offset increases in the costs of raw materials.

Net income of $269 million in 1994 increased over 1993 net income of $214
million primarily due to higher PO and derivatives volumes and higher SM
margins and volumes, partly offset by the effects of a weaker MTBE market. The
1994 period also benefitted from lower interest expense. Net income for these
years included special items, on an after-tax basis, as follows: a $19 million
restructuring charge and a $12 million benefit from insurance proceeds in
1994; a $10 million loss on early debt retirement and $20 million of net
benefits from lower income taxes in 1993.

13
<PAGE>

RESULTS OF OPERATIONS

Product Volumes

Sales and other operating revenues include the sales and processing volumes
of PO, TBA, SM and their derivatives as set forth below for the years
indicated.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
PO and derivatives (pounds)....................... 3,476 3,699 3,356
Co-products:
TBA and derivatives (gallons)................... 1,140 1,004 1,164
SM and derivatives (pounds)..................... 2,579 2,496 2,084
</TABLE>

Revenues

Revenues increased 25 percent to $4,282 million in 1995 from $3,423 million
in 1994 primarily due to higher sales prices. While sales prices were
generally higher for all products, average SM sales prices increased
significantly versus the 1994 period as a result of higher worldwide demand
during the early part of 1995. Volume benefits from higher domestic MTBE
volumes and first-time sales of TDI were substantially offset by lower volumes
for PO and derivatives. Domestic MTBE volumes increased versus 1994 primarily
due to increased demand, which resulted from implementation of the
reformulated gasoline phase of the Clean Air Act in 1995. PO and derivatives
volumes in 1995 decreased six percent compared to 1994 primarily due to the
entry of a new PO producer into the U.S. market in late 1994 as well as lower
Asia Pacific sales, which were affected by a slowdown in China markets.

Revenues increased seven percent in 1994 versus 1993 with the majority of
the increase attributable to higher average sales prices. Sales prices were
generally higher for all products. Revenues also benefitted from higher
volumes for PO and SM and their derivatives, partly offset by lower U.S. MTBE
volumes. PO and derivatives volumes in 1994 increased 10 percent versus 1993
due to a strong U.S. economy, increased market penetration by propylene
glycol-based deicers and coolants, and a recovering economy in Europe. SM and
derivatives volumes in 1994 increased 20 percent over 1993 primarily due to
higher SM export sales, reflecting increased worldwide demand, and higher SM
contractual offtakes by the limited partners in the PO/SM II plant. Lower U.S.
MTBE volumes reflected lower contractual sales volumes and flat demand for
MTBE as an oxygenate coupled with increased worldwide capacity. Additionally,
demand for MTBE in world octane markets was lower.

Gross Profit

Gross profit increased 41 percent to $1,180 million in 1995 from $837
million in 1994, reflecting the 25 percent increase in revenues as well as
higher margins. Overall gross profit was 27.6 percent of sales in 1995
compared to 24.5 percent in 1994 as higher sales prices more than offset net
increases in raw materials costs. The margin improvements were seen in PO and
derivatives, especially in the fourth quarter, and in SM margins during the
first half of the year. Average SM margins improved significantly in 1995 as
evidenced by industry raw material margins, which doubled, on average,
compared to 1994. SM prices and margins increased substantially during the
first half of 1995, but declined over the second half as worldwide demand
declined. Raw material cost comparisons, 1995 versus 1994, were mixed with
substantial increases in average propylene costs, more moderate increases in
average butane and ethylene costs and a decrease in average benzene and
methanol costs.

14
<PAGE>

Gross profit increased 13 percent to $837 million in 1994 from $739 million
in 1993, reflecting the seven percent increase in revenues as well as higher
margins, primarily for co-products. Overall gross profit was 24.5 percent of
sales in 1994 compared to 23.2 percent in 1993. The improvement was primarily
due to higher prices for SM and U.S. MTBE. Higher SM prices were attributable
to increased worldwide demand and a series of planned and unplanned outages at
producers' plants that reduced available supplies. U.S. MTBE prices reflected
the escalation in market prices of methanol, which peaked in the fourth
quarter of 1994.

The 1995, 1994 and 1993 periods included pretax charges of $12 million, $13
million and $12 million, respectively, in costs and other operating expenses
for estimated future environmental cleanup costs. These charges do not reflect
any potential benefit from insurance proceeds.

Other

In 1994, management adopted a corporate restructuring program, resulting in
a pretax charge of $30 million, primarily for costs associated with personnel
reductions. This item was reported as restructuring costs in 1994.

Interest expense was $89 million in 1995, $85 million in 1994 and $105
million in 1993. Interest expense declined in 1994 from 1993 due to lower debt
levels and lower interest rates on certain foreign bank borrowing.

Other income (expense), net, was $22 million in 1995, $26 million in 1994,
and $(9) million in 1993. The 1995 period reflected higher equity earnings
from the Company's Japanese PO/SM joint venture and higher interest income,
partly offset by higher foreign exchange losses. The 1994 period included an
$18 million pretax benefit from an insurance settlement related to the 1990
Channelview plant incident. The decrease in 1993 reflects a pretax loss of $13
million on early retirement of debt.

Income Taxes

The Company's effective income tax rate was 32.8 percent in 1995, 35.3
percent in 1994, and 31.2 percent in 1993. The decrease in 1995 reflected
benefits from higher export income and increased utilization of foreign tax
credits due to higher foreign earnings. The low rate in 1993 reflects
recognition of deferred foreign assets.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of December 31, 1995, the Company had $235 million in cash and cash
equivalents compared with $144 million at December 31, 1994.

The Consolidated Statement of Cash Flows for the year ended December 31,
1995 shows that net cash flows provided by operating activities were $677
million, whereas net cash flows used by investment and financing activities
were $301 million and $285 million, respectively.

Operating cash flow in 1995 was affected by increases in receivables and
inventories of $58 million and $64 million, respectively, excluding related
party receivables and foreign exchange effects. The accounts receivable
increase is primarily due to the integration of the TDI business in 1995. The
increase in 1995 inventory reflects a combination of low inventory levels at
year-end 1994 and a slowdown in second-half 1995 sales.

Investment activities in 1995 included expenditures for plant and equipment
of $195 million, which was comparable to the $186 million spent in 1994. A
significant portion of the 1995 and 1994 capital

15
<PAGE>

programs were devoted to environmental, health and safety projects as well as
PO derivative capacity expansions at existing facilities. The Company's 1996
capital budget for plant and equipment is $285 million.

The Board of Directors has approved commencement of engineering studies for
the expansion of the PO/SM complex located in Channelview, Texas and the
construction of a new world scale PO/SM plant in Rotterdam, the Netherlands.
Final Board of Directors' approval of such projects will depend on the results
of engineering studies, the receipt of permitting approvals and the conclusion
of certain commercial arrangements.

In connection with the plant project in Rotterdam, the Company anticipates
that it will make capital commitments denominated in a foreign currency
beginning in 1996 and extending through 2000. The Company has entered into
foreign currency forward and purchased option contracts to minimize the
foreign exchange exposures associated with these anticipated commitments. The
notional amount of foreign currency contracts outstanding increased to $442
million at December 31, 1995 from $120 million at December 31, 1994, primarily
due to these contracts. See Note 19 of Notes to Consolidated Financial
Statements.

In January 1995, the Company entered into a long-term supply arrangement
with Rhone-Poulenc (RP) for toluene diisocyanate (TDI). Adding TDI to the list
of products sold by the Company complements the Company's existing line of
polyols products and strengthens the Company's position in the polyurethanes
market. Effective January 1, 1995, the Company was entitled to the entire TDI
output of RP's two plants in France, which have a combined annual capacity of
approximately 264 million pounds.

The Company made an initial payment of $80 million at closing for capacity
reservation fees and other long-term rights and costs. These are reported in
the accompanying consolidated balance sheet as "Deferred charges and other
assets" and are being amortized on a straight-line basis over the 15-year
period of the agreement. The Company is obligated to pay additional capacity
reservation fees and purchase minimum quantities of TDI for periods of up to
15 years. The Company's projected TDI sales volumes exceed the minimum
purchase quantities, and the Company expects to fund the obligations under
this arrangement through cash flows from increased sales revenues.

In December 1995, an explosion occurred at one of RP's plants. As a result,
RP may not be able to supply the full amount of TDI to the Company from this
RP plant for several months. During this period of time, certain of the fees
payable by the Company to RP for the production from this RP plant will be
abated.

The Company paid dividends totalling $255 million in 1995, including a $.70
per share dividend, totalling $68 million, during the quarter ended December
31, 1995. On January 25, 1996, the Board of Directors declared a dividend of
$.70 per share on the Company's common stock, payable March 1, 1996.

The Company maintains a credit agreement under which it can borrow amounts
of up to $300 million. At December 31, 1995, the Company had no outstanding
borrowings against the credit agreement, which is used to back up the
Company's commercial paper borrowing.

It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will be met by cash generated from operating
activities and additional borrowing.

Effects of Inflation

Based on the age of the Company's fixed assets, it is estimated that the
replacement cost of those assets is greater than the historical cost reflected
in the Company's financial statements. Accordingly, the Company's depreciation
and amortization expense for the three years ended December 31, 1995, would be
greater if the expense were stated on a current cost basis.

16
<PAGE>

Risk Management

The Company uses derivative financial instruments to reduce certain types of
financial risk. Use of derivatives is limited to simple, non-leveraged
instruments placed with major financial institutions whose creditworthiness is
monitored. Company policy provides restrictions on concentrating credit risk
in any one institution. Hedging strategies and transactions are reviewed and
approved by management before being implemented. Monthly market valuations and
quarterly sensitivity analyses are performed to monitor the effectiveness of
the Company's risk management program.

The Company enters into the following activities using derivative financial
instruments: (1) foreign currency forward contracts, option contracts and swap
contracts to reduce the risk of foreign currency fluctuations on future cash
flows, and, to a lesser extent, (2) interest rate swaps to minimize the impact
of fluctuating interest rates on the Company's outstanding floating rate debt.

Feedstock Costs

See "Raw Materials" included in Items 1 and 2.

Environmental

The Company is subject to loss contingencies pursuant to federal, state,
local, and foreign environmental laws and regulations. These contingencies
include possible obligations to remove or mitigate the effects on the
environment of the past disposal or release of certain chemical substances at
various sites (remediation costs). The Company continues to evaluate the
amount of these remediation costs and periodically adjusts its reserve for
remediation costs and its estimate of additional environmental loss
contingencies based on progress made in determining the magnitude, method and
timing of the remedial actions that may be required by government authorities
and an evaluation of the Company's potential liability in relation to the
liability and financial resources of any other potentially responsible
parties. Reflected in costs and other operating expenses for 1995 is a $12
million pretax charge for estimated future remediation costs compared with $13
million in 1994 and $12 million in 1993.

The Company relies upon remedial investigation/feasibility studies (RI/FS)
at each site as a basis for estimating remediation costs at the site. The
Company has substantially completed RI/FS at most of its sites; however, two
plant facilities are currently undergoing either RI/FS or preliminary
assessments. In addition, selection of the remediation method and the cleanup
standard to be applied is, in most cases, subject to approval by the
appropriate government authority. Accordingly, the Company may have possible
loss contingencies in excess of the amounts reserved to the extent the scope
of remediation required, the final remediation method selected and the cleanup
standard applied vary from the assumptions used in estimating the reserve. The
Company estimates that the upper range of these possible loss contingencies
should not exceed the amount accrued by more than $65 million.

17
<PAGE>

environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts reserved or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.

Statement of Financial Accounting Standards Not Yet Adopted

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires companies to adopt its provisions for
fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair
value based method of accounting for employee stock options or similar equity
instruments, but allows continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Companies electing to continue to
use APB No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The
Company is evaluating the provisions of SFAS No. 123, but has not yet
determined whether it will continue to follow the provisions of APB No. 25 or
change to the fair value method of SFAS No. 123.

18
<PAGE>

ITEM 8.FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ARCO CHEMICAL COMPANY PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants................................... 20
Consolidated Statements of Income for the Years Ended December 31,
1995, 1994, and 1993.............................................. 21
Consolidated Balance Sheets as of December 31, 1995 and 1994....... 22
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994, and 1993........................... 23
Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1995, 1994, and 1993...... 24
Notes to Consolidated Financial Statements......................... 25
</TABLE>

19
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of ARCO Chemical Company

We have audited the consolidated financial statements of ARCO Chemical
Company and Subsidiaries listed in the index on page 19 of this Form 10-K.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
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 ARCO Chemical
Company and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.

