Document By8j5X28B1LygVDRrZnVDeJd4

ARCO s downstream businesses are the leaders in their ilS.iT'..' respective activities. During 1994, ARCO's refining DOWN PER ATI ON S STREAM PNVC 000,2SS8' regulations for reformulated gaso lines in major portions of its market 3rea- A nev Pro^uct #ix vas intro duced. in conjunction with a full slate of reformulated fuels, in Southern California in early 1995 . AliCO Chemical Company, in which ARCo holds an S3.3% interest, enjoyed higher volumes and increased mar gins. This reflected the improved business climate in certain segBents of the U.S. economy, particu larly residential and automotive, and efforts to increase markets for ARCO operate* a number of businesses ancillary to its refining and fuels marketing operations. Automobile gas oline* produced by ARCO. for sample. are sold primarily througham/pm* convenience store and SMOGPROS* sites in addition to tiadhionat ARCObranded service stations. ni/ifn. SMOGPROS. derivatives of its core products. ARCO's transportation company con Billboard* and talevision commercials emphasized ARCO'* premium product* and lowar price*. tinued to grow in the Lower 48 by focusing on operational integrity and excellence in customer service in pipeline, terminal and marine businesses. ARCO's aluminum subsidiary, ARCO Aluminum. Inc., reported its 11th consecutive year of increased profits. AUTOMOBILE GASOLINES RSEORKUL/CEO To meet Environmental Protection Agency (EPA) emission control regula Tha smfpms* represent mote than half of ARCO retail outlets in the Rve western U S. state* of CaUfomia, Washington, Oregon, Nevada and Arizona. SMOGPROS* are found in CaSfomiawharatheatata faquirs* regular vshicular emissions tasting and rapeirs. Most ARCO retail outlet* are equipped with ARCOk proprietary PayPoint* etectTcriicpaymentsystem, a service the company offer* commaroaliy to a growing number of retailer* nationwide. am/pm SMOGPROS V Refinery tions by January 1995 , U.S. refining companies were required to reformu late automotive gasolines sold in nine regions, including two in Southern California. For ARCO. this required major modifications to its Los Angeles refinery. Additional modifications will be required to meet California standards by 1996. The manufacture of gasolines to meet the nev California standards will give ARCO additional capacity for producing jet fuels, a market sector in which ARCO's volumes con tinued to increase in 1994. The company produces and markets calcined coke, which is used in the pNYC 00012859 aluminum industry. It also operates F a large co-generation unit, which produces steam and electricity for use at the Los Angeles refinery and sells electricity to the local power company. ARCO Chemical is the world's leading producer of propylene oxide (PO). which is used in a wide range of consumer and industrial applica tions. particularly by the automo tive and housing industries. As a result of derivatives development, polyether polyols now consume about a quarter of the company's internal PO production annually. An ARCO crude oil pipeline thet stretches from the Gulf of Mexico to Okie, home operated at capacity in 1994, meeting refiners' requirements for offshore and waterborne foreign crude oil. Line 90. moving crude oil out of Southern California, was near capac ity and Una 63, an oil pipeline connecting the San Joaquin Valley to the Loa Angelas Basin, was in Heavy demand due to the closure of a 97-mile portion of Una 1 after the January earthquake in Southern California. In conjunction withthe Intro duction of EPA gasoline, ARCO debuted a new ilete of high-juaUty unleaded emission-control automobile gasoline products including an 89-octane mid-grade, en 67-octane, and a 92-octane premium. ARCO had offered Southern Californians amission-control premium and regular gasolines prior to the 7995 EPA deadline, which established ARCO ee a market eeder in the development of deener burning gasolines. ARCO Chemical was responsible for introduction of the first natkmsby-marketed propylene gtycol-based automotive anti freeze end coolant which it distributed in retail markets under the Siena* brand name by ARCO Chamteal's customer. Safe Brands Corporation. Polyols are the key component in urethanes and are foamed to make seat cushions and mattresses, for mulated into coatings or molded into other products. Another sig nificant ingredient in these prod ucts is toluene di-isocyanate (TDD. In January 199S. ARCO Chemical entered into long-term agreements with the French chemical company. Rhone-Poulenc. for a supply of TDI. Under the arrangement. ARCO Chemi cal will be entitled to the entire TDI output of Rhone-Poulenc's two plants in France. Propylene glycol-based products have become ARCO Chemical's second largest integrated use for PO. The leading propylene glycol aanufac turer in the U.S..ARC0 Chemical opened a new propylene glycol ether (POE) plant in Rotterdam in early 1995 . Two primary co-products are pro duced with ARCO Chemical's PO tech nologies -- styrene monomer and tertiary butyl alcohol (TBA), which is primarily converted to methyl tertiary butyl ether OfIBE). a key ingredient in reformulated gaso lines. The company also has the r co i* PNYC 00012860 Propylene Oxide markets grow with development -apability to produce ethyl tertiary butyl ether (ETBE). of new products Profits from Lower 48 transporta tion businesses increased during j994. With completion of an expan sion. the Texas City-Cushing pipeline volumes increased 35%. Operations at ARCO's West Coast storage facilities and terminals were modified in 1994 to accommo date oxygenate movements and stor age requirements associated with the new reformulated gasolines. These facilities, combined with ownership of the two largest U.S. flag product vessels, allow ARCO to transport MTBE from the U.S. Gulf Coast and to serve West Coast product markets. ARCO acquired the remaining 50% interest in an NGL pipeline which runs from northern Louisiana to Mont Belvieu. Texas, in 1994. The Trans Alaska Pipeline System (TAPS) carried its 10 billionth barrel of erude oil in early 1994. With a 21.3% interest in TAPS. ARCO was actively involved during 1994 in responding to findings of federal regulators and TAPS owners. ARCO's eight crude oil tankers carried over 190 million barrels of the Alaskan production to ports along the u.s. West Coast and to Panama. During 1994. ARCO completed the required modifications to make EPA gasolina* end worked to meet the California Air Reaourcai Board'* (CARBI more etringant etandardt for automobilo gasolines sold in the Hate by March 1996. Whan the modification* are complete. 1004* of the gasoline produced at the Los Angeles refinery will meet those standard*. The company expacts to invest about SS00 million in total to make the EPA and CAR8 gaso lines. Areas served by ARCO's Cherry Point refinery in Wash ington state are not impacted by the new fuels standards;. therefore, modifications ware not raquirad thare. PNYC 00012861 and othar oparating ravanuaa -- indutfog axdaa tuN S1M2 S1SM7 SIMM Incom* bafora ehangM tn accounting prtnriplaa $ #1* s at s i.isi Nat incoma Earned per there before chengee in accounting prlndplae S SI* s s.ss S 2M s 1M S SOI S 7M Earned per ahare I SM * V * AM Caeh dividend* par common ahare t MO I M S MO Total aaaeta cun S23M4 CMM Long-term debt and capital laaaa obdgatlona t 7.1M t 7ms % i2Z7 (1i SaaNata2o(NotaatoCenaal ISWiwaiBmai SI Indudaarfm iaMgdnetC7*aIStenBmlmMaiMelaieMbTihWai'lhninii.toa. Ol IntAidna natprodden of'llUniMmidftaaraOMiSaaraaifidWianaaaaiwOSalindpnrpirMliM. cMaaiyaUiaatbniiiaMliM. aiOSiavlWkaBiiMRSMNlH S1S.1S1 S 7SS S 709 S J* * OS S MO S24M3 S SMS SIMM S IMS S Mil S ISM t 12.1# S 5M S23M4 S SM7 Ma n a g e me n t 's Di s c u s s i o n a n d a n * l y s i s o f . Fi n a n c i a l Co n d i t i o n a n d Re s u l t s o f Op e r a t i o n s / : Operating results in 1994 imp roved c omp ared to 1993 as a result of approximately $250 million after tax in first-year savings from ARCO's cost reduction program, higher earnings from ARCO's chemical interests in ' PNyC 00012862 Lyondell Petrochemical Company (LyondelD and ARC0 Chemical Company (ARCO Chemi=al}- and hiSher natural gas sales volumes. These improvements were partially offset by lower crude oil and natural gas prices and reduced refining and marketing margins. Earning* *"* Operation* Operations in 1993 . compared to 1992. benefited from improved margins and higher gasoline sales volumes in ARCO's Uest Coast refining and marketing operations, higher coal sales volumes and higher natural gas prices. These benefits were more than offset by lower crude oil prices and volumes, lower natural gas volumes, higher exploration and selling, general and administrative (SGiA) expenses and lower after-tax earnings from trans portation operations. ScwcUl Hem* After Tax JESUITS OF CONSOLIDATES OPERATIONS REVENUES The sale of ARCO's Brazilian marketing operations in' December 1993 resulted in reduced operating revenues in 1994. At the same time, increased crude oil trading and natural gas marketing activity, higher chemical prices and CO T 9 volumes, natural gas volumes and excise taxes were offset by lower crude oil prices and volumes, and lower prices for refined products and natural gas. In 1993. increased natural gas market ing volumes and higher refined and Chemical products sales volumes and natural gas prices were more than off set by lower crude oil prices, crude oil and natural gas volumes, decreased crude oil trading volumes and lower refined and chemical products prices. The increase in income from equity investments in 1994 primarily reflected Lyondell's higher earnings. ARCO has a 49.9% equity interest in Lyondell. The fluctuations in other revenues primarily reflected the impact of asset sales. EXPENSES The sale of ARCO's Brazilian marketing operations resulted in reduced trade purchases in 1994. At the same time, increased crude oil trading and natu ral gas marketing activity were offset by lover crude oil and natural gas prices. In 1993. lower crude oil trad ing prices and volumes and lower pur chased volumes of finished refined products and chemical feedstocks resulted in reduced trade purchases. This reduction was partially offset by higher natural gas marketing volumes and prices. As a result of ARCO's cost reduction program, lease and other operating costs in oil and gas operations and refining and marketing operations were lower in 1994. These reductions were partially offset by higher operating costs as a result of increased produc tion volumes for coal operations and ARCO Chemical, and by higher operating costs associated with the response to p,C 00012863 . findings cf regulatory and owner com pany reviews of the Trans Alaska Pipeline System (TAPS). Litigationrelated accruals, higher compensation and contract personnel costs associated with downstream and coal operations and higher maintenance costs, includ ing turnarounds at three chemical plants, resulted in higher operating costs in 1993. Partially offsetting these increases were lower lease and other operating costs in oil and gas operations. The decline in exploration expense in 1994 reflected reduced activity as part of ARCO's cost reduction program, particularly in Alaska and the Lower 48. The increase in 1993 reflected higher dry hole costs in Alaska and increased activity overseas, partially offset by decreased activity in the Lower 48. Selected Expense* The sale of ARCO's Brazilian marketing operations and lower personnel costs in oil and gas operations resulted in reduced SGSA expenses in 1994. Higher compensation expense and higher deliv ery and advertising costs increased SC&A expenses in 1993. The sale of ARCO's Brazilian marketing operations also resulted in reduced taxes other than excise and income taxes in 1994. The decrease in 1993. compared to 1992. primarily resulted from lower production raxes related to lover crude oil prices and volumes. Excise taxes increased in 1994-as a result of the full-year effect in 1994 of the fourth quarter 1993 increase in federal excise taxes and a mandatory assumption of the collection respon sibility for excise taxes on diesel fuel. The increase in 1993 primarily resulted from the fourth quarter 1993 federal excise tax increase, the fullyear effect in 1993 of increased state excise taxes in 1992 and higher refined products sales volumes. Depreciation, depletion and amorti zation (DD&A) decreased in 1994 reflecting the absence of a $73 mil lion accrual fot plugging and abandon ment of onshore wells recorded in 1993. This was partially offset by increased depreciation associated with the fitst full year of operation of the Gordonstone mine. The decrease in DD&A in 1993 resulted from the sale of Lower 48 oil and gas properties, partially off set by the $73 million plug and aban donment accrual. Personnel reductions associated with ARCO's cost reduction program were reported as unusual items in 1994. The fourth quarter 1993 reorganization of ARCO's Lower 48 oil and gas operations is reflected in unusual items expense and included $554 million before tax for writedowns for sale or other dis position of oil and gas properties and excess office space, in addition to charges for work force reductions. The 1992 unusual items comprised a settle ment on assets nationalized by Iran and recognition of a previously deferred portion of the gain from the 1989 sale of a majority interest in Lyondell, partially offset by a charge related to the withdrawal by ARCO Chemical from a Korean joint venture. Ga ik o h is s u a n c e o f STOCK BY VASTAR RESOURCES. INI On July 5. 