-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mnj89tG9kCk18403klVtA9QHrfsWLxLHUC4YIRNj2WfrvLD3iVnOP6kEtSiqGWWd MFNSODNMdZzihKlk8+ouYw== 0000898430-97-000768.txt : 19970227 0000898430-97-000768.hdr.sgml : 19970227 ACCESSION NUMBER: 0000898430-97-000768 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970226 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC RICHFIELD CO /DE CENTRAL INDEX KEY: 0000775483 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 230371610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01196 FILM NUMBER: 97543497 BUSINESS ADDRESS: STREET 1: 515 S FLOWER ST CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134863511 10-K 1 FORM 10-K FOR PERIOD 12-31-96 1996 --------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1996 Commission file number 1-1196 [LOGO OF ARCO] ATLANTIC RICHFIELD COMPANY (Exact name of registrant as specified in its charter) Delaware 23-0371610 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 South Flower Street, Los Angeles, California 90071 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 486-3511 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ------------------------------- Common Stock ($2.50 par value) New York Stock Exchange Pacific Stock Exchange Elektronische Borse Schweiz EBS London Stock Exchange $3.00 Cumulative Convertible Preference New York Stock Exchange Stock ($1 par value) Pacific Stock Exchange $2.80 Cumulative Convertible Preference New York Stock Exchange Stock ($1 par value) Pacific Stock Exchange Three year 9% Exchangeable Notes due September 15, 1997 New York Stock Exchange Twenty year 10 7/8% Debentures Due July 15, 2005 New York Stock Exchange Thirty year 9 7/8% Debentures Due March 1, 2016 New York Stock Exchange Twenty-five year 9 1/8% Debentures Due March 1, 2011 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant on December 31, 1996, based on the closing price on the New York Stock Exchange composite tape on that date, was $21,611,653,327. Number of shares of Common Stock, $2.50 par value, outstanding as of December 31, 1996: 161,082,043. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 are incorporated by reference under Part III. TABLE OF CONTENTS PART I
ITEM PAGE ---- ---- 1. and 2. Business and Properties...................................... 1 Corporate History and Organization......................... 1 Financial Information about Industry Segments.............. 2 Upstream................................................... 2 Worldwide Exploration and Production Operations.......... 2 Worldwide Coal Operations................................ 6 Downstream................................................. 7 Refining and Marketing................................... 7 Transportation........................................... 8 Chemicals................................................ 9 Equity Interest in Lyondell................................ 10 Capital Program............................................ 10 Patents.................................................... 11 Competition................................................ 11 Human Resources............................................ 11 Research and Development................................... 11 Environmental Matters...................................... 12 3. Legal Proceedings............................................ 14 4. Submission of Matters to a Vote of Security Holders.......... 17 ---------------- Executive Officers of the Registrant......................... 18 Description of Capital Stock................................. 21 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995..................................................... 24 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................................... 26 6. Selected Financial Data...................................... 26 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 27 8. Financial Statements and Supplementary Data.................. 37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 60 PART III 10. Directors and Executive Officers of the Registrant........... 60 11. Executive Compensation....................................... 60 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 60 13. Certain Relationships and Related Transactions............... 60 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 60
(i) PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES CORPORATE HISTORY AND ORGANIZATION Atlantic Richfield Company ("ARCO" or the "Company") was incorporated in 1870 under the laws of Pennsylvania as The Atlantic Refining Company. Atlantic Petroleum Storage Company, a predecessor to The Atlantic Refining Company, began operations in 1866. The Company's principal executive offices are at 515 South Flower Street, Los Angeles, California 90071 (Telephone (213) 486-3511). ARCO's present name was adopted subsequent to the merger of Richfield Oil Corporation into The Atlantic Refining Company in 1966. In 1969, Sinclair Oil Corporation was merged into ARCO. In 1977, The Anaconda Company was merged into a wholly-owned subsidiary of ARCO and, on December 31, 1981, that subsidiary was merged into ARCO. On May 7, 1985, ARCO was reincorporated in the State of Delaware. Unless indicated otherwise, the terms "ARCO" or the "Company" as used herein refer to Atlantic Richfield Company or Atlantic Richfield Company and one or more of its consolidated subsidiaries. ARCO, including its subsidiaries, constitutes one of the largest integrated enterprises in the petroleum industry. ARCO conducts operations in two business segments: resources and products. ARCO's resources segment, known as its "upstream" operations, includes the exploration, development and production of petroleum, which includes petroleum liquids (crude oil, condensate and natural gas liquids ("NGLs")) and natural gas, the purchase and sale of petroleum liquids and natural gas, and the mining and sale of coal. ARCO's products segment, or its "downstream" operations, includes the refining and transportation of petroleum and petroleum products, the marketing of petroleum products on the U.S. West Coast and the worldwide manufacture and sale of chemical products. ARCO's corporate structure is a complex of wholly-owned and majority-owned subsidiaries and various divisions or units of the parent company, ARCO, that have been delineated or defined for various operational reasons. Many of the wholly-owned subsidiaries are formed to conduct ARCO's numerous international operations. The principal majority-owned subsidiaries are ARCO Chemical Company ("ARCO Chemical") and Vastar Resources, Inc. ("Vastar"). ARCO Chemical was formed in July 1987, and it sold just under 20% of its common stock to the public in October 1987; ARCO currently owns 82.7% of ARCO Chemical. Vastar was formed in September 1993, and in July 1994 sold under 20% of its common stock to the public; ARCO currently owns 82.3% of Vastar. Vastar is the primary vehicle through which ARCO conducts natural gas and, to a lesser extent oil, exploration, production and marketing in the Lower 48 States (the "Lower 48"). ARCO's principal subsidiaries are ARCO Chemical, Vastar, ARCO Alaska, Inc. (a wholly-owned subsidiary through which ARCO conducts its Alaska operations) and ARCO Transportation Alaska, Inc. (a wholly-owned subsidiary through which ARCO holds its interest in the Trans Alaska Pipeline System ("TAPS")). ARCO also owns a 49.9% equity interest in Lyondell Petrochemical Company ("Lyondell"), which operates petrochemical processing and petroleum refining businesses. ARCO originally sold just over 50% of Lyondell's common stock ("Lyondell Common Stock") to the public in January 1989; in August 1994, ARCO received net proceeds of approximately $958 million from the sale of its 9% Exchangeable Notes due September 1997 (the "Exchangeable Notes"). The Exchangeable Notes are exchangeable at maturity, at ARCO's option, into shares of Lyondell Common Stock, of which ARCO currently holds 39,921,400 shares, or cash with an equal value. The number of shares or amount of such cash will be determined based on a formula that takes into account the market price of Lyondell Common Stock at maturity of the Exchangeable Notes. If ARCO elects to deliver shares of Lyondell Common Stock upon maturity of the Exchangeable Notes, ARCO's equity interest in Lyondell will be substantially reduced or eliminated, depending on the market price of Lyondell Common Stock at such time. See Notes 10 and 20 of Notes to Consolidated Financial Statements on pages 47 and 55. 1 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Reference is made to Note 5 of Notes to Consolidated Financial Statements on page 44 for segment information concerning sales and other operating revenues, earnings, total assets and additional information for certain operations of the Company. UPSTREAM WORLDWIDE EXPLORATION AND PRODUCTION OPERATIONS General ARCO conducts its worldwide oil and gas exploration and production operations primarily in the United States, the United Kingdom, Indonesia, China, Algeria, Dubai and Qatar. Reserves Estimated net quantities of ARCO's proved oil and gas reserves at December 31, 1996 were as follows:
NATURAL GAS PETROLEUM LIQUIDS (BILLION CUBIC (MILLION BARRELS) FEET) ---------------------- ---------------------- U.S. INTERNATIONAL U.S. INTERNATIONAL ----- ------------- ----- ------------- Proved reserves................... 2,112(a) 409 4,776(c) 3,347 Proved developed reserves......... 1,828(b) 150 4,310(d) 1,780
- -------- (a) Includes 115 million barrels ("MMB") attributable to Vastar. (b) Includes 88 MMB attributable to Vastar. (c) Includes 2,224 billion cubic feet ("BCF") attributable to Vastar. (d) Includes 1,801 BCF attributable to Vastar. Reference is made to Supplemental Information, Oil and Gas Producing Activities, beginning on page 57, for additional information concerning oil and gas producing activities and estimates of proved oil and gas reserves. Production Net quantities of petroleum liquids and natural gas produced by ARCO were as follows:
NATURAL GAS PETROLEUM LIQUIDS (MILLION CUBIC FEET (BARRELS PER DAY) PER DAY) YEARS ENDED --------------------- --------------------- DECEMBER 31, U.S.(a) INTERNATIONAL U.S.(b) INTERNATIONAL - ------------ ------- ------------- ------- ------------- 1996............................... 559,300 66,100 1,044 730 1995............................... 583,100 66,800 999 557 1994............................... 591,300 72,800 960 511
- -------- (a) Includes 48,800, 45,300, and 43,500 barrels per day produced by Vastar in 1996, 1995, and 1994, respectively. (b) Includes 872, 810, and 782 million cubic feet per day ("MMCFD") produced by Vastar in 1996, 1995, and 1994, respectively. 2 Average sales prices and average production costs per unit of petroleum liquids and natural gas were as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1996 1995 1994 -------------------- -------------------- -------------------- U.S. INTERNATIONAL U.S. INTERNATIONAL U.S. INTERNATIONAL ------ ------------- ------ ------------- ------ ------------- Average sales price (including transfers) per barrel of petroleum liquids produced....... $16.22 $19.02 $12.17 $15.96 $10.43 $14.56 Average lifting cost per equivalent barrel of production............. 3.89 4.14 3.73 3.98 4.05 3.52 Average sales price per thousand cubic feet ("MCF") of natural gas produced... 1.80 2.54 1.35 2.56 1.76 2.51
Delivery Commitments ARCO has various long-term natural gas sales contracts covering the majority of its production in Indonesia, the United Kingdom North Sea, and China, substantially all of which are reservoir specific. While annual delivery requirements may vary under these contracts, delivery obligations under the agreements are essentially limited to producible reserves from specific fields. In the Lower 48, Vastar has various long-term natural gas sales contracts under which Vastar has contracted to deliver approximately 460 MMCFD in 1997. Such obligation is presently the maximum requirement and declines to less than 103 MMCFD by 2003. The majority of these contracts are either index-based and present little or no price risk, or are reservoir-dedicated, and present no obligation to deliver if production from these reservoirs ceases. Vastar can satisfy its existing natural gas delivery commitments from the gross natural gas production controlled by Vastar, including proprietary production, royalty gas, call rights on third party gas and gas obtained through joint operating agreements. Vastar's total proprietary natural gas production was 872 MMCFD in 1996. There have been no instances in the last three years in which Vastar was unable to meet its natural gas delivery commitments. Vastar also has additional long-term contracts with certain cogeneration facilities pursuant to which it delivered an average of 80 MMCFD in 1996. These contracts have an average contract term of approximately 19 years, for which an average 13 years remain. In 1996, the average price of gas sold under these contracts was approximately $2.49 per MCF. Exploration and Drilling Activity The following table shows the number of wells drilled to completion by the Company:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- --------------------- U.S.(a) INTERNATIONAL U.S.(b) INTERNATIONAL U.S.(c) INTERNATIONAL ------- ------------- ------- ------------- ------- ------------- Net productive exploratory wells drilled................ 28 2 17 8 12 3 Net dry exploratory wells drilled.......... 48 7 37 13 29 5 Net productive development wells drilled................ 332 23 315 12 245 11 Net dry development wells drilled.......... 33 -- 30 -- 27 1
- -------- (a) Includes 17, 29, 156, and 25 wells, respectively, drilled by Vastar. (b) Includes 15, 26, 133, and 23 wells, respectively, drilled by Vastar. (c) Includes 11, 25, 89, and 11 wells, respectively, drilled by Vastar. The Company's current activities, as of December 31, 1996, were as follows:
U.S. INTERNATIONAL ---- ------------- Gross wells in process of drilling (including wells temporarily suspended)..................................... 55 10 Net wells in process of drilling (including wells temporarily suspended)..................................... 33 5 Waterflood projects in process.............................. 2 -- Enhanced oil recovery operations............................ 13 1
3 The following table shows the approximate number of productive wells at December 31, 1996:
OIL GAS --------------------------- --------------------- U.S.(a)(b) INTERNATIONAL(c) U.S.(d) INTERNATIONAL ---------- ---------------- ------- ------------- Total gross productive wells.................. 11,312 518 3,325 231 Total net productive wells.................. 5,546 205 1,586 65
- -------- (a) Includes approximately 1,542 gross and 311 net multiple completions for ARCO, of which there are 268 gross and 136 net multiple completions for Vastar. (b) Includes approximately 1,455 gross and 709 net wells, respectively, attributable to Vastar. (c) Includes approximately 85 gross and 39 net multiple completions. (d) Includes approximately 2,529 gross and 1,261 net wells, respectively, attributable to Vastar. As of December 31, 1996, the Company's holdings of petroleum rights acreage (including options and exploration rights) were as follows (in thousands):
DEVELOPED UNDEVELOPED ACREAGE ACREAGE ----------- ------------- NET GROSS NET GROSS ----- ----- ------ ------ U.S. Alaska.............................................. 207 373 725 1,114 Lower 48(a)......................................... 1,353 2,609 3,017 5,231 ----- ----- ------ ------ Total U.S......................................... 1,560 2,982 3,742 6,345 International......................................... 147 394 33,369 48,313 ----- ----- ------ ------ Total............................................. 1,707 3,376 37,111 54,658 ===== ===== ====== ======
- -------- (a) Includes 1,021 net developed acreage, 1,659 gross developed acreage, 2,737 net undeveloped acreage and 4,062 gross undeveloped acreage, respectively, held by Vastar. Alaska Approximately 62% of ARCO's worldwide petroleum liquids production came from ARCO's interests in Alaska, primarily in the Prudhoe Bay, Kuparuk River and the Greater Point McIntyre Area fields on the North Slope of Alaska. ARCO's net liquids production from Alaska in 1996 decreased 6% to 387,500 barrels per day. ARCO's interests in Alaska included net proved reserves of 1,847 million barrels of oil equivalent at December 31, 1996. ARCO operates the eastern half of the Prudhoe Bay field and has a 21.87% working interest in the oil rim production from the field and a 42.56% working interest in the gas cap production. ARCO's net petroleum liquids production from the Prudhoe Bay field averaged 210,900 barrels per day in 1996, compared to 226,600 barrels per day in 1995. ARCO is the sole operator of the Kuparuk River field and holds a 55.2% working interest in the field. Its share of production from the field was 130,500 net barrels per day of petroleum liquids during 1996, compared to 140,700 net barrels per day during 1995. The Kuparuk Large Scale Enhanced Oil Recovery project started full operations in September 1996 and is expected to add 35,000 to 40,000 barrels of oil to daily gross production by 1999. NGLs, obtained from the Prudhoe Bay field, are injected into existing wells in the Kuparuk River field in order to recover additional barrels of oil and offset natural field decline. ARCO estimates that this project will result in an additional 200 million gross barrels (97 million net barrels to ARCO) of incremental oil from the Kuparuk River field. In 1996, ARCO announced that the Alpine field, west of the Kuparuk River field, is commercial. ARCO added 65 million barrels of net reserves for primary recovery from its 56% working interest in the Alpine field. ARCO has established working interests in four of five Greater Point McIntyre Area fields as follows: 30.1% in Point McIntyre, 40.0% in Lisburne, and 50.0% in both West Beach and North Prudhoe Bay State. Additionally, ARCO 4 has a working interest in the Niakuk field, which is currently being negotiated among the owners of that field. All five of the fields are processed through the Lisburne Production Facility, which ARCO operates. During 1996, liquids processed through the Lisburne Production Facility averaged 207,000 gross barrels per day, or 51,000 net barrels per day. All of ARCO's petroleum liquids shipped from the North Slope fields are transported to market through TAPS to terminal facilities at Valdez, and from there to west coast locations by ARCO's ocean-going tankers. Lower 48 During 1996, ARCO's consolidated Lower 48 operations had net production of 380 BCF of natural gas (including consumption) and 63 MMB of petroleum liquids as compared to 359 BCF and 62 MMB in 1995, respectively. Exploration, development and purchases (net of sales) replaced 124% of 1996 production on a barrel-of-oil-equivalent ("BOE") basis. The primary vehicle for ARCO's Lower 48 exploration and production operations is Vastar, of which ARCO owns 82.3%. Vastar, headquartered in Houston, Texas, is engaged in the exploration for and the development, production and marketing of natural gas and crude oil in selected major producing basins in the Gulf of Mexico, the Gulf Coast, the San Juan Basin/Rockies and the Midcontinent areas. For additional information about Vastar, a copy of Vastar's 1996 Annual Report to Stockholders and 1996 Annual Report on Form 10-K can be obtained by writing to Manager, Investor Relations, Vastar Resources, Inc., 15375 Memorial Drive, Houston, Texas 77079. Vastar's telephone number is (713) 584-6000. ARCO's other Lower 48 operations accounted for reserves at December 31, 1996 of 575 MMBOE, of which 85% were petroleum liquids. In 1996 net production from ARCO's other Lower 48 interests was 54 MMB of oil equivalent, down slightly from 55 MMB in 1995. International ARCO's international operations include both exploration and production. ARCO's 1996 international production of petroleum liquids averaged 66,100 barrels per day, and came primarily from Indonesia and the North Sea. Natural gas production averaged 730 MMCFD. Natural gas production from the United Kingdom sector of the North Sea accounted for 45% and the Pagerungan and the Offshore Northwest Java natural gas fields in Indonesia accounted for 43% of ARCO's 1996 international natural gas production. ARCO's net proved reserves from international interests at December 31, 1996 were 967 MMBOE. Natural gas production from ARCO's Yacheng-13 field, situated in the South China Sea, began on January 1, 1996. This gross $1.1 billion project, developed with two partners, consists of two offshore production platforms, onshore receiving facilities, the world's second longest subsea pipeline, the 480-mile pipeline to Black Point, near Hong Kong, and a 60-mile pipeline to Sanya on Hainan Island. Ultimate production is expected to be more than 300 gross MMCFD. ARCO is the operator of, and has a 34.3% working interest in, the Yacheng-13 field. During 1996, ARCO's net production was 69.3 MMCFD. In 1996, ARCO signed an agreement with Sonatrach, the Algerian state oil company, to undertake a major enhanced oil recovery ("EOR") project in the Rhourde El Baguel oil field. ARCO made a one-time $225 million acquisition payment to Sonatrach. In addition, the agreement provides for ARCO to make an investment of over $1.3 billion in the project. Under the production sharing contract, ARCO will receive up to 49% of the project's annual production. ARCO believes its EOR efforts should yield over 500 million incremental barrels of crude oil equivalent over the 25-year life of the project and increase production rates from the current 25,000 barrels per day to a peak of 125,000 barrels per day within the next five years. ARCO began receiving production on July 1, 1996. 5 Recent Developments Exploration activities by an ARCO operated consortium in which ARCO holds a 27.5% interest led to the discovery of an oil field called Al-Rayyan, in the Persian Gulf offshore Qatar, from which production commenced in late 1996. Delineation and appraisal of the discovery continues. ARCO, along with its co- venturers, is currently negotiating with the governments of Qatar and Dubai a contractual framework for the supply of natural gas to Dubai from the huge Qatar North field, which is located in close proximity to the Al-Rayyan field. In early 1997, ARCO finalized a joint venture with LUKOIL, Russia's largest oil company, to pursue exploration and production projects in the Commonwealth of Independent States ("CIS"). The joint venture entity, LUKARCO, is owned 54% by LUKOIL and 46% by ARCO. LUKARCO may invest up to $5 billion in various projects over the next 18 years; ARCO has agreed to provide most of the financing to LUKARCO. The first investment will be in the Caspian Pipeline Consortium, a multi-party $2 billion project to construct a 900-mile pipeline from the Tengiz oil field in Kazakstan to the Black Sea via Russia. LUKARCO will hold a 12.5% interest, which will obligate LUKARCO to fund 25% of the construction costs. In addition to the joint venture participation, ARCO owns approximately 8% of LUKOIL's total equity as a result of ARCO's purchase of convertible bonds in public offerings in 1995 and 1996. ARCO is conducting delineation drilling to appraise a discovery it made in eastern Indonesia. Appraisal efforts are being conducted to determine whether the discovery, called Wiriagar, holds the necessary 6 to 7 trillion cubic feet of gas to support a two-train liquefied natural gas facility. WORLDWIDE COAL OPERATIONS ARCO has interests in nine surface and underground coal mines in the western United States and in northeastern Australia. In the United States, during 1996, ARCO owned and operated two surface mines in Wyoming's Powder River Basin, Black Thunder and Coal Creek, and an underground mine, West Elk, in western Colorado. Total U.S. coal shipments for 1996 were 52 million tons of coal. In December 1996, a subsidiary of ARCO acquired a 65% interest in Canyon Fuel Company, a limited liability company that owns three mines--SUFCO, Skyline and Soldier Creek--located in Utah's Uinta Basin. At December 31, 1996, ARCO's net investment at cost was $411 million. The three mines are estimated to contain approximately 270 million tons of economically recoverable coal reserves. In Queensland, Australia, ARCO has interests in three mines in the Bowen Basin: Curragh, Gordonstone and Blair Athol. ARCO operates and holds an effective 87% interest in Curragh, an 80% interest in Gordonstone and a non- operating 31.4% interest in Blair Athol. As a result of the unanticipated geological complexity of the Curragh mine, ARCO is studying several options, which may include scaling back the level of operations at the mine. ARCO's net share of total shipments in 1996 from Australian operations was 11 million tons, of which 4.4 million tons was from Curragh. As of December 31, 1996, ARCO had long-term contracts to supply U.S. utility companies with steam coal from its Black Thunder, Coal Creek and West Elk mines and from its interest in Canyon Fuel Company. These contracts have various termination dates with the longest contract extending to December 31, 2017. It is anticipated that these contracts will require approximately 70% of planned production from these six U.S. coal mines in 1997. Approximately 80% of planned 1997 production in Australia is committed under long-term arrangements. Future revenues from these contracts in the U.S. and Australia can be affected by periodic reopeners that adjust sales prices based on prevailing market conditions. In total, ARCO shipped 63 million tons of coal during 1996 and had 1,669 million tons of recoverable coal reserves as of December 31, 1996. Reference is made to Supplemental Information, Coal Operations on page 59 for further information concerning reserves and shipments of coal. 6 DOWNSTREAM REFINING AND MARKETING ARCO operates two U.S. petroleum refineries on the west coast, the Los Angeles Refinery in Carson, California and the Cherry Point Refinery near Ferndale, Washington. Both of these refineries are accessible to major supply sources and major markets through ocean-going tankers, pipelines and other transportation facilities. The combined annual average operable crude distillation capacities of these two refineries, as measured pursuant to the standards of the American Petroleum Institute, are shown in the following table:
ANNUAL AVERAGE OPERABLE CRUDE DISTILLATION CAPACITY (BARRELS PER DAY) ----------------------- 1996 1995 1994 ------- ------- ------- Los Angeles Refinery.................................... 260,000 237,000 237,000 Cherry Point Refinery................................... 200,500 185,000 185,000 ------- ------- ------- Total................................................. 460,500 422,000 422,000 ======= ======= =======
ARCO's crude oil refinery runs and petroleum products manufactured at its refining facilities were as follows:
YEARS ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (EQUIVALENT BARRELS PER DAY) Crude oil refinery runs................................. 452,700 438,800 408,300 ======= ======= ======= Petroleum products manufactured: Gasoline.............................................. 214,800 217,400 206,700 Jet fuels............................................. 105,700 101,300 88,800 Distillate fuels...................................... 66,000 70,700 71,900 Other (a)............................................. 100,500 82,700 66,600 ------- ------- ------- Total (b)........................................... 487,000 472,100 434,000 ======= ======= =======