Coopers & Lybrand L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 12, 1996

20
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties.................................... $4,085 $3,267 $2,996
Related parties...................................... 197 156 196
------ ------ ------
Total revenues....................................... 4,282 3,423 3,192
Costs and other operating expenses (includes costs of
$134 in 1995, $85 in 1994, and $135 in 1993, of
related parties sales)................................ 3,102 2,586 2,453
------ ------ ------
Gross profit......................................... 1,180 837 739
Selling, general and administrative expenses........... 278 256 242
Research and development............................... 79 76 72
Restructuring costs.................................... -- 30 --
------ ------ ------
Operating income..................................... 823 475 425
Interest expense....................................... (89) (85) (105)
Other income (expense), net............................ 22 26 (9)
------ ------ ------
Income before income taxes........................... 756 416 311
Provision for income taxes............................. 248 147 97
------ ------ ------
Net income........................................... $ 508 $ 269 $ 214
====== ====== ======
Earnings per common share.............................. $ 5.28 $ 2.80 $ 2.23
====== ====== ======
</TABLE>

See accompanying notes.

21
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

(MILLIONS OF DOLLARS)

ASSETS

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 235 $ 144
Short-term investments....................................... 25 --
Accounts receivable.......................................... 630 549
Accounts receivable--related parties......................... 1 16
Inventories.................................................. 472 397
Prepaid expenses and other current assets.................... 19 18
------ ------
Total current assets......................................... 1,382 1,124
Investments and long-term receivables.......................... 90 97
Property, plant and equipment, net............................. 2,293 2,221
Deferred charges and other assets (net of accumulated amortiza-
tion of $285 in 1995 and $247 in 1994)........................ 370 295
------ ------
Total assets................................................. $4,135 $3,737
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................ $ -- $ 23
Long-term debt due within one year........................... 25 15
Accounts payable............................................. 228 208
Accounts payable--related parties............................ 25 34
Taxes payable................................................ 94 66
Other accrued liabilities.................................... 217 199
------ ------
Total current liabilities.................................... 589 545
------ ------
Long-term debt................................................. 887 898
Other liabilities and deferred credits......................... 158 142
Deferred income taxes.......................................... 409 369
Minority interest.............................................. 123 124
Stockholders' equity:
Common stock, $1 par value; authorized 250,000,000 shares;
99,550,001 issued; outstanding 96,488,880 (1995), 96,085,201
(1994)...................................................... 100 100
Additional paid-in capital................................... 869 864
Retained earnings............................................ 985 732
Foreign currency translation................................. 110 70
Treasury stock, at cost (shares: 3,061,121, 1995; 3,464,800,
1994)....................................................... (95) (107)
------ ------
Total stockholders' equity................................... 1,969 1,659
------ ------
Total liabilities and stockholders' equity................... $4,135 $3,737
====== ======
</TABLE>

See accompanying notes.

22
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

(MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 508 $ 269 $ 214
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 233 235 223
Deferred income taxes................................. 15 27 43
Restructuring costs................................... -- 30 --
Provision for environmental liabilities............... 12 13 12
Equity in net (income) loss of affiliate.............. (14) (2) 2
Dividends received from affiliate..................... 17 -- --
Net change in accounts receivable, inventories,
accounts and other payables.......................... (68) 24 (73)
Other................................................. (26) (31) 3
----- ----- -----
Net cash provided by operating activities............... 677 565 424
----- ----- -----
Cash flows from investment activities
Capital expenditures.................................... (195) (186) (181)
Increase in deferred charges............................ (82) (9) (10)
Net (purchases of) proceeds from short-term investments
....................................................... (25) -- 9
Proceeds from asset sales............................... 6 22 69
Other................................................... (5) (3) 12
----- ----- -----
Net cash used in investment activities.................. (301) (176) (101)
----- ----- -----
Cash flows from financing activities
Dividends paid.......................................... (255) (240) (240)
Net (repayment of) proceeds from notes payable ......... (24) (33) 21
Repayment of long-term debt............................. (23) (18) (57)
Early debt extinguishment............................... -- -- (135)
Other................................................... 17 3 (3)
----- ----- -----
Net cash used in financing activities................... (285) (288) (414)
----- ----- -----
Effect of exchange rate changes on cash................... -- 1 (2)
----- ----- -----
Net increase (decrease) in cash and cash equivalents...... 91 102 (93)
Cash and cash equivalents at beginning of year............ 144 42 135
----- ----- -----
Cash and cash equivalents at end of year.................. $ 235 $ 144 $ 42
===== ===== =====
</TABLE>

See accompanying notes.

23
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ADDITIONAL FOREIGN
COMMON STOCK PAID-IN RETAINED CURRENCY
ISSUED TREASURY CAPITAL EARNINGS TRANSLATION
------ -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992
(99,550,001 shares issued;
3,622,950 treasury shares).... $100 $(112) $864 $ 729 $ 49
Net income..................... -- -- -- 214 --
Cash dividends ($2.50 per
share)........................ -- -- -- (240) --
Foreign currency translation... -- -- -- -- (30)
Reissuance of 71,650 treasury
shares upon exercise of stock
options....................... -- 2 -- -- --
---- ----- ---- ----- ----
Balance December 31, 1993
(99,550,001 shares issued;
3,551,300 treasury shares).... 100 (110) 864 703 19
Net income..................... -- -- -- 269 --
Cash dividends ($2.50 per
share)........................ -- -- -- (240) --
Foreign currency translation... -- -- -- -- 51
Reissuance of 86,500 treasury
shares upon exercise of stock
options....................... -- 3 -- -- --
---- ----- ---- ----- ----
Balance December 31, 1994
(99,550,001 shares issued;
3,464,800 treasury shares).... 100 (107) 864 732 70
Net income..................... -- -- -- 508 --
Cash dividends ($2.65 per
share)........................ -- -- -- (255) --
Foreign currency translation... -- -- -- -- 40
Reissuance of 403,679 treasury
shares in connection with
purchases by employee benefit
plan and upon exercise of
stock options................. -- 12 5 -- --
---- ----- ---- ----- ----
Balance December 31, 1995
(99,550,001 shares issued;
3,061,121 treasury shares).... $100 $ (95) $869 $ 985 $110
==== ===== ==== ===== ====
</TABLE>

See accompanying notes.

24
<PAGE>

ARCO CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.FORMATION OF THE COMPANY

On June 9, 1987, Atlantic Richfield Company (ARCO) transferred substantially
all the assets and liabilities of the oxygenates and polystyrenics businesses
of the then ARCO Chemical Division to ARCO Chemical Company (the Company) in
exchange for 80,000,001 shares of common stock. On October 5, 1987, the
Company completed an initial public offering of 19,550,000 shares of common
stock. ARCO's 80,000,001 shares represented approximately 82.9 percent of the
outstanding shares of common stock at December 31, 1995.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries and partnerships.
Investments in affiliates (20 percent to 50 percent owned) are accounted for
under the equity method. All significant intercompany transactions have been
eliminated in consolidation. Certain amounts in 1994 and 1993 have been
reclassified for comparative purposes.

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,
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. See Note
11.

Cash Equivalents; Short-Term Investments--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 from the date of purchase. Short-term investments consist of similar
investments maturing in more than three months from the date of purchase. Cash
equivalents and short-term investments are carried at cost, which approximates
market, and are classified as held-to-maturity.

Property, Plant and Equipment--Property, plant and equipment are depreciated
on a straight-line method over their estimated useful lives. Upon disposition,
residual cost less salvage is included in current income. Maintenance and
repairs are expensed and betterments are capitalized.

Deferred Charges--Deferred charges are carried at cost and consist primarily
of the value assigned to acquired technology, capacity reservation fees and
other long-term processing rights and costs. These assets are being amortized
on a straight-line method over their estimated useful lives or the term of the
related agreement, if shorter.

Environmental Expenditures--Environmental expenditures that relate to
current operations are expensed or capitalized, depending upon their future
economic benefit. Expenditures that result from the remediation of an existing
condition caused by past operations are expensed. Liabilities are recognized
for remedial activities when remediation is probable and the costs can be
reasonably estimated.

Income Taxes--The Company's results of operations are included in the
consolidated federal income tax return, and certain consolidated, combined, or
unitary state returns of ARCO. The Company's income tax expense in the
consolidated financial statements is computed on a modified stand-alone basis
pursuant to a tax sharing agreement, with any resulting liability or refund
settled with ARCO. The agreement, as modified effective January 1, 1995,
permits the Company to reduce its federal income tax liability through the use
of certain tax attributes that produce a benefit to the ARCO affiliated group,
but would not otherwise benefit the Company on a stand-alone basis. The
modification had no effect on net income in 1995. Income tax expense also
reflects the Company's liability under separate company returns filed with
certain states.

25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Long-Lived Asset Impairment--Effective January 1, 1995, the Company 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 provisions of SFAS No. 121 require the Company to review its long-
lived assets for impairment on an exception basis whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable through future cash flows. If it is determined that an impairment
loss has occurred based on expected future cash flows, then the loss is
recognized in the income statement and certain disclosures regarding the
impairment are made in the financial statements. The adoption of the
provisions of SFAS No. 121 did not have an effect on the Company's 1995
consolidated financial statements.

3.RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS

Effective July 1, 1987, the Company and ARCO (including ARCO subsidiaries)
entered into a series of agreements that included, among other things,
purchase, exchange and processing agreements, product sales agreements,
operational services agreements, and an administrative services agreement.

Certain of these agreements are between the Company and Lyondell
Petrochemical Company (Lyondell). Currently, ARCO's interest in Lyondell is
49.9 percent. In 1994, ARCO issued Exchangeable Notes due 1997, which, at
ARCO's option, can be exchanged at maturity into Lyondell common stock or cash
of 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. Lyondell is treated by the Company as a related party.

The purchase, exchange, and processing agreements are principally for
methanol, benzene, ethylene, propylene, and MTBE. Other purchases from ARCO
and Lyondell principally include normal butane, isobutane, isobutylene,
nonenes and tetramers, natural gas and certain butanediol feedstocks. Product
sales include sales by the Company to ARCO and Lyondell of MTBE and propane.
In 1991, the Company entered into long-term sales agreements with ARCO
providing for delivery of fixed quantities of MTBE. The operational services
agreements are for various plant services performed by ARCO and Lyondell. The
administrative services agreement provides that beginning October 1, 1987,
ARCO provides the Company with certain leased office space, insurance and
other financial, internal audit, legal, aviation and administrative services,
and the Company provides ARCO with various technical and legal services. These
agreements have various durations, ranging from monthly renewals to a term
extending to 2017.

An analysis of the aggregate transactions for the years ended December 31,
1995, 1994, and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Purchases........................................................ $344 $332 $276
Product sales.................................................... 197 156 196
Processing fees and operational services......................... 11 16 17
Administrative services:
For ARCO....................................................... 1 1 4
By ARCO........................................................ 32 34 36
</TABLE>

Outstanding balances under these agreements at December 31, 1995 and 1994,
are included in "Accounts receivable--related parties" and "Accounts payable--
related parties."

26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. GEOGRAPHIC INFORMATION

The Company is an international manufacturer of intermediate chemicals and
specialty chemical products which it principally markets to other industrial
concerns. The Company operates in one industry segment. The geographic
distribution of the Company's markets and assets is indicated by the table
below.

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues (by destination)
United States.................................... $ 2,181 $ 1,911 $ 1,862
Europe and other foreign......................... 2,101 1,512 1,330
------- ------- -------
Total.......................................... $ 4,282 $ 3,423 $ 3,192
======= ======= =======
Total revenues (by origin)
United States.................................... $ 2,878 $2,431 $2,280
Europe........................................... 1,497 943 900
Other foreign.................................... 313 302 247
Elimination of intercompany sales................ (406) (253) (235)
------- ------- -------
Total.......................................... $ 4,282 $3,423 $3,192
======= ======= =======
Pretax earnings
United States.................................... $ 764 $ 495 $ 428
Europe........................................... 76 3 16
Other foreign.................................... 21 4 (24)
Interest expense................................. (89) (85) (105)
Eliminations..................................... (16) (1) (4)
------- ------- -------
Total.......................................... $ 756 $ 416 $ 311
======= ======= =======
Total assets
United States.................................... $ 2,610 $2,462 $2,325
Europe........................................... 1,530 1,298 1,149
Other foreign.................................... 315 283 253
Eliminations..................................... (320) (306) (225)
------- ------- -------
Total.......................................... $ 4,135 $3,737 $3,502
======= ======= =======
United States export sales
Asia Pacific..................................... $ 294 $ 206 $ 128
Canada and Latin America......................... 115 114 86
Europe and other foreign......................... 11 9 2
------- ------- -------
Total.......................................... $ 420 $ 329 $ 216
======= ======= =======
</TABLE>

Intercompany sales are made at prices approximating current market values.
The amounts of intercompany sales that are included in total revenues are as
follows:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
United States........................................... $373 $ 218 $207
Europe.................................................. 32 34 28
Other foreign........................................... 1 1 --
------- ------- -------
Total................................................. $406 $ 253 $235
======= ======= =======
</TABLE>

27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4.GEOGRAPHIC INFORMATION--(CONTINUED)

Included in pretax earnings are royalty charges made to foreign operations
for the use of Company technology. Eliminations principally include
intercompany sales, profit, and receivables.

