Document peOQbEd4mej9doeZMkx3NByQj

Muskn PNYC 00013028 Contmt* Z..j / ilitfilightx 2 Letter to StotMtaUrri 6 Managing ARCO 7 ht Coast OpCTIlfl'lWI S ARCO Alaska, h*c, /2 ARCOTWmc B Cmpany M 4J?G6> TmruporTanim Company 19 Lower -1ftand international 20 ARCO Oil and Gas Company 21 ARCO international Oil and Cat Company 2ft ARCO Coal Company 11 Finaneeand Other Corporate 12 StnMiMer Return 75 Community imethemml 16 ARCO(Jiemtiat Company IS Lyondell Dtrochrmical Company 19 financial Renew 7/ Directors and Officers 72 index 71 StoMwIdrr Information HIGHLIGHTS Millions oftiollan rxcrpt ptrsharr amounts Financial Total revenues Net income Net income per share Dividends Dividends per share ofcommon stock Additions to fixed assets Total assets Return on stockholders' equity--percent Return on capital employed -- percent Reserve* Petroleum liquids -- million barrels: Domestic Foreign Total Natural gas -- billion cubic feet: Domestic Foreign Total Coal -- million tons recoverable Operating Oil and Gas Liquids production -- net barrels per day: Domestic Foreign Total Natural gas production -- million cubic feet per dav Coal shipments--thousand tons Refining and Marketing: Total refinery runs -- barrels per day Petroleum product sales (West Coast) -- barrels per dav Chemical sales--millions of pounds Propylene oxide and derivatives 1990 1969 1988 1987 1986 519,896 $ 2,011 5 12.15 5 810 $ 5.00 $ 2,718 $23,864 29.3 15.6 $16,815 $ 1.953 $ 11.26 S 760 $ 4.50 S 2,105 $22,261 30.5 15.3 $18,868 $ 1.583 $ 8.78 S 704 $ 4.00 $ 3.304 $21,514 26.1 13.0 $1 7.579 S 1,224 s 6.68 s 714 5 4.00 $ 1.463 $22,890 22.0 10.9 SI5.698 $ 615 S 3.38 $ 706 S 4.00 S 1.822 321.913 11.4 7.1 2,720 210 2,930 6,256 1,796 8,052 1,265 2.765 237 3,002 6.452 1,206 7.658 1.190 2.829 264 3.093 6.373 1.249 7.622 1.183 2.818 223 3,041 3.854 897 6.751 1.028 2.728 199 2.927 5.923 972 6.895 1.115 638,300 67,100 705,400 660.000 70.100 730.100 674.200 63.600 737.800 665.000 63.200 728.200 659.100 74.600 733,700 1,747 38,256 1.698 39.447 1.543 32.447 1,436 26.137 1.377 27.149 401,100 401.900 396.900 375.000 377.600 444,000 435,500 418.800 406.200 391.100 2,563 2.586 2.812 2.334 1.986 PNYC 00013030 LETTER TO STOCKHOLDERS Net Income miUitm.1 ofdollars 2000 1500 86 87 88 89 90 ARCO had yet another outstanding year in 1990. As a result of adhering consistently to our basic corporate strategies. ARCO's net income was $2,011 billion, or $12.15 per share, both ofwhich are new records for our Company. The 1990 return on stockholders' equity was 29.3 percent We are pleased to share with you our convic tion that ARCO condnues to be well positioned for the future. Vie want to review with you our strategies and topics of concern to ARCO and its industry. These include the uncertain economic climate, recent clean air initiatives, and other significant environmental issues. Many ofyou are aware that since our restruc turing in 1985, ARCO has followed aset ofbasic business strategies that are well suited for the long term. ARCO is a hydrocarbons-based com pany. concentrating on oil, gas. coal and petrochemicals. We focus on quality assets and competitive differentiation. Vie are continuously evaluating the capital markets for opportunities to effectively utilize the markets in our activities. Our dividend policy and stock repurchase pro gram are designed to help maintain appropriate financial leverage. A healthy return to ARCO stockholders i$ our ultimate objective and. as you can see. these strategies have served you well. An investment in ARCO stock bought onJanuary 1.1990, vielded a total return of 14.4 percent through Decem ber 31. 1990, assuming all dividends were re invested. That's 17.3 percentage points better than the total return on the Standard & Poors 500 Index. The Board of Directors approved an il.l per cent increase in quarterly common stock divi dends inJanuary 1990. Again inJanuary 1991. our Directors raised the quarterly dividend another 10 percent to $1,375 per share. At the new rate, stockholders will receive $5,50 per share annually. Volatile oil prices have been a major factor in the economic uncertainty within our industry. From a first-quarter level of $21.80 for West Texas Intermediate crude oil twru. spot prices dropped to a low of$15.48 a barret onJune 20. Prices began to rise in July, but. after Iraq invaded Kuwait, crude oil prices soared to more than $40 a barrel before returning to the mid-$20s as 1991 began. Overall, tbe wn average for 1990 was $24.44 per barrel. By exercising flexibility and following our basic strategies. ARCO has been able to deal with these unprccedented price swings while maintaining our focus on managing for the future. We feel that you can be extremely proud of how ARCO conducted its businesses in 1990. Our Wsst Coast operationsstartingwith the production of crude oil in Alaska, continuing with the transportation ofcrude oil through our svstem ofpipelines and cankers and culminating with the refining and marketing of finished j t ^ { | | j . ! ; PNYC 00013031 product in our five-state marketing area -- provide a good example. From the time the Middle East crisis flared up in August. ARCO was very concerned about what (his meant from a global perspective. We recog nized the need to meet our ongoing commit ments to dealers and other customers, but the issues of national security and consumer confi dence also had to be addressed. ARCO froze gasoline prices for a two-week period following the Iraqi invasion of Kuwait. Our Company was praised for this, and we adjusted prices only after the demand caused us to run out of gasoline at many of our stations. .Again on January 16. when the counterattack began, in order to help dampen concerns of motorists about rising prices and supply avail ability. ARCO said it would not increase its prices to dealers at that time. In fact, as crude oil prices went down over the next several days. ARCO low ered its wholesale gasoline prices. We felt these pricing actions were the right thing to do, espe cially in light of the President's cal) for price restraint Doing the right thing, is central to ARCO's approach to business. As pan of this approach. ARCO believes society placesa high priority on improving the environment and we are taking action in this area. In 1969, ARCO became the first oil company to introduce a reformulated emission-control gas oline. Ed* Regular. Developed for can and trucks requiring regular leaded gasolines, it replaced regular leaded gasoline at all of our pumps in Southern California. In 1990. ARCO introduced a new emission-control gasoline. EC-Premium*, which replaced our unleaded 3 premium in Southern California with a higher octane, lower emission product As 1991 began, we announced that ARCO is testing new gasoline formulas that we believe will burn as cleanly as (he alternative methanol fuels now proposed. ARCO is proud to have set the pace for cleaner air. We have invested money and talent to demonstrate what can be done with cleaner gasolines at competitive prices. Our achieve ments are unmatched in our industry During the 1990 smog season (from May 1 through October 91). Southern California had the cleanest air in more than 40 years ofrecord keeping. We recognize that many factors played a role in this, but ARCO's emission- control gasolines were definitely one of them. As ofJanuary 1991. ARCO's emission-control gas olines had prevented more than 100 million pounds ofpollutants from entering die air. The enormously important aspect ofthese gasolines is their instant impact on the can now on the road. The otherfuels ofthe future target bene- Earnings Per Share fits 10 to 15 years from now. We are committed to environmentally safe operations throughout ARCO. We are proud that programs such as those at our Black Thunder coal mine and our Sheep Mountain CO, production field have received recognition for their environmental sensitivity. However, we are not satisfied, and we are doing even more. In the next five yean, ARCO will be spending $2 billion ofcapital on environmental projects. These will include modifications to our produc tion and manufacturing units, reclamation projects and developmental programs to meet the anticipated standards ofboth the Clear Air Act amendments of 1990 and the California Air 86 87 88 89 90 PNYC 00013032 Tool Return to Stockholder! ARCO common stock SiP 500 Index Other Major Oils common stock 30 24 Resources Board's regulations. Changes are going to be required in our industry. We feel ARCO is prepared to meet those challenges, and we have the quality assets and people with ingenuity to do it. ARCO expects to realize some competitive benefits from the new clean air regulations. .ARCO Chemical is the world's leading producer of methyl tertiary butyl ether (MTBE). which is used in many of the reformulated gasolines mar keted today. The Clean Air Act's requirement that sulfur dioxide emissions be reduced could benefit ARCO's C.S. coal mines, which produce a low sulfur coal. Overall, by anticipating and pre paring for new environmental challenges, we intend to maintain our competitive lead in the industry. In 1990. ARCO spent $2.7 billion to explore, develop and otherwise enhance our worldwide oil, gas. refining, marketing, chemical, coal and transportation assets. In 1991, we expect to devote $3.9 billion to these programs. Costeffective replacement of the oil and gas reserves chat we produce is important to our business in the long term. In 1990, while we produced 376 million barrels of oil equivalent, we re placed nearly 100 percent of our production. We continue to make focused exploration activity one of our highest priorities. It is critical to the future success of our Company. Vie feel exploration in the Lower 48 states makes good sense, and we are successful at it. V/e are also confident there are abundant resources in Alaska to be discovered. Else where throughout the world, ARCO's inter national group is pursuing major exploration projects in many new venture areas. While taking care to ensure ARCO s future from a resources standpoint, we are mindful that to be successful ARCO must remain cost effective and efficient. Our production cost per barrel of oil equivalent produced in 1990 was $3.14. Like wise. we are determined to hold our finding or exploration costs to a level which makes eco nomic sense to ARCO. Key to our past and future success are the ARCO people. Throughout all levels of the organization, our people deserve a great deal of credit, not only for improving profitability, but also for being responsible members of the world community We are dedicated to work ing together to continue improving our performance. ARCO and its employees are very excited about the future. Even with the economic and international uncertainties, we have a can-do attitude that will benefit the Company, its stockholders and the communities where we do business Lodwrick M. Cook Chairman of the Board and ChiefExecutive Officer Robert E. Vfycoff President and Chief Operating Officer PtC 000A*> February 25.1991 jUCO'tWfcaCiwKifBUiiwpiiiiifc at jprfmHyimiiMflfffliriHithapiiHlhiiim -- programs Each of tine cofflpaaka is a success snry in its on ri^land, by otaiiog1 together, they male an unbeatable combi nation. Asa result,we can maiixain a lo* price policy for the consumer while providing impreanc financialretana to the operations and to ocr stockholder*.- Pu b AMAmb ExecutiveVice Ftgnrieitt 1990 l#i 19X7 tamingx -- million* Tital.iweiv -- million* Additions [> hxvd assets -- millions Liquids production -- thousand barrel* das -- net Average crude price -- per barrel Stale taxes -- millions* Exploration expense -- millions Prosed liquids resenes -- million barrels Prosed natural gas resenes -- billion Cubic feel $ 700 53,724 S 298 433.8 514.84 $ 427 5 147 1.966 2.367 S 346 $3,650 $ 243 459.4 $11.71 S 394 S 69 1.965 2.4X6 $ :W2 $3,977 $ 214 467.3 $ 631 $ 474 S 2.064 2.464 S 4H7 $4,221 $ 136 470.4 SI 0.95 $ 326 S 45 2.136 2.207 S 124 54.615 $ 5i >6 429.9 $ fi. 43 $ 463 S 44 2.046 1.965 -rein, pmpms mill iiuomrtnxnpiwitr Umkn. n\ wlho lump won -rtllsm'nt pnimnin mmlf i,, lb, miir.n / Winn// lKft /or mrnmr unripmdurtwn Man. Dor\ mil tnrlutluhr siitir i -ippmximnlrh I2.fpnirnl ihnrr /./priuhuiwn. ARCO ALASKA. INC. Liquids Production -- Alaska ihoumml harrrti<itnx-nel Lisburne Other Kuparuk Prudhoe 300 300 100 H6 87 SS 89 90 Headquartered in .Anchorage. .ARCO .Alaska. Inc. provides all of the crude oil for ARCO's West Coast refin ing and marketing operations. In fulfilling its mission as the cornerstone of this highlv efficient, integrated operation. ARCO .Alaska contributed over 60 percent of .ARCO's total worldwide petroleum liquids pro duction in 1990 and was responsible for about 13 percent of total L.S. crude oil production as operator of the Kuparuk River field, the Lisburne field and half of the Prudhoe Bav field. ARCO has been active in .Alaska for 35 years. In 1990. .ARCO Alaska was the state's largest private emplover with over 2.700 employees. Activities in .Alaska during 1990 were focused on improving oil field recovery through a variety of projects, preparing for future new production opportunities and exploring in additional areas. Due to the Middle East crisis, the importance of .Alaska's oil resources and .ARCO's strong .Alaskan position gained increased recognition. In September 1990. ARCO and the State of .Alaska reached agreement on a settlement resolving all claims related to royalty issues on ARCO's North Slope crude oil production from 1977 through June 1990. 'The Company paid the State approximately $290 million as a result of the settlement. Prudhoa Bay The largest producing oil field in America. Prudhoe Bav has been in production since 1977. Despite natural field decline and production impacts from extensive facility maintenance and modi fication projects both at Prudhoe Bay and on the Trans Alaska Pipeline. Prudhoe Bav liquids production was down only 6 percent net to ARCO from 1989. The largestjoint project during 1990 was the sealift and installation of the $465 million Gas Handling Facility Expansion (GHX-l). which was designed to increase the Prudhoe Bav field's average gas handling capacity from 3.8 billion to 5.2 billion cubic feet per day. Natural gas produced along with oil from the Prudhoe Bav field is reinjected into the reservoir to improve oil recovery. The major compressor compo nents ofGHX-l were started up in November 1990 and contributed an additional 125.000 barrels per dav to field rate at year's end. Modification of existing compressors will continue into the fourth quarter of 1991. Additionally, a verv successful, aggressive well fracture stimulation program was expanded in 1990 and will continue in 1991. . Looking to future opportunities. .ARCO and the other principal wnersofthe Prudhoe Bav field reached a number of agreements'during 1990. They have committed to invest $1.3 billion for additional gas handling facilities The project, called GHX-2, is expected to increase gross oil production by some 100.000 barrels perdaybyl995.lt will result in the recovery ofadditional liquids ranging from 330 million to 450 million gross barrels over the life of the field. In an effort to reduce costs and increase efficiency. ARCO and its part- PNYC 00013037 r AftCO is participant offshore drilling pro grams tnatareeontmu,ng in the Chukchi Sea, 350 miles Irom the State's targe North Slope oilfields 9 PruOhoe Bay and Kuperuk are situated on Alaska's North Slope. bsOurne underlies PrudhoeBayandis adjacent to Point McIntyre. Additional development continues m these areas. Exploration projects are active offshore m the BeeutortSee where ARCO drilled two pros pects in 1990 and plans mere in 1991. nr ll.suf, luih'tH. \IH U Xhn/o, to, \hi\hi i\ f t,< hit/tl uontfu ant juitrtttml fat no,It' fitly nit ifiu ,t, i r/rA. inuf \f{< O ointt\ In ft, /nut tfotu Hi att {tut * hat nuntawt.n/t , Osoto ftt'\[itu,titnm /if 10^0,11 Ilf t,fl<l nt,*iut\ ifilntti nf itat < 'O'l/tt lilt, i /luMtimt u\in",,ui f\/tt,,mtiuii infiti ina/ittii. unit,n .. ifttu Mtho-nt.* /m/mMU th,\ h,,t,,,l, t. Illlllf'lt one pros pect m Cook Inlot in 1990 and expacts to return for additional drilling dunng 1991. PNYC 00013038 ARCOexplorationdrilling 1990-1991 Exploration drilling/ ARCOpsrocipation 1990-1991 # ARC0 operational facilities ' /?i 4 oiiiiiiittnu^ i apt ful* \p, udifiot x t,*ial i" \l Shifhottjur td/\ I omU.ttX ,,\ thv udhov Rtt\ pot! ,,n s in, n a\t d pro din torn h\ hurt, t\ n da\ ill \nn ,uil fwihmttr\ptif U. [t,> ll,, f i h i lilMi it h\ HHUttMUutlth II itn\ in f/'H. ilh on \pt h 11 iiu 11 os* in f'lfiit m'i m M p ntn pi op * 1% t.f ,,, <*/ SiM imflnm Honrix Pn \* piofi tx and The Central Gas facility 121 separates natural gas liquids INGLs) and miscible gases from nat ural gas. NGls are sent to TAPS and misciple gases are remitted into the reservoir |4) for enhanced oil recovery. PNYC 00013039 m Bay KupcruA Listotnu 1990 liquids production* -- thousand barrels/day Cross 1.333 292 43 Net 277 138 15 Cumulative liquids production* -- millions of barrels Cross 7.075 722 67 t Net 1.392 355 24 Cumulative field investment -- billions Net $ 3.4 3 2.4 $5 Producing oil wells--as of 12/31 ,'90 Cross 778 343 67 Net 169 189 2" Remaining proved liquids reserves -- millions ofbarrels *Includes crude mL. condensateand natural gas liquids Net 1.307 519 58 liquids Reserves--Alaska millions ojbarrels OtherAlaska lisbume a Kuparuk a Prudhoe 2400 ner in operating the field, BP Exploration (Alaska), also are conducting ajoint review of operations and have agreed to consolidate and share certain common services. ARCO Alaska's working interest in Prudhoe Bay includes a 21.8 percent interest in crude oil production and a 42.6 percent interest in condensate production. Kuparuk Rivar The Kuparuk River field, 30 miles west ofPrudhoe Bay. is America's second largest pro ducing field. The field continues to shew strong production performance, setting a single-day production record of 340,000 barrels on Dec. 25,1990. Cross production for 1990 was only 2 percent below that of t989. Normal decline was nearly offset by ongoing drilling and well stimulation programs and the startup of additional facilities. ARCO Alaska and the other Kuparuk owners successfully completed a final equity redetermination of ownership interests in mid-1990. As a result. ARCO's revenue interest in the Kuparuk River field changed to 55.17 percent from 56.30 percent. A related 24-month production payback of9,000 barrels per day began onJuly 1.1990. As a result. ARCO is receiving beneficial adjustments to capital and operating costs. Development activities associated with peripheral and infill drilling have increased with the startup of a second drilling rig in late 1990. Initial engineeringwork required for expansion of the ongoing enhanced oil recovery project was also approved by the owners in 1990. These programs should enable production to be maintained at current levels through the mid-1990s. UsburnofPoint McIntyre In production since 1966, Lisburne is a carbonate reservoir underlying pan of the Prudhoe Bay field. ARCO Alaska holds a 40 percent working interest in Lisbume. This field's performance in 1990 surpassed expectations due to improved drilling results, new stimulation techniques and production optimization. The Point McIntyre field discovery was confirmed in 1989 with a potential of 300 million gross barrels of recoverable crude oil. During 1990, additional delineation wells were drilled to confirm reservoir extent. ARCO Alaska and its partners reached an agreement with the U.S. Army Corps of Engineers to facilitate the issuance of the required permit to begin construction activities. Point McIntyre startup is planned for late 1992. In a move to optimize the use ofexisting facilities, ARCO Alaska and its partners are negotiating to process Point McIntyre production through the Lisburne facilities. A modest expansion of the Lisburne facility is being planned to accommodate the new production. Exploration ARCO Alaska had an active year ofexploration drilling in 1990 and participated in nearly every major exploration project in Alaska, including prospects in the Beaufort Sea. Cook Inlet and Chukchi Sea areas. Reserves In 1990, ARCO Alaska added proved liquid reserves of 139 million barrels. Reserve additions came primarily from Prudhoe Bay as a result of the recent agreements with the other principal owners. p NYc II 00t>l3040 Earnings-- millions Total assets -- millions Additions to fixed assets -- millions Refinery runs --- thousand barrels/ day Petroleum product sales (l .S ) -- thousand barrels/ dav Branded retail outlets (I'.S.) 1990 $ 499 $2303 S 370 401.1 444.0 1347 1989 $ 291 32.175 $ 314 401.9 435.5 1,700 1988 3 368 31.975 S 251 396.9 418.8 1.700 1987 3 150 31.850 3 318 375.0 406.2 1.750 1986 3 353 31.628 3 246 377.6 3988 1.700 ARCO PRODUCTS COMPANY ARCO Products Company, headquartered in Los Angeles, reaffirmed its status as the nation's premier refining and marketing operation in 1990 through programs that reflected both customer and environ mental sensitivities. At the same time, the Company launched programs that will prepare its manufactur ing units for future environmental regulations. Gasoline Sales-- west Coast thousand bcmit/day industry Leader In reaction to President Bush's request that oil companies use restraint in pricing following Iraq's invasion ofKuwait. ARCO Products froze gasoline prices for two weeks in August 1990. The move was positively received by customers as welt as the public at large. The Company raised prices only after demand outstripped supply at many stations. Even at that point, the Company assured the public it would only raise the wholesale price of gasoline in proportion to increases in its actual crude oil costs. Clean Air Role Model In September 1990, ARCO Products introduced its second emission-control gasoline. EC-Premium*, to replace its super unleaded gasoline in Southern California markets. The nation's first reformulated gasoline, EC-1* Regular, was introduced by ARCO in Southern California markets in' September 1989. With 92-octane EC-Premium. ARCO formulated a gasoline which emits less benzene, carbon monoxide and 250 smog-forming compounds than conventional premiums, while meeting the needs of current high perfor mance engines. Like EC-1, the new EC-Premium uses the oxygenate MTBE (methyl tertiary butyl ether) to increase the octane rating and produce a cleaner burning fuel. On the basisofindependent testing, the use ofARCO's emission-control products had reduced vehicular air pollutants in Southern California by 100 million pounds as ofjanuary 1991. The development of emission-control gasolines contributed to making 1990 the South Coast Basin's best airquality year in more than 40 years. ARCO Products' contributions to improving Southern California's air quality were widely recognized dur ing 1990. Then-Governor George Deukmejian presented ARCO with the state of California's top award for a new product for its EC-1gasoline in the annual competition conducted by the California Society of Profes sional Engineers. The South CoastAir Quality Management District presented ARCO with its highest award for advancement in air pollution technology, and for its development ofcleaner burning fuels. ARCO was commended by the California Assembly and Los Angeles Mayor lorn Bradley. 86 87 88 89 90 pNYC 00013041 12 r AfiCO'* reformulation ot gasolines adds the oxy genate mathy* tertiary butyl ether (MTBE) while reducing the con tent of benzene Iby nrore than SO percent), aromatics and butane which causes evap orative emissions. PNYC 00013042 m Nevada. SO ot 76 oranrtea outlets s'e am/om sues, wtule in Arizona. iRCO has 75 outlets otwnict>63are am/om locations Refinery 9 Distribution Terminal PNYC 00013M3 r I Crude Runs ihvuuutd txinflsMn^ 340 17 k_ 86 87 88 89 90 Refining \Rt:o Products operates the Los Angeles Refiners at (.arson and the Cherrv Point Refiners near Fernrl.tle. Washington. The facilities have been continually upgraded to process .Alaskan North Slope crude oil. making them two of the most efficient refineries on the West Coast. In 1990. the refineries ran at 1<>2 percent ot capacity, compared to an 87 percent average lor the industry. Light product vield was 89 percent, compared to 82 percent for the industry. ARCO Products' gasoline production from its two refineries is supplemented in Northern California with products from the Tosco Corporation refiners under a long-term supply agreement. In older to meet new environmental requirements for cleaner fuels. ARCO Products undertook projects jt both refineries to reduce the sulfur content ofdiesel fuel. The Los Angeles Refinerv brought on stream an MTBE production unit incarlv 1990 that makes it possible for ARCO Products to supply a portion of its own requirements for this increasingly important gasoline component. Other major projects completed m 1990 included a sulfur recovers- facility at Los .Angeles and coker improvements at Chern Point. Calcined coke and the cogeneration of electricity are two profitable businesses ancillary to ARCO's refining operations. .ARCO continues to be the nation's leading exporter of calcined coke for the aluminum indus try. Caiciner facilities are located at Cherry Point and in Wilmington, near the Los .Angeles Refinerv Watson Cogeneration Company, ajoint venture with a subsidiary ofSouthern California Edison, provides steam and electricity- for the Los .Angeles Refinery and electricity-for Edison customers. In 1990, this facility produced enough power to supply a city the size ofSt, Louis. Missouri. Marketing The established low-price leader and the No. I gasoline marketer in the five Western states, the Products Company has also earned a reputation for quality gasolines and. with the development of EC-1 and EC-Premium, for an environmentally superice product Recognition for .ARCO's gasoline came from the automobile manufacturer. BMW. which included .ARCO gasolines in its recommended list to customers. Lessee dealersof .ARCO had an average throughput of 226.000 gallons ofgasoline per month in 1990. com pared to 213.000 gallons per month in 1989. The 1990 level was more than twice the nationwide average throughput for the service stations of .ARCO's closest competitors. As part of a program to upgrade and standardize its retail outlets in 1990. ARCO de-branded approximately 200 outlets, most of which were small, low-volume stations. Approximately 50 new outlets were opened during the year. The Products Company's total gasoline sales grew by 4 percent in 1990. while overall industry gasoline sales in the five-state marketing area were up 1 percent. .ARCO's sales ofjet fuels to airlines and the military grew by 4.4 percent in 1990. ARCO am/pm* mini markets, which make up about half of the Company's 1.547 branded retail outlets, increased their food sales by 10 percent in 1990. The am/pm program continues to grow and recently has been introduced internationally throughjoint venture and/or licensing agreements. ARCO Products also markets motor fuels and lubricants in Brazil through a chain of more than 2.700 ser vice stations, most ofwhich are owned by individual operators. In 1990. .ARCO introduced its new SMOGPROS* Service Centers in California by converting 112 MP&C TunvL'p sites to the new program. SMOGPROS offer state-required smog checks and repair services featuring .ARCO's "Pass or Don't Pay" guarantee. Future Growth .ARCO Products continues to lead the industry in cleaner fuel development while retaining its position as the West Coast's No. 1 gasoline marketer. These strengths and the Company's mn<> vative marketing programs position ARCO for future growth in an increasingly competitive market. ptfYC 00013044 F..irr>inirs -- million' Tcn.il assets -- millions Additions to bxed assets -- millions TAPS tariff-- dollars.- barrel TAPS throughput -- thimsand barrels, das Knparuk pipeline throughput -- thousand barrels dav 1990 $ 274 52.162 $ 103 S 3.83 1.789 310 IWS S 2tib S2.I70 $ 43 S 3.11 J.H80 ! VHH $ III* $2,326 S '.3 S 3.11 2.034 31') 302 i9x: S Mo 32.310 S 2b S 3.03 1.059 2X3 5 152 $2.bln 5 II $ 4.50 I.M'i 273 ARCO TRANSPORTATION COMPANY Headquartered in Long Beach. California. .ARCO Transportation Company continues to preside theutal link between .ARCO's.Alaska crude oii production and its refining.and marketing operations More than just a service operation to .ARCO, the Transportation Company has been expanding its commercial busi nesses in recent years, and it expects this segment to make a growing contribution to the Compans's overall success. Integrated Operation! In 1990.80 percent of .ARCO Transportation's earnings came from .ARCO's integrated West Coast operations. These businesses include a 21.3 percent interest in the Trans .Alaska Pipeline System iX\PS); a 57 percent interest in Kupamk Transportation Company. which moves crude oil via pipeline from the Kuparuk River held to TAPS; a fleet of eight ocean-going tankers: and crude oil and products terminals and pipelines serving the Los Angeles Refinery. TAPS 1990 earnings improved 16 percent even though pipeline throughput decreased versus 1989 due to declining production on the .Alaska North Slope. This income growth was attributable to a higher TAPS tar iff which reflected a make-up for volume losses and higher expenses associated with the EXXON Valdez spill in 1989- These costs were not reflected in the 1989 tariff As TAPS ages, its owners anticipate larger expenditures for operations and maintenance. In 1990. expendi tures for the pipeline were up significantly over the previous year. The most important repairs made in 1990 and scheduled for 1991 are related to areas of corrosion discovered by new ultrasonic testing methods. Most ofthe corrosion identified has occurred between Pump Stations 4 and 5. in the Atigun Pass. Chandalar and Wilbur Creek areas. While the pipeline has not experienced any major spills or shutdowns as a result of corrosion, the ongoing detection efforts and repair programs are dedicated to preventing poten tial problems in the future. Currently, the largest single project involves the replacement of approximate!' nine miles of pipe in the Atigun Pass, a remote area of harsh climatic conditions. This replacement is expected to be completed in the third quarter of 1991 without major disruption to the pipelines throughput The .ARCO marine fleet includes eight tankers dedicated to the West Coast operations, as well as two that are chartered to anothercompany fn 1990. the eight tankers delivered 170 million barrels of North Slope crude oil. The chartered tankers carried 40 million barrels of crude oil for a nonaffiiiated customer. State and federal laws related to tanker operations, which were passed in 1989 and 1990. will impact the marine PNYC 00013045 fortyetgw 'nches 10 diameter anfl 800 m.tes long, the Trans Alaska Pipeline System (TAPS) carries about 25 percent 0l America's domestic crude oil proouct'on 17 PNYC 00013046 Pump Station A Atigun Pass # Valdez Terminal indusjn: Of particular interest to ARCO Transportation is the federal Oil Pollution .Art of 1990 which requires all tankers 10 be replaced or retrofitted with double hulls starting in 1995. ARCO Transportation anticipates that the first of its vessels will be subject to this requirement in 1997 and the last bv 2008. ARGO Western Gas Pipeline Company, an ARCO subsidiary constructed and operates the Ferndale natural gas pipeline svstem on behalf of its owners. .ARCO and Intalco Aluminum Company. This 37-mile pipeline, linking natural gas sources in western Canada to.ARCO s Cherry Point Refinery and Intalco's aluminum plant, started operation in late 1990 and has a capacity to move 105 million standard cubic feet per dav. Commercial Businesses .ARCO Transportation is directing efforts to increase returns from its com mercial pipelines and terminals. Historically, these terminals and pipelines were dedicated to moving crude oil. petroleum products, petrochemicals and gas products for .ARCO affiliates. These assets now pri marily sene nonaffiliated customers and a large portion of their revenue is attributable to this market segment. In 1990. these businesses contributed 20 percent ofARCO Transportation's earnings. The largest of these businesses is ARCO Pipe Line Company, headquartered in Independence. Kansas. Its pipeline network sendees the Midcontinent. Midwest and south central United States. In 1990. .ARCO Pipe Line Company began a project to link its Houston-to-Cushing pipeline to its Texas Cin marine terminal. The project is expected to increase the pipeline's capacity to move waterborne crude oil to midcontinent refineries from its current 55.000 barrels per day to approximately 110,000 barrels per day. Shipments through the pipeline averaged 37,500 barrels per day in 1990, despite a dramatic decline fol lowing the start of the Middle East crisis. Formerly the Wiichita Falls-to-Houston crude system, this line was reversed in 1988 to participate in the projected growth in demand for foreign crude oil by refineries in the Midcontinent and Midwest. Other ARCO Transportation commercial operations are Four Comers Pipe Line Company and ARCO Termi nal Services Corporation, which operate pipelines, storage facilities and terminals in the southwestern United States. Growth in these operations came from increased common carrier volumes and tariffs, as well as a strong demand for storage and terminal services in the Los Angeles Basin. With the prospect of a declining Wfest Coast crude oil surplus. Four Corners Pipe Line is considering alter natives such as reversing and converting one of its pipelines. Line 90. In 1990, Line 90 carried 53.000 bar rels per day of crude oil from Southern California to the Four Comers area. Four Corners PipeUne'also has a 13.4 percent interest in PointArguello Pipeline Company, a project to transport wet crude oil from the Point Arguello fields in federal waters to a shore facility for separating the oil and water and delivering dry oil to a marine terminal facility at Gaviota, California. The pipeline is expected to become active by mid-1991 with an initial throughput of 20,000 barrels per day. PNYC 00013047 1 '* battling' -- million' |1 ,i,ila"ii' --million' AiLlnioii' in livi-il assvK-- million' l it|iini' piotlnt lion -- ilioii'.nnl barrel' tl.iv -- net N.ilut.il g.i' pi t>< lot nun -- million t uliit teet 'lav -- ml Aw-tagr 11 lull- pr u < -- pci h,n lei Avcingc II.IIUl.l! g [, p! u,----p,n \f( ,F Kvplotniion c\p.ms.