- -------- (a) Includes chemical products, petroleum coke (green and calcined) and feedstocks, sulfur, middle-of-barrel specialties and changes in unfinished stocks. (b) Total manufactured petroleum products volumes exceed total crude oil runs as a result of the expansion of petroleum product through rearrangement of molecular structure and refinery blending of oxygenates. In 1996, the long-term crude oil supply agreement with Tosco Corporation expired. ARCO received an average of 20,000 barrels per day of refined product under this agreement in 1996. In connection with its refining operations, ARCO produces calcined coke and operates electric cogeneration facilities. ARCO markets gasoline and other refined petroleum products to both consumers and resellers. Gasoline is marketed under the ARCO(R) trademark through independent dealers and distributors and directly to motorists at branded retail outlets located in Arizona, California, Nevada, Oregon and Washington. ARCO also sells gasoline to unbranded resellers. NGLs are sold directly to end-use customers and the Watson Cogeneration Facility, which is 51% owned by ARCO, and are also marketed through distributors. Jet fuels are sold directly to airlines and the United States Department of Defense. Calcined coke is sold to U.S. and international industrial consumers. Cargo and bulk sales of petroleum products are also made to commercial and industrial consumers, and certain products are marketed through other channels. As of December 31, 1996, there were 1,514 branded retail outlets, which included franchisee and Company-operated am/pm(R) convenience stores and SMOGPROS(R) Service Centers, and traditional service stations. 7 In June 1996, ARCO and the other California gasoline marketers were required to meet California Air Resources Board ("CARB") specifications standards for automobile gasolines available for retail sale in California. In order to meet the more stringent CARB standards with 100% of the gasoline produced at the Los Angeles Refinery, ARCO completed in 1995 the necessary modifications and upgrades at the refinery. The cost to meet both Environmental Protection Agency ("EPA") and CARB standards was approximately $500 million. Total refined petroleum product sales, which include insignificant sales to ARCO Chemical and Lyondell, for the periods indicated, were as follows:
YEARS ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (EQUIVALENT BARRELS PER DAY) Petroleum product sales: Gasoline.............................................. 266,400 256,800 253,800 Jet fuels............................................. 117,000 106,200 97,600 Distillate fuels...................................... 69,000 69,100 73,500 Other(a).............................................. 80,700 61,800 53,000 ------- ------- ------- Total................................................. 533,100 493,900 477,900 ======= ======= =======
- -------- (a) Includes heavy fuel oils, NGLs, calcined and green coke. Total petroleum product sales differ from total petroleum products manufactured due to the consumption of some products as refinery fuel, the exchange of products with other companies, change in inventory levels, and the purchase and resale of products not manufactured by ARCO. Recent Developments In 1994, ARCO acquired a 9.9% interest in China's third largest refiner, Zhenhai Refining and Chemical Company ("ZRCC"). In late 1996, ARCO purchased an additional interest in ZRCC. The newly issued convertible bonds, when converted, will give ARCO a 20% interest in ZRCC, which has a modern refinery complex. In addition, in 1996, ARCO entered into a joint venture project to produce and upgrade heavy oil from the Orinoco region of Venezuela. Subject to certain governmental approvals, the initial $2 billion phase of the project is expected to be operational by 2001. ARCO will be a 30% owner. In early 1997, ARCO announced plans to build a 400 million pound-per-year polypropylene manufacturing facility to be constructed adjacent to the Los Angeles Refinery. ARCO estimates the $300 million plant will be operational in 1999. TRANSPORTATION ARCO's transportation business includes ownership interests in pipelines in Alaska, ownership interests in and operations of pipelines and terminalling facilities in the Lower 48, and the operation of 10 ocean-going U.S. flag tankers. In Alaska, ARCO has a 22.3% weighted average undivided ownership interest in TAPS. TAPS consists of an 800-mile pipeline system used to transport petroleum liquids from the North Slope of Alaska to the port of Valdez in south-central Alaska. In addition, ARCO owns approximately 22% of the stock of Alyeska Pipeline Service Company ("Alyeska"), which was established to design, construct, operate and maintain TAPS for the owners. ARCO's undivided interest in TAPS is proportionately consolidated for financial reporting purposes. TAPS 1996 total throughput averaged approximately 1,436,000 barrels per day. In the Lower 48, ARCO manages facilities for transportation and terminalling of petroleum liquids, refined petroleum products, petrochemicals and natural gas. In 1995, ARCO and Phillips Petroleum Company formed the 8 Seaway Pipeline Company ("Seaway"), a joint venture. ARCO has ownership interests in petroleum liquids pipeline systems that include gathering lines serving producing fields in California, New Mexico, Oklahoma, Texas and Utah, and common carrier trunk lines extending from dock facilities and producing areas to refineries and terminals. These pipelines moved petrochemicals and refined petroleum products for all shippers (including ARCO) that properly tendered these materials for transportation. In addition, ARCO owns or leases and operates terminals that provide a variety of terminalling and transportation services both to third-party customers and ARCO. ARCO has reorganized management responsibility for its transportation business, which will result in a change in segment reporting of those operations in 1997. ARCO Alaska Transportation, Inc. will be included with exploration and production. ARCO Marine, Inc. will be included in refining and marketing. CHEMICALS The Company's chemicals operation consists of the businesses owned by ARCO Chemical. ARCO currently owns 80,000,001 shares of common stock of ARCO Chemical, which represent 82.7% of the outstanding shares. ARCO Chemical is an international manufacturer and marketer of chemicals used in a broad range of consumer products. ARCO Chemical's core product is propylene oxide ("PO"), which it produces through two distinct process technologies based on indirect oxidation (peroxidation) processes that yield co-products. One process yields tertiary butyl alcohol ("TBA") as the co- product; the other process yields styrene monomer ("SM") as the co-product. The two technologies are mutually exclusive such that either a dedicated PO/TBA plant or a dedicated PO/SM plant must be built. ARCO Chemical's other major products include PO derivatives, which include polyols and propylene glycols ("PG"), TBA derivatives, which include methyl tertiary butyl ether ("MTBE") and ethyl tertiary butyl ether ("ETBE"). In September 1996, ARCO Chemical sold its plastics business and, as a result, no longer manufactures SM derivatives, but will continue to produce SM. In 1995, ARCO Chemical began marketing toluene di-isocyanate ("TDI"), obtained under long-term supply agreements with Rhone-Poulenc. TDI and polyols are combined to manufacture polyurethanes. In 1996, ARCO purchased Olin Corporation's TDI and aliphatic di-isocyanate ("ADI") businesses, including TDI and ADI production facilities located in Lake Charles, Louisiana and related assets and technology. ARCO Chemical's principal chemical facilities are located in: Bayport, Texas (PO, TBA and various derivatives including PG); Channelview, Texas (PO, SM and various derivatives including polyols and MTBE); Rotterdam, the Netherlands (PO, TBA and various derivatives including PG, propylene glycol ethers and MTBE); Fos-sur-Mer, France (PO, TBA and various derivatives including PG, polyols and MTBE); Lake Charles, Louisiana (TDI and ADI); and a joint venture in Chiba, Japan (PO and SM). Other production facilities include polyols at South Charleston and Institute, West Virginia, Rieme, Belgium, Kaohsiung, Taiwan, and Anyer, West Java, Indonesia. ARCO Chemical owns a majority equity interest in a second PO/SM plant at Channelview, Texas. The two equity investors in the plant, which are limited partners, each take a substantial portion of the SM output of the plant through long-term processing agreements. In 1996, ARCO Chemical's Board of Directors gave final approval for the construction of a new PO/SM plant at Rotterdam, scheduled for completion in fourth quarter 1999, and for expansion of the Channelview, Texas PO/SM capacity by early 1998. The following table shows ARCO Chemical's worldwide production capacity (in millions of pounds per year, except where otherwise noted) for PO, SM and certain key derivatives:
PRODUCT U.S. INTERNATIONAL ------- ------ ------------- PO 2,335 1,360 Polyols 725 590 PG 565 345 SM 2,570 790 TDI 250 -- MTBE--Bbls/day 30,000 28,500
9 Capacities shown are the production capacities that, as of December 31, 1996, ARCO Chemical believes it can obtain based upon plant design and subject to certain onstream factors, product mix and other variable factors. Capacities shown include the full capacity of joint-venture facilities. Plants can and have exceeded these capacities for extended periods of time. In addition, ARCO Chemical currently has processing arrangements at a third party facility pursuant to which it has the capacity to produce an additional 12,000 barrels per day of MTBE or ETBE. In addition to raw material purchase agreements and product sales or processing agreements with unrelated third parties, ARCO Chemical has agreements with ARCO and Lyondell which provide for, among other things, the purchase, sale and processing of various products and feedstocks. ARCO Chemical sells MTBE at contract prices to ARCO for use in the production of the Company's reformulated gasolines. ARCO and ARCO Chemical have entered into long-term sales agreements providing for delivery of fixed quantities of MTBE. Lyondell provides ARCO Chemical with a portion of the feedstocks purchased for use at ARCO Chemical's manufacturing facilities in Texas. Lyondell also provides certain plant services at these facilities. ARCO Chemical in turn provides certain supplies and services to Lyondell. ARCO Chemical is also a party to certain service agreements and other arrangements with the Company and Lyondell. For additional information about ARCO Chemical, a copy of ARCO Chemical's 1996 Annual Report to Stockholders and 1996 Annual Report on Form 10-K can be obtained by writing to Manager, Investor Relations, ARCO Chemical Company, 3801 West Chester Pike, Newtown Square, Pennsylvania 19073-2387. ARCO Chemical's telephone number is (610) 359-2000. EQUITY INTEREST IN LYONDELL ARCO owns a 49.9% equity interest in Lyondell, which is accounted for on the equity method. Lyondell is a manufacturer and marketer of petrochemicals and, through its participation interest in LYONDELL-CITGO Refining Company Ltd. ("LCR"), of refined petroleum products. Prior to 1989, Lyondell was a wholly- owned subsidiary of ARCO. In August 1994, ARCO completed an offering of Exchangeable Notes due 1997 which can be exchanged at maturity into Lyondell Common Stock or, at ARCO's option, cash of an equal value. If ARCO elects to deliver shares of Lyondell Common Stock at maturity, ARCO's equity interest in Lyondell will be substantially reduced or eliminated. ARCO currently owns 39.9 million shares of Lyondell Common Stock. See Notes 10 and 20 of Notes to Consolidated Financial Statements on pages 47 and 55. For the year ended December 31, 1996, Lyondell recorded total revenues of approximately $248 million from sales to ARCO Chemical. Lyondell also provides certain plant services at ARCO Chemical's Texas facilities. ARCO Chemical in turn provides certain supplies and services to Lyondell. See "Downstream-- Chemicals." In addition, Lyondell currently purchases certain of its crude oil, natural gas and NGLs requirements from ARCO and Vastar at prices based on prevailing market prices. During 1996, Lyondell paid ARCO and its consolidated subsidiaries an aggregate of $17 million under these agreements, arrangements and transactions and received an aggregate of $318 million, principally from sales of product to ARCO Chemical. For additional information about Lyondell, a copy of Lyondell's 1996 Annual Report to Stockholders and 1996 Annual Report on Form 10-K can be obtained by writing to Investor Relations, Lyondell Petrochemical Company, One Houston Center, 1221 McKinney Street, Houston, Texas 77010. Lyondell's telephone number is (713) 652-7200. CAPITAL PROGRAM The Company's capital expenditures for additions to fixed assets (including dry hole costs) totaled approximately $2.1 billion in 1996. In addition, 1996 capital expenditures included $1.2 billion for various investments including ARCO Chemical's investments in a TDI manufacturing facility, ARCO's investment in Canyon Fuel Company and investments in convertible bonds issued by ZRCC and LUKOIL. The capital program for additions to fixed assets is budgeted at $3.4 billion for 1997. The levels of future capital expenditures may be affected by business conditions in the industry, particularly possible changes in prices of and demand for crude oil, natural gas and petroleum products. Changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements, and other changes in environmental rules and regulations may also affect future capital expenditures. 10 PATENTS ARCO owns numerous patents, many of which are available for license to the petroleum industry, and is itself a licensee under certain patents which are available generally to the industry. The Company's operations are not dependent upon any particular patent or patents or upon any exclusive patent rights. COMPETITION The petroleum industry is competitive in all its phases, including manufacturing, distribution and marketing of petroleum products and petrochemicals. Methods of competition for new sources of supply include finding and developing such sources and competition in bidding for leases which may contain such sources and the acquisition of producing properties. Competitive factors in manufacturing, distribution and marketing include price, methods and reliability of delivery, product quality, new product development and, with respect to consumer products, advertising and sales promotion. Crude oil and natural gas supplies are currently abundant relative to demand in the worldwide markets for those commodities. Market prices are typically volatile as a result of uncertainties caused by world events. ARCO's emphasis on the cost-efficient exploration and development of petroleum resources and on innovative marketing strategies make the Company well situated to compete in this environment. In the refining, marketing and manufacturing segment of the industry, refining operations that yield a higher proportion of high-margin products and marketing operations that put a premium on high volume and innovation are of primary importance. The U.S. coal mines primarily serve competitive U.S. markets, where the availability of specific transportation arrangements, primarily rail transportation, are often a key element in competition because transportation costs are a significant component of the delivered price of coal. Almost all of the Company's U.S. coal customers are electric utilities. The Company's Australian mines are export-oriented, largely to Japan, and face worldwide competition from Canadian, Indonesian, South African, U.S. and other Australian producers. Key competitive factors in the chemicals markets include research and development, product price, quality, reliability of supply, technical support, customer service and potential substitute materials. The Company ranked as the sixth largest U.S. based oil company on the basis of revenues in the most recent Fortune 500 list of U.S. industrial companies. HUMAN RESOURCES As of December 31, 1996, ARCO had approximately 22,800 full-time equivalent employees, of whom approximately 15% were represented by collective bargaining agents. RESEARCH AND DEVELOPMENT ARCO engages in research for new and improved products and methods for operating its businesses principally at two facilities located at Newtown Square, Pennsylvania and Plano, Texas. Total research and development expenses were $106 million, $104 million and $109 million in 1996, 1995 and 1994, respectively. 11 ENVIRONMENTAL MATTERS Site Remediation The Company is subject to federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), and the Superfund Amendments and Reauthorization Act of 1986 and the Resource Conservation Recovery Act of 1976 ("RCRA"), which may require the Company to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, including the restoration of natural resources located at these sites and damages for loss of use and non-use values. The Company is currently participating in environmental assessments and cleanups under these laws at federal Superfund and state-managed sites, as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites that were formerly owned by ARCO. The Company may in the future be involved in additional environmental assessments and cleanups, including the restoration of natural resources and damages for loss of use and non-use values. The ultimate amount of the future costs associated with such environmental assessments and cleanups is indeterminable due to such factors as the unknown nature and/or extent of contaminants at many sites, the unknown timing, extent and method of the remedial actions which may be required and the determination of the Company's liability in proportion to other responsible parties. In addition, environmental loss contingencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO. The Company continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the magnitude of remediation costs, experience gained from sites on which remediation has been completed, the timing, extent and method of remedial actions required by the applicable governmental authorities and an evaluation of the amount of the Company's liability considered in light of the liability and financial wherewithal of the other responsible parties. As the scope of the Company's obligation becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against the Company's earnings. The Company's environmental remediation reserve of $577 million at December 31, 1996 covers federal Superfund and state-managed sites as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. The Company has been named a potentially responsible party ("PRP") for 117 sites. The number of PRP sites in and of itself does not represent a relevant measure of liability, because the nature and extent of environmental concerns vary from site to site and the Company's share of responsibility varies from sole responsibility to very little responsibility. The Company reviews all of the PRP sites along with other sites as to which no claims have been asserted, in estimating the amount of accrual. The Company's future costs for these sites could exceed the amount reserved by as much as $600 million. Approximately 45% of the reserve relates to sites associated with the Company's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component relates to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites that received wastes from these facilities. The Company is also the subject of certain material legal proceedings described below under the caption "Material Environmental Litigation." The remainder relates to sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total reserve. Substantially all amounts reserved are expected to be paid out over the next five to six years. Clean Air The Federal Clean Air Act Amendments of 1990 (the "1990 Clean Air Act Amendments") and various state and local laws and regulations impose certain air quality requirements. Among other things, the 1990 Clean Air Act Amendments effectively require the manufacture and sale of reformulated and oxygenated gasolines in areas not meeting specified air quality standards. The EPA wintertime oxygenate gasoline program became effective in the fall of 1993. The EPA reformulated gasoline requirements became effective January 1, 1995 for the nine U.S. cities, including Los Angeles and San Diego, and other areas with the worst ozone pollution. The CARB's specifications for reformulated 12 gasoline, which are stricter than the EPA requirements, became effective for retail sales on and after June 1, 1996. To comply with the EPA air quality requirements and CARB standards, in 1995 ARCO completed major modifications at its Los Angeles Refinery. The Company does not anticipate any material adverse effect upon its consolidated financial position as a result of compliance with such environmental laws and regulations. In 1993 the South Coast Air Quality Management District ("AQMD"), which sets air quality standards for a five county area of southern California, including Los Angeles County, adopted regulations requiring phased reductions of certain pollutants. By 2003 the Los Angeles Refinery and the Wilmington calciner will be required to achieve cumulative reductions from 1992 levels of oxides of nitrogen (NOx) of 63% and oxides of sulfur (SOx) of 83%. As part of the regulations, AQMD created a Regional Clean Air Incentives Market ("RECLAIM") program under which regulated firms can earn credits for achieving emission reductions below targeted levels. Those credits may then be bought and sold. The Los Angeles Refinery plans to achieve the requisite levels of emission reductions by a combination of reductions and acquisitions of credits, substantial amounts of which have already been purchased. The AQMD is currently considering modifications to the RECLAIM program, but nothing has yet been finalized. Environment-Related Expenditures For the past three years, the Company's environment-related expenditures have been comprised of both capital expenditures and operating expenses. Environment-related capital expenditures include the cost of projects to reduce and/or eliminate pollution and contamination in the future and the cost of modifications to the Company's manufacturing facilities necessary to comply with the aforementioned federal, state and local air quality laws and regulations. Environment-related operating costs include both costs to eliminate, control or dispose of, pollutants, as well as costs to remediate previously contaminated sites. Sites are remediated using a variety of techniques, including on-site stabilization, bioremediation, soil removal, pump and treat and other methods as deemed appropriate for each specific site. For the past three years, the Company's environment-related capital expenditures have averaged approximately $225 million per year. The Company anticipates environment-related capital expenditures of approximately $170 million and $175 million for 1997 and 1998, respectively. For the past three years, the Company's operating expenses for the remediation of previously contaminated properties either compelled or likely to be compelled in the foreseeable future by government or third parties have averaged approximately $110 million per year. Cash payments for site remediation have averaged $120 million per year over the same period. The Company's operating expenses also include ongoing costs of controlling or disposing of pollutants. For the past three years, the Company estimates that its operating expenses related to these ongoing costs have averaged approximately $230 million per year. In addition to the reserve for environmental remediation costs, the Company has also accrued, as of December 31, 1996, $950 million for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and the estimated costs of restoration and reclamation of land associated with such facilities. Material Environmental Litigation Pursuant to the authority provided under Superfund, the State of Montana has asserted claims against ARCO for compensation for damage to natural resources up to the maximum amount allowed by 42 United States Code (S)9607. These alleged damages, arising out of ARCO's or its predecessors' alleged activities, include restoration and compensable damages, assessment costs, and prejudgment interest. On December 12, 1983, a lawsuit, styled Montana v. ARCO, ex rel., (Case No. CV-83-317-HLN-PGH) was filed in the United States District Court for the District of Montana. The claim, as of January 1, 1997, was for damages of $764 million for alleged injuries to natural resources resulting from mining and mineral processing operations. ARCO is contesting this demand. In addition, on January 21, 1997, the court granted the Confederated Salish and Kootenai Tribes of the Flathead Reservation ("Tribes"), a limited form of intervention in Montana v. ARCO. The Tribes, as alleged trustees, have asserted claims against ARCO for alleged injury to and loss of natural resources located in the Clark Fork River Basin in southwest Montana. The United States Department of Interior also stated an intention to make a claim for natural resource damages in the Clark Fork River Basin. 13 On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO (amended October 15, 1992), styled U.S. v. ARCO, et al. (Case No. CV-89-039- BU-PGH), in the United States District Court for the District of Montana, for oversight costs at several of the Upper Clark Fork River Basin Superfund sites. Litigation is proceeding on both the EPA's claims (in the approximate amount of $80 million) and ARCO's counterclaims against various federal agencies. (In the counterclaims, ARCO seeks contributions from the federal agencies for remediation costs and for any natural resource damage liability ARCO might incur in Montana v. ARCO.) ARCO and its subsidiary, Atlantic Richfield Hanford Company ("ARHCO"), and several other companies who have served as government contractors at the Hanford Nuclear Reservation in south central Washington State are named as defendants in a consolidated complaint in the United States District Court for the Eastern District of Washington, titled In re Hanford Nuclear Reservation Litigation (CY-91-3015-AAM). In October 1994, the Department of Energy determined that the government will indemnify ARCO and ARHCO for any judgment or settlement in the action pursuant to the contract between ARHCO and the Atomic Energy Commission and the provisions of the Price-Anderson Act. Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking compensatory and punitive damages and injunctions were filed by the State of Alaska, the United States, and private plaintiffs against Exxon, Alyeska, and Alyeska's owner companies (including ARCO Transportation Alaska, Inc.). Alyeska and its owner companies have settled the civil damage claims by federal and state governments and the lawsuits by private plaintiffs. Certain issues relating to liability for the spill remain unresolved between the Exxon companies, on the one hand, and Alyeska and its owner companies, on the other hand. On November 21, 1990, ARCO filed a complaint in Los Angeles County Superior Court, Atlantic Richfield Company v. AETNA Casualty and Surety Company of America, et al. (Case No. BC 015575), seeking recovery under numerous insurance policies in effect at times during past years for certain environmental expenses incurred by ARCO. The claims arise from the activities of ARCO and its predecessor companies, including The Anaconda Company, at sites and locations throughout the United States. ARCO has settled with most of the insurance company defendants. ARCO expects that a trial against the remaining defendants will begin in 1997. Conclusion Environmental concerns, including the minimization and prevention of environmental contamination from ongoing operations, and the cost-effective remediations of existing contaminated sites, continue to be vital factors in the Company's future planning. See Note 13 of Notes to Consolidated Financial Statements on page 49, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 3. LEGAL PROCEEDINGS THE COMPANY On June 7, 1989, the City of New York, the New York City Housing Authority, and the New York City Health and Hospitals Corporation brought suit in the Supreme Court of the State of New York for the County of New York (Case No. 14365/89) against six alleged former lead pigment manufacturers or their successors (including ARCO as successor to International Smelting and Refining Company ("IS&R"), a former subsidiary of The Anaconda Company), and the Lead Industries Association ("LIA"), a trade association. Plaintiffs seek to recover damages in excess of $50 million including (i) past and future costs of abating lead-based paint from housing owned by New York City and the New York City Housing Authority; (ii) other costs associated with dealing with the presence of lead-based paint in that housing and privately-owned housing; and (iii) any amounts paid by the City or the Housing Authority to tenants because of injuries caused by the ingestion of lead-based paint. Plaintiffs also seek punitive damages and attorney fees. The trial court dismissed all of plaintiffs' claims other than their fraud claim. Plaintiffs appealed the dismissal of their claims for restitution and indemnification and on June 27, 1996, the appellate court unanimously reversed the trial court's order. 