1994. Vastar Resources. Inc. (Va6tar) consummated the sale of PWVC 12SS4 ,7 250.000 shares of its common stock the public at an initial offering price of $28 per share. Prior to the -'fering. Vastar was a wholly owned subsidiary of ARCO. At December 31. ^994. ARCO owned 80.000.001 shares of Vastar's common stock, which repre sented 82.3% of Vastar's outstanding -omnon stock. ARCO realized an after tax gain of S273 million as a result of the initial public offering by Vastar. Vastar's results are included in ARCO's Lower 48 results in the oil and gas segment. INCOME TAXES ARCO's effective tax rate was 28.3% in 1994. compared to 51.6% in 1993 and 35.6% in 1992. The lower effective tax rate in 1994 reflected recognition of a foreign deferred tax asset, increased net foreign tax credits, a refund of paid foreign taxes and an increase in other tax credits. The higher effective tax rate in 1993 reflected increased taxes on foreign income and the effect of the 1993 federal tax rate increase on deferred taxes. ACCOUNTING CHANGES The 1992 results included a net after tax charge of $392 million, or $2.43 per share, for the_ cumulative effect of the adoption of two new accounting standards related to non-pension postretirement benefits and income taxes. RESULTS Of SEGMENT OPERATIONS OIL AND GAS Lower exploration and operating expenses and higher natural gas vol umes were partially offset by lower crude oil prices and volumes and lower natural gas prices in 1999. In 1993. the effect of lower crude oil prices and volumes, natural gas vol umes and higher dry hole expense was partially offset by higher natural gas prices and lower depletion and lease operating costs. Oil and Gaa Special Kama Attar Tax Worldwide petroleum liquids volumes decreased in 1994 and 1.993 as a result of Lower 48 property divestitures and natural field declines. In 1994. increased volumes resulting from the expanded gas handling system (GHX-2) at Prudhoe Bay and new volumes from the Point McIntyre field, which began production in October 1993. were par tially offset by natural field decline in Alaska from the Prudhoe Bay and Kuparuk River fields. NATURAL GAS PRODUCTION ARCO's international natural gas pro duction grew in 1994 as a result of the new Fagerungan and Offshore Northwest Java Sea fields in Indonesia and a full year of production from the Orwell and Murdoch fields in the United Kingdom North Sea. International natural gas ace PNYC 00012865 operations in 1993 were favorably impacted by a full year of production from the Pickerill field in the U.K. North Sea, new production from the Orwell and Murdoch fields in the U.K. North Sea. which began in late 1993. and the Java Sea field in Indonesia. U.S. natural gas production growth in 1994 came primarily from Vastar's Mustang Island 805 field in the Gulf of Mexico and fields in the San Juan Basin. The sale of Lower 48 prop erties and natural field declines reduced domestic natural gas pro duction in 1993. :c a l TP Revenues from record volumes in 1994 were more than offset by lower interna tional coal prices, the reopening to current market prices of a major sales contract in the U.S. and unfavorable for eign exchange rate movements. Improved earnings in 1993 reflected higher sales volumes as a result of strong electric utility demand and reduced East Coast supply as a result of a mine workers strike. The 1993 results included a benefit of approximately $10 million after tax associated with a change in the accrued estimated loss on the sale of the Coal Resources of Queensland mine. which was completed in January 1993. REFINING AND MARKETING The 1994 results were negatively impacted by reduced U.S. West Coast margins and the absence of earnings from Brazil, partially offset by reduced operating costs.The 1994 special items included after-tax charges related to personnel reductions and future environmental reme diation costs. The 1993 special items comprised primarily litigation-related accruals.a loss associated with the sale of the Brazilian marketing sub sidiaries and the effect of the increase in the federal tax rate on deferred taxes. The 1992 special items included a charge of approximately $40 million after tax primarily for environmental costs related to previously divested operations. ARCO's U.S. West Coast sales volumes were relatively unchanged for the three years ended December 31. 1994. TRANSPORTATION JJ, ..-V'.JJ. I'.. The 1994 results included charges of approximately $20mllllon after tax related to personnel reductions, a loss on the sale of midcontinent product pipelines, and costs associated with the Southern California earthquake, par tially offset by a tax credit. The 1993 earnings declined as a result of lower TAPS earnings and the effect of the fed eral tax rate increase, partially offset by higher commercial pipeline earnings. INTERMEDIATE CHEMICALS AND SPECIALTY PRODUCTS After-tax earnings for ARCO's inter mediate chemicals and specialty prod ucts segmentwere$265millionin!994. $239 million in 1993 and $210 million PNYC 00012866 1992. The segment consists of ARC0 ^emical. an 03.3% owned subsidiary. ^ chemical reported that its 1994 results included an after-tax charge f $19 Billion for corporate restruc-uring and a S12 million benefit from JnSurance proceeds. ARCO Chemical's -sported net income in 1993 included a SlO million after-tax loss on early debt retirement and net benefits of 520 million from lower income taxes, the 1992 results included SS6 million before tax for a charge resulting from ^r CO Chemical's withdrawal from a joint venture in Korea. AACO Chemical Salat Volomat ARCO Chemical's reported net income was higher in 1994. compared to 1993 . primar ily as a result of higher sales volumes in ARCO Chemical's core products, propylene oxide (P0) and derivatives and styrene monomer (SM). and higher SM margins, partially of f set by the effects of a veakermethyl tertiary butyl ether (MTBE) market. In 1993. increased sales volumes in ARCOChemical's core products worldwide were of fset by higher fixed eosts associated with a new plant. lower MTBEmargins. primarily in Europe, and lover overall PO and derivatives margins as a result of lower U.S. PO derivatives prices and continued weakness In the European economy. LYONDELL PETROCHEMICAL COMPANY ARCO's 49.9% equity share of Lyondell's net income was 111 million for 1994, $13 million for 1993 and S8 million for 1992. Lyondell ' s results in 1994 reflected improved olefins and methanol *C0 margins and increased olefins sales vol umes. This more than offset lower earn ings from Lyondell's approximate 90% participation Interest in LfONDELL-ClTGO Refining Company Ltd. (LCR). which was affected by poor industry conditions as well as downtime formajormainrenance turnarounds in the fourth quarter. LCR took over Lyondell's operation of the Houston. Texas, refinery in July 1993. Lyondell ' s results in 1993 improved as a result of higher margins attained through the processing of greater volumes of Venezuelan crude oil. V -.LLOCAIED EXPENSES ANE OTHER Unallocated expenses and other was a net after-tax expense of $57 million in 1994 and $140 million in 1993 compared to a net after-tax benefit of $25 million in 1992.Reductions incorporate staff expense.increased foreign tax credits and a tax refund resulted in lower unallocated expenses in 1994. In addi tion.increased interest income on short-term investments was more than offset by reimbursement of money market losses in certain employee benefit plans and charges for personnel reductions at ARCO*s corporate headquarters. The increase in unallocated expenses in 1993 reflected the absence of a $111 million after-tax gain recognized in 1992 and discussed below, increased compensa tion, higher charges for future environ mental remediation, and lover net investment income. In 1992. unallocated expenses and other included the recogni tion of a $111 million after-tax gain representing a previously deferred por tion of the gain from the 1989 sale of a majority interest in Lyondell, par tially offset by increased corporate expenses and charges for future environ mental remediation. PNYC 00012867 FINANCIAL POSITION AND LIQUIDITY -- CaafiRewRmMaShaaMfcy! OaaHw Flnanctne mMMaa MM MM tun AM Of mm cum ma mm miw (MM The netcashusedin investing activi * ties in 1994 included expenditures for additions to fixed assets (including dry .-.ole costs) of SI. 658 million and a net increase in short 'term investments of $768 million, partially offset by proceeds from asset sales of $167 million. The net cash used in financing activities in 1994 included proceeds of Si.275 million from the issuance of long-term debt, primarily 9% Exchangeable Notes and $453 million from issuance of common stock by Vastar. offset by repayments of long'term debt o $796 million and dividend payments of S885 million. Cash and cash equivalents and short term investments totaled $4.4 billion at year-end 1994 and short-term borrowings were $1.5 billion. Working capital was $429 million higher at the end of 1994, primarily reflecting an increase in short-term investments, partially of fset by an increase in long-term debt due within one year. At December 31. 1994. ARCO had unused bank credit facilities totaling $3.2 billion and ARCO Chemical had an unused bank credit facility totaling S300 million, while Vastar had fully utilized its $1.05 billion revolving credit facility with an interest rate of 6.15%. Vaster's revolv ing line of credit is available until November 30. 1996. Cn August 8. 1994 . ARCO issued 39.9 mil lion 9%Exchangeable Notes (the Notes) due September 15. 