5.INVENTORIES

Inventories are stated at the lower of cost or market. In 1995, approximately
90 percent 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 valued using either the first-in, first-out (FIFO) or the
average cost methods.

Inventories at December 31, 1995 and 1994, comprised the following
categories:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Finished goods............................................ $338 $272
Work-in-process........................................... 38 35
Raw materials............................................. 51 49
Materials and supplies.................................... 45 41
---------- ----------
Total................................................... $472 $397
========== ==========
</TABLE>

If the FIFO inventory valuation method had been used exclusively, inventories
would have been higher (lower) than the book value of such inventories by
approximately $9 million and $(6) million at December 31, 1995 and 1994,
respectively.

6.PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, at cost, and related accumulated depreciation
at December 31, 1995 and 1994, were as follows:

<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Land............................................................. $ 18 $ 18
Buildings and equipment.......................................... 3,670 3,325
Construction in progress......................................... 124 181
------ ------
3,812 3,524
Less: Accumulated depreciation................................... 1,519 1,303
------ ------
Total.......................................................... $2,293 $2,221
====== ======
</TABLE>

Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was
$192 million, $193 million, and $188 million, respectively. Expenses for
maintenance and repairs, including costs associated with plant maintenance
turnarounds, for the years ended December 31, 1995, 1994, and 1993 were $97
million, $105 million, and $109 million, respectively.

28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7.BANK CREDIT FACILITIES

In October 1994, the Company executed an amendment to an existing credit
facility under which it can borrow a total amount of up to $300 million. This
agreement effectively replaced the two previous revolving credit agreements
entered into in December 1993. The credit agreement, as amended, has a
restrictive financial covenant which requires that the Company maintain a
minimum net worth of $1 billion and has a term of five years. At December 31,
1995, the Company had no outstanding borrowings against the credit agreement.

Notes payable at December 31, 1994 consisted primarily of short-term bank
borrowings and commercial paper issued to a variety of financial investors and
institutions at various interest rates and maturities of up to 270 days. The
weighted average effective interest rate for these borrowings at December 31,
1994 was 5.8 percent. As a condition of the sale of commercial paper, the
Company is required to maintain a back-up credit facility at least equal to
the amount of the outstanding commercial paper. The Company uses the credit
agreement for this purpose.

8.OTHER ACCRUED LIABILITIES

Other accrued liabilities at December 31, 1995 and 1994, were as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
(MILLIONS
OF
DOLLARS)
<S> <C> <C>
Payroll and benefits.................................................. $ 79 $ 65
Contractual obligations............................................... 26 21
Interest.............................................................. 20 20
Restructuring costs................................................... 6 15
Other................................................................. 86 78
---- ----
Total............................................................... $217 $199
==== ====
</TABLE>

9.TAXES

The components of the provision for income taxes for the years ended
December 31, 1995, 1994, and 1993 were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Federal:
Current............................................. $ 202 $123 $ 50
Deferred............................................ 6 21 72
------- ------- -------
Total............................................. 208 144 122
------- ------- -------
Foreign:
Current............................................. 21 (6) 2
Deferred............................................ 9 12 (33)
------- ------- -------
Total............................................. 30 6 (31)
------- ------- -------
State:
Current............................................. 10 3 (1)
Deferred............................................ -- (6) 7
------- ------- -------
Total............................................. 10 (3) 6
------- ------- -------
$248 $147 $ 97
======= ======= =======
</TABLE>

29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9.TAXES--(CONTINUED)

Deferred tax liabilities and assets are comprised of the following at
December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization........................... $435 $415
Other................................................... 47 32
---------- ----------
Gross deferred tax liabilities......................... 482 447
---------- ----------
Deferred tax assets:
Loss carryforwards...................................... 167 113
Tax basis in excess of book............................. 31 45
Provisions for benefit plans and estimated expenses..... 74 75
---------- ----------
Gross deferred tax assets.............................. 272 233
---------- ----------
Deferred tax asset valuation allowance................. 138 101
---------- ----------
Net deferred tax liability................................ $348 $315
========== ==========
</TABLE>

The valuation allowance was $116 million at December 31, 1993.

A reconciliation of the federal statutory rate to the effective tax rate for
the years ended December 31, 1995, 1994, and 1993 is as follows:

<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate...... 35.0 35.0 35.0
Increase (reduction) in
taxes resulting from:
State income taxes (net
of federal effect)..... 0.9 (0.5) 1.9
Foreign deferred tax as-
set recognition........ -- -- (8.3)
Deferred tax effect of
federal rate increase.. -- -- 2.1
Other................... (3.1) 0.8 0.5
-------- -------- --------
Effective tax rate.......... 32.8 35.3 31.2
======== ======== ========
</TABLE>

During 1993, the Company took certain actions to convert five-year foreign tax
loss carryforwards into additional depreciable tax basis. Future losses
attributable to the additional basis will have an unlimited carryforward
period.

At December 31, 1995, the Company had federal capital loss carryforwards of
$75 million, foreign tax loss carryforwards of $366 million, and state tax loss
carryforwards of $152 million. These carryforwards begin expiring in 1996.
Existing foreign tax credits are sufficient to offset any tax on undistributed
earnings of foreign subsidiaries.

30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10.LONG-TERM DEBT

Long-term debt at December 31, 1995 and 1994, comprised the following:

<TABLE>
<CAPTION>
1995 1994
---- ----
(MILLIONS
OF
DOLLARS)
<S> <C> <C>
9.9% debentures due in 2000.......................................... $200 $200
9.375% debentures due in 2005........................................ 100 100
10.25% debentures due in 2010........................................ 100 100
9.8% debentures due in 2020.......................................... 224 224
Dutch bank loans..................................................... 187 172
French bank loans.................................................... 76 84
Other................................................................ 25 33
---- ----
Total.............................................................. 912 913
Debt due within one year............................................. 25 15
---- ----
Long-term debt..................................................... $887 $898
==== ====
</TABLE>

On December 1, 1993, the Company redeemed all of its outstanding 9.35
percent Debentures due 2019, in accordance with the provisions of the
Debentures at a redemption price of 107.48 percent of principal plus interest
accrued to the redemption date. The principal amount redeemed represented the
original $125 million issue less amounts repurchased in the open market. The
Company reported a fourth quarter charge for loss on early extinguishment of
debt of approximately $13 million before tax, primarily due to repurchase and
redemption premiums and write-off of original issue discount.

The Dutch bank loans, entered into by the Company's wholly owned subsidiary,
ARCO Chemie Nederland, Ltd. (ACNL), consist of two borrowings, both due in
1997. At December 31, 1995, ACNL had outstanding interest rate swaps on both
of its bank loans, totalling 300 million Dutch guilders, or approximately $187
million. Both swaps mature in 1997 when the related debt becomes due. The
swaps effectively changed both loans' floating rates, which are based on the
Amsterdam Interbank Offer Rate ("AIBOR"), to fixed rates of 5.7 percent and
6.7 percent. The Company intends to hold the swaps until maturity. See Note
19.

The French bank loans, entered into by the Company's wholly owned affiliate,
ARCO Chimie France, SNC, mature at various dates through 2006. The weighted
average effective interest rate for these borrowings was approximately 7.4
percent and 7.9 percent in 1995 and 1994, respectively.

Aggregate maturities of all long-term debt during the next five years are
$25 million in 1996, $214 million in 1997, $26 million in 1998, $20 million in
1999, $201 million in 2000, and $426 million thereafter.

11.OTHER COMMITMENTS AND CONTINGENCIES

COMMITMENTS

In January 1995, the Company entered into a long-term supply arrangement for
toluene diisocyanate (TDI). Initial payments of $80 million were made at
closing for capacity reservation fees, related inventory and other rights and
costs. Effective January 1, 1995, the Company was entitled to all of the TDI
output of the supplier's two plants in France, which have a combined rated
capacity of approximately 264 million pounds per year. Under the arrangement,
the Company is required to purchase a minimum of 216 million pounds of TDI per
year for up to 15 years. The aggregate purchase price is a combination of
plant cost and market price. The Company is further obligated to pay
additional capacity reservation fees based upon plant output factors.

31
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)

To assure itself of reliable, long-term supplies of utilities at favorable
rates for its Rotterdam plant, the Company entered into a 15-year utility
cogeneration joint venture as a limited partner. The joint venture operates a
cogeneration plant, primarily funded through nonrecourse debt. The Company is
obligated to take or pay for minimum quantities of steam and electricity in
support of the joint venture's financing arrangement. The Company pays for
actual quantities of steam and electricity taken based on the joint venture's
actual cost plus a specified return on the partners' investment. The Company
also has a long-term purchase agreement for ethylene which requires the
Company to take or pay for 143 million pounds annually at prevailing market
prices for a remaining term of four years. Purchases under the cogeneration
and the ethylene agreements during 1995, 1994 and 1993 were $50 million, $30
million and $27 million, respectively.

The Company has commitments, including those related to capital
expenditures, all made in the normal course of business. At December 31, 1995,
there were commitments associated with various capital projects which were not
significant either individually or in the aggregate.

CONTINGENCIES

The Company and its subsidiaries are involved in a number of lawsuits, all
of which have arisen in the ordinary course of the Company's business. The
Company is unable to predict the outcome of these matters, but does not
believe, based upon currently available facts, that the ultimate resolution of
such matters will have a material adverse effect on the consolidated financial
statements of the Company.

The Company is subject to other loss contingencies pursuant to federal,
state, local, and foreign environmental laws and regulations. These
contingencies include possible obligations to remove or mitigate the effects
on the environment of the past disposal or release of certain chemical
substances at various sites (remediation costs). The Company continues to
evaluate the amount of these remediation costs and periodically adjusts its
reserve for remediation costs and its estimate of additional environmental
loss contingencies based on progress made in determining the magnitude, method
and timing of the remedial actions that may be required by government
authorities and an evaluation of the Company's potential liability in relation
to the liability and financial resources of any other potentially responsible
parties.

At December 31, 1995, the Company's environmental reserve totaled $59
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
reserve is related to the Company's Beaver Valley (Pennsylvania) facility. The
reserve gives recognition to a work plan, between the Company and the
Pennsylvania Department of Environmental Resources, for testing, risk
assessment, remedial process design and remediation of conditions at the
Beaver Valley plant. The reserve also reflects an agreement between the
Company and another responsible party whereby that party has agreed to pay for
approximately 50 percent of the costs associated with the Beaver Valley plant
work plan. The remainder of the reserve is related to four other plant sites
and two federal Superfund sites for amounts ranging from $1 million to $15
million per site. The Company is involved in administrative proceedings or
lawsuits relating to seven other Superfund sites. However, it estimates, based
on currently available information, that potential loss contingencies
associated with these sites, individually and in the aggregate, are not
significant. Substantially all amounts reserved are expected to be paid out
over the next five to ten years.

The Company relies upon remedial investigation/feasibility studies (RI/FS)
at each site as a basis for estimating remediation costs at the site. The
Company has substantially completed RI/FS at most

32
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)

of its sites; however, two plant facilities are currently undergoing either
RI/FS or preliminary assessments. In addition, selection of the remediation
method and the cleanup standard to be applied are, in most cases, subject to
approval by the appropriate government authority. Accordingly, the Company may
have possible loss contingencies in excess of the amounts reserved to the
extent the scope of remediation required, the final remediation method
selected and the cleanup standard applied vary from the assumptions used in
estimating the reserve. The Company estimates that the upper range of these
possible loss contingencies should not exceed the amount accrued by more than
$65 million.

The extent of loss related to environmental matters ultimately depends upon
a number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts reserved or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.