14 On January 24, 1996, ARCO (as successor to IS&R) was added as a defendant to a class action suit pending in the United States District Court for the Southern District of New York, German, et al. v. Federal Home Loan Mortgage Corp., et al. (Case No. 93 Civ 6941), by plaintiff intervenors Naquan and Naiya Thomas, minors, and their mother and guardian Kaii Henry. The complaint in intervention names as defendants, in addition to ARCO, eight alleged former processors of lead pigment and lead paint, the LIA, the City of New York and its Housing Authority, and the owner of the building where plaintiffs reside. Plaintiffs seek on behalf of themselves, and a purported class of children under seven and pregnant women residing in dwellings in the City of New York containing or presumed to contain lead paint, injunctive relief from all defendants including orders to abate lead paint and to contribute to court- administered funds to pay for abatement and medical monitoring and treatment. The complaint alleges causes of action against the lead pigment defendants and the LIA for negligence, strict products liability, fraud and misrepresentation, breach of express and implied warranty, nuisance, conspiracy, concert of action, and enterprise and market share liability. The City of New York, its Housing Authority, and the owner of the building where plaintiffs reside have filed cross-claims against ARCO, the other alleged former processors of lead pigment and paint, and the LIA seeking indemnification against or contribution toward any liability they (cross- claimants) may have to plaintiffs. On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to a purported class action suit pending in the Court of Common Pleas in Cuyahoga County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case No. 236835), which seeks on behalf of the three named plaintiffs, and all other persons similarly situated in the state of Ohio, money damages for injuries allegedly suffered from exposure to lead paint, punitive damages, and an order requiring defendants to remove and abate all lead paint applied to any building in Ohio. The suit names as defendants, in addition to ARCO, the LIA and 16 companies alleged to have participated in the manufacture and sale of lead pigments and paints and includes causes of action for strict product liability, negligence, breach of warranty, fraud, nuisance, restitution, negligent infliction of emotional distress, and enterprise, market share and alternative liability. The trial court dismissed the complaint. The court of appeals reversed and remanded the case to the Court of Common Pleas. On August 29, 1995, a purported class action was filed in the United States District Court for the Eastern District of Louisiana, Jefferson v. Lead Industries Association, Inc. (Case No. 95-2885), which seeks compensatory and punitive damages on behalf of the named plaintiff and all Louisiana parents of children who attained a blood lead level equal to or greater than 25 micrograms per deciliter before the age of six. The named defendants are ARCO (as successor to IS&R), the LIA, NL Industries, Inc., Sherwin-Williams Co., SCM Corporation, Glidden Co., and Fuller-O'Brien Corporation. The complaint states as theories of recovery strict liability, negligence, failure to warn, fraud, and breach of express and implied warranty. The complaint also asserts that the manufacturer of the lead pigment in any particular paint cannot be determined by chemical analysis or any other means, and that plaintiff, therefore, may rely upon market share and civil conspiracy to establish defendants' liability. On June 3, 1996, the trial court dismissed the case. The plaintiff has appealed the decision. In addition, the Company is a defendant in several lawsuits brought by individuals that allege injury from exposure to lead paint. Such cases, in the aggregate, are not material to the financial condition of the Company. On June 27, 1995, three former ARCO Alaska, Inc. employees filed an action in the Alaska Superior Court in Anchorage, titled Tesch, et al. v. ARCO Alaska, Inc. (Case No. 3AN-95-3320-CI), purporting to represent a class of all ARCO Alaska, Inc. employees classified as exempt from overtime pay requirements within the preceding three years. The plaintiffs claim that they and other exempt employees were not actually exempt under Alaska law from overtime pay and are entitled to pay for unpaid overtime and penalties in an unstated amount. On May 7, 1996, the court denied plaintiffs' motion for class certification and allowed further discovery. The plaintiffs recently filed a motion for reconsideration of the May 7, 1996 ruling denying certification. Employees of Alyeska in which ARCO Transportation Alaska, Inc. owns approximately 22%, have filed two other purported class actions making similar claims against Alyeska. On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et al. (Case No. 700810) was brought in the Superior Court of California for the County of San Diego against ARCO and eight other refiner-marketers of CARB reformulated gasoline. The plaintiffs allege that the defendants conspired to restrict the supply, and thereby to raise 15 the price of CARB gasoline in violation of California state antitrust and unfair competition law. The plaintiffs seek to recover treble damages, restitution, attorneys fees, and injunctive relief on behalf of themselves and a purported class of California residents who bought CARB gasoline after March 1, 1996 other than for resale. ENVIRONMENTAL PROCEEDINGS As discussed under the caption "Environmental Matters," ARCO is currently participating in environmental assessments and cleanups at numerous operating and non-operating sites under Superfund and comparable state laws, RCRA, and other state and local laws and regulations, and pursuant to third party indemnification requests, and is the subject of material legal proceedings relating to certain of these sites. See "Environmental Matters--Material Environmental Litigation." Set forth below is a description, in accordance with SEC rules, of certain fines and penalties imposed by governmental agencies in respect of environmental rules and regulations. Certain organic waste material is contained in the soil and ground water at the site of the company's Monaca, Pennsylvania ("Beaver Valley") plant. In 1994, ARCO Chemical entered into a Consent Order and Agreement (the "Consent Agreement") with the Pennsylvania Department of Environmental Protection ("PADEP") pursuant to which ARCO Chemical and PADEP agreed upon a work plan for testing and remedial process design with regard to the conditions at the Beaver Valley site. Under the terms of the Consent Agreement, ARCO Chemical paid civil penalties totaling $363,000 in 1994. In addition, ARCO Chemical is paying a penalty of $63,000 each year until the commencement of active remediation at the Beaver Valley site, after which the amount of such annual penalty shall be reduced based on the extent of remediation commenced at the site. ARCO Chemical has an agreement with Beazer East, Inc., the successor to Koppers Inc. (the previous owner of the Beaver Valley plant), whereby Beazer East, Inc. agreed to pay for approximately 50% of the cost of the remediation. ARCO Chemical sold the Beaver Valley plant assets to NOVA Chemicals Inc. ("NOVA") as of September 30, 1996, but currently retains ownership of the Beaver Valley land, substantial portions of which are being leased to NOVA. NOVA will assume ownership of such portions of the Beaver Valley land after the occurrence of certain defined events. ARCO Chemical has retained responsibility for the work plan and for certain additional remediation of the Beaver Valley land that may be required by PADEP pursuant to the Pennsylvania Land Recycling and Environmental Remediation Standards Act. On January 17, 1994, southern California experienced a major earthquake that caused widespread property damage and major disruptions to utilities and highways. Certain of ARCO's assets located in the region experienced varying degrees of damage. A common carrier crude oil pipeline suffered ruptures, one of which was involved in a fire of unknown origin. In addition, there was one person injured, property damage, and oil spills into the Santa Clara and Los Angeles Rivers. Each of the Los Angeles District Attorney and the State of California Attorney General have notified the Company that pursuant to various state statutes, some of which impose liability without fault, penalties and damages in excess of $100,000 may be imposed on the Company. A settlement has tentatively been reached. A class action lawsuit has been filed seeking damages in excess of $10 million plus punitive damages on behalf of individuals alleged to have been injured in the pipeline ruptures. On October 11, 1995, Vastar, on behalf of, and with ARCO's knowledge and full cooperation, met with the United States EPA to apprise the EPA of certain results obtained from Vastar's internal self-evaluation and audit program. The results conveyed to EPA concern the Prevention of Significant Deterioration ("PSD") permit program under the federal Clean Air Act at Vastar's Ignacio Blanco Fruitland ("IBF") coal degasification facilities. Through its self- evaluation and audit program, Vastar previously determined that a PSD permit may have been required for construction and operation of certain equipment at the IBF operations due to unanticipated levels of carbon monoxide emissions. Under federal law, EPA has the power to seek injunctive relief and civil penalties for violations of the federal Clean Air Act. Liability for failure to obtain a PSD permit under the Clean Air Act can be imposed without regard to willfulness or negligence. Vastar has sought the benefits of EPA's "Voluntary Environmental Self-Policing and Self-Disclosure Interim Policy Statement," which may allow Vastar to avoid any punitive penalties, although EPA may seek to recover what it considers to be the economic benefit of noncompliance. Vastar has advised ARCO that on October 27, 1995, the company made a written submittal to the EPA pursuant to the Interim Policy Statement. In January 1997, the U.S. Department of Justice, acting on behalf of the EPA, and the company agreed to settle the matter. Under the terms of the settlement, Vastar agreed to pay a $137,949 civil penalty. In addition, ARCO, the previous owner of the natural 16 gas compression facilities, agreed to pay a $519,463 civil penalty. Under the terms of the settlement, the finalization of which is subject to certain minor conditions precedent, neither Vastar nor ARCO admitted liability with respect to the matter. The stipulation of settlement between the United States and ARCO has been entered in the U.S. District Court for the District of Colorado and the $519,463 ARCO civil penalty has been paid. In connection with the conveyance of the IBF facilities from ARCO to Vastar, Vastar agreed to indemnify ARCO against certain claims or liabilities to which ARCO could be subject relating to ARCO's historical ownership and operation of the facilities. Pursuant to such agreement, Vastar has reimbursed ARCO for the amount of the ARCO civil penalty. In addition to the matters reported herein, from time to time, certain of the ARCO's operating divisions and subsidiaries receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Such alleged violations may become the subject of enforcement actions or other legal proceedings and may involve monetary sanctions of $100,000 or more (exclusive of interest and costs). TAX MATTERS In 1994, the Internal Revenue Service issued a Notice of Deficiency for income tax relating to tax years 1983 through 1988. During 1996, the Company has made significant progress in substantiating its position to refute the claims originally asserted on the face of the Notice. ARCO has paid to the Internal Revenue Service the amount of tax (and interest) that it believes is due under the Notice and timely filed a petition in the U.S. Tax Court challenging the balance. OTHER LITIGATION The Company and its subsidiaries are defendants in numerous suits in which they are not covered by insurance which involve smaller amounts than the matters described above. Although the legal responsibility and financial impact in respect to such litigation cannot be ascertained, it is not anticipated that these suits will result in the payment by the Company or its subsidiaries of monetary damages which in the aggregate would be material in relation to the net assets of the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. ---------------- 17 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of Registrant as of February 24, 1997.
NAME, AGE AND PRESENT POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b) ---------------------- --------------------------------------------- Mike R. Bowlin, 54 Mr. Bowlin has been Chairman of the Board since July 1995, Chairman of the Board, Chief Executive Officer since July 1994, President of ARCO Chief Executive Officer since June 1993 and a director since June 1992. He served as and President Executive Vice President (June 1992-May 1993) and Senior Vice President of ARCO (August 1985-June 1992), President of ARCO International Oil and Gas Company (November 1987-June 1992), President of ARCO Coal Company (August 1985-July 1987), Se- nior Vice President of International Oil and Gas Acquisitions (July 1987-November 1987), a Vice President of ARCO (October 1984-July 1985) and a Vice President of ARCO Oil and Gas Com- pany (April 1981-December 1984). He has been an officer of the Company since 1984. Anthony G. Fernandes, 51 Mr. Fernandes has been an Executive Vice President of ARCO Executive Vice and a director since September 1994. He served as a Senior President and Director Vice President of ARCO and President of ARCO Coal Company (September 1990-September 1994), Vice President and Control- ler of ARCO (July 1987-September 1990), a Vice President of ARCO Oil and Gas Company (January 1985-July 1987) and a Vice President of Anaconda Minerals (May 1981-January 1985). He has been an officer of the Company since 1987. Marie L. Knowles, 50 Mrs. Knowles has been an Executive Vice President and the Executive Vice Chief Financial Officer of ARCO and a director since July President, Chief 1996. She served as a Senior Vice President of ARCO and Pres- Financial Officer and ident of ARCO Transportation Company (June 1993- July 1996), Director Vice President and Controller of ARCO (July 1990-May 1993), Vice President of Finance, Control and Planning of ARCO In- ternational Oil and Gas Company (July 1988-July 1990), and Assistant Treasurer of Banking of ARCO (October 1986-July 1988). She has been an officer of the Company since 1990. William E. Wade, Jr., 54 Mr. Wade has been an Executive Vice President of ARCO and a Executive Vice director since June 1993. He served as a Senior Vice Presi- President and Director dent of ARCO (May 1987-May 1993), President of ARCO Oil and Gas Company (October 1990-May 1993), President of ARCO Alas- ka, Inc. (July 1987-July 1990), a Vice President of ARCO (1985-1987) and a Vice President of ARCO Exploration Company (1981-1985). He has been an officer of the Company since 1985. H. L. Bilhartz, 50 Mr. Bilhartz has been a Senior Vice President of ARCO since Senior Vice President July 1990 and President of ARCO Exploration and Production Technology since June 1994. He served as President of ARCO Alaska, Inc. (July 1990-May 1994), a Vice President of ARCO (June 1987-July 1990), President of ARCO Coal Company (July 1987-July 1990), Vice President and Managing Director for ARCO British Limited and ARCO Netherlands in London (1985- 1987), Vice President of Finance, Control and Planning of ARCO International Oil and Gas Company (1984-1985) and Vice President and District Manager for ARCO Oil and Gas Company (1983-1984). He has been an officer of the Company since 1987.
18
NAME, AGE AND PRESENT POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b) ---------------------- --------------------------------------------- John B. Cheatham IV, 48 Mr. Cheatham has been a Senior Vice President of ARCO and Senior Vice President President of ARCO International Oil and Gas Company since De- cember 1995. He was Senior Vice President, Operations and New Business Development (November 1993-November 1995) and Se- nior Vice President, New Business Ventures (November 1992-No- vember 1993) of ARCO International Oil and Gas Company and Senior Vice President, Eastern District (August 1991-November 1992) and Vice President, Southeastern District (November 1989-August 1991) of ARCO Oil and Gas Company. He has been an officer of the Company since 1995. Terry G. Dallas, 46 Mr. Dallas has been a Senior Vice President of ARCO since Senior Vice President November 1996 and Treasurer since January 1994. He was a Vice and Treasurer President of ARCO (June 1993-November 1996), the Vice President, Corporate Planning (June 1993-January 1994), and Assistant Treasurer, Corporate Finance of ARCO (1990-1993) and Manager, Finance, Control and Planning, ARCO British, Ltd. (1988-1990). He has been an officer of the Company since 1993. Kenneth R. Dickerson, 61 Mr. Dickerson has been Senior Vice President, External Senior Vice President Affairs/Environment, Health and Safety of ARCO since July 1988. He served as Vice President and General Tax Officer (October 1985-June 1988) and Deputy General Counsel-- Resources of ARCO (September 1983-October 1985) and Associate General Counsel of ARCO Oil and Gas Company (September 1982- September 1983). He has been an officer of the Company since 1985. John H. Kelly, 42 Mr. Kelly has been a Senior Vice President, Human Resources Senior Vice President of ARCO since January 1997. He was Vice President, Corporate Units Human Resources of ARCO (June 1993-January 1997) and Vice President, Human Resources of ARCO Oil and Gas Company (February 1992-June 1993). He has been an officer of the Com- pany since 1993. Stephen R. Mut, 46 Mr. Mut has been a Senior Vice President of ARCO since Sep- Senior Vice President tember 1994 and President of ARCO Global Energy Ventures since August 1996. He was President of ARCO Coal Company (September 1994-August 1996) and Senior Vice President of Op- erations of ARCO International Oil and Gas Company (1991- 1994). He has been an officer of the Company since 1994. William C. Rusnack, 52 Mr. Rusnack has been a Senior Vice President of ARCO since Senior Vice President July 1990 and President of ARCO Products Company since June 1993. He was President of ARCO Transportation Company (July 1990-May 1993), Vice President, Corporate Planning of ARCO (June 1987-July 1990) and Senior Vice President, Marketing and Employee Relations of ARCO Oil and Gas Company (1985- 1987). He has been an officer of the Company since 1987. J. Kenneth Thompson, 45 Mr. Thompson has been a Senior Vice President of ARCO and Senior Vice President President of ARCO Alaska, Inc. since June 1994. He was a Vice President of ARCO and a Vice President of ARCO Exploration and Production Technology (June 1993-June 1994) and as Senior Vice President, Western District of ARCO Oil and Gas Company (January 1990-June 1993). He has been an officer of the Com- pany since 1994.
19
NAME, AGE AND PRESENT POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b) ---------------------- --------------------------------------------- Bruce G. Whitmore, 52 Mr. Whitmore has been the Senior Vice President, General Senior Vice President, Counsel and Corporate Secretary of ARCO since December 1994. General Counsel and He served as Vice President and General Counsel of ARCO Chem- Corporate Secretary ical Company (October 1990-December 1994) and as Associate General Counsel, Finance and Corporate Affairs of ARCO (June 1986-September 1990). He has been an officer of the Company since 1994. Allan L. Comstock, 53 Mr. Comstock has been a Vice President and Controller of ARCO Vice President and since June 1993. He was a Vice President of ARCO Chemical Controller Company (October 1989-June 1993) and General Auditor of ARCO (November 1985-October 1989). He has been an officer of the Company since 1993.
- -------- (a) Division names used in the descriptions of business experience of executive officers of the Company are the names which were in effect at the time such officers held such positions. In some instances, divisions have been combined or reorganized and, accordingly, activities thereof are presently conducted under different division names. (b) The By-Laws of the Company provide that each officer shall hold office until the officer's successor is elected or appointed and qualified or until the officer's death, resignation or removal by the Board of Directors. 20 DESCRIPTION OF CAPITAL STOCK The following description of the Company's capital stock is included in order to facilitate incorporation by reference of such description in filings by the Company under the federal securities laws. Certain statements under this heading are summaries of provisions of the Restated Certificate of Incorporation of ARCO, dated June 27, 1994, and do not purport to be complete. The summaries make use of certain terms defined in the Certificate of Incorporation and are qualified in their entirety by reference thereto. The term "$3.00 Preference Stock" refers to the Company's $3.00 Cumulative Convertible Preference Stock, par value $1 per share. The term "$2.80 Preference Stock" refers to the Company's $2.80 Cumulative Convertible Preference Stock, par value $1 per share. The term "Preferred Stock" refers to the Company's Preferred Stock, par value $.01 per share; this class of Preferred Stock was authorized by stockholders on May 3, 1993. The term "Common Stock" refers to the Company's Common Stock, par value $2.50 per share. The following is a summary of the capital stock of ARCO as of December 31, 1996.
SHARES SHARES AUTHORIZED OUTSTANDING ----------- ----------- $3.00 Preference Stock.......................... 78,089 60,759 $2.80 Preference Stock.......................... 833,776 673,855 Preferred Stock................................. 75,000,000 -- Common Stock.................................... 600,000,000 161,082,043*
- -------- * Excludes treasury stock. Certain Open Market Stock Purchases. Pursuant to the 1985 Executive Long- Term Incentive Plan, as amended on February 24, 1997 (the "Amended LTIP"), officers and key employees are eligible to receive shares of Common Stock upon exercises of stock options, surrender of dividend share credits, and upon grants of Restricted Stock. Pursuant to the compensation program for outside directors, as amended in November 1996, outside directors are eligible to receive shares of Common Stock upon grants of Restricted Stock, including Restricted Stock granted in lieu of some or all of their cash compensation for serving as directors and in connection with the termination of the Outside Directors Retirement Plan. Pursuant to the Company's Capital Accumulation Plans, employees are eligible to receive Common Stock in satisfaction of employer and employee contributions thereunder. ARCO may satisfy these obligations by issuing new shares of Common Stock. From time to time ARCO may also purchase Common Stock on the open market and contribute it to treasury to provide for current and future obligations to deliver Common Stock under each of these plans; in addition, ARCO may purchase Common Stock on the open market and contribute it to treasury in satisfaction of its obligations upon conversion of the $3.00 Preference Stock and the $2.80 Preference Stock. Power of Board to Determine Terms of Preferred Stock. Under the Certificate of Incorporation, as amended following approval by stockholders on May 3, 1993, the Board is authorized to issue, at any time or from time to time, one or more series of Preferred Stock at its discretion. In addition, the Board has the power to determine all designations, powers, preferences and the rights of such stock and any qualifications, limitations and restrictions, including but not limited to: (i) the designation of series and numbers of shares; (ii) the dividend rights, if any; (iii) the rights upon liquidation or distribution of the assets of the Company, if any; (iv) the conversion or exchange rights, if any; (v) the redemption provisions, if any; and (vi) the voting rights, if any. No shares of Preferred Stock have been issued. So long as the Preference Stocks are outstanding, and only for that period of time, the rights of the Preferred Stock are subordinate to the rights of the holders of Preference Stocks. Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80 Preference Stock are entitled to receive cumulative dividends at the annual rate of $3.00 per share and $2.80 per share, respectively, payable quarterly, before cash dividends are paid on the Preferred Stock, if any, and the Common Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock rank on a parity as to dividends. After provision for payment in full of cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference Stocks, and the payment in full of cumulative 21 dividends on the outstanding Preferred Stock, if any, dividends may be paid on the Common Stock as the Board of Directors may deem advisable, within the limits and from the sources permitted by law. Conversion Rights. Each share of $3.00 Preference Stock is convertible, at the option of the holder, into six and eight-tenths (6.8) shares of Common Stock of the Company at any time, and each share of $2.80 Preference Stock is convertible, at the option of the holder, into two and four-tenths (2.4) shares of Common Stock of the Company at any time. These conversion rates are subject to adjustment as set forth in the Certificate of Incorporation. Shares of Preferred Stock would be convertible, if at all, on such terms as were designated by the Board of Directors. Voting Rights. The holders of $3.00 Preference Stock are entitled to eight votes per share; holders of $2.80 Preference Stock are entitled to two votes per share; and holders of Common Stock are entitled to one vote per share. Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote cumulatively for directors; holders of Common Stock have no cumulative voting rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together as one class, except as provided by law and except as to certain matters which require a vote by the holders of $3.00 Preference Stock or by the holders of $2.80 Preference Stock as a separate class as set forth below. The Certificate of Incorporation provides that if the Company shall be in default with respect to dividends on the $3.00 Preference Stock in an amount equal to six quarterly dividends, the number of directors of the Company shall be increased by two at the first annual meeting thereafter, and at such meeting and at each subsequent annual meeting until all dividends on the $3.00 Preference Stock shall have been paid in full, the holders of the $3.00 Preference Stock shall have the right, voting as a class, to elect such two additional directors. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock. The Certificate of Incorporation provides that the Company shall not, without the assent of the holders of two-thirds of the then outstanding shares of $3.00 Preference Stock, (a) change any of the terms of the $3.00 Preference Stock in any material respect adverse to the holders, or (b) authorize any prior ranking stock; and that the Company shall not, without the assent of the holders of a majority of the then outstanding shares of $3.00 Preference Stock, (1) authorize any additional $3.00 Preference Stock or stock on a parity with it; (2) sell, lease or convey all or substantially all of the property or business of the Company; or (3) become a party to a merger or consolidation unless the surviving or resulting corporation will have immediately after such merger or consolidation no stock either authorized or outstanding (except such stock of the Company as may have been authorized or outstanding immediately before such merger or consolidation of such stock of the surviving or resulting corporation as may be issued upon conversion thereof or in exchange therefor) ranking as to dividends or assets prior to or on a parity with the $3.00 Preference Stock or the stock of the surviving or resulting corporation issued upon conversion thereof or in exchange therefor. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock. The holders of Preferred Stock, if any, would have such voting rights, if any, as were designated by the Board. Redemption Provisions. The $3.00 Preference Stock is redeemable at the option of the Company as a whole or in part at any time on at least thirty days' notice at $82 per share plus accrued dividends to the redemption date. The $2.80 Preference Stock is redeemable at the option of the Company as a whole or in part at any time on at least thirty days' notice at $70 per share plus accrued dividends to the redemption date. The holders of Preferred Stock, if any, would have such redemption provisions, if any, as were designated by the Board. Liquidation Rights. In the event of liquidation of the Company, the holders of $3.00 Preference Stock and holders of $2.80 Preference Stock will be entitled to receive, before any payment to holders of Common Stock, $80 per share and $70 per share, respectively, together in each case with accrued and unpaid dividends. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock will rank on a parity as to assets of the Company upon its liquidation. Subject to the rights of creditors and the holders of $3.00 Preference Stock and $2.80 Preference Stock, the holders of Common Stock are entitled pro rata to the assets of the Company upon its liquidation. The holders of Preferred Stock, if any, would have such liquidation rights, if any, as were designated by the Board. Preemptive Rights. No holders of shares of capital stock of the Company have or will have any preemptive rights to acquire any securities of the Company. 22 Liability to Assessment. The shares of Common Stock are fully paid and non- assessable. Prohibition of Greenmail. Article VII of the Certificate of Incorporation provides in general that any direct or indirect purchase by the Company of any of its voting stock (or rights to acquire voting stock) known to be beneficially owned by any person or group which holds more than 3% of a class of its voting stock and which has owned the securities being purchased for less than two years must be approved by the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the voting stock. Such approval shall not be required with respect to any purchase by the Company of such securities made (i) at or below fair market value (based on average New York Stock Exchange closing prices over the preceding 90 days) or (ii) as part of a Company tender offer or exchange offer made on the same terms to all holders of such securities and complying with the Securities Exchange Act of 1934 or (iii) in a Public Transaction (as defined). Rights to Purchase Common Stock. On July 24, 1995, the Board of Directors of the Company declared a dividend of one common share purchase right (a "Right") for each outstanding share of Common Stock, par value $2.50 per share (the "Common Shares"), of the Company. The dividend was paid on August 18, 1995 to the stockholders of record on that date. Each Right entitled the registered holder to purchase from the Company one Common Share at a price of $400.00 per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and First Chicago Trust Company of New York, as Rights Agent. The Rights will be evidenced by and will be transferred with the Common Share certificates until the Distribution Date. The Distribution Date is defined as the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding Common Shares (an "Acquiring Person") or (ii) 10 business days following the commencement of, or announcement of an intention to make, a tender or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights will be issued. The Rights are not exercisable until the Distribution Date. The Rights will expire on August 18, 2005 unless redeemed prior to that date by the Company. The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be void), will have the right to receive, upon exercise of each Right, that number of Common Shares having a market value of two times the Purchase Price. If, after the Distribution Date, the Company is acquired in a merger or other business combination with, or 50% or more of its consolidated assets or earning power are sold to, the Acquiring Person, each holder of a Right will have the right to receive, upon exercise of each Right, that number of shares of common stock of the acquiring company with a market value of two times the Purchase Price. At any time after an Acquiring Person crosses the 15% threshold and prior to the acquisition by such person of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio of one Common Share per Right. The Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right prior to the acquisition by an Acquiring Person of 15% or more of the outstanding Common Shares. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that after any person becomes an Acquiring Person no such amendment may adversely affect the interests of the other holders of the Rights. A copy of the Rights Agreement is filed as an exhibit hereto. This summary description of the Rights is qualified in its entirety by reference thereto. 23 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the "safe harbor" provisions contained in Section 27A of the Private Securities Litigation Reform Act and is including this statement in its 1996 Form 10-K in order to do so. From time to time ARCO's management may wish to make forward-looking statements to inform more fully existing and potential security holders regarding various matters, including without limitation, projections regarding future income, oil and gas production, production and sales volumes of refined petroleum products and petrochemicals, replacement of oil and gas reserves, capital spending, as well as predictions as to the timing and success of specific projects. Such forward-looking statements are generally accompanied by words such as estimate, project, predict, or expect, that convey the uncertainty of future events or outcomes. The factors identified in this statement are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward looking statement made by or on behalf of the Company. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward looking projections. The Company does not intend to update these cautionary statements. UPSTREAM FACTORS AFFECTING PERFORMANCE Volatility and Level of Crude Oil and Gas Prices The Company's projections as to the level of future earnings are based on certain assumptions as to the future prices of crude oil and natural gas. These price assumptions are used for planning purposes and the Company expects they will change over time. Any substantial or extended decline in the actual prices of crude oil and natural gas could have a material adverse effect on the Company's financial position, results of operations and on quantities of crude oil and natural gas reserves that may be economically produced. These prices historically have been volatile and may vary based on factors affecting commodities markets generally, such as political instability in producing regions, changes in market demand, and fluctuations in political, regulatory and economic climates throughout the world. Ability to Maintain Production Rates and Replace Reserves Projecting future rates of oil and gas production is inherently imprecise. Producing oil and gas reservoirs generally have declining production rates. Production rates depend on a number of factors, including crude oil prices, market demand, and the political, economic and regulatory climate. The other major factor affecting production rates is the Company's ability to replace depleting reservoirs with new reserves through enhanced recovery, acquisition or exploration success. Exploration success is impossible to predict particularly over the short term, where results vary widely year to year; moreover, the ability to replace reserves over an extended period depends not only on the total volumes found, but on the cost of finding and developing such reserves. Depending on the general crude oil price environment, the Company's finding and development costs may not justify the use of resources to produce such reserves. There can be no assurances as to the level or timing of success, if any, that the Company will be able to achieve in acquiring or finding and developing additional reserves. DOWNSTREAM FACTORS AFFECTING PERFORMANCE A substantial proportion of the Company's total income for the foreseeable future is expected to come from operations downstream of oil and gas production and sale, chiefly refining and marketing of gasoline and other products and chemical operations. It is possible that the Company could meet its projections for upstream operations and still fail to meet overall projections made in various forward looking statements. 24 Products The Company conducts significant refining and marketing operations in the five western states of the U.S. Results of these operations will be significantly affected by changes in the volumes sold and the prices received on those volumes. These, in turn, are influenced by such factors as the general economic condition of the western states, which affects the overall demand for gasoline and other refined products, the actions taken by competitors, including both pricing and the expansion and retirement of refining capacity in response to market conditions, environmental regulations issued by the state and federal government, including particularly regulations dealing with gasoline composition and characteristics. Overall profitability of the Company's refining and marketing operations depends heavily on the margin between the price of crude oil and/or purchased products and the sales price of products produced and/or purchased. These margins may fluctuate depending upon changes in the price of crude oil and the relative supply/demand balance for products. Political constraints either in the form of express legal requirements or general political pressure may also limit the margins otherwise available to the Company. Projections as to the level of future earnings are dependent on the Company's ability to produce and sell the volumes of refined products and to achieve the margins on which those projections are based. Products volumes and margins historically have been volatile and may vary with factors such as the national and regional economy, market demand, regulatory changes, the price of crude oil, and the ability of regional refiners and the Company to provide a sufficient supply of refined products. Chemical Operations ARCO derives a material portion of its net income from the chemical operations of its affiliates. Results of its chemical operations are influenced by changes in the cost of raw materials, the availability of substitutes, changes in the supply/demand balance, and actions taken by competitors to increase or decrease their production volumes. Earnings with respect to chemical operations typically are cyclical and show marked responses to changes in the overall economic climate. Projections as to the level of future earnings are dependent on achieving the volumes and margins for chemicals on which those projections are based. Volumes and margins for these petrochemical products are strongly influenced by national and world economic growth, market demand, the availability of substitutes, regulatory changes, the cost of raw materials, and the worldwide capacity to produce these petrochemical products. EFFECT OF POLITICAL AND REGULATORY INSTABILITY ON COMPANY'S OPERATIONS The Company's ability to conduct acquisition, exploration, development and production of oil and gas interests is dependent on the political and regulatory climate in the particular geographic regions where the properties are located. The Company's ability to negotiate and implement specific projects in a timely and favorable manner may be impacted by political considerations unrelated to or beyond the control of the Company. Political instability may result in insurgencies and military operations that could interfere with the Company's operating facilities located throughout the world. Possible political and regulatory actions by governments may affect future results in unpredictable ways. OPERATING HAZARDS The Company's drilling operations are subject to various hazards common to the industry, including explosions, fires, and uncontrollable flows of oil and gas. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions. Similarly, the Company's refining and petrochemical operations are subject to explosions, fires, and damage from severe weather conditions. 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1996 1995 ----------------------------------- ------------------------------------- 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST -------- -------- -------- -------- -------- -------- -------- ---------- Common Stock: Market price per share High................. $142 1/2 $128 $123 $119 7/8 $115 3/8 $116 5/8 $117 7/8 $115 19/64 Low.................. $126 3/4 $114 3/8 $112 1/2 $107 1/2 $104 1/4 $106 3/8 $109 $100 1/2 Cash dividends per share................. $1.375 $1.375 $1.375 $1.375 $1.375 $1.475* $1.375 $1.375 $3.00 Cumulative Con- vertible Preference Stock: Market price per share High................. $873 $822 3/4 $822 $778 3/8 $745 $771 $778 1/2 $761 5/8 Low.................. $873 $794 $812 5/8 $748 1/2 $744 1/2 $738 $765 $708 Cash dividends per share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $2.80 Cumulative Con- vertible Preference Stock: Market price per share High................. $337 1/2 $305 1/8 $290 1/2 $283 5/8 $274 1/2 $276 $280 $274 Low.................. $303 5/8 $277 $270 1/2 $260 $249 1/8 $256 $266 3/4 $242 Cash dividends per share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
- -------- *Dividends include a $0.10 per share redemption payment for Common Stock purchase rights. Prices in the foregoing table are from the New York Stock Exchange composite tape. On February 24, 1997 the high price per share was $127 7/8 and the low price per share was $126 5/8. As of December 31, 1996, the approximate number of holders of record of Common Stock of ARCO was 88,400. The principal markets in which ARCO's Common Stock is traded are listed on the cover page. The quarterly dividend rate for Common Stock was increased to $1.375 per share in January 1991. On January 27, 1997, a dividend of $1.375 per share was declared on Common Stock, payable on March 14, 1997 to stockholders of record on February 14, 1997. Future cash dividends will depend on earnings, financial conditions and other factors; however, the Company presently expects that dividends will continue to be paid. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for ARCO:
YEARS ENDED DECEMBER 31, ------------------------------------------ 1996(1) 1995(2) 1994(1)(3) 1993(4) 1992(5) ------- ------- ---------- ------- ------- (MILLIONS EXCEPT PER SHARE AMOUNTS) Sales and other operating revenues.. $18,592 $15,819 $15,035 $17,189 $17,503 Income before changes in accounting principles......................... 1,663 1,376 919 269 1,193 Net income.......................... 1,663 1,376 919 269 801 Earned per share before changes in accounting principles.............. 10.18 8.42 5.63 1.66 7.39 Earned per share.................... 10.18 8.42 5.63 1.66 4.96 Cash dividends per common share..... 5.50 5.60 5.50 5.50 5.50 Total assets........................ 25,715 23,999 24,563 23,894 24,256 Long-term debt and capital lease obligations........................ 5,593 6,708 7,198 7,089 6,227
- -------- (1) See Note 2 of Notes to Consolidated Financial Statements regarding unusual items on page 44. (2) Dividends include a $0.10 per share redemption payment for Common Stock purchase rights. (3) Includes after-tax gain of $273 million from issuance of stock by Vastar Resources, Inc. (4) Includes charges of $404 million after tax related to the writedown for sale or other disposition of oil and gas properties and excess office space, and the costs associated with the elimination of approximately 1,300 positions. (5) Includes a net after-tax benefit of $211 million related to a settlement with Iran, the recognition of a portion of the gain from the sale of Lyondell Petrochemical Company common stock, partially offset by a charge resulting from ARCO Chemical Company's withdrawal from a joint venture. 26 ARCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Earnings from Operations Millions 1996 1995 1994 ---- ---- ---- Net income $1,663 $1,376 $919 Special items (benefit) charge - (45) (40) ------ ------ ---- Operating Results $1,663 $1,331 $879 ====== ====== ====
Special items after tax Millions 1996 1995 1994 ---- ---- ---- Insurance settlements $(47) $(82) $ - Restructuring charges 19 - 210 Gain on issuance of subsidiary stock - - (273) Future environmental remediation 19 30 48 Other, net 9 7 (25) ---- ---- ----- Total (benefit) charge $ - $(45) $ (40) ==== ==== =====
ARCO's 1996 earnings were 21% higher than 1995 earnings which, in turn, were 50% higher than 1994 earnings. The 1996 operating results benefited from higher crude oil and natural gas prices, increased natural gas volumes, higher refining and marketing volumes, and lower exploration and interest expense. 3 Bar Graphs Showing Average Crude Oil Sales Prices for 1994, 1995 and 1996.
Average Crude Oil Sales Prices (per barrel) 1994 1995 1996 ---- ---- ---- U.S. including Vastar $10.44 $12.31 $16.36 International $15.16 $16.26 $19.60
3 Bar Graphs Showing Average Natural Gas Sales Prices for 1994, 1995 and 1996
Average Natural Gas Sales Prices (per thousand cubic feet) 1994 1995 1996 ---- ---- ---- U.S. including Vastar $1.76 $1.35 $1.80 International $2.51 $2.56 $2.54
These combined benefits were partially offset by lower earnings from ARCO's chemical interests. 1996 cost savings from ARCO's efforts to achieve a low-cost operating structure exceeded $450 million after tax, compared to the benchmark year of 1993. In 1995, operating results benefited from higher ARCO Chemical Company earnings, higher crude oil prices, cost savings resulting from ARCO's 1993 and 1994 restructurings, and higher earnings from ARCO's equity interest in Lyondell Petrochemical Company. These benefits were partially offset by lower refining and marketing margins and lower domestic natural gas prices. 1995 cost savings totaled $330 million after tax, compared to the benchmark year of 1993. Results of Segment Operations
Exploration and Production Millions 1996 1995 1994 ---- ---- ---- Net income $1,271 $683 $405 Special items (benefit) charge (15) (23) 75 ------ ---- ---- Operating results $1,256 $660 $480 ====== ==== ====
Special items after tax Millions 1996 1995 1994 ---- ---- ---- Restructuring charges $ - $ - $66 Asset sales - (9) (6) Asset impairment - 12 - Other, net (15) (26) 15 ---- ---- --- Total (benefit) charge $(15) $(23) $75 ==== ==== ===
Higher crude oil and natural gas prices, growth in natural gas volumes and lower exploration expenses combined to benefit earnings in 1996. In 1995, earnings reflected the effect of higher crude oil prices, higher natural gas volumes and reduced operating expenses, partially offset by lower domestic natural gas prices and higher exploration expenses. 27 ARCO MANAGEMENT'S DISCUSSION
Petroleum Liquids Production Barrels/day - net 1996 1995 1994 ---- ---- ---- Prudhoe Bay 181,200 200,500 214,800 Kuparuk River 130,500 140,700 147,200 Greater Point McIntyre 50,100 45,000 36,000 Alaska NGLs 25,700 27,400 23,200 Lower 48, including Vastar 171,800 169,500 170,100 International 66,100 66,800 72,800 ------- ------- ------- Total 625,400 649,900 664,100 ======= ======= =======
Worldwide petroleum liquids production decreased in both 1996 and 1995 as a result of natural field declines. In Alaska, increased production from the Greater Point McIntyre fields was more than offset by production declines in the Prudhoe Bay and Kuparuk River fields. Internationally, new production volumes from the Rhourde El Baguel field in Algeria in the latter half of 1996 and the Blenheim field in the United Kingdom in 1995 were more than offset by decreases in volumes received from Indonesian production sharing contracts in both years.
Natural Gas Production Million cubic feet/day - net 1996 1995 1994 ---- ---- ---- U.S., including Vastar 1,044 999 960 United Kingdom 330 265 286 Indonesia 311 270 206 China 69 - - Other international 20 22 19 ----- ----- ----- Total 1,774 1,556 1,471 ===== ===== =====
U.S. natural gas production growth in 1996 and 1995 came primarily from Vastar Resources, Inc.'s fields in the San Juan Basin and the Gulf of Mexico. In 1996, international natural gas production was higher as a result of the startup of the Yacheng-13 field in the South China Sea and higher production in the United Kingdom and Indonesia. A full year of production from the Gawain field contributed to the increase in United Kingdom natural gas sales. 1 Pie Chart Showing Production for 1996
Production (thousand barrels of oil equivalent per day) 1996 ---- Alaska 392.9 Lower 48 340.4 International 187.8
Production from Indonesian natural gas fields in 1996 and 1995 grew as a result of greater contract takes by purchasers. Unseasonably warm weather in late 1995 contributed to the decline in United Kingdom natural gas sales. In 1996, a number of projects were started that will contribute growth to ARCO's exploration and production operations. ARCO became a partner with Sonatrach in Rhourde El Baguel, Algeria's second largest oil field. This added 218 million barrels of oil to ARCO's reserves. In Alaska, the Alpine field west of the Kuparuk River field on the North Slope should start production in 2000. ARCO added 65 million barrels of proved reserves for primary recovery from Alpine. In eastern Indonesia, ARCO is drilling the sixth delineation well to appraise the Wiriagar gas discovery's potential for a large liquefied natural gas project. 3 Bar Graphs Showing Natural Gas Growth for 1994, 1995 and 1996
Natural Gas Growth (million cubic feet per day) 1994 1995 1996 ---- ---- ---- U.S. Gas 960 999 1,044 International Gas 511 557 730
28 ARCO
Coal Millions 1996 1995 1994 ---- ---- ---- Net income $ 60 $ 75 $ 70 Special items (benefit) charge - 10 - ------ ----- ----- Operating results $ 60 $ 85 $ 70 ====== ===== ===== Worldwide shipments (tons) 62.5 57.6 49.6
Record production in the U.S. in 1996 was more than offset by lower average U.S. coal prices, higher worldwide operating and maintenance costs, and the exchange rate effect of a stronger Australian currency. U.S. volumes were up 13% in 1996 as production increased at all U.S. mines. Australian volumes were 8% lower because of equipment down time and labor-related interruptions. Due to the unanticipated geological complexity of ARCO's Curragh mine in Australia, the current cost of recovering coal is significantly more than originally estimated. Therefore, the Company is studying several options to improve profitability and efficiency which may include scaling back the level of operations at the mine. Total shipments from the mine were 5 million tons in 1996. In December 1996, a subsidiary of ARCO acquired a 65% interest in Canyon Fuel Company, a limited liability company which owns three mines in Utah. The mines produced 9.4 million tons in 1996 and have estimated recoverable reserves of 270 million tons. At December 31, 1996, ARCO's net investment at cost was $411 million. The results of the acquired mines were not included in ARCO's 1996 consolidated net income. The pro forma effect of including the earnings from the acquired mines was immaterial to ARCO's consolidated net income in 1996. 1 Pie Chart Showing Operating Results for 1996
Operating Results (millions) 1996 ---- Exploration and production $1,256 Coal $ 60 Refining and marketing $ 270 Transportation $ 161 ARCO Chemical $ 320 Lyondell $ 53
In 1995, worldwide production increases and higher coking and export steam coal prices for Australian production were partially offset by lower average U.S. prices. Earnings included a net charge of $10 million, primarily related to the impact on deferred taxes of an Australian tax rate increase.
Refining and Marketing Millions 1996 1995 1994 ---- ---- ---- Net income $ 260 $ 177 $ 195 Special items (benefit) charge 10 23 80 ----- ----- ----- Operating results $ 270 $ 200 $ 275 ===== ===== =====
Operating results in 1996 reflected higher refined product prices and sales volumes, partially offset by the impact of higher crude oil prices, higher prices and volumes of purchased refined products and increased operating costs. The increased operating costs were associated with maintenance turnarounds and charges for environmental and other remediation. Refined products were purchased from third parties to supplement ARCO's refinery production. 29 ARCO MANAGEMENT'S DISCUSSION The Company's margins in 1996 were highest in the second and third quarters and declined in the fourth quarter, reflecting rising oil prices and declining products prices. The declining product prices resulted primarily from extremely competitive conditions in the Los Angeles area in the 1996 fourth quarter. As a result, the Company had an after-tax loss of $8 million for the quarter, compared to after-tax earnings of $53 million for the 1995 fourth quarter. Margins remained weak in January 1997. In 1995, the impact of higher crude oil costs more than offset increased sales prices and volumes and lower operating expenses.
Petroleum Products Sales Thousand barrels/day 1996 1995 1994 ---- ---- ---- Gasoline 266.4 256.8 253.8 Jet 117.0 106.2 97.6 Distillate 69.0 69.1 73.5 Other 80.7 61.8 53.0 ----- ----- ----- Total 533.1 493.9 477.9 ===== ===== =====
The 1996 special items included an after-tax charge of $10 million related to environmental and other remediation. The 1995 special items included charges related to terminating certain contractual agreements and future environmental remediation. The 1994 special items included charges related to personnel reductions and future environmental remediation. 1 Pie Chart Showing Petroleum Products Sales for 1996
Petroleum Products Sales (thousand barrels/day) 1996 ---- Gasoline 266.4 Jet 117.0 Distillate 69.0 Other 80.7
ARCO was able to achieve higher sales in 1996 and 1995 by a combination of increased refining capacity resulting from modifications and debottlenecking projects necessary to make reformulated gasolines and increased refined products purchases. The increase in other sales in 1996 reflected the sale of intermediate products as a result of turnarounds.
Transportation Millions 1996 1995 1994 ---- ---- ---- Net income $ 141 $ 193 $ 172 Special items (benefit) charge 20 (3) 20 ----- ----- ----- Operating results $ 161 $ 190 $ 192 ===== ===== =====
The operating results reflected lower Trans Alaska Pipeline System (TAPS) tariff revenues and a 6% decrease in TAPS volumes compared to 1995. In 1995, increased volumes and earnings from the commercial pipeline and terminal businesses in the Lower 48 nearly offset declines in earnings from TAPS. The 1996 transportation results included a net after-tax charge of approximately $20 million for the writedown of ARCO's interest in the Point Arguello Pipeline and a TAPS tariff refund of $14 million (reflected as a benefit in ARCO's exploration and production special items), partially offset by a gain on a pipeline interest sale. The 1994 results included net charges of approximately $20 million after tax related to personnel reductions, a loss on the sale of Midcontinent product pipelines, and costs associated with the Southern California earthquake, partially offset by a tax credit. 30 ARCO
Chemicals Millions 1996 1995 1994 ---- ---- ---- ARCO Chemical Net income (reported) $ 348 $ 508 $ 269 ARCO's share* 320 460 265
*Reflects ARCO's share of ARCO Chemical net income after segment adjustments, primarily for interest expense and minority interest. ARCO Chemical's earnings declined in 1996 primarily as a result of significantly lower styrene monomer (SM) margins. The SM margins were lower as sale prices decreased more than raw material costs. SM sale prices declined significantly versus the 1995 period as production from increased industry capacity depressed SM market prices. In 1995, ARCO Chemical's earnings reflected higher margins for propylene oxide (PO) and its derivatives and SM. The margin improvements were primarily attributable to higher prices, which more than offset increased costs of raw materials. Both prices and margins for SM decreased in the second half of 1995 as worldwide demand declined, reversing the trend during the early part of 1995. ARCO Chemical reported that its 1994 results included an after-tax charge of $19 million for corporate restructuring and a $12 million benefit from insurance proceeds. In 1996, ARCO Chemical undertook actions to focus on its core PO and derivatives businesses. ARCO Chemical sold its plastics business in September 1996, and purchased an isocyanates business in December 1996. ARCO Chemical announced plans to build a PO/SM plant in Rotterdam, Netherlands, and expand its existing PO/SM capacity in Channelview, Texas.
Lyondell Petrochemical Company Millions 1996 1995 1994 ---- ---- ---- Net income (reported) $ 126 $ 389 $ 223 ARCO's equity income 53 194 111
ARCO has a 49.9% interest in Lyondell. Lyondell's net income declined in 1996 primarily because of lower olefins margins resulting from higher feedstock costs. Lyondell's results in 1995 benefited from higher olefins margins and increases in its polymers business following the acquisition of additional capacity in 1995 and strong aromatics performance at LYONDELL-CITGO refinery. The strong performance in the olefins and polymers markets in the first nine months of 1995 was followed by a sharp market decline in the latter part of the year.