1997. atapriceof $24.75 per Note. ARCO realized proceeds of approximately $958 million. At matu rity. holders will receive shares of Lyondell common stock, or at ARCO's option, cash with an equal value in exchange for the principal amount of the Notes. The number of shares ot the amount ofsucheashwillbe determined using a formula based on the price of Lyondell common stock at the maturity of the Notes. ARCO's 1995 capital spending program includes $1.9billionfor additions to fixed assets. Future capital expenditures remain subject to business conditions affecting the industry.par ticularly changes in price and demand for crude oil. natural gas and petroleum products. Changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements, and other changes in environmental rules and regulations may also affect future capital expenditures. It is expected that future cash require ments for capital expenditures, divi dends and debt repayments will come from cash generated from operating activi ties, existing cash balances. and future financings. ENVIRONMENTAL MATTERS ARCO is subject to federal, state and local environmental laws and regula tions which require the Company to remove or mitigate the effect on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites. PNYC 00012868 IT' jhe amount reserved represents the eSt jmated undiscounted costs which ARCO will incur to complete the remediation of sites with known contamination. In view of the uncertainties associated with estimating these costs, such as differ ences of opinion between ARCOand various regulatory agencies with respect to the appropriateoethod for remediatingcontaminated sites, uncertainty as to the extent of contamination at various sites, and uncertainty regardingARCO's ultimate share of costs at various sites, it is possible that actual costs could exceed the amount reserved by as much as SI billion. See Note 12 to Consoli dated Financial Statements regarding environmental matters. In addition to the provision for environmental remediation costs. $848 million has been accrued for the estimated cost. net of salvage value, of dismantling facilities as required by contract, regulation or law. and the estimated costs of restoration and reclamation of land associated with such facilities. *I$K MANAGEMENT ARCO utilizes derivative instruments for risk management purposes. The Com pany uses simple,non-levaraged deriva tive instruments denominated inmajor ' currencies with highly liquid secondary Barkers. The derivative instruments Are placed with major international . financial institutions whose credit worthiness is continually monitored, Hedging strategies are reviewed and approved by senior management before being implemented. Policy controls limit the maximum dollar amount of posi * tions that can be taken at any given time. To minimize the effects of interest rate and foreign currency fluctuations, the Company enters into the following trans actions using derivatives: 1) foreign currency forward and swap contracts; 2) interest rate swaps: and 3) financial futures contracts and OTC Treasury options which are limited to investment portfoliohedging.alteration of port folio duration and charging asset mix. The Company and its subsidiaries engage in hedging strategies involving forward and futures contracts. swaps and options to hedge part of their crude oil and natural gas production to minimize the effects of commodity price fluctua tions. In 1994, Vastar entered into a series of commodity swaps covering approximatelySOXof its natural gas production for March through Dec ember. Vastar realized a $42 million pre-tax gain as a result of these swaps. EFFECTS OF INFLATION While the annual rate of inflation remained moderate during the three-year period ended December 31.1994.ARCO continued to experience certain infla tionary effects. ARCO will benefit by using current.inflated dollars to satisfy its debt obligations and other monetary liabilities. In addition, it is estimated that the replacement cost of ARCO's property, plant. equipment and inventory is greater than the historical cost reflected in the financial statements. CO Si PNYC 00^as9 ' - REVENUES CONSOLIDATED STiTEMENt OF INCOME AND RETAINED EARNINGS Ihg M*' Adl 0r<ar n 1**4 tin un Seles nd other operating revenues (including mu m tax**) Irveomt from equity investment* Interest Other revenues EXTENSES *16.552 141 201 305 17,199 *18,487 40 164 492 19,183 *18268 22 182 376 192*8 Trade purchase* Operating expenses Sailing, general and administrative expanses Depredation, depletion and amortization Exploration expense* (including undeveloped lease amortization! Excise taxes Taxes other than axdsa and income taxes interest Unusual items Income before gem on iasuanca of stock by subsidiary Gain on issuance of stock by subsidiary Incoma before income taxes, minority intsrest and cumulative effect of change* in accounting principle* Provision for taxes on income Minority internet in earnings of subsidiaries Income before cumulative affect of changes in accounting principles Cumulative effect of changes In accounting principles Net income EARNED TER SHARE 5,83* 3.222 1,705 1.671 4S5 1,517 780 759 3*7 16290 722* 3293 1,828 1,718 687 1296 1,147 715 686 ' 18249 909 634 *59 - 7263 3,174 1.724 1,754 567 1.165 1203 762 12711 17241 1267 - 1.368 387 62 919 - S 919 <34 327 38 269 - S 269 1207 676 38 1.193 (3921 * 601 Before cumulative effect of changes In accounting principles Cumulative effect of changes In accounting principles Net Income per share RETAINED EARNING* S 5.63 - S 5.63 8 1.66 - * 1.66 * 7.39 12.431 ( 4.96 Balance. January 1 Net income CaahdMdends: Preference stocks Common stock Balance. December 31 8 5.308 919 8 6218 269 1 5290 801 <31 18821 <31 <8761 <31 (8701 S 5242 8 5208 * 5218 N--mgf MiWuRiM. PNVC00012S70 ' ^ ?unwAiav,ng Co n s o l id a t e d Ba l a n c e Sh e e t ASSETS Current Meet*: Cesls end cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses and other current assets Total current assets Investments and long-term receivables: Investments accounted tor on the equity method Other investments end long-term receivables Fixed assets: Property, plant and equipment Less accumulated depredation, depletion end amortization Deferred charges and other assets Total assets LIABILITIES AND STOCKHOLDERS' EOUITV Current liabilities: Note* payable Accounts payable Long-term debt due within one year Taxes peyabie, Including axdae taxes Accrued interest Other Total euiTsnt liabilities Long-term debt Deferred income taxes Other deferred liabilities and credits Minority intarost Stockholders' equity: Preference stocks Common stock, S2.50 par value; shares issued 160,800.137 11994), 160,746,12511883); shares outstanding 160.753.96611994), 159,363.380 <19931 Capital in emess of par value of stock Retained earnings Foreign currency translation Pension liability adjustment Treasury stock, at coat Net unrealized ion on Investments Total stockholders' equity Totel liabilities and stockholders' equity IHCanHryMmNiMHNu liimptpaMNiA g l rwoumktf Nr el md tr* i PNYC 00012871 Dtftnbtl SI, ,,,4 3 1.394 2.991 1.446 797 185 6.813 S 1,458 2.289 1,333 914 237 6,231 348 268 297 221 64S 487 32.248 16,528 15.722 1,383 824.563 31.494 15,628 15,866 1,310 823,894 S 1.478 986 630 253 183 958 4.488 7.198 2.721 3.471 407 8 1,510 1,091 165 272 190 1.107 4,335 7.089 2,779 3.177 387 11 402 647 5.342 1511 1201 IS) 1381 6.278 t24,563 402 881 5,308 (133) (291 183) - 6.127 823.894 Co n s o l id a t e d St a t e me n t o f Ca s h Fl o w s CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustment* to reconcile not income to not cash provided by operating activities: Depreciation, depletion and amortization Dry hole expense and undeveloped leasehold amortization Nat gain on asset sales Gain on issuance of stock by subsidiary Income from equity investments Dividends from equity Investments Transition obligation for postretkement benefits Noncash provisions grestar (la**) than cash payments OMerrad Income taxes Change* kt account* receivable, Inventories and account* payable Changes in other working capital account* Other Net cash provided by operating actMtlee CASH FLOW# FROM INVESTING ACTIVITIES: Adttttons to fixed assets, ktdudbtg *y hole coots Not cash ussd by short-term investments Proceeds from asset sale* investment* and long-term recstvsblss Other Net cash used by Investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repayment* of long-term debt Proceeds from Issuance of long-term debt Proceeds from jeousnte of stock by stAaUery Net caeh provided lueetfl by nota* payable Dividends peid TtaoMPy stock contributed to benefit plane Other Net cesh used by financing actMUas Effect of exchange rate changes on cosh Net Increase (decrease) In cash and cash equivalents Cash end cash equivalents at beginning of year Cash end cash equivalent* at end el yeas lvMe*MWiMwve<nviUT,mMeu*feiw.iMwiatMH<w lellmsmetlRiM* 1M4 111) *M t S 919 S 299 8 801 1,671 251 13) 1459) (1411 71 88" IIS 1,718 419 12941 (40) 97 - 513" 1157) 1,754 331 1162) ms in 897 (207) 2 (1691 1287) 3S 2,097 55 53 39 1762 109 (103) (232)* 3.079 I1.6S8) 1768) 187 (791 1B9 (2.1691 (2.070) (789) 582 (6) 46 (2J37) I2J78) 1180) 553 193) (117) (2.1151 (798) 1,275 453 (69) (885) 56 (38) (2) IQ (54) 1,458 S 1,394 18881 1.255 30 18791 81 (27) (426) (55) 44 1,414 STAGS 1834) 1,112 11991 1873) 110 132) (716) (62) 188 1,228 S 1.414 PNVC 000,2872 No t e s t o Co n s o l id a t e d Fin a n c ia l St a t e me n t s NOTE1 Accounting ar c O's accounting policies conform to generally accepted accounting principles, including the 'successful efforts' method of accounting for oil and gas producing activities. principles of Consolidation The consolidated financial statements include the accounts of all subsidiaries, ventures and partnerships in which a controlling interest is held, including at December 31,199*, ARCO Chemical Company (ACCI, of which ARCO owned 83.3% of the outstanding shares, and Vaster Resources, Inc. (Vastar), of which ARCO owned 82.3% of the outstanding shares. ARCO also consolidates its interests in undivided interest pipeline companies and in oil and gas and coal mining joint ventures. ARCO uses the equity method of accounting for companies where its ownership is between 20% and 50% and for other ventures and partnerships in which less than a controlling interest is held. Cash Eauivalents Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit and market able securities other than equity securities, maturing within three months of purchase. Cash equivalents are stated at cost which approximates market value. Oil and Gas Unproved Property Costa 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 accu mulated 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 unh-of-production or straight-line method based on the expected lives of individual assets or groups of assets. Upon disposal of assets depreciated on an individual basis, residual cost less salvage is included In current income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage is charged against accumulated depreciation. Dismantlement, Restoration and Reclamation Coats The estimated costs, net of salvage value, of dismantling facilities or projects with limited lives or facilities that are required to be dismantled by contract, regulation or law. and the estimated costs of restoration and reclamation associated with oil and ges 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 operat ing expenses based on the estimated timing and extent of remedial actions required by applicable governmental authorities and the amount of ARCO's liability in considera tion of the proportional liability and financial wherewithal of other responsible parties. Estimated liabilities are not discounted to present value. Reclassifications Certain previously reported amounts have been restated to conform to classifications adopted in 1994. NOTE 2 Unutuat Kern* During 1994, ARCO announced a restructuring program under which approximately 2.400 positions were elimi nated. The program covered all operating units, excluding Lower 48 oil and gas operations, along with the corporate headquarters. ARCO provided as unusual items $347 mil lion before tax, consisting primarily of personnel costs (pension enhancements, severance and other ancillary costs) associated with the terminations. Approximately $155 million of the accrual related to sev erance and other ancillary costs that will be paid from Company funds over the next two yean. Approximately $110 million related to enhanced pension benefits which will be paid from the assets of qualified pension plans, not from Company funds. An additional $60 million related to enhanced non-qualified pension benefits and postretire ment benefits other then pensions which Bre currently unfunded. These benefits will be paid after retirement and over the remaining lives of the recipients; as such, it will not be practical to track the actual payments of these benefits. In 1993, ARCO announced a reorganization of its Lower 48 oil and gas operations. ARCO provided as unusual items a pretax charge of $659 million, of which $554 million related to the writedown for ssle or other disposition of oil and gas pNYc 0012873 No t e s t o Co n s o l id a t e d Fin a n c ia l St a t e me n t s properties and excess office space. In addition, amounts of S65 million, S35 million, and $5 million, respectively, were accrued for severance and ancillary costs, enhanced Quali fied pension benefits, and enhanced non-quaiified pension benefits related to the elimination of approximately 1.300 positions. Through December 31.1994, approximately 1,400 and 1,300 employees have been terminated under the 1994 and 1993 programs, respectively. Approximately $41 million and $47 million, respectively, of severance and ancillary benefits have been paid and charged against the 1994 and 1993 accruals. Payments do not necessarily correlate with the number of terminations due to the ability of employees to defer receipt of certain payments. In 1992, ARCO recognized a pretax benefit of $149 million from the settlement with Iran related to Company assets that had been nationalized in the late 1370s, ARCO also recognized a pretax benefit of $178 million related to a portion of the gain from the 1989 sale of a majority interest in Lyondell Petrochemical Company (Lyondell) which was