The Company and ARCO are parties to an agreement whereby the Company has
indemnified ARCO against certain claims or liabilities that ARCO may incur
relating to ARCO's former ownership and operation of the oxygenates and
polystyrenics businesses of the Company, including liabilities under laws
relating to the protection of the environment and the workplace and
liabilities arising out of certain litigation. ARCO has indemnified the
Company with respect to claims or liabilities and other matters of litigation
not related to the assets or businesses reflected in the consolidated
financial statements. ARCO has also indemnified the Company for certain
federal, foreign, state, and local taxes that might be assessed upon audit of
the operations of the Company included in its consolidated financial
statements for periods prior to the July 1, 1987 formation of the Company.

12.RETIREMENT PLANS

Substantially all employees are covered by various pension plans. The ARCO
Chemical Retirement Plan (ACRP), a defined benefit plan, provides pension
benefits to all of the Company's employees in the United States and certain
employees in foreign countries. In addition to the ACRP, the Company also
maintains defined benefit pension plans for hourly employees at the Beaver
Valley plant in Monaca, Pennsylvania, as well as several plans covering
certain employees throughout its European and Asia Pacific operations.

Retirement benefits under the ACRP are based on years of participation
service and the employee's compensation primarily during the last three years
of service. Retirement benefits for the Beaver Valley Hourly Retirement Plan
are primarily based on years of service and on the employee's career average
earnings after January 1, 1989, plus a prior benefit accrued through December
31, 1988. European and Asia Pacific plans vary by country, but are primarily
based on years of service
and compensation during the last year of service. The funding policy for these
plans consists of annual contributions as required by applicable regulations.
In 1995, 1994, and 1993, the Company charged pension costs as accrued, based
on an actuarial valuation, and funded the plans through contributions to
separate trust funds that are kept apart from Company funds.

33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12.RETIREMENT PLANS--(CONTINUED)

The following tables set forth the plans' funded status and amounts
recognized in the Company's balance sheets at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995
---------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................ $171 $ 20
==== ====
Accumulated benefit obligation................... $194 $ 20
==== ====
Projected benefit obligation..................... $261 $ 32
Plan assets at fair value, primarily stocks and
bonds............................................. 258 --
---- ----
Projected benefit obligation in excess of plan as-
sets.............................................. (3) (32)
Unrecognized net loss.............................. 32 15
Prior service cost not yet recognized in net peri-
odic pension cost................................. 6 2
Unrecognized net liability at January 1, 1995...... 4 --
Adjustment required to recognize minimum liability. -- (6)
---- ----
Prepaid pension cost (liability) recognized in the
balance sheet..................................... $ 39 $(21)
==== ====
</TABLE>

<TABLE>
<CAPTION>
1994
---------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................ $125 $ 16
==== ====
Accumulated benefit obligation................... $144 $ 17
==== ====
Projected benefit obligation..................... $200 $ 23
Plan assets at fair value, primarily stocks and
bonds............................................. 205 --
---- ----
Projected benefit obligation less than (in excess
of) plan assets................................... 5 (23)
Unrecognized net loss.............................. 8 9
Prior service cost not yet recognized in net peri-
odic pension cost................................. 6 2
Unrecognized net liability at January 1, 1994...... 3 --
Adjustment required to recognize minimum liability. -- (5)
---- ----
Prepaid pension cost (liability) recognized in the
balance sheet.....................................
$ 22 $(17)
==== ====
</TABLE>

The above tables for plans with assets exceeding accumulated benefits
include foreign pension plans. These foreign plans constitute approximately 21
percent and 25 percent of the projected benefit obligation and 24 percent and
26 percent of the plan assets in the table at December 31, 1995 and 1994,
respectively. The plans for which accumulated benefits exceed assets represent
supplemental retirement benefits for executives and expatriated employees.

34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12.RETIREMENT PLANS--(CONTINUED)

Components of net pension cost related to Company-sponsored plans for the
years ended December 31, 1995, 1994, and 1993 were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost......................................... $ 13 $ 15 $ 10
Interest cost........................................ 19 15 12
Actual return on plan assets......................... (44) 1 (27)
Net amortization and deferral........................ 25 (18) 13
------- ------- -------
Net periodic pension cost.......................... $ 13 $ 13 $ 8
======= ======= =======
</TABLE>

In addition to the pension cost above, in 1994 the Company recorded $13
million pretax of additional pension expense in connection with work force
reductions resulting from the corporate restructuring program.

Foreign pension plans comprised $3 million, $5 million and $3 million of net
periodic pension cost for the years 1995, 1994 and 1993, respectively.

The assumptions used as of December 31, 1995, 1994, and 1993 in determining
the domestic net pension cost and net pension liability were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Discount rate.............................................. 7.0% 8.25% 7.25%
Rate of salary progression................................. 5.0 5.0 5.0
Long-term rate of return on assets......................... 10.25 10.25 10.25
</TABLE>

The assumptions used in determining the net pension cost and pension
liability for foreign pension plans were based on the economic environment of
each applicable country. The range of assumptions used as of December 31, 1995
was as follows: discount rates, 7.0 to 7.95 percent; rate of salary
progression, 5.0 percent; long-term rate of return on assets, 7.0 to 9.0
percent.

13.OTHER POSTRETIREMENT BENEFITS

The Company provides medical and life insurance benefits for retired
employees and covered dependents. Substantially all U.S. employees of the
Company may become eligible for these benefits if they remain employed until
normal retirement age or fulfill other eligibility requirements. Retiree
contribution levels to the medical benefit plan are determined annually by the
Company; the life insurance plan is noncontributory. The underlying plans are
not funded.

The following reconciles the unfunded accumulated obligation to the
Company's balance sheet as of December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
---- ----
(MILLIONS
OF
DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $20 $14
Fully eligible active plan participants........................... 8 9
Other active plan participants.................................... 31 33
Unrecognized net loss............................................. (1) (2)
--- ---
Accrued postretirement benefit liability............................ $58 $54
=== ===
</TABLE>

35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13.OTHER POSTRETIREMENT BENEFITS--(CONTINUED)

Net periodic postretirement benefit cost for the years ended December 31,
1995, 1994 and 1993 included the following components:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Service cost..................................................... $2 $4 $3
Interest cost.................................................... 3 4 4
--- --- ---
Net periodic postretirement benefit cost......................... $5 $8 $7
=== === ===
</TABLE>

The medical cost trend inflation rate assumption was changed during 1995,
based on cumulative experience, from 10 percent to 9 percent annually for the
period 1993 to 1996, from 8 percent to 7 percent annually for the period 1997
to 2001, and from 6 percent to 5 percent annually thereafter. Increasing the
health care cost trend rate by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1995 by $9
million and increase net periodic postretirement benefit cost for 1995 by $1
million. The discount rate used was 7.0 percent.

14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS

In November 1989, the Board of Directors adopted the 1990 Long-Term Incentive
Plan (the 1990 Plan). The 1990 Plan, which became effective January 1, 1990,
provides, among other things, for the granting to officers and other key
management employees of nonqualified stock options for the purchase of up to
two million shares of the Company's common stock. The option price per share is
fixed by the Long-Term Incentive Plan Administration Subcommittee (the
subcommittee) of the Board of Directors, which administers the 1990 Plan, but
may not be less than the fair market value of the Company's common stock on the
date the option is granted. The maximum option period is ten years. Options
granted may be exercised after one year of continuous service with ARCO, the
Company, or any of their subsidiaries immediately following the date of the
grant unless the subcommittee establishes a longer waiting period.

In July 1987, ARCO, the Company's sole stockholder at the time, approved the
1987 Executive Long-Term Incentive Plan (the 1987 Plan). The 1987 Plan, which
became effective September 1, 1987, provided, among other things, for the
granting to officers and other key management employees of non-qualified stock
options for the purchase of up to 290,000 shares of the Company's common stock
at $32 per share. The options are currently exercisable through October 1997.
No additional options will be granted under the 1987 Plan.

The following table summarizes the activity relating to the Company's stock
option plans:

<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ---------
(NUMBER OF SHARES, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Outstanding at beginning of year....... 1,443,106 1,280,806 1,126,556
Granted................................ 339,200 250,000 225,900
Exercised.............................. (100,133) (86,500) (71,650)
Cancelled/forfeited.................... (800) (1,200) --
Outstanding at end of year............. 1,681,373 1,443,106 1,280,806
Exercisable at end of year............. 1,342,973 1,193,106 1,054,906
Available for grant at end of year..... 273,910 613,110 863,110
Option exercise price per share:
Shares under option.................. $32-48 9/16 $32-48 9/16 $32-41 15/16
Shares exercised..................... 32-48 9/16 32-41 15/16 32-39
</TABLE>

36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS--(CONTINUED)

The Company issues treasury shares upon exercise of stock options.

Effective January 1, 1995, the Company began issuing treasury shares in
connection with purchases of the Company's common stock made by the ARCO
Chemical Company Capital Accumulation Plan (the CAP Plan), a defined
contribution plan for current and former employees of the Company.
Participants' contributions to the CAP Plan through payroll deductions may be
used to purchase the Company's common stock, among other investment
alternatives. The Company makes matching contributions which are used solely
to purchase the Company's common stock. Prior to January 1, 1995, purchases of
the Company's common stock by the CAP Plan were made on the open market.

15.EARNINGS PER COMMON SHARE

Earnings per common share are computed based on the weighted average number
of shares outstanding during the year. For 1995, 1994 and 1993, the weighted
average number of shares was 96,294,810; 96,059,348 and 95,956,777 shares,
respectively. The effect of stock options issued under the 1987 Executive
Long-Term Incentive Plan and the 1990 Long-Term Incentive Plan (see Note 14)
on the computation of primary and fully diluted earnings per common share was
not material and had no effect on the reported earnings per common share.

16.SUPPLEMENTAL CASH FLOW INFORMATION

Following is supplemental cash flow information provided for the years ended
December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Short-term investments:
Gross proceeds from sales........................... $ 30 $ -- $ 43
Gross purchases..................................... (55) -- (34)
-------- ------ ------
Net (purchases) proceeds............................ $ (25) $ -- $ 9
======== ====== ======
Notes payable:
Gross proceeds from issuances....................... $ 1,484 $ 724 $ 601
Gross repayments.................................... (1,508) (757) (580)
-------- ------ ------
Net (repayments) proceeds........................... $ (24) $ (33) $ 21
======== ====== ======
Cash paid during the year for:
Interest (net of amount capitalized)................ $ 87 $ 82 $ 105
Income taxes........................................ 213 93 51
</TABLE>

17.LEASE COMMITMENTS

The Company leases various facilities and equipment under noncancelable
lease arrangements for varying periods. At December 31, 1995, future minimum
lease payments for all noncancelable operating leases with lease terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
(MILLIONS
OF DOLLARS)
<S> <C>
1996.......................................................... $ 50
1997.......................................................... 36
1998.......................................................... 27
1999.......................................................... 15
2000.......................................................... 13
Later years................................................... 93
----
Total minimum lease payments................................ $234
====
</TABLE>

37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17.LEASE COMMITMENTS--(CONTINUED)

Rental expense for the years ended December 31, 1995, 1994, and 1993 was
$100 million, $88 million and $81 million, respectively.

18.FOREIGN CURRENCY TRANSACTIONS

For the years ended December 31, 1995, 1994, and 1993, losses on foreign
exchange transactions, including foreign currency derivative instruments, were
$13 million, $2 million, and $1 million, respectively. See Note 19.

19.FINANCIAL INSTRUMENTS

The Company does not hold or issue financial instruments for speculative
trading purposes.

Various types of foreign currency forward, option and swap contracts are
used to minimize foreign exchange exposures. Foreign exchange exposures result
from cash flows between U.S. and international operations and transactions
denominated in currencies other than the local currency of an operating
entity. Swap contracts are used predominantly to minimize intercompany debt
exposures with maturities exceeding one year, while forward and option
contracts are used for other types of foreign exchange exposures. During 1995,
the Company announced plans to commence engineering studies for the
construction of a new world scale PO/SM plant in Rotterdam, the Netherlands.
In connection with this project, the Company anticipates that it will make
capital commitments denominated in a foreign currency beginning in 1996 and
extending through 2000. During 1995, the Company entered into foreign currency
forward and purchased option contracts to minimize the foreign exchange
exposures associated with these anticipated commitments. The notional amounts
of foreign currency contracts outstanding, principally involving European
currencies, were $442 million at December 31, 1995, with various maturity
dates ranging from 1996 to 2000. At December 31, 1994, the notional amounts of
foreign currency contracts outstanding were $120 million.

Interest rate swap contracts are used to minimize interest rate exposures on
foreign bank loans due in 1997. The maturities of the interest rate swap
contracts correspond to the maturities of the related debt.