Unallocated Expenses and Other Millions 1996 1995 1994 ---- ---- ---- Unallocated net benefit (expense) $ 4 $ 94 $ (57)
The net benefits in 1996, and to a greater extent in 1995, were from insurance settlements related to certain past environmental expenses. In 1996, the net benefit was also lower due to final charges for previously reported personnel reductions, and less interest income from short-term investments. The insurance settlements, the absence of charges for personnel reductions and other items, and lower insurance and corporate staff expense resulted in a net after- tax benefit in 1995, compared to a net after-tax expense in 1994. 31 ARCO MANAGEMENT'S DISCUSSION Results of Consolidated Operations
Revenues Millions 1996 1995 1994 ---- ---- ---- Sales and other operating revenues (excluding excise taxes) Upstream $ 9,774 $ 8,898 $ 8,632 Downstream 11,682 10,511 9,362 Intersegment eliminations (2,864) (3,590) (2,959) ------- ------- ------- Total $18,592 $15,819 $15,035 ======= ======= =======
In 1996, higher crude oil and natural gas prices, increased natural gas marketing activity and higher natural gas production volumes were partially offset by decreased crude oil trading activity. Sales to third parties of natural gas (produced and purchased volumes) increased to 3.8 billion cubic feet per day in 1996, up from 2.8 billion cubic feet per day in 1995. The majority of the increase was generated by Vastar, where natural gas revenues increased from $1.3 billion in 1995 to $2.5 billion in 1996. The remainder of the increase came from international production in the South China Sea, North Sea and offshore Indonesia. Sales to third parties of petroleum liquids (both produced and purchased volumes) were down 42,200 barrels per day, compared to 1995. In downstream businesses, higher refined products prices and volumes were partially offset by a decline in chemical products prices and volumes. ARCO Chemical sales and other operating revenues declined $327 million in 1996. 1 Bar Graph Showing Crude Oil Refinery Runs for 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Crude oil refinery runs (thousand barrels/day) 408 439 453
In 1995, higher crude oil prices and increased sales volumes for coal were partially offset by decreased crude oil trading activity and lower domestic natural gas prices. Sales to third parties of petroleum liquids (both produced and purchased volumes) were down 90,200 barrels per day, compared to 1994. In downstream businesses, the 1995 revenues reflected higher prices and sales volumes for chemical and refined products. ARCO Chemical sales and other operating revenues increased $859 million in 1995, compared to 1994. 1 Pie Chart Showing Revenues for 1996
Revenues (millions) 1996 ---- Upstream $ 9,774 Downstream $11,682
Other revenues declined in 1996 primarily because of lower equity earnings from Lyondell, lower benefits from insurance settlements and a lower average balance of short-term investments. Other revenues were higher in 1995 primarily because of insurance settlements and higher equity earnings from Lyondell. 32 ARCO
Expenses Millions 1996 1995 1994 ---- ---- ---- Trade purchases $ 7,949 $ 6,116 $ 5,961 Operating expenses 3,953 3,790 3,797 SG&A expenses 1,018 1,029 1,003 Exploration expenses 413 523 455 ------- ------- ------- Total $13,333 $11,458 $11,216 ======= ======= ======= Percent of operating revenues 71.7% 72.4% 74.6%
In 1996, trade purchases were higher as a result of increased natural gas marketing activity and higher third-party purchases of refined products. Natural gas marketing purchases increased to 2.1 billion cubic feet per day in 1996, up from 1.3 billion cubic feet per day in 1995. Prices for purchased volumes of natural gas, crude oil and refined products were also higher in 1996. In 1995, trade purchases increased as a result of higher chemical feedstock costs and crude oil prices, partially offset by decreased crude oil trading activity. Crude oil trading purchases decreased 73,300 barrels per day in 1995, compared to 1994. ARCO's 1996 operating expenses reflected higher oil and gas lease operating and other support costs for new international operations, partially offset by lower operating costs in Alaska. In addition, refining and marketing and coal operating expenses were higher in 1996. The higher refining and marketing expenses were associated with maintenance turnarounds, marketing improvements and charges for environmental and other remediation. The higher coal expenses were associated with increased production volumes and maintenance. The 1995 operating expenses were lower in the following areas: domestic exploration and production - lease operating and other support; refining and marketing - maintenance, outside services and personnel; transportation - maintenance; and insurance costs. The lower maintenance expense was related to the level of scheduled refinery turnarounds and less required work on the Trans Alaska Pipeline in 1995. ARCO Chemical tolling costs associated with toluene di- isocyanate sales, which began in 1995, partially offset the reductions. The decline in 1996 exploration expense primarily reflected lower dry hole costs in ARCO's international exploration and production operations. Higher exploration expenses in 1995 primarily reflected dry hole costs associated with South China Sea exploration, partially offset by lower exploration costs in Alaska. The higher taxes other than income taxes in 1996 primarily reflected the impact of higher crude oil prices on U.S. production taxes and the impact of higher crude oil prices and production volumes in the United Kingdom. The reduction in 1995 primarily reflected the absence of an accrual for certain tax issues recorded in 1994. The decline in interest expense in 1996 reflected lower average long-term debt balances outstanding during the year, compared to prior years. Unusual items in 1996 were final charges for personnel reductions, the majority of which were reported as unusual items in 1994. 33 ARCO MANAGEMENT'S DISCUSSION Gain on Issuance of Stock by Vastar Resources, Inc. In July 1994, Vastar consummated the sale of 17,250,000 shares of its common stock to the public at an initial offering price of $28 per share. Vastar was a wholly owned subsidiary of ARCO prior to the offering. ARCO realized an after-tax gain of $273 million as a result of the initial public offering by Vastar. At December 31, 1996, ARCO owned 80,000,001 shares of Vastar's common stock, which represented 82.3% of Vastar's outstanding common stock. Vastar's results of operations are included in ARCO's Lower 48 results in the exploration and production segment. Income Taxes The Company's effective tax rate was 34.7% in 1996, compared to 31.6% in 1995 and 28.3% in 1994. The higher effective tax rate in 1996 primarily reflected a decrease in the benefit from the dividends received tax deduction and the absence of the 1995 foreign deferred tax asset valuation allowance benefit. The higher effective tax rate in 1995 primarily reflected the effect of higher pretax income, without an increase in tax credits compared to 1994. Financial Condition and Liquidity Cash and cash equivalents and short-term investments totaled $2.2 billion at year-end 1996 and short-term borrowings were $1.2 billion. Working capital was $1.8 billion lower at the end of 1996, primarily reflecting the addition to current liabilities of the $988 million principal amount of ARCO's 9% Exchangeable Notes due September 15, 1997, and a decrease in short-term investments. At maturity, holders of the 9% Exchangeable Notes will receive shares of Lyondell common 1 Pie Chart Showing Cash Inflows for 1996
Cash Inflows (millions) 1996 ---- Operations $3,405 Long-term debt $ 680 Short-term investments $ 778 Other $ 393
stock, or at ARCO's option, cash with an equal value in exchange for the principal amount of the Notes. At December 31, 1996, ARCO had unused committed bank credit facilities totaling $3.1 billion and ARCO Chemical had an unused bank credit facility totaling $300 million. Vastar had an unused revolving credit facility totaling $1.1 billion. During 1996, two projects were begun that could lead to growth in ARCO's exploration and production operations. ARCO entered into a joint venture with Russia's largest oil company, LUKOIL, to pursue projects in the Commonwealth of Independent States. The joint venture entity, LUKARCO, of which ARCO owns 46% and LUKOIL owns 54%, may invest up to $5 billion in various projects over the next 18 years; ARCO has agreed to provide most of the financing to LUKARCO. The first investment will be in the Caspian Pipeline Consortium, a $2 billion 900- mile pipeline project, of which LUKARCO will hold a 12.5% interest. ARCO also entered into a joint venture to produce and upgrade heavy oil from the Orinoco region of Venezuela. The initial $2 billion phase of the project, of which ARCO will hold a 30% interest, is expected to be operational by 2001. 34 ARCO 1 Pie Chart Showing Cash Outflows for 1996
Cash Outflows (millions) 1996 ---- Adds to fixed assets $2,141 Long-term debt $ 861 Acquisitions $ 987 Dividends $ 887 Investments in ZRCC and LUKOIL $ 218 Other $ 240
Capital Expenditures ARCO's 1997 capital spending program includes $3.4 billion for additions to fixed assets, which includes spending for the Rhourde El Baguel, Wiriagar and Alpine projects and a polypropylene project at the Los Angeles refinery. Future capital expenditures remain subject to business conditions affecting the industry, particularly changes in price and demand for crude oil, natural gas and petroleum products. Changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements, and other changes in environmental rules and regulations may also affect future capital expenditures. In addition, the status of negotiations with foreign sovereign governments and third parties and approvals by foreign governments may also affect the timing of future capital expenditures. 1 Pie Chart Showing Additions to Fixed Assets for 1997
Adds to Fixed Assets (millions) 1997 ---- U.S. E&P $ 925 International E&P $1,200 Refining and marketing $ 485 Chemicals $ 455 Other $ 335
It is expected that future cash requirements for capital expenditures, dividends and debt repayments will come from cash generated from operating activities, existing cash balances, and future financings. Environmental Matters ARCO is subject to federal, state and local environmental laws and regulations that require the Company to remove or mitigate the effect on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites. ARCO is currently participating in environmental assessments and cleanups at numerous sites under these laws and may in the future be involved in additional environmental assessments and cleanups.
Environmental Reserves Millions 1996 1995 1994 ---- ---- ---- Beginning balance $ 658 $ 670 $ 648 Charges 49 101 138 Payments (130) (113) (116) ----- ----- ----- Ending balance $ 577 $ 658 $ 670 ===== ===== =====
The amount accrued represents the estimated undiscounted costs that ARCO will incur to complete the remediation of sites with known contamination. In view of the uncertainties associated with estimating these costs (such as differences of opinion between ARCO and various regulatory agencies with respect to the appropriate method for remediating contaminated 35 ARCO MANAGEMENT'S DISCUSSION sites, uncertainty as to the extent of contamination at various sites, and uncertainty regarding ARCO's ultimate share of costs at various sites), it is possible that actual costs could exceed the amount accrued by as much as $600 million. 1 Bar Graph Showing Environmental Charges for 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Environmental Charges (millions) $ 138 $ 101 $ 49
ARCO's operating expenses include ongoing costs of controlling or disposing of pollutants. For the past three years, the Company estimates that its operating expenses related to these ongoing costs have averaged approximately $230 million per year. See Notes 3 and 13 to Consolidated Financial Statements regarding environmental matters. In addition to the provision for environmental remediation costs, $950 million has been accrued for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and for the estimated costs of restoration and reclamation of land associated with such facilities. Risk Management To minimize the effects of interest rate and foreign currency fluctuations, ARCO enters into the following transactions using derivatives: 1) foreign currency forward, option and swap contracts; 2) interest rate swaps; and 3) financial futures contracts and over-the-counter Treasury options which are limited to investment portfolio hedging, alteration of portfolio duration and changing asset mix. ARCO and its subsidiaries also engage in hedging strategies involving forward and futures contracts, swaps and options covering part of its natural gas and crude oil production to minimize the effects of commodity price fluctuations. As of December 31, 1996, Vastar had entered into a series of commodity swaps and natural gas price collar agreements covering approximately 373 million cubic feet per day (mmcfd) of its natural gas production in the first quarter 1997 and 260 mmcfd in the second through fourth quarters 1997. Commodity swaps covering approximately 125 mmcfd and 150 mmcfd of Vastar's natural gas production for 1997 and 1998, respectively, were at an average price of $1.92 per thousand cubic feet (Mcf) and $2.07 per Mcf, respectively (on a Henry Hub basis). Another series of commodity swaps, covering approximately 115 mmcfd of its natural gas production in the first quarter 1997 and 85 mmcfd in the second through fourth quarters 1997, were at an average price of $2.15 per Mcf during the first quarter 1997 and $1.82 per Mcf (on a Henry Hub basis) during the period April 1, 1997 through December 31, 1997. The natural gas price collar agreements, covering an additional 133 mmcfd of its natural gas production in the first quarter 1997 and 50 mmcfd in the second through fourth quarters 1997, were at prices between $2.37 and $2.75 per Mcf during the first quarter 1997 and $2.07 and $2.33 per Mcf, (on a Henry Hub basis) during the period April 1, 1997 through December 31, 1997. Vastar's 1996 natural gas production was 871.6 mmcfd. The Company uses simple, non-leveraged derivative instruments that are placed with major institutions whose creditworthiness is continually monitored. Risk management strategies are reviewed and approved by senior management before being implemented. Policies limit the maximum amount of positions that can be taken in any given instrument. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
SCHEDULE NO. PAGE --- ---- Independent Accountants' Report............................... 38 Financial Statements: Consolidated Statement of Income.......................... 39 Consolidated Balance Sheet................................ 40 Consolidated Statement of Changes in Stockholders' Equity. 41 Consolidated Statement of Cash Flows...................... 42 Notes to Consolidated Financial Statements................ 43 Supplemental Information.................................. 57 Supporting Financial Statement Schedule Covered by the Foregoing Independent Accountants' Report: II Valuation and Qualifying Accounts......................... 66
Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. Financial statements with respect to unconsolidated subsidiaries and 50% owned companies are omitted per Rule 3-09(a) of Regulation S-X. 37 INDEPENDENT ACCOUNTANTS' REPORT To the Stockholders and Board of Directors of Atlantic Richfield Company We have audited the accompanying consolidated balance sheets of Atlantic Richfield Company as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996 and the related financial statement schedule listed in the index on page 37 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atlantic Richfield Company as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Los Angeles, California February 12, 1997 38 ARCO CONSOLIDATED STATEMENT OF INCOME
For the year ended December 31, Millions, except per share amounts 1996 1995 1994 ---- ---- ---- REVENUES Sales and other operating revenues $18,592 $15,819 $15,035 Other revenues 577 920 647 ------- ------- ------- Total revenues 19,169 16,739 15,682 ------- ------- ------- EXPENSES Trade purchases 7,949 6,116 5,961 Operating expenses 3,953 3,790 3,797 Selling, general and administrative expenses 1,018 1,029 1,003 Depreciation, depletion and amortization 1,633 1,641 1,671 Exploration expenses (including undeveloped lease amortization) 413 523 455 Taxes other than income taxes 800 717 780 Interest 668 750 759 Unusual items 26 - 347 ------- ------- ------- Total expenses 16,460 14,566 14,773 ------- ------- ------- Income before gain on issuance of stock by subsidiary 2,709 2,173 909 Gain on issuance of stock by subsidiary - - 459 ------- ------- ------- Income before income taxes and minority interest 2,709 2,173 1,368 Provision for taxes on income 941 687 387 Minority interest in earnings of subsidiaries 105 110 62 ------- ------- ------- Net income $ 1,663 $ 1,376 $ 919 ======= ======= ======= Net income per share $ 10.18 $ 8.42 $ 5.63 ======= ======= ======= Weighted average equivalent shares outstanding 163.4 163.4 163.2 ======= ======= =======
See Notes on pages 43 through 56. 39 ARCO CONSOLIDATED BALANCE SHEET
December 31, Millions 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 1,460 $ 1,537 Short-term investments 784 1,569 Accounts receivable 1,936 1,684 Inventories 995 877 Prepaid expenses and other current assets 258 221 ------- ------- Total current assets 5,433 5,888 ------- ------- Investments and long-term receivables: Investments accounted for on the equity method 764 711 Other investments and long-term receivables 1,598 550 ------- ------- 2,362 1,261 ------- ------- Net property, plant and equipment 16,195 15,355 Deferred charges and other assets 1,725 1,495 ------- ------- Total assets $25,715 $23,999 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 1,157 $ 1,174 Accounts payable 1,443 1,145 Long-term debt due within one year 1,102 184 Taxes payable 438 303 Other 1,163 1,157 ------- ------- Total current liabilities 5,303 3,963 ------- ------- Long-term debt 5,593 6,708 Deferred income taxes 2,884 2,637 Other deferred liabilities and credits 3,450 3,456 Minority interest 684 477 Stockholders' equity: Preference stocks 1 1 Common stock, $2.50 par value; shares issued 161,086,174 (1996), 160,879,765 (1995) shares outstanding 161,082,043 (1996), 160,831,190 (1995) 403 402 Capital in excess of par value of stock 628 632 Retained earnings 6,592 5,816 Equity adjustments 177 (93) ------- ------- Total stockholders' equity 7,801 6,758 ------- ------- Total liabilities and stockholders' equity $25,715 $23,999 ======= =======
See Notes on pages 43 through 56. 40 ARCO CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the year ended December 31, Millions 1996 1995 1994 ---- ---- ---- PREFERENCE STOCKS Beginning and end of year $ 1 $ 1 $ 1 ====== ====== ====== COMMON STOCK Beginning of year $ 402 $ 402 $ 402 ------ ------ ------ End of year, after issuances $ 403 $ 402 $ 402 ====== ====== ====== CAPITAL IN EXCESS OF PAR VALUE Beginning of year $ 632 $ 647 $ 661 ------ ------ ------ End of year, after conversions $ 628 $ 632 $ 647 ====== ====== ====== RETAINED EARNINGS Beginning of year $5,816 $5,342 $5,308 Net income 1,663 1,376 919 Common stock dividends (885) (900) (882) Preference stock dividends (2) (2) (3) ------ ------ ------ End of year $6,592 $5,816 $5,342 ====== ====== ====== EQUITY ADJUSTMENTS Treasury stock, at cost: Beginning of year $ (5) $ (5) $ (83) Conversions 61 39 22 Contributed to benefit plans - - 56 Purchases (57) (39) - ------ ------ ------ End of year $ (1) $ (5) $ (5) Net unrealized gain (loss) on investments: Beginning of year $ (11) $ (38) $ - ------ ------ ------ End of year, after adjustments $ 225 $ (11) $ (38) Pension liability adjustment: Beginning of year $ (60) $ (20) $ (29) ------ ------ ------ End of year, after adjustments $ (28) $ (60) $ (20) Foreign currency adjustment: Beginning of year $ (17) $ (51) $ (133) ------ ------ ------ End of year, after adjustments $ (19) $ (17) $ (51) ------ ------ ------ Total equity adjustments $ 177 $ (93) $ (114) ====== ====== ====== Total stockholders' equity $7,801 $6,758 $6,278 ====== ====== ======
See Notes on pages 43 through 56. 41 ARCO CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, Millions 1996 1995 1994 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,663 $ 1,376 $ 919 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,633 1,641 1,671 Dry hole expense and undeveloped leasehold amortization 209 317 251 Minority interest in earnings of subsidiaries 105 110 62 Net gain on asset sales (41) (16) (3) Gain on issuance of stock by subsidiary - - (459) Income from equity investments (74) (243) (141) Dividends from equity investments 77 89 71 Cash payments (greater) less than noncash provisions (220) (183) 88(a) Deferred income taxes 11 26 118 Changes in working capital accounts(b) 121 (204) (456) Other (79) 6 (24) ------- ------- ------- Net cash provided by operating activities 3,405 2,919 2,097 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets, including dry hole costs (2,141) (1,699) (1,658) Net cash provided (used) by short-term investments 778 1,500 (768) Acquisition of businesses (987) - - Investment in LUKOIL and Zhenhai securities (218) (252) (74) Proceeds from asset sales 208 66 167 Investments and long-term receivables (104) (73) (5) Other 85 (92) 169 ------- ------- ------- Net cash used by investing activities (2,379) (550) (2,169) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (861) (1,138) (796) Proceeds from issuance of long-term debt 680 178 1,275 Proceeds from issuance of stock by subsidiary - - 453 Net cash used by notes payable (79) (293) (69) Dividends paid (887) (902) (885) Treasury stock purchases (57) (39) - Treasury stock contributed to benefit plans - - 56 Other 100 (31) (36) ------- ------- ------- Net cash used by financing activities (1,104) (2,225) (2) ------- ------- ------- Effect of exchange rate changes on cash 1 (1) 10 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (77) 143 (64) Cash and cash equivalents at beginning of year 1,537 1,394 1,458 ------- ------- ------- Cash and cash equivalents at end of year $ 1,460 $ 1,537 $ 1,394 ======= ======= ======= (a) Includes noncash unusual items of $347. (b) Changes in working capital - increase (decrease) to cash: Accounts receivable $ (235) $ (239) $ (173) Inventories (96) (75) 117 Accounts payable 279 159 (113) Other working capital 173 (49) (287) ------- ------- ------- $ 121 $ (204) $ (456) ======= ======= =======
See Notes on pages 43 through 56. 42 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Accounting Policies ARCO's accounting policies conform to generally accepted accounting principles, including the "successful efforts" method of accounting for oil and gas producing activities. Principles of Consolidation The consolidated financial statements include the accounts of all subsidiaries, ventures and partnerships in which a controlling interest is held, including ARCO Chemical Company and Vastar Resources, Inc., of which ARCO owned 82.7% and 82.3% of the outstanding shares, respectively, at December 31, 1996. ARCO also consolidates its interests in undivided interest pipeline companies and in oil and gas and coal mining joint ventures. ARCO uses the equity method of accounting for companies where its ownership is between 20% and 50% and for other ventures and partnerships in which less than a controlling interest is held. Cash Equivalents Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit and marketable securities other than equity securities, maturing within three months of purchase. Cash equivalents are stated at cost, which approximates fair value. Oil and Gas Unproved Property Costs Unproved property costs are capitalized and amortized on a composite basis, considering past success experience and average property life. In general, costs of properties surrendered or otherwise disposed of are charged to accumulated amortization. Costs of successful properties are transferred to developed properties. Fixed Assets Fixed assets are recorded at cost and are written off on either the unit-of- production or straight-line method based on the expected lives of individual assets or groups of assets. Upon disposal of assets depreciated on an individual basis, residual cost less salvage value is included in current income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage value is charged against accumulated depreciation. Dismantlement, Restoration and Reclamation Costs The estimated costs, net of salvage value, of dismantling facilities or projects with limited lives or that are required to be dismantled by contract, regulation or law, and the estimated costs of restoration and reclamation associated with oil and gas and mining operations are accrued during production and classified as a long-term liability. Such costs are taken into account in determining the cost of production in all operations, except oil and gas production, in which case such costs are considered in determining depreciation, depletion and amortization. Environmental Remediation Environmental remediation costs are accrued as operating expenses based on the estimated timing and extent of remedial actions required by applicable governmental authorities and the amount of ARCO's liability in consideration of the liability and financial wherewithal of other responsible parties. Estimated liabilities are not discounted to present value. Stock-based Compensation Employee stock options are accounted for under the intrinsic-value-based method prescribed by Accounting Principles Board Opinion (APB) No. 25. Earned per Share Earned per share is based on the average number of common shares outstanding during each period including common stock equivalents that consist of certain outstanding options and all outstanding convertible securities. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Research and Development Expenditures for research and development totaled $106 million, $104 million and $109 million for the years ended December 31, 1996, 1995 and 1994, respectively. Reclassifications The amounts for 1995 and 1994 reflect the exclusion from revenue and expenses of excise taxes collected on behalf of the U.S. and various states and reclassifications of delivery and other expenses from selling, general and administrative expenses to operating expenses to conform with current classifications. Certain other previously reported amounts have been restated to conform to classifications adopted in 1996. 43 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 Unusual Items During 1994, ARCO announced a restructuring program under which approximately 2,400 positions were to be eliminated. The program covered all operating units, excluding Lower 48 oil and gas operations, along with the corporate headquarters. In 1994, ARCO provided as unusual items $347 million before tax, consisting primarily of personnel costs (pension enhancements, severance and other ancillary costs) associated with the terminations. In 1996, $26 million was recorded as an unusual item to adjust reserves from the previously estimated amounts. The following summarizes the final costs related to the program:
($ Millions) Funded Unfunded Long-term Long-term Short-term Terminations Benefits (a) Benefits (b) Benefits (c) Other Total - ------------ -------- -------- -------- ----- ----- 2,589 $130 $70 $157 $16 $373
(a) Enhanced pension benefits to be paid from assets of qualified pension plans after retirement of recipient. (b) Enhanced non-qualified pension benefits and postretirement medical and life insurance benefits. Benefits will be paid after retirement over the life of the recipient. (c) Severance and other ancillary benefits paid from Company funds. As of December 31, 1996, all of the accrued short-term benefits have been paid. Note 3 Accounting Changes In October 1996, the Accounting Standards Executive Committee issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP 96-1 requires adoption of its provisions for fiscal years beginning after December 15, 1996. The provisions include standards affecting the measurement, recognition and disclosure of environmental remediation liabilities. The effect of initially applying the provisions of SOP 96-1 will be reported as a change in accounting estimate in the period adopted. ARCO has not yet had sufficient time to evaluate the impact of the provisions of SOP 96-1. In the fourth quarter of 1995, ARCO adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The effect of adopting SFAS No. 121 resulted in a charge of $12 million after tax to 1995 net income. Effective January 1, 1994, ARCO adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires investments to be carried at fair value, unless they are considered held-to-maturity securities. The effect of adopting SFAS No. 115 had no impact on 1994 net income. Note 4 Public Offering of Vastar Common Stock In September 1993, ARCO established Vastar Resources, Inc., a wholly owned subsidiary of ARCO. Effective October 1, 1993, ARCO conveyed to Vastar beneficial title to certain producing properties together with certain developed and undeveloped acreage. Vastar is primarily engaged in the exploration for and the development, production and marketing of natural gas. In July 1994, Vastar completed an initial public offering of 17,250,000 shares of its common stock at $28 per share. ARCO recognized an after-tax gain of $273 million from this transaction. Note 5 Segment Information ARCO operates primarily in the Resources (upstream) and Products (downstream) segments. The Resources segment includes worldwide exploration and production operations, which comprise the exploration, development and production of petroleum, including petroleum liquids (crude oil, condensate and natural gas liquids) and natural gas; the purchase and sale of petroleum liquids and natural gas; and the mining and sale of coal. The Products segment includes the refining and transportation of petroleum, primarily from the North Slope of Alaska; the marketing and transportation of petroleum products in the West Coast region of the United States; and the worldwide manufacture and sale of chemical products, including propylene oxide and derivatives, styrene monomer, and methyl tertiary butyl ether. Segment information for the years ended December 31 was as follows:
Millions 1996 1995 1994 ---- ---- ---- SALES AND OTHER OPERATING REVENUES Resources: Exploration and production $ 9,021 $ 8,136 $ 7,969 Coal 753 762 663 Products: Refining and marketing 6,944 5,380 5,012 Transportation 770 821 897 Chemicals 3,955 4,282 3,423 Other 13 28 30 Elimination of intersegment amounts (2,864) (3,590) (2,959) ------- ------- ------- Total $18,592 $15,819 $15,035 ======= ======= =======
44 ARCO Intersegment sales were made at prices approximating current market values. Intersegment sales included in sales and other operating revenues were as follows:
Millions 1996 1995 1994 ---- ---- ---- Resources: Exploration and production $ 2,207 $ 2,909 $ 2,338 Products: Refining and marketing 33 21 21 Transportation 424 438 416 Chemicals 179 195 154 Other 21 27 30 ------- ------- ------- Total $ 2,864 $ 3,590 $ 2,959 ======= ======= =======
Millions 1996 1995 1994 ---- ---- ---- PRETAX SEGMENT EARNINGS Resources: Exploration and production $ 2,044 $ 1,061 $ 608 Coal 77 105 95 Products: Refining and marketing 393 285 303 Transportation 226 297 239 Chemicals 557 838 502 Equity in earnings from Lyondell 53 194 111 Gain on issuance of stock by subsidiary - - 459 Unallocated expenses and other 27 143 (190) Interest (668) (750) (759) Income taxes (941) (687) (387) Minority interest (105) (110) (62) ------- ------- ------- Net income $ 1,663 $ 1,376 $ 919 ======= ======= =======
Millions 1996 1995 1994 ---- ---- ---- AFTER-TAX SEGMENT EARNINGS Resources: Exploration and production(a) $ 1,271 $ 683 $ 405 Coal 60 75 70 Products: Refining and marketing 260 177 195 Transportation 141 193 172 Chemicals(a) 320 460 265 Equity in earnings from Lyondell 53 194 111 Gain on issuance of stock by subsidiary - - 273 Unallocated expenses and other 4 94 (57) Interest (446) (500) (515) ------- ------- ------- Net income $ 1,663 $ 1,376 $ 919 ======= ======= =======
(a) Net of minority interest.