previously deferred as the amount equal to ARGO'S guaran tee of certain Lyondell notes. When Lyondell repaid the notes in 1992, ARCO was released from its guarantee and accordingly recognized the gain. ARCO also recognized a pretax charge of $56 million resulting from ACC's with drawal from the YUKONG ARCO Chemical Ltd. joint venture in Korea. The net benefit related to 1992 unusual items was $211 million aftertax. NOTE 3 Accounting ChangM Effective January 1, 1994, ARCO adopted Statement of Financial Accounting Standards (SFAS) No. 115, `Account ing for Certain Investments in Debt and Equity Securities,' which requires investments to be corried at fair value, unless they are considered held-to-maturity securities. The effect of adopting SFAS No. 115 had no impact on 1994 net income.' Effective January 1.1992, ARCO adopted SFAS Nos. 106, 109 and 112. The cumulative effect of adopting SFAS No. 106 resulted in a charge of $435 million, or $2.70 per share, to 1992 earnings, net of income tax effects of approximately $262 million. The cumulative effect of adopting SFAS No. 109 resulted in a benefit of $43 million, or $0.27 per share. There was no cumulative effect of adopting SFAS No. 112. Excluding the cumulative effects, the effect of adopting SFAS Nos. 106,109 and 112 was not material to 1992 net income. NOTE 4 Spgmtnt Information ARCO operates primarily in the Resources (upstream) and Products (downstream) segments. The Resources segment includes oil and gas operations, which comprise the explo ration, development and production of petroleum, includ ing petroleum liquids (crude oil, condensate and natural gas liquids) and natural gas; the purchase and sale of petroleum liquids and natural gas; and the mining and sale of coal. The Products segment includes the refining and transportation of petroleum and petroleum products; the marketing of petroleum products; and the manufacture and sale of intermediate chemicals and specialty products, including propylene oxide and derivatives, styrene monomer, tertiary butyl alcohol, and methyl tertiary butyl ether. Segment information for the years ended December 31, 1994,1993 and 1992 was as follows: MINIM '994 IMS 1992 ALES AND OTHER OPERATING REVENUE* Un o iw m: Ofandpaa Coal Products; fUAnlng arid marfcadnfl Tranaportstkm httarmadtota ctiamfcala and apadafty product* Otfwr CMnatton of Intanogmant Total s 7.96* I 6J67 f IJ94 K3 04* 5*5 6 529 897 MGS STS 0,4*1 900 3.423 30 3,1*2 29 3.100 24 12.9591 *16,552 021 111,4*7 1S.3MV *10.0*1 Intersegment sales were made at prices approximating current market values. Intersegment sales included in sales and other operating revenues were as follows: MMma 1994 1992 1992 Raacunna: oavrtSM 12332 tun MMn* and mortatln* Tranapoctatkxi kitamadatodianiicafeand IMlifry product! Total 21 IS U 416 MB 41* 154 1(6 30 ______2* S2.959 *3.219 104 24 *3.39* PNYc 00012ST4 ',9*4 IMS 190 RaM***** Oiland*** &*( Pruducta: ftafintos *4 markatlnp Trunaportadcn miarmaditta chamreala and paciaKv product* (gutty In aanWnpa from lyundall Qgtti o isauaned of ttocK by Hlbotf^ UnAMmO oono and ether Mnerlty Mara*! CMnpaa In acceuntlnp prlndptM Not inecmo MMena AFTER-TAX SEGMENT EARNINOS MH'R OS and p**" Coal Products RaOrdno and marhatbip Tranapoctatton bn*rm*dtacftamlcl**nd apadahy pradura1* Eeufty In aamlnp* from Lyendai Qaln on taeuane* a# atocd by Addary Unadocatad inpanm and othar kttaraat Chanpaa In aMOuntbn prinripla* Nat income WMiiaMrMrat MMaru TOTAL ASSETS Raoairat: 09 and pa* Cadi huibntn RaMnp and mediating Tranaportedod Marmadtet* chamkala and Vodahypigdurta Othar ' Toed ADDITIONS TO RXEO ASSETS tniuw OS and d m Coat, Product* RaOnlng and marketing Trmportatieri Marmodtae chamical* and iparlalT) pruducta Othar Total S SOS 95 s 114 ISO S 1,1(3 107 309 se 547 293 327 37# $02 412 394 til 13 * 459 |19 (759) 13*7) tea - S SIS 1240) (TIB) 1327) 13*1 - s 2Si SO (70 IC7S] m\ [3921 t SOI ISM IMS IMS S 405 70 s 45 107 S SIS S3 1SS 307 340 172 ISO 231 m 23* 210 111 IS S 271 1ST) (SIS) - f SIS 11401 (4S1I - s 2M 25 (SMI (3S2I s SOI ISM 1M -- IMS S S.1S2 1JK S 1341 1A2 *10*02 1.411 2*41 2,040 2.790 2,140 2*90 2,1*1 1.797 SJN S243B 3*02 4,710 tajeo 3*S0 1*0* *24350 s see 57 s ijes M 5 1*4* 300 JTf 34S 315 49 50 M ISS 2 S 1.650 1*1 S 2*70 2S5 17 S 2*7* DEPRECIATION. DEPLETION ANO AMORTIZATION Raacurcaa: 09 and g**" Caa) Pruducta: RdfWng and marketing Tranaportabon bitarmadUta ehamlcata and WacUlty pruducta Othar Total *1.043 70 191 194 235 23 *1.571 *1,0*2 St 200 104 223 40 SI ,715 SI.ITS 5* 17* M 199 50 SV754 International operations are conducted principally in the following geographic regions: Oil and gas - United King dom, Asia Pacific and Dubai; Coal - Australia; Intermediate chemicals and specialty products - Europe and Asia Pacific; Refining and marketing - Brazil (marketing only). The Brazilian operations were sold in December 1993. Wind INTERNATIONAL OPERATIONS Solaa and other opdredng raatnuM: OSandpM Coot MWngandmwkmlng brttrmadatd cSwmtaait and podoNy product* Othar Totaf Nat Income (loot): 0 andpaa Coal Rofkdrrg and inarkotfc>g 19M 1M 1*92 SI .027 23* 2 * 990 304 1*20 * *52 2*2 1,794 1*10 30 *2.005 1.122 29 *4*73 1*56 a M*0S * 29 29 2 S 1171 5* 2 * 171 41 a apacWty pruducta** Other Tata* TOMlaaaat* 0* andpaa Coat WaBnlnp and nurkethig bldnudw ihamltaN and tpetMty pruducta Othar Total 70 123) 9 10* 5* (251 77 37 I2S) t SI *2.792 >92 - S2*91 ei - *2.415 SOI 301 1.5*0 2M K-SO* 1*24 230 96.1*0 1**7 233 S417 pNYC 00012875 mo s* No t e s t o Co n s o l id a t e d Fin a n c ia l St a t e me n t s NOTES Taxoa Taxes other than excise and income taxes for the years ended December 31,1994,1993 and 1992 comprised the following: MiUiom Property ProductK>n/u*ranc Valua Mdod Othar Total 1M4 1M Wl $189 306 285 $790 $19* 331 349 299 S1.147 $ 206 39* 330 279 91303 The components of the provision for taxes on income for the years ended December 31,1994,1993 and 1992 were as follows: Wawa 19M IMS 12 The deferred tax benefit in 1993 primarily resulted from book accruals associated with the bower 48 reorganization and work force reductions. The msjor components of the net deferred tax liability as of December 31,1994 and 1993 were as follows: K3.049) (3SC U3A30) <3291 S22 325 20a 332 ARCO has foreign loss carryforwards of'S290 million which begin expiring in 1995. The valuation allowance was $102 million at December 31,1992. The domestic and foreign components of income before income taxes, minority interest and cumulative effect of changes in accounting principles, and a reconciliation of income tax expense with tax at the effective federal statu tory rate for the years ended December 31,1994,1993 and 1992 were as follows: 199* ineoma baton ineotns taxaa: Dermatic Fonign Total Tax it 351L moum Mn $1,147 221 $1,358 $ 479 83.8 152 100.8 35.0 Taxaa on foralgn Income in axcaaa of statutory rata Foratgn dstarrsd tax tanat racognMon Stxta incoma taxes Inal of tadsrai sftacD Taxcradto Othar Proataion tor taxaa on incoma 1993 Incoma baton incoma taxaa: Domestic Fonign Total Tax at 36% Incriaaa induction) In taxaa naulttog tram: DMdand axttualen bnpaat ettadwatnta Intram an dctan ad tax labaty Tanas an faratgn brecrac in axcaaa e( amatory rata SMa at lorstgn uMtel fonign datarrad tax aaaat raoognWow Stata incoma taxaa Inst at tadani atlact) Taxcradta OtfMX ProrMon tor taxaa on beams 1992 fcvoma batata totems taxac Domaodc rental Total Tax at 34% tooaaas iraducdenl in taxaa raaultlng from DMdand axduston Taxaa an laraipi Incoma In axcaso of atatutacy rata 9tata incoma taxaa Ins* l tadcral affacU Tan c imKi OttMT proyMon tor taxaa eci Inooma 1311 46 1301 25 1841 1191 $ 387 12.31 34 12.21 1611 11 4) 28.3 8 342 292 i 04 8 222 7 86 74 37 on 148) 117) $ 327 S3.9 44.1 100.0 35.0 1.1 103 11.7 5.8 H,:' 23 17.71 (2.7) 51.5 91,449 458 $1307 t 848 12 25 80 143) 124) 8 678 78.0 24.0 1000 34.0 .6 1.3 33 123) 11.3) 2SA NOTE 5 ln*ntort* inventories are recorded when purchased, produced or manufactured and are stated at the lower of cost or market. In 1994, approximately 86% of inventories, excluding CO It PNYC 00012876 materials and supplies, were determined by the last-in, first-out (UFOl method. Materials and supplies and other non-UFO inventories are determined predominantly on an average cost basis. Total inventories at December 31.199* and 1993 com prised the following categories: MHMxw Cnid* efl and patrotoum product* Ctiamcal preduet* Otfur pmAicts Mattrikto and PP Total 1994 *172 351 4* 228 *797 1993 *2*0 373 32 243 *914 The excess of the current cost of inventories over book value was approximately S2S3 million and $228 million at December 31.1994 and 1993, respectively. NOTE 7 Long-tarm Dabt Long-term debt at December 31,1994 and 1993 com prised the following: MMib i 1994 1M 55%. duo iff 19*7 5.90*. duo to 20C7 V duo to IMS nv duo to 2022 n%. duo to 2012 nvduoto2032 ft* ndantNto noto. duo to 19*7 9V duo to 2021 %. duo to 2031 9*V duo to 2011 *%. duo to 2031 n%. duo to 2oia 10*%, duo to 2000 10*%. duo to IMS 10*%, duo to 2Q0S Third Sarto* Modhjm-Torm Noto* Motfum-Torm Notaa - A Sortoo ModkinvTormNotoo-eSorioo ARCO Traoop Non* Vnriabto rata**, duo to 2031 4RCO Otototeol Compwir 3375%. duo to 2008 9.0%. duo to 2020 93%. dut to 200S 1039%. duo to 201# France bonk toon* ACM. bank toont Victor honk toon Coptalbod loooo obAtfcdono Othar Total, todudtog d*M duo wtthto ono poor Uoc Oobt duo ndOifn ono roar Send! h*U to Nnktoe hold Lanp-urm date t 14 . 102 250 194 203 98* 2*0 13* 300 ISO *90 250 SM 500 75 19* 250 311 265 1* 2*6 102 250 250 250 300 ISO 300 360 460 250 500 500 137 200 200 311 - 100 224 200 100 *4 172 1,050 26 201 7339 too 224 200 100 4 160 1300 20 2S7 7360 830 11 97.1M 166 IS S73M miaNiwatwniii minmt. Maturities and sinking fund obligations for the five years subseouem to December 31,1994 are as follows (millions of dollars): 1995-$630; 1996 -$1,234; 1997-$1,275; 1998 -$177; 1999 - $139. No material amounts of long term debt are collateralized by Company assets. In 1993, Vastar borrowed $1.25 billion principal amount under a $1.25 billion unsecured, variable rate (6.15% at December 31,1994), revolving-term credit agreement avail able until 1996. During 1994, the maximum principal amount under the credit agreement was reduced to $1.05 billion. The agreement contains restrictions which, among other things, require Vastar to maintain certain financial ratios and restrict encumbrance of assets. in August 1994, ARCO issued 39.9 million 9% Exchange able Notes (Notes) due September 15,1997 at a price of $24.75 per note. At maturity, holders will receive, in exchange for the principal amount of the Notes, shares of Lyondell stock, or at ARCO's option, cash with an equal value. The number of shares or the emount of such cash will be determined using a formula based on the price of Lyondell common stock at the maturity of the Notes. At December 31,1994 and 1993, approximately $360 mil lion and $355 million, respectively, of long-term debt was denominated in foreign currencies. To reduce the exposure to foreign currency fluctuations, ARCO entered into a swap agreement on an 18 billion yen debt issue due in 1996 which fixes the principal balance at $102 million with an effective interest rate of 8.14%. ARCO periodically enters into interest rate swap agree ments 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 agree ment At December 31, 1994, ARCO had outstanding inter est rate swaps on two loans totalling 300 million Dutch guilders (approximately $172 million) due in 1997. Both swaps mature in 1997 whan the related debt becomes due. The swaps effectively changed both loans' floating interest rates to fixed rates of 5.7% and 6.71%. ARCO intends to hold the swaps until maturity. NOTI ( ShormnnewrowlneiandSan*CradhPaUiU** Notes payable consist primarily of commercial paper issued to a variety of financial investors and institutions and any amounts outstanding under ARCO or ACC credit facilities. The weighted average interest rate on notes payable outstanding at December 31,1994 and 1993 was 6.1% and 4.3%, respectively. ICO 11 PNYC 00012877 n o t e s t o Co n s o l id a t e d f in a n c ia l St a t e me n t s In 1994, ARCO and certain wholly owned subsidiaries had committed bank credit facilities of approximately $3.3 bil lion. At December 31,1994, $115 million was borrowed under these committed facilities. ACC maintains its own credit facility, not guaranteed by ARCO, under which it may borrow up to $300 million. At December 31,1994, there were no borrowings against the ACC credit facility. At December 31.1994. ARCO