- -- mi Hit in' I'loictl In pint' it-'ci'c' -- mil lion harrrl' Plot ctl ii.itin.vl u.i' reset vex -- billion cubit tcei 1990 S 588 S3.217 S 808 204.5 1.515 S20.85 S 1.67 S 334 754 3.889 t`l!XV 5 349 S.'.ub* S 7n:i 200.6 1.497 $18 92 5 l.tix 5 312 Th ii .i.Owi /wv.v S 231 5.YI74 51.2*5 |.xri.9 1.359 514.2') 5 1.69 5 297 7tS5 3.HK9 m: 5 tr, '4.71 7 < 12') l`*4 ti 1.244 517.23 5 1 64 5 232 t>*2 3.n47 1'1'x -4 s- 1 .. 111) Jl ..'1 n ' 1 on s 1 n., < oti me.' o is ARCO OIL AND GAS COMPANY Liquid' Production -- Lourr4* Iholt ittoil toir'rll'>io\ nW NOL' Crude Oil and Condensate 23') Headquartered in Dallas. Texas. .ARTO Oil and GasCompanv is responsible for ARCO's exploration, produaion and marketing of crude oil. natural gas and natural gas liquids in the Lower 48 states. In 1990. \RCOOil and Gas Companvachieved record earnings and enhanced its Lower 48 re'erve h.t'e through a kev acquisition and a continued successful exploration program. ARCO Oil and GasCompanv acquired oil and gas properties in the Arkoma Basin of southeastern Okla homa from TXO Production Corp.. a subsidiary of LSX Corp.. in May 1990. These properties, which are near ARCO's Wilburton field, added approximate!' 46 billion cubic feet of proved natural gas reserves to the asset base and strengthened .ARCO's exploration position in the .Arkoma Basin. On januarv 31.1991. .ARCO Oil and Gas Company completed the purchase of Orvx Energy Compam's prop erties in the Midwav-Simset field of Kern County. California. The Midway-Sunset field is the largest produc ing oil field in the Lower 48 states, generating 162.000 barrels gross per day of crude oil. and the third largest field in North .America, surpassed only bv the Prudhoe Bay and Kuparuk River fields on the . Alaska North Slope. This purchase gave .ARCO an additional 1.270 oil wells which are currently producing more than 29.t8>o gross barrels per dav (23,000 net to .ARCO). These new assets fit very well with .ARCO's existing properties in the Midway-Sunset field and will add approximately 125 million barrels of crude oil equiv alent to pros ed reserves in 1991. The acquisition also included a 49 percent interest in a cogeneration facility Liquids Production Forty-four percent of the Companv's liquids production came from fields locaied in Texas. California fields, including those in the SanJoaquin Valley and ARCO's 60 percent interest in the THL'MS Long Beach Companv, accounted for 25 percent of the total liquids production. The Companv .il-n produced 16 percent of its liquids volumes from the Culf of Mexico, and this will increase in eariv 1991 when the repair ofa South Pass 60 production platform is complete. Most of the remaining liquids arc pro duced in Oklahoma. Wvoming and New Mexico. ARCO Oil and Cas Company's 1990 liquids production level was slightly higher than in 1989 as a result >t the Companv's acquisition of 60 percent interest in THL'MS in December 1989 and new production from fields in the Culf of Mexico and midcontinent areas which partially offset natural field declines in olein fields Natural gas liquids volumes were up slightly as a result of new production from the East Camer< nt 1 block in the Gulfof Mexico. PNYC 00013049 Onsnore 'n* 4u*,lf hik area of sovin Teas. ;s at' ve soin eoio'at'cn a^o oeeiocmn! PNYC000130SO T Oats shown hare from trie Sen Emidio GeoQuest Protect which cowers over 144 square miles sampled every 55 feet is integrated wrth existing well informaoon to make drilling reeommenflatons PNYC 00013051 2 Gas Production -- Lower 48 willon cubtrffrt/dm m Offshore Onshore 800 400 86 87 88 89 90 Natural Gas Increased natural gas production volumes in the VV'ilburton field. Bavou Sale field and in the SanJuan Basin of northern New Mexico contributed to ARCO Oil and Cas Companvs highest produc tion rate since 19/6. The VV'ilburton field in eastern Oklahoma accounted for 163 million net cubic feet of gas per davin 1990. a 17 percent increase compared with 1989. in the Bavou Sale field of southern Louisiana, exploratory success and development drilling resulted in incremental volumes of 29 million cubic feet per dav. an increase of 160 percent over 1989. The Gulfof Mexico fields continue to be a primary producer of natural gas for ARCO Oil and Gas Com pany In 1990, the Company's Gulfproduction accounted for 40 percent of its total production. Production of natural gas from coal bed methane fields continued to grow in 1990. .Additional develop ment drilling and facility installations over the Fruitland Coal Formation located in the SanJuan Basin increased production to 39 million net cubic feet per day to ARCO Oil and Gas Company. Exploration At a time when much of the industry had curtailed exploratory drilling in the Lower 48 states. .ARCO Oil and Gas Company has maintained a belief that domestic exploration can be good busi ness. In 1990. the Company participated in 89 decisioned wells, resulting in seven oil discoveries and 33 natural gas discoveries. In California, where a substantial lease position was acquired in late 1988. ARCO Oil and Gas Company decisioned 12 wells gross, resulting in four gas discoveries and two oil discoveries. An already active drilling program in the shallow water shelf area of the Gulfof Mexico was expanded in 1990 with 39 wells gross decisioned and 17 discoveries. The Company aggressively participated in areawide lease sales in the Gulfin 1990. acquiring leases containing 44 new prospects on 260.000 shelfacres. Exploratory drilling has continued in the Arkoma Basin ofeastern Oklahoma where the Wilburton field and the newly acquired TXO properties are located. A gross total ofeight wells were decisioned in 1990. with five discoveries, and additional drilling is scheduled for 1991 and beyond. Reserve* The discoveries made in 1990, along with development additions, net acquisitions and other revisions, replaced 77 percent ofARCO Oil and Gas Company's 1990 production. This includes reserve additions of 49 million barrels of oil and natural gas liquids and 486 billion cubic feet of gas. The Orvx acquisition is not included in these reserve figures. Environment and Technology LikeeachofARCO'soperatingcompanies.ARCOOilandGasCompany focuses both human and financial resources on the environmental sensitivity of its projects. ARCO Oil and Gas Company was one of six companies nationwide to receive the 1990 Bureau of Land Man agement's "Partners in the Public Spirit" award. This award recognized ARCO's accomplishments in balanc ing CO, production and development with protection of sensitive environmental resources at the Company's Sheep Mountain production facility in southern Colorado. The Company manages ARCO's Research and Technical Services Center; which received two prestigious awards in 1990 from R&D Magazine for new product developments. The "R&D 100" awards were given for thejointly developed Advanced Drillstring .Analysis and Measurement System and for a new Vapor Pressure Analyzer, which is key to some important industry enviromental projects Additionally, an environmentally compatible drilling mud is being developed. If testing proves successful, the potassium-sulfate based mud could be spread on land to enrich soil, much like common fertilizer. PNYC 00013052 Earning! (Losses) -- millions Total assets -- millions Additions to fixed assets -- millions Liquids production -- thousand barrels/ dav -- net Natural gas sales-- million cubic feet dav -- net Average crude price -- per barrel Average natural gas price -- per \ICF Exploration expense -- millions Proved liquids reserves-- million barrels Proved natural gas reserves-- billion cubic feet 1990 5 7$ $2,205 $ 454 67.1 193.5 $20.15 $ 3.08 S 170 210 1.796 1989 5 (8) 51.902 $ 363 70.1 169.2 $16.25 5 2.71 5 98 237 1.206 1988 S t7l> $1,395 $1,056 63.6 154.1 SI 4.20 S 2.64 S 132 264 1.249 1987 $ 13 $1,089 S 165 63.2 164.4 Stfi.44 $ 2.36 S 105 223 697 1986 S 14 $ 993 s 352 74 6 132.6 S13.77 S 1 51 s 5y 199 972 ARCO INTERNATIONAL OIL AND GAS COMPANY Liquids Production-- International thousand bamls/dcn-ntt a NCL's a Other a Indonesia 45 30 15 ' 36 87 88 89 90 ARCO is committed to an increased participation in the international oil and gas business This commit ment was evidenced by an increase in international exploration activities and the startup of significant new production in 1990. ARCO International Oil and Gas Company, headquartered in Plano. Texas, is responsible for ARCOs explo ration and production activities outside the United States. These activities include production operations in the United Kingdom, the Netherlands, Indonesia. Dubai and Turkev, plus exploration plavs in 10 countries, giving it a land position totaling 34 million gross acres at year-end 1990. Europa Both natural gas and crude oil production in the United Kingdom grew in 1990 as three new gas fields -- Wetland, Ravenspum North and Amethyst--commenced production, and the production capacicv at the YWtch Farm oil field was substantially expanded. .ARCO holds a 17.5 percent interest in the Wvtch Farm development, which is the largest onshore oil field in western Europe. ARCO s net share of total production from the field for 1990 was 1.8 million barrels Net gas sales from the L.K. Neath Sea averaged 155 million cubic feet per day in 1990. a 32 percent increase compared with 1989. The three new gas fields, which started production in the third quarter of 1990. are expected to add 93 million cubic feet per day to ARCO's net production in 1991. The Thames-area gas fields, which have been producing since 1986, averaged 60 millioncubic fees perdat net to ARCO. which holds a 43 percent interest. Operated remotely from the Thames production facilities, the new ARCO-operated Welland gas field intro duced for the first time to the U.K. North Sea a combination ofsubsea well control and automation tech nology. It is also the first gas field to sell production to multiple purchasers in the L'JC's developing competitive gas market ARCO has a 25 percent interest in Welland, which has net proved reserves of Sri bil lion cubic feet. The other new gas fields are Ravenspum North, in which .ARCO holds a 20 percent interest, and Amethyst, in which ARCO's interest is 13 percent ARCO's net proved reserves are 230 billion cubic feet for Ravenspum North, and 104 billion cubic feet for Amethyst ARCO s development plans for the Pickerill gas field, also in the U.K. North Sea. were approved bv the Brit ish government in 1990. This approval made possible the first sale ofa North Sea gas field's entire output r< PowerCen. a power generation company formed under the government s privatuation program u> succeed the state-owned Central Electricity Generating Board. ARCO has a SI percent interest in the Pu k erill field and will be the field operator. The net gas reserves for Pickerill are 246 billion cubic (re production is scheduled to begin in 1992. PNYC 00013053 *}.*.&** \ ' X V -.1 ' *' '.Vr'U* tvwfNriVd rspforatiou prtnram\ nutsidr if tfmsv orrm sfhrrv ur atrvad\ * in [irotimfioH. Hi'art* taking an rt"ifv>wir iippnitnh to in-a4 tTi tun \ in tiut inttma finun/ opnolin/h and finrr \trrin^hrvvtf <m' v\plotafiott ori'O nlintion tu do this. Ur aant tofind nnotfur major pm- k *" This diagram shows an anticline Bounded d v a major fault ana syncime PNYC 00013055 Indonesia \K< <> International and the Indonesian governmentextended for a period of 2<)vears trm I1.'''? i the Production Sharing Contract covering ARGON extensive operations in the Northwest Natural Gas Sales -- International million ruble /rrt/iiay a Other a Indonesia a North Sea 100 50 In the java Sea. \RTO is responsible for operating approximated 150 platforms plus processing and export facilities. This area accounted for gross production of 125.000 barrels per da\ of crude oil and natural gas liquids cWiMO net to ARCO) during 1990. The Malacca Strait is ARCO's other current production area. ARCO holds an interest in the Malacca Strait fields which had 1990 gross production of 46.000 barrels per dav (6.600 net to ARCO). The Pagerungan gas field, located in the ARCO-operated Kangean contract area offshore Bali, has been granted government approval for development, and a gas supplv agreement was executed in 1990 with Pertamina. the Indonesian national oil companv. The Pagerungan held, with proved reserves of 1.5 trillion cubic feet of natural gas (680 billion net to ARCO) was discovered in 1985. When fullv developed. Pagerungan is expected to have gross production of approximately 300 million cubic feet pier dav: Produc tion is expected to start in late 1992. Dubai ARCO international acquired an additional 33 percent interest to become the 100 percent owner of the.Margham condensate field in Dubai. United Arab Emirates, effectiveJanuary 1.1990. The held, which has been in production since 1984. has net proved reserves of 33 million barrels of petroleum liquids. Despite tensions in the Middle East, operations continued without interruption during 1991) and early 1991 and produced 14.000 barrels per dav. Turkey Production from the newlv discovered Cendere field started in early 1990 and averaged 1.450 barrels per dav (590 barrels net to ARCO). Additional delineation and exploration work is under wav in this area. Exploration ARCO International continued its exploration program in 1990 by drilling 12 prospects in six new venture areas, including Egypt. Gabon and New Zealand, and 35 exploratory wells in areas of cur rent production. .4s a result of the drilling program. ARCO International recorded eight gross discoveries, six oil and two gas. along with four confirmations of previous oil discoveries. In late 1990. ARCO completed a successful exploration well, since named the Blenheim oil field, in which .ARCO holds a 44 percent interest, offshore from Aberdeen. Scotland. Stabilized test production rates exceeded 4.000 barrels ofoil per day. Additional offshore wells are planned for 1991. In the German sector of the North Sea. ARCO was awarded two major new exploration licenses with a total area ofover two million acres. These awards position ARCO as a significant license holder offshore Ger many. .ARCO plans to conduct a major seismic survey and to drill its first well here during 1991. (Usorvos .ARCO International's net proved reserves at year end totaled 210 million barrels ofliquids and 1.8 trillion cubic feet of gas. compared with 237 million barrels ofliquids and 1.2 trillion cubic feet of gas at the beginning of the year. On an oil equivalent basis, net proved reserves increased 16 percent, due primarilv to the addition of Pagerungan reserves, offset by the sale of ARCO's interests in Norway and Colombia, which had a total of 56 million barrels of oil and 1 million barrels ofoil equivalent, respectively 36 37 33 39 90 PNYC 00013056 K.n rung-. -- millions Total assets -- millions \dditionsm hveri assets -- millions Ve-mge market price -- per ion <'oal shipments -- millions ol tons < ioal resenes -- million ton* recoverable 1990 $91 $9*9 $109 $14.81 38.3 1.265 S 92 S 857 S UK S11.95 39.4 1.190 I WV.V $ TP S 7^5 $ HIT $13.71 32.4 l.m.l S K7 s '>4o $ 12 SI3.I4 26.1 I.H2H S 7h s >>; S L-, Sl3n2 J7 | in') ARCO COAL COMPANY Coal Shipments million roni a Foreign Domestic 40 30 20 10 86 87 88 89 90 ARC'.O Coal Companv, headquartered in Denver. Colorado, continues io strengthen its position as a major coal producer in both the United States and Australia where it owns and operates some of ihe world's largest and most efficient mines. United States Operations Already one of the nation's largest producers of low-sulfur coal. ARCO Coal's outlook for market expansion brightened even more with passage of the 1990 Clean .Air .Amend ments. The Companv's L'.S. coals, being low in sulfur and other pollutants, offer an attractive, cost-effective option to electric utilities as they develop plans to comply with new emission requirements. Traditional!' limited to markets in the central and southwestern states because of geographical proximity the Coal Com pany's markets now are expanding to include utilities in the Southeast and upper Midwest. ARCO Coal has the distinction ofoperating the largest surface mine in the .Americas. Its Black Thunder Mine in Morning's Powder River Basin shipped 28 million tons of coal in 1990. down due to mild weather from the record 30 million tons in 1989. In just 14 years ofoperation. Black Thunder has yielded 230 million tons of coal. With a second dragline startup planned for 1991. Black Thunder is expected to continue at current levels of production well into the next century The Company also operates a surface mine at nearby Coal Creek. ARCO Coal operates underground mines in Colorado and Utah. Coal from these mines, having low-sulfur content and high heating (BTU) values, has helped secure a new. long-term contract with a major midwestern utility. These mines shipped 1.4 million tons in 1990 and included, for the first time, a shipment of high-quality coal toJapan. ARCO Coal added materially to both reserves and expected mining life at its Trail Mountain mine in Utah by successfully bidding on an adjacent federal lease in 1990. At the West Elk mine in western Colorado, the opening of a second seam will increase production in 1991. Australian Operations .ARCO Coal Australia Inc . a subsidiary, operates two Australian coal mines, is developing a third and holds an interest in a fourth major producing operation -- all in the state of Queensland. Altogether, the Company's net share of these Australian mines' shipments totaled 8.8 million tons in 1990. The ARCOoperated Curragh mine works three surface coal seams and. utilizing its modern production plant, provides customers with a wide range of coking and steaming coals. Curragh's flexible production capacity allows a variety of specialized blends ofcoal products to fit exacting customer needs, providing PNY6 00013057 AARRCC0 Co i Aos(ra'>a has n,,,te'1 * ">'0u,mme*,n me State of Queensland ^romiefttongMlSlair AtMl.Gordonstone. Curragn. ana Coa1 Re sources of Queensland CQi The r""ies 3's 3,1 ;oca(efl,n;ne Bowen gjjin witnm 100 miles of one anotner Coal from AFCO'sAuStralian mines moves inrough Die ports of Gladstone and Mackey to Asia and as far as Europe and South America. ARCO Coal Austraiias headouarters are m Brisbane. r 9 (, fi-rnaudes h.sitl.ot \Kt "\K(OG*jthas been protittnnt> i not in rnihn fnrjusl vim \<f/r> and alrmd\ lRKH'Xil lustratia t\ one uj the nuintryt -shoal iton ftitnn %. Our hues/ tn-nfs ttrr ttttTvasimi. fhe deit UPment of (ordtne>t<ne u l(f >n e ie> the largest tnidert'nntnd i oal mine in (he * ountry. .1*1 Ih liimfiu Nun 11, if in in fWj. (aptuity n also in fnmt \ al (urra^h." PNYC 00013058 Seaport 0 Coal Ume Headauarters unique marketing advantages. In 1990, ARCO's 87 percent ownership in Curragh netted shipments of 3.3 million tons of coal for export and another 1.8 million tons of coal for the Queensland Electricity Commission. Coal Resources of Queensland fCRQ) is ARCO Coal's second operating mine in Australia CRQproduces both high-quality metallurgical and steam coals for export from its underground operations. CRQcoal is exported tojapan. Korea. India, Malaysia and Europe. ARCO has 100 percent ownership of CRQ, which shipped 1.1 million tons in 1990. The Blair Athol mine, in which ARCO hoidsa 31.4 percent ownership interest, shipped 2.6 million net tons ofsteam coal in 1990. Most of this coal is exported toJapanese electrical utilities under long-term contract. The new Gordonstone mine is under development and scheduled for production startup in 1992. Gotdonstone is expected to be the highest volume underground coal mine in Australia by 1994. It will utilize state-of-the-art technology and is expected to give ARCO a substantial competitive edge in mining tech niques for the 21$t century. With recoverable reserves estimated in excess of 100 million gross tons, this new production is destined primarily for shipments tojapan and Europe. Adjacent acreage, believed to have significant additional reserve potential, is currently being evaluated. The company's ownership in Gor donstone increased horn 65.5 percent to 95 percent in early 1991 with the purchase ofan Australian co-venturer's interest. Venezuela ARCO Coal Company holds a 24 percent interest in ajoint venture that operates a 1.7 mil lion ton per year surface coal mine in the Guasare region ofVenezuela. The Company has reached a tenta tive agreement to sell its interest in this project to one ofits partners, subject to the approval of appropriate governmental agencies. Environmental Sensitivity As operator ofboth surface and underground mines. ARCO Coal Com pany has distinguished itselffor the environmental sensitivity of its reclamation programs and for its health and safety programs. During 1990, the Black Thunder Mine was awarded its third consecutive "Excellence in Surface Mining" award from Wyoming's Department of Environmental Quality It also received the "Outstanding Conservation Award" from the National Institute for Urban Wildlife. These awards were in recognition of Black Thunder's successful post-mining land use programs, which involve permanently reclaiming and managing the lands for livestock grazing and wildlife habitat. ARCO Coal's US. mines have outperformed the domesuc coal industry in recent yean in terms of tons-perman-hour-worked and in fewest lost workdays. An early assessment of 1990 performance, using an internal safety index, indicates a 19 percent improvement compared to 1989 results. As an example of this com mitment to safety, during 1990. the West Elk mine received the award for the safest underground coal mine in Colorado for the third consecutive year. Safety and training programs at all ARCO Coal mines emphasize the interdependence of safety and productivity, a combination that has a direct posidve impact on the Company's employees and overall bottom-line performance. PNYC 00013059 STOCKHOLDER RETURN l ash Di' idend* Pert omnmn Share rW/lIM VOI) 4.D0 2.ou 1.1)0 .it, .17 -in .11 <*) Maximizing stockholder return is a primary consideration behind virtuallv even action \R( n mnl< i ukv UHO's attention to financial implications and capital markets plavs a vital role in itwrategu planning mil execution. Success is measured in terms of rate of return, and for the past six tears. iRi o common Mm i. has achieved a 23.3 percent average annual growth, compared to the Si-P 3<h > Index average ->l i'U percent. ARCO's stock repurchase programs, the first ofwhich was started injuh 19R4. are designed n> mainlain an optimal capital structure which has increased stockholder value. BetweenJune 3d. I9H4. and Dei mil in '!. IWO. theCompanv repurchased 101 million shares of ARCO common stock for Sti.6 billion, at an aveiagc price of S63.78 per share. In 1900. ARCO repurchased 5.7 million shares of stock for Srtis.'s imlUnn. ai an average price of S120 per share. Tlie Company has successfullv integrated operating goals with the capital markets. During the I.im me -tears. ARCO was involved in two large public offerings of stock in whollv owned subsidiaries. In 19*7. the Companv sold just under 20 percent of the stock of.ARCO Chemical Companv. for total proceed' oi nearh $600 million. In 1989, ARCO sold over 30 percent of the stock of Lvondell Petrochemical Compam tor total proceeds ofSi.2 billion. ttTiile maintaining active interests in both companies. .ARCO and its *tm-MuWrier v were able to realize value that had not been reflected in .ARCO's stock price when the compame' wen- oper ated as divisions of .ARCO. Through this publiclv held subsidiary structure. ARCO and its stockholder' "ill continue to participate along with other stockholders in these companies' growing future The value that .ARCO's financial group brings to bear on the bottom line can also be illustrated in the linea ments arena. Unlike most companies. ARCO manages most of its pension funds iiuernalh through .i unit - a the Company. .ARCO Investment Management Companv i.AIMCO). Over the past five vears. MMi <> has consistentlv been a top performer, based on external surveys of major pension funds. These re'iih' h.iucomribuied toot fund which is in excess of expected liabilities and virtually have eliminated the nerd n> fund the pension plans in recent years. As is evident, bv following its basic strategies consistentlv at all levels of its operations. ARt O has been .iblr to continue to offer an outstanding return to its stockholders over the long term. PNYC 00013061 r High-auaiity assets and low-cost operations nave seen central to *RCOs competitive dif ferentiation Achieve ment of acoroi>,iate manciai leverage-s necessary to out operating Each of ARCO's corpo rate strategies work in unison to build stock holder return. Paramount to these strategies has been concentration on the core hydrocark Cons business, while integrating the best. mostefficientuseof capital markets to meet operat- 4 Hydroearbon-besed imegraton of capital markets High-quality assets, low costs 4 Appropriate financial leverage 4 Competitive differentiation pNYC 00013062 kmttfth R. Dukrrutrt V/1-..r tUr /v< Sttl. nI t.illmimrnI .-\ffoir\ tm'oii*- limit at \R< On b*>t I'spnsuihn t*rms of profiti /tshrioifir tradition that \R< O u /rmni thil unrh timi xprrOitio^ ,nfh \l OrmphiM AACOs investments in charuatjie community programs m Alaska topped S2.5 million m 1990 r in the flacky Mountain and Southwest regions ARCO Devoted SS.i million to'community charitable protects. inoiu^ to hrtp (until < brttiT worl/t. Rowit 17 hours a month n . iiluiitrir ijjortx \R( ft supports fhr Community charitable projects in the Western Region received S129 million from ARCO dur ing 1990. Additional con tributions were made to netionel programs end in countries outside the U.S. where ARCO is doing business. PNYC 00013063 COMMUNITY INVOLVEMENT AR< .0 manages Us community participation in much the same wav it approaches the hvrirocarbonv busi ness. To be the verv best. ARCO works to maximize the value of its contributions. ARtiO's people, both active and retired, prov ide the qualitv element in commumtv involvement. The>e emplovee groups are activelv involved whenever ARCOs name appears as a sponsor and frequently when it is not listed. .ARCO also serves as a catalvst. increasing participation bv others, to mnliiplv its own direct contributions manvfold. In 1990. ARCO donated more than S26.2 million to nonprofit organizations through the ARCO Foundation's direct grams, emplovee matching programs and other company participation programs. A spirit of involvement is inherent at-ARCO. .All emplovees. from the newest workers to the chairman of the board, are involved. Employees and retirees give freely of their own time. Employees also mav be partici pants in programs where their time is donated during working hours. Their volunteer efforts take them from inner-cifv schools and homeless shelters to city commissions, councils and volunteer fire departments. Volunteer coordinators are active in ARCO's major locations, working to make all emplovees aware of involvement opportunities. Through these programs in 1990. an estimated 185,000 hours were devoted bv 4.290 emplovee volunteers. In 1990. the .ARCO Foundation contributed nearlv $6 million to organizations in which emplovees or retirees were contributing either their personal time or money. The Volunteer Grants program, which seni $226,400 to 340 charities, requires emplovees to certifv that they have worked few the charitv a minimum ot 12 hours a month for ac least six months on their own time..Additionally employees' cash ctwuribmions of $25 or more to qualified organizations are matched by the Company. In response to this program, the Foundation made 13.015 matching gifts totaling $2.7 million in 1990. The remaining funds went to United Why programs in 200 communities under which employee and retiree contributions are matched. For the past several yean. ARCO has devoted special attention in its community involvement to education projects starting at the preschool levels up to institutions of higher learning. The Companv has been active in Junior Achievement programs in every area that it does business and .ARCO Chairman Lod Cook has served as the organization's national chairperson. As part of its community involvement programs. ARCO also helps address urgent issues facing commu nities. In 1990. for example, the Company paid the first installment ofa five-year $500,000 gram to the (Ulifomia Institute ofTechnology to support Caltech's pioneering research on air pollution. The funds will to the Caltech Center for Air Quality .Analysis to investigate the characteristics of emission sources, (he chemistry of air pollutants, and the economic and technological feasibility of various emission controls To further the interests of all businesses in the communities where it operates. .ARCO spent over S200 mil lion of its total purchasing budget with minority-and women<iwned vendors and contractors in 1990. pMYC 00013064 k Karnmgs -- millions Tiii.il asseis -- millions \i Mi units to fixed assets -- mill ions Total revenues -- millions Props lent-oxide and derivatives--- million pounds TRA and derivatives -- million gallons siviTne monomer and derivatives -- million pounds 1990 S SSI 53,739 $ 339 52.950 2.563 955 1.098 /'XU S 4D5 52.b.s5 S 262 S2.663 2..W6 912 MTS 1 wx.v S 494 S2.:> *x 5 24." 52.Too 2.612 917 1.66.) /'<x: 5 2'tT 52 .-i U 5 2,,'> 5I.9.-.2 2.:ti4 794 1 290 -T 5 141 51 4 So 5 i: 51 S4I 1 .'.IVi 1.2.V l"hi\inNt tttrinih svinil-tthtnr finunnttl nru! \ffili\tifal tnf'>rr*ntu>n of.