Gains and losses, realized and unrealized, on foreign currency forward
contracts covering anticipatory cash flows are recognized currently as other
income or expense in the results of operations. Gains and losses on foreign
currency swaps are recognized currently in income and offset foreign exchange
gains and losses on the underlying intercompany loans. Gains and losses on
interest rate swap contracts are accrued for each annual period to yield an
effective fixed rate of interest on the related debt. Net gains and losses
associated with derivative contracts for 1995 and 1994 were not material.
Gains on the purchased options related to the new PO/SM plant project are
deferred and will be used in the measurement of the plant construction costs.
There were no deferred hedging gains as of December 31, 1995.

38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19.FINANCIAL INSTRUMENTS--(CONTINUED)

The carrying value and the estimated fair value of the Company's derivative
instruments as of December 31, 1995 and 1994 are shown as assets (liabilities)
in the table below. The carrying value of the purchased options represents the
unamortized balance of the option premium.

<TABLE>
<CAPTION>
1995 1994
--------------- --------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ -------- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Nonderivatives:
Short-term investments....................... $ 25 $ 25 $ -- $ --
Investments and long-term receivables........ 90 90 97 97
Notes payable................................ -- -- 23 23
Long-term debt (including current maturi-
ties)....................................... 912 1,095 913 968
Derivatives:
Foreign currency forwards.................... (5) (5) -- --
Foreign currency options..................... 7 7 -- --
Foreign currency swaps ...................... (6) (6) (4) (4)
Interest rate swaps.......................... (1) (5) -- (5)
</TABLE>

The carrying amounts of nonderivative financial instruments are reported on
the balance sheet under the indicated captions. 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 consist of highly liquid investments, such as time
deposits, certificates of deposit and marketable securities other than equity
securities, maturing in more than three months from the date of purchase.
Short-term investments are carried at cost, which approximates fair value.
Investments and long-term receivables, which consist primarily of equity
investments in affiliated companies, were valued using current financial and
other available information. The fair value of notes payable approximates
carrying value due to the relatively short-term maturities of such
instruments. Long-term debt was valued based on quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The fair value of derivative financial
instruments represents the amount to be exchanged if the existing contracts
were settled at year end and are based on market quotes.

The Company is exposed to credit risk related to its financial instruments
in the event of nonperformance by the counterparties. The Company does not
generally require collateral or other security to support these financial
instruments. However, the counterparties to these transactions are major
institutions deemed creditworthy by the Company; the Company does not
anticipate nonperformance by the counterparties.

20.CORPORATE RESTRUCTURING PROGRAM

In November 1994, the Company announced a worldwide corporate restructuring
program to reorganize its workforce on a global basis. In connection with the
restructuring, approximately 130 positions in the Company were eliminated. The
Company accrued $30 million before tax in the fourth quarter of 1994,
consisting primarily of personnel costs (pension enhancements, severance and
other ancillary costs) associated with personnel reductions. Of the total
accrued, approximately $15 million was primarily related to enhanced pension
benefits, the majority of which will be paid from the assets of qualified
pension plans. An additional $15 million was related to severance and other
ancillary costs to be paid from Company funds. Through the end of 1995, the
program was substantially completed. The accrual balance at December 31, 1995
was $6 million, which primarily consisted of severance payments that were
deferred by employees and which will be paid in 1996.

39
<PAGE>

21.SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
----------- ----------- ------------- ------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
1995
----
<S> <C> <C> <C> <C>
Net sales.................... $ 1,141 $ 1,149 $ 999 $ 993
Gross profit................. 297 327 270 286
Net income................... 126 150 117 115
Earnings per common share
(2)......................... 1.31 1.56 1.21 1.19
<CAPTION>
1994
----
<S> <C> <C> <C> <C>
Net sales.................... $ 757 $ 824 $ 895 $ 947
Gross profit................. 170 216 223 228
Net income (1)............... 45 68 81 75
Earnings per common share
(2)......................... .47 .71 .84 .78
</TABLE>
- --------
(1) The fourth quarter 1994 includes a charge of $19 million ($.20 per share)
for corporate restructuring costs and a benefit of $12 million ($.12 per
share) from insurance proceeds.
(2) Earnings per common share calculations for each of the quarters are based
on the weighted average number of shares outstanding for each period. The
sum of the quarters may not necessarily be equal to the full year earnings
per share amount.

40
<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 Company's definitive proxy statement for its Annual Meeting of
Stockholders, to be held on May 10, 1996, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995,
and which is incorporated herein by reference.

PART IV

ITEM 14.EXHIBITS AND REPORTS ON FORM 8-K

(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:

<TABLE>
<S> <C>
1. and 2. Financial Statements: These documents are listed in the Index to Consolidated
Financial Statements. See Item 8.
3. Exhibits:
3.1 Certificate of Amendment and Restated Certificate of Incorporation of ARCO
Chemical Company, filed as an Exhibit bearing the same number to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing the same number
to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on
July 28, 1987, and incorporated herein by reference.
4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Company and The
Bank of New York as Trustee, filed as Exhibit 4.2 to the Company's Registra-
tion Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and incor-
porated herein by reference.
4.2 Forms of Debt Securities issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3
(No. 33-23340), filed on July 27, 1988, and incorporated herein by reference.
4.3 Form of Debt Security issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated
January 30, 1990, and incorporated herein by reference.
4.4 Forms of Debt Securities issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibits 4.1 and 4.2 to the Company's Current Report on Form 8-
K dated October 31, 1990, and incorporated herein by reference.
</TABLE>

41
<PAGE>

<TABLE>
<S> <C>
4.5 Form of Debt Security issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated De-
cember 7, 1990, and incorporated herein by reference.
4.6 Credit Agreement, dated as of November 19, 1993, between ARCO Chemical Com-
pany and The First National Bank of Chicago, as Agent for the banks listed
therein, filed as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by reference.
4.7 Credit Agreement, dated as of November 19, 1993, between ARCO Chemical Com-
pany and The First National Bank of Chicago, as Agent for the banks listed
therein, filed as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by reference.
4.8 Amendment No. 1 to the Credit Agreement, dated as of October 14, 1994, be-
tween ARCO Chemical Company and The First National Bank of Chicago, as Agent
for the banks listed therein, filed as an Exhibit bearing the same number to
the Company's Annual Report on Form 10-K for 1994, and incorporated herein by
reference.
4.9 Instruments defining the rights of holders of long-term debt not registered
under the Securities Exchange Act of 1934 (other than long-term debt issued
pursuant to the Credit Agreement) are not filed because the total amount of
securities authorized under any such instrument does not exceed 10 percent of
the consolidated total assets of the company. The Company agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
10.1 ARCO Chemical Company Annual Incentive Plan, effective January 1, 1988, filed
as an Exhibit bearing the same number to the Company's Annual Report on Form
10-K for 1993, and incorporated herein by reference.
10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Annual In-
centive Plan, as adopted February 15, 1989, filed as an Exhibit bearing the
same number to the Company's Annual Report on Form 10-K for 1990, and incor-
porated herein by reference.
10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Annual In-
centive Plan, as adopted July 17, 1990, effective September 1, 1990, filed as
an Exhibit bearing the same number to the Company's Annual Report on Form 10-
K for 1990, and incorporated herein by reference.
10.4 Amendment and Restatement of ARCO Chemical Company Executive Supplementary
Savings Plan, effective January 1, 1989, filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for 1990, and incorporated herein by
reference.
10.5 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Executive
Supplementary Savings Plan, as adopted July 17, 1990, effective September 1,
1990, filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.
10.6 ARCO Chemical Company 1987 Executive Long-Term Incentive Plan, filed as Ex-
hibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on July 28, 1987, and incorporated herein by reference.
10.7 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as amended
through July 20, 1995.
10.8 ARCO Chemical Company Retirement Benefit Restoration Plan, effective January
1, 1988, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K
for 1993, and incorporated herein by reference.
10.9 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Retirement
Benefit Restoration Plan, as adopted July 17, 1990, effective September 1,
1990, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.
</TABLE>

42
<PAGE>

<TABLE>
<S> <C>
10.10 ARCO Chemical Company Supplementary Executive Retirement Plan, effective
October 1, 1990, filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for 1992, and incorporated herein by reference.
10.11 ARCO Chemical Company Financial Counseling Policy, effective January 1, 1988,
filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for 1993,
and incorporated herein by reference.
10.12 ARCO Chemical Company Executive Medical Insurance Plan (Summary Plan Descrip-
tion), effective January 1, 1988, filed as Exhibit 10.14 to the Company's An-
nual Report on Form 10-K for 1993, and incorporated herein by reference.
10.13 ARCO Chemical Company Key Management Deferral Plan, effective October 1,
1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.
10.14 Amendment No. 1 to the Key Management Deferral Plan, effective as of October
22, 1992.
10.15 ARCO Chemical Company Key Management Long-Term Disability Plan, effective Oc-
tober 1, 1990, filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for 1992, and incorporated herein by reference.
10.16 Resolutions relating to ARCO Chemical Company Key Management Life Insurance
Plan, as adopted July 17, 1990, effective August 1, 1990, filed as Exhibit
10.21 to the Company's Annual Report on Form 10-K for 1990, and incorporated
herein by reference.
10.17 ARCO Chemical Company Retirement Plan for Outside Directors, as amended and
restated effective October 1, 1990, filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for 1992, and incorporated herein by reference.
10.18 ARCO Chemical Company Deferral Plan for Outside Directors, effective October
1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for 1992, and incorporated herein by reference.
10.19 Cross-Indemnification Agreement, dated as of June 1, 1987, between ARCO Chem-
ical Company and Atlantic Richfield Company, filed as Exhibit 10.2(a) to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
10.20 Amendment No. 1 to Cross-Indemnification Agreement, dated as of June 30,
1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as
Exhibit 10.2(b) to the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on July 28, 1987, and incorporated herein by reference.
10.21 Amendment No. 2 to Cross-Indemnification Agreement, dated as of July 1, 1987,
between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.2(c) to Amendment No. 1 to the Company's Registration Statement on
Form S-1
(No. 33-15930), filed on August 21, 1987, and incorporated herein by refer-
ence.
10.22 Amended and Restated Tax Sharing Agreement, effective as of January 1, 1995,
between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly pe-
riod ended June 30, 1995, and incorporated herein by reference.
10.23 LPC/ACC Services Agreement, dated as of June 30, 1987, between ARCO Chemical
Company and Lyondell Petrochemical Company, filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
10.24 Services Agreement, dated as of July 18, 1987, between ARCO Chemical Company
and Atlantic Richfield Company, filed as Exhibit 10.5 to the Company's Regis-
tration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and in-
corporated herein by reference.
</TABLE>

43
<PAGE>

<TABLE>
<S> <C>
10.25 Amendment No. 1 to Services Agreement, dated as of March 30, 1990, between
ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.29
to the Company's Annual Report on Form 10-K for 1990, and incorporated herein
by reference.
10.26 Shareholder Agreement, dated as of June 30, 1987, between ARCO Chemical Com-
pany and Atlantic Richfield Company, filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987,
and incorporated herein by reference.
10.27 Form of ARCO Chemical Company Indemnity Agreement with officers and direc-
tors, filed as Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by refer-
ence.
12 Statement re computation of the ratio of earnings to fixed charges.
21 Subsidiaries of ARCO Chemical Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>

All documents incorporated herein by reference to any Annual Report on Form
10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K previously
filed by the Company relate to Commission File No. 1-9678.

Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.

(B) REPORTS ON FORM 8-K:

None.

44
<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, in Newtown Square, Commonwealth of
Pennsylvania, on February 29, 1996.