had letters of credit out standing totalling approximately $330 million. NOTE 9 lntrt Expn Interest expense for the years ended December 31, 1994, 1993 and 1992 comprised the following: MMena Long-tarm Mix Short-tarm daM Othar CapItaBzad (ntaraat TOPI Inlaraat aijaoaa Total imaraat In caah im $834 *2 to 790 (37) S7S0 $7(6 1M SS73 92 10( 771 (Si) 3718 8743 1992 $824 10* 143 377 MIS) $7(2 3782 NOTE 10 Foraign Curraney Transaction* Foreign exchange transactions resulted in a net loss of $12 million in 1994 and net gains of $22 million and $1 mil lion in 7993 and 1992, respectively. NOTE 11 Fixed Aaaat* Property, plant and equipment and related accumulated depreciation, depletion and amorotation at December 31, 1994 and 1993 were as follows: MUBqna n--ourwr OBandgaa Coal Product* running and martadng TranaportaOon Intarmadtata thamfcala acid apariMti product* Othar Accunadatad dwadadon, daptation awdmmllmlmi Total 1994 IMS I1IJH 1.411 110,100 1.2*0 4.000 7.S84 iM7 3M 2,524 381 3224$ 3257 too 21,4*4 WA2$ (18.722 It,*21 iiSM Expenses for maintenance and repairs for 1994,1993 and 1992 were $525 million, $509 million and $513 million, respectively. NOTE 12 Other Commhmanta end Continganciaa ARCO h8S commitments, including those related to the acquisition, construction and development of facilities, all made in the normal course of business. At December 31,1994 and 1993, there were contingent lia bilities primarily with respect to guarantees of securities of other issuers of approximately $75 million and $111 mil lion, respectively, of which approximately $41 million was indemnified at December 31.1993. Following the March 1989 EXXON VAL0E2 oil spill, Alyeska Pipeline Service Company (Alyeska) and Alyeska's owner companies were the subject of numerous lawsuits by the State of Alaska, the United States and private plaintiffs. ARCO Transportation Alaska, Inc. (ATAj owns approximately 21% of Alyeska. Alyeska and its owner companies have set tled the federal and state claims and all but a handful of the lawsuits by privste plaintiffs. Certain issues relating to the liability for the spill remain unresolved between the Exxon companies and Alyeska and its owner companies. ARCO and former producers of lead pigments have been named as defendants in cases filed by a municipal housing authority, a purported class and several individuals seeking damages and injunctive relief as a consequence of the presence of lead-based paint in certain housing units, ar c o is alsothe subject or party to a number of other pending or threatened legal actions. In January 1995, the State of Montana presented to ARCO a revised demand for damages of $635 million based on alleged injuries to natural resources resulting from ARCO's mining and mineral processing businesses formerly oper ated by Anaconda, ARCO's predecessor, in Montana. ARCO is contesting the amount of this demand. ARCO is subject to other loss contingencies pursuant to federal, state and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, including the restoration of natural resources located at these sites and damages for loss of use and non-use values. ARCO is currently participating in environ mental 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 discon tinued operations and sites formerly owned by ARCO. ar c o mey in the future be involved in additional environments! ICO 1 012, '8/8 assessments and cleanups, including the restoration of nat ural resources and damages for loss of use and non-use values. The amount of such future costs will depend on such factors as the unknown nature and extent of contami nation at marry sites, the unknown timing, extent and method of the remedial actions which may be required and the determination of ARCO's liability in proportion to other responsible parties, in addition, environmental loss contin gencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO. ar CO continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the megnitude of remediation costs, experi ence gained from sites on which remediation has been completed, the timing and extent of remedial actions required by the applicable governmental authorities and an evaluation of the amount of ARCO's liability considered in light of the liability and financial wherewithal of the other responsible parties. At December 31,1994, the environ mental remediation accrual was $670 million. As the scope of ARCO's obligations becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against ARCO's earnings. ARCO's environmental remediation accrual covers federal Superfund and state-managed sites as well as other clean up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear pro cessing facilities, sites associated with discontinued opera tions and sites formerly owned by ARCO. ARCO has been named a potentially responsible petty iPRPi for 126 sites. The number of PRP sites in and of itself does not represent a relevant measure of liability, because the nature end extent of environmental concerns varies from site to site and ARCO's share of responsibility varies from sole respon sibility to very little responsibility. ARCO reviews all of the pflp sites, along with other sites as to which no claims have been asserted, in estimating the amount of foe accrual. ARCO's future costs at these sites could exceed foe amount accrued by as much as SI billion. Approximately haif of foe accrual related to sites associ ated with ARCO's discontinued operations, primarily mining activities in foe states of Montane, Utah and New Mexico. Another significant component related to currently and for merly owned chemical, nuclear processing, and refining end marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 15 percent of tha total accrual, Substantially all amounts accrued are expected to be paid out over foe next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against vari ous insurance companies and other third parties. These claims have not been resolved. Due to the uncertainty as to ultimate recovery from these parties, ARCO has neither recorded any asset nor reduced any liability in anticipation of such recovery. Although any ultimate liability arising from any of foe 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, foe likelihood of such occur rence 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 con solidated 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 con tract rights and expropriation of property. Both foe likeli hood of such occurences and their overall effect on ARCO vary greatly and are not predictable. These uncertainties ere part of a number of items that ARCO has taken and will continue to take into account in periodically establishing reserves. NOTE 13 RttlremMitMn ARCO and its subsidiaries have defined benefit pension plans to provide pension benefits to substantially all employees. The benefits are besed on years of service and the employee's compensation, primarily during the last three years of service. ARCO's funding policy is to mske annual contributions as required by applicable regulations. ARCO accrues pension costs besed on an actuarial valua tion for each plan and funds foe plans through contribu tions to trust funds that are kept apart from Company funds. PWYC 00012879 * * C 0 II No t e s t o Co n s o l id a t e d Fin a n c ia l St a t e me n t s The following table sets forth the plans' funded status and amounts recognized in the balance sheet at Oecember 31, 199* and 1993: Mint** 19M Actuarial preaant value of bonolH obligation*: VMld benefit obligation Accumulated beneAt obligation Pro)ctd banaAt obligation Man arret* at Mr value, primarily atoefca and bond* Prolaned tanaAt obligation (In aacaaa oD or lata than plan aaaat* Unrecognized natloaa Ntor aarvtea coat not yat recognized in net perlodK petition coat Aamalnlng uruecognlzodluaot) obligation from January 1. ISM Adfuetment regulred to tecoMtta minimum Mobility Mapaid paoalan coat IkabMtyt rotepotted In the btlanoa ah--< isn Actuarial prsaant vtiue of benefit obAgetiorw Vaatad benefit oMgatlen Accumulated benefit obAgatien rrOfSCVO DOnvm BOUQIDOa Man aaartr at Mr value. primarAy atoMs and bonda Projected banaAt obAgatfen (In aaeoaa at) er Maa than plan aaaata Unrecognized hat kaa Prior service teat net yat recognized In nat portoHC paoalon coat Aamalnlng unraoeytitad laaaat] abAgatfon from January 1.7SM Ad|uatmant regulrod to raoognfaa minimum UabAtty Prepaid ponalen coat (IcMKy) recognized In tha balance thaat AwobeMd Accumufrted SanaAta tacaad Iraata SI.592 SI,799 12,105 2477 272 121 149 (3191 - S 223 S 152 S 171 S 230 (2301 S2 25 13 (63) S (173) 12407 S2464 S2420 2.72A 900 IM 14S Ml . t 294 t IM f 111 S 214 . 1214) 100 27 1 (63) (161) Pension costs related to ARCO-sponsored plans, on a pre tax basis, including amortization of unfunded projected benefit obligations for the years ended December 31,1994, 1993 and 1992 were as follows: MHana ISM IM ISM Sarvtoa eoat-banaINt anted during tiro period Intaraat coat on projected banaAt ebAgetion Actual loat (return) on plan aaaata Nat amortization anddafarral Net pariodk panelcnbeneAl S SI S > 51 in 65 1344) S IIS) ITS MB) 220 t at) 1 (Oil 1127) S (34) In addition to this pension benefit in 1994 and 1993 ARCO recorded S143 million and 961 million, respectively, before tax as additional pension cost in connection with the work force reductions in those years. ARCO's assumptions used as of December 31.1994,1993 and 1992 in determining the pension cost and pension lia bility were as follows: ParoeM Discount rata Hanoi salary prograaalon long-term rata o* return on sssata ISM 1*M a.zs 7-25 s.O 5.0 10.5 10.5 NOTE 14 Other Peatrttlrement Benefits ARCO and its subsidiaries sponsor defined postretirement benefit plans to provide other postretirement benefits to substantially all employees who retire with ARCO having rendered the required years of service, along with their spouses and eligible dependents. Health care benefits are provided primarily through comprehensive indemnity plans. Currently, ARCO pays approximately 80% of the cost of such plans, but has the right to modify the cost-sharing provisions 8t any time. Life insurance benefits are based primarily on the employee's final compensation and are also partially paid for by retiree contributions, which vary based upon coverage chosen by the retiree. ARCO's current policy is to fund the cost of postretirement health care and life insurance plans on a pay-as-you-go basis. The following table sets forth the plans' combined postretirement benefit liability as of December 31,1994 and 1993: MBo m . Ha** UN Cm Imum** Total ISM Ameindetpifpoetretlt ament benefit obAgetiorc hi&tm Emptoyaat hiAy aAgMa Other octlve pvtidpante Tebd Unrecognized gain lleaa) Accrued peeBetirament bandH coal rangidad In the btianee aheet ISM Aowaiudatad poatiadramant banaAt bAgetieK Aatiiaaa bagteyaasluAy aAgMa Other active participants Total Unaupitted toes Aooniad poabatiramam beneAt ceetrecogntzed b> th* balanca ahaat H12 1153 1665 S 1 32 155 34 190 693 IM 687 153) 9 144) 1640 1203 1643 S461 H 211 707 IIS) 1154 12 47 217 Dll 6619 47 256 924 1143) MB 1190 6791 CO s PNYC 00012880 ARCO charges postretiremen? benefit costs as accrued, based on actuarial calculations for each plan. Net annual postretirement benefit costs for the years ended December 31,1994,1993 and 1992 included the following components: Milliora Hum Ute C* Iwiinnin Toni 1994 Sank* coR-benefft* earned during the period tntereR COR on accumulated poeuelliowenl tierieftt obHgetten NR mordxRkMi NR poetretfcanient beiieflL c o r 1993 Smtw c o r banalhe timed during tha parted hrtereR c o r on accumulated poetietternecu banaflt aMigatten NR poavatSramant benefit coat 19B2 Service coot-banaAt* aamad during (ho parted tntereet c o r on accumulated poeliotlteniem bartaW obligation NRpocoetbetuanl ImnaTH coat 917 * 4 921 54 IS 69 3 -3 974 919 933 SIS 9 3 616 47 IS 62 962 SIS no ns S 3 616 46 16 61 HI 616 *76 in addition to the cost above, in 1994 and 1993, ARCO recorded $24 million and $9 million, respectively, before tax as additional postretirement benefit expense in connec tion with workforce reductions. The significant assumptions used in determining postretirement benefit cost and the accumulated postretirement benefit obligation were as follows: PM ISM IMS int Otecount rota Rato (4 nln-t pmnulwi 8.26 6.6 7-29 6.6 The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i,e., health cars trend rate) for the health plans is 10% for 1992 to 1996,8% for 1997 to 2001, and 6% thereafter. The effect of a