\M(.0( hrmicot (nn<hh*\ not truiu/i' s/ufi\iu\ *rittfr>l hi - iirmnit nHrt\ rtltunrrl fa AftCOnn/i tnfhutffi in .\R(.() \ intrrm#litr > iwmt<uh n*ul sftrrmlts t/rinhoh wyv*/. M,'f> it\, urporm^ilUnntM intrrryi ryptnir/ind mtnnntx tntfffU. ARCO CHEMICAL COMPANY ARCO holds an 83.4 percent interest in ARCO Chemical Companv tNASE: RtAii. a leading international manufacturer and marketer of intermediate chemicals and specialty products used in a hroad range of consumer goods. The Companv is the world's leading producer of propvlene oxide, tertian bun! alcohol iTRA) and meihvl tertian, burvi ether iMTBE) and a leading merchant marketer ofstvrene monomer. ARCO Chemical Company, headquartered in Newtown Square. Pennsylvania, had a challenging tear in 1990. OnJuly 5. a tragic explosion and fire at its manufacturing facility in Channelview, Texas, took IT lives. The entire plant was shut down, and individual units at the plant were then restarted from midSeptember through lateJanuary 1991. The reconstruction included manv saferv enhancements and equip ment upgrades. Clean Air Advantage The Clean Air Act Amendments of 1990 created a fast-growing market for reformulated gasolines, many of which rely cm MTBE to make a cleaner-burning fuel. ARCO Chemical, which has 34 percent ofworld MTBE capacity, has seen demand rise dramatically over the past 10 vearsdue to vtTBE's performance and environmental benefits. Worldwide Growth .ARCO Chemical operates around the world. Today. 52 percent of its operating assets are outside the United States. In the Company's.Americas region, several accomplishments in 1990 are noteworthy The Company closed a major acquisition of a worldwide urethane potvols business, which moves .ARCO Chemical further into propylene oxide derivatives and builds its portfolio of value-added products. Under terms of a consent agreement with the Federal Government, the business is being maintained as a separate venture until the Companv completes certain divestiture obligations. In Channelview. construction began on a propylene oxide/styrene plant, which should be completed by early 1992. In Europe, a new urethane polyols plant at Fos-sur-Mer, France, is nearing completion. This plant will also make polvmerpolvols. which enhance the combustion resistance of foams and allow the replacement o! chiorofluorocarbons (CFCs) with environmentally friendly blowing agents. In Eastern Europe, the Com pany is evaluating business opportunities that could includejointventures. The Companv has established sales representation in Moscow, U.5.S.R-. and will open a sales office in Vienna, Austria, in April. In the .Asia Pacific region, the Company'sjoint-venture plant in South Korea began operations at the end or 1990. Capacity expansions were completed at the Company'sjoint-venture plant inJapan, which alreadv was the largest propylene oxide plant in .Asia. Additionally. ARCO Chemical is building a technical center m Singapore and has established safes representation in Shanghai. China. Por more information, a copy of.ARCO Chemical's annual report can be requested from Investor Retailors. ARCO Chemical Company, 3801 VVfest Chester Pike. Newtown Square, PA 19073-2837. PNYC 00013065 4RCD Chemical Bjre tnanJOvears eipenenee wth O'Yjenatea fuels mat"*** environmental and oe'r5,ipj.iee eer'f,,:s ln :ne jjslOvea'S.^e ^mnahy "as oecame *ng -WC'nj Dr3 aucei al MTBI. a simsie molecu lar compound com prising oxvsen. caroon ana hydrogen, has sev eral umQuedualities, tt Boosts ocianer/) unleaded gasoline and reduces automotive emissions mat contnb- uie to smog and otone ;l pollution. , zFj ti f'.. uri, r Ojju f, \K<<Hh, m,,al(, " Wf <> CJtfmnol aniHifKitn Ihat ti'Mnwtfur JItftl. :n!l i^iik 1 Mih\lan htilli i,nritfuitf, a> ''"nil ijfthr l V t/r ""Wv .ihuhhair ri or. if<1/01/ iillrhtljitr ttihil gmi^/i/.'i. ow!/h. h<f milrnd.-tlJ,u h i,, t u'.'/ii Hrn.fr.nf;, t>`ht\Jr.\tllll ,,,th, I s. ffir A. ffi.Tfa./.f, "*..1 fr.iii,, fJt. '-'/< r r.1 infniltd .ibi-rrur hair a 'vthnologiial "f. .n/ r.//..j../r.^*r, ~ Oxygen Hydrogen Carbon P/i/yc o o ?a oee 1990 mv W3 EUrn mgs -- millions Tii.il assets -- millions LrirtitioiH io b\ert assets -- millions 'Liles and other operating revenues -- millions Refiners crurie runs -- thousand barrels das Petroleum prod tin sales -- thousand barrels dav tihslene. props lene and polvmers sales -- million pc Minds $ 356 $1,372 $ 145 $6,495 257.7 305.7 6.373 S 374 51.2b? S 17b S3.338 23b.4 :V)2.t> 3.04K S M3 $ 913 S n.3 S4.b9b 247.3 267.3 5.294 l h\ tiih/r rrt,rrwitt\J/itl*il''nrinnanonl anil vahuiial in/ormilion of l.yiwMIfhm hmnial / $ 123 5 ?->o S 29 $3,931 240.4 21HI.H 4..'`30 $ 123 $ '.9? $ lx s 3.0 In >----- 2x7x 5.993 LYONDELL PETROCHEMICAL COMPANY ARCO holds a 49.9 percent interest in Lyondell Petrochemical Company iN'YSE: LYO). Headquartered in Houston. Texas. Lyondell is one of the largest producers of ethylene and propylene in the United States and is also one of the nation's largest independent refiners. Despite uncertainties and rising costs in the last five months of the sear as a result of the Middle East crisis, Lyondell's 1990 earnings were only slightly below 1989 levels. The year started strongly after a late 1989 freeze shut down many plants on the Gulf Coast, resulting in light supply/demand conditions for mans of the Company's products. Lyondell was able to keep its units running without serious interruption and this created significant profit opportunities during the first half of 1990. Prices for crude oil and related raw materials were lower in the second quarter, but conditions changed dramatically with the Middle East crisis. Along with its competitors. Lyondell was faced with rapidlv escalat ing and volatile raw materials costs. Lvondell's feedstock and product flexibility which is one of the Company's strengths, made it possible to switch feedstocks as supply and market conditions changed. At the same time, the Companv increased its emphasis on low-cost production and reduced expenses. Additional capacity for several major products contributed to Lyondell's performance in 1990. Demand for ethvlene and propvlene increased sales volumes to record levels. During 1990, the Company completed capacity expansions for butadiene, paraxylene. methanol and MTBE. In earlv 1990, Lyondell acquired a polyethylene and a polypropylene facility, thereby entering the downstream polymers markets. For additional information, a copy of Lvondell's 1990 Annual Report can be obtained bv writing to ImeMoi Relations. Lyondell Petrochemical Company. 1221 McKinney. Houston. TX "7010. PNYC 00013067 ? SELECTED FINANCIAL INFORMATION AHw ii ilnltn'' ixirptper hiii'iimnii'l' i990' Salt-sand other operating revenues-- including excise taxes $18,808 Net income 5 2.011 tamed per share $ 12.15 < ash dividends per common share $ 5.00 Total assets $23,864 Long-term debt and capital lease obligations $ 5.997 SI 6.021 S 1.953 S 11.26 S 4.50 S22.261 S 5.313 SI 8.324 S 1.583 S X.7X S 4.00 S21.514 S 5.665 SI 6.977 s 1.224 s 6.6,x s 4.00 s:'2..X9U s 6.514 Sl.').|l|<4 S nr, s u 3 4.nil 321.91:1 8 6.06R /1 t'fn> 2- W >,n p,( niitim*/rim < umultitr, 2 nn 4 Sot'to < ofluill'tturd hrum >tnI *,/ ihr hoot* nt h >< hoUmi fu' n 1i. .r*rfrf.\.<v.iv, $ > ;iiutu* - >; 1,4 1' ... MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Consolidated Operations The upward trend in crude nil prices had a -truin' milnenceon the Companv's favorable results over the past two sears. The Companv believes that the operating straiegv followed by management also contributed to the Companv's favorable performance. This -tr airs' was put into place as part of the positive steps management undertook in the mid-1980s to restructure thr Companv's operations bv selling underperforming and nonstrategic assets and reducing annual operating costs. The main elements of this strategy have been to focus on markets where the Compam luestablished a competitive advantage, to maintain and enhance the qualitv of the Companv'- a--et- in r.u h of its business segments and to effectively utilize the capita! markets. Indicators of the Companv's performance have been its return on stockholders' equitv and the increase m its common stock value. The Company's return on stockholders' equitywas 29.3 percent in I99ti coinpared to 30.5 percent in the prior vear and 26.1 percent in 1988. The closing price on the New Virk Muck Exchange for ARCO's common stock on December 31.1990.1989and 1988 was S123V.. Sill -and .. respectively. Overview of 1990 Results In 1990. ARCO recorded the highest net income in the hi-tor. ut the Companv. Net income was $2,011 million, or $12.15 per share. In 1990. the effect of higher crude ml priceparticular^ in the third and fourth quarters, was partialiv offset by higher exploration expense- ami operating costs. .Additionally, higher refined product margins, especially in the first half of the vear. cuntributed to the earnings improvement, However, the earnings from ARCO's ownership interest in \R< t > Chemical Company ("ARCO Chemical") were lower as a result of reduced domestic volumes and u>< rc.i-rd costs associated with a plant explosion and fire in the second half of the vear. partialiv offset bv margin implements for propvlene oxide and methyl tertiary butyl ether. The 1990 results included a $323 million gain as a result of the Company's adoption of Statement oi Finan cial Accounting Standards No. 96. 'Accounting for Income Taxes." The cumulative effect of this jicuunnm: change on 1990 net income per share was $1.95. In addition, the 1990 results included approximately S185 million in after-tax gains resulting from a -eiilrment with SONAT related to an offshore accident and the sale of .ARCO's Norwegian oil and gas a-vt- THc-e gains were offset by the Companv recording after-tax charges of $130 million for future enviruiwnvm.it clean-up costs and $267 million for tax and royalty issues. Overview of 1989 Results In 1989. the Companv's net income was $1,953 million, or SI l.2 i*-t share. The 1989 results included a $634 million after-tax gain from .ARCO's sale of a majorin inirt v-i n Lyondell Petrochemical Company ("Lyondell'') injanuan 1989. Partialiv offsetting this gain wen- > 1 f' million in first quarter after-tax charges for future environmental clean-up costs, provision- U" 'I" anticipated loss associated with the sale of .ARCO Solar. Inc., which was completed in 1990. the wiiudo>,n PNYC 000130S9 Return on Stockholders' Equity .ibatabW preferred stock, and some tax-related provisions, in 1989. higher crude oil prices and increased sales volumes for natural jjas. refined products and coal were offset hv higher refining and marketing oper ating costs, lower ARCO Chemical sales volumes, lower margins for snrene and the effect of ARCO's reduced ownership interest in Lsondell. Results tn 1989 included S43 million of after-tax gams resulting from settlements of natural gas contract disputes, increased interest income resulting from the investment of the proceeds from the sale of Lvondeli's common stock, and reduced interest expense resulting from lower average debt outstanding during the vear. Overview of 1988 Result* TheCompanv'$neiincomewas$1.383million.orS6.7Hpersharem t'WK. Net income in 1988 included a SI 10 million net after-tax gain as a result of the sale of ARCO's shares of Britoil pic. S30 million of after-tax gains from property sales and S22 million of after-tax gains from the settlement of natural gas contract disputes. However, these gains were largely offset bv charges relaiingto the writedown of abatable preferred stock, the carls redemption of a debt issue, the move of ARCO Interna tional Oil and Cas Company's headquarters from Los Angeles to Plano. Texas, and future env ironmental clean-up costs. Rtsults of Consolidated Operations Revenues Sales and other operating revenues were S18.8 billion in 1990. S16.0 billion in 1969 and $18.3 billion in 1988. The $2.8 billion increase in 1990 com pared to 1989 primarily resulted from higher crude oil and refined product prices. The decline in sales between 1989 and 1988 resulted from the exclusion of Lyondell from ARCO's consolidated financial state ments beginning in 1989. Excluding the impact of Lvondell on 1988 sales. .ARCO's sales and revenues increased SI.660 million in 1989 from 1988 as a result of higher crude oil and refined product prices and higher sales volumes for coal and refined products. In addition, sales to Lyondell were included in .ARCO's 1989 sales since Lvondell became an equity investment injanuarv 1989. Income from equirv investments was $277 million in 1990. $240 million in 1989 and $48 million in 1988. The higher income in 1990 and 1989 resulted from the inclusion of ARCO's interest in the net income of Lvondell. which has been accounted for as an equitv investment since .ARCO's sale of a majority interest in )anuan 1989. The 1990 amount also includes $43 million after tax related to ARCO's recognition of income from dividends received in excess of its equity investment in Lyondell. Other revenues were $443 million in 1990 compared to $199 million in 1989 and $206 million in 1988. The increase in 1990 primarily resulted from the settlement with SONAT and the gain from the sale of .ARCO's Norwegian oil and gas assets. Rssolts of Consolidated Operations Expanses Costs and otheroperating expenses were $10.8 billion in 1990. $9.0 billion in 1989 and $10.7 billion in 1988. The increase in operating expenses in 1990 compared to 1989 primarily resulted from higher crude oil and refined product costs and higher operating and exploration expenses. The decline in 1989 operating expenses from 1988 resulted from the exclusion of Lvondell from .ARCO's consolidated financial statements in 1989. Excluding the impact of Lyondell on 1988 operating expenses, ARCO's operating expenses increased $1,616 million in 1989 from 1988 as a result of increased crude oil trading costs, increased refining and marketing operating costs, charges for future environmental clean up costs and provisions for the anticipated loss associated with the sale of ARCO Solar. Inc., which was com pleted in 1990. In addition, purchases from Lyondell were included in .ARCO's 1989 expenses since Lvondell became an equity investment inJanuary 1989. Selling, general and administrative expenses were Sl.652 million in 1990. $1,476 million in 1989 and $1,408 million in 1988. The increase in 1990 selling and administrative expenses compared to 1989 resulted from higher retail marketing costs associated with ARCO Products Company's additional am/pm stores and Brazilian operations, higher advertising costs associated with .ARCO's new emission-control gasolines. EG-1* and EC-Premium, and higher delivery charges associated with .ARCO Coal Company's operations. In addition. ARCO Chemical incurred higher administrative costs, including costs associated with per sonnel additions and additional support facilities, related to its continued program of worldwide grow th. Excluding the impact of Lyondell on 1988 selling, general and administrative expenses. .ARCO's expenses increased $156 mitlion in 1989 from 1988. The increase in 1989 resulted from many factors. .ARCO Products Company's selling expenses were higher as a result of retail marketing costs associated with its service sta tions. additional am/pm sites and Brazilian operations .ARCO Chemical s selling expenses increased due to 86 87 88 89 90 PNYC 00013070 MANAGEMENT'S DISCUSSION continued expansion. ARLO Coal Gvmpany's selling expenses were higher due to expansion nt itsAuvtra. Iian operations. ARCO Oil and Gas Company's selling expenses increased due to higher natural gas >ales volumes. Tuxes other than excise and income taxes were SI.3U3 million in 1990. $94:1 million in 19*9 and S665 mil. hon in !9KX. The increase in 1990 taxes primarily resulted from an increase in Brazilian value-added taxes and Alaskan production taxes associated with higher crude oil prices in 1990. The increase in 19*9 [ax,, le-tilted from a Brazilian value-added tax w hich replaced a similar ax w hich in prior sears was included m the petroleum product purchase price, an increase m production taxes associated with higher crude ml prices in 19*9. and an increase in the rate for Alaskan production taxes due to the revision of the Economic Limit Factor. Excise taxes were S800 million in 1990. $670 million in 1989 and $698 million in 19*8. The higher amount in 1990 primarily resulted from increases in federal and state excise taxes during the year. The decrease in 1989 excise taxes from 1988 occurred because the sales ofjet fuel to the Department of Defense became tax exempt in 1989. This decrease was partially offset bv higher gasoline sales volumes. Result* of Segment Operations Oil and Gas ARCO's oil and gas exploration and production operations earned 51.364 million aftertax in 1990, which was an increase of 34 percent from the $88" million after tax in 1989. The effect of higher crude oil prices, partially offset by higher operating costs, increased exploration expenses and lower production volumes, was responsible for the improved performance. The 1990 earnings also included after tax gains of approximately S185 million as a result of the SONAT settlement and the sale of ARCO's Nor wegian assets. ARCO's oil and gas after-tax earnings in 1989 increased 64 percent from the S542 million after tax earned in 1988. Higher crude oil prices and natural gas sales volumes, partiallv offset by higher operating costs and taxes, including Alaskan production taxes, were the primary reasons for the increased earnings in 19*9. The 1989 results also included $43 million of after-tax gains asa result of settlements of natural gas con tract disputes. The earnings in 1988 included $30 million ofafter-tax gains from property sales and $22 million of after-tux Closing Stock Pnce On December 31 dollan gains from settlements of natural gas contract disputes, partially offset by an $18 million after-tax charge in connection with the move of .ARCO International Oil and Gas Company's headquarters from Los .Angeles to Plano. Texas. As previously discussed, fluctuating crude oil prices have had a significant impact on earnings over the past two years. The Company's domestic composite average price for crude oil was $16.56 per barrel in 1990. $13.13 per barrel in 1989 and $9.90 per barrel in 1988. Average domestic natural gas prices were 31.66 per thousand cubic feet in 1990. $1.67 per thousand cubic feet in 1989 and $1.68 per thousand cubic feet in 1988. The Compands worldwide petroleum liquids production averaged 705.400 barrels per day in 1990.730,100 barrels per day in 1989 and 737.800 barrels per day in 1988. ARCO's share of production from its largest Alaskan field. Prudhoe Bav, was 276.800 barrels of petroleum liquids per day in 1990. compared to 294.300 barrels per day in 1989 and 320,600 barrels per day in 1988. The decrease in worldwide production in !99o primarily resulted from the following factors: reduced Alaskan production as a result of scheduled field downtime for installation of a gas handling facility (GHX-l) which is designed to increase production at Prudhoe Bay. pipeline maintenance, a Kuparuk River field production payback of 9.000 barrels per da\ which commenced onJuly 1.1990, and natural field decline. The decrease in 1989 worldwide production was the result of a decline in Prudhoe Bay production primarily resulting from production curtailments related to the EXXON VALDEZ oil spill, natural field decline and facility downtime for maintenance. The Company's share of petroleum liquids production from the Kuparuk River field decreased to 138.400 barrels per day in 1990 from 147.100 barrels per day in 1989 and 146.600 barrels per dav in 1988. The decrease in 1990 primarily resulted from the six-mdnth effect of the above-mentioned payback of 9.000 bar rels per day: The 24-month pavback is the result of a final equity redetermination-in 1990 among ARt.O .Alaska and the other working interest owners of the field. 86 87 88 89 90 pNYC 00013071 \R Average Domestic Sales Price For Crude Oil dollars per barret 20 15 Lower 48 petroleum liquids production was 204.500 barrels per day in 1990,200,600 barrels per day in 1989 and 186.900 barrels per dav in 1988. The 1989 production represented a 15.000 barrel per dav increase in Lower 48 production as a result of.ARCO's acquiring West Coast oil and gas properties from Tenneco in late 1988 that were fully integrated into ARCO Oil and Gas Company during 1989. Foreign petroleum liquids production averaged 67.100 barrels perdav in 1990. 70.100 barrels perdav in 1989 and 63.600 barrels per dav in 1988. The decrease in 1990 was in Indonesian production. This was the result of natural field decline and a reduction in the number of barrels required to provide for cost recovery under the Indonesian production sharing agreement. The increase in 1989 was due to a higher Indonesian production as a result of the 1989 startup of the Kurau field and higher production from the United Kingdom as a result ofproperties acquired from Tricentrol PLC. Domestic natural gas production totaled 1.554 billion cubic feet perday in 1990.1.529 billion cubic feet per day in 1989 and 1.389 billion cubic feet per day in 1988. The 1989 increase was the result ofa full vear of pro duction from the Wilburton gas field in southeastern Oklahoma and production from new wells in the Gulf of Mexico. Coa( .After-tax earnings from che Company's coal operations were $9t million in 1990, $92 million in 1989 and $79 million in 1988. Total coal shipments in 1990 were 38.3 million tons compared to 39.4 million tons in 1989 and 32.4 million tons in 1988. The reduction in 1990 shipments was due to mild weather and softer market conditions in the United States. The higher earnings in 1989 compared to 1988 resulted from the fulLvear impact ofAftCO's increased ownership in two Australian mines and increased domestic sales from the Company's Black Thunder mine in Wyoming. Refining end Marketing .After-tax earnings for refining and marketing operations were $439 mil lion in 1990, $291 million in 1989 and $368 million in 1968. The increased earnings in 1990 resulted from higher refined product margins, primarily in the first half of 1990. partially offset by the effects of higher crude oil prices and ARCO's twoweek price freeze cm gasoline prices in August following President Bush's call for price restraint. The lower earnings in 1989 compared to 1988 resulted primarily from increased operating costs and a $60 million after-tax charge for future environmental clean-up costs, partiallv offset by higher refined product prices and sales volumes. Yfest Coast petroleum products sales totaled 444.000 barrels per day in 1990.435,500 barrels per day in 1989 and 418.800 barrels per day in 1988. The progres sive increase in sales from 1988 resulted from higher demand for refined products that the Company was able to meet by achieving refinery utilization rates in excess oflOO percent ofaverage operable capacity at its two West Coast refineries and by making purchases and resales of products not manufactured by the Company. Transportation After-tax earnings for the transportation operations were $274 million in 1990. $266 million in 1989 and $308 million in 1988. The increase in 1990 compared to 1989 was the result of a higher Trans Alaska Pipeline System ("TAPS") tariff rate partially offset by lower TAPS volumes associated with declining production from Prudhoe Bay and higher pipeline maintenance expenses The 1990 tariff included a makeup for costs resulting from volume losses and higher costs in 1989 associated with the EXXON VALDEZ spill. The operational impact of the EXXON VALDEZ incident largely contributed to the decline in earnings from 1988 to 1989. Intarmadlata Chemicals end Specialty Producte ,After-tax earnings for the Company's inter mediate chemicals and specialty products segment were $271 million in 1990. $336 million in 1989 and $400 million in 1988. The segment primarily consists of ARCO Chemical, an 83.4 percent owned subsidiary of the Company. ARCO Chemical's earnings in 1990 included a pre-tax accrual totaling $120 million for business interruption insurance related to theJuly 5 explosion and shutdown of ARCO Chemical s Channelview facility. In 1990. an increase in propylene oxide and methyl tertiary butyl ether margins was more than offset by a decrease in styrene margins and volumes and higher administrative and interest expenses. The 1990 .ARCO Chemical results also reflect pre-tax charges of approximately $90 million for costs related to the ChanneWiew accident. ARCO Chemical's earnings decreased in 1989 versus 1988 as a result oflower sales and processing volumes for major products and significantly leaver styrene margins. 86 87 88 89 90 43 pNYC 00013072 MANAGEMENT'S DISCUSSION Cash Provided Bv Operations millions ofdollars Lyondell Petrochemical Company .\JCO s 49.9 percent equity share of Lyondell s net income wM S223 million for 1990 and $214 million for 1989. The 1990 results include $45 million after tax relating to \RCO $ recognition of income from dividends received in excess of its equity investment in Lyondell. In 1990. higher refining profits were more than offset by lower olefins margins resulting from higher raw material costs. In 1988. Lyondell was 100 percent owned by ARGO and earned $529 million. Unallocated Expanaoa and Other Operations Unallocated expenses and other operations after tax totaled $410 million in 1990, $250 million in 1989 and $104 million in 1988. The 1990 results included approximately $250 million after tax for provisions for taxes and royalties, a $110 million after-tax charge for future environmental dean-up costs primarily associated with operations previous^ discon tinued and a $S0 million after-tax charge for the early redemption of two debt issues. In addition. 19% results included lower net investment income. The 1989 results included a $120 million after-tax charge for future environmental clean-up costs and a $25 million after-tax charge for the final year of abatable pre ferred stock associated with the prior sale ofaluminum assets to Alcan. In addition. 1989 results included higher net investment income and lower insurance expenses, partially offset by provisions for the antici pated loss associated with the sale of ARGO Solar. Inc., which was completed in 1990. The 1988 results included the $110 million after-tax gain on the sale of Britoil pic stock, a $75 million after-ux charge relat ing to the write-dcftvn of abatable preferred stock and a $16 million after-ux charge associated with the early redemption ofa debt issue. Financial Position and Liquidity Cash flows from operating activities were $3309 million in 1990. $3,729 million in 1989 and $3,551 million in 1988. The cash flows from operating activities in 1990 included settlement payments totaling approximately $1,090 million to the Internal Revenue Service rlRS 'i and the State ofAlaska. The payment to the IRS resulted from an agreementwhich settled all IRS claims for additional windfall profit tax liabilities The payment to the Sate ofAlaska resulted from an agreement which settled all major claims relating to royalty issues The net cash used in investing activities was $2,560 million and primarily included expenditures for additions to fixed assets (including dry-hole costs) of $2,718 million, proceeds from asset sales of$338 million, and a net increase in short-term investments of $93 million. The proceeds from asset sales in 1990 resulted primarily from the sale of a number ofoil and gas properties, includingARCO's Norwegian properties. . The net cash used in financing activities was $1,018 million in 1990 and primarily included repayments of long-term debt of$810 million, proceeds of$1,062 million from the issuance of long-term debt, dividend payments of$810 million and treasury stock purchases by ARGO of$704 million. Cash and cash equivalents and short-term investments totaled $3,031 million at year-end 1990. Short-term borrowings were $932 million at year-end 1990. The Company hasacapital spending program that includes $3.9 billion for additions to fixed assets in 1991. Future capital expenditures remain subject to business conditions affecting the industry, particularly changes in price and demand forcrude oil, natural gas and petroleum products and any changes in the tax laws. h is expected that future cash requirements for capital expenditures, dividends, debt repayments and am treasury nock purchaseswill come from cash generated from operating activities, future borrowings and existing cash balances. inJanuary 1989. the Company's Board of Directors authorized a new common stock buy-back program. Under the program, the Company repurchased for its treasury approximately 5.7 million shares for $685 million in 1990. At their January 1991 meeting, the Company's Board of Directors approved a 12'i cent increase in the quarterly dividend payable to holders of common stock, raising the quarterly dividend from $1.25 to $1,375 per share. The Company called fix'early redemption in 1990 an aggregate of $500 million ofdebentures. Proceeds 86 87 88 89 90 PNYC 00013073 L l f 3 Treasury Stock Repurchases. T mjtfitfnj Of$hcrn V 9 t V jo * 8 7 V from iheLvondell stock offering as well as from certain ocher asset sales were used for (he redemption. The C.ompanv anticipates an annua! reduction in after-tax interest expense resulting from the eartv redemp tion of these debentures to be approximately $35 million in 1991 and beyond. At December 31.1990. the Company's long-term debt was $5,997 million. On January 30,1990, ARCO Chemical issued $225 million of9.80 percent debentures due 2020. In Novem ber and December 1990. ARCO Chemical issued an aggregate of$400 million ofdebentures with interest rates ranging from 9.375 to 10.25 percent and maturing between November 1,2000. and November 1.2010. Environmental Mattara The Company is subject to federal, state and local environmental laws and regulations which require the Company to remove or mitigate the effect on the environment of the dis posal or release of certain chemical and petroleum substances at various sites, including Superfund sites, oil fields, service stations, terminals and other operating and closed facilities. The Company is currently participating in environmental assessments and cleanups at numerous sites under these laws, and mav in the future be involved in additional environmental assessments and cleanups. The Company continues to estimate the amount of these costs in periodically establishing reserves based on progress made in deter mining the magnitude of clean-up costs, the timing and extent of remedial actions required by the applicable governmental authorities, the amount of the Company's liability in proportion to the other responsible parties and the extent, ifany. to which such costs are recoverable from insurance. As the scope of the Company's obligations becomes more dearly defined, there may be changes in these estimated costs, which might result in future charges against the Company's earnings. During 1990. the Company added $220 million to its reserves relating to future environmental clean-up costs. At December 31.1990. such reserves totaled $737 million. Statement! of Financial Accounting Standards Not Yot Adopted In December 1990. the Financial .Accounting Standards Board issued Statement ofFinancialAccounting Standards ("SAS") No. 106. "Employers'Accountingfor Postretirement Benefits Other Than Pensions." SPiS No. 106 requires the Company to adopt its provisions for fiscal yean beginning after December 15.1992. The precisions will require the Company to begin accruing its estimated postretirement benefit obligation for current as well as retired employees. The Company currently recognizes an expense when an obligation is paid. Once the Companydetermines its transition obligation, it has rwooptions forrecognizing that obligation. The Company can choose to immediately recognize the transition obligation as the effect of an accounting change, subject to certain limitations. Alternatively, the Company can amortize on a straight-line basis the transition obligation over the average remaining service period ofactive plan participants. Ifthat period is less than 20 yean, the Company may elect to use a 20-year period. If the Company uses the delayed basis for recognition ofthe transition obligation, then the unrecognized amount must be disclosed. The Company has notyet had sufficient time to evaluate the provisions ofSAS No. 106. Effect! of Inflation While the annual rate of inflation remained moderate during the three-vear period ended December SI. 1990, the Companycontinued to experience certain inflationary effects. The Company will achieve some benefits by using current, inflated dollars to satisfy its debt obligations and other monetary liabilities, because the Company's monetary assets are less than its monetary liabilities at December 31,1990. Based or the age ofthe Company's property, plant and equipment, it is estimated that the replacement cost of those assets is greater than the historical cost reflected in the Company's financial statements. Accordingly, the Company's depreciation, depletion and amortization expense for the three yean ended December 32.1990, would be greater ifthe expense were stated on a current cost basis. To the extent that the Company uses the last-in. first-out (UFO) inventory accounting method, the replace ment cost ofinventory is greater than the historical cost reflected on the Company's balance sheet, while the costs of products sold reflected in the Company's income statement approximate current cost. PNYC 00013074 * CONSOLIDATED STATEMENT OF INCOME ANO RETAINED EARNINGS Shiltons ofdollars txetptprr thanamounts Revenges Sales and other operating revenues -- including excise taxes Income from equity investments Interest Other revenues Expenses Costs and other operating expenses Selling, general and administrative expenses Taxes other than excise and income taxes Excise taxes Depreciation, depletion and amortization Interest income before gain on subsidiary stock transaction ' Gain on subsidiary stock transaction Income before income taxes, minority interest and cumulative effect ofchange in accounting principle Provirion for taxes on income Minority interest in earnings ofsubsidiary Income before cumulative effect ofchange in accounting principle Cumulative effect of change in accounting for income taxes Not Income $18,808 277 368 443 19,896 316,021 240 355 199 16.815 318.324 -48 290 206 18.868 10,763 1,652 1,303 800 1,723 835 17,076 2,820 -- 8,975 1,476 943 670 1.748 799 14,611 2,204 957 10.731 1.408 665 698 1.704 842 16.048 2.820 -- 2320 1,076 56 3,161 1,142 66 2.820 1.144 93 1,688 1,953 1.583 323 $ 2,011 -- $ 1.953 -- 3 t.583 Earned par Shara Before cumulative effect ofchange in accounting principle Cumulative effect ofchange in accounting for income taxes Nat Incoma par Share Retained Earning* Balance,January 1 Net income Cash dividends: Preference stocks Common stock Cancellation of treasury stock Balance, December SI ' Sn SMts on pagn 49through)9. $ 10.20 S 11.26 3 8.78 1.95 -- -- S 12.15 $ 11.26 3 8.78 $ 5,656 % 7.562 $ 6.683 2,011 1.953 1.583 (5) (807) -- (4) (756) (3.119) (4) (700) -- $ 6,837 $ 5.636 $ 7,562 PNYC 00013075 4h Il I \ c o n s o l id a t e d b a l a n c e s h e e t Orrrmber 31 MilUont a) dolUin Assets Current assets: C.ish and cash equivalents Short-term investments .Accounts receivable Inventories Prepaid expenses and other current assets Total current assets Investments and long-term receivables: Investments accounted for on the equirv method Other investments and long-term receivables Fixed assets: Property, plant and equipment . Less accumulated depreciation, depletion and amortization Deferred charges and other assets Total Assets 1990 1989 $ 1,102 1.929 1.963 760 294 6,048 5 1.173 1.836 1.483 710 212 5.414 291 194 66 80 357 274 30,164 13,764 28.431 12.774 16.400 1,059 15.657 916 $23,864 $22,261 liabilities and Stockholders' Equity Current liabilities: Notes pavabie Accounts payable Taxes payable, including excise taxes Long-term debt due within one year Accrued interest Other $ 932 1,394 529 502 233 670 $ 577 1.078 409 704 200 469 Total current liabilities 4,260 3.437 Long-term debt Deferred income taxes Other deferred liabilities and credits Minority interest Stockholders' equity: Preference nocks Common stock, $2.50 par value; shares issued 167,679,563 (1990). 