ARCO Chemical Company

By: ALAN R. HIRSIG
---------------------------------
Alan R. Hirsig
President and Chief Executive
Officer

----------------

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 date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
MIKE R. BOWLIN* Chairman of the
- ------------------------------------- Board and Director
Mike R. Bowlin

ALAN R. HIRSIG President, Chief
- ------------------------------------- Executive Officer
Alan R. Hirsig and Director

MARVIN O. SCHLANGER* Executive Vice
- ------------------------------------- President, Chief
Marvin O. Schlanger Operating Officer
and Director

WALTER J. TUSINSKI* Senior Vice
- ------------------------------------- President, Chief
Walter J. Tusinski Financial Officer February 29, 1996
and Director

RONALD J. ARNAULT* Director
- -------------------------------------
Ronald J. Arnault

WALTER F. BERAN* Director
- -------------------------------------
Walter F. Beran

E. KENT DAMON, JR.* Director
- -------------------------------------
E. Kent Damon, Jr.

MARIE L. KNOWLES* Director
- -------------------------------------
Marie L. Knowles
</TABLE>

45
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
JAMES A. MIDDLETON* Director
- -------------------------------------
James A. Middleton

FRANK SAVAGE* Director
- -------------------------------------
Frank Savage

ROBERT H. STEWART, III* Director
- ------------------------------------- February 29, 1996
Robert H. Stewart, III

JOHN A. SHAW Vice President and
- ------------------------------------- Controller (principal
John A. Shaw accounting officer)

</TABLE>

*By: JOHN A. SHAW
---------------------------------
John A. Shaw
(Attorney in fact)

46
<PAGE>

EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-9678
ARCO CHEMICAL COMPANY

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
3.1 Certificate of Amendment and Restated Certificate of Incorpora-
tion of ARCO Chemical Company, filed as an Exhibit bearing the
same number to the Company's Registration Statement on Form S-1
(No. 33-15930), filed on July 28, 1987, and incorporated herein
by reference...................................................
3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing
the same number to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated
herein by reference............................................
4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical
Company and The Bank of New York as Trustee, filed as Exhibit
4.2 to the Company's Registration Statement on Form S-3 (No.
33-23340), filed on July 27, 1988, and incorporated herein by
reference......................................................
4.2 Forms of Debt Securities issuable under the Indenture referred
to in Exhibit 4.1, filed as Exhibit 4.1 to the Company's Regis-
tration Statement on Form S-3 (No. 33-23340), filed on July 27,
1988, and incorporated herein by reference.....................
4.3 Form of Debt Security issuable under the Indenture referred to
in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Re-
port on Form 8-K dated January 30, 1990, and incorporated
herein by reference............................................
4.4 Forms of Debt Securities issuable under the Indenture referred
to in Exhibit 4.1, filed as Exhibits 4.1 and 4.2 to the
Company's Current Report on Form 8-K dated October 31, 1990,
and incorporated herein by reference...........................
4.5 Form of Debt Security issuable under the Indenture referred to
in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Re-
port on Form 8-K dated December 7, 1990, and incorporated
herein by reference............................................
4.6 Credit Agreement, dated as of November 19, 1993, between ARCO
Chemical Company and The First National Bank of Chicago, as
Agent for the banks listed therein, filed as an Exhibit bearing
the same number to the Company's Annual Report on Form 10-K for
1993, and incorporated herein by reference.....................
4.7 Credit Agreement, dated as of November 19, 1993, between ARCO
Chemical Company and The First National Bank of Chicago, as
Agent for the banks listed therein, filed as an Exhibit bearing
the same number to the Company's Annual Report on Form 10-K for
1993, and incorporated herein by reference.....................
4.8 Amendment No. 1 to the Credit Agreement, dated as of October
14, 1994, between ARCO Chemical Company and The First National
Bank of Chicago, as Agent for the banks listed therein, filed
as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1994, and incorporated herein by refer-
ence...........................................................
</TABLE>

1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
4.9 Instruments defining the rights of holders of long-term debt
not registered under the Securities Exchange Act of 1934 (other
than long-term debt issued pursuant to the Credit Agreement)
are not filed because the total amount of securities authorized
under any such instrument does not exceed 10 percent of the
consolidated total assets of the Company. The Company agrees to
furnish a copy of any such instrument to the Securities and Ex-
change Commission upon request.................................
10.1 ARCO Chemical Company Annual Incentive Plan, effective January
1, 1988, filed as an Exhibit bearing the same number to the
Company's Annual Report on Form 10-K for 1993, and incorporated
herein by reference ...........................................
10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Com-
pany Annual Incentive Plan, as adopted February 15, 1989, filed
as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1990, and incorporated herein by refer-
ence...........................................................
10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Com-
pany Annual Incentive Plan, as adopted July 17, 1990, effective
September 1, 1990, filed as an Exhibit bearing the same number
to the Company's Annual Report on Form 10-K for 1990, and in-
corporated herein by reference ................................
10.4 Amendment and Restatement of ARCO Chemical Company Executive
Supplementary Savings Plan, effective January 1, 1989, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.....................
10.5 Resolutions relating to Amendment No. 2 to ARCO Chemical Com-
pany Executive Supplementary Savings Plan, as adopted July 17,
1990, effective September 1, 1990, filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for 1990, and incorporated
herein by reference............................................
10.6 ARCO Chemical Company 1987 Executive Long-Term Incentive Plan,
filed as Exhibit 10.12 to the Company's Registration Statement
on Form S-1 (No. 33-15930), filed on July 28, 1987, and incor-
porated herein by reference....................................
10.7 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated
as amended through July 20, 1995...............................
10.8 ARCO Chemical Company Retirement Benefit Restoration Plan, ef-
fective
January 1, 1988, filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by refer-
ence...........................................................
10.9 Resolutions relating to Amendment No. 1 to ARCO Chemical Com-
pany Retirement Benefit Restoration Plan, as adopted July 17,
1990, effective September 1, 1990, filed as Exhibit 10.10 to
the Company's Annual Report on Form 10-K for 1990, and incorpo-
rated herein by reference......................................
10.10 ARCO Chemical Company Supplementary Executive Retirement Plan,
effective October 1, 1990, filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for 1992, and incorporated
herein by reference............................................
10.11 ARCO Chemical Company Financial Counseling Policy, effective
January 1, 1988, filed as Exhibit 10.13 to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by refer-
ence...........................................................
10.12 ARCO Chemical Company Executive Medical Insurance Plan (Summary
Plan Description), effective January 1, 1988, filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K for 1993, and
incorporated herein by reference...............................
10.13 ARCO Chemical Company Key Management Deferral Plan, effective
October 1, 1990, filed as Exhibit 10.19 to the Company's Annual
Report on Form 10-K for 1990, and incorporated herein by refer-
ence...........................................................
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
10.14 Amendment No. 1 to the Key Management Deferral Plan, effective
as of October 22, 1992.........................................
10.15 ARCO Chemical Company Key Management Long-Term Disability Plan,
effective October 1, 1990, filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for 1992, and incorporated
herein by reference ...........................................
10.16 Resolutions relating to ARCO Chemical Company Key Management
Life Insurance Plan, as adopted July 17, 1990, effective August
1, 1990, filed as Exhibit 10.21 to the Company's Annual Report
on Form 10-K for 1990, and incorporated herein by reference....
10.17 ARCO Chemical Company Retirement Plan for Outside Directors, as
amended and restated effective October 1,1990, filed as Exhibit
10.18 to the Company's Annual Report on Form 10-K for 1992, and
incorporated herein by reference. .............................
10.18 ARCO Chemical Company Deferral Plan for Outside Directors, ef-
fective October 1, 1990, filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for 1992, and incorporated
herein by reference............................................
10.19 Cross-Indemnification Agreement, dated as of June 1, 1987, be-
tween ARCO Chemical Company and Atlantic Richfield Company,
filed as Exhibit 10.2(a) to the Company's Registration State-
ment on Form S-1 (No. 33-15930), filed on July 28, 1987, and
incorporated herein by reference...............................
10.20 Amendment No. 1 to Cross-Indemnification Agreement, dated as of
June 30, 1987, between ARCO Chemical Company and Atlantic Rich-
field Company, filed as Exhibit 10.2(b) to the Company's Regis-
tration Statement on Form S-1 (No. 33-15930), filed on July 28,
1987, and incorporated herein by reference.....................
10.21 Amendment No. 2 to Cross-Indemnification Agreement, dated as of
July 1, 1987, between ARCO Chemical Company and Atlantic Rich-
field Company, filed as Exhibit 10.2(c) to Amendment No. 1 to
the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on August 21, 1987, and incorporated herein by
reference......................................................
10.22 Amended and Restated Tax Sharing Agreement, effective as of
January 1, 1995, between ARCO Chemical Company and Atlantic
Richfield Company, filed as Exhibit 10 to the Company's Quar-
terly Report on Form 10-Q for the quarterly period ended June
30, 1995, and incorporated herein by reference.................
10.23 LPC/ACC Services Agreement, dated as of June 30, 1987, between
ARCO Chemical Company and Lyondell Petrochemical Company, filed
as Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated
herein by reference............................................
10.24 Services Agreement, dated as of July 18, 1987, between ARCO
Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.5 to the Company's Registration Statement on Form S-1
(No. 33-15930), filed on July 28, 1987, and incorporated herein
by reference...................................................
10.25 Amendment No. 1 to Services Agreement, dated as of March 30,
1990, between ARCO Chemical Company and Atlantic Richfield Com-
pany, filed as Exhibit 10.29 to the Company's Annual Report on
Form 10-K for 1990, and incorporated herein by reference.......
10.26 Shareholder Agreement, dated as of June 30, 1987, between ARCO
Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.6 to the Company's Registration Statement on Form S-1
(No. 33-15930), filed on July 28, 1987, and incorporated herein
by reference...................................................
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
10.27 Form of ARCO Chemical Company Indemnity Agreement with officers
and directors, filed as Exhibit 10.8 to the Company's Registra-
tion Statement on Form S-1 (No. 33-15930), filed on July 28,
1987, and incorporated herein by reference......................
12 Statement re computation of the ratio of earnings to fixed
charges.........................................................
21 Subsidiaries of ARCO Chemical Company...........................
23 Consent of Independent Accountants..............................
24 Power of Attorney...............................................
27 Financial Data Schedule.........................................
</TABLE>

<PAGE>

Exhibit 10.7

1990 ARCO CHEMICAL COMPANY LONG-TERM INCENTIVE PLAN

Article I GENERAL PROVISIONS
------------------

Section 1. PURPOSES OF THE PLAN
--------------------

The purposes of this Plan are to encourage management and other key
employees to focus on the long-range growth and profitability of the Company; to
reward them for success in achieving specific long-range goals; and to
facilitate the attraction and retention of employees of superior capability.

Section 2. EFFECTIVE DATE AND DURATION OF PLAN
-----------------------------------

The effective date of the Plan is January 1, 1990, subject to
approval by the holders of a majority of the shares which are represented in
person or by proxy and entitled to vote on the subject at a meeting of the
stockholders of the Company at which a quorum is present, except that awards
under the Plan may be made subject to such stockholder approval. No awards may
be made under the plan after December 31, 1996.

Section 3. DEFINITIONS
-----------

As used herein, the following terms shall have the following
meanings:

(a) "Common Stock" shall mean the common stock of the Company
having a par value of $1.00 per share.

(b) "Company" shall mean ARCO Chemical Company.

(c) "Dividend Share Credits" (DSC's) shall mean the number of
credits, expressed as an equivalent number of shares of Common Stock, to be
recorded as credited to an Eligible Employee as of the record date established
by the Board of Directors of the Company for each cash dividend declared and
issued on outstanding shares of Common Stock, with respect to the Stock Rights
held by an Eligible Employee on such record date. The number of DSCs to be
credited shall be the aggregate number derived by (i) multiplying the declared
dividend rate per share of Common Stock by the number of Stock Rights held by an
Eligible Employee as of the dividend record date, and (ii) dividing the
resulting figure by the Fair Market Value of a share of Common Stock on such
record date. The DSCs will be calculated to the nearest 0.0001 of a unit.
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 2

(d) "Eligible Employees" shall mean management and other key
employees of the Company or of any Subsidiary or Affiliate who, in the opinion
of the Subcommittee, are in a position to contribute significantly to the
Company's long-term profit and growth objectives; provided, however, that no
member of the Subcommittee nor any person owning stock processing more than 10
percent of the total combined voting power of all classes of stock of the
Company shall be an Eligible Employee. "Eligible Employee" shall mean the
singular of Eligible Employees.

(e) "Employer" shall mean, with respect to any Eligible
Employee, the Company, Lyondell Petrochemical Company, and any Subsidiary or
Affiliate of either, that is the employer of the Eligible Employee.

(f) "Fair Market Value" (FMV) of a share of Common Stock
shall be the mean of the highest and lowest sale prices, or the closing sale
price of a share of Common Stock, whichever is higher, on the date in question
as reported on the composite tape for issues listed on the New York Stock
Exchange. If no transactions were reported on the composite tape for the Common
Stock on such date, the FMV shall be computed using the prices reported on the
nearest day preceding the date in question. If the Common Stock should not then
be listed or admitted to trading on such Exchange, FMV shall be the mean of the
closing bid and asked prices on the date in question as furnished by any member
firm of the New York Stock Exchange selected from time to time by the
Subcommittee for that purpose.

(g) "Plan" shall mean this 1990 Long-Term Incentive Plan
including any amendments hereof and rules and regulations hereunder.