one-per centage-point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31,1994, by approxi mately 12%, and the aggregate of the service and interest cost components of net annual postretirement benefit cost by approximately 14%. NOTE is Stockholders'Equity Detail of ARCO's capital stock as of December 31,1994 and 1993 was as follows: S3.00Cwnuia mn.an4a pwhnon Rot*, pw *1: Shoraa authorized Sharoa laauad and eutRonAtg AW'*9ata value in RguldattenIdMuaanM 0.80 CumutaMre renvartkjla prateranaa atoak, par 91: Sharaa ainherbad Shavee iaaued and eutatandng Aggregate value in hpiteettenKhnuamM Common Rack, par CJO: Share# autttorttad Share# laauad Share# oumandteg Skaraa kaM In eeaaunr 79.089 73.721 94J14 11.308 833.779 794.796 955.636 600.000.000 160,000.137 160,763,966 46.171 942.016 694.963 959,784 600.000.000 160.746.125 1HJ63J60 792.141 Changes in preference stocks outstanding in 1994,1993 and 1992 were due to conversions. The $3.00 cumulative convertible preference stock is convertible into 6.8 shares of common stock. The $2.80 cumulative convertible prefer ence 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 tha option of ARCO for $82 and $70 per share, respectively. ARCO has authorized 75,000,000 shares of preferred stock, S.01 par, of which none were issued or outstanding at December 31,1994. The balance in ARCO's common stock at December 31, 1994,1993 and 1992 was $402 million. Detail of changes in treasury stock in 1994,1993 and 1992 was as follows: PNYC 0001288) The net decrease in capital in excess of par value of stock in 1994,1993 and 1992 of $14 million, $15 million snd $12 million, respectively, was due primarily to the conver sion of preference stock to common stock. a> No t e s t o Co n s o l id a t e d Fin a n c ia l St a t e me n t s At December 31,199*, shares of ARCO's authorized and unissued common stock were reserved as follows: Convorafenc (3.00 brateranco stock S.tO Pnhnnca stock Slock option plan* Employ** bonoib pl*nt Total 541.303 1.947.510 6.3&3.46S 9.974.482 18.73fi.700 Under ARCO's incentive compensation plans, awards of ARCO's common stock may be made to officers, outside directors and key employees. NOTE 16 Earnad par Shara Earned per share is based on the average number of common shares outstanding during each period including common stock equivalents that consist of certain outstand ing options and all outstanding convertible securities. The average shares used in the calculation of earned per share for the years ended December 31,1994,1993 and 1992 were 163.2 million, 162.4 million and 161.5 million, respectively. NOTE 17 Stock Option* Options to purchase shares of ARCO's common stock have been granted to executives, outside directors and key employees. These options become exercisable in varying installments end expire ten years after the date of grant Transactions during 1994, 1993 and 1992 were as follows: Mtnco. Jonuwy 1,1982 Granted Eaarataod (avorsg* option prteo par dura: (77.0*1 8al*nca. Docomb*r31.1*92 Granted Exardaod Iwnp option prta* par than; *81.74) Bolanca. Dacambar 31.19*3 Granted Enrelaadtavarag* option prko par dure rTS.17) Cimilid Bdonra. Oacombar 31,1994 At Docombor 31,1994: Shorao willodilo Shut* tvadabia tar option (1496474 K Droomtp 31.1*8*1 Avorago option prk* par dure Sbaras undar option Sharao onarcteabte zjeejti *79.4*7 isijasi 2436.1*2 574.72* 148.747) 110,182 (73416 (75.41*1 (87-2*61 3473.742 2.737.754 2.779,723 814428 S1S3.S7 NOTE 18 Sopplomontal Caoh Flow Informotlon The following is supplemental cash flow information for the years ended December 31.1994, 1993 and 1992: MBHono m* 1*89 1982 Short-term kiroouiunla. Grooamoturttioo Greoo pvcbaoos Not cooh mod Noteopoyddo: Graaaproeaod* Oraoorapoynunt* Not coob pravldod (uaad) Graaa noncaab provMono chargadte Interna Caab poymanta ol prpytouaty tci uad Kama NoitHab pcortatano graalat llaaa) than caab paymanu 85.952 18.7201 S <7681 9642* (6417) 8 (789) 84,79* (447*1 6 11601 (9.518 19,5*51 8 189) 98468 (84381 6 30 17460 (74701 * 1199) 9 989 61.148 8 553 1800) 16351 17801 *88 * 513 * 1207) NOTE 18 La***Commitment* Capital lease obligations are recorded at the present value of future rental payments. The related assets are amortized on e straight-line basis. At December 31,1994, future minimum rental payments due under leases were as follows: C*pltd Oporatin* to**** L**oo *3 3 3 3 3 73 *6 t 1S2 129 106 87 59 307 9 850 82 Minimum future rental income under noncanceliable sub leases at December 31,1994 amounted to $108 million. Operating lease net rental expense for the years ended December 31,1994,1993 end 1992 was as follows: Minimum ranted Contingant ranted tutilim rantd Incemo Not rantd aaponao 1*84 *21* 2 (12) 8208 1*88 8220 1 (15) 1206 1992 8206 1 1161 1180 PNYC 00012882 No restrictions on dividends or on additional debt or lease financing exist under ARCO's lease commitments. Under certain conditions, options and obligations exist to purchase certain leased properties. NOTE 20 lyondall Potroehamieal Company Lyondell is engaged in the manufacture and marketing of basic commodity chemicals, including ethylene, propyiene, methanol and aromatics, and, through its approximately 90% interest in LYONDELL-CITGO Refining Company, the refining and marketing of petroleum products. At December 31,1994, ARCO owned 49.9% of Lyondell common stock outstanding; ARCO accounts for this invest ment on the equity method. The market value of ARCO's shares of Lyondell common stock, based on the closing quoted market price at December 31,1994, was $1,033 million. Summarized financial information for Lyondell was as follows: HBWini 13H 1M VMramMDacambarSI: Havanaw** Operating laaont* Incoma bafera Imenw tan* and cumulrtva aflaet of accounting cbangoa CumuIMva offocl ofcbangao M accounting prindpfaa Nat Incoma ANCO'a gutty In not kwonw of Lt o mM Caob dMOcnda rocofvod from LyonMI At Docambor 31: Currant taaati NOAMTtfM MMtl Currant lUMWaa WgltwaNM ttbaMUMMaa Mnortty krtaraat StocbtaMan' aquity IdafkAT S3AST 3 u S3JM 3 S3 34303 * 104 S 343 ss 223 3 ts 3 22 3 28 3 38 3 <101 3 It s 111 3 13 3 3 3 36 3 S4 3 72 sm s MS t 433 t 737 < ist s 23* 33 3 023 3 703 3 2S3 3 717 3 17* 3 124 3 (Ml 3m 3 3*7 3 346 1 726 3 161 3* 3 161 ...................................................................................................... a h i.j w NOTE 21 Public Offering of Vaator Common Stock In September 1993, ARCO established Vastar, a wholly owned subsidiary of ARCO. Effective October 1,1993, ARCO conveyed to Vastar beneficial title to certain producing properties together with certain developed and undeveloped acreage. Vastar is primarily engaged in the exploration for and the development and production of natural gas. In July 1994, Vestar completed an initial public offering of 17,250,000 shares of its common stock at S28 per share. ARCO recognized an after-tax gain of S273 million from this transaction. At December 31,1994 ARCO's 80,000,001 shares represent 82,3% of the outstanding common stock. NOTE 22 Invcctmcntc At December 31,1994. investments were composed principally of U.S. Treasury securities, corporate debt instruments, and municipal securities and were included in cash equivalents or short-term investments depending on their maturities, which generally ranged from one day to one year. At December 31.1994, investments in debt securities classified as held-to-maturity were recorded at amortized cost while investments in debt securities classified as available-for-sale are reported at fair value, with unrealized holding gains and losses, net of tax, reported in a separate component of stockholders' equity. At December 31,1993, all investments in debt securities were stated at cost which approximated fair value. The following summarizes investments in debt securities at December 31,1994: r-Sat* Hld to Maturttp Aggnen* Mr value Grow umeeted hofcSng toeeee AiMrOzedceet Groaa mated toeeee on edee Sm pwcbeeee Grace oaleo Grace metwMee 31,673 3 <2 31,341 I 23 36,300 34.700 3 SO 3 1.233 1 1 1.239 3 340.500 3 340.800 For purposes of determining gross realized losses, the cost of available-for-sale securities sold is based upon the specific identification method NOTE 23 Financial Inetrumente end Fair Value ARCO does not hold or issue financial instruments for trading purposes. ARCO enters into various types of foreign currency for ward and swap contracts to hedge foreign currency trans actions. Foreign currency forward contracts are used predominantly to hedge U.S. dollar denominated debt issued by a foreign subsidiary. A foreign currency swap contract is used to hedge debt denominated in Japanese yen. in addition, ARCO uses a combination of foreign cur rency forwards snd swaps to hedge anticipated future cash flows from oversees operations. These foreign currency contracts generally do not have maturities exceeding one year. Gains and losses on foreign exchange contracts gen ARCO I PNYC 00012883 No t e s t o Co n s o l id a t e d Fin a n c ia l St a t e me n t s erally offset gains and losses on assets, liabilities, and transactions being hedged. At December 31,1994 and 1993, the total notional amounts of foreign currency contracts (principally European currencies, Australian dollars and Japanese yen) were approximately $760 million and $700 million, respec tively. ARCO also uses various hedging arrangements to reduce exposure to price risk for future crude oil and natural gas transactions. Gains and losses are netted and deferred until realized in sales and other operating revenues as the physi cal production required by the contracts is delivered. At December 31,1994 and 1993, the notional amounts of open contracts were not significant. Explicitly deferred gains and losses arising from hedging activities of anticipated transactions are generally included in the balance sheet as either other current assets or other current liabilities. At December 31,1994 and 1993, the carrying and fair val ues of interest rate swaps were not significant At December 31.1994 and 1993, the carrying value and estimated fair value of ARCO's other financial instruments were as follows: nn Non-OMtvsthiM: Short-tann inraalniaiiu O0wr Iniwtmmnendlongtarm racatvablaa Nataa payafe4a lang-tarm daM. Induing currant maturtttaa QarNttlraa; Feraign currancy tarurard contract! Faraign currancy awapa Oi A gaa prica aoraga Crnytna ---- 0.991 s 3a S 297 91.478 S7.929 9 (18) S 93 Ss ftk 1 92.991 91.279 VM " FM VM 92298 92299 1 299 91,997 t 297 91.479 9 221 91410 9 221 91410 97.991 97JS4 99497 9 (19) ta 9S t 118 9 (1) 1 (12) 9N 9 111 Short-term investments and notes payable were valued at their carrying amounts, which were reasonable estimates of fair value due to the relatively short period to maturity. Investments and long-term receivables were valued at quoted market prices K available. For unquoted investment securities, which were predominantly equity interests in associated entities, the reported fair value was estimated on the basis of financial end other information. The fair value of ARCO's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to ARCO for debt of the same remaining maturities. The fair value of foreign currency contracts and interest rate swaps represented the amount to be exchanged if the existing contracts had been settled at year end and were estimated by obtaining quotes from brokers. ARCO is exposed to credit risk related to its financial instruments in the event of non-performance by the coun terparties. ARCO does not generally require collateral or other security to support these financial instruments. The counterparties to these instruments are major institutions deemed creditworthy by the Company; ARCO does not anticipate nonperformance by the counterparties. NOTE 24 Unaudited Ouartarly Result* Mlilam, --aturiNmmuxB isw im pn y c o o 0128S4 ilCO 4 In d e p e n d e n t Ac c o u n t a n t s - Re p o r t To th Stockholders nd Boord of Director* of Atlentlc Richfield Compenr We have audited the accompanying consolidated balance sheets of Atlantic Richfield Company as of December 31,1994 and 1993, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31,1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materiel 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 ail material respects, the consolidated financial position of Atlantic Richfield Company as of December 31,1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,1994, in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for income taxes, postretirement benefits other than pensions and postemployment