167,584,194 <1989); shares outstanding 158,912.873 (1990), 164.186.803 (1989) Capital in excess of par value of stock Retained earnings Treasury stock, at cost Foreign currency translation Total stockholders' equity Total Liabilities and Stockholders' Equity 5.997 3,440 2,709 309 I 5.313 3,407 3.273 269 1 419 740 6.837 (890) 42 419 764 5.636 (236) (22) 7,149 6.562 $23,864 $22,261 i L TV ComfQKifMovt Urn wcmfvl tfferU muM /ewiMiii(jbr oilandga) pnductnfaaimtu Sh Vw j on paftt *9ihmtgh >9. PNYC 00013076 CONSOLIDATED STATEMENT OF CASH FLOWS For fV tear ended Ortrmbrt )! \UUions nffiolian Cash flows from operating activitias: Net income Adjustments to reconcile net income to net cash provided bv operating activities: Depreciation, depletion and amortization Gain on subsidiary stock transaction Income from equitv investments Dividends from equitv investments Noncash provisions greater (less) than cash payments Net change in deferred taxes Drv-hole expense Net change in accounts receivable. inventories and accounts pavable Net change in other working capital accounts Other Net cash provided by operating activities Cah flows from invoking activities: .Additions to fixed assets (including dry-hole costs) Net cash provided (used) by short-term investments Proceeds from asset sales Payments received on notes for sales ofproperty Net proceeds from subsidiary stock transaction Other Net cash used in investing activities Cash flow* from financing activities: Repayments oflong-term debt Proceeds from issuance of long-term debt Net cash provided (used) by notes payable Dividends paid Treasury stock purchases, including subsidiaries Other Net cash used in financing activities Effect ofexchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear Set Xoits m pcgei 9 rtimif* 39. <~i 1990 I9H9 /9M $2,011 $1,953 $1,583 1,72$ ___ (277) 192 (472) 35 299 (214) 272 (58) 5,509 1.748 (634) (240) 84 570 (363) 163 380 57 ii 3.729 1.704 -- (48) 31 146 129 149 (263) 114 6 3,551 (2,718) (95) 538 -- -- (87) (2,560) (2.105) (814) 149 -- 1.241 (334) (1.863) (3,038) 1,597 145 60 -- 142 11.094) (810) 1,062 277 (810) (704) (33) (1,018) (2) (71) 1,173 11,102 (486) 459 85 (760) (810) (29) (1.541) (28) 297 876 $1,173 (868) 219 (1.026) (704) (601) (13) (2.993) (23) (559) 1.435 $ 876 PNYC 00013077 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS \* Soul Accounting Policv ARCO's accounting policies conform to generally accepted accounting principles, including the "success ful efforts" method of accounting for oil and gas producing activities. PnnnpUs o) Consolidation The consolidated financial statements include the accounts of all subsidiaries, ventures and partnerships in which a controlling interest is held. The Company also consolidates its interest in undivided interest pipeline companies and in oil and gas and coal mining joint ventures. The Company uses the equity method of accounting for companies where its ownership is between 20 and 50 percent, and for other ventures and partnerships in which less than a controlling interest is held. Cash Equivalents: Short-Term Investments Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit, and marketable securities other than equity securities, maturing within three months of purchase. Shori-tenn investments consist of similar investments maturing in more than three months of purchase. Cash equivalents and short-term investments are stated at cost, which approximates market value. Oil and Gas UnprovedProperty Costs Unproved property costs are capitalized and amortized on a composite basis, considering past success experi ence and average property life. In general, costs of properties surrendered or otherwise disposed of are charged to accumulated amortization. Costs of suc cessful properties are transferred to developed properties. Dismantlement, Restoration and Reclamation Costs The estimated costs, net ofsalvage value, ofdismantling facilities or projects with limited lives or facilities which are required to be dismantled by contract, regulation or law, and the estimated cost of restoration and reclama tion of (and associated with such projects and land associated with mining operations, are accrued during operations 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 produc tion. in which case such costs are considered in determining depreciation, depletion and amortization. Fixed Assets Fixed assets are recorded at costand are written off on either a unit-of-production method or a straight-line method based upon the expected lives of individual assets or groups of assets. Disposal ofFixed Assets Upon disposal of assets depreciated on an individual basis, residual cost less salvage is included in current income. Upon disposal ofassets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage is charged against accumulated depreciation. Minority Interest Minority interest represents the minority stockholders' proportionate share of the equiev and the income or loss of certain consolidated subsidiaries, primarily ARCO Chemical Company (ACC). At December 31.1990. ARCO owned approximatelyS3.4 percent ofthe outstanding shares of ACC. Reclassifications Certain previously reported amounts have been restated to conform to classifications adopted in 1990. Publie Offering of Lyondell Sou2 Petrochemical Compeny Common Stock InJanuary 1989. ARCO completed an initial public offer ing ofits Lyondell Petrochemical Company (Lyondell) common stock. The Company recognized an after-tax gain of $634 million from this transaction. Effective January 1989. ARCO accounts for its investment in Lvondell on the equity method. At December 31.1990. ARCO owned 49.9 percent of Lyondell common stock outstanding. The market value ofARCO's shares ofLyondell common stock, based upon the closing quoted market price at December 31.1990. was $585 million. PNYC 0001307$ NOTES TO CONSOLIDATED f i n a n c ia l s t a t e me n t s Stxt > Sogmont Information The Company operates primarily in the Resources and Products segments. The Resources segment includes the Compant's oil and gas operations, which comprise the exploration, development and production of petro leum. including petroleum liquids (crude oil. condensate and natural gas liquids! and natural gas; the purchase and sale of petroleum liquids and natural gas; and the mining and sale of coal. The Products seg ment 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, such as propylene oxide, smene monomer, tertiary butyl alcohol and methyl tertiary butyl ether. Lyondell, a significant equity investment of the Com pany. is engaged in the manufacture, refining and marketing of basic commodity chemicals, including eth ylene. propvlene. methanol and aromatics, and petroleum products. Prior to ARCO s sale of a majority interest in 1989. Lvondell was consolidated and reported as the integrated petrochemical and petroleum pro cessing component of the Products segment. Segment information for che years 1990.1989and 1988, was as follows: Millions ofdollen Sales and Other Operating Revenues Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing Other operations Elimination of inienegmem amounts Total 1990 1989 1988 $ 9.429 S 8.198 $ 6,949 541 519 403 8,649 946 6.789 862 6.138 931 2,990 2.663 2,700 -- 4.696 99 55 48 (9,796) (3.005) (3.541) 918408 916.021 $18,324 Intersegment sales/transfers were made at prices approximating current market values. The amounts for intersegment sales that were included in sales and other operating revenues were as follows: Millions ofdollars 1990 1989 /&$$ Resources: Oil and gas Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing Other operations lota! 53.311 29 390 24 -- 26 $9,796 $2,632 . $2,406 18 14 312 333 13 11 -- 28 $3,005 732 25 $3,341 Pretax Segment Earnings Resources: Oil and gas Coal Products: Refining and marketing transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing Equity earnings from Lvondell Petrochemical Company Gain on subsidiary stock transaction Unallocated expenses and other operations Interest Income taxes Minority interest Cumulative effect ofchange in accounting principle Net income 92,147 $1,464 S 939 199 138 114 806 484 638 496 424 488 439 596 761 -- -- 850 290 214 -- -- 957 -- (599) (895) (1476) (56) (3171 (799) (1.1421 (661 < 143 <842) < 1.1441 i93t 923 ___-- ___Z $2,011 31.953 SI.383 After-Tax Segment Earnings Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products (a) Integrated petrochemical and petroleum processing Equicv earnings from Lvondell Petrochemical Company Gain on subsidiary stock transaction Unallocated expenses and other operations Interest Cumulative effectof change in accounting principle Net income 91,964 91 439 274 $ 887 92 291 266 5 542 79 368 308 271 336 400 ---- 223 214 -- -- 634 -- (410) (564) (2301 (317) <539 329 $2,011 -- $1,953 SI.383 <ai \ttofminenlyinumlofSf}ll. il66) ondp93i m 1990. l9S9onit 1988, mfteliveh PNYC 0000079  Millions ofdollars 1990 f 9S9 1988 Total Assets Revourrev: Coal products: Refining and marketing Transportation SI 1.146 310.620 $11,046 929 857 725 2.503 2.162 2.175 2.170 2.326 specultv products Integrated petrochemical and petroleum processing Other operations Tocal 3.7S9 -- 3.385 $23364 2.655 -- 322.261 2.548 $21,514 Depreciation. Depletion and Amortisation Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing Other operations Tout $1,247 43 144 135 -- 26 $1,723 31.311 132 128 $1,748 $1,269 $1,704 .iddilioru to Fixed Assets Resources: Oil and gas Coal Products: Refining and marketing Transportation intermediate chemicals and specialty products Integrated petrochemical and petroleum processing Other operations Total $1,560 109 370 $1,309 148 314 $2355 107 251 539 -- $2,718 262 $2,105 245 $3304 Millions o/doltan 1990 IV89 /M ' Foreign Operations Sales and other operating revenues: Oil and gas Coal Refining and marketing *1 Intermediate chemicals and specialty products Other operations Elimination of intersegment amounts--oil and gas Total $ 719 288 2.052 5 577 256 1.427 S 484 154 1.373 1.146 920 850 26 28 25 (3031 .2761 1195) 33.928 32.932 52.891 Net income: Oil and gas Coal Refining and marketing1*' intermediate chemicals and specialty products'1" Ocher operations Total $ 76 34 29 148 (43) $ 244 3 i8l 34 ". 89 (3) 3 119 5 .71) 23 14 92 6 $ 64 loul assets: Oil and gas Coal Refiningand marketing1** Intermediate chemicals and specialty products Other operations Total 32,191 569 321 1.662 155 $4,898 $1,902 519 244 1.154 167 $3,986 31.895 388 275 1.067 53.938 lai Principally marAttingopmiioni ia Bmti tbi Intlvdn earnings ofryum affiliates. pnnnpotty Asianjoint ventures, of US. flf and t3!,m 1990, 1989and 1988. respectively. L PNYC <>0013080 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sot/-* lnvntori Inventories are recorded when purchased, produced or manufactured and are staled at the lower of cost or market. In 1990. approximately 55 percent of inven tories, excluding materials and supplies, are valued by the last-in. first-out (LiFOi method. Materials and sup plies and other non-LIFO inventories are valued pre dominantly on an average cost basis. Total inventories at December 31.1990 and 1989, com prised the following categories: Milbms ofdollars Crude oil and petroleum products Chemical products Other products Materials and supplies Total 1990 JIM 149 47 $760 1989 $150 256 $710 The excess of the current cost of inventories over book value was approximately $191 million at December 31, 1990. Xou5 Fixd Assets Property, plant and equipment, and related accumu lated depreciation, depletion and amortization at December 31,1990 and 1989, were as follows: Miliimi sfdeOan Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Other operations .Accumulated depreciation. depletion andamortization Total 1990 1989 $20,177 $19,492 976 789 2.915 $490 2491 9411 2,467 $91 90,164 1.851 28.431 15,764 $16,406 $15,657 T Expenses for maintenance and repairs for 1990,1989 and 1988 were $519 million, $518 million and $469 mil lion. respectively. Bank Credit Facilities and Soie6 Compensating Balances In 1990. the Companyand certain wholly owned subsid iaries had bank credit facilities of approximated $5.2 billion. Included in this total is a credit facilitv negoti ated on behalf of a subsidiary that is denominated in pounds sterling. At December 31.1990. there were no borrowings under these committed facilities. maintains its own credit facility of $500 million which is not guaranteed by ARCO. At December 31.1990. there were no borrowings against the ACC credit facility. Notes payable on the balance sheet 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 Company has no requirements for compensating balances in a specific amount at a specific point in time. The Company does maintain balances for some of its banking services and products. Such balances are main tained on an average basis and are solely at the Company's discretion, so that effectively on any given date, none of the Company's cash is restricted. Sou 7 Interest Expense Interest expense for the years ended December 31,1990. 1989 and 1988, was comprised of the following Mi&enitfdcilars Long-term debt Short-term debt Other Capitalized interest Total interest expense Total interest paid in cash 1990 $616 118 180 914 (79) $855 $802 1989 $587 75 232 894 (95) $799 $818 1988 $625 80 203 908 1661 $842 $850 PNYC 00013081 RD Sole 8 Taxes Taxes other than excise and income taxes for the years ended December 31. 1991). 1989 and 1988. comprised the following: Million* of 4olt/in Property' Production severance Value Added Other Total 1990 $ 191 459 196 556 $1405 1989 $177 395 130 '.>41 $943 1988 $188 268 _ 209 $665 The components of the provision for taxes on income for the years ended December 31. 1990, 1989 and 1988. were as follows: Million! ofMian 1990 1989 1988 Federal: Current Deferred Foreign: Current Deferred State: Current Deferred Total provision for taxes on income Total taxes paid $ 517 177 794 $1,074 $ 777 (206) 89 868 866 104 116 (4) 14 100 130 107 24 131 43 39 81 $1,076 $ 731 183 (39) 144 $1,142 146 1 147 $1,144 $1,267 $1,053 The sources of deferred income tax for the years ended December 31,1990,1989 and 1988, were as follows: .Mittens ofMian Federal: Depreciation Capitalized interest Oil and gas lease amortization Intangible drilling costs Reserve provisions Subsidiary stock transaction Other Foreign State Total 1990 1989 1988 t 31 13 <14> 11 171 M 41 *77 (4) 39 $311 S 38 23 (19) <U) (181) (60) 4 (206) 14 (39) $(231) $120 19 (3) (25) -- -- (22) 89 24 1 $114 The domestic and foreign components of income before income taxes, minority interest and cumulative effect of change in accounting principle, and a reconciliation of income tax expense with tax at the effective federal statutory rate for the years ended December 3t, 1990, 1989 and 1988. were as follows: Vfittoiu ofMian ftrrftu ofPretax Amount Ineome 1990 Income before income taxes: Domestic Foreign Total Tax at 34% Increase (reduction) in taxes resulting from: Subsidiary dividend exclusion Taxes on foreign income in excess of sututorv rate State income taxes (net of federal effect) Other Provision for taxes on income 1989 Income before income taxes: Domestic foreign Total Tax at 34% Increase (reduction) in taxes resulting from: Subsidiary stock transaction/ dividend exclusion T^xes on foreign income in excess of statutory rate State income taxes (net offederal effect) Other Provision for taxes on income 1988 Income before income taxes: Domestic Foreign Total Tax at 34% Increase in taxes resulting from: Taxes on foreign income in excess of statutory rate State income taxes (netoffederal effect) Other Provision for taxes cn income $2,260 560 $2420 $ 959 80.1 19.9 100.0 34.0 (48) 92 54 19 $1,076 (1.71 33 19 ,7 38.2 $2430 331 $3,161 $1,075 89.5 10.5 100.0 34.0 (83) 63 95 (8) $1,142 (2.61 2.0 3.0 (.3) 36.1 $2481 239 $2,820 $ 959 91.5 8.5 100.0 34.0 78 97 10 $1,144 2.8 3.4 .4 40.6 PNYC 00013082 NOTES TO CONSOLIDATED f i n a n c ia l s t a t e me n t s EffectiveJanuary J. 1990- the Companv adopted State ment of Financial Accounting Standards No. 96, 'Accounting for Income Taxes." The cumulative effect of this accounting change on vears prior to 1990 was a S323 million reduction in the Company's deferred tax liability as of December 31.1989. The reduction resulted in an increase in net income for 1990 of 5323 million or SI.95 per share. The effect of the change on 1990 net income, excluding the cumulative effect upon adoption. was not material. Sotc9 Long-Torm Dobt Long-term debt at December 31.1990 and 1989, com prised the following: Afilicmj ofdollan 5H%,due in 199? 7.70%. due in 2000 TV.^.due in 2003 3H%,due in 2000 5.909b, due in 2007 8*%.duein 1997 6 H%, due in 1993 7%.due in 1991:3400 less unamortized discount of 323, effective rate 13.6% ZercKOupon notes, due in 1992: 3500 less unamonized discount of 369. effective rate 13.04% 11 !V*b.due in 2015 11%. due in 2013 10'/.%.due in 2000 10 Vs-%. due in 1995 10 >*%.due;/> 2005 Second Senes Medium-Term Notes Third Series Medium-Term Notes 10 ^%.duein 1995 9 l/4%.due in 1996 . 9 '/<%.due in 1993 9'/*%. due in 1993 97A%.due in 2016 6 A%, due in 1996 9 W-%,due in 2011 ARCO British Limited: Tricentrol Debt Eurobonds, due in 1999 Eurobonds, due in 2000 ARCO Chemical Company-. French bank loans 9.35%. due in 2019 Medium-Term Notes 9.9%.due in 2000 9.375%. due in 2005 10-25%-due in 2010 9.8%. due in 2020 ACNLbank loans Capitalized lease obligations Other Total, including debt due within one year Less: Debt due within one vear Bonds held in unking fund Long-term debt 1990 3 31 H 139 87 265 S3 30 1989 5 36 62 147 93 265 41 39 377 355 431 -- 250 500 500 -- 162 ISO 150 250 200 450 10* 300 69 290 145 163 123 80 200 100 100 224 178 27 472 6,680 302 137 35.997 377 300 200 250 500 500 18 172 150 150 250 200 450 102 300 131 241 "" 147 123 100 -- -- -- -- -- 26 445 6.170 704 153 35.313 Maturities and sinking fund obligations for the five veafs subsequent to December 31.1990. are as follows tmil. lions of dollars): 1991 -- S502: 1992 -- $649:1993 _ $553; 1994 -- $99:1995 -- Sl05. Sott 10 Other Commitments and Contingencies The Companv has commitments, including those related to the acquisition, construction and develop ment of facilities, all made in the normal course of business. At December 31,1990 and 1989. there were contingent liabilities with respect to guarantees of securities of other issuers of approximately $470 million and S405 million, respectively, of which approximated $34 mil lion and 542 million, respectively, are indemnified. Of the 1990 amount, 5380 million relates to the guarantee of commercial paper issued bv an unrelated third parts. The Company believes it would be made whole if it became obligated to pay pursuant to such guarantee. SinceJune 1975, the Company and certain other petro leum companies have been named as defendants in a number ofcivil antitrust actions brought against them by state agencies or by private entities as class actions which allege violations of federal and state monopolv and restraint of trade statutes.The various types of relief sought in such actions include injunctive reliefand dam ages. The Company is unable to predict the outcome of these actions at this time, but believes that thev can be successfully defended; however, adverse decisions in cer tain such actions could have a significant effect on the scope and nature of the Company's operations. Final judicial determination of these actions is expected to take a number ofyears. Claims of alleged violations of pricing regulations previ ously in effect established by the Department of Energy brought by private parties are pending in two actions against the Company, one ofwhich has been certified as a class action. These two matters, when resolved, are not expected to have a material adverse effect on the con solidated financial position of the Company. On March 24,1989, an oil tanker, the EXXON Valdez, ran aground near Bligh Island, Alaska, after taking on crude oil from the Valdez Marine Terminal operated bv Alveska Pipeline Service Company (AJveska). of which ARCO Pipe Line Company (APL) owns approximately 21 percent Roughly 240.000 barrels of crude oil were dis charged into the waters of Prince Wiliam Sound. .Asa result, numerous lawsuits seeking damages and injunc tions have been filed in state and federal court in Alaska against Exxon and Alyeska, alleging; among other PNYC 00013083 ? things, that Alveska responded inadequate!' to the oil ^pill. APL. along with the other owners of Alveska, has been named as a defendant in at least tweniv-nine federal cases and nventv-three state cases. The Company does not believe that resolution of these claims will have a material adverse effect on its consolidated finan cial position. There is pending against the Company a consolidated class action lawsuit alleging certain misstatements and omissions in the prospectus relating to the sale to the public bv the Company in January 1989 of just over 50 percent of the common stock of Lyondell, the Com pany's then wholly owned subsidiary The suit also names as defendants Lvondell. some of Lyondell's directors and the underwriters of theJanuary 1989 initial public offering. The suit also alleges certain misstatements and omissions in certain of Lyondell's public disclosures made during 1989. The suit seeks to recover damages for stockholders who purchased stock between the period beginningJanuary 18.1989 and ending on November 14. 1989. The original complaint in this consolidated class action was dismissed by the court in October 1990. The plaintiffs then filed an amended complaint in January 1991. A new action alleging similar misstatements and omissions was filed by a stockbroker against the Com pany. Lyondell and two of Lyondell's directors in Decem ber 1990. The Company does not believe that resolution of these claims will have a material advene effect on its consolidated financial position. The Company and former producen of lead pigments and lead paints have been named as defendants in cases filed by the Cities of Sew fork, Philadelphia and New Orleans and/or their respective housing authorities seeking damages and injunctive relief as a consequence of the presence of lead-based paint in housing units owned or operated by these plaintiffs and in privately owned buildings located in New \brk and Philadelphia. The Philadelphia case also purports to be a class action on behalf of all cities in the United States with over 100.000 residents that are engaged in or contemplating a program involving any aspect of lead paint and its alleged hazards. The Company does not believe that the resolution of these claims will have a material adverse effect on its consolidated financial position. Since August 1990. the Company and its subsidiary. Atlantic'Richfield Hanford Company, have been named as defendants in a number of civil actions brought against them by private citizens as purported class actions which allege commission of common law torts and violations offederal and state environmental stat utes. These actions arise out ofthe performance by the subsidiary of a contract with the Atomic Energy Commis sion to provide chemical processing, waste manage- }} ment and support services at the Hanford Nuclear Res ervation in Richland, Washington during the period from 1967 to 1917. The various types of reliefsought in the actions include injunctive relief and compensators' and punitive damages. The Company does not believe that the resolution of these claims will have a material adverse effect on its consolidated financial position. The Company is also the subject of or parts- to a number of pending or threatened legal actions for which the legal responsibility and financial impact cannot pres ently be ascertained. The Companv does not anticipate chat any ultimate liability arising from anv of these suits would have a material effect on its consolidated financial position. The Company is subject to other loss contingencies pur suant to federal, state and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects cm die environment of the disposal or release of certain chemical and petroleum substances at various sites, such as Superfund sites, oil fields, service stations, terminals and other operating and closed facilities. The Company is currently partici pating in environmental assessments and cleanups at numerous sites under these laws and may in the future be involved in additional environmental assessments and cleanups. The amount ofsuch future cost is indeter minable due to such factors as the unknown magnitude of dean-up costs, the unknown timing and extent of the remedial actions which may be required, the deter mination of the Company's liability in proportion to other responsible parties and the extent, if any. to which such costs are recoverable from insurance. These con tingencies also include claims for personal injuries allegedly caused by exposure to toxic materials manu factured or used by the Company. Although these comingendes could result in significant expenses or judgments, such expenses or judgments are not expected to have a material effect on the Company's consolidated financial position. The operadons and consolidated financial position of the Company continue to be affected from time to time in varying degrees by domestic and foreign political developments as well as legislation, regulauons and litigation pertaining to restricdons on production, imports and exports, natural gas reguladon, tax increases, envi ronmental regulauons, cancelladon ofcontract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on the Com pany varygreatly and are not predictable. These uncertainues are part of a number of items that the Company has taken and will continue to take into account in periodically establishing reserves. PNYC 00013084 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sntfl! Retirement Plant The Company and its subsidiaries have defined benefit pension plans to provide pension benefits to substan tially all employees. The benefits are based on years of service and the employee's compensation, primarily dur ing the last three years of service. The Company's funding policy is to make annual contributions as required by applicable regulations. In 1990. 