(h) "Pyramiding" shall mean the process whereby an optionee
surrenders shares received from the exercise of a portion of the optionee's
total stock options to satisfy the exercise price for additional option shares.
The additional shares thus obtained may in turn be surrendered at their Fair
Market Value to satisfy the exercise price for yet additional option shares. The
process may be repeated as often as the optionee directs to satisfy the total
exercise price for the options exercised.

(i) "Sale Price" of any share of Common Stock shall mean the
actual price for which such share of Common Stock shall have been sold by an
Eligible Employee on the date in question as reported on a confirmation form
prepared and furnished to the Company by the broker effecting the transaction on
behalf of such Eligible Employee.
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 3

(j) "Stock Options" shall mean Non-qualified Stock Options,
and shall consist of options to purchase the Common Stock of the Company under
the terms and conditions set forth in Article II.

(k) "Stock Rights" shall mean, as of any date, (i) the total
number of shares of Common Stock underlying all outstanding and unexercised
Stock Options held by an Eligible Employee pursuant to the Plan, plus (ii) the
number of DSCs credited to an Eligible Employee on such date.

(l) "Subcommittee" shall mean the Long-Term Incentive Plan
Administration Subcommittee of the Board of Directors of the Company.

(m) "Subsidiary" or "Affiliate" shall mean (i) any
corporation which is a member of a controlled group of corporations within the
meaning of Section 1563(a) of the Internal Revenue Code of 1986 (the "Code")
[determined without regard to Section 1563(a)(4) and Section 1563(e)(3)(c) of
the Code] and of which the Company is then a member, and (ii) all trades or
businesses, whether or not incorporated, which, under regulations prescribed by
the Secretary of the Treasury pursuant to Section 210(d) of the Employee
Retirement Income Security Act of 1974, are then under common control with the
Company.

Section 4. ADMINISTRATION OF THE PLAN
--------------------------

The plan shall be administered by the Subcommittee, which is
authorized to interpret the Plan, to adopt such rules and regulations as it may
from time to time deem necessary for the effective operation of the Plan, and to
act upon all matters relating to the granting of awards under the Plan. Any
determination, interpretation, construction or other action made or taken
pursuant to the provisions of the Plan by or on behalf of the Subcommittee shall
be final, binding and conclusive for all purposes and upon all persons
including, without limitation, the Company, its subsidiaries and Affiliates,
their respective stockholders, Eligible Employees and their respective
successors in interest.
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 4

Article II STOCK OPTIONS
-------------

Section 1. GRANTS OF STOCK OPTIONS
-----------------------

The Subcommittee may grant Stock Options to Eligible Employees on
the terms and conditions set forth in this Plan and on other terms and
conditions consistent with the purposes and provisions of the Plan and within
the appropriate regulations governing such grants.

Section 2. TERMS AND CONDITIONS FOR STOCK OPTION GRANTS
--------------------------------------------

All Stock Options granted under the Plan shall be subject to the
following terms and conditions:

(a) Option Price The Option Price per share with respect to
------------
each Stock Option shall be fixed by the Subcommittee, but shall not be less than
the Fair Market Value of the Common Stock on the date the Stock Option is
granted.

(b) Period of Option A Stock Option shall expire and all
----------------
rights thereunder shall end at the expiration of such period (not exceeding 10
years) after the date the Stock Option is granted as shall be fixed by the
Subcommittee at the time it grants the Stock Option.

(c) Exercise of Option A Stock Option may be exercised at
------------------
such time or times, either as to all shares or in installments, as the
Subcommittee shall prescribe when it grants the Stock option and in compliance
with pertinent government regulations. In no event, however, may a Stock Option
be exercised until the expiration of one (1) year following the date of grant.

(d) Payment for Shares Every share purchased through the
------------------
exercise of a Stock Option shall be paid for in full in cash within ten business
days following the time of exercise, or, unless the Stock Option expressly
provides otherwise, in shares of Common Stock valued at their Fair Market Value
on the date of exercise, or, with respect to options granted prior to January 1,
1992 as to which an optionee has not relinquished the right to pyramid, by
Pyramiding, or a combination thereof.

(e) Dividend Share Credits DSCs shall be credited as
----------------------
provided in Article I, Section 3(c). DSCs attributable to exercised, expired or
surrendered Stock
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 5

Options shall be canceled upon such exercise, expiration or surrender as
provided in Article III.

(f) Termination of Employment If an optionee's employment is
-------------------------
terminated prior to the expiration of one year from the date of grant of Stock
Options, such Stock Options, and accumulated DSCs pertaining thereto, shall be
cancelled unless the optionee's termination is due to (i) death, (ii) total and
permanent disability, (iii) termination of employment with a right to an
immediate allowance under a retirement plan of the Employer, or (iv) any other
termination of employment in connection with which the Subcommittee, in its sole
discretion, has determined that the optionee's Stock Options shall not be
cancelled.

If an optionee's employment is terminated following the
expiration of one year from the date of grant of Stock Options, such Stock
Options and accumulated DSCs pertaining thereto, shall be cancelled if the
termination is due to (i) discharge for cause, (ii) resignation without approval
of the Employer (except in conjunction with a right to an immediate allowance
under a retirement plan of the Employer) or (iii) resignation at the initiation
of the Employer (except in conjunction with a right to an immediate allowance
under a retirement plan of the Employer, an economic layoff or a reduction in
force).

(g) Expiration Date Extensions In the event of the death of
--------------------------
an optionee, the expiration dates of any Stock Options which occur on and after
the date of death and prior to the date on which a fiduciary is qualified, duly
appointed, or otherwise legally empowered to exercise the Stock Options, shall
be extended for 60 days immediately succeeding the date of such qualification,
appointment or empowerment. In the event an optionee is unable to exercise any
Stock Options because of mental or physical disability, or for other reasons
beyond the optionee's control, the Subcommittee may, in its sole discretion,
extend the expiration date(s) to such date(s) as it deems reasonable under the
circumstances.

(h) Maximum Grant No individual may receive a grant or
-------------
grants of Stock Options in any single calendar year the aggregate number of
which exceeds 25% of the total number of Stock Options granted in that calendar
year.
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 6

Article III PERFORMANCE-BASED DIVIDEND SHARE CREDITS
----------------------------------------

Section 1. CANCELLATION OF CREDITS UPON EXERCISE, EXPIRATION OR SURRENDER OF
-----------------------------------------------------------------
STOCK OPTION
------------

Upon exercise of any Stock Option, in whole or in part, the credited DSCs
attributable to the exercised Stock Option shall be canceled. Upon expiration
of any Stock Option at the end of its original maximum term, the credited DSCs
attributable to the expired Stock Option shall be canceled. An optionee may
elect to surrender for cancellation exercisable Stock Options in whole or in
part. Upon surrender and cancellation of any such Stock Options, the DSCs
attributable to the surrendered Stock Options shall also be canceled.

The Shares of Common Stock underlying Stock Options exercised, surrendered
or expired pursuant to this Section shall be referred to as the "affected
shares" for purposes of the application of the performance criterion set forth
in Section 2 below. For purposes of the application of such criterion, the date
of exercise, surrender or expiration shall be referred to as the "determination
date."

Section 2. PERFORMANCE-BASED CRITERION FOR DIVIDEND SHARE CREDITS
------------------------------------------------------

Upon the exercise, expiration or surrender of any Stock Option, the
Subcommittee shall apply the following performance-based criterion to the DSCs
allocable to the affected shares: In order for the performance criterion to be
attained, the aggregate Fair Market Value of the canceled DSCs must exceed the
aggregate Option Price of the affected shares less their Fair Market Value on
the determination date.

The criterion shall be applied independently to each grant in the event of
the exercise, cancellation or surrender of Stock Options attributable to
multiple grants on the same date.

Section 3. CALCULATION FOR CASH PAYMENT
----------------------------

If the performance criterion set forth in Section 2 above is attained, a
cash payment in respect of canceled DSCs shall be made to the optionee in an
amount calculated pursuant to: X, as stated below, in the case of the exercise
of any Stock Option and sale of the affected shares in a broker-assisted
transaction involving the
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 7

withholding of a portion of the proceeds from the sale of the affected shares in
payment of the Option Price (a "cashless exercise"); or Y, as stated below, in
any other case, including, but not limited to, the exercise of any Stock Option
involving the delivery of cash (other than pursuant to a cashless exercise) or
surrender of shares of Common Stock to the Company in payment of the Option
Price, or the expiration or surrender to the Company of any Stock Option.

Where:

X = Sale Price of a share of Common Stock multiplied by the total
number of canceled DSCs.

Y = Fair Market Value of a share of Common Stock multiplied by the
total number of canceled DSCs, less the amount by which the
aggregate Option Price of the affected shares exceeds the
aggregate Fair Market Value of such shares on the
determination date.

No payment may be made to any covered employee (as defined in proposed
Treasury Regulations Section 1.162(m)) unless the Subcommittee has certified in
writing that the performance criterion set forth in Section 2 above has been
attained.

Article IV MISCELLANEOUS PROVISIONS
------------------------

Section 1. OPTION LIMITS
-------------

Subject to adjustment as provided in Section 2 of this Article IV,
the number of shares of Common Stock that may be issued upon exercise of Stock
Options shall not exceed 2,000,000 in the aggregate over the life of the Plan.
The shares shall be made available from authorized but unissued Common Stock or
from Common Stock issued and held in the treasury of the Company as shall be
determined by the Subcommittee.

Section 2. ADJUSTMENT IN TERMS OF AWARD
----------------------------

In the event of a reorganization, recapitalization, stock split,
stock dividend, distribution of assets other than pursuant to a normal cash
dividend, combination of shares, merger, consolidation, rights offering, split-
up, split-off, spin-off
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 8

or any other change in the corporate structure or shares of the Company, the
Subcommittee may, in its discretion, after consultation with the Chairman of the
Board and the President, make appropriate adjustments to reflect such event in
the limitation in Section 1 of this Article IV, the number of shares of Common
Stock covered by, and the exercise price per share applicable to, outstanding
Stock Options, and in the number of DSCs. In the event that the Subcommittee,
after consultation with the Chairman of the Board and the President, determines
that, because of the change in the Company's business, operations, corporate
structure, capital structure, assets or manner in which it conducts business,
which it deems to be extraordinary and material, the terms of awards theretofore
made are no longer suitable to the objectives which the Subcommittee sought to
achieve when it made such awards, it may modify the terms of any or all such
awards in such manner as it may decide is advisable; provided, however, that no
award may be modified in a manner which would be inconsistent with the intent of
Section 8 of this Article IV.

Section 3. GOVERNMENTAL REGULATIONS
------------------------

The Plan and the grant of Stock Options, the exercise of Stock
Options, and the crediting and payment of DSCs hereunder, and the issuance of
stock, shall be subject to all applicable rules and regulations of governmental
and other authorities.

Section 4. NO GUARANTEE OF EMPLOYMENT
--------------------------

The grant of a Stock Option, or credit of a DSC under the Plan,
shall not constitute assurance of continued employment.

Section 5. ASSIGNMENT OR TRANSFER
----------------------

No Stock Option or DSC shall be assignable or transferable by an
Eligible Employee otherwise than by will or the laws of descent and
distribution.

Section 6. RIGHTS AS STOCKHOLDER
---------------------

An Eligible Employee under the Plan shall have no rights of a
holder of Common Stock by virtue of a Stock Option award hereunder, unless and
until
<PAGE>

1990 ARCO Chemical Company Long-Term Incentive Plan Page 9

certificates for shares of Common Stock are issued to him pursuant to the Plan.
DSCs shall not be considered as dividends on Common Stock for any purpose.

Section 7. WITHHOLDING TAXES
-----------------

The Employer shall have the right to withhold from salary or other
remuneration or to otherwise cause the employee (or the executor or
administrator of his estate or his distributee) to make payment of any Federal,
state, local or foreign taxes required to be withheld with respect to the
exercise of any Stock Options or cash settlement of any DSCs.

Section 8. AMENDMENT AND DISCONTINUANCE OF THE PLAN
----------------------------------------

The Subcommittee may amend or discontinue the Plan as it shall
from time to time consider desirable, provided that:

(a) no amendment shall, without further approval by the holders of a majority
of shares represented in person or by proxy and entitled to vote on the subject
at a meeting of stockholders of the Company, change the terms of the Plan so as
to increase the maximum number of shares that may be issued upon exercise of
Stock Options granted under the Plan or credited as DSCs under the plan (other
than as contemplated by Section 2 of this Article IV) reduce the minimum option
price, or extend the maximum option period; and (b) no amendment, discontinuance
or termination shall deprive persons entitled to exercise Stock Options, or to
receive a cash settlement of any DSCs, pursuant to the terms and provisions of
the Plan, of their rights with respect thereto.