Millions 1996 1995 1994 ---- ---- ---- TOTAL ASSETS Resources: Exploration and production $10,288 $ 9,127 $ 9,192 Coal 1,749 1,330 1,381 Products: Refining and marketing 2,951 2,901 2,841 Transportation 2,082 2,074 2,046 Chemicals 4,394 4,135 3,737 Other 4,251 4,432 5,366 ------- ------- ------- Total $25,715 $23,999 $24,563 ======= ======= ======= ADDITIONS TO FIXED ASSETS Resources: Exploration and production $1,671 $1,179 $ 989 Coal 42 43 57 Products: Refining and marketing 115 207 376 Transportation 61 64 48 Chemicals 244 195 186 Other 8 11 2 ------ ------ ------ Total $2,141 $1,699 $1,658 ====== ====== ======
Millions 1996 1995 1994 ---- ---- ---- DEPRECIATION, DEPLETION AND AMORTIZATION Resources: Exploration and production $ 994 $ 996 $1,043 Coal 89 85 76 Products: Refining and marketing 212 204 191 Transportation 100 103 104 Chemicals 222 233 235 Other 16 20 22 ------ ------ ------ Total $1,633 $1,641 $1,671 ====== ====== ======
ARCO has reorganized management responsibility for its Transportation operations, which will result in a change in segment reporting of those operations in 1997. Comparative presentations will be restated. 45 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International operations are conducted principally in the following geographic regions: Exploration and production - United Kingdom, Asia Pacific, North Africa and Middle East; Coal - Australia; Chemicals - Western Europe and Asia Pacific.
Millions 1996 1995 1994 ---- ---- ---- INTERNATIONAL OPERATIONS Sales and other operating revenues: Exploration and production $1,387 $1,169 $1,027 Coal 362 378 336 Chemicals 1,592 1,777 1,210 Other 26 30 32 ------ ------ ------ Total $3,367 $3,354 $2,605 ====== ====== ====== Net income (loss): Exploration and production $ 58 $ (43) $ 26 Coal 24 34 29 Chemicals(a) 83 147 70 Other (32) (24) (21) ------ ------ ------ Total $ 133 $ 114 $ 104 ====== ====== ====== Total assets: Exploration and production $3,631 $2,931 $2,792 Coal 877 846 892 Chemicals 1,682 1,845 1,580 Other 1,198 564 299 ------ ------ ------ Total $7,388 $6,186 $5,563 ====== ====== ======
(a) Includes income (losses) of equity affiliates, principally Asia Pacific joint ventures, of $(1), $14, and $2, in 1996, 1995 and 1994, respectively. Note 6 Inventories Inventories are recorded when purchased, produced or manufactured and are stated at the lower of cost or market. In 1996, approximately 86% of inventories, excluding materials and supplies, were determined by the last-in, first-out (LIFO) method. Materials and supplies and other non-LIFO inventories are determined predominantly on an average cost basis. Total inventories at December 31 comprised the following categories:
Millions 1996 1995 ---- ---- Crude oil and petroleum products $ 204 $ 184 Chemical products 488 423 Other products 48 32 Materials and supplies 255 238 ----- ----- Total $ 995 $ 877 ===== =====
The excess of the current cost of inventories over book value was approximately $293 million and $297 million at December 31, 1996 and 1995, respectively. Note 7 Investments At December 31, 1996 and 1995, investments in debt securities were primarily composed of U.S. Treasury securities and corporate debt instruments. Maturities generally ranged from two days to 22 months. These investments were principally included in short-term investments. ARCO's investments in LUKOIL common stock and Zhenhai Refining and Chemical Company common stock and convertible bonds were included in other investments and long-term receivables. At December 31, 1996, all investments were classified as available-for-sale (AFS); there were no investments considered held-to-maturity (HTM). AFS investments were reported at fair value, with unrealized holding gains and losses, net of tax, reported in a separate component of stockholders' equity. The following summarizes investments at December 31:
AFS --- Millions 1996 1995 ---- ---- Aggregate fair value $2,311 $2,435 Gross unrealized holding losses 3 30 Gross unrealized holding gains (365) (23) ------ ------ Amortized cost $1,949 $2,442 ====== ======
Investment activity for the years ended December 31 was as follows:
1996 1995 ---- ----------------- Millions AFS AFS HTM ------ ------ ------ Gross purchases $7,799 $4,517 $1,293 Gross sales 2,371 2,368 - Gross maturities 5,920 1,830 2,407 Gross transfers - 125 (125)
Gross realized gains and losses were insignificant and were determined by the specific identification method. 46 ARCO Note 8 Fixed Assets Property, plant and equipment at December 31 was as follows:
1996 1995 ---- ---- Millions Gross Net Gross Net ----- --- ----- --- Resources: Exploration and production $20,999 $ 8,305 $19,306 $ 7,634 Coal 1,493 996 1,424 1,005 Products: Refining and marketing 4,257 2,417 4,179 2,517 Transportation 3,429 1,661 3,397 1,706 Chemicals 4,152 2,622 3,812 2,293 Other 407 194 426 200 ------- ------- ------- ------- Total $34,737 $16,195 $32,544 $15,355 ======= ======= ======= =======
Expenses for maintenance and repairs for 1996, 1995 and 1994 were $497 million, $475 million and $525 million, respectively. Note 9 Short-term Borrowings and Bank Credit Facilities Notes payable consist primarily of commercial paper issued to a variety of financial investors and institutions and any amounts outstanding under ARCO or ARCO Chemical credit facilities. The weighted average interest rate on notes payable outstanding at December 31, 1996 and 1995, was 5.7% and 6.3%, respectively. In 1996, ARCO and certain wholly owned subsidiaries had committed bank credit facilities of approximately $3.1 billion. At December 31, 1996, there were no borrowings under these committed facilities. ARCO Chemical maintains its own credit facility, not guaranteed by ARCO, under which it may borrow up to $300 million. At December 31, 1996, there were no borrowings against this credit facility. At December 31, 1996, ARCO had unused letters of credit totaling approximately $275 million. Note 10 Long-term Debt Long-term debt at December 31 comprised the following:
Millions 1996 1995 ---- ---- 5-5/8%, due in 1997 $ - $ 10 6-1/8%, due in 1996 - 102 8-1/4%, due in 2022 250 250 8-1/2%, due in 2012 178 178 8-3/4%, due in 2032 198 198 9% exchangeable notes, due in 1997 988 988 9%, due in 2021 286 286 9%, due in 2031 136 136 9-1/8%, due in 2011 300 300 9-1/8%, due in 2031 345 345 9-7/8%, due in 2016 450 450 10-1/4%, due in 2000 250 250 10-7/8%, due in 2005 500 500 Medium-Term Notes - A Series, 8.65%(a) 197 197 Medium-Term Notes - B Series, 8.34%(a) 250 250 ARCO Tresop Notes, 5.47%(a) 224 278 Variable rate, due in 2031, 3.77%(a) 265 265 ARCO Chemical: 9.375%, due in 2005 100 100 9.8%, due in 2020 224 224 9.9%, due in 2000 200 200 10.25%, due in 2010 100 100 French bank loans, 7.3%(a) 55 76 Dutch bank loans 173 187 Vastar: Revolving credit agreements - 610 Commercial paper, 6.0%(a) 554 - 6.95%, due in 2006 75 - 8-3/4%, due in 2005 149 149 Capitalized lease obligations 27 25 Other 221 244 ------ ------ Total, including debt due within one year 6,695 6,898 ------ ------ Less: Debt due within one year 1,102 184 Bonds held in sinking fund - 6 ------ ------ Long-term debt $5,593 $6,708 ====== ======
(a) Weighted average of interest rates at December 31, 1996. Maturities for the five years subsequent to December 31, 1996, are as follows:
Millions 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Maturities $1,102 $175 $132 $458 $612
47 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the fourth quarter of 1996, Vastar established a $1.1 billion Commercial Paper Program for issuance of unsecured notes with maturities of up to 270 days from the date of issue. Vastar has agreed to maintain credit lines sufficient to support payment on the notes. In 1996, Vastar consolidated existing unsecured revolving credit agreements into a single facility. The commitment under this facility totaled $1.1 billion and expires March 29, 2001. At December 31, 1996, the facility was unused. The credit facility is not guaranteed by ARCO. The agreement contains covenants, the most restrictive of which require Vastar to maintain minimum levels of tangible stockholders' equity and certain financial ratios and restrict encumbrance of assets. In August 1994, ARCO sold 39.9 million 9% Exchangeable Notes (Notes), due September 15, 1997, at an issue price of $24.75 per note. At maturity of the Notes, holders will receive, in exchange for the principal amount, shares of Lyondell stock, or at ARCO's option, cash with an equal value. The number of shares or the amount of such cash will be determined using a formula based on the price of Lyondell common stock at the maturity of the Notes. ARCO periodically enters into interest rate swap agreements with the objective of managing interest rate risk by converting the interest rate on variable rate debt to a fixed rate. The fixed rate is accrued and charged to interest expense through the term of the interest rate swap agreement. All interest rate swaps are intended to be held until maturity. At December 31, 1996, ARCO Chemical had outstanding interest rate swaps on two loans of 150 million Dutch guilders each (approximately $173 million in total) due in 1997. Both swaps mature when the related debt becomes due. The swaps effectively changed the loans' floating interest rates to fixed rates of 5.7% and 6.7%, respectively. At December 31, 1996 and 1995, approximately $230 million and $365 million, respectively, of long-term debt was denominated in foreign currencies. No material amounts of long-term debt are collateralized by ARCO assets. Note 11 Interest Interest for the years ended December 31 comprised the following:
Millions 1996 1995 1994 ---- ---- ---- Long-term debt $579 $637 $634 Short-term debt 83 90 82 Other 28 72 80 ---- ---- ---- 690 799 796 Capitalized interest (22) (49) (37) ---- ---- ---- Total interest expense $668 $750 $759 ==== ==== ==== Total interest paid in cash $675 $780 $766 ==== ==== ==== Interest income $193 $212 $201 ==== ==== ====
Note 12 Financial Instruments and Fair Value ARCO does not hold or issue financial instruments for trading purposes. ARCO enters into various types of foreign currency forward, option and swap contracts. Foreign currency forward and option contracts are used to minimize foreign exchange exposures associated with U.S. dollar-denominated debt issued by a foreign subsidiary, anticipated foreign currency commitments and anticipated future cash flows from overseas operations. Foreign currency swap contracts are used to minimize foreign exchange exposures related to foreign- denominated intercompany debt with maturities exceeding one year. At December 31, 1996, the notional amounts of foreign currency contracts outstanding (principally involving European currencies and Australian dollars) were approximately $804 million, with various maturities ranging from 1997 to 2000. At December 31, 1995, the notional amounts of foreign currency contracts outstanding were approximately $960 million. Gains and losses on foreign currency forward contracts covering anticipatory cash flows are recognized currently as other income or expense. Gains and losses on foreign currency swaps associated with intercompany debt are recognized currently in income and offset foreign exchange gains and losses on the underlying intercompany loans. Gains and losses on other foreign currency contracts are generally deferred and offset the transactions being hedged. 48 ARCO ARCO periodically enters into interest rate swaps to manage interest rate risk. Interest rate swaps are used in conjunction with debt (see Note 10). ARCO also uses various hedging arrangements to manage the exposure to price risk for future natural gas and crude oil transactions. Gains and losses resulting from these transactions are deferred and included in other assets or accrued liabilities until realized in sales and other operating revenues as the physical production required by the contracts is delivered. During 1996, Vastar entered into a series of natural gas swap and price collar agreements which at December 31, 1996, covered 288 million cubic feet per day of its 1997 natural gas production and 150 million cubic feet per day of its 1998 natural gas production. These swap agreements will serve as hedges which secure prices on these volumes at an average price of $1.99 per thousand cubic feet for 1997 and $2.07 for 1998 (on a Henry Hub basis). At December 31, the carrying value and estimated fair value of ARCO's financial instruments are shown as assets (liabilities) in the table below:
1996 1995 ------------------- ------------------ Millions Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- Non-derivatives: Short-term investments $ 784 $ 784 $ 1,569 $ 1,569 Equity method investments 764 1,369 711 1,364 Other investments and long-term receivables 1,598 1,598 550 550 Notes payable (1,157) (1,157) (1,174) (1,174) Long-term debt, including current maturities (6,695) (7,213) (6,892) (7,929) Derivatives: Foreign currency forwards $ (14) $ (14) $ (6) $ (6) Foreign currency options 6 6 7 7 Foreign currency swaps (4) (4) 69 69 Interest rate swaps: Debt (1) (3) (1) (5) Investments - - (11) (11) Oil & gas price swaps (21) (21) (21) (21) Commodity futures (6) (6) (9) (9)
All derivative instruments are off-balance-sheet instruments; however, net receivable or payable positions related to derivative instruments are carried on the balance sheet. Short-term investments are carried at fair value. The fair value of notes payable approximates carrying value due to its short-term maturities. Equity method investments and other investments and long-term receivables were valued at quoted market prices if available. For unquoted investment securities, the reported fair value was estimated on the basis of financial and other information. The fair value of ARCO's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to ARCO for debt of the same remaining maturities. The fair value of foreign currency contracts and interest rate swaps represented the amount to be exchanged if the existing contracts had been settled at year end and was estimated based on market quotes. ARCO is exposed to credit risk in the event of nonperformance by the counterparties. ARCO does not generally require collateral or other security to support these financial instruments. The counterparties to these instruments are major institutions deemed creditworthy by ARCO; ARCO does not anticipate nonperformance by the counterparties. Note 13 Other Commitments and Contingencies ARCO has commitments, including those related to the acquisition, construction and development of facilities, all made in the normal course of business. Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking compensatory and punitive damages and injunctions were filed by the State of Alaska, the United States and private plaintiffs against Exxon, Alyeska Pipeline Service Company (Alyeska) and Alyeska's owner companies (including ARCO, which owns approximately 22%). Alyeska and its owner companies have settled the civil damage claims by federal and state governments and the lawsuits by private plaintiffs. Certain issues relating to the liability for the spill remain unresolved between the Exxon companies, on the one hand, and Alyeska and its owner companies. 49 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARCO and former producers of lead pigments have been named as defendants in cases filed by a municipal housing authority, three purported classes and several individuals seeking damages and injunctive relief as a consequence of the presence of lead-based paint in certain housing units. ARCO is also the subject of or party to a number of other pending or threatened legal actions. The State of Montana is seeking recovery from ARCO of $764 million based on alleged injuries to natural resources resulting from ARCO's mining and mineral processing businesses formerly operated by Anaconda, ARCO's predecessor in Montana. ARCO is contesting this demand. ARCO is subject to other loss contingencies pursuant to federal, state and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, including the restoration of natural resources located at these sites and damages for loss of use and non-use values. ARCO is currently participating in environmental assessments and cleanups under these laws at federal Superfund and state-managed sites, as well as other clean-up sites. ARCO may in the future be involved in additional environmental assessments and cleanups. The amount of such future costs will depend on such factors as the unknown nature and extent of contamination, the unknown timing, extent and method of remedial actions which may be required and the determination of ARCO's liability in proportion to other responsible parties. In addition, environmental loss contingencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO. ARCO continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the magnitude of remediation costs, experience gained from sites on which remediation has been completed, the timing and extent of remedial actions required by the applicable governmental authorities and an evaluation of the amount of ARCO's liability considered in light of the liability and financial wherewithal of the other responsible parties. At December 31, 1996, the environmental remediation accrual was $577 million. As the scope of ARCO's obligations becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against ARCO's earnings. ARCO's environmental remediation accrual covers federal Superfund and state- managed sites as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. ARCO has been named a potentially responsible party (PRP) for 117 sites. The number of PRP sites in and of itself is not a relevant measure of liability because the nature and extent of environmental concerns varies by site and ARCO's share of responsibility varies from sole responsibility to very little responsibility. ARCO reviews all PRP sites, along with other sites as to which no claims have been asserted, in estimating the amount of the accrual. ARCO's future costs at these sites could exceed the amount accrued by as much as $600 million. Approximately 45% of the reserve related to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total accrual. Substantially all amounts accrued are expected to be paid out over the next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various third parties. Many of these claims have been resolved. ARCO has neither recorded any asset nor reduced any liability in connection with unresolved claims. Although any ultimate liability arising from any of the matters described herein could result in significant expenses or judgments that, if aggregated and assumed to occur within a single fiscal year, would be material to ARCO's results of operations, the likelihood of such 50 ARCO occurrence is considered remote. On the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on ARCO's consolidated financial statements. The operations and consolidated financial position of ARCO continue to be affected from time to time in varying degrees by domestic and foreign political developments as well as legislation, regulations and litigation pertaining to restrictions on production, imports and exports, tax increases, environmental regulations, cancellation of contract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on ARCO vary greatly and are not predictable. These uncertainties are part of a number of items that ARCO has taken and will continue to take into account in periodically establishing reserves. Note 14 Taxes Taxes other than income taxes for the years ended December 31 comprised the following:
Millions 1996 1995 1994 ---- ---- ---- Property $178 $180 $189 Production/severance 445 343 306 Other 177 194 285 ---- ---- ---- Total $800 $717 $780 ==== ==== ====
ARCO has foreign loss carryforwards of $511 million which begin expiring in 1997. The valuation allowance was $104 million at December 31, 1994. The income tax provision for the years ended December 31 comprised the following:
Millions 1996 1995 1994 ---- ---- ---- Federal: Current $662 $497 $176 Deferred (9) 42 128 ---- ---- ---- 653 539 304 ---- ---- ---- Foreign: Current 155 108 62 Deferred 24 (40) (19) ---- ---- ---- 179 68 43 ---- ---- ---- State: Current 113 56 31 Deferred (4) 24 9 ---- ---- ---- 109 80 40 ---- ---- ---- Total provision for taxes on income $941 $687 $387 ==== ==== ==== Total income taxes paid in cash $930 $785 $447 ==== ==== ====
In 1996, a deferred tax expense of $144 million was recorded related to unrealized investment gains included in stockholders' equity. Major components of the net deferred tax liability at December 31 were as follows:
Millions 1996 1995 ---- ---- Depreciation, depletion and amortization $(3,741) $(3,688) Other (510) (341) ------- ------- Total deferred tax liabilities (4,251) (4,029) ------- ------- Dismantlement and environmental 518 528 Postretirement benefits 330 331 Foreign excess tax basis/loss carryforwards 299 299 Other 350 347 ------- ------- Total deferred tax assets 1,497 1,505 ------- ------- Valuation allowance (130) (113) ------- ------- Net deferred income tax liability $(2,884) $(2,637) ======= =======
The domestic and foreign components of income before income taxes and minority interest, and a reconciliation of income tax expense with tax at the effective federal statutory rate for the years ended December 31 were as follows:
1996 1995 1994 ----------------- ----------------- ----------------- % Pretax % Pretax % Pretax Millions Amount Income Amount Income Amount Income ------ ------- ------ ------- ------- ------- Income before income taxes: Domestic $2,279 84.1 $1,896 87.3 $1,147 83.8 Foreign 430 15.9 277 12.7 221 16.2 ------ ----- ------ ----- ------ ----- Total $2,709 100.0 $2,173 100.0 $1,368 100.0 ------ ----- ------ ----- ------ ----- Tax at 35% $ 948 35.0 $ 761 35.0 $ 479 35.0 Increase (reduction) in taxes resulting from: Dividend exclusion (15) (0.6) (54) (2.5) (31) (2.3) Taxes on foreign income in excess of statutory rate 41 1.5 46 2.1 46 3.4 Foreign deferred tax asset valuation 28 1.0 (30) (1.4) (30) (2.2) State income taxes (net of federal effect) 71 2.6 52 2.4 26 1.9 Tax credits (95) (3.5) (81) (3.7) (84) (6.1) Other (37) (1.3) (7) (0.3) (19) (1.4) ------ ----- ------ ----- ------ ----- Provision for taxes on income $ 941 34.7 $ 687 31.6 $ 387 28.3 ====== ===== ====== ===== ====== =====
51 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 Retirement Plans ARCO and its subsidiaries have defined benefit pension plans to provide pension benefits to substantially all employees. The benefits are based on years of service and the employee's compensation, primarily during the last three years of service. ARCO's funding policy is to make annual contributions as required by applicable regulations. ARCO accrues pension costs based on an actuarial valuation for each plan and funds the plans through contributions to trust funds that are kept apart from Company funds. ARCO's assumptions used as of December 31 in determining the pension cost and pension liability were as follows:
Percent 1996 1995 1994 ---- ---- ---- Discount rate 7.25 7.0 8.25 Rate of salary progression 5.0 5.0 5.0 Long-term rate of return on assets 10.5 10.5 10.5
Pension costs related to ARCO-sponsored plans, on a pretax basis, for the years ended December 31 were as follows:
Millions 1996 1995 1994 ---- ---- ---- Service cost-benefits earned during the period $ 79 $ 62 $ 81 Interest cost on projected benefit obligation 198 195 183 Actual (return) loss on plan assets (454) (517) 65 Net amortization and deferral 190 272 (344) ----- ----- ----- Net pension (income) cost $ 13 $ 12 $ (15) ===== ===== =====
In 1994, ARCO also recorded $143 million before tax as additional pension cost in connection with work force reductions. The following table sets forth the plans' funded status and amounts recognized in the balance sheet at December 31:
1996 1995 ------------------------- ------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Millions Benefits Assets Benefits Assets ----------- ----------- ----------- ----------- Actuarial present value of benefits: Vested benefits $(2,131) $(213) $(1,965) $(238) Non-vested benefits (31) (1) (138) (7) ------- ----- ------- ----- Accumulated benefits (2,162) (214) (2,103) (245) Effect of future projected salary increases (359) (78) (377) (77) ------- ----- ------- ----- Projected benefit obligation (PBO) (2,521) (292) (2,480) (322) Plan assets at fair value, primarily stocks and bonds 2,895 2 2,637 - ------- ----- ------- ----- PBO (greater) less than plan assets 374 (290) 157 (322) Unrecognized net loss 178 123 291 169 Prior service cost not yet recognized in net periodic pension cost 136 22 143 23 Remaining unrecognized (asset) obligation from transition (263) 7 (290) 7 Adjustment for minimum liability - (76) - (124) ------- ----- ------- ----- Prepaid pension asset (liability) recognized in the balance sheet $ 425 $(214) $ 301 $(247) ======= ===== ======= =====
52 ARCO Note 16 Other Postretirement Benefits ARCO and its subsidiaries sponsor defined postretirement benefit plans which provide other postretirement benefits to substantially all employees who retire with ARCO having rendered the required years of service, and to their spouses and eligible dependents. Health care benefits are provided primarily through comprehensive indemnity plans or health maintenance organizations (HMO), as chosen by the employee. Beginning January 1, 1997, ARCO will pay for the cost of the benchmark HMO with employees responsible for the differential cost, if any, of their selected option. Previously, ARCO paid approximately 80% of the cost of a comprehensive indemnity plan. This change resulted in the unrecognized prior service benefit reflected below. Life insurance benefits are based primarily on the employee's final compensation and are also partially paid for by retiree contributions, which vary based upon coverage chosen by the retiree. ARCO has the right to modify the plans at any time. ARCO's current policy is to fund the cost of postretirement health care and life insurance plans on a pay-as-you-go basis. ARCO accrues postretirement benefit costs based on actuarial calculations for each plan. Net postretirement benefit costs for the years ended December 31 included the following:
1996 1995 1994 --------------------- --------------------- --------------------- Life Life Life Health Insur- Health Insur- Health Insur- Millions Care ance Total Care ance Total Care ance Total ------ ------ ----- ------ ------ ----- ------ ------ ----- Service cost-benefits earned during the period $ 7 $ 3 $ 10 $ 8 $ 2 $ 10 $ 17 $ 4 $ 21 Interest cost on APBO 32 13 45 49 13 62 54 15 69 Net amortization (13) - (13) - (1) (1) 3 - 3 Net postretirement ---- ---- ---- ---- ---- ---- ---- ---- ---- benefit cost $ 26 $ 16 $ 42 $ 57 $ 14 $ 71 $ 74 $ 19 $ 93 ==== ==== ==== ==== ==== ==== ==== ==== ====
In addition to the cost above, in 1994 ARCO recorded $24 million before tax as additional postretirement benefit expense in connection with work force reductions. The significant assumptions used in determining postretirement benefit cost and the accumulated postretirement benefit obligation (APBO) were as follows:
Percent 1996 1995 1994 ---- ---- ---- Discount rate 7.25 7.0 8.25 Rate of salary progression 5.0 5.0 5.0
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care trend rate) for the health plans is 9% for 1995 and 1996, 7% for 1997 to 2001, and 5% thereafter. The assumed trend rate for 1994 was 10% to 1996; 8% for 1997 to 2001, and 6% thereafter. The effect of a one-percentage-point increase in the assumed trend rate would increase the APBO as of December 31, 1996, by approximately $57 million, and the aggregate of the service and interest cost components of net annual postretirement benefit cost by approximately $5 million. The plans' combined postretirement benefit liability at December 31 was as follows:
1996 1995 -------------------------- ------------------------- Life Life Health Insur- Health Insur- Millions Care ance Total Care ance Total ------ ------ ----- ------ ------ ----- Accumulated postretirement benefit obligation (APBO): Retirees $ (370) $ (153) $ (523) $ (579) $ (160) $ (739) Employees fully eligible (16) (7) (23) (22) (6) (28) Other active participants (88) (33) (121) (136) (32) (168) ----- ----- ----- ----- ----- ----- Total APBO (474) (193) (667) (737) (198) (935) Unrecognized prior service (benefit) cost (233) 2 (231) - - - Unrecognized net (gain) loss 65 (13) 52 75 (5) 70 Accrued postretirement ----- ----- ----- ----- ----- ----- benefit cost recognized in the balance sheet $(642) $(204) $(846) $(662) $(203) $(865) ===== ===== ===== ===== ===== =====
53 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 Lease Commitments Capital lease obligations are recorded at the present value of future rental payments. The related assets are amortized on a straight-line basis. At December 31, 1996, future minimum rental payments due under leases were as follows:
Capital Operating Millions Leases Leases ------- --------- 1997 $ 3 $ 167 1998 3 175 1999 3 147 2000 3 121 2001 3 66 Later years 71 458 ----- ----- Total minimum lease payments 86 $1,134 ====== Imputed interest (rates ranging from 9.75% to 12.00%) 59 ----- Present value of minimum lease payments included in long-term debt $ 27 =====
Minimum future rental income under noncancellable subleases at December 31, 1996, amounted to $74 million. Operating lease net rental expense for the years ended December 31 was as follows:
Millions 1996 1995 1994 ----- ----- ----- Minimum rentals $ 215 $ 225 $ 218 Contingent rentals 2 10 2 Sublease rental income (11) (12) (12) ----- ----- ----- Net rental expense $ 206 $ 223 $ 208 ===== ===== =====
No restrictions on dividends or on additional debt or lease financing exist under ARCO's lease commitments. Under certain conditions, options exist to purchase certain leased properties. Note 18 Stockholders' Equity Detail of ARCO's capital stock as of December 31 was as follows:
1996 1995 ---- ---- $3.00 Cumulative convertible preference stock, par $1: Shares authorized 78,089 78,089 Shares issued and outstanding 60,759 66,376 Aggregate value in liquidation - (thousands) $4,861 $5,310 $2.80 Cumulative convertible preference stock, par $1: Shares authorized 833,776 833,776 Shares issued and outstanding 673,855 731,055 Aggregate value in liquidation - (thousands) $47,170 $51,174 Common stock, par $2.50: Shares authorized 600,000,000 600,000,000 Shares issued 161,086,174 160,879,765 Shares outstanding 161,082,043 160,831,190 Shares held in treasury 4,131 48,575
Changes in preference stocks outstanding in 1996, 1995 and 1994 were due to conversions. The $3.00 cumulative convertible preference stock is convertible into 6.8 shares of common stock. The $2.80 cumulative convertible preference stock is convertible into 2.4 shares of common stock. Common stock is subordinate to the preference stocks for dividends and assets. The $3.00 and $2.80 preference stocks may be redeemed at the option of ARCO for $82 and $70 per share, respectively. ARCO has authorized 75,000,000 shares of preferred stock, $.01 par, of which none were issued or outstanding at December 31, 1996. At December 31, 1996, shares of ARCO's authorized and unissued common stock were reserved as follows:
Conversions: $3.00 Preference stock 413,161 $2.80 Preference stock 1,617,252 Stock option plans 8,153,068 Employee benefit plans 9,974,482 ---------- Total 20,157,963 ==========
Under ARCO's incentive compensation plans, awards of ARCO's common stock may be made to officers, outside directors and key employees. 54 ARCO Note 19 Stock Options Options to purchase shares of ARCO's common stock have been granted to executives, outside directors and key employees. The exercise price of each option is equal to the fair market value of common stock at the date of grant. These options become exercisable in varying installments and expire 10 years after the date of grant. Options vest over two years in equal installments. Transactions during 1996, 1995 and 1994 were as follows:
Weighted Average Exercise Price -------------- Balance, January 1, 1994 3,162,182 $ 104.21 Granted 573,865 101.02 Exercised (75,019) 75.17 Cancelled (87,286) 106.30 --------- --------- Balance, December 31, 1994 3,573,742 104.26 --------- --------- Granted 486,598 109.00 Exercised (221,086) 87.31 Cancelled (1,118) 104.22 --------- --------- Balance, December 31, 1995 3,838,136 105.84 --------- --------- Granted 550,917 113.21 Exercised (555,163) 92.29 Cancelled (17,179) 116.95 --------- --------- Balance, December 31, 1996 3,816,711 $ 108.82 ========= =========
A summary of ARCO's fixed stock options as of December 31, 1996 and 1995, was as follows:
1996 1995 --------- --------- Shares available for option 4,336,357 3,583,446 Options exercisable 3,033,988 3,074,876 Weighted average exercise price of options exercisable $ 108.02 $ 105.77 Weighted average fair value of options granted during the year $ 51.80 $ 57.26
At December 31, 1996, exercise prices for options outstanding ranged from $79.00 to $126.56 and the weighted average remaining contractual life was 5.87 years. ARCO applies APB 25 in accounting for its fixed stock options. Accordingly, no compensation cost has been recognized in the financial statements for options granted. The pro forma impact to both net income and earnings per share from calculating compensation expense consistent with the fair value method under SFAS No. 123 was not material for the years ended December 31, 1996 and 1995. Note 20 Lyondell Petrochemical Company Lyondell is engaged in the manufacture and marketing of basic commodity chemicals, including ethylene, propylene, methanol and polymers, and, through its approximately 90% interest in LYONDELL-CITGO Refining Company Ltd., the refining and marketing of petroleum products, primarily in the southwestern United States. At December 31, 1996, ARCO owned 49.9% of Lyondell common stock outstanding; ARCO accounts for this investment on the equity method. The market value of ARCO's shares of Lyondell common stock, based on the closing quoted market price at December 31, 1996, was $883 million. Summarized financial information for Lyondell was as follows:
Millions 1996 1995 1994 ---- ---- ---- Year ended December 31: Revenues(a) $5,052 $4,936 $3,857 Operating income 278 706 424 Income before income taxes 196 618 349 Net income 126 389 223 ARCO's equity in net income of Lyondell $ 53 $ 194 $ 111 Cash dividends received from Lyondell $ 36 $ 36 $ 36 At December 31: Current assets $ 831 $ 678 $ 697 Noncurrent assets 2,445 1,928 966 Current liabilities 771 750 433 Long-term debt 1,194 807 707 Other liabilities 271 210 192 Minority interest 609 459 268 Stockholders' equity(b) 431 380 63
(a) Includes $318, $325 and $314 of sales to ARCO in 1996, 1995 and 1994, respectively, which approximated 4%, 5% and 5% of ARCO's purchases in those years. (b) ARCO's investment in Lyondell comprises 49.9% of Lyondell's stockholders' equity plus $72 of dividends received in excess of basis of investment. Note 21 Foreign Currency Transactions Foreign currency transactions resulted in net losses of $17 million, $15 million and $12 million in 1996, 1995 and 1994, respectively. 55 ARCO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22 Supplemental Cash Flow Information The following is supplemental cash flow information for the years ended December 31:
Millions 1996 1995 1994 ---- ---- ---- Short-term investments: Gross sales and maturities $ 3,335 $ 4,216 $ 5,952 Gross purchases (2,557) (2,716) (6,720) ----- ----- ----- Net cash provided (used) $ 778 $ 1,500 $ (768) ===== ===== ===== Notes payable: Gross proceeds $ 5,806 $ 8,058 $ 9,516 Gross repayments (5,885) (8,351) (9,585) ----- ----- ----- Net cash used $ (79) $ (293) $ (69) ===== ===== ===== Gross noncash provisions charged to income $ 295 $ 444 $ 888 Cash payments of previously accrued items (515) (627) (800) ----- ----- ----- Cash payments (greater) less than noncash provisions $ (220) $ (183) $ 88 ===== ===== =====
Note 23 Unaudited Quarterly Results
Millions, except per share amounts 1996 1995 ---- ---- Sales and other operating revenues Quarter ended: March 31 $ 4,156 $ 3,894 June 30 4,559 4,046 September 30 4,748 3,872 December 31 5,129 4,007 ------ ------ Total $18,592 $15,819 ====== ====== Income before income taxes and minority interest Quarter ended: March 31 $ 620 $ 534 June 30 720 649 September 30 791 511 December 31 578 479 ----- ----- Total $ 2,709 $ 2,173 ===== ===== Net income Quarter ended: March 31 $ 370 $ 322 June 30 434 391 September 30 479 315 December 31 380 348 ----- ----- Total $ 1,663 $ 1,376 ===== ===== Earned per share Quarter ended: March 31 $ 2.26 $ 1.97 June 30 $ 2.66 $ 2.39 September 30 $ 2.94 $ 1.93 December 31 $ 2.32 $ 2.13
56 ARCO SUPPLEMENTAL INFORMATION (UNAUDITED) Oil and Gas Producing Activities The Securities and Exchange Commission (SEC) defines proved oil and gas reserves as those estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. ARCO reports reserve estimates to various federal government agencies and commissions. These estimates may cover various regions of crude oil and natural gas classifications within the United States and may be subject to mandated definitions. There have been no reports of total ARCO reserve estimates furnished to federal government agencies or commissions which vary from those reported to the SEC since the beginning of the last fiscal year. Estimated quantities of ARCO's proved oil and gas reserves were as follows:
Petroleum Liquids Natural Gas (million barrels) (billion cubic feet) ----------------- -------------------- U.S. Int'l U.S. Int'l ----- ----- ----- ----- January 1, 1994: Proved reserves 2,259 206 4,725 3,280 Proved developed reserves 1,804 127 4,190 1,120 December 31, 1994: Proved reserves 2,246 222 4,615 3,493 Proved developed reserves 1,915 87 4,301 1,142 December 31, 1995: Proved reserves 2,163 206 4,666 3,683 Proved developed reserves 1,896 92 4,294 1,806 December 31, 1996: Proved reserves 2,112 409 4,776 3,347 Proved developed reserves 1,828 150 4,310 1,780
Included in ARCO's reserves are 100% of the reserves of Vastar, a consolidated subsidiary of which ARCO owned 82.3% at December 31, 1996. Vastar's reserves comprised 5% and 47% of U.S. petroleum liquids and natural gas reserves, respectively, at December 31, 1996. ARCO owns shares of common stock of LUKOIL, a Russian oil company, representing approximately 8% of LUKOIL's total equity. As of January 1, 1996, LUKOIL reported western Siberia reserves of approximately 7.9 billion barrels of oil and 1.5 trillion cubic feet of natural gas. Reserve information subsequent to that date is not presently available. Eight percent of those reserves would be 634 million barrels and 122 billion cubic feet, respectively. LUKOIL reserves are not included in ARCO's totals. ARCO has no long-term supply contracts to purchase from foreign governments or any interest in equity affiliates involved in oil and gas producing activities. The changes in proved reserves for the years ended December 31 were as follows:
Petroleum Liquids Natural Gas (million barrels) (billion cubic feet) ----------------- -------------------- U.S. Int'l U.S. Int'l ---- ----- ---- ----- Reserves at January 1, 1994 2,259 206 4,725 3,280 Revisions of estimates 85 (19) 94 31 Improved recovery 90 - 13 - Purchases of minerals-in-place 11 - 13 82 Extensions and discoveries 21 75 232 291 Production (216) (26) (350) (187) Consumed in production - - (78) (4) Sales of minerals-in-place (4) (14) (34) - ----- ---- ----- ----- Reserves at December 31, 1994 2,246 222 4,615 3,493 ----- ---- ----- ----- Revisions of estimates 76 2 184 7 Improved recovery 15 - 8 - Purchases of minerals-in-place 16 1 78 89 Extensions and discoveries 33 5 252 302 Production (213) (24) (365) (203) Consumed in production - - (93) (5) Sales of minerals-in-place (10) - (13) - ----- ---- ----- ----- Reserves at December 31, 1995 2,163 206 4,666 3,683 ----- ---- ----- ----- Revisions of estimates 60 4 103 (94) Improved recovery 5 - 14 - Purchases of minerals-in-place 16 218 114 - Extensions and discoveries 76 5 343 30 Production (205) (24) (382) (267) Consumed in production (2) - (78) (5) Sales of minerals-in-place (1) - (4) - ----- ---- ----- ----- Reserves at December 31, 1996 2,112 409 4,776 3,347 ===== ==== ===== =====
Estimates of petroleum reserves have been made by ARCO engineers. These estimates include reserves in which ARCO holds an economic interest under production-sharing and other types of operating agreements with foreign governments. These estimates do not include probable or possible reserves. Natural gas liquids comprise 14% of petroleum liquid proved reserves. Significant changes in 1996 related to a production-sharing agreement signed with the Algerian national oil company and the discovery of the Alpine field in Alaska. 57 ARCO The sale of natural gas from the North Slope of Alaska, other than that used in providing fuel in North Slope operations or sold to others on the North Slope, is dependent upon construction of a natural gas transportation system or another marketing alternative. Such gas is not included in ARCO's reserves. ARCO continues to study various options for marketing North Slope gas. However, ARCO believes that market conditions continue to make implementation of any large gas sales projects unlikely in the near future. The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of December 31 were as follows:
1996 1996 ---- ---- Proved Unproved Properties Properties ----------------- ------------- Millions U.S. Int'l U.S. Int'l ------- ------- ---- ----- Gross $15,004 $5,245 $257 $297 Accumulated depreciation, depletion and amortization 9,875 2,638 49 30 ------- ------ ---- ---- Net $ 5,129 $2,607 $208 $267 ======= ====== ==== ==== 1995 1995 ---- ---- Proved Unproved Properties Properties ----------------- ------------- Millions U.S. Int'l U.S. Int'l ------- ------- ---- ----- Gross $14,355 $4,304 $182 $236 Accumulated depreciation, depletion and amortization 9,215 2,285 42 17 ------- ------ ---- ---- Net $ 5,140 $2,019 $140 $219 ======= ====== ==== ==== 1994 1994 ---- ---- Proved Unproved Properties Properties ----------------- ------------- Millions U.S. Int'l U.S. Int'l ------- ------- ---- ----- Gross $14,353 $3,998 $510 $231 Accumulated depreciation, depletion and amortization 8,963 2,100 328 8 ------- ------ ---- ---- Net $ 5,390 $1,898 $182 $223 ======= ====== ==== ====
Costs, both capitalized and expensed, incurred in oil and gas producing activities during the three years ended December 31 were as follows:
1996 1995 1994 -------------------- -------------------- -------------------- Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total ---- ----- ----- ---- ----- ----- ---- ----- ----- Property acquisition costs: Proved properties $ 82 $ 275 $357 $ 56 $ 34 $ 90 $ - $ 1 $ 1 Unproved properties 98 11 109 24 15 39 38 23 61 Exploration costs 277 213 490 212 309 521 180 237 417 Development costs 481 482 963 389 328 717 363 303 666
Results of operations from oil and gas producing activities (including operating overhead) for the three years ended December 31 were as follows:
1996 1995 1994 -------------------------- ------------------------- ------------------------- Millions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total ----- ------ ------ ----- ----- ------ ----- ----- ------ Revenues: Sales $1,892 $1,140 $3,032 $1,460 $920 $2,380 $1,421 $ 837 $2,258 Transfers 2,199 - 2,199 1,679 - 1,679 1,456 - 1,456 Other 47 45 92 83 44 127 74 43 117 ------ ------ ------ ------ ---- ------ ------ ----- ------ 4,138 1,185 5,323 3,222 964 4,186 2,951 880 3,831 Production costs 1,044 284 1,328 1,021 232 1,253 1,166 198 1,364 Exploration expenses 238 175 413 212 311 523 277 178 455 Depreciation, depletion and amortization 691 276 967 713 251 964 731 275 1,006 Other operating expenses 277 256 533 218 201 419 251 159 410 ------ ------ ------ ------ ---- ------ ------ ----- ------ 1,888 194 2,082 1,058 (31) 1,027 526 70 596 Income tax expense (628) (109) (737) (332) (7) (339) (143) (43) (186) ------ ------ ------ ------ ---- ------ ------ ----- ------ Results of operations from production activities $1,260 $ 85 $1,345 $ 726 $(38) $ 688 $ 383 $ 27 $ 410 ====== ====== ====== ====== ==== ====== ====== ===== ======
The difference between the above results of operations and the amounts reported for after-tax exploration and production segment earnings in Note 5 of Notes to Consolidated Financial Statements is primarily marketing-related activities, minority interest adjustments, the exclusions of gains on property sales and unusual items related to the oil and gas operations. 58 ARCO SUPPLEMENTAL INFORMATION (UNAUDITED) The standardized measure of discounted estimated future net cash flows related to proved oil and gas reserves at December 31 was as follows:
1996 1995 1994 --------------------- --------------------- --------------------- Billions U.S. Int'l Total U.S. Int'l Total U.S. Int'l Total ----- ----- ----- ----- ----- ----- ----- ----- ----- Future cash inflows $48.8 $17.8 $66.6 $32.5 $12.1 $44.6 $30.6 $11.3 $41.9 Future development and production costs 14.2 7.3 21.5 13.2 4.4 17.6 13.9 4.3 18.2 Future income tax expense 12.0 3.2 15.2 6.5 2.5 9.0 5.4 2.3 7.7 ----- ---- ----- ----- ---- ----- ----- ---- ----- Future net cash flows 22.6 7.3 29.9 12.8 5.2 18.0 11.3 4.7 16.0 10% annual discount 10.3 3.6 13.9 5.7 2.4 8.1 4.9 2.2 7.1 ----- ---- ----- ----- ---- ----- ----- ---- ----- Standardized measure of discounted future net cash flows $12.3 $ 3.7 $16.0 $ 7.1 $ 2.8 $ 9.9 $ 6.4 $ 2.5 $ 8.9 ===== ===== ===== ===== ===== ===== ===== ===== =====
Primary changes in the standardized measure of discounted estimated future net cash flows for the years ended December 31 were as follows:
Billions 1996 1995 1994 ---- ---- ---- Sales and transfers of oil and gas, net of production costs $(3.9) $(2.9) $(2.3) Extensions, discoveries and improved recovery, less related costs 1.2 .7 1.0 Revisions of estimates of reserves proved in prior years: Quantity estimates .5 .4 .2 Net changes in price and production costs 8.4 1.8 4.6 Purchases/sales 1.0 .1 .1 Other (.4) (.4) (.2) Accretion of discount 1.5 1.3 .8 Development costs incurred during the period 1.0 .7 .7 Net change in income taxes (3.2) (.7) (1.6) ----- ----- ----- Net change $ 6.1 $ 1.0 $ 3.3 ===== ===== =====
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flows to ARCO. Management's investment and operating decisions are based on reserve estimates that include proved reserves prescribed by the SEC as well as probable reserves, and on different price and cost assumptions from those used here. It should be recognized that applying current costs and prices and a 10% standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves. Coal Operations Supplemental operating statistics for the coal operations of ARCO for the three years ended December 31 were as follows:
1996 1995 1994 ---- ---- ---- Coal shipments - thousand tons: U.S. 51,615 45,853 38,322 International 10,851 11,772 11,235 ------ ------ ------ Total 62,466 57,625 49,557 ====== ====== ====== Coal reserves - million tons recoverable: U.S. 1,471 1,265 1,279 International 198 216 227 ------ ------ ------ Total 1,669 1,481 1,506 ====== ====== ====== Average market price per ton: U.S. $ 7.58 $ 8.38 $ 8.52 International $33.37 $32.09 $29.90 Composite price $12.06 $13.22 $13.37
59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 5, 1997, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference, except for the material included under the captions "Committee Report on Executive Compensation" and "Performance Graph." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1 and 2. Financial Statements and Financial Statement Schedules: These documents are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule. 3. Exhibits: 3.1 Restated Certificate of Incorporation of Atlantic Richfield Company ("ARCO") as of June 27, 1994, filed with the Securi- ties and Exchange Commission (the "Commission") as Exhibit 3 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1994, under File No. 1-1196 and incorporated herein by reference. 3.2 By-Laws of ARCO as amended through January 23, 1989, filed with the Commission as Exhibit 3.2 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chicago Trust Company of New York, as Rights Agent, filed with the Commission as Exhibit 4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1995, under File No. 1-1196 and incorporated herein by reference. 4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhattan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1985, under File No. 1-1196 and incorporated herein by reference. 4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of New York, filed with the Commission on January 6, 1992 as Exhibit 4.3 to ARCO's Registration Statement on Form S-3 (No. 33-44925) and incorporated herein by reference. 60 4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities au- thorized under any such instrument does not exceed 10% of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request. 10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of ARCO on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplemen- tary Executive Retirement Plan, effective as of March 22, 1993, filed with the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1993, un- der File No. 1-1196 and incorporated herein by reference. 10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplemen- tary Executive Retirement Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral Plan, effective as of July 27, 1992, filed with the Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.2(c) to ARCO's report on Form 10- K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.3* Atlantic Richfield Executive Medical Insurance Plan-Summary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196, and incorporated herein by reference. 10.4(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective as of July 1, 1988, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1988, under File No. 1-1196 and incorporated herein by reference. 10.4(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of January 1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1989, under File No. 1-1196 and incorporated herein by reference. 10.4(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of July 1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.4(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of August 5, 1996, filed herewith. 10.5* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised and effective Janu- ary 1, 1997, filed herewith. 10.6(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on November 26, 1984, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by refer- ence. 61 10.6(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January 1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.7* Atlantic Richfield Company's 1985 Executive Long-Term Incen- tive Plan, as adopted by the Board of Directors of ARCO on May 28, 1985, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.7 to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. The proposed amendments to the 1985 Executive Long-Term Incentive Plan will be included in the appendix to the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held on May 5, 1997, which will be filed with the Commission within 120 days after December 31, 1996, and is incorporated herein by reference. 10.8* Atlantic Richfield Company Executive Life Insurance Plan--Sum- mary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.9(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--Summary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.9 to ARCO's re- port on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.9(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and in- corporated herein by reference. 10.10 Form of Indemnity Agreement adopted by the Board of Directors of ARCO on January 26, 1987 and executed in February 1987 by ARCO and each of its directors and officers, included in Ex- hibit A to the 1987 Proxy Statement, filed with the Commission under File No. 1-1196 and incorporated herein by reference. 10.11(a)* Stock Option Plan for Outside Directors effective as of Decem- ber 17, 1990, filed with the Commission as Exhibit 10.14 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors, effective as of June 22, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.12(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990, filed with the Commission as Exhibit 10.13(a) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.13* Special Incentive Plan, as adopted by the Board of Directors of ARCO on February 28, 1994, and as effective on that date, is included in Appendix C to the Company's 1994 Proxy Statement filed with the Commission under File No. 1-1196 and incorporated herein by reference. 21 Subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule. Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Corporate Secretary. - -------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K. (b) REPORTS ON FORM 8-K: No Current Reports on Form 8-K were filed during the quarter ended December 31, 1996, and thereafter through February 24, 1997. 62 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company: Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), and Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), of our report dated February 12, 1997, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California February 25, 1997 63 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. ATLANTIC RICHFIELD COMPANY By /s/ Mike R. Bowlin ___________________________________ Mike R. Bowlin Chairman of the Board, Chief Executive Officer and President FEBRUARY 24, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Mike R. Bowlin Chairman of the Board, February 24, 1997 ____________________________________ Chief Executive Officer and Mike R. Bowlin President Principal executive officer /s/ Anthony G. Fernandes Executive Vice President and February 24, 1997 ____________________________________ Director Anthony G. Fernandes /s/ Marie L. Knowles Executive Vice President, February 24, 1997 ____________________________________ Chief Financial Officer and Marie L. Knowles Director Principal financial officer /s/ William E. Wade, Jr. Executive Vice President and February 24, 1997 ____________________________________ Director William E. Wade, Jr.