1989 and 1988. the Company charged pension costs as accrued, based on an actuarial valuation for each plan, and funded the plans through contributions to trust funds that are kept apart from Company funds. The following table sets forth the plans' funded status and amounts recognized in the Company's balance sheet at December 31.1990 and 1989: MilliontofdoUan Attcti Exited Armmulaud Acmmuloled Bmtfia Benefits Exceed Assets 1990 Actuarial present value ofbenefit obligations: Vested benefit obligation $1,914 $ $44 Accumulated benefit obligation $1,322 $ 347 Projected benefit obligation Plan assets at fairvalue, primarily stocks and bonds Projected benefit obligation (in excess of) or less than plan assets Unrecognized net gain Prior service cost not yet recognized in net periodic pension cost Remaining unrecognized (asset) obligation fromJanuary 1.1986 .Adjustment required to recognize minimum liability Prepaid pension cost (pension liability) recognized in the balance sheet $1,499 $.193 6M (36) <$) (499) -- $ $70 14 <299) (18) 103 8$ (144) $ 158 $ ($59) 1989 .Actuarial present>a)ue ofbenefit obligations: Vested benefit obligation .Accumulated benefit obligation Projected benefit obligation Plan assets at fair value, primarily stocks and bonds Projected benefit obligation (in excess of) or less than plan assets Unrecognized net gain 'Prior service cost not vet recognized in net periodic pension cost Remaining unrecognized (asset) obligation fromJanuary 1,1986 Adjustment required to recognize minimum liability Prepaidpension cost (pension liability) recognized in the balance sheet $1571 91,301 $1,460 2.427 967 (44)) 44 (595) -- 9 95 $ 155 3 157 $ 172 11 (161) (26) 13 100 (74) $(148) Pension costs related to Company-sponsored plans. on a pre-tax basis, including amortization of unfunded pro jected benefit obligations for 1990.1989 and 1988. were as follows: Millions njdollars Service cost-benefits earned during the period Interest cost on projected benefit obligation Actual return on plan asseu Net amortization and deferral Net periodic pension cost (benefit) 1990 1989 1988 $ 98 190 127 (317) $ 32 117 1349) 190 $ 28 120 <180) 26 $ (22) S 110) S .6, The Company's assumptions used as of December 3l. 1990.1989 and 1988. in determining the pension cost and pension liability shown above were as follows: ftrrwu Ditcoum rate Rate of salarv progression Long-term rate ofreuim on assets 1990 1989 IMS 9.5 9.75 10.0 5.0 5.0 3.0 9.5 9.5 9.5 The Company provides certain health care and life insurance benefits for substantially all retired employ ees. The costs of such benefits are recognised as incurred. In 1990,1989 and 1988, these costs totaled S39 million, S25 million and $22 million, respectively. Moitl2 Stockholder*'Equity Detail of the Company's capital stock as of December 31. 1990 and 1989, was as follows: 1990 19S9 $9.00 Cumulative convertible preference stock, par $1: Shares authorized Shares issued andoutstanding Aggregate value in liquidation -- (thousands) $2.80 Cumulative convertible preferencestock, par $1: Shares authorized Shares issued andoutstanding Aggregatevalue in liquidation-- (thousands) Common stock, par$2J0: Shares authorized Shares issued Shares outstanding Shares held in treasury 245.714 114.352 $9,148 245.71 A 126.101 910.088 4,785.041 1,070585 4.785.041 1.181.758 $74,920 $82,723 600,000.000 167.679569 158512.873 8,766,690 600.000.000 167.584.194 164.186.803 3.397.391 PNYC000A3085 6h VK The changes in preference stocks were due solelv to con versions. The S3.00 cumulative convertible preference stock is convertible into 6.3 shares of common stock. The $2.30 cumulative convertible preference stock is convertible into 2.4 shares ofcommon stock. The com mon stock is subordinate to the preference stocks for dividends and assets. The $3.00 and $2.80 preference stocks mav be redeemed at the option of the Company for $82 and $70 per share, respectively. The Companvhas authorized 352.000 shares of Series B. 3.75 percent cumulative preferred stock. $100 par. of which none were issued or outstanding at December 31. 1990 and 1989. Bv Board authorization, effective December 31,1989. the Company cancelled 50 million shares of common stock held in treasury. As a result of the cancellation, common stock decreased bv $125 million, capital in excess of par value of stock decreased by $228 million, and retained earnings decreased by $3,119 million. The balance in the Company's common stock was $419 million at December 31.1990 and 1989, and $544 mil lion at December 31.1988. The change in 1989 was due to the cancellation of treasury stock. Detail of changes in the Company's treasury stock in 1990.1989 and 1988. was as follows: Millions ofdollars Balance.January 1.1988 Treasurv stock purchases Conversions Employee benefit plans Balance.December31.1988 Treasurv stock purchases Conversions Cancellation of treasury stock Balance. December 31.1989 Treasurvstock purchases Conversions Balance. December 31.1990 $2,438 492 (18) (3) 2.909 827 (28) (3,472) 236 666 (61) $ 690 The net decrease in capital in excess of par value of stock in 1990,1989 and 1988 of$24 million. $252 million and $18 million, respectively, was due primarily to the conversion of preference stock to common stock and the cancellation of treasury stock in 1989. The Company's certificate of incorporation contains a provision restricting dividend payments; however, at December 31.1990. retained earnings were free from such restriction. At December 31. 1990. shares of the Company's authorized and unissued common stock were reserved as follows: Conversions: 33.00 Preference stock 52.80 Preference stock Stockoption plans Employee bencfitplans Total 777.594 2.568.684 3.160.397 9.974.482 16.481.157 Under the Company's incentive compensation plans. awards ofthe Company's common stock mavtve made to officers, outside directors and key employees. Sou 13 Stock Options Options to purchase shares of the Compands common stock have been granted to executives, outside directors and key employees. These options become exercisable in varying installments anu expire eight to ten vears after the date ofgrant. Transactions during 1990.1989 and 1988, were as follows: Balance.January 1.1988 Granfed Cancelled or. expired Exercised (average option price per share: 649.20) Balance. December 31.1988 Granted Cancelled or expired Exercised (averageoption price per share: $50.19) Balance. December 31.1989 Granted Cancelled or expired Exercised (average option price per share: $63.80) Balance. December 31.1990 AtDeceroberSl. 1990 Shares exercisable Shares available foroption (1.789,470 at December 31.1989) Average option price per share: Shares under option Shares exercisable 690.119 .339.37) (3.176) (43.316) 1.182.998 424.496 (5.479) (113.480) 1.488.535 474.610 (i4.404) 1,791,133 386.269 ^ <>0013086 L NOTES TO CONSOLIDATED FINANCIAL s t a t e me n t s Soitl-f Earned p*r Short Earned per share is based on the average number of common shares outstanding during each period, includ ing common siock equivalents that consist of certain outstanding options and all outstanding convertible securities. The dividends attributable to the convertible securities are considered, for this calculation, to be avail able to common shares. The information necessary for the calculation of earned per share for the years ended December 31.1990.1989 and 1988, was as follows: Milkens ofdollars and sham exrepl pershort amounts Net income Average number of common chares outstanding Common stock equivalents Total Earned per share 1990 1989 1988 52,011.2 51.952.8 51.583.1 161.5 4.0 163.5 512.13 169.2 4.2 I7S.4 511.26 173.8 4.6 180.4 58.78 Sou l! Supplamonttl C**h Flow Information The following is supplemental cash flow information provided in accordance with SELS So. 95, "Statement of Cash Flows." for the years ended December 31.1990, 1989 and 1988: Millions ofdollars 1990 1989 1988 Cross maturities of short-term investments Cross purchases of short-term investments Net cash provided (used) bv short-term investments 57359 55351 514.151 (7.952) (6.365) (12354) 5 (93) 5(814) 5 1397 Cross proceeds from issuance of notes pavable Cross repayments of notes payable Net cash provided (used) by notes payable 57,448 52.891 511.630 (7.171) (2.806) (12.676) 5 277 5 85 5(1.026) Cross noncash provisions charged to income Cash payments of previously deferred items Noncash provisions greater (less) than cash payments 5 990 5 834 5 489 (1.402)* (264) (543) 5 (472) 5 570 5 146 * Inctudts poymmti ofoppnxttuueh MOO outturn In the InternetRevenue Service and 8290 million to tU Stott ofAiasho >*. settlement ofdisputed unndfeli profit touts end royalty usuei m AftCO'l Aletkan Sank Slope crude production. During 1988, the Company purchased all of the capita} stock ofTricentrol PLC. In connection with the acqui sition. liabilities were assumed as follows: SUiltons ofdollars Set fair value of assets acquired Cash paid for capital stock Liabilities assumed JTio 1454, j'>5 Liabilities assumed consisted of $132 million of long term debt and $124 million outstanding under a short term credit facility. Sou 16 Last* Commitment* Commitments under capital financial leases are capi talized with the obligation recorded at the present value of future rental payments. The related assets are amor tized on a straight-line basis. At December 31.1990, future minimum rental payments due under leases were as follows: Millions ofdollars 1991 1992 1993 1994 1995 Lateryears Total minimum lease payments Imputed interest (rates ranging from 9.75% to 14.875%) Present value ofminimum lease payments included in long-term debt Capital Leases $3 5 5 3 5 87 102 75 Operating Leases $ 158 150 112 94 8$ 47J 51.050 5 27 Minimum future rental income under noncancelable subleases at December 31,1990. amounted to $21? miUion- Operaung lease net rental expense for the years ended December 31.1990.1989 and 1988. was as follows: Millions ofdollars Minimum rentals Contingent rentals Sublease rental income Net rental expense 1990 5206 5 (15) 5194 1989 5169 2 (23) 5148 1988 5163 1 (16) 5150 No restrictions on dividends or on additional debt or lease financing exist under lease commitments of the Company. Under certain conditions, options and obliga tions exist to purchase certain leased properties. PNYC 00013087 \R i i> Sot* l? Foreign Currency Traneection Loee Foreign exchange losses amounted to $102 million. $89 million and S97 million in 1990.1989 and 1988. respectiveh. relating primarilv to Brazilian operations. Financial Instruments with Sate IS Off-Balance-Sheet Risk At December 31.1990. the Company had letters of credit outstanding totaling S275 million, ofwhich approxi mately S95 million guarantee obligations carried on the balance sheet. At December 31.1990. the Company had outstanding several foreign currency forward contracts and foreign cross-currency forward contracts outstanding, maturing at various dates. The Company also has sold foreign currency put and call options outstanding. In the aggre gate. these transactions require the exchange of $49 million for 73 million Deutsche marks. $16 million for 2 billion yen, and 75 million French francs few 25 million Dutch guilders. Approximately $1 billion of the Company's long-term debt is denominated in foreign currencies 1b reduce exposure to foreign currency fluctuations, the Company has entered into a swap agreement on an 18 billion yen debt issue due in 1996 which fixes the principal balance at S1U2 million with an effective rate of 8.14 percent. The Company has entered into two currency swap agreements with a commercial bank to reduce its expo sure to sterling/dollar exchange rate fluctuations. These agreements, having a total notional principal amount of $380 million, effectively remove the Com pany's currency exposure created by agreements entered into with an unrelated third party. The currency swaps mature at the time the associated third party agreements expire in 1999 and 2000. The counterparties to these transactions are major inter national financial institutions; the Company does not anticipate nonperformance by the counterparties. Sou!9 Uyondell Petrochemical Company Summarized financial information for Lyondell, an equity investment ofARCO, was as follows; i9 SUlhont ofdnllan year Ended December 31: Sale* m ARCO and .ACC Income belore income taxes Net income$ ARCO'v equity m net income of Lyondell Cash dividends received from Lyondell 1990 /9H9 IW* $6,495 So.338 34.6y6 S 390S 667--$ 732 $ 5J7 $ yvs $ 356 S 374 S 343 $ 214 ii $ 164 5 48 At December 31: Current assets Noncurrent assets Current liabilities Long-term debt Other liabilities Stockholders' equity $ 788 3 801 $ 584 3 $ 550 S 434 $ 47) S 300 $ 315 3 334 $ 38" ' $ 9 raj Apfmximoltl6% end 10% efARCO'ipurrhaus .a l9Kjniut 1`otv. mpecuveh. ibi Includes 49.9% ofLyondell's 1990 income plus $41 mtfUoo nfimnx from dividend* received in execs* ofARCO 'i bests o/mwivni. icr ARCO't investments* Lyondell comprises 49 9% ofLsondells stock holders' eq*tty ptus ST2 million ofdividends rttetved tn exeat ofbeus. tdi Priorto 1969, Lyondell urns o 100% ownedconsolidated subsidiary. Sou20 Unaudited Quarterly Results Millions ofdoiian eterplpirshaftamounts 1990 I9S9 Sales and other operating revenues (including excise taxes) Qaarter ended: March 31 June 30 September SO December31 Total $ 4.215 4.035 4.816 5.740 $18,808 $ 3.962 4.334 3.714 4,011 516.021 income before income taxes, minority interest and cumulative effect of change in accounting principle Qiarter ended: March 31 June 30 September SO Decembers! Total $ 468 684 723 945 $ 2.820 $ 1.071 770 648 672 5 3.161 Net Income Quarter ended: March 31 June 30 September 30 December 31 Total $ 392* 391 462 566 S toil 3 704 467 379 403 $ 1.953 Earned per Share Quarter ended: March 31 June SO September 30 December 31 $ 5.55* $ 2.36 $ 2.79 $ 3.45 3 2.66 $ 2.14 * Inrludn nmulaUvttffulefckaipm occeununffor mtomriam el S lilua or SI. 9} ptr than. 1 PNYC 00013088 RESPONSIBILITY f o r FINANCIAL STATEMENTS INDEPENDENT ACCOUNTANTS REPORT To the Stockholders of Atlantic Richfield Company (ARCO) The Company's management assumes responsibility for the integrity and objectivity of the financial information contained in this Annua! Report, including the state ments covered bv the independent accountants' report. The Companv maintains an accounting system and related controls to provide reasonable assurance of the integrity and objectivity ofaccounting information and for the safeguarding of assets. The fair presentation of the Company's financial position and results of oper ations. in conformity with generally accepted accounting principles, is reported on by the indepen dent accountants. In addition to the accounting and control systems and the use of independent accountants, the Company maintains a staffof internal auditors who conduct inter nal 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 twenty years. The Committee currently consists exclusively of directors who are not employees of the Company, and meets as required, but at a minimum of three limes 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 empha sizing the' need for internal financial controls, and initiating special investigations as 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 pres ent, to discuss all appropriate matters. To the Stockholders end Board of Directors of Atlantic Richfield Company (ARCO) We have audited the accompanying consolidated bal ance sheets of Atlantic Richfield Company as of December 31,1990 and 1989. and the related consoli dated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31.1990. 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 auditto obtain reasonable assurance about whether the financial statements are free of material misstatement. .An audit includes exam ining, on a test basis, evidence supporting the amounts and disclosures in the financial statements An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. in our opinion, the financial statements referred to above present fairly, in all material respects, the consoli dated financial position of Atlantic Richfield Company as of December 31, 1990 and 1989, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1990, in conformity with generally accepted accounting principles As discussed in Note 8 to the consolidated financial statements, the Company changed Us method of accounting for income taxes in 1990. Lodwrick M. Cook Chairman of the Board and ChiefExecutive Officer Coopers 8c Lybrand Los Angeles-, California February 14,1991 PNYC 00013089 1Vi SUPPLEMENTAL INFORMATION (UNAUDITED) Oil and Gaa Producing Activities The Securities and Exchange Commission (SEC) defines proved oil and gas reserves as those estimated quanti ties of crude oil. natural gas. and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recov ered through existing wells with existing equipment and operating methods. ARCO reports reserve estimates to various federal gov ernment agencies and commissions. These estimates may cover various regions of crude oil and natural gas classifications within the United States and may be subject to mandated definitions. There have been no reports of total Company reserve estimates furnished to federal gewemment agencies or commissions which vary from those reported to the SEC since the beginning of the last fiscal year. Estimated quantities of proved oil and gas reserves of the Company were as follows: January). 1988: Proved reserves Proved developed reserves December 31.1988: Proved reserves Proved developed reserve* December 31.1989: Proved reserves Proved developed rerv December 31.1990: Prewd reserves Proved developed reserves fttmitum liquids Matural Cos Imillion barrets) fbilHon cubicfeat) Domestic fomgn Domestic foreign 2.818 2.201 2529 2.184 2.765 2.157 2.720 2,15* 223 5.854 897 86 4.806 319 264 6573 1.249 115 5.420 363 237 6.452 1.206 101 5.473 324 210 6,254 1,796 134 5543 475 The changes in proved reserves for the years ended December 31.1988.1989 and 1990. were as follows: _______________ Reserves al January 1. 1988 Revisions of estimates Imprcwed recovery Purchases of mineralsm-placc Extensions and discoveries Production Consumed in production Sales of mineralsin-place Reserves at Decembers!. 19B8 Revisions ofestimates improved recovery Purchases ofmineralsin-place Extensions and discoveries Production Consumed in production Sales of mineralsin-place Reserves at Decembers), 1989 Revisions ofestimates Improved recovery Purchases of mineralsin-place Extensions and discoveries Production Consumed in production Sales of mineralsin-place Reserves at Decembers!. 1990 fbtmleum liquids Sutural Gas million barretsi `billion rubleJrrt) Domestic foreign Domestic foreign 2.818 18 98 117 32 (246) _ 223 18 415 30 43 16 620 (23) (3081 .407 _ (8) 2.829 38 31 39 79 (241) __ (10) 2.765 55 115 15 19 (233) -- (16) '" 2,7*0 -- 264 _(2_) 2 (26) _ (1) 237 22 16 10 6 (24) -- (57) 210 (19) 6.373 204 12 5 307 (68) (23) 6.452 (70) 2 103 499 (567) (74) (89) ... 6,256 -- 1.249 6 (62) __ -- 1.206 (14) __ __ 678 (71) -- --(3) 1.796 Significant changes to proved oil and gas reserves dur ing 1990 were due to the following: the addition of reserves from the Pagerungan gas field in Indonesia upon finalization of a gas supply agreement; the addi tion of liquids reserves at Prudhoe Bay as a result of an agreement with co-owners which included the addition of a second gas handling facility (CHX-2); and a reduction in foreign liquids reserves due to the sale of the Company's Norwegian interests ^ PNYC 00013090 M s u p p l e me n t a l (UNAUDITED) i n f o r ma t io n Estimates of petroleum reserves have been made bv Companv engineers. These estimates do not include probable or possible reserves. Natural gas liquids com prise 13 percent of petroleum liquid proved reserves. Included in domestic proved reserves are approximately 90 million barrels of crude oil equivalents associated with the Coal Oil Point held offshore California. In 1987. the California State Lands Commission (SLC) denied development permits for this project. The Company has hied suit against the SLC and Countv of Santa Barbara to force approval of the development plan or allow the Company to recover damages. OnJanuary 24.1990. the California Superior Court for the County of Los Angeles issued an order in favor of the SLC. Under the order, the SLC was allowed to defer development of the Coal Oil Point leases for a reasonable period while ARCO and the SLC evaluate technological and economic feasibility of alternative methods for further development ARCO has appealed this order to the California Court ofAppeal. Meanwhile. .ARCO and the SLC have undertaken set tlement discussions with a view toward settling the litigation and resolving the question of Coal Oil Point development. The sale of natural gas from the North Slope ofAlaska, which is not used in providing fuel in North Slope oper ations or sold to others on the North Slope, is dependent upon construction ofa natural gas transportation sys tem or another marketing alternative. There are cur rently two active projects under consideration: the .Alaska Natural Cas Transportation System and the Trans .Alaska Gas System. However, there are a number of regulatory, financial, legal and marketing questions regarding the projects that remain unresolved. The Company has studied various options for marketing North Slope gas over the past few years. However, ARCO Alaska believes that market conditions are not likely to permit implementation of any large gas sales project within the foreseeable future. OnJanuary SI, 1991, ARCO completed the acquisition of all of Oryx Energy Company's oil properties in the Midway-Sunset field in Kero County, California. These oil properties will add approximately 125 million barrels ofcrude oil equivalent to domestic proved reserves in 1991. The aggregate amounts of capitalised costs relating to oil and gas producing activities and the related accumu lated depreciation, depletion and amortization as of December 31.1990.1989 and 1988. were as follows: Millions ofdollars 1990 Crow .Accumulated depreciation. depletion and amortization Net 1999 Gros -Accumulated depreciation. depletion and amortization Net 1989 Gross Accumulated depreciation. depletion and amortization Net frmrd Properties Domestic $16,140 $2,647 L npm+d Propen Domestic famgri $786 $573 6.859 1.318 $ 7,281 $1,329 SI5.751 $2,347 93 77 $693 $496 $826 $477 8.307 1.106 $ 7.444 $1,239 *15358 52.311 89 74 *737 3403 $749 3330 7321 934 * 7.737 SI .377 25 $724 81 $269 Costs, both capitalized and expensed, incurred in oil and gas producing activities (including operating over head) during the three years ended December 31.1990. 1989 and 1988. were as follows: Millieni ofdollars 1990 Properoacquisition costs: Proved properties Unproved properties Exploration costs Development costs 1989 Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs 1988 Propertyacquisition costs: Proved properties Unproved properties Exploration costs Development costs Domestic Total $ 38 $113 $483 $657 $ 64 S5 $232 $233 $102 $118 $715 $890 $7 $122 $384 $625 $6 $173 $216 $7 5127 $557 $841 $249 $351 $323 $734 $579 $123 $232 $209 $628 $474 S 535 $943 pNYC 00013091 'R Results ofoperaiions from oil and gas producing activilies 'including operating overheadi for the three years ended December 31. 1990. 1989 and !9H8. were as follows: \filhrn of 'l-tilors 1990 Rocrmes: Sales Transfers Other Production costs Exploration expenses Depreciation, depletion and amortization Other Income tax expense Results ofoperations from production activities 1989 Revenues: Sales Transfers Other Production costs Exploration expenses Depreciation, depletion and amortization Other Income tax expense Results of operations from production activities 1988 Revenues: Sales Transfen Other Production costs Exploration expenses Depreciation. depletion and amortization Other Income tax expense Results ofoperations from production activities Dtmrtfu- Fnmgn Total 52.523 2.415 246 5.184 1.626 444 1.002 167 1.985 752 51.255 5416 305 86 805 240 244 52.939 2.718 332 5.989 1.866 648 215 1.217 -- 167 106 2.091 SO 762 5 76 51.329 St .679 2.487 156 4.322 1.392 283 1.094 134 1.419 533 5301 276 15 592 211 157 $1,980 2.763 171 4.914 1.603 440 192 1.286 -- 134 32 1.45) 40 573 S 886 5 (8) 5 878 5 723 2.725 152 3.600 1.220 277 1.024 136 943 359 5289 195 17 501 172 192 51.012 2.920 169 4.10) 1.392 469 166 1.190 -- 136 (29) 914 42 401 5 584 5(71) $ 513 The difference between the above results of operations for 1990,1989 and 1988. and the amounts reported for after-tax oil and gas segment earnings in N'oie 3 of Notes to Consolidated Financial Statements is primarily the marketing-related activities. The standardized measure of discounted estimated future net cash flows, and changes therein, related to proved oil and gas reserves were as follows: BiUtens ofdoilar^ 1990 Future cash inflows Future development and production costs Future income tax expense Future net cash flows 10% annua] discount Standardized measure of discounted future net cash flows 1989 Future cash inflows Fucure development and production costs Future income tax expense Future net cash flows 10% annual discount Standardized measure of discounted future net cash flows 1988 Future cash inflows Fucure development and production costs Future income ox expense Future net cash flows 10% annual discount Sandardized measure of discounted future net cash flows Dcmntu FoTflf!1 561.4 27.3 H.8 22.3 10.2 ' 512.1 $9.4 3.2 2.4 3.8 1.7 $2.1 $48.6 24.0 8.2 16.4 7.3 5 9.1 $6.9 3.1 1.4 2.4 1.1 513 S33.3 17.4 5.0 10.9 5.0 S 5.9 568 32 1.2 2.4 1.3 51.1 Total 570.8 30.5 14.2 26.1 11.9 -- 514.2 555.5 27.1 9.6 16.8 6.4 510.4 540.1 20 6 tf.2 13.3 6.3 S 7.0 PNYC 0013092 63 SUPPLEMENTAL INFORMATION (UNAUDITED) Primarv changes in the standardized measure of dis counted estimated future net cash flows were as follows: BiUion> >/ 'tnll/in Sale* tranter <>t oil and <as. nci of production costs Extensions. discoveries and improved recovery less related costs Rev isions of estimates of reserves proved in prior vears: Quamitv estimates Net changes m price and production cosu Purchases. Sales Other Accretion ofdiscount Development costs incurred during the period Set change in income taxes Set change 1990 10X9 1988 3(3.8) 3(3.2) 5(2-5) l.S .9 .6 .3 .3 6.3 5.3 (1.7) ---- .8 (.6) 2 1.6 1.1 (.1) 1.0 .9 (2.5) 3 3.8 .8 (2.0) 3 3.4 .9 .1 5 (.5) Estimated future cash inflows are computed by applying year-end prices ofoil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrange ments. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the prwed oil and gas reserves at the end of the year, based on yearend costs and assuming continuation of existing eco nomic conditions. Estimated future income tax expenses are calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flews 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 Standards Board and the SEC Because ofunpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, largely influenced and controlled by (J.S. and foreign governmental actions, and the feci that the bases for such estimatesvary signifi cantly. management believes the usefulness of these projections is limited. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flow to the Com pany Management's investment and operating deci sions are based upon reserve estimates that include proved reserves prescribed bv the SEC as well as prob able reserves, and upon different price and cost assumptions from those used here. It should be recognized that applying current costs and prices and a 10 percent standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of prosed reserves. Regarding the information concerning estimated reserve quantities and discounted future net cash flows, the Company has no long-term supply contracts with for eign governments or any interest in equity affiliates involved in oil and gas producing activities. Coal Operations Supplemental operating statistics for the coal opera tions of the Company for the three years ended December 31,1990,1989 and 1988. were as follows: Coal shipments - thousand tons: Domestic foreign Toot Coal reserves million tons recoverable: Domestic foreign Total Average market price per ton ofcoal: Domestic foreign Composite price 1990 1989 1988 29.437 8319 38,256 31.114 8.333 39.447 26.936 5.5)1 32.447 854 411 1.265 869 321 1.190 877 306 1.183 S 9 45 332-70 $1431 $ 9.29 $31.33 $13.95 $10.60 328.87 313.71 PNYC 00013093 CONSOLIDATED FINANCIAL DATA Militant nf XoUnn fxrtptprr tharr amounts 1990 /e9 19X8 19X7 /<* Sales and Other Operating Revenues Resources: Oil and gas (.oa! Products: Retiningand marketing Transportation Intermediate chemicals and specialty-products Integrated petrochemical and petroleum processing'4' Other operations Elimination of intersegment amounts Total Net Ineome Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing1*1 Equity earnings from Lvondell Petrochemical Company Gain on subsidiary stock transactions Unallocated expenses and other operations Interest Cumulative effect of change in accounting for income taxes Net Income Earned per share(t>> Retained earnings $ 9,425 S 8.138 S 6.949 S 7.724 S 6.942 541 519 403 320 345 8,649 946 2,950 6.789 862 2.663 6.138 931 2.700 5.960 967 1.967 1.045 1.907 -- S3 (3,736) __ 55 (3.005) 4.696 48 (3.541) 3.926 64 (3.951) 3.008 83 i3.477l $18,808 $16,021 318.324 S16.977 S15.109 $ 1,364 $ 887 $ 542 S 835 S 333 91 92 79 67 76 439 291 368' 150 353 274 266 308 340 352 271 336 400 404 70 529 132 132 223 __ (410) (564) 214 634 (250) (517) __ __ (104) (539) -- __ (126) (578) __ __ (187) (5141 323 -- -- -- -- $ 2,011 $ 1.953 $ 1.583 $ 1.224 s 615 $ 12.15 $ 11.26 $ 8.78 3 6.68 3 3.38 $ 6,837 $ 5,636 $ 7.562 $ 6.683 S 6.173 Addition* to Flxod Ataots Resources: Oil and gas (including dry-hole costs) Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing'*' Other operations Total $ 1360 $ 1.309 $ 2.555 $ 721 s 1.322 109 148 107 12 15 370 314 251 318 246 103 43 53 26 31 539 262 245 312 172 -- 37 $ 2,718 -- 29 $ 2.105 65 28 $ 3.304 27 47 3 1.463 13 23 s 1.822 iat hior to 1999. LyondeU fotroehemtal Company w a 100percent owned comoiidaled subtidiory. foryeon tuteryoent to i998, L\ondtil ';"<t ts an *futty tnvnlmenl and u no longer tonsoitdoied. iti The cumalatrve effect ofUwrkangetn oeconnttngfoe incometaxes n 1990 teas SI.99 perstart. PNYC 00013094 SEGMENT OPERATING DATA v* Oil and Gas After-tax oil and gas earnings (millions): Alaska Lower 48 Foreign Total Exploration expense (millions): .Alaska -- Dry-hole costs Lease amortization Geological and geophysical Other Total Alaska Lower 48 -- DtvhcJe costs Lease amortization Geological and geophysical Other Total Lower 48 Total Domestic Foreign -- Drv-hole costs Geological and geophysical Other Total Foreign Total Crude oil. condensate and NGL production (thousand barrels/day-net): Domestic -- Prudhoe Bay Kuparuk Usburne Other Alaska NGLs Total Alaska Lower 48--Crude oil -- NGLs Total Domestic Foreign -- Indonesia Dubai United Kingdom Other NGLs Total Foreign PNYC 00013095 Total 1990 1989 1988 1987 I98t, $ 700 588 76 $1,364 S546 349 (8) 5887 $382 231 (71) $542 $487 335 13 S835 $124 195 14 $333 $ 91 17 20 19 147 108 90 44 92 $34 481 100 19 51 170 $ 651 $6 23 21 19 69 107 95 34 76 312 381 50 19 29 98 $479 $8 24 10 14 56 82 90 42 83 297 353 59 25 48 132 $485 $2 24 9 10 45 33 95 30 74 232 277 41 28 36 105 $382 S9 18 4 13 44 174 66 31 105 376 420 10 15 34 59 S479 263.1 138.4 13.9 3.4 15.0 433.8 168.2 36.3 ii i 6.3..8...3 38.4 12.9 10.7 .6 4.5 67.1 .... -- i 705.4 280.5 . 304.9 147.1 146.3 12.5 13.6 4.3 5.2 15.0 17.3 ii 459.4 487.3 166.2 151.2 34.4 35.7 ' -- 660.0 674.2 ' 47.2 8.1 9.6 .9 4.3 70.1 i 730.1 42.4 8.7 6.8 -6 5.1 63.6 ...... 737.8 313.4 122.0 15.0 6.1 13.9 470.4 157.1 37.5 . 1 ... 665.0 1 Ml 306.8 109.9 4.1 7.3 1.8 429.9 188.8 .4.0.4 659.1 46.6 9.6 1.0 .8 5.2 . ..6.3..2 728.2 56.8 10.9 -- .9 6.0 74.6 733.7 to SEGMENT OPERATING OATA 1990 /9#9 /Qgg !9a: /9X/, Oil and Gas 'continued) Natural gas production (million cubic feet, dav): Domestic -- Onshore Otfshore Total Domestic Foreign -- I'nited Kingdom Indonesia Netherlands Colombia Total Foreign Total Average sales prices -- Crude oil and condensate (dollars/barrel): Alaska Lower 48 Composite average Foreign NGLs. lease and plant (dollars/barrel): Domestic Foreign Natural gas (dollars/ thousand cubic feet): Domestic Foreign 939.3 614.3 1,553.6 855.0 674,0 1.529.0 708.0 681.0 1.389.0 587.0 685.0 1.272.0 582.0 662.0 1.244.0 155.5 13.6 24.4 -- 193.5 1,747.1 117.9 14.2 31.1 6.0 169.2 1.698.2 99.8 17.5 29.4 7.4 154.1 1.543.1 108.3 21.9 26.1 . 