benefits in 1992. Coopers & Lybrand LLP. Los Angeles, California February 10,1995 Re s p o n s i b i l i t y f o r Fi n a n c i a l St a t e me n t s Te th* Stockholders of Atlantic Richfield Company The Company's management assumes responsibility forthe integrity and objectivity of the financial information contained in this Annual Report, including the statements covered by the independent accountants' report The Company maintains an accounting system and related controls to provide reasonable assurance of the integrity and objectivity of accounting information and for the safeguarding of assets. The fair presentation of the Company's financial position and results of operations, in conformity with generally accepted accounting principles, is reported on by the independent accountants. In addition to the accounting and control systems and the use of independent accountants, the Company maintains a staff of internal auditors who conduct internal control audits as well as special audits, coordinating their activities with the independent accountants. The Company has had an Audit Committee of the Board of Directors for more than 25 years. The Committee currently consists exclusively of directors who are not employees ofthe Company, and meets as required, but at a minimum of three times a year. The Committee has been established for the general purpose of satisfying itself as to the integrity of the Company's accounting and financial reporting, maintaining communications between the Board of Directors and external and internal auditors, continuously emphasizing the need for internal financial controls, and initiating spatial investigations ss deemed necessary. The independent accountants and the internal auditors have full and free access to the Audit Committee and meet with it with and without management being present to discuss all appropriate matters. Mike R. Bowlin President, Chief Executive Officer and Chief Operating Officer PNYC 00012885 RCO 4 1 Su p p l e me n t a l i n f o r ma t i o n (u n a u d i t e d ) Oil md Got Producing AcDvitio* 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 exist* ing equipment and operating methods. ARCO reports reserve estimates to various federal govern ment agencies and commissions. These estimates may cover various regions of crude oil and natural gas classifica tions within the United States and may be subject to man dated 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 g8$ reserves were as follows: Jmiwuita Proyod Finn -- DocomfeorSI. 1982: Prouod fwrito Pionod dooolopod wurm DocomOor 31.1MJ: Prorodnoorroo Prouod doroiopod raw*-- Dmmmt at, is m Provod rttocvti Provod doolopod rwn'M IMbaUnU IMPwiuMM U*. -- WwiwawW UA. ImimiliiW ..... LW 2.004 1SS s.7*e 2.408 1S1 S4M0 SU un 1A1I use 1J04 211 5.1* *.117 123 4.562 MO 204 4,728 3400 1*7 4.1IO 1,120 Ue ISIS 222 4.S1S 3.40* 87 4401 1.142 Included in ARCO's reserves are 100% of the reserves of Vaster, a consolidated subsidiary of which ARCO owned 82.3% at December 31,1994. Vastar's reserves comprised 4% and 43% of U.S. petroleum liquids and natural gas, respectively, at December 31,1994. ARCO has no long-term supply contracts to purchase from foreign governments or any interest in equity affiliates involved in oil and gas producing activities. PNYC 00012886 The changes in proved reserves for the years ended December 31,1992,1993 and 1994 were as follows: NoiliwilloC* Nmnta u w n mmii U.& IwWfU*MM Jtnuarv 1.1002 ftovMons of ocdmatoo Ifnprow0 ncowf Purehmoo of minprop Hi-ptoco Etlontiono tnd Jtratrin Production Conogmod in production Soioo of minoraMn-ptoeo RooorvMot Docondior *1.1002 RovMono of oodmotoo IVC0WV Purtfiotoo of minorapIn plow Extonpiono ond dPcovorioo Production Conoymod in production Wooorvooot DocomtnrH, 1003 Rorioipno ofoothnotoo (mprorod lucoupry Purdwaao of minoratMpiooo Production Conoumod In production Rooorvooot DocomOor *1,1M4 2.442 40 39 35 100 12421 . 107) 2417 (20) 17 I 10 <2211 147) 2AM as 90 11 21 <2ie> 14) 2446 ISO 5.79* 2.466 22 22 44 _ 40 27 29 14S <2*1 1440) . (72) <1) (3S3) 761 ISO) IS) - 211 5.1* 3.117 IS 112) (54) - 2* . 30 11 1M 3SO 1291 (332) (117) . (75) 19) 12) (216) 17) 20* 4,725 <191 94 . 13 3490 31 . 13 92 75 232 291 126) 1350) 1187) . 179) 141 114) 134) - 222 4.615 3.493 Significant changes to proved oil and gas reserves during 1994 were due to the addition of reserves from an enhanced oil recovery project at Kuparuk. from the Villano field in Ecuador, and the Trent and Tyne gas fields in the North Sea. Estimates of petroleum reserves have been made by ARCO engineers. These estimates include reserves in which ar c o holds an economic interest under production-sharing and other types of operating agreements with foreign govern ments. These estimates do not include probable or possible reserves. Natural gas liquids comprise 12% of petroleum liq uid proved reserves. The sale of natural gas from the North Slope of Alaska, which is not used in providing fuel in North Slope opera tions or sold to others on the North Slope, is dependent upon construction of a natural gas transportation system or another marketing alternative. Such gss is not included in ARCO's reserves. There are currently several projects under consideration, including the Alaska Natural Gas Transporta tion System and the Trans Alaska Gas System. However, A ft C O there are a number of regulatory, financial, legal and market ing questions regarding the projects that remain unresolved. ARCO continues to study various options for marketing North Slope gas. However, ARCO Alaska believes that market conditions are not likely to permit implementation of any large gas sales projects within the foreseeable future. The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of December 31, 1994,1993 and 1992 were as follows: hnwi)w U.l Wt 19U Orm AeeuniulitMdaprt* elation. action and amortization tm 1H3 Ona Accumulatad daprm elation, daplatlon and amortization Not IMS Grow Accumulatad daoro- dado", depletion and amortization Nat 814.353 S3.938 SS10 8231 9.963 8 5.390 2.100 S1.898 329 8182 < 8223 IliBt 93494 teas S23S t,m 142S 31S 4 t 5.719 $1,799 9279 9231 81541* 934K 9(77 (199 1421 S 9491 1.719 81491 77 MOO 1 IIS Costs, both capitalized and expensed, incurred in oil and gas producing activities during the three years ended December 31,1994,1993 and 1992 were as follows: Results of operations from oil and gas producing activities (including operating overhead) for the three years ended December 31,1994,1993 and 1992 were as follows: 1994 havonuea: SaMa TranaMr* Othar Production eoata Exploration arpanaaa Depredation, depletion and amortization Othar operating expanoee Incoma taz aapanaa hoaula dope! allum from production taMOm 1193 Wavanuw- Salw ItarWara Othar Production coata Eugdoration aapanaaa Depredation, depletion and awortlulkm Othar oparadmi aapanaao Incoma tar aapanaa HaauA* o* eperatione horn production activMm 1992 Hrranuec Saloa TrartaTara O0ar Production coata Eqlocidon aapaiaw DipfidiliOMr dcplvttoii and amortization Othar apmatlnp nqianaaa doom* tax axpanm Weeulta el oparaBona horn V.. MpiuUOUl Ta* $1421 1.4S6 74 2.351 1.166 277 8 859 - 41 900 199 176 82.2*0 1.156 115 3.851 1.365 155 731 251 529 1143) 275 171 77 1431 1.006 422 603 11861 8 3(3 8 34 8 117 1439 1.11* 49 340* 1413 497 9 107 - 31 839 1*4 210 G449 1.810 79 4.141 1407 97 719 209 oe 12091 200 979 140 3S7 29 <31 <491 1256) 9 3M 9 1231 9 371 82.187 1442 77 4479 14*1 392 1 9M - 41 141 227 IK 92497 1442 119 4417 1.709 WT 914 Z39 1.000 1340 239 1.149 139 379 SB 1.116 U1\ 13911 9 714 9 34 S 741 The difference between the above results of operations and the amounts reported for after-tax oil and gas segment earnings in Note 4 of Notes to Consolidated Financial Statements is primarily marketing-related activities, the exclusions of gains on property sales and unusual items related to the oil and gas operations. PNYC 00012887 CO 4 ) Su p p l e me n t a l In f o r ma t io n i u n a u d i t e o i The standardized measure of discounted estimated future net cash flows related to proved oil and gas reserves at December 31,1994,1993 and 1992 was as follows: awn U.S. W*niW*lt Tow 1994 Ftffljf* cash inflows Future dovotopmonl snd production coots Futura neom* Ui u j mw Future not cosh flows 10% annual discount Standardbad minun at dtacoumad Mur* nat cash flow* 1991 Futura caah inflow* Futura davalopmant and production coala Futur* incoma tax erpenar Futura nat cash flow* 10% annual dbcount 8t*ndanftz*d maaaura of dbeoumad luiur* nat caah flow* 1992 Future cosh inflows Future development end production coat* Futura Incoma taa aapanaa Futura nat caah Saar* 10% annual dbcount Standardbad maaaura at dtocountad futura nat caah flow* 1304 139 5.4 11.3 4.9 $11.3 3.9 2.7 47 2.2 1419 17.8 8.1 160 7.1 S 5.4 124.4 104 24 S.7 2.4 i 25 9104 3.0 24 4.4 2.1 * 8.9 04.8 20.1 4.4 10.1 44 1M 1 24 1 SO 074 204 S4 1t4 44 0104 44 24 44 24 494 2S4 7.4 154 7.1 0 94 S 2.1 S 9.4 Primary changes in the standardized measure of dis counted estimated future net cash flows for the years ended December 31,1994,1993 and 1992 were as follows: ae< is m im ia an .4 tan 1.0 1441 <J> .1 14 J 14 san 4 2.1 141 4 1.0 4 1141 si.4 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. Esti mated future development and production costs are deter mined 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 yearend statutory tax rates Iadjusted 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 accord ance with requirements of the Financial Accounting Stand ards 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 Oparatlona Supplemental operating statistics for the coal operations of ARCO for the three years ended December 31, 1994,1993 and 1992 were as follows: 1994 19*9 19(2 PNYC 000f2888 Co n s o l id a t e d Fin a n c ia l d a t a SALES AND OTHER OPERATING REVENUES 1M) >S! 1M1 1IM Resources: Oil and gas Coal Producer. Refining and marketing Transportation Intermediate chemical* and specietty products Other Elimination of intersegment amounts Total NET INCOME S 7.969 663 S 8.357 648 S 8494 586 9 8469 597 ( 9.425 SOS 6.529 897 3.423 30 12.959) SI6.552 8.603 878 3.192 28 02191 (18.487 8,441 900 3,100 24 [34981 (18,608 7499 849 2490 30 (3.123) 819,191 8,049 940 2450 33 0730) 810430 Resources: Oil and gas Coal Products: ReAning and marketing Transportation bnemtetlats chemicals and specialty products Equity earnings from Lyondel Gain on issuance of stock by stAsMary Unallocated expenses and other Interest Cumulative effect of changes In accounting principle* Net Income Earned per share** Retained earnings ADDITIONS TO FIXED ASSETS S 405 70 8 48 107 8 818 83 9 549 33 8 1494 91 195 172 265 111 273 (57) 1515) 307 189 238 13 - (140) 1491) 348 239 210 8 . 25 1534) 269 212 192 111 _ 190) 1594) 439 274 271 223 _ 14101 1504) S 919 S 5.63 S 5442 S 289 8 1.66 8 5JOS (382) 8 801 8 4.98 8 5J18 8 709 $ 449 8 5490 323 8 2411 8 12.15 9 0437 nsecurest: Oil and gas, including dry hots coats: Alaska Vaster Other lower 48 International S 152 327 64 446 8 418 231 103 833 Coal Products: Refining end marketing Transportation IntarmedUta chemicals and ^sciattyproducts Other 989 1483 57 94 376 348 46 58 186 181 28 Total S 1.658 8 2470 in n --in^nw mm* until *> ws w* want . wxm nrn > ttouimni. 