64
SIGNATURE TITLE DATE --------- ----- ---- /s/ Frank D. Boren Director February 24, 1997 ____________________________________ Frank D. Boren /s/ Lodwrick M. Cook Director February 24, 1997 ____________________________________ Lodwrick M. Cook /s/ Richard H. Deihl Director February 24, 1997 ____________________________________ Richard H. Deihl /s/ John Gavin Director February 24, 1997 ____________________________________ John Gavin Director February , 1997 ____________________________________ Hanna H. Gray Director February , 1997 ____________________________________ Philip M. Hawley /s/ Kent Kresa Director February 24, 1997 ____________________________________ Kent Kresa /s/ David T. McLaughlin Director February 24, 1997 ____________________________________ David T. McLaughlin /s/ John B. Slaughter Director February 24, 1997 ____________________________________ John B. Slaughter /s/ Henry Wendt Director February 24, 1997 ____________________________________ Henry Wendt /s/ Allan L. Comstock Vice President and February 24, 1997 ____________________________________ Controller Allan L. Comstock Principal accounting officer
65 SCHEDULE II ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(COLUMN A) (COLUMN B) (COLUMN C) (COLUMN D) (COLUMN E) - ------------------------------------------------------------------------------ ADDITIONS ---------------- BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE AT BEGINNING TO TO OTHER FROM CLOSE OF DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES PERIOD - ------------------------------------------------------------------------------ YEAR 1996 Amounts deducted from applicable assets: Accounts receivable....... $ 16 4 -- -- $ 20 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 882 75 -- 7 950 Reduction in force........ 75 -- -- 75 -- Insurance ................ 201 15 -- 47 169 Environmental remediation. 658 49 -- 130 577 Other..................... 201 31 -- 11 221 YEAR 1995 Amounts deducted from applicable assets: Accounts receivable....... $ 15 5 -- 4(a) $ 16 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Other investments and long-term receivables.... 50 -- -- 50 -- Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 848 65 -- 31 882 Reduction in force........ 177 -- -- 102 75 Insurance ................ 202 47 -- 48 201 Environmental remediation. 670 101 -- 113 658 Other..................... 249 15 -- 63 201 YEAR 1994 Amounts deducted from applicable assets: Accounts receivable....... $ 14 2 -- 1(a) $ 15 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Other investments and long-term receivables.... 50 -- -- -- 50 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 788 87 -- 27 848 Reduction in force........ 91 179 -- 93 177 Insurance ................ 185 56 -- 39 202 Environmental remediation. 648 138 -- 116 670 Other..................... 326 132 -- 209 249
- -------- (a) Write-off for uncollectible accounts, net of recoveries. 66 EXHIBIT INDEX EXHIBIT DESCRIPTION 3.1 Restated Certificate of Incorporation of Atlantic Richfield Company ("ARCO") as of June 27, 1994, filed with the Securities and Exchange Commission (the "Commission") as Exhibit 3 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1994, under File No. 1- 1196 and incorporated herein by reference. 3.2 By-Laws of ARCO as amended through January 23, 1989, filed with the Commission as Exhibit 3.2 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chi- cago Trust Company of New York, as Rights Agent, filed with the Commission as Exhibit 4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1995, under File No. 1-1196 and incorporated herein by reference. 4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhattan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1985, under File No. 1- 1196 and incorporated herein by reference. 4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of New York, filed with the Commission on January 6, 1992 as Exhibit 4.3 to ARCO's Registration Statement on Form S-3 (No. 33-44925) and incor- porated herein by reference. 4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities authorized under any such instrument does not exceed 10% of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request. 10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of ARCO on March 26, 1990 and effec- tive as of October 1, 1990, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplementary Execu- tive Retirement Plan, effective as of March 22, 1993, filed with the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quar- terly period ended June 30, 1993, under File No. 1-1196 and incorpo- rated herein by reference. 10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral Plan, effective as of July 27, 1992, filed with the Commission as Ex- hibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.3* Atlantic Richfield Executive Medical Insurance Plan-Summary Plan De- scription, effective as of January 1, 1994, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196, and incorporated herein by reference. EXHIBIT DESCRIPTION 10.4(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective as of July 1, 1988, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1988, under File No. 1-1196 and incorporated herein by reference. 10.4(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of January 1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1989, under File No. 1-1196 and incorporated herein by reference. 10.4(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of July 1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.4(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of August 5, 1996, filed herewith. 10.5* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised and effective January 1, 1997, filed herewith. 10.6(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on November 26, 1984, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1994, under File No. 1- 1196 and incorporated herein by reference. 10.6(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January 1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.7* Atlantic Richfield Company's 1985 Executive Long-Term Incentive Plan, as adopted by the Board of Directors of ARCO on May 28, 1985, and ef- fective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.7 to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. The proposed amendments to the 1985 Executive Long-Term Incentive Plan will be included in the appendix to the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held on May 5, 1997, which will be filed with the Commission within 120 days after December 31, 1996, and is incorporated herein by reference. 10.8* Atlantic Richfield Company Executive Life Insurance Plan--Summary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.9(a)* Atlantic Richfield Company Executive Long-Term Disability Plan-- Summary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.9 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.9(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.10 Form of Indemnity Agreement adopted by the Board of Directors of ARCO on January 26, 1987 and executed in February 1987 by ARCO and each of its directors and officers, included in Exhibit A to the 1987 Proxy Statement, filed with the Commission under File No. 1-1196 and incorporated herein by reference. 10.11(a)* Stock Option Plan for Outside Directors effective as of December 17, 1990, filed with the Commission as Exhibit 10.14 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.11(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors, effective as of June 22, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. EXHIBIT DESCRIPTION 10.12(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990, filed with the Commission as Exhibit 10.13(a) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.12(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1- 1196 and incorporated herein by reference. 10.13* Special Incentive Plan, as adopted by the Board of Directors of ARCO on February 28, 1994, and as effective on that date, is included in Appendix C to the Company's 1994 Proxy Statement filed with the Com- mission under File No. 1-1196 and incorporated herein by reference. 21 Subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule. - ------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K. EX-10.4(D) 2 AMENDMENT NO. 3 TO THE ATLANTIC RICHFIELD COMPANY EXHIBIT 10.4(d) AMENDMENT NO. 3 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE SUPPLEMENTARY SAVINGS PLAN II __________________________ Pursuant to the resolutions adopted by the Board of Directors on March 25, 1996, the Atlantic Richfield Company Executive Supplementary Savings Plan II (the "Plan") is amended effective as of August 5, 1996. Section 6 of the Plan is amended to read as follows: "SECTION 6. AMOUNT OF BENEFIT 6.1 The amount of an Employee's benefit for each Plan Year shall be equal to either: (a) With respect to an Employee who makes the maximum permissible elective deferral under the Atlantic Richfield Capital Accumulation Plan II during the Plan Year, an amount equal to the maximum percentage of the amount of such Employee's Base Pay that would have been contributed by the Company under the Atlantic Richfield Capital Accumulation Plan II assuming that there were no limitations on such contributions imposed by Section 415 of the Code during the Plan Year; or (b) With respect to an Employee who does not make the maximum permissible elective deferral under the Atlantic Richfield Capital Accumulation Plan II during the Plan Year, an amount equal to the product of 1.6 times the amount of elective deferrals made by the Employee under the Atlantic Richfield Capital Accumulation Plan II during the Plan Year." Executed this 24th day of July, 1996. ATTEST: ATLANTIC RICHFIELD COMPANY /s/ ARMINEH SIMONIAN /s/ JOHN H. KELLY ______________________ By: ___________________________ John H. Kelly Vice President Human Resources EX-10.5 3 ATLANTIC RICHFIELD COMPANY POLICY ON FINANCIAL COUNSELING EXHIBIT 10.5 CONFIDENTIAL ------------ COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4 A. ELIGIBILITY ----------- This policy shall be applicable to the executives in salary grade 64E4. B. EFFECTIVE DATE -------------- This policy first became effective January 1, 1987. The provisions herein reflect all modifications made through January 1, 1997, the effective date of this current policy. C. DEFINITIONS ----------- Financial counseling service as used in this statement means professional (financial, legal and tax) counseling in the broad area of estate building and estate conservation including, but not necessarily limited to: o Effective utilization of Company benefit programs; o Individual capital building methods and tools; o Income tax planning guideposts and tax shelters; o Estate conservation and insurance planning; o Preparation of personal wills and trust agreements; o Cash flow, commercial banking, leverage and liquidity analysis, and o Problem analysis and financial trade-offs. Individual income tax service as used in this statement is specifically limited to professional assistance in the preparation of the executive's individual federal, state and/or local income tax returns and support of such return upon audit. D. COVERED SERVICES AND ALLOWANCES ------------------------------- 1. The Company will provide the following to eligible executives upon request to the Manager, Executive Relations: a. Information regarding the kinds of financial counseling services provided by nationally known organizations. b. Information regarding nationally known organizations which provide professional assistance in the preparation of individual income tax returns. c. Information regarding the executive's Company benefits for use by the selected counseling organization, including a statement of the extent to which the Company will reimburse the executive for services of financial and tax counseling organizations. Page 1 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADE 64E4 2. The Company will reimburse eligible executives in accordance with the following provisions for the services of the organizations they select: a. Reimbursement for all financial counseling and individual income tax service rendered during the initial calendar year of the executive's participation under this policy will generally not exceed $5,800. b. Reimbursement for all financial counseling service and individual income tax service during the calendar year of a participating executive's termination will generally not exceed $5,800. c. Reimbursement for follow-up financial counseling and individual income tax services in any calendar year other than the initial calendar year of participation or the calendar year immediately preceding the executive's termination will generally not exceed $4,200. d. Any allowance unused in a calendar year may be carried forward to the next calendar year for use during that period as necessary. However, no more than the maximum allowance for a given year is subject to carry forward, i.e., $5,800 for the initial year and $4,200 for succeeding years. e. If necessary, the allowance for the year following the current year may be carried back to cover expenses in the current year assuming the executive's expected continued eligibility. No more than one year forward is available for carry back. If an executive has received reimbursement under the carry back provisions of the plan at the time of termination of employment, the Company may, at its discretion, request reimbursement from the executive for any such amount. f. A one-time allowance of up to $3,000 for reimbursement of legal services provided in preparation/updating of personal wills and trusts is available. However, if an eligible executive relocates to a different state, an additional allowance of up to $1,500 for reimbursement of legal services provided in updating personal wills and trusts to reflect the laws of the new state is available. g. The first year allowance of $5,800 will also be available to change counseling organizations one time during the entire eligibility period at the executive's discretion, not including the provisions of f. above. This allowance would include individual income tax service for that year. h. If an executive terminates or dies while a participant under this policy, an allowance of $950 will apply with respect to individual income tax returns for the last calendar year in which the executive was in the active service of the Company. Page 2 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E4 i. If an executive's employment with the Company ceases other than by retirement with an immediate retirement allowance, death, or by agreement with the Company, reimbursement will not be made for any financial counseling or income tax services performed for the executive after the date employment terminates. 3. Brokers' fees or promoters' fees are not reimbursable. 4. To obtain reimbursement under this policy, a participating executive will forward the service organization's invoices with covering memorandum to the Manager, Executive Relations. The Company's check will be payable to the executive. The executive is responsible for payment of the service organization's invoices. 5. Reimbursements will be grossed up in consideration of federal and state income taxes. 6. The total reimbursement made by the Company will be reported to the Internal Revenue Service and to other applicable tax jurisdictions as supplemental payment of compensation. Each reimbursement will be subject to FICA and withholding at the standard federal and state tax rates at the time payment is made. E. NON-ENDORSEMENT --------------- It is the Company's policy that the decision whether or not to use financial counseling service and/or income tax service as well as the selection of organizations to render such services is an individual one. Therefore, representatives of the Company will not suggest whether or not an eligible executive should use such services, and will not encourage or discourage use of any particular organization by an eligible executive. By application for information outlined in "D" above, and by acceptance and receipt thereof, any eligible executive shall release and discharge the Company and any employee or other person who furnishes such information from any and all liability and responsibility for loss or damage which said applying executive may suffer as a consequence of receipt or use of such information. F. ADMINISTRATION -------------- All decisions regarding this policy rest entirely with the Company and such decisions shall be final. The Company reserves the right to modify or terminate this policy at any time. Effective: January 1, 1997 Page 3 CONFIDENTIAL ------------ COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3 A. ELIGIBILITY ----------- This policy shall be applicable to the executives in salary grades 64E2 and 64E3. B. EFFECTIVE DATE -------------- This policy first became effective January 1, 1987. The provisions herein reflect all modifications made through January 1, 1997, the effective date of this current policy. C. DEFINITIONS ----------- Financial counseling service as used in this statement means professional (financial, legal and tax) counseling in the broad area of estate building and estate conservation including, but not necessarily limited to: o Effective utilization of Company benefit programs; o Individual capital building methods and tools; o Income tax planning guideposts and tax shelters; o Estate conservation and insurance planning; o Preparation of personal wills and trust agreements; o Cash flow, commercial banking, leverage and liquidity analysis, and o Problem analysis and financial trade-offs. Individual income tax service as used in this statement is specifically limited to professional assistance in the preparation of the executive's individual federal, state and/or local income tax returns and support of such return upon audit. D. COVERED SERVICES AND ALLOWANCES ------------------------------- 1. The Company will provide the following to eligible executives upon request to the Manager, Executive Relations: a. Information regarding the kinds of financial counseling services provided by nationally known organizations. b. Information regarding nationally known organizations which provide professional assistance in the preparation of individual income tax returns. c. Information regarding the executive's Company benefits for use by the selected counseling organization, including a statement of the extent to which the Company will reimburse the executive for services of financial and tax counseling organizations. Page 1 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3 2. The Company will reimburse eligible executives in accordance with the following provisions for the services of the organizations they select: a. Reimbursement for all financial counseling and individual income tax service rendered during the initial calendar year of the executive's participation under this policy will generally not exceed $10,600. b. Reimbursement for all financial counseling service and individual income tax service during the calendar year of a participating executive's termination will generally not exceed $10,600. c. Reimbursement for follow-up financial counseling and individual income tax services in any calendar year other than the initial calendar year of participation or the calendar year immediately preceding the executive's termination will generally not exceed $6,200. d. Any allowance unused in a calendar year may be carried forward to the next calendar year for use during that period as necessary. However, no more than the maximum allowance for a given year is subject to carry forward, i.e., $10,600 for the initial year and $6,200 for succeeding years. e. If necessary, the allowance for the year following the current year may be carried back to cover expenses in the current year assuming the executive's expected continued eligibility. No more than one year forward is available for carry back. If an executive has received reimbursement under the carry back provisions of the plan at the time of termination of employment, the Company may, at its discretion, request reimbursement from the executive for any such amount. f. A one-time allowance of up to $3,000 for reimbursement of legal services provided in preparation/updating of personal wills and trusts is available. However, if an eligible executive relocates to a different state, an additional allowance of up to $1,500 for reimbursement of legal services provided in updating personal wills and trusts to reflect the laws of the new state is available. g. The first year allowance of $10,600 will also be available to change counseling organizations one time during the entire eligibility period at the executive's discretion, not including the provisions of f. above. This allowance would include individual income tax service for that year. h. If an executive terminates or dies while a participant under this policy, an allowance of $1,250 will apply with respect to individual income tax returns for the last calendar year in which the executive was in the active service of the Company. Page 2 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E2 AND 64E3 i. If an executive's employment with the Company ceases other than by retirement with an immediate retirement allowance, death, or by agreement with the Company, reimbursement will not be made for any financial counseling or income tax services performed for the executive after the date employment terminates. 3. Brokers' fees or promoters' fees are not reimbursable. 4. To obtain reimbursement under this policy, a participating executive will forward the service organization's invoices with covering memorandum to the Manager, Executive Relations. The Company's check will be payable to the executive. The executive is responsible for payment of the service organization's invoices. 5. Reimbursements will be grossed up in consideration of federal and state income taxes. 6. The total reimbursement made by the Company will be reported to the Internal Revenue Service and to other applicable tax jurisdictions as supplemental payment of compensation. Each reimbursement will be subject to FICA and withholding at the standard federal and state tax rates at the time payment is made. E. NON-ENDORSEMENT --------------- It is the Company's policy that the decision whether or not to use financial counseling service and/or income tax service as well as the selection of organizations to render such services is an individual one. Therefore, representatives of the Company will not suggest whether or not an eligible executive should use such services, and will not encourage or discourage use of any particular organization by an eligible executive. By application for information outlined in "D" above, and by acceptance and receipt thereof, any eligible executive shall release and discharge the Company and any employee or other person who furnishes such information from any and all liability and responsibility for loss or damage which said applying executive may suffer as a consequence of receipt or use of such information. F. ADMINISTRATION -------------- All decisions regarding this policy rest entirely with the Company and such decisions shall be final. The Company reserves the right to modify or terminate this policy at any time. Effective: January 1, 1997 Page 3 CONFIDENTIAL ------------ COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1 A. ELIGIBILITY ----------- This policy shall be applicable to the executives in salary grades 64E0 and 64E1. B. EFFECTIVE DATE -------------- This policy first became effective January 1, 1987. The provisions herein reflect all modifications made through January 1, 1997, the effective date of this current policy. C. DEFINITIONS ----------- Financial counseling service as used in this statement means professional (financial, legal and tax) counseling in the broad area of estate building and estate conservation including, but not necessarily limited to: o Effective utilization of Company benefit programs; o Individual capital building methods and tools; o Income tax planning guideposts and tax shelters; o Estate conservation and insurance planning; o Preparation of personal wills and trust agreements; o Cash flow, commercial banking, leverage and liquidity analysis, and o Problem analysis and financial trade-offs. Individual income tax service as used in this statement is specifically limited to professional assistance in the preparation of the executive's individual federal, state and/or local income tax returns and support of such return upon audit. D. COVERED SERVICES AND ALLOWANCES ------------------------------- 1. The Company will provide the following to eligible executives upon request to the Manager, Executive Relations: a. Information regarding the kinds of financial counseling services provided by nationally known organizations. b. Information regarding nationally known organizations which provide professional assistance in the preparation of individual income tax returns. c. Information regarding the executive's Company benefits for use by the selected counseling organization, including a statement of the extent to which the Company will reimburse the executive for services of financial and tax counseling organizations. Page 1 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1 2. The Company will reimburse eligible executives in accordance with the following provisions for the services of the organizations they select: a. Reimbursement for all financial counseling and individual income tax service rendered during the initial calendar year of the executive's participation under this policy will generally not exceed $12,000. b. Reimbursement for all financial counseling service and individual income tax service during the calendar year of a participating executive's termination will generally not exceed $12,000. c. Reimbursement for follow-up financial counseling and individual income tax services in any calendar year other than the initial calendar year of participation or the calendar year immediately preceding the executive's termination will generally not exceed $8,000. d. Any allowance unused in a calendar year may be carried forward to the next calendar year for use during that period as necessary. However, no more than the maximum allowance for a given year is subject to carry forward, i.e., $12,000 for the initial year and $8,000 for succeeding years. e. If necessary, the allowance for the year following the current year may be carried back to cover expenses in the current year assuming the executive's expected continued eligibility. No more than one year forward is available for carry back. If an executive has received reimbursement under the carry back provisions of the plan at the time of termination of employment, the Company may, at its discretion, request reimbursement from the executive for any such amount. f. A one-time allowance of up to $3,000 for reimbursement of legal services provided in preparation/updating of personal wills and trusts is available. However, if an eligible executive relocates to a different state, an additional allowance of up to $1,500 for reimbursement of legal services provided in updating personal wills and trusts to reflect the laws of the new state is available. g. The first year allowance of $12,000 will also be available to change counseling organizations one time during the entire eligibility period at the executive's discretion, not including the provisions of f. above. This allowance would include individual income tax service for that year. h. If an executive terminates or dies while a participant under this policy, an allowance of $1,550 will apply with respect to individual income tax returns for the last calendar year in which the executive was in the active service of the Company. Page 2 COMPANY POLICY ON FINANCIAL COUNSELING & INDIVIDUAL INCOME TAX SERVICE FOR EXECUTIVES IN SALARY GRADES 64E0 AND 64E1 i. If an executive's employment with the Company ceases other than by retirement with an immediate retirement allowance, death, or by agreement with the Company, reimbursement will not be made for any financial counseling or income tax services performed for the executive after the date employment terminates. 3. Brokers' fees or promoters' fees are not reimbursable. 4. To obtain reimbursement under this policy, a participating executive will forward the service organization's invoices with covering memorandum to the Manager, Executive Relations. The Company's check will be payable to the executive. The executive is responsible for payment of the service organization's invoices. 5. Reimbursements will be grossed up in consideration of federal and state income taxes. 6. The total reimbursement made by the Company will be reported to the Internal Revenue Service and to other applicable tax jurisdictions as supplemental payment of compensation. Each reimbursement will be subject to FICA and withholding at the standard federal and state tax rates at the time payment is made. E. NON-ENDORSEMENT --------------- It is the Company's policy that the decision whether or not to use financial counseling service and/or income tax service as well as the selection of organizations to render such services is an individual one. Therefore, representatives of the Company will not suggest whether or not an eligible executive should use such services, and will not encourage or discourage use of any particular organization by an eligible executive. By application for information outlined in "D" above, and by acceptance and receipt thereof, any eligible executive shall release and discharge the Company and any employee or other person who furnishes such information from any and all liability and responsibility for loss or damage which said applying executive may suffer as a consequence of receipt or use of such information. F. ADMINISTRATION -------------- All decisions regarding this policy rest entirely with the Company and such decisions shall be final. The Company reserves the right to modify or terminate this policy at any time. Effective: January 1, 1997 Page 3 EX-21 4 SUBSIDIARIES OF THE REGISTRANTS EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
PERCENTAGE OF VOTING SECURITIES OWNED BY ORGANIZED IMMEDIATE NAME OF COMPANY UNDER LAWS OF PARENT --------------- ------------- ------------- Atlantic Richfield Company (Registrant)........... Delaware Subsidiaries of Registrant in consolidated financial statements, as of December 31, 1996: ARCO Alaska, Inc................................ Delaware 100.0 ARCO Chemical Company........................... Delaware 82.7 ARCO Transportation Alaska, Inc. ............... Delaware 100.0 Vastar Resources, Inc. ......................... Delaware 82.3
The subsidiaries whose names are not listed above, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 5 CONSENT OF COOPERS & LYBRAND EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company: Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), and Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21552), of our report dated February 12, 1997, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California February 25, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 1,460 784 1,936 0 995 5,433 34,738 18,542 25,715 5,303 5,593 0 1 403 7,397 25,715 18,592 19,169 14,335 14,748 26 0 668 2,709 941 1,663 0 0 0 1,663 $10.18 $10.18
-----END PRIVACY-ENHANCED MESSAGE-----