8.1 72.4 28.5 8.5 164.4 132.6 1.436.4 1,376.6 $14.84 $20.85 $16.56 $20.15 $11.71 $16.92 513.13 516.25 5 8.51 514.20 5 9.90 514.20 510.95 517.23 S12.56 516.44 5 6.43 514.66 5 8.94 513.77 $14.40 $10.89 510.38 $ 6.60 5 9.25 5 7.53 510.43 5 9.02 S 9.53 S 8.59 $ 1.66 $ 3.08 5 1.67 5 2.71 5 1.68 5 2.64 5 1.63 5 2.36 S 1.94 S 1.51 Proved oil and gas reserves -- net Crude oil and NGLs (million barrels): Alaska Lower 48 Foreign Total 1,966 754 210 2.930 1,985 780 237 3.002 2.064 765 264 3.093 2.136 682 223 3.041 2.046 682 199 2.927 Natural gas (billion cubic feet): Alaska 2367 2.486 2.484 2.207 1.985 Lower 48 3389 3.966 3.889 3.647 3.938 ` Foreign 1,796 1.206 1,249 897 972 Total 8,052 7.658 7.622 6.751 6.895 PNYC 000,3096 GMENT OPERATING DATA R r. ) Oil and Gas (continued) Set wells completed: Domestic -- Exploratory --oil gas drv Development --- oil gas drv Foreign -- Exploratory --oil gas drv Development -- oil dry Net producing wells: oil gas Net acreage (thousand acres): Domestic -- Developed Undeveloped Foreign -- Developed Undeveloped Coal Coal shipments (thousand tons): Domestic Foreign Total Coal reserves (million tons recoverable): Domestic Foreign Ibtai Net coal acreage (thousand acres): Domestic Foreign Average market price (dollars/ton): Domestic Foreign 1990 1989 ms /<W7 5464 22 21 22 15 4 7 48 41 42 28 45 225 188 271 150 215 137 131 $5 59 35 44 32 36 16 16 4 2 3 53 2 l-- 2 1 18 15 17 8 5 21 22 14 17 33 3 3-- 1 6 1 ------ 1 7.582 2,009 8.138 1,889 8,418 1.796 7.582 8.946 1.672 ' 1.772 2,379 6,144 75 17,319 2,453 5.858 69 16.752 2.508 5.839 69 16.236 2.458 0.00 64 10.849 2.855 6.317 00 10.161 29,437 8419 38,256 31,114 8,333 39.447 26.936 5.511 32.447 22.888 3.249 26.137 24.371 2.778 27.149 854 411 1,265 869 321 1,190 877 306 1.183 910 118 1.028 991 124 1.115 73 17 $ 9.45 $32.70 76 14 $ 9.29 $31.33 78 12 $10.60 $28.87 122 6 $11.42 $25.27 6 511.15 $29.42 PNYC OOt3o 97 Refining and Marketing Refiner'' runs I thousand barrels/ dav): Blended crude oil -- Los Angeles. California Cherrv Point. Washington Unfinished stock-- Los .Angeles. California total Petroleum product sales volumes, including intersegment sales (thousand barrels/dav): West Coast-- Gasoline Distillate fuels Jet fuels Coke Natural gas liquids Other Total West Coast Foreign total Domestic branded retail outlets Transportation Crude pipelines (miles) Product and petrochemical pipelines (miles) TAPS throughput (thousand barrels/day) Crude transported (million barrel miles) Product transported (million barrel miles) tankers owned or under long-term charter tonnage (thousand tons) Intermediate Chemicals and Specialty Products Chemical product sales volumes, including intersegment sales (millions): Propylene oxide and derivatives (pounds) TEA and derivatives (gallons) Styrene monomer and derivatives (pounds) Chemical sales revenue, including intersegmentsales (millions) 1990 1989 1988 1987 1986 231.4 167.2 398.6 2.5 401.1 233.6 167.3 400.9 1.0 401.9 224.4 1724 396.9 -- 396.9 211.8 160.8 372.6 2.4 375.0 219.9 154.3 374.2 3.4 377.6 231.2 784 88.0 14.8 124 19.2 444.0 92.0 536.0 1447 223.1 85.4 84.3 13.3 12.8 16.6 435.5 93.0 5284 1,700 214.8 87.2 784 16.2 9.8 12.3 418.8 85.1 503.9 1,700 209J> 84.9 72.0 13.6 7.0 194 406.2 86.2 492.4 1.750 187.4 88.7 63.3 15.8 5.3 30.6 391.1 87.4 478.5 1.700 7400 3,000 1,789 144,200 8400 10 1400 7400 3.000 1,880 158,500 9,500 10 1.500 7400 3,000 2,034 182.600 10.300 10 1400 7.500 3,000 1.959 163.000 10,400 10 1400 7.500 3.000 1.819 164.900 10.100 10 1.500 2468 955 1,098 2,586 912 1,478 2,812 917 1,665 2.334 794 1.290 1.986 680 1.258 $2,950 $2,663 $2,700 $1,967 SI .907 PNYC 00013098 69 SEGMENT OPERATING DATA T Million* n/doiian nerpt p/r \hajr nmmnu Other Data Dividends: Common stock -- total I millions of dollars) -- per share Total dividends declared (millions ofdollars) Common stock: Average shares outstanding, including equivalents (millions of shares) Earned per share Book value per share Market price per share -- high -- low -- close Stockholders (thousands) Employees (thousands) Resources: / Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialtv products Integrated petrochemical and petroleum processing Other operations Total Payroll expense (millions ofdollars) Financial Data local assets Working capital Current ratio Long-term debt Stockholders' equity Research and Development Expense 1990 1989 1988 1987 198/, S 807 $ 5.00 $ 810 S 756 $ 4.50 S 760 S 700 S 4.00 S 704 S 710 $ 4.00 S 714 S 701 S 4.00 S 706 165.5 173.4 180.4 183.3 182.2 $ 12.15 S 11.26 $ 8.78 $ 6.68 S 3.38 $ 44.85 $ 39.64 $ 35.59 $ 32.38 S 28.91 1424 1144 904 994 641 1054 804 674 58Vi 45;. 1234 1114 804 69 60 120 126 158 166 178 10.4 10.4 10.6 10.1 10.3 1.8 1.7 1.2 1.2 1.2 8.1 7.7 7.1 7.2 7.2 1.7 1.7 1.6 1.6 1.6 5.7 3.2 3.0 2.5 2.6 2.0 1.9 2.1 1.6 1.9 .2.0 1.8 2.0 27.5 26.6 27.5 26.3 27.0 $ 1.406 $ 1.256 $ 1.209 $ 1.147 S 1.117 $25,864 $ 1.788 1.42 $ 5.997 $ 7,149 $22,261 $ 1.977 1.58 $ 5,313 S 6.562 $21314 $ 1.493 1.46 $ 5.400 $ 6.247 $22,890 $ 2.885 1.64 $ 6.028 $ 5.878 S21.913 $ 1.945 1.50 $ 6.662 S 5.259 $ 156 $ 112 $ 119 $ 109 S 94 pNYC 00013099 IOARO OF DIRECTORS Lodwrick M.Cook Chairman of the Board and ChiefExecutive Officer Robert E. WVcoff President and ChiefOperating Officer Ronald J. .Arnault Executive Vue President James A. Middleton Executive Weeftwidrat James S. Morrison Executive tier President and ChiefFinancial Officer Rw A. .Anderson Directorand Chairman Emeritus. Lockheed Corporation Frank D. Boren Conservation Fellow. World VnldliftFund Aut President and Chairman, The Saturn Conservancy Richard H. Deihl Chairman ofthe Board and ChiefExecutive Offiter, USAkmanson & Company The Hon.John Gavin President, Comma Services International Former L'.S. Ambassador to Mexico Hanna H. Gray President, t niverstty ofChicago Philip M. Hawley Chairman ofthe Board and ChiefExecutive Officer, Carter Hawley Hale Stores, Inc. Donald M. Kendall Director and Chairman oftheExecutive Committee Former Chairman cf the Board, HpsiCo, Inc. William E Kieschnick Retired President, ARCO John B. Slaughter President, Occidental College Hicks B. Waldron Former Chairman ofthe Board, Avon Products, Inc. Henry Wendt Chairman ofthe Board SmithXbne Beecham 71 OFFICERS Lodwrick M. Cook Chairman ofthe Board and ChiefExecutive Officer Robert E. WVcoff President and ChiefOperating Officer Ronaldj. .Arnault Executive Vice President James A. Middleton Executive Vice President James S. Morrison Executive Her President and ChiefFinancial Officer George H. Babikian Senior lice President President, .kRCOProducts Company H.L. Bilhartz Senior Wee President President, ARCOAlaska, Inc. Mike R. Bowlin Senior Vice President President, ARCO International Oiland Gas Company Camron Cooper Senior Wee President and Treasurer E. Kent Damon,Jr. Senior Wee President, Planningand Control Kenneth R. Dickerson Senior WtePressdent, Government Affairs Anthony G. Fernandes Senior Vic# President President, ARCO CoalCompany Francis X. McCormack Senior Wee President and General Counsel William C. Rusnack Senior W President Fhendent, ARCO Transportation Company William E. Wide,Jr. Senior VicePresident President, ARCO Oiland Gas Company StephenJ. Giovanisci lice President, PublicAffairs Beverly L. Hamilton Vice President and Investment Officer President, ARCOInvestment Management Company Mark L. Hazelwood Wee President and General Tax Officer Marie L. Knowles Wee President and Controller WUliam D. Leake VtuPresident, EnvironmentalProtection Donald A. Murray Woe President, Human Resources StevenJ. Shapiro Wee Resident, Corporate Planning Howard L Edwards Corporate Secretary PNYC 00013100 r NOEX 1 Accountants Report-60 Accounting Policies-49 Acreage -68 .NdriitioH'io Fixed .Assets-51. 65 .Aitielh'M-24 .mi pm' mini markets-13 ARCO Alaska. Inc. -x ARCO Chemical Company -4.32.3d. 41 ARCO C^>al Australia - 28 ARCO Coal ("jjmpativ - 28. 41 ARCO Foundation - 35 . UJCO International Oil and Cas Companv-24.41 ARCO Investment Management Company-32 ARCO Oil and Cas Company - 20.42 ARCO Pipe Line Companv-18 ARCO Products Companv -12.41 .ARCO Solar. Inc. - 44 ARCO Terminal Services Corporation -18 .ARCO Transportation Company -17 ARCO Western Gas Pipeline Companv 17 Arkoma Basin - 20 Balance Sheet-47 Bavou Sale held - 23 Beaufort Sea-9 Blair Athol - 30 Blenheim oil field- 27 Board of Directors - 71 Book Value per Share - 70 BP Exploration (Alaska) -9 Business strategies - 2 Calcined coke-15 CaliforniaAir Resources Board - 3 Caltech Center for Air Qaalirv Analysis - 35 Capital expenditures - 4.44 Cash Flows. Statement of- 48 Cendere field - 27 Central Electricity Generating Board- 24 Cherry Point Refinery-12.14.17 Chukchi Sea-9 Clean .Air.Amendments of 1990 - 3,28.36 Coal Creek-28 Coal Resources ofQueensland (CRQ) - 30 Colombia-27 Community involvement - 35 Cook Inlet-9 Crude oil reserves - 67 Curragh-28 Current Ratio-70 Depreciation. Depletion and Amortization - 51 Dividends-2.70.73 Dubai - 24.27 Earnings per share - 2.58.70 East Cameron 60 - 20. EC-1 Regular*-3.12 EC-Premium* - 3.12 Egvpt - 27 Employees-70 Environmental matters-3.12.23,30.45 Exploration -4. II. 23.27 Exploration expense - 66 EXXON Valdez -16 Finance and Other Corporate - 31 Financial Position and Liquidity-44 Financial Review - 39 Fixed .Assets-52 Foreign Operations - 24.51 Four Corners Pipe Line Company -18 Fruitland Coal formation - 23 Gabon - 27 Gas Handling Facility Expansion -8 Germany-27 Gordonstone - 30 Gulf ofMexico-20.23 Highlights ofI990-l Income Statement - 46 Income Taxes-53.54 Indonesia - 24.27 ]nventories-52 Investor Information - 73 Java Sea-27 Junior Achievement-35 Kuparuk River field- 8.9,17 Kuparuk Transportation Company -17 Lease Commitments - 58 Letter to Stockholders - 2 Lisbume field - 8.9 Long-Term Debt - 54.70 Los Angeles Refinerv-12.14.17 jLower 48 and International Operabons- 19 Lyondell Petrochemical Companv - 32. 36.40.49 Malacca Strait -27 Management's Discussion and Analysis - 40 Margham field - 27 Middle East crisis - 2.8.12.27 Midway-Sunset field-20 Natural Gas Production - 67 Natural Gas Reserves - 61 Net Income-1.65 New Zealand-27 Norway - 27 Notes to Consolidated Financial Statements-49 Officers-71 Oil and Gas Information - 61 Oil Pollution Act of 1990-17 Operating Statistics-66 Oryx Energy Company - 20.23 Pagerungan - 27 Pavroll - 70 Pickertll-24 Point Arguello Pipeline Company -18 Point Mclntvre-9 Powder River Basin - 28 PowerGert - 24 Prices: Crude Oil-2.67 Coal-68 Natural Gas-67 NGLs-67 Stock-70.73 Production-66 Prudhoe Bay field - 8 Quarterly Information - 59 Ravenspurn North - 24 Refining & Marketing-15,69 Reformulated gasoline - 3.12 Research and Technical Services Center 23 Retirement plans- 56 Return on Capital Employed -1 Return on Stockholders' Equity -1 Sales and Other Operating Revenues 40.50.65 SanJuan Basin - 23 Scgt.tent Information -50.51.. Selected Financial Information - 40 Sheep Mountain - 3,23 SMOGPROS* -14 South Coast Air Qualitv Management District-12 South Pass 60-20 Southern California Edison -14 Stock Opuons - 57 Stockholder Return - 2.32 Stockholders-70 Stockholders' Equity- 47,56.70 Thames-24 The Netherlands - 24 THUMS Long Beach Companv - 20 Thunder Basin coal mine - 3.28 Trail Mountain - 28 Trans Alaska Pipeline System- 8,17 Turkey-24.27 TXO Production Corp. - 20 L'nited Arab Emirates - 27 United Kingdom - 24 Venezuela-30 Watson Cogeneration Company -14 Welland field-24 Wells-68 West Coast Operations - 5 West Elk-28 Wilburton field-20.23 Wsrking Capital- 70 WVich Farm-24 FNYC 00013101 Common Sunk: Market Prut Per Share -- High low Cash Dividends Per Share $3.00 Convertible Preference Stock: Market Price Per Share -- High Low Cash Dividend* Per Share 12.80 Convertible Preference Stock: Market Price Per Share--High low Cash Dividend* Per Share Stock Exchanges Atlantic tifkfieM r/imnvwt New Vbrk, Pacific, Basel, exchanges. Tbie $.80 Preference Stock are listed stock exchanges -^ Transfer Agent and R*| first ChicagoThatCompany BO. Box 3981 Church StreetStatkm New Vbrk, NewVbrk 10006-3981 (212) 791-6422 Annual Meeting The Annual Meetingof May 6,1991, beginning room, Sheraton Grande Street, Los Angeles, proxy statement and'prosy stockholders in advance ... _ . .. fU ' fl.ISS 91.1S5 w $1.1X3 n- ar* $& ARCO IN 1991 ARCO, Atlantic Richfield Company, is a worldwide, integrated hydrocarbons company which traces its hi't'Ty Hack to July 1, 1866, the beginning of Atlantic Refining Company, its principal predecessor. Today, ARCO's operations encompass all aspects of the oil and gas business: exploration and production of crude oil, natural gas and natural gas liquids, and refining, marketing and transportation of petroleum products. ARCO also mines and markets coal and has interests in two petrochemical companies. A highly visible company with its corporate, as well as refining and marketing, headquarters in downtown i Los Angeles (as seen on the cover), ARCO is ii recognized for its focus on long-term financial and operational success and for making environmental sensitivity and community concern an integral part of its business. The report on 1991 shows a company working toward the future in all ofits endeavors. PNYC 00013104 H 11; i i i. i c; h t s \ 1nl; . r .t,th/*, i \. .*; /v>' h,i ./wonnr 1991 ; w / V \ V Cm ; lnt.il rcxemic' Net mo ime \'et mo ime per -.hare Dividend' Du uleiiii' per 'hare of common <tock \dditnui' to fixed uiiets Total assets Return on stockholders' equtrv -- percent Return on capital employed -- percent :i 'i r \ i s Petroleum liquids -- million barrels: Domestic Foreign Total Natural sras -- billion cubic feet: Domestic Foreign Total Coal -- million tons recoverable DPI K V 1 IllSS Oil anJ Gas Liquids production -- net barrels per day: Domestic Foreign N'acural gas production -- million cubic feet per day net: Domestic Foreign Coal shipments -- thousand cons Refining and Marketing Total refiners- runs -- barrels per dav Petroleum product sales (domestic) -- barrels per dav Chemical sales -- millions ofpounds Propylene oxide and derivatives 518,922 S 709 5 4.39 S 872 S 5.50 $ 3.239 $24,492 10.1 7.7 Sl'>.M'>6 S 2.011 S 12.1' S sio S vOO S 2.*18 S25.864 29.3 15.6 SI6.SI5 S 1.953 S 11.26 S "60 S 4.50 S 2.105 S22.261 30.5 15.3 Slx.868 S 1.5*3 S *.*s S *04 S 4.00 S 5.504 s: i,514 26.1 ! 5.0 Si*.5*9 S 1.224 S Mi-' S *14 S 4 i K1 S 1.46! S22.*9ii -- 1H9 2.642 189 2.831 5,798 2,405 8,203 1,118 2.720 210 2.930 6.256 1.796 8.052 1.265 2.*65 2>~ 3.002 6.452 1.206 *.658 1.190 2.829 264" 5.093 :..si* 22? 5.D4I 6.5*5 1.249 *.622 1.183 5.654 *9* 6.*51 1.028 668,500 638.300 660.000 6*4.200 665.0110 75,700 67,100 70.100 63.600 65.201) 1,399 261 41,559 1.534 193 38.256 1,529 169 39.447 1.589 154 32.447 1.2*2 164 26.15* 407,600 401,100 401.900 396.900 5*5.001) 466,400 444.000 435.500 418.800 406.200 2,729 2.563 2.586 2.812 2.5 ^4 Co n t e x t s 2 Letter to Stockholders 6 West Coast Operations 6 ARCO Alaska. Inc. 10 ARCO Transportation Company 12 ARCO Products Company 16 Lower 48 and International 16 ARCO Oil and Gas Company 20 ARCO International Oil and Gas Company 24 ARCO Coal Company 26 ARCO Chemical Company 28 Lyondell Petrochemical Company 29 Corporate Responsibility 31 Environment, Health and Safety 33 Financial Review 65 Directors and Officers 66 Index 67 Stockholder Information PNYC 00013105 LfTT K R TO S TOC K H O I. O K R S \sV,,u are .til aware. N'd was .I>c;ir that posed nuns challenges. The economic recession eroded consumer confidence .rnd demand. while oil price', which .ire nlw.ivs volatile. declined to their ii iwe't level in the past three \ e:rs. In spue "t this environment. \R(.i > had signifie.mt .ichie'cinent' .uni took steps torw.ird in l't'M th.it vv ill en.tble us to he a stronger company in the future. With I'W! net income ofS'W million. <>rS4.59 per share. our company was still profitable. However, after five years ot sustained earnings growth, profits and earnings per share were down and were disappointing, particularly after last vear's record-setting performance. The |W| net income included charges related to personnel reductions and propern sales and writedowns. Without these charges and other special items, we would have reported earnings ofSi.004 billion. orS6.2I per share. Either way. this was less than the 1990 earnings of S2.0I1 billion, which included a net benefit from special items of approximately S100 million. There were very different economic climates in the two years, and these caused most ot the decline in earnings. First, crude oil prices were significantly lower in 1991. compared w ith 1990 when they were temporarily inflated by the Middle East crisis. Despite the fact that produc tion from Iraq and Kuwait was out of the market in ll>9|, other OPEC members, principally Saudi .Arabia, more chan made up for the slack. Moreover, domestic natural gas prices were at their lowest level in the past tl years. Secondly, the West Coast was hit harder by the current recession than it had been in the past. / for the first time in recent memorv. m the live Western states that comprise our retail market ing area, gasoline demand was down compared to the previous vear. This weak demand, coupled ith record industrv gasoline production on the W est (.o.ist. lev! M lower product prices. While \R(.(' s gasoline sales volumes were up. product margins were lower. F mallv. the impact of the worldw ide recc"i> >n on our chemical businesses also depressed ! vM results. The S2r,5 million in special charges further lowered earnings, but the action w .is necess.irv to enhance the long-term strength of the com pany. These charges included the costs ot personnel reductions, the restructuring of our Lower48 operations and the writedow n of certain properties. Stockholders who have been with \RO> for some years, as a great many ofvou have, will remember that our company underwent a major restructuring in 1985. At that time, we established basic business strategies that were designed to help us in good times as w ell as those less favorable. PNYC 00013106 I These strategies continue to serve us well. They state that ARCO is a hydrocarbons-based com pany. concentrating on oil and gas. coal and petrochemicals. We focus on quality assets with low-cost resources and competitive differen tiation. We continue to evaluate the capita! markets tor opportunities to effectively utilize those markets in our activities. Our final strategy is to maintain appropriate financial leverage. Our dividend policy and. in the past several years, our stock repurchase program have enhanced stockholder returns. A RCO's strategies were crafted to withstand the test of time, providing sufficient flexibility to respond to short-term economic conditions. That flexibility was put to the test in 1991. .All of our operating units, along with ARCO Chemical Company, of which ARCO holds an 83.4 percent interest, evaluated their operations in line with current economic conditions as we!) as expectations for the next several years. This required timely and difficult decisions. All company units were involved in the changes made in 1991, but the most significant changes came in the Lower 48 oil and gas operations. A major part of our Lower 48 exploration and development efforts in the last several years involved natural gas. By early 1991, it was appar ent that the impact of excess natural gas supplies was going to keep domestic natural gas prices at lower levels throughout the 1990s than origi nally anticipated. After careful review of our future plans, steps were taken to reduce our operating costs and refocus our exploration pro gram so that we can compete more effectively. While maintaining our overall strategies, we took actions to flne-tune and tighten up all of our operations in response to the competitive envi ronment. V\ e were able to make these changes quickly and without altering the promising future we have planned for ARCO. We have, for example, continued extensive exploration and development programs. We hav e confidence in these programs and are pleased with the successes we have seen in 1991. including 20 oil and 27 gas discoveries companywide. Moreover, ARCO's leadership in refining and marketing on the West Coast will be main tained. We are expanding both the numbers and quality of retail outlets annually. The ultimate objective of ARCO's strategies is to O T" maximize the total return to our stockholders oo while preserving our financial strength for the e long run. One important indicator of this is the P amount of proved oil and gas reserves behind each share of stock outstanding. In the seven years since these strategies were implemented. ARCO's reserves of oil equivalent have risen from 17 barrels per share to 27 barrels per share. This is an improvement of 54 percent. But. perhaps a more important fact is that ARCO's annualized total return to stockholders over this seven-year period, assuming all dividends were reinvested, was 19.6 percent versus the industry average of 14.9 percent. InJanuary 1991. our Board ofDirectors approved the latest increase in the quarterly dividend, an increase of 10 percent to SI.3" per share. At this rate, stockholders are receiving S5.50 per share annually. For 1992. our additions to fixed assets are planned at S2.4 billion, down about 10 percent from the S2.7 billion we spent in 1991, excluding the acquisition ofoil and gas properties in Cali fornia early in the year. More than 55 percent of the budget will be devoted to exploration and n e t In c o me o* gtutti 87 88 89 90 91 tooo :sco PNYC 00013108 development, with a significant amount of that going to Alaskan and international areas which ARCO has targeted for its primary growth. We are making this commitment to our capital programs because we know that growth and the cost-effective replacement of our oil and gas reserves is essential for the long term. Fluctua tions in financial performance because of volatility in the political and economic environ ment could affect the level of these programs, but not our overall strategies. ARCO will also maintain its proactive commit ment to the environment, health and safety, community involvement and the development of its people, whom we see as our most important asset. Just as ARCO's people are key to our oper ational and financial success, they are also essential to the company's role in environmental protection, its health and safety record and its community involvement. A RCO continues to be at the forefront of envi ronmental concerns in our industry. In 1991, the California .Air Resources Board (CARB) passed the world's most stringent regulations for refor mulated gasolines. According to C.ARB estimates, these gasolines will reduce smog-causing auto pollutants by 30 to 40 percent when they are fully implemented in early 1996. .ARCO was the only injior oil company that supported these toueh new California standards. I n bet. ARCO paved the route to reformulated gasoline. Three years ago. California air quality regulators, as well as federal legislators, planned to effectively eliminate gasoline and were look ing at a number of alternative fuels, including a methanol-based product. ARCO accepted the challenge: Can we economically produce a reformulated gasoiine as dean as the proposed alternatives* First. ARCO introduced EC-1 Regular, the first unleaded gasoiine for older cars and trucks. A year later. Premium was reformu lated under the name EC-Premium and joined EC-1 in the large Southern California market. Injulv 1991, we announced development of an experimental gasoline. EC-X. and shared with the regulators test results that proved an unleaded gasoline could be as clean or cleaner than the methanol-blend fuel known as M85. .And. of course, continued use of gasoline will not require the infrastructure changes that a new M85 fuel would require. While the newly required fuels in California will mean costly modifications to our Los .Angeles To t a l Re t u r n To St o c k h o l d e r s >>C0 (* S'eet st> sac /odd a C'-tt am j'oci S7 8S S9 90 91 so 10 Refinery, we recognize that they will mean better air quality and an exciting future for our gaso lines. The modification projects should provide a boost for the local economy as well. Reformulated gasoline is just one example of ARCO stepping out ahead of the industry, taking a leadership role in finding environmentally cleaner and safer ways to conduct our opera tions. Moreover, we include considerations of the environment, health and safety in the plan ning for projects worldwide. Through our active community involvement, we are seeking answers to many ofsociety's most pressing problems. .ARCO people are involved -- in schools, shelters, and charitable organizations throughout our communities -- in helping shape the future for an increasingly diverse population. Together we share a tremendous pride in the company's accomplishments and potential for the future. In 1991. we made decisions that will enhance the long-term success of our company. As everyone knows, the worldwide economic and political climate remains uncertain. What is certain is that .ARCO will maintain its strategies and aggressive response to meet challenges under all circumstances. We have proven that our strategies work for the long-term benefit of our stockholders, employees and the commu nities in which we operate. Lodwrick M, Cook Chairman of the Board and Chief Executive Officer Robert E. Wycoff President and Chief Operating Officer February 24,1992 PNYC 00013109 ARCO At. ASK A. I VC. Production rcomk, a significant exploratory find and adjustment*, in the company's expense >tructure highlighted lW| activities at ARCO Alaska. Inc. I ieadquartered tn Anchorage. the company is responsible for the operation ot the Kuparuk Riser held, the l.i'I'urne field and halt of'the Prudhoc Bay field on Alaska's North Slope, as well as sei cral properties in the Cook Inlet area. The production records set by ARCO .Alaska and its partners were achicxed primarily as the result of ongoing programs to improve field recovery. UTule IRCO Alaska's net crude.oil production topped IW{) levels, the average price per barrel "as down, resulting in reduced earnings for the year. ARC a) Alaska had an active exploration program in I'WI. highlighted by the company s announcement of'the first oil discovery in the Cook Inlet area since l'M5. Significant steps were taken to mitigate cost increases during |Wl. including staff reductions. In addition. ARCO and its Prudhoc Bay co-operator agreed in I WO to s PNYC 00013111 consolidate several common services at the giant oil held for the purpose of increased V ........................ efficiency and cost savings. .s ......... >' Liquids production at Prudhoe Bay. the largest producingoil field in America. was maintained at essentially the same level as I WO due to increased capacity to handle reservoir gases. The increased gas handling was responsible for 1W1 record ..... production of condensate and natural gas liquids which along with crude oil make up the total liquids production. ARCO Alaska has a 42.56 percent working interest in the A. ... condensate produced, a 21.78 percent working interest in the crude oil and. in IWI. a " percent workinginterest in the N'GLs. ... . ... In operation since 1977. Prudhoe Bay has been in an oil production decline since 1988. As the field declines, it produces additional gas and water. These fluids are processed . for reinjection into the reservoir to enhance oil production and increase recoverable reserves. The first Gas Handling Facility Expansion (GHX-1) was installed in late 1990. Preparation for construction of modules which will be pan of a second gas handling expansion. GHX-2. is under way in Louisiana, with planned sealifts and installations :u , . . in ] 993 and 1994. This Si.4 billion project is expected to increase gas handline capacity to 7.5 billion cubic feet per day and to provide gross liquids production benefits of /./....... A 100.000 barrels per day by 1995. ht k v k i k unfit The second largest producing oil field in America, the Kupamk .>/,. ..... ,, River field celebrated its 10th production anniversary in 199! and set new records both for gross annual crude oil production and single-day production (355,000 barrels). An ongoing series ofprojects were responsible for Kuparuk's production improvements, despite natural field decline. New drill sites were developed and existing drill sites expanded. Infiil drilling, enhanced oil recovery pr< ises and a well refracture program were successfully implemented. Asa result ofa 1990 redetermination ofownership interests. ARCO Alaska is subject to a 24-month production payback to the other owners of 9,000 barrels per day. The payback will be completed by the end ofJune 1992. ARCO .Alaska's working interest in . IauIJS PRODUCTION CvS**? $**.i v/r the Kuparuk River field is 55.17 percent. t! s e t r \ r Operated by .ARCO, Lisbume completed its fifth full year of production in 1991. The reservoir underlies the Prudhoe Bay field. p o in t viciNTt r e Confirmed as a discovery tn 1989. Point McIntyre is expected to start production by late 1993. It has a potential of 300 million gross barrels of recover 87 88 89 90 91 able crude oil. Working interests have yet to be determined between ARCO .Alaska and its co-owners. Point McIntyre will share production facilities with the Lisbume and Prudhoe Bay fields. This will require only a modest expansion of facilities and add cost efficiencies. -- PriiJbct Bay Kuptliuk 1., -- 100 IWI liquids production* -- thousand barrels^dav Cumulative liquids production* -- millions ofbarrels Cumulative field investment -- billions Producing oil wells -- as of IJ/JI/91 Remaining proved liquids reserves -- millions ofbarrels V".fWra `itdr ml. lenJrnmff >i*J Cross Set Gross Set Set Gross Set i.tj? :u: 7.56: 1.4<5J S3.5 777 1.205 PNYC 00013112 *10 l-K) K.O 40ft s:,4 SM 4R5 411 14 *; SlI.T "i 'I vR( :o Mask.i wiii involved in the drillingof nine exploratory wells m ]*>**!. 'C\ emit which were on or offshore the North Slope of \!aska. Two wells were drilled in the Cook Inlet region. The 1W| oil discoverv with the Suntish well. 35 miles trom \nchor.ige. confirm' that the Cook Inlet region still has potential. Reflecting it' continuing interest in future production opportunities. \RCO \l.isk.i maintain' the No. 1 leasehold position in the State of Alaska w ith nearly n><> million acres a "t December ,U. t'Wl. In the comp-mv conducted an active leasehold Kt|tii'inon program, adding about 400.000 net acres. In !`W|. \RCO Alaska added proved liquids reserves of 1" million bar rel'. which came primarily from revisions associated with ongoing development at Kup.iruk. Re'crve additions were more than offset by production. 1991 i'rm / V > < /'>!- 1 irmuj--- uuUwms 1 -a ll i-.vt' -- millmn' Wilimi' In tiwil ,i"tt' -- ill il linn' 3 u|iiu|v pn i.juct ti >n -- th< mviml ti.irrvl'/ilai -- net V ..r iet sruile |>ric -- per lurre! M.iic : i\e' -- mh IIi. .ns* 1 \|'l.ir,iiti.n tvpen't -- no!]i'r>I'rmctl Iniiml' reserve' -- me Hi*in barrel' I'ri>\ ci 1 n.irur.il gas re'erv c> -- liillmn cul'is' tecc $ 413 <, *<X) Si.700 $ 343 S 2'>x 440.6 4il.S SI 1.23 514x4 S 381 s 4:5 S 76 5 14' t.822 l .`>fth 2.369 2..'6* 5 S+f. SvsrO s* 5 245 S 214 450.4 4'*. > Si l.*t 5 1.51 5 !> S r.<J 5 4-4 5 5ft l.ox> 2.0A4 2.4xft 2.4X4 S 4X* 54.221 5 lift 4*11.4 Sin.v? S 52s 5 4? 2.13 ft 2.2if PNYC 00013113 0 o :. 3f 38 ? r. ARCO TRANSPORTATION COMPANY A RCO Transportation Company directly links ARCO s .Alaskan nil production and its .4,, West Coast refining and marketing operations. The assets tt manages include a 21.5 percent interest in the Trans .Alaska Pipeline System <TAPSn a 57 percent interest in kuparuk Transportation Company, which moves crude oil via pipeline from the kup.iruK River field to T\PS: oceangoing tankers, and crude oil and products terminals n. ,, and pipeline' sen mg \RC< >\ Los .Angeles Retinerv. ARCO Transportation Company also manages commercial businesses in the Lower 48 states. These entities include pipelines and terminals on the West Coast and in the .Midcontinent. Reorganization expenses and a special charge for the settlement ofan outstanding kuparuk pipeline rate case were the primary reasons for the 199] earnings decline. . .. . _...... In addition, lower TAPS earnings, principally determined by the TAPS Settlement Methodology Agreement, and reduced volumes on ARCO's Midconcinent systems. . partially offset by higher volumes on its West Coasc systems, negatively affected ARCO Transportation Company's 1*591 financial performance. v. ,.d I n order to maximize utilization of the tanker fleet, the company's marine subsidiary placed a large crude oi! carrier, previously chartered to a third party, into the propri- y.