8 294 287 137 SB1 U48 308 315 84 298 17 9 1279 8 30 290 793 484 1488 306 448 124 438 37 8 3439 298 409 399 454 1400 109 370 103 539 37 $ 2.718 Aft C0 4% PNYC 00012889 Se g me n t Op e r a t in g Da t a OIL AND GAS Aftar-tax oil ond gat oaminga (million*): Ala*ka Vaatar Othor Lowar 48 Intamational Total Cruda oil, eondonMta and NGL production (thousand barrals/day - not): U.S.: Prudhot Bay Kuparuk Grsattr Point Mdntyro Othar Alaska NGU Total Alaska Vaotar - Cruda oil -NGU Othor Lowar 48 - Cruda oil -NGU Total U.S. Intamational: Indonasla UnKsd Kingdom Oubai Othar NGU Total Intamational Total Natural gas production {million cubic foot/day - not): U.B.: Vaotar Othar UJ. Total U.S. Intamational: Urdtsd Kingdom Indonasla N***rtn* Total Intamational PNYC 00012890 Total m '* mi mi S14Z 149 88 26 *405 8225 117 (280) (17) 8 46 *453 32 ie 171 *816 5413 21 36 79 *549 * 700 243 345 76 *1364 214.8 1472 36.0 - 23.2 *212 32.7 10.8 108.4 182 591.3 2292 151.5 15.1 - 222 418.7 35.7 9.0 1202 202 804.7 248.0 1502 112 4.0 232 4382 382 122 146.1 25.1 0802 2622 140J 122 43 20.3 440.6 38.6 11.1 1482 28.4 668.5 2C3.1 138.4 132 3.4 15.0 4332 32.5 92 135.7 27.1 638.3 40.7 15.3 8.5 12 7.1 72.8 664.1 50.4 132 82 1.7 52 79.7 684.4 442 102 0.7 22 42 77.7 7382 422 152 11.6 12 52 75.7 7442 38.4 10.7 12.9 .6 4.5 67.1 706.4 782.0 177.5 9592 8942 218.1 0102 720.1 4812 12012 7*1.4 607.4 13882 891.7 661.9 12532 2BS.7 206.4 18.8 510.9 1,470.4 2782 242 120 3202 12312 203.4 13.1 232 239.7 12412 221.1 153 242 2612 1280.0 166.5 13.6 24.4 193.5 1,747.1 ID CO 4 0 Se g me n t o p e r a t in g Da t a o il a n d c a s (continued) Average sales price*: Crude oil and condensate Idotlars/berrsl): Alaska Lower 48, including Vaster Composite average International NGLa, lease and plant Idollars/bairel): U.S., including Vaster International Natural gas IdoRars/thouaand cubic feet): U.S., including Vaster International Average oil and gas production costs (dollars/equivalent barrel of oil): Alaska Vaster Other Lower 48 International Proved od and gas reserve* - net Crude oil and NGls (million barrels): Alaska: Prudho* Bay Kupanik Greater Point McIntyre Other Alaska Vastar Other Lower 48 International Total Natural gaa (bHBon cubic feet): Alaska Vastar Other Lower 48 International Total U94 mi till 191 <ss S 9.36 $13.60 $10.44 S1S.16 610.33 615.07 611.67 816.41 811.41 61044 812.92 818.17 81143 816.72 81243 818.67 814.84 820.85 816.58 820.15 $10.32 S 9.02 811.84 810.84 812.44 81243 81240 811.51 814.40 81049 $ 1.76 $ 2.S1 S 19) 8 2.88 8 1.86 8 248 8 1.64 8 3.16 8 1.06 8 3.08 $ 3.50 * 2.70 $ 6.99 S 3.52 8 344 8 3.42 8 846 8 349 8 340 8 344 8 7.48 8 547 0 4.51 6 348 8 443 8 547 8 4.83 8 2.33 8 4.18 8 4.68 1,003 513 108 3 1.627 95 524 222 2.488 1,014 488 141 3 1423 92 544 208 2.466 1,107 518 48 98 1.788 98 649 211 2.726 1406 406 52 so 1422 91 729 189 2431 1407 519 58 82 1468 33 661 210 2430 2.127 1.982 506 3.493 8.108 2.191 1488 548 3480 0406 2484 2,100 801 3.117 8402 2499 2494 1,136 2.406 8403 2487 2412 1477 1,790 8.062 PNYC 00012891 A Ae0 Se g me n t Op e r a t in g Da t a o il a n d g a s <continued) "M 'Ml OHdhaigeg Pretax exploration expanse (million*): Alaska: Dry hot* eorts Undeveloped leasehold amortization Geologies! and geophysical Other Total Alaska Lower 44, including Vastar Dry hot* coats Undeveloped leasehold amortization Geological and geophysical Other Total Lower 4* Total U.S. International: Dry hole coats Undeveloped leasehold amortization Geological and geophysical Other Total IntomatienaP* Total Not watt* completed. Inducting Vaster. U4.: Exploratory -OH dry Devatopment - oti International: dry Exploratory - oti gee dry Devalopmant - oti gaa dry Net producing watis. btdudbtg VtiataR oti gaa S 76 19 14 28 137 62 38 12 28 140 277 46 10 44 78 178 UK $184 15 37 2S 241 83 75 17 41 218 457 74 8 46 S3 210 $887 17 11 6 29 66 164 184 81 84 27 21 14 24 S 13 8 17 S 14 12 5,833 1491 6.778 1,427 Nat acreage, indudbtg Vaster (thousand acre*): U4k - Developed Undeveloped International: Developed Undeveloped 1,622 4.342 98 31,506 1,786 521$ ft 22.803 (iJSiOvart O--MIm. M$ Mu Ml Mh WimHW--HIM..... .. wdSsti mm0m wi'l|imnM-- mo <1 l 'Ml 10* .. 1 56 IS 17 24 112 98 88 23 83 270 382 69 7 37 72 186 1687 S 28 16 10 22 76 118 89 44 88 338 415 71 6 21 78 178 8683 $ 91 17 20 19 147 108 90 44 92 334 481 100 0 19 45 170 8851 8 7 70 124 40 IS 6 3 IS 16 8 1 7404 1427 8 18 42 286 168 173* 4 2 19 24 6 - 5 22 48 225 137 44 4 2 18 21 3 1 8472 1.704 7482 2.009 2.128 6431 81 28460 2433 8402 76 29461 2479 6,144 75 17419 PNYC 00012892 SEGMENT OPERATING DATA COAL Coaf shipment* (thousand tonal: U.S. Imamational Total Coal rtMivn (million tons recoverable): U.S. Intamational Total Average market price (dollera/ton): U.S. Imamational REFINING AND MARKETING Refinery runs (thousand barrals/day): Blended crude oil: Lot Angeiee. California Chany Point Washington Total Petroleum product salat voluntas, indudtog intaraagmant tales (thousand barrsit/dsyh U.S.: Gasollna Jet fuels Distillate fuels Othar Total U-S. 8raztt Total U.S. brsndad retag outlets TRANSPORTATION TAPS throughput (thousand harrala/doy) Crude transportad ImBSon banal mftas) Product transportad (mOBon banal mSaal Tankara ownod or undar long-term chartar Torutaga (thousand tonal INTERMEDIATE CHEMICALS AND 8PEC 1 ALTV PRODUCTS Chsmicai product sale* votumea, inchtdbig Imereegment salaa imlMonal: Propylana oxide and darlvattvaa (pounds) Styrene monomor and derivative* Ipounde) TBA and derivative (gaSonal 1 994 mi tttt ms 38,322 1133S *9357 37.490 10348 47.745 30334 9,158 38.792 32399 8381 4t359 29,437 8319 38358 1379 227 1.508 1396 214 1310 1336 232 1,481 878 242 1.118 854 411 1386 9 8.52 >29.90 8 9.12 829.89 8 9.79 830.94 6 930 832.70 8 9.46 832.70 225.8 182.7 4083 2383 1863 *253 238.6 1893 (25.1 230.4 1743 404.9 231.4 1873 398.9 2S3J 97.8 733 53.0 *773 4773 1354 2523 97.1 78.7 633 4813 943 6753 1311 2403 1043 813 62.0 4793 923 5723 1341 234.5 96.0 84.0 51.7 4003 97.0 5833 1.832 2313 88.0 783 483 444.0 92.0 5383 1347 1387 140300 5,708 10 1300 1320 129300 8,700 10 1300 1,747 140300 7300 10 1300 1322 143300 6,100 10 1300 1.789 144,100 8300 10 1300 3,008 2.495 1304 3350 2304 1,104 3366 1334 1392 2.729 1378 998 2383 1398 956 AICO 4 PNYC 00012893 Se g me n t Op e r a t in g 0 AT A OTHER 0 AT A Dividends: Common Rock - total - per Riara Total dividanda declared Common Reck: Average share* outRanding, including equivalents (million* of share*) Earned par share Book value par share Market price per share - high low -do** Stockholders (thousand*) Employees. fufl-tiro* equivalent (thousand*!: Resources: Oil sndga* Coal Products: Refining and marketing Transportation Intarmadlsts chemical* and specialty product* Other operations Total Payroll expense FINANCIAL DATA Total assets Working capital Current ratio Long-term debt Stockholders' equity Return on Rockholdsrs* equity* Return on capital employed" RESEARCH AND DEVELOPMENT EXPENSE turn i te Mat 'Hi 1999 1992 1991 - 1999 8 882 S 5.50 8 885 9 878 9 5.50 6 879 8 870 8 5.50 1 873 8 869 8 5.50 8 872 8 807 8 5.00 9 810 163.2 S 5.63 8 39.60 112* 92Vv 101* 100 162.4 8 1.80 8 38.51 127* 100* 106* 106 181.5 8 448 8 42.88 121* 96* 114* 110 161.7 8 448 8 42.96 135* 99* 106* 118 165.5 8 12.15 8 4442 142* 106* 123* 120 7.0 74 8.3 10.0 10.7 1.6 1.7 1.7 14 1.7 7.4 1.4 4.4 1.4 234 8 1,400 74 14 44 22 28.1 9 1,497 8.7 14 4.1 2.4 284 8 MTS 8.4 1.7 44 14 27.7 8 1448 8.1 14 4.0 14 274 8 1467 *24,563 6 2425 1.52 S 7,198 6 6,279 14.8% 9.4% 823494 8 1408 1.44 8 7469 8 6,127 44% 5.1% 824450 8 826 1.17 8 8427 8 8.721 17.8% 11.4% 824,482 823464 8 126 8 1,788 1.02 1.42 9 5468 8 5497 8 8432 8 7,148 10.1% 24.6% 8.7% 184% S 109 8 108 8 88 8 119 8 120 A * C 0 19 PNYC 00012894 J b o a r d o f Dir e c t o r s LODWRICKM. COOK * - Chairman of the Board MIKE R. BOWLIN* President. Chief Executive Officer and Chief Operating Officer RONALD J. ARNAULT* Executive Vice President and Chief Financial Officer ANTHONY G- FERNANDES* Executive Vice President WILLIAM B. WADE. JR. Executive Vice President FRANK D. BOREN*-' PresidentSustainable Conservation RICHARD 5. DEIHL*- * 4 Former Chairman of the Board. H.F. Ahmanson & Company THE HONORABLE JOHN GAVIN*- * Chairman. Gamma Services International Former U.S. Ambassador to Mexico HANNA H. CRAY*- 4 President Emeritus and Professor of History. University of Chicago PHILIP M. HAWLEY*- ** Former Chairman of the Board and Chief Executive Offi' Carter Hawley Hale Stores. Inc. KENT KRZSA*- * Chairman. President and Chief Executive Officer. Northrop Grumman Corporation DAVID T. MCLAUGHLIN*-* Chairman and Chief Executive Officer. The Aspen Institute JOHN B. SLAUGHTER*-' President. Occidental College HICKS B. WALDRON*- Former Chairman of the Board. Avon Products. Ine. HENRY WENDT*- ' Former Chairman of the Board. SmlthKline Beecham Board Committees * Executive * Compensation 'Environment. Health and Safety 4 Audit * Nominating LODVRICK M. COOK Chairman of the Board MIKE R. BOWLIN President. Chief Executive Officer and Chief Operating Officer RONALD J. ARNAULT Executive Vice President and Chief Financial Officer ANTHONY G. FERNANDES Executive Vice President WILLIAMS. WADE. JR. _ Executive Vice President H. L. BILHARTZ Senior Vice President President. ARCO Exploration and Production Technology E. KENT DAMON. JR. Senior Vice President President. ARCO Asia Pacific. Ltd. KENNETH R. DICKERSON Senior Vice President. External Affairs KARLANV. DOWNEY Senior Vice President President. ARCO International Oil and Gaa Company MARIE L. KNOWLES Senior Vice President President. ARCO Transportation Company STEPHEN R. NUT Senior Vice President President. ARCO Coal Company WILLIAM C. RUSNACK Senior Vice President President. A&CO Products Company J. KENNETH THOMPSON Senior Vice President President. ARCO Alaska. Inc. THOMAS W. VELLECA Senior Vice President. Exploration BRUCE G. WHITMORE Senior Viee President. General Counsel and Corporate Secretary ALLAN L. COMSTOCK Vice President and Controller TERRY G. DALLAS Vice President and Treasurer STEPHEN J. GIOVANISCI Viee President. Publie Affaire BEVERLY L. HAMILTON Vice President and Investment Officer President. ARCO Investment Management Company LINDA G. HAVARD Vice President. Corporate Planning ALLEN C. HOLMES Vice President end General Tax Officer JOHN H. KELLY Vice President. Human Resources ROBERT J.TRUNEK Vice President. Environment. Health and Safety PNYC 00012895 I N0E X Accountants' Report - 41 Accounting Changes - 21. 30 Accounting Policies -29 Acreage - 98 Additions to Fixed Assets - 3. 45 Alaska - 5. 10 Algeria - 5 am/pm* mini markets - 15 ARCO Chemical Company - 5. 15. 23 Assets - 3. 27 . 50 Australia -5,12 Balance Sheet - 27 Bank Credit Facilities - 24. 33 Black Thunder - 12 Blair Athol - 13 Blenheim - 9 Board of Directors - 51 Book Value per Share - 50 Brasil 19, 22 California Air Resources Board - 17 Capital Expenditures - 7. 24 Cash Flows. Statement of - 2B China - 5 . 7. 9. n China National Offshore Oil Co. - 11 Clean Air Act - 5 . 14 Coal - 5. 12. 22. 49 Coal Creek - 12 Commitments 6 Contingencies - 34 Cook Inlet - 12 Cost Reduction Program - 4. 18. 29 Cuttagh - 13 Current Ratio - 50 Depreciation. Depletion and Amortization 20. 31. 43 Description of Business - 1 Dividends - 3. 28. 50. 53 Downstream Operations - 14 Dubai - 9 Earnings per Share 3. S. 26. 38 Ecuador -5.12 Egypt - 12 Employees - 50 Environment. Health and Safety - 7 Environmental Hatters - 24. 34 Environmental Protection Ageney (EPA) - 15 Expenses - 19. 26 Exploration - 11, 48 Financial Instruments - 39 Financial Position and Liquidity - 24 Fixed Assets - 34 Foreign Currency - 34 Cas Handling Facility Expansion (S8X-2) - 5, 10. 13 Gawain - 9 Gordonstone - 5. 12, 13 Greater Point McIntyre - 11. 21. 46 Gulf of Mexico - 10 Hainan Island - 10 Income Statement - 26 Indonesia - 4. 9 Interest Expense - 34 Intermediate Chemicals and Specialty Products - 23. 49 International Operations - 31 Intersegment Sales - 30 Inventories - 32 Investments - 39 Kupatuk River - 5. 10. U. 46 Lease Commitments - 38 Letter to Stockholders - 4 Liabilities - 27 Lisburne - 11 Long-term Debt * 33 Lyondell Petrochemical Company - 23. 30, 39 Management's Discussion and Analysis - 18 KTBE - 16. 23 Mustang Island 80S - 12. 22 Natural Gas Production - 3. 22. 46 Net Income - 3. 18. 26. 45 North Sea - 4. 9. 12 Notes to Consolidated Financial Statements 29 Officers - 51 Offshore Northwest Java Sea -4.9 Oil and Gas Information - 21. 42. 46 Operating Data * 46 Pagerungan - 4. 9. 10 PayPolnt* - 15 Payroll - 50 Philippines 12 Point McIntyre * 11. 21, 46 Postretirement Benefits. Other - 36 Powder River Basin 12 Prices: Crude Oil - 47 Coal - 44. 49 Natural Gas - 47 NCLs 47 Stock - 53 Production - 21, 46 Prudhoe Bay - 5. 10. 13. 21. 46. 47 Qatar - 5 Quarterly Results - 40 Refining 6 Marketing - 22. 49 Reformulated Gasoline 15 Research and Development - 50 Reserves: Crude Oil -3.47 Natural Gas -3.47 Coal - 3. 44. 49 Retained Earnings 26 Retirement Plans - 35 Return on Capital Employed -3.50 Return on Stockholders' Equity - 3. 50 Risk Management - 25 Romani* - 12 Sales and Other Operating Revenues - 18. 19. 30. 45 Segment Information - 21. 30. 46 Selected Financial Information - 18 Short-term Borrowings - 33 Sirasun - 11 SH0CPR0S* - IS South China Sea -5,9 Special Items - 19 St. James's Oil and Gas * 12 Stock Options - 38 Stockholders - 50 Stockholders' Equity - 27, 37, 50 Sunfish - 12 Supplemental Information - 42 Taxea - 21. 32 Terang - 12 Trans Alaska Pipeline - 17. 20 Transportation - 6. 22. 49 Trent 12 Trinidad - 12 Tunisia - 12 Tyne - 12 United Kingdom - 9. 31 Unusual Items - 20. 29 Upstream Operations * 8 Vaster Resources. Inc. - 4. 9. 21. 39 Vietnam - 12 Vlllano - 5. 12 Wells - 48 West Elk - 12. 13 Working Capital - 24. SO Yeeheng 13-1 Field - 9 Yacheng 35 Bloek - 11 Zhenhal Refining and Chemical Company 5 w k c o o m**8. co a