Section 9. GENDER
------

As used herein, masculine pronouns shall refer to men or women or
both as the context may require.

Document date: July 20, 1995
-------------
Fourth restatement of Plan to
include amendments 1, 2, 3 and 4.

<PAGE>
Exhibit 10.14

AMENDMENT NO. 1
TO THE
ARCO CHEMICAL COMPANY
KEY MANAGEMENT DEFERRAL PLAN
-----------------------------------
Pursuant to the power of amendment reserved therein, the following amendment is
hereby made to the ARCO Chemical Company Key Management Deferral Plan (the
"Plan") effective as of October 22, 1992.

1. Article IV, Section 2 of the Plan is amended to read as follows:

"Section 2. Form and Time of Retirement Distribution

2.1 Retirement Distributions shall be paid at the time and in the form
of benefit elected by the Participant for each Deferral Unit made
by the Deferral Commitment contained in the applicable
Participation Agreement. A Participant's election shall be
irrevocable, except that a Participant may request, by application
to the Administrative Committee, approval of a change of the prior
election at any time prior to retirement or commencement of
benefits, or in the case of installment payments, following
commencement of payments, for any Deferral Unit. Such approval may
be granted (i) without any reduction in, or imposition of any
penalty on the Participant's Account, provided that the
Administrative Committee determines, upon application of the
Participant, that the Participant has experienced a Financial
Hardship justifying the request for a change of election or the
Adminstrative Committee, in its sole discretion, determines that it
is appropriate to grant the Participant's request. Absent an
election by the Participant of the form and/or commencement date of
the Retirement Distribution, payment will be made in a lump sum
immediately following the Participant's date of retirement.

<PAGE>

2.2 The available forms and times of payment upon retirement are as
follows:

(a) Lump Sum. A single payment at retirement.
--------

(b) Installment Payments. Monthly installment payments in
--------------------
substantially equal payments of principal and interest over
payment periods prescribed and communicated by the
Administrative Committee in advance of the applicable
Deferral Period. The amount of each of the monthly
installments shall be redetermined effective as of January 1
of each year based on the remaining Account balance and the
remaining number of installment payments.

(c) Deferred Payments. A lump sum or installment payments
-----------------
commencing subsequent to retirement at one of the optional
deferral times prescribed and communicated by the
Administrative Committee in advance of the applicable
Deferral Period."

2. Article IV, Section 5(c) of the Plan is amended as follows:

"(c) Timing and Form of In-Service Distribution. The In-Service
------------------------------------------
Distribution shall commence at a time prescribed by the
Administrative Committee and in the form elected by the Participant
on the Participation Agreement at the time the Deferral Commitment
was made; provided, however, that if the Participant terminates
employment without a right to commence a retirement allowance under
the Retirement Plan, the In-Service Distribution election shall be
canceled and distribution shall be made pursuant to Section 3 of this
Article, and provided, further, that if the Participant terminates
employment with a right to commence a retirement allowance, the In-
Service

<PAGE>
Distribution election shall be canceled and distribution will be
made pursuant to Section 2 of this Article."

3. Article IV, Section 6 of the Plan is amended as follows:

"Section 6. Unscheduled Distributions
6.1 Upon a finding that a Participant has suffered a Financial
Hardship, following submission of an application by the Participant,
the Administrative Committee shall make a distribution of all or a
portion of the Participant's Account, without any reduction in, or
imposition of any penalty on, the Participant's Account, consistent
with the finding of Financial Hardship but in no event exceeding the
amount of the Participant's request. The distribution shall be made
as soon as administratively practicable following the finding of
Financial Hardship.

6.2 A Participant may apply for a distribution of all or part of his
Account, without regard to any condition of Financial Hardship. Such
distribution shall be made as soon as practicable following the
Participant's application and shall be subject to whatever penalty,
in the form of a forfeiture of a percentage of the amount requested
and/or a suspension of participation as determined by the
Administrative Committee upon the advice of Counsel for the Plan as
is deemed necessary to preclude the constructive receipt of taxable
income by any Participant in the Plan.

6.3 Counsel for the Plan shall review legal and tax developments to
assure continuous compliance with the relevant authorities governing
plan design to prevent constructive receipt and shall advise the
Administrative Committee in writing in advance of any change in its
most

3
<PAGE>

recent written advice on the penalty which is to be imposed.

6.4 The Company shall notify Participants in writing of this amendment
and of the specific, currently effective penalty as described under
Section 6.2, and shall update this written notification periodically
and in advance of any subsequent change of which it is notified under
Section 6.3, unless administratively impossible to do so, in which
case such notification shall be provided no later than 30 days
following the effective date of the change."

4. Section 11.1(b) of the Plan is deleted.

Executed this 22nd day of March, 1993.

Attest ARCO CHEMICAL COMPANY

By: /s/ Robert J. Millstone By: /s/ Frank W. Welsh
------------------------ -------------------
Frank W. Welsh
Vice President
Human Resources

<PAGE>

ARCO CHEMICAL COMPANY AND CONSOLIDATED SUBSIDIARIES

COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax income from continuing operations.............. $319 $322 $311 $416 $756
Add:
Interest expense.................................... 101 91 105 85 89
Rental expense factor............................... 22 26 20 22 25
---- ---- ---- ---- ----
Earnings available for fixed charges.................. $442 $439 $436 $523 $870
==== ==== ==== ==== ====
Interest expense...................................... $101 $ 91 $105 $ 85 $ 89
Add capitalized interest.............................. 39 37 -- 3 1
Rental expense factor................................. 22 26 20 22 25
---- ---- ---- ---- ----
Fixed charges......................................... $162 $154 $125 $110 $115
==== ==== ==== ==== ====
Ratio of earnings to fixed charges.................... 2.7 2.9 3.5 4.8 7.6
==== ==== ==== ==== ====
</TABLE>

EXHIBIT 12

<PAGE>

ARCO CHEMICAL COMPANY

SUBSIDIARIES

<TABLE>
<CAPTION>
JURISDICTION
NAME ENTITY OF FORMATION
---- ------------------- ------------
<S> <C> <C>
ARCO Chemie Nederland, Ltd. corporation Delaware
ARCO Chimie France SNC partnership France
POSM II Limited Partnership, L.P. limited partnership Delaware
ARCO Chemical Delaware Company corporation Delaware
ARCO Chemical Technology, L.P. limited partnership Delaware
The Meadows Corporation corporation Delaware
</TABLE>

The subsidiaries whose names are not listed above, if considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary
of the Company.

EXHIBIT 21

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the following registration
statements of ARCO Chemical Company and Subsidiaries: Registration Statement
on Form S-8 (No. 33-17707), Registration Statement on Form S-8 (No. 33-23867),
Registration Statement on Form S-8 (No. 33-38062), and Registration Statement
on Form S-8 (No. 33-23241) of our report dated February 12, 1996 on our audits
of the consolidated financial statements of ARCO Chemical Company and
Subsidiaries as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995 which report is included in this Annual
Report on Form 10-K.

Coopers & Lybrand L.L.P.

Philadelphia, Pennsylvania
February 29, 1996

EXHIBIT 23

<PAGE>

ARCO CHEMICAL COMPANY

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
Alan R. Hirsig, Robert J. Millstone, John A. Shaw, and Walter J. Tusinski, and
each of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to effect the following
acts as necessary or appropriate for the conduct of the business and affairs
of ARCO Chemical Company (the "Company"):

I. In connection with any outstanding security of the Company registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended

(1) to execute any singular or periodic report required or permitted
to be filed under the Securities Exchange Act of 1934, as amended,
including SPECIFICALLY the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995; and

(2) to file or cause to be filed such report with the Commission, any
national or foreign securities exchange, any securities industry self-
regulatory organization, any state or other jurisdiction of the United
States, and any jurisdiction outside the United States, in each case as
required or permitted by applicable law;

II. In connection with the issuance, offering, or sale of any securities
authorized by the Board of Directors of the Company or by the Executive
Committee thereof pursuant to due authorization by such Board, or in
connection with the issuance, offering or sale of any security,
participation or interest in any employee or executive compensation or
benefit plan authorized and approved by the Board of Directors of the
Company or by the Executive or Compensation Committees thereof pursuant to
due authorization by such Board

(1) to execute and file, or cause to be filed, with the Securities
and Exchange Commission (the "Commission"), (A) Registration Statements
and any and all amendments (including post-effective amendments)
thereto, and to file, or cause to be filed, all exhibits thereto and
other documents in connection therewith as required or permitted by the
Commission in connection with such registration under the Securities
Act of 1933, as amended, and (B) any singular or periodic report or
other document required or permitted to be filed by the Company with
the Commission pursuant to the Securities Exchange Act of 1934, as
amended;

(2) to execute and file, or cause to be filed, any application for
registration or exemption therefrom, or any report or any other
document required or permitted to be filed by the Company under the
Blue Sky or securities laws of any state or other jurisdiction of the
United States, and to furnish any other information required in
connection therewith, including any reports or other documents required
or permitted to be filed subsequent to the issuance of such securities;

(3) to execute and file, or cause to be filed, any application for
registration or exemption therefrom under the securities laws of any
jurisdiction outside the United States, including any reports or other
documents required or permitted to be filed subsequent to the issuance
of such securities; and

(4) to execute and file, or cause to be filed, any application for
listing such securities on any national or foreign securities exchange;

granting to such attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act required to be done as he
or she might or could do in person, hereby ratifying and confirming all that
such attorneys-in-fact and agents, and each of them, may lawfully do or cause
to be done by virtue of this Power of Attorney.

EXHIBIT 24
<PAGE>

Each such attorney-in-fact and agent shall have the right to indemnification
for any action taken or omitted pursuant to this Power of Attorney provided in
the By-Laws of the Company to officers and directors for service as such,
including, but not limited to, the non-exclusivity provisions of such By-Laws.

Each person whose signature appears below may at any time revoke this Power
of Attorney, as to himself or herself only, by an instrument in writing
specifying that this Power of Attorney is revoked as to him or her as of the
date of delivery of such revocation to the Secretary of the Company or at a
subsequent specified date. This Power of Attorney shall be revoked
automatically with respect to any person whose signature appears below
effective on the date he or she ceases to be a member of the Board of
Directors, or in the case of Mr. Shaw, on the date he ceases to be principal
accounting officer of the Company. Any revocation shall not void or otherwise
affect any acts performed by any attorney-in-fact and agent named herein
pursuant to this Power of Attorney prior to the effective date of such
revocation.

This instrument may be executed in multiple counterparts each of which shall
be deemed an original and all of which together shall be deemed one
instrument.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mike R. Bowlin Chairman of the
- ------------------------------------- Board and Director
Mike R. Bowlin

/s/ Alan R. Hirsig President, Chief
- ------------------------------------- Executive Officer
Alan R. Hirsig and Director

/s/ Marvin O. Schlanger Executive Vice
- ------------------------------------- President, Chief
Marvin O. Schlanger Operating Officer
and Director

/s/ Walter J. Tusinski Senior Vice
- ------------------------------------- President, Chief
Walter J. Tusinski Financial Officer
and Director
February 15, 1996

/s/ Ronald J. Arnault Director
- -------------------------------------
Ronald J. Arnault

/s/ Walter F. Beran Director
- -------------------------------------
Walter F. Beran

/s/ E. Kent Damon, Jr. Director
- -------------------------------------
E. Kent Damon, Jr.

/s/ Marie L. Knowles
- ------------------------------------- Director
Marie L. Knowles
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ James A. Middleton Director
- -------------------------------------
James A. Middleton February 15, 1996

/s/ Frank Savage Director
- -------------------------------------
Frank Savage

/s/ Robert H. Stewart, III Director
- -------------------------------------
Robert H. Stewart, III

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 235
<SECURITIES> 25
<RECEIVABLES> 631
<ALLOWANCES> 0
<INVENTORY> 472
<CURRENT-ASSETS> 1,382
<PP&E> 3,812
<DEPRECIATION> 1,519
<TOTAL-ASSETS> 4,135
<CURRENT-LIABILITIES> 589
<BONDS> 887
<COMMON> 100
0
0
<OTHER-SE> 1,869
<TOTAL-LIABILITY-AND-EQUITY> 4,135
<SALES> 4,282
<TOTAL-REVENUES> 4,282
<CGS> 3,102
<TOTAL-COSTS> 3,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 756
<INCOME-TAX> 248
<INCOME-CONTINUING> 508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 508
<EPS-PRIMARY> 5.28
<EPS-DILUTED> 5.28

</TABLE>