-mu ,/.u., etarv fleet. This enabled the conversion of a smaller vessel for refined product service along the West Coast. A RCO Transportation Company continued to dedicate substantial resources to envi ronmental protection and safety during 1991. In Alaska and the Lower 48 states, the IK......... company is actively involved with local oil-spill cooperatives, and is participating in funding a nationwide oil-spill response organization through the Marine Preservation - Iff' il/lll/n/jfxlf<?'. ' i '' .Association. The company is also working closely with state and local governments on the West Coast in connection with the development ofoil-spill response and environmental regulations. .Marker demand for the West Coast pipelines and terminals was very strong in J99l. Clean air and environmental standards have resulted in a need for storaee of reformu TAPS InSOuSMPut lated gasoline and blending components in the Los .Angeles Basin. .A full-service, finished products facility is being developed for stamp in 1992 to meet that need. In the midconrinenc area, the company expanded the capacity of its Houston-to- Cushing pipeline and connected the pipeline to its Texas City-Marine Terminal. These assets enable waterborne crude oil to be moved directly from the Texas Gulf Coast to B7 SB !9 SO 91 midcontinent refineries. In 1991, ARCO also acquired a 37.45 percent interest in Olympic Pipe Line Company, which delivers finished products from refineries in northwest Washington, including ARCO's Cherrv Point Refinery, to Pacific N'orthwest markets. PNYC 00013114 1991 19 Vll WV m* ;v* Earnings --- millions S 212 S 274 S 266 S 308 S !4I> Total assets -- millions S2.223 S'.ia : S2.I70 S2.326 S2.3IV ;:oo .Additions to fixed assets -- millions $ 124 S 101 S 43 S 33 S 2ft TAPS tariff -- per barrel S 3.72 S 3.83 S 3.11 S 3.11 s ssc T.APS throughput -- thousand barrels/day 1.822 1.789 1.880 2.034 t.uto kuparuk throughput -- thousand barrels/day 330 310 >10 302 0 Marine crude barrels delivered -- millions 199 :io 209 210 2IO IO i * i t i i ARCO Pr o d u c t s Co mp a n y Environmental issues dominated the outlook while marketplace competition inten sified for \RCO Products Company durine 1901. The company leads the industry in its emphasis on clean air solutions and consumer marketing. In response to current economic conditions and the need to maintain the utmost in operating efficiency, the Los Angeles-headquartered company reorganized and con solidated its marketing organization and made personnel reductions during 1991. Lower product margins resulting from higher industry production levels on the West Coast and weak consumer demand reduced earnings. i i i w i i m s i i \m KMiif \RCO Products Company continued to take a leader ship role in dean fuels. In July 1991. the company announced it had developed an envi ronmentally superior gasoline formula that would reduce gasoline's smog-producing potential and toxic emissions for all cars. Moreover, tests showed the experimental fuel. : ,} .- -.'///' 'I .i/I,-n:{ I.-./ J..,K/mh.,- ...I/, PNYC 00013117 I called EC-X. would reduce emissions from late-model vehicles to levels equal to or better than those from fiexible-foel vehicles powered by an alternative methanol-based <1,1,!;,,A,.-,. fuel. MS?, and at a substantially lower cost to consumers. In addition, with the EC-X development. \RC.O Products demonstrated that a refiner can meet anticipated clean "/HU'nt W'x . i i jr.nu .. ,f! ./ i. fuel requirements hv modi tying existing facilities. I n \inumber l`W|. the California Air Resources Board iCARB) announced new. strict . it W!oiJ"V'>s speciricauons for reformulated gasoline. While not identical to a RCOs proposed EC-X gasoline, the required formula is very similar. Following modifications to the Los / :. I , l`i A" .,,, I hi. Angeles Refinery. ARC.(Krill he able to produce the new gasoline by early 1996. A RCt > introduced the first emission control gasoline. EC-1* Regular, in Southern Cali i 'A'/' . , r.. , .,,< fornia markets in 1989. and added EC-Premium* to its pump offerings in [990. In its first expansion of EC products outside of California. ARCO Products Company intro / >./ \.,!\, : duced EC-1 Regular into southern Nevada in December 1991. kiiiMM. .Asa result ofCARB and other anticipated clean fuel requirements, '.Mil;. ,U.I ' V'U.I'H',- -- ' ARCO will make modifications at its Los .Angeles Refinery in Carson, California, and hl`<t full W.u "(-.p././Aoi, M (V'( the Cherry Point Refinery near Ferndale, Washington, over the next five years. Already two of the most efficient refineries on the West Coast, they operated at 104 percent of capacity in 199t. compared to an 88 percent industry average- Light product yield was HR percent, compared to *8 percent for the industry. Gasoline production from the two refineries is supplemented in Northern California with product from the Tosco Cor poration refinery under a long-term supply agreement. In conjunction with its refinery operations. ARCO Products also operates calcined coke and cogeneration facilities, which provided additional profits. Calcined coke is marketed to the aluminum industry worldwide from ARCO calciners at Cherry Point and at Wilmington, near the Los .Angeles Refinery. The Watson Cogeneration Company is a joint venture with a subsidiary of SCEcorp. It provides steam and electricity for the Los .Angeles Refinery in addition to electricity for Southern California Edison's customers. ma r k e t in g The established No. 1 gasoline marketer in the five western states. Ga s o l in e Sa l e s i.SA.C Stttlil 01V ARCO Products faced strong marketing competition in 1991. While crude oil prices were generally lower than the previous year, product prices were also lower, leading to reduced operating margins. Lower prices resulted from higher industry production levels and weak demand chat intensified market competition. 8? 88 89 90 91 ARCO lessee dealers ied the industry with average throughput of2'8,000 gallons of gasoline per month in I99J. This compared favorably to an average of226.000 gallons per month in 1990. a year when ARCO's price freeze following the onset of the Middle East crisis contributed to increased station sales. The 1991 average throughput w as more than double the nationwide average for ARCO's competitors. ARCO Products Company's total gasoline sales grew by 1 percent in 1991, while overall industry gasoline sales in the five-state marketing area were estimated to be down about 1 percentARCO Products continued to expand its am/pm and SMOGPROS* marketing outlets during 1991. The am/pm mini markets, which feature fast food and conv enience store items as well as gasoline, make up about half of the company's 1,632 branded retail outlets. The SMOGPROS service centers in California were increased to a total of i >4 units in 1991, with many offering state-required smog checks and repair services, in addition to gasoline, seven days a week. ; PNYCU0013118 - 14 The ARCO Products Company also operates internationally. The am/pm mini mar kets have expanded through licensing agreements and joint ventures in six countries, with !00 stores in operation at the end of 1991. The company also markets motor fuels and lubricants in Brazil through a chain of more than 2,600 service stations, most of which are owned by individual operators. The company's Pay Point* electronic payment system allows customers to pay for their gasoline and ocher purchases using the convenience oftheir bank ATM card. In addi tion to being featured at most ARCO retail outlets, the PayPoinc system expanded to provide electronic payment service to major grocery, fast food and other retailers dur ing !99|. A total of 2,ISO locations were connected to the PayPoinc network by the end of 1991, including 1,000 outside the ARCO retail system. Ramins? -- millions Total assets -- millions Additions to lixed assets -- millions Refinery runs -- thousand barrets/day Petroleum product sales (L'.S.) -- thousand barrels/day .Branded retail outlets (L'.S ) I98> IMfl 19,19 )91 lt` S 266 $3,732 S 448 407.6 $ 434 S3.503 S 370 +01.1 S 29] S2.175 S 3!4 401.9 S 568 51,975 S 251 396.9 S 150 $1,850 S 318 375.0 466.4 1.632 444.0 1.547 435.5 !,700 418.8 1.700 406.2 1.750 Ceuat Oi l u h s 'gisog 87 88 89 90 91 ?5 no 2SS 170 %% 0 PNYC 00013119 . V irV tf ARCO Oi l a n d Ga s Co mp a n y A RCO OiJ and Gas Company is responsible for exploration, production and marketing ofcrude oil, natural gas and natural gas liquids in the Lower 48 states. During 1991, the company implemented several significant changes to address the continued weak ness in natural gas markets and further strengthen its position in the industry. A restructure program, implemented in the third quarter, resulted in consolidation of district offices from four to wo, decentralization of numerous functions to give dis tricts greater responsibilities, and a workforce reduction. Additionally, .ARCO Oil and Gas Company adopted a plan to divest 1,100 oil and gas properties that account for approximately 5 percent ofARCO's total production. T he company completed purchase ofadditional properties in the Midway-Sunset held in Kern County, California, and increased its ownership to 80 percent in the THUMS Long Beach Company, which is a contract operator in the Wilmington oil field. As a result ofthese acquisitions, the two fields accounted for 21 percent ofthe company's 1991 Ho i'k a iim! drifting rn'inofoip Mh tmphytJin rusr Trxal df. dntmrnt p^jecu during 199{. Refer. Efi%wrer Oui'ui BUikein. left. and Ad,w/ BhitutarJ, nprr.u o k rr.'tfz ioq< in the CbtrirvhQTofitId. pNYC 00131Z1 !7 liquids production, compared to 11 percent in 1990. An agreement to acquire the remain- AR'.t) . .. -r, ine 20 percent of the THL'MS Long Beach Company was finalized in early 1992. A RCO has been given the right to implement an expanded waterflood project at Long Beach as a result of an agreement with the State of California. The project will increase I. -Ui,: > oil production from the THL'MS Long Beach Company, benefitting the Cirvand the St3te. as well as ARCO. Following State approval of this project. ARCO surrendered two Coal Oil Point leases to the State and dismissed a related lawsuit. T he Midway-Sunset purchase, a strategic fit with the company's other Midway-Sunset assets, increased ARCO's production from the field by over 20,000 barrels ofcrude oil per day. The company was able to capitalize on its existing operatine structure to improve its competitive position in the field. u q l id s PRoott.Tiov ARCO Oil and Gas Company continued to increase its . /, ..11 ./ :' . overall liquids production in 1991, reaching a five-year high. Crude oil and natural gas \l.Hh/^rr 11 .!!!,/ ..... liquids comprised 50 percent of the company's total production on an oil equivalent basis, up from 45 percent in 1990. The increased ownership in che two California fields and increased production at South Pass 60 offshore Louisiana, following completion <! V A-yri`,,ih ./ ..l- / <. ", of platform repairs, were responsible for the liquids production increases. The . property divestiture program did not materially affect 1991 production. A RCO Oil and Gas Company initiated development activity in new areas and partici hill rjy;'.ir;.. .11 /vv| pated in a number of enhanced oil recovery projects in existing fields during 1991. Development of new .ARCO acreage in the Austin Chalk of East Texas began, using horizontal drilling technology, and -ARCO participated in CO-' and waterflood expansion projects in the Permian Basin ofWest Texas. The company is also involved in two major drilling programs in California with over 150 new steam-flood wells being drilled. MTmu c \s Narural gas production declined 10 percent from peak levels in 1990. The decrease was due to natural field decline and reduced spending on natural gas projects in response to a depressed natural gas market in the United States. Na t u r a l Ga s Pr o d u c t io n C*:c let' U' it! a tmmeu m The outlook for natural gas prices in the future caused the company to alter its strategy fordeveloping gas plays. The focus moved to areas when technology could be used to improve project performance or where the company maintained competitive advan tages in asset operations and cost structure. 87 88 89 90 91 Development continued at the North Dauphin Island and the Northwest Dauphin fields, located offshore Alabama. Moving to improve overall economics ofthese fields. ARCO was one ofthe first companies to drill horizontal wells to shallow gas horizons in an offshore environment, resulting in significantly increased production rates over chose obtainable from standard wellbores. This reduces the number ofyears necessary' 1600 to recover the reserves in these fields. The company also continued development of coal seam degasification projects in New Mexico and Colorado, where an existing infrastructure and die utilization of available tax credits allow for the continued eco nomic development of reserves. e x p l o r a t io n In conjunction with die company's restructuring, ARCO made stra - regie changes in its Lower 48 exploration efforts. Operations were streamlined, geoscience support decentralized and a new exploration group formed to pursue increasing joint venture opportunities. As a result, che company has completed six agreements to drill approximately 25 joint venture wells in 1992. . 18 PNYC 00013122 During 1991, ARCO's Lower 48 projects were concentrated in the GulfofMexico, East Texas and the Arfcoma Basin of Oklahoma, plus onshore areas of California and Louisiana. The company participated in 79 decisioned gross exploratory wells, with 10 oil discoveries and 22 gas discoveries. r e s er v e s .As a result ofdevelopment additions, acquisitions and exploration suc cess, ARCO Oil and Gas Company maintained its reserve levels in 1991, replacing 53 percent of its production, despite divestitures and lease surrenders. Net reserve additions included 149 million barrels of petroleum liquids and $0 billion cubic feet of natural gas. ______________________________________ 1991 1990 1919 I9SS 1917 Earnings -- millions Total assets -- millions Additions to lixed assets -- millions Liquids production -- thousand barrels/day --net Natural gas production -- million cubic feet/day -- net Average crude price -- pet barrel Average natural gas price -- per MCF Exploration expense -- millions Proved liquids reserves -- million barrels Proved natural gas reserves--billion cubic feet $ 57 . S 588 $ >49 $5,343 $5,217 ' $5,068 51,083 ' S 808 5 703 227.9 204.5 200.6 S 2>1 $ 5 $5,174 : $4,717 ' $1,285 $ 420 186.9 194.6 : 1.358 : 1.515 $15.72 S20.85 $ 1.54 $ 1.67 S 339 S 33* 820 75* 3,429 3.889 1.497 516.92 $ 1.68 S 312 780 >966 1.359 ' 1.244 514.20 Sl?.2> $ 1.69 S 1.64 5 297 5 232 765 682 >.889 >.64? PNYC 00013123 LIQUIDS PRODUCT I ON T"OVSA*0 Htt 9 C*vb( Oik CPct*iA'< 87 88 89 90 91 o___ 200 ISO ICO 0 IV k A R C O In t e r n a t i o n a l Oi l a n d Ga s Co mp a n y PNYC 00013125 * ARCO International Oil and Gas Companycontinued its growth in 1991 by increasing ' both its crude oil and natural gas production and by adding to its net reserves . following significant progress on several strategic gas development projects. F rom its headquarters in Plano, Texas, ARCO International is involved in oil and gas exploration, development, production and marketing activities throughout the world. i s K'M'i ARCO International has current production both on and offshore L'nited Kingdom and offshore of the Netherlands. Net natural gas and oil production in the C.K. increased 42 percent from 1990 as a result of the first full-year production from three new gas fields and an onshore oil field expansion. Three additional major gas development projects are also under way in the C.K. waters ofthe North Sea. Net gas production from the U.K. North Sea averaged 221 million cubic feet per day in . 1991. The three new gas fields which began production in the third quarter of 1990 -- L ARCO iihTtttwJjirtiift in rbf Mail' \, .f Jimnn IWI .iml mm Mt: nil.i iruiirt J .xpkrjruin Julianprnt<-i tbnv ik'.'l linmi.iuoniil Drilling Y.vi- ' < D.ili Bulk. Itfi. .wiI Dan J.i.l.-m , \J:an(e inloninition mi .1 brh.le. k m air \nb \tii pioje.i Welland. Ravenspurn North, and .Amethyst -- contributed 95 million cubic feet per DeX'etnpineiir ^ .u p for the P.i^erun^.m day to 1991 net gas production. Following additional field development in 1990, ARCO's net share of production from the Witch Farm onshore oil field in the I'.K. increased to 10,700 barrels per day in 1991. iuiuir.it `iiis netd in InJfinaid `dj.i under Development woTkon the Pickerill gas field in the I'.K. North Sea proceeded on schedule. ARCO will operate Pickerill and holds a 31 percent interest. The field is - .A in I'l'il r.hn< Bt.ur. left, eiiginecnnii expected to add 46 million cubic feet per day to.ARCO's net production by late 1992. Negotiations for the sale of gas from the Murdoch field, also in the U.K. North Sea. tn.in.ititr .nut /.,nnut B.i, */>/,<,, r.ul were finalized in 1991. ARCO increased its Murdoch field interest from 25 to 34 per cent. .ARCO's net gas reserves in the field, where production is projected to begin in the peycn oupav: a -. nine ;) the fall of 1993, are 135 billion cubic feet. ARCO acquired a 50 percent interest in die Orwell field in the Southern Gas Basin of phnr lor rhproject. -.hub in.tuJc'.1 the U.K. North Sea in 1991. As operator ofthe field. .ARCO plans to bring it to produc > !U.,mtlinii;iif`u tecr-per-J.n tion in late 1993. Net gas reserves are 112 billion cubic feet- iMxiMsii ARCO International's largest production operation is located in the Offshore Northwest Java contract area in Indonesia, where it operates a complex of cmipretsinn pLinr mi andolf.bnre '.'cll-ite over 180 platforms as well as processing and export facilities. Gross oil production from theJava Sea increased to 119,500 barrels a day in 1991 with production, mhe.i pipelines,nut -nrl/erd the initial startup of the BZZ development in August. .ARCO's net share of oil pro .ic.-onrmtuLimns. duction from the contract area was 35,300 barrels per day, up from 31,800 barrels per day in 1990. ARCO International also holds interests in crude oil production in the Malacca Straits. In 1991, ARCO's net production in this area was 7,200 barrels per day. Development work on the first ARCO-operared natural gas project in Indonesia began in 1991. The Pagerungan field will be operated from an island near Bali. The Indonesian government authorized construc tion ofa pipeline that will connect the natural gas field with an electric power plant, the primary customer. The field, which has proved reserves of 1.4 trillion cubic feet of natural gas (646 billion net to ARCO), is expected to start production in 1993. Na t u r a l Ga s pr o d u c t io n r u l K* Ch ic m o*t 9 m *>fT,, St4 ac t 87 88 8$ 90 91 A major natural gas development project in the Offshore NorthwestJava contract area is planned following ARCO's signing in 1991 ofa gas sales Letter ofIntent with Pertamina. the Indonesian national oil company. Gas reserves associated with this project are esti mated at 1.1 trillion cubic feet (428 billion cubic feet net to ARCO). o L' a \ i Thecompany is the sole working interest owner and operator ofthe Margham condensate field in Dubai, United Arab Emirates. In production since 1984. the field produced 12,700 barrels of liquids per day in 1991. T i r k e Y In its first full year ofproduction, the Cendere field in southeastern Turkey averaged 3,600 barrels ofcrude oil per day (1,200 net to ARCO). Y e m E s Committed to increasing opportunities abroad, .ARCO International agreed to provide exploration and development services to the operator and sole working 220 interest owner ofa block in the Shabwa province ofthe Republic ofYemen. ARCO has an option to acquire a 25 percent working interest in the block upon completion of the minimum work commitment. Originally explored by Soviet Technoexport, the area has had at least three discoveries, one ofwhich has had limited production. e x p l o r at io n .ARCO International was actively involved in exploration projects, with 72 gross wells drilled in 13 countries during 1991. The company participated in ! 7 new venture wells in Australia, Ecuador, the Philippines, New Zealand, the German 22 PNYC 00013126 North Sea. Syria, Egypt and Gabon. The exploration program resulted in 14 gross dis coveries. nine oii and five gas, as well as one confirmation ofa previous discovery. Inanticipation offuture drilling projects, ARCO International acquired additional acre age in six countries during 1991. The company successfully competed in the Twelfth Licensing Round in the L'.K. North Sea, receiving five licenses, all ARCO-operated. r tm \ > s ARCO Internationals net proved reserves increased 16 percent on an oil equivalent basis by the end of 1991. This was primarily due to the progress made on the Java Sea, Murdoch and Orwell gas development projects. 1991 1990 1989 1988 198' Earnings (Losses)--millions Total assets--millions Additions to fixed assets -- millions Liquids production -- thousand barrels/dav -- net Natural gas production -- million cubic fttt/day -- net Average crude price -- per barrel Average natural gas price -- per MCF Exploration expense -- millions Proved liquids reserves -- million barrels Proved natural gas reserves -- billion cubic feet S 79 $2,466 S 464 75.7 261.2 $18.67 $ 3.16 S 178 189 2.40$ S 76 $ (8) $ <7t) $ 13 S2J0S $1,902 $1,895 $1,089 $ 454 $ 363 $1,056 S 165 67.1 70.1 63.6 63.2 I9J.5 169.2 154.1 164.4 $20.15 $16.25 $14.20 $16.44 $ 3.08 $ 2.71 $ 2.64 S 2.36 S 170 S 98 $ 132 $ 105 210 237 264 223 1.796 1.206 1.249 897 PNYC 00013127 iteuios Pr o d u c t io n i 9 6r*t* 9 87 88 89 90 91 75 60___ *5 10___ IS 0 ARCO c o a l Co mp a n y Headquartered in Denver. Colorado. ARCO Coal Company continued to prow in 1991 in the United States and Australia through its interests in some of the highest quality and most productive coal mines in the world. Its coal reserves are low in sulfur and ash content, have relatively high energy values and, in Australia, have vers- high coking properties. These attributes, combined with lower operating costs, give ARCO Coal's mines a competitive advantage. 1 n 1991. ARCO Coal's worldwide shipments reached record levels. However, earnings w ere reduced by $50 million in net after-tax charges primarily associated with a write down for an Australian mine and U.S. personnel reductions. ARCO Coal's production is currently concentrated in the western United States and in Queensland. Australia, after its entire 24 percent interest in a surface coal mine in Venezuela was sold in 1991. i mii i! mil' nn r u io n n ARCO Coal owns and operates the Black Thunder WDr/vl I Mine in Wyoming's Powder River Basin, the largest surface coal mine in the .Americas. The company also operates another surface mine at nearby Coal Creek. D uring 1991, Black Thunder achieved several milestones as it produced and shipped a -1tni\i record 31 million tons ofcoal to surpass a quarter billion tons shipped in its 15-year life. The company operates two underground mines in the United States, West Elk in Colo mtihttm hut- t rado and Trail Mountain in Utah, which together shipped 1.36 million tons in 1991. West Elk is in the process of installing a longwall mining unit that will significantly increase liiuiii. e 4 'i miUn.ii productive capacity and reduce operating costs. Startup is scheduled formid-1992. u mh \u \\ upmuiiis' In Australia. ARCO Coal has an interest in three active . oi/ltq coal mines, two ofwhich it operates, and is currently developing what will become Australia's largest underground mine. Together, the Australian mines shipped nine mil lion tons net to ARCO in 1991, making ARCO one ofthe top coal producers in Australia. The ARCO-operated Curragh surface mine produces high-quality coking coals, as well as steam coal used for electricity generation. In 1991, the mine shipped five million net tons ofcoal, with an expected increase to over b.I million tons peryear in 1992 as a result ofa large dragline added in Co il Sh ip me n t s H/,lIC* '0*S 'Kill, late 1991. The writedown was related to the Coal Resources of Queensland fCRQ) mine. .An underground mine,CRQ continuedto experience difficulties in mining, which limited shipments to approximately 900,000 tons in 1991. ARCO Coal also owns a 31.4 percent interest in Blair Athol, a surface mine, which shipped three million net tons in 1991. Gordonstone, currently under development near Emerald in Central Queensland, is designed to produce 4.6 million tom of coal per year. ARCO Coal is the mine operator and holds an 80 percent interest in the project. Scheduled to begin production in late 1992, Gordonstone has estimated recoverable reserves in excess of 100 million grosstons ofsuperior quality coking and steam coals. 1991 1990 19S9 I9SS I9j? I I l i I i f Earnings -- millions Total assets--millions Additions to fixed assets -- millions Average market price--per ton Coal shipments--millions of tons Coal reserves -- million tons recoverable $ 33 S 91 $ 92 $ T9 S 6* St,095 S 929 S 857 $ 725 S 540 S 30$ S 109 S 148 S 107 S 12 S14J7 SI4.S1 $13.95 $13.71 513.14 41.6 38.3 39.4 32.4 26.1 1,118 . 1,265 1,190 1.183 1.028 1* PNYC 00013128 ARCO Ch e mi c a l Co mp a n y ARCO hoidsan 83.4 percent interest in ARCO Chemical Company, which is headquar- .-I,.,- , cered in Newtown Square, Pennsylvania. Its stock is listed on the NTew York Stock Exchange under the symbol "RC.M." Rufhr.Lt'f/' ho,f- ARCO Chemical is the world's leading producer of propylene oxide and methyl tertiary bury! ether (MTBE) and a leading merchant marketer of sryrene monomer. The manufacture of MTBE has put ARCO Chemical in the forefront of environmental programs concerning clean air. MTBE in gasoline promotes more efficient combustion, reduces tailpipe emissions and boosts octane, and, consequently, worldwide demand for MTBE is expected to increase substantially by the mid-1990s. The recession in world markets slowed ARCO Chemical Company's growth in 1991. ARCO Chemical implemented a cost-reduction program that included a work force downsizing, the realigning of functions, and the deferral of some future capital rtiiinhir\Jh,{ r ft<n,ii.l: commitments. At the same time, the company is stressing basic elements for building value while meeting the long-term needs of its customers --- profit improvement, manufacturing excellence and environmental performance. ARCO Chemical's focus on win/ Oteuv manufacturing excellence stresses safe and environmentally sound operations along 'Vitf with improved quality, efficiency and reliability at all of its plants. w o r l d w id e o p e r a t io n s ARCO Chemical operates plants in three major world the pon wW /nc `To/./qr regions -- the .Americas, Europe and Asia Pacific. Marketing programs are conducted throughout the world. B uilding on its worldwide market leadership, ARCO Chemical has a number ofprojects under way. In Channelview, Texas, a world-scale propylene oxide/styrene monomer plant is scheduled for completion in 1992. A new technical center was opened in Singapore during 1991, providing customer and manufacturing support throughout Asia Pacific. A joint venture propylene oxide/styrene monomer plant in South Korea completed its first year ofoperation. Two significant events in 1991 have strengthened the company's conventional and polymer polyols business: ARCO Chemical began operations ofa new polyols plant at an d LtHt Ox I DC De n i v a t z ve$ touts* Fos-sur-Mer, France, and, after Federal Trade Commission approval, began inte grating a worldwide polyols business acquired from Union Carbide. Polymer polyols, derivatives ofpropylene oxide, enhance the combustion resistance ofurethane foams and allow the replacement ofchlorofluorocarbons (CFCs) by foammalters. For more information about ARCO Chemical, a copy ofthe company's annual report 97 99 99 90 91 can be obtained by writing to Investor Relations, ARCO Chemical Company, 3801 West Chester Pike, Newtown Square, PA 19073-2387. 1991 1990 1919 1988 m* Earnings -- millions Total asses--millions Additions to fixed asses -- millions Total revenues--millions Propylene oxide and derivatives -- million pounds TBA and-derivatives -- million gallons S 188 S3,676 S 435 sz.wo 2,729 996 S 351 $3,739 S 539 $2,950 2,563 955 S 405 : $ 494 $2,655 $2,548 S 262 !$ 245 $2,663 $2,700 2,586 912 2,812 917 $ :s: $2,534 $ 295 $1.95' 2.334 794 Styrene monomer and derivatives -- million pounds r* etfmuslotutt rrtoiat4h ,49COniorkffsdfvmrwtt ittiadedn tmtb ofnrpoeotf'Otiotsttd trpfwit ttdmt--ntj mtfrtst. 1,278 1,098 1,478 1.665 I..'90 r tntiodeMima rrUna ett/n p*f4u<n srgmrmt. pNYC 00013130 iw n m Ly o n d e l l Pe t r o c h e mi c a l Co mp a n y Headquartered in Houston. Texas, Lyondell Petrochemical Company is one of the nation's largest producers of ethylene and propylene and also one of the nation's largest independent reliners. ARCO holds a 49,9 percent equity interest in Lyondell. Lyondell stock has been traded on the New York Stock Exchange under the symbol "LYO" since its initial public offering in 1989. Lyondell's 190] earnings were below 1990 results due to the weak economic environ ment and recent industry overbuilding of petrochemical capacity, which combined to compress product mareins. Despite these factors, the company achieved good results relative to die industry due to ongoing emphasis on low costs and operational flexibility, as well as continued high employee productivity. The most recent Fortune 500 surveys have shown Lyondell is the most productive company in sales per employee and sales per dollar ofstockholders' equity and. based on Fortune 500 data, it is number one in profits per employee. During 1991. Lyondell increased its dividend by 12.5 percent to Si.80 per share on an annualized basis. Along with the industry, Lyondell's petrochemicals businesses suffered from t cyclical downturn in 1991 as increased industry capacity was coupled with stagnant demand. However. Lyondell's ethylene and methanol sales volumes were at record levels, reflecting strong marketing performance and continued emphasis on quality. Lyondell's refining operation maintained its profitability levels for the second consecutive year as industry supply and demand conditions remained favorable, despite the recession- The passage of the Clean Air Act has had important implications for the refining and petrochemicals businesses. On die refining side, the company has supplied reformulated gasoline to several customers and is well positioned to capitalize on the increasing demand. In terms of petrochemicals, Lyondell is a major producer ofoxygenates, which are necessary to produce reformulated gasolines. The company is a major producer of methanol and MTBE and has an acbve research project under way to produce low-cost isobutylene, a key feedstock in the production of MTBE. A commercial-scale demonstration of this technology is AND P0t,vE*S $-*!.$ >ov*oi planned for 1992. Lyondell's 5115 million capital program for 1992 includes projects to expand its prod uct flexibility unit, which converts ethylene to propylene, and to upgrade the fluid catalytic cracker, as well as several major projects to reduce environmental emissions. 8? 88 89 90 91 For additional information, a copy of Lyondell's 1991 Annual Report can be obtained by writing to Investor Relations, Lyondell Petrochemical Company, 1221 McKinney. Houston, TX 77010. 1991 1990 !9S9 /w /v>` $200 ?op nqo o___ Earnings -- millions Total assets -- millions Additions to fixed assets -- millions Sales and other operating revenues -- millions Refinery crude runs -- thousand barrels/dav Petroleum product sales -- thousand barrels/day S 222 Sl.479 S 55.729 254.6 287.7 S 556 $1,572 S 145 $6,495 257.7 500.9 $ 374 $1,267 S 176 $5,358 236.4 298.2 S 543 S 9)3 S 63 S4.696 247.3 261.0 s i :j S '50 S 29 S3.VO 240 4 28? 1 Ethylene, propylene and polymers sales -- million pounds 6.000 6,375 5.048 Tbit tabU rtpttsntt uani-ataa*fiaatmtla*4 tittKtira/lafoimaua* tfLyadtll PrmttrmiesJ Cempa>n 5.204 4.s:n 29 PNYC 00013132 V- nRPOR Re s p o n s i b il i t y \RCl5 pljces high priority on its corporate responsibilities to the communities in which it operates- Faced with an increasingly diverse population in the United States and urgent worldwide economic struggles, the role of ARCO and other industrial leaders has taken on new significance in addressing these complex issues. While \RCs Vs corporate citizenship activities ate many, chose most visible are in the areas of community involvement through participation and funding, equal opportunity in employment and promotion, and seeking out and working with women* and minority-owned businesses. Being part ofARCO, as an employee or retiree, generally means being involved. Whether it's the chairman of the board, president or a new employee, ARCO people have a spirit of involvement. In hundreds ofcommunities throughout the world, ARCO employees are helping children to learn more, helping hungry people eat better, help ing homeless people find affordable shelter and helping all people to experience cultural and historical events that help bind them together as a society. ARCO's history ofcommunity involvement is now serving to help others in business recognue what can be done through votunteerism and focused, strategic project fundine- Chairman Lod Cook is serving on the board of the Points of Light Foundation, created to facilitate the spirit ofconsequential personal involvement in the most urgent social needs in communities nationwide. Education is receiving increasing attention at ARCO to address society's current ills and to fulfill the future needs of society. ARCO volunteers have long been involved in classroom projects through activities such as adopt-a-schooi mentoring programs and Junior Achievement. While supporting these efforts, ARCO President Bob Wycoff and other executives are working with other business, community and political leaders to restructure U.S. public education so that it can teach today's students more effectively. ARh'th.tpe,till'.1 i,,v 1 .innr. , .uui I ht.nut .,t Ij ,i:;.i ' ' 1 l> ') * fit ,u,,l >. I-' .I 1l.irh. Uh. ten.! their i.mnt- -. >; y p-.im' t.,nn.i ! 9,v,r )' huint ,I,iftton shite 8dl\ .; .utvnori i'O-'r-J ,ir.J votiiiileeir hr- tmie '-.i the Itsiiiimn? .ump.UQO). hjruiiit? n: mi III,I nei/rhy tranfilicnai hoiiiinn hhilit\ jr* invited Seekh torn i.innh tne.it P,Hosed l'\ eiiiu.irioniil. inform,irr.e pr'/^r.inr .mil reereationii/uctiviiiel k. pt^cooo^^33 29 i In Los Angeles. Wycoff heads a group called LEARN, which stands for Los .Angeles Educational .Alliance for Restructuring Now and is dedicated to school reform. In Anchorage and Fairbanks, children ; .icipating in day-care and after-school-care programs are now learning the joys of science and math, thanks to ARCO's assistance in developing special activity kits created by Children's Television Workshop (originators of Se.'-.ime Street). ARCO financed a pilot project which took these learning kits to YMCA after-school clubs in the inner-city areas of Houston. Los .Angeles and Dallas three years ago. Popularity and use of the kits has been expanding rapidly. The company's interest in education extends beyond the primary grades. In 1991.25 universities, primarily in the West and Southwest, received financial assistance to help in retaining minority students in engineering disciplines related to the energy industry. A RCO's involvement in community reaches throughout its operating areas. In total for 1991. ARCO invested approximately S26 million in nonprofit organizations through the ARCO Foundation's direct grams, employee matching grants programs and other company-participation projects. ARCO is also actively involved in shaping the future of its workforce, which is being recruited from a diverse population. In hiring and promotion programs, the company seeks out qualified female and minority candidates. Although the number ofemployees at ARCO has declined since 1985, the percentage of minority and female employees has increased. Furthermore, ARCO strives to increase the number of women and minorities in mid-to-senior levels ofmanagement. In managing its procurement practices, .ARCO endeavors to promote opportunities for a diverse business base. .As a result, the company spent over S2 80 million of its total purchasing budget in 1991 with women- and minority-owned vendors and contractors. mndl Pro/ect,unrd.it I l<nr !mt- Afreet /7"* ; .htdterr lel'itc.i indent.. and it' O t-j. helped rr./, other needed equipment. I...ii-iuiit. *.v' n Product> Compare colnnrcer. \!:it ,\nonaii. hipsfifth trader* create a L n::,.t Stairs map The Indents, tor mast -t -. ham English is a econd lantmue. esrote to each state tor pictures and inron/un aj . complete repons and the colorful map PNYC 00013134 30 j Nv i r o n .w e n t . He a l t h a n d Sa f e t y ARCO's commitment to environment, health and safety issues is long-standing and arell recognized in the petroleum industry. Like technology for managing its other operations, expertise in these matters is growing. ARCO's Board of Directors has an Environment. Health and Safety Committee which meets regularly. The direction and goals are set by company management, and the operating locations are responsible for the results achieved. i w ik i>\ mi n i Environmental issues are pan ofthe planning for all ARCO projects. With increased exploration drilling worldwide, the company's environmental specialists are part of the initial planning for each project. In the Oriente area of Ecuador, for example. ARCO completed drilling its first well in the rain forest in 1991. Before anv well-site preparation work started, rain forest environmental protection guidelines were developed. Minimizing the use of heavy equipment in the forest, ARCO kept the drilling area to just four acres (previous comparable sites in Ecuador averaged 8 to 12 acres). Helicopter flights were used instead of roads for transport of equipment and workers to the site. Local citizens from the nearby village. Moretecocha, and scientific consultants studied the specific site for drilling. Local residents selected trees to be cut for use at the well site. Immediately following the drilling, restoration of the site began. An on-site nursery was utilized to grow seedlings for transplant to the drilling area. Boards used at the drill . Ihl ii.i Pin inn sire were recycled and made into wooden pallets that were spread over the reseeded areas to protect tiny plants from the tropical sun. Low-impact site preparation methods, use of nursery-grown plants, banking and reuse ofthe topsoil are all resulting in accelerated recovery ofthe forest. Lessons learned at this site are already being utilized at a second well site being pre 'p.fn \ \/v, pared for drilling nearby, minimizing even further any impacts to the environment. c\'phitl)i !\tr{el`,ti,\i .t.-umi,-' m w 111 v m> ''ii m In 1991. ARCO moved to revitalize its safety culture when it concluded overall safety performance was unacceptable compared toother performance measures. By the end of 1991, ARCO's lost workday case incident rates had improved 24 percent, compared to 1990. There were no employee work-related fatalities in 1991, but four contractor fatalities did occur. To improve contractor safety performance, ARCO has implemented a contractor strategy which demands the same high standards required of ARCO employees. ARCO carries its safety concern through all operating divisions worldwide. ARCO management and employees, as well as contractor employees and visitors, are required to maintain specific safety standards at ARCO-operated locations. By training and managing for safety, ARCO plans to become the top performer in its industry. k i mi ih u ms Federal clean-up procedures and standards for post-industrial activities have become very complex and stringent. Remediation programs cost ARCO $148 million in 1991. ARCO has found that by leading the investigation and remedial design effort, the whole process can be shortened and still produce an equally effective remedy. Near Vinita, Oklahoma, for example, .ARCO recognized its potential responsibility related to a refinery site abandoned by a predecessor company in 1925. While parts of hnth i>/(V 'V / ;> X( 4 .... the acreage had been used for ranching, it also included acid tar pits which had been fenced and abandoned. ARCO purchased the land and voluntarily signed an agreement ~ ti-, ht'i'i with the Oklahoma Department ofHealth providing for cleanup of the site. In 1992, after a $5 million, 22-month restoration, ARCO plans to transfer the restored 148-acre b.hkinund h .< -U <\ w.i* .1 I /*, sice to the Oklahoma Department of Wildlife Conservation for public use. .Moving ahead of requirements or specific regulations is also die approach that ARCO is taking tn>.' K./rr.e.tihi on the North Slope ofAlaska, where it has been active since the 1960s. New seed and plant development, along with tundra restoration, are under way so that the footprints >7/t* l 7'/ib ..v'T./'V ; 7r\ from exploration and development activities in past years can be removed even as production continues. wfHtrtmt'ntfjiiJ ,*{ %* '* PNYC 00013136 Re v i i w c o nt ent s' 34 MiiugcnKB^iDucusion '' .. 40 -QnuoiidatedFuundalStxcemems >,/ - v 43 NocestoCcmsoiidaBedFuuncalScKemeDis.-)" 54 fadcpcndcatAccountant^Report' ^... v* '*7. SySnpplenjmtillhfoniiaCKio'^ 59 CotflbfatacgdFrnaarraj Pair ' - v/; 60, SegmentOpsati&gOata ' -' PNYC 00013137 v. , Se l e c t e d Fi n a n c ia l In f o r ma t io n Millions ofdollars. rxtept per shore nmouna J991< I990>:> 19S9` ms /Pi* Sales and other operating revenues -- including excise taxes Net income Earned per share Cash dividends per common share Total assets Long-term debt and capica! lease obligations $18,157 S 709 $ 4.39 S 5.50 $24,492 S 5,989 $18,808 $ 2,011 $ 12.15 $ 5.00 $23,864 S $.997 $16,021 S 1,953 S 11.26 $ 4.50 $22,261 S 5,313 $18,324 S 1,583 S 8.78 S 4.00 S2&.514 $ 5,665 $16,977 $ 1.224 S 6.68 $ 4.00 $2 2,890 S 6.314 ill See Sore or'Sores re LoresohJjeed FinencrolStatements. 0 Tire 1990 import err nit tntvmefnmtSt evmuStttve effeet ofthe sbnge nteentortngfor income taxes fttSlU. or St.91pershore 1 Sr See Sort 19 ofSorts so CoruoUioted fttunool Statements. Ma n a c e me n t 's Di s c u s s io n a n d An a l y s i s o f Fin a n c ia l Co n d it io n a n d Re s u l t s o f Op e r a t io n s r e s u l t s OF c o s s o l io a t e d OPERATIONS Earnings were lower in 1991 compared to 1990 and 1989, primarily as result ofan unfavorable economic climate. The upward trend in crude oil prices, which had a strong influence on operating results in the two preceding years, reversed itself in 1991. The Company also took charges in 1991 against earnings for unusual items related to personnel reductions, restructuring ofits Lower 48 operations, the anticipated loss on the sale of certain Lower 48 oil and gas properties and the writedown ofcertain coal assets. In recognition ofthe currently difficult and changing business environment, the Company took these steps to improve its profitability in the future. Charges for the unusual items associated with these actions totaled $503 million pretax, S312 million aftertax. o v e r v ie w of i*i r e s u l t s In 1991, ARCO's net income was$?Q9 million,or $4.39 pm share, and included approxi mately S29S million after tax in net charges, primarily related to personnel reductions, anticipated loss on property sales and property writedowns. Earnings in 1991 were also negatively impacted by lower crude oil and natural gas prices, refining and marketing margins and margins related to chemical operations, only partially offset by higher crude oil and refined prod ucts sales volumes. In addition, the Company's income from equity investments and interest was lower in 1991. o v e r v ie w of t90 r e s u l t s In 1990, ARCO recorded the highest net income in the history ofthe Company. Net income was S2,Oil million, or $12.15 per share. The effect ofhigher crude oil prices was partially offset by higher explora tion expenses and operating costs. Additionally, higher refined product margins contributed to the earnings improvement. However, earnings from ARCO's ownership interest in ARCO Chemical Company (ARCO Chemical) were lower as a result of reduced domestic volumes and increased costs associated with a plant accident and shutdown in the second half of the year, partially offset by margin improvements for propylene oxide and methyl tertiary butyl ether. The 1990 results included a $323 million gain as a result ofthe Company's adoption ofStatement ofFinancial Accounting Standards No. 96, "Accounting for Income Taxes." The cumulative effect ofthis accounting change on 1990 net income per share was $1.95. In addition, foe 1990 results included approximately Si85 million in after-tax gains resulting from a settlement with SONAT related to an offshore accident and foe sale of ARCO's Norwegian oil and gas assets. These gains were offset by after-tax charges of5130 million for future environmental remediation and S267 million for tax and royalty issues. o v e r v ie w o f is * r e s u l t s In 1989, the Company's net income was Si,953 million, or $11.26 per share. The 1989 results included a $634 million after-tax gain from ARCO's sale ofa majority interest in Lyondell Petrochemical Company (Lyondell) in January 1989 and $43 million of after-tax gains resulting from settlements of natural gas contract disputes. Partially offsetting these gains were $34$ million in first quarter after-tax charges for future environmental remediation, provisions for the anticipated loss associated with the sale ofARCO Solar, Inc^ the writedown ofabatable preferred stock, and some tax-related provisions. PNYC 00013138 A ?; o RESt LTS OF CONSOLIDATED OPERATIONS RE v e s i e s Sales and other operating revenues were $18.2 billion in 1991, $18.8 billion in 1990 and $16.0 billion in 1989. The decrease in revenues in 1991 compared to 1990 resulted from lower crude oil and refined and chemical products prices and lower natural gas prices and sales volumes, partially offset by higher crude oil trading volumes and higher refined and chemical products sales volumes. The $2.8 billion increase in 1990 compared to 1989 primarily resulted from higher crude oil and refined product prices. Income from equity investments was $119 million in 1991, $277 million in 1990 and $240 million in 1989. The lower income in 1991 primarily resulted from lower earnings from ARCO's equity interest in Lyondell. The lower earnings resulted from reduced operating margins for Lyondell as well as the absence of any income related to dividends received during 1991 in excess ofARCO's equity investment in Lyondell. The higher income in 1990 compared to 1989 primarily resulted from the inclusion of$45 million after tax related to ARCO's recognition ofincome from dividends received during 1990 in excess of its equity investment in Lyondell- Other revenues were $385 million in 1991 compared to $443 million in 1990 and $199 million in 1989. The 1991 revenues included net foreign currency transaction gains, versus losses in 1990. The 1990 revenues included the SON'AT settlement and die gain from the Norwegian oil and gas assets sale. e x p e n s e s Costs and other operating expenses were $10.5 billion in 1991, $10.8 billion in 1990 and $9.0 billion in 1989. Operating expenses in 1991 included higher crude oil trading volumes, which were partially offset by lower crude oil feedstock prices, and higher operating costs associated with oil and gas properties purchased in California and increased production in the United Kingdom. In addition, 1991 operating expenses included higher purchased volumes of finished refined products and chemical feedstocks. In 1990, however, operating expenses were higher than in 1991 because they included charges for tax and royalty settlements and higher charges for future environmental remediation. The increase in operating expenses in 1990 compared to 1989 primarily resulted from higher crude oil and refined productcosts and higher operating and exploration expenses. Selling, general and administrative expenses were $1,784 million in 1991, $1,652 million in 1990 and $1,476 million in 1989. Increased expenses in 1991 resulted primarily from higher insurance costs. The increase in 1990 selling and administrative expenses compared to 1989 resulted from higher retail marketing costs associated with ARCO Products Company's addi tional am/pm* stores and with its Bmilian operations, higher advertisingcosts associated with ARCO's emission control gasolines, EC-1* and EC-Premium*, and higher delivery charges associated with ARCO Coal Company's operations. In addition, ARCO Chemical incurred higher administrative costs, including costs associated with personnel additions and additional Ea r n in g s p e r $a e oen.t*> support facilities, related to.its continued program ofworldwide growth. Taxes other than excise and income taxes were $1,131 million in 1991, $1,303 million in 1990 and $943 million in 1989. The decrease in 1991 taxes primarily resulted from lower production taxes related to lower crude oil prices and a decrease in Brazilian $; 88 89 90 91 value-added taxes related to lower products prices. The increase in 1990 taxes primarily resulted from an increase in Brazilian value-added taxes and Alaskan production taxes associated with higher crude oil prices in 1990. Excise taxes were $1,120 million in 1991, $800 million in 1990 and $670 million in 1989. The increases in 1991 and 1990 compared to 1989 primarily resulted from increases in federal and stare excise tax rates in 1991 and 1990 and the full-year effect in 1991 of 12 increased rates in 1990. RESULTS OF SEGMENT OPERATIONS o il a n d g a s .ARCO's worldwide oil and gas exploration and production operations tamed $549 million after tax in 1991. This amount included approximately $170 mil lion after tax in net charges related to personnel reductions and the anticipated loss on divestiture ofproperties in the Lower 48, partially offset by a benefit associated with the reduction in U-K. corporation tax rates. The effect oflower crude oil prices, lower PNYC 00013139 3S MANAGEMENT'S DISCUSSION natural gas prices and volumes, and higher operating costs, partially offset by higher crude oil sales volumes, resulted in the lower earnings for 1991. .ARCO's oil and gas exploration and production operations earned $1,364 million after tax in 1990. versus $887 million after tax in 1989. The effect of higher crude oil prices, partially offset by higher operating costs, increased exploration expenses and lower production volumes, was responsible for the improved performance. The 1990 earnings also included after-tax gams of approximately Sl85 million as a result of the SOSAT settlement and the sale of ARCO's Norwegian assets. The 1989 results included S43 million ofafter-ax gains as a result of settlements of natural gas contract disputes. F lucruating crude oil prices have had a significant impact on earnings over the past three years. The Company's domestic composite average price for crude oil was$l2.9J per barrel in 1991, $16.56 per barrel in 1990 and 513.13 per barrel in 1989. Average domestic natural gas prices were Sl.54 per thousand cubic feet in 1991, $1.66 per thousand cubic feet in 1990 and $1.67 per thousand cubic feet in 1989. The Company's worldwide petroleum liquids production averaged 744,200 barrels per day in 1991,705,400 barrels per dav in 1990 and 730,100 barrels per day in 1989. ARCO's share of production from its largest Alaskan field. Prudhoe Bay, was 281,700 barrels ofpetroleum liquids per day in 1991, compared to 276,800 barrels per day u\ 1990 and 294,300 barrels per day in 1989. The worldwide production volumes were higher than in the previous year as a result of Itases acquired in the Midway-Sunset field ofCalifornia in early 1991 and the impact of the expanded gas handling system (GHX-U installed in late 1990 at Prudhoe Bay on Alaska's North Slope, which was designed to increase production. The decrease in worldwide pro duction in 1990 primarily resulted from the following factors: reduced Alaskan production as a result of scheduled field downtime for installation of GHX-1, pipeline maintenance, a Kuparuk River field production paybackof 9,000 barrels per day that commenced onJuly 1.1990 and natural field decline in Alaska. The Company's share ofpetroleum liquids production from the Kuparuk River field increased to 140,300 barrels per day in 1991 from 138,400 barrels per day in 1990 and 147,100 barrels per day in 1989. The decrease in 1990 primarily resulted from the six-month effect of the above-mentioned payback of9,000 barrels per day. The 24-month payback is the result of a final equity ^determination in 1990 among ARCO Alaska and the ocher working interest owners of the field. Lower 48 petroleum liquids production was 227,900 barrels per day in 1991,204,500 barrels per day in 1990 and 200.600 barrels per day in 1989. The increase in 1991 was primarily attributable to the additional leases in the Midway-Sunset field. Foreign petroleum liquids production averaged 75,700 barrels per day in 1991,67,100 barrels per day in 1990 and 70,100 barrels per day in 1989. ARCO's international operations in 1991 reflected increased production from the startup of the BZ2 field in Co u p e OH Av e r a g e Do me s t ic Sa l e s Pr ic e t:uH tinu Indonesia and increased production onshore in the United Kingdom. The decrease in foreign production in 1990 was attributable to Indonesian production, which was the result ofnatural field decline and a reduction in the number ofbarrels required to pro vide forcost recovery under the Indonesian production sharing agreement. Domestic natural gas production totaled 1.399 billion cubic feet per day in 1991, 37 33 39 90 91 l.S 54 billion cubic feet per day in 1990 and 1.529 billion cubic feet per day in 1989. The reduced production level in 1991 reflected primarily natural field decline in the Lower 48. c o al Afttr-czx earnings from the Company's coal operations were $33 million m 1991,591 million in1990 and $92 million in 1989. Included in the 1991 earnings were approximately $50 million in net after-tax charges primarily associated with a write down ofthe Coal Resources of Queensland (CRQ) mine in Australia, partially offset by gains from the sale ofVenezuelan and other assets. As a result ofCRQ's difficulties in meeting its production objectives, ARCO Coal has been considering various options, including the use ofalternative mining methods and mining plans and/or a reduction in its ownership interest Total worldwide coal shipments in 1991 were 41.6 million tons compared to 38.3 million tons in 1990 and 39.4 million tons in 1989. r e f in in g a n d ma r k e t in g After-tax earnings for refining and marketing oper ations were $266 million in 1991, $439 million in 1990 and $291 million in 1989. 36 PNYC 00013140 a c <s Earrings were lower in 1991 because of lower refining margins resuiting from higher industry production levels on che West Coast and weak consumer demand. The 1991 earnings also included approximately $10 million ofnet after-tax charges for personnel reductions, for future environmental remediation, primarily associated with previously divested properties, and for "min legal exposures, partially offset by benefits associated with accounting and tax adjustments related to Brazilian operations. The increased earnings in 1990 resulted from higher refined product margins, partially offset by the effects ofhigher crude oil prices- West Coast petroleum products sales totaled 466,400 barrels per day in 1991,444,000 barrels per day in 1990 and 435,500 barrels per day in 1989. The progressive increase in sales volumes from 1989 resulted in increased market share for Company's refining and marketing operations. The refining and marketing operations met part of this increased sales demand by reselling products not refined by the Company. t r a n s p o r t a t io n After-tax earnings for the transportation operations were $212 million in 1991, $274 million in 1990 and $266 million in 1989, The 1991 earnings were lower as a result oflower Trans Alaska Pipeline System (TAPS) revenues, as determined by the TAPS SettlementMethodology Agreement, and reduced volumes on the Midcontinent system. The \991 earnings also included after-tax charges ofapproximately $30 million for personnel reduction costs and for settlement of Kuparuk Pipeline tariff rate litigation. The increase in 1990 compared to 1989 was the result of a higher TAPS tariff rate, partially offset by lower TAPS volumes associated with the decline in production from Prudhoe Bay and higher pipeline maintenance expenses. The 1990 tariff included a makeup for costs resulting from volume losses and higher costs in 1989, both associated with che EXXON VALDEZ spill. in t e r me d ia t e c h e mic a l s a n o SPECIALTY p r o d u c t s After-tax earnings for the Company's intermediate chemicals and specialty products segment were $192 million in 1991, $271 million in 1990 and $336 million in 1989. The segment consists of ARCO Chemical, an 83.4 percent owned subsidiary of the Company. Sales volumes were higher in ail major product lines in 1991 compared to 1990 when the Channefview, Texas, plant was shutdown after an accident; however marginswere generally lower as a result of the weak worldwide economy. ARCO Chemical's reported 1991 results included i$l53 million pretax benefit from business interruption insurance related to dieJuly 1990 Channelvicw claim, which is now finalized, and to feedstock contamination in the fourth quarter of 1990 at its Bayport, Texas, plant. Also included in the 1991 results were pretax charges totaling $3 8 million, reflecting personnel reductions and future environmental remediation costs, partially offset by a pretax benefit of$18 million related to a change in estimated accident charges. ARCO Chemical's earnings in 1990 included a pretax accrual totaling$120 million for business interruption insurance related to che Channeiview accident. In 1990, an increase in propylene oxide and methyl tertiary butyl ether margins was more than offset by a decrease in styrene margins and volumes and higher administrative and interest expenses. The 1990 ARCO Chemical results also reflected pretax charges of Na t u r a l 6a s Av e r a g e d o me s t ic Sa l e s Pr ic e Vtiittt/ T*0viA flit approximately $90 million for costs related to the Channeiview accident and S24 mil lion for future environmental remediation. l y o s d e l l p e t r o c h e mic a l COMPANY ARCO's 49.9 percent equity shirtof 47 St 89 90 91 Lyondell's net income was Sill million for 1991, $223 million for 1990 and $214 million for 1989. Lyondell's 1991 earnings were lower as a result oflower ethylene margins, which were partially offset by higher methanol margins. In 1990, higher refining profits were more than offset by lower olefins margins resulting from higher raw material costs. The 1990 results include $45 million after tax relating to ARCO's recognition ofincome 1.75 from dividends received in excess of its equity investment in Lyondell. u n a l l o c a t e d e x p e n s e s a n d OTHER- Unallocated expenses and other after tax totaled $60 million in 1991, $410 million in 1990 and $2 50 million in 1989. The 1991 results included after-tax charges of$34 million for future environmental remediation. In addition, 1991 results reflected higher insurance costs compared to 1990- The 1990 results included approximately $250 million after tax for provisions for taxes and royalties, a $110 million after-tax charge for future environmental remediation primar ily associated with operations previously discontinued and a $30 million after-tax PNYC 00013141 J? Ma n a g e me n t 's Di s c u s s io n charge for the early redemption of two debt issues. In addition. 1990 results included lower net investment income. The 1989 results included a $120 million after-tax charge for future environmental remediation and a $25 million after-tax charge for the writedown of abatable preferred stock. In addition. 1989 results included higher net investment income and lower insurance expenses, partially offset by provisions for the anticipated loss associated with the sale ofARCO Solar. Inc., which was completed in 1990. f in \n < m p o s it io n * v n d uouiDiTV Cash flows from operating activities were $2,984 million tn 1991, $3,509 mil lion in 1990 and $3,729 million in 1989. The net cash used in investing activities was S2.691 million in 1991 and primarily included expenditures for additions to fixed assets (including dry-hole costs) of$3,239 million, and a net decrease in short term investments ofS608 million. The net cash used in financing activities was $112 million in 1991 and primarily included repayments of long-term debt of $957 million, proceeds of $1,079 million from the issuance of long-term debt, dividend payments ofS872 million and treasury stock purchases by ARCO of$204 million. Cash and cash equivalents and short-term investments totaled $2,549 million at year-end 1991. Short-term borrowings were $1,807 million at year-end 1991. The Company's working capital decreased by $1,663 million, primarily as a result of a drawdown in short-term investments and an increase in notes payable outstanding. During 1991, short-term interest rates declined more sharply than long-term interest rates, maiang shorter term debt more attractive to the Company than longer term debt. The Company has a capital spending program that includes $2.4 billion for additions to fixed assets in 1992. Future capita! expenditures remain subject to business conditions affecting the industry, particularly changes in price and demand for crude oil, natural gas and petroleum products. Changes in the tax laws, the imposition of and changes in federal and state clean air and dean fuel requirements, and other changes in environmental rules and regulations may also affect future espi al expenditures. It is expected that future cash requiremeno for capital expenditures, dividends, debt repayments and any treasury stock purchases will come from cash generated from operatingactivities, future borrowings and existing cash balances. InJanuary 1989, die Company's Board ofDirectors authorized a common stock buy-back program. Under the program, the Company repurchased for its treasury approximately 1.7 million shares fot $204 million in 1991. In April and May 1991, the Company issued $300 million and$150million of9 percent debentures due in 2021 and 2031. respectively. In August 1991, the Company issued $350 millionof9'A percent debentures due 2031, and in September 1991, Ca s h e a o v j b e b *V Or B A A T I`0NS *nuo*t 0* 9oa**$ the Company completed the issuance and sale of$200 million of medium-term notes due in nine months to 30 years from date of issue. These debt securities were issued pursuant to a shelf registration statement on Form S-3 (Registration No. 33-39277) filed with the Securities and Exchange Commission in March 1991 under which the Company registered the issuance ofup to $1 billion of debt securities. In January 1992, the Company filed a $1 billion shelf registration statement on Form 87 S3 89 90 91 S-3 (Registration No. 33-44925) with the Securities and Exchange Commission. On February 3,1992, the Companyissued $250 million of 8V4 percent debentures due 2022. In February 1992, the Company also began the issuance and sale ofup to $250 million of medium-term notes due in nine months to 30 years from date of issue. e n v ir o n me n t a l ma t t e r s The Company is subject to federal, state and local environmental laws and regulations which require the Company to remove or mitigate the effecton the environment of the disposal or release ofcertain chemical and petro leum substances at various sites. The Company is currently participating in environ 1000 mental assessments and cleanups at numerous sins under these laws, and may in the futurebe involved in additional environmental assessments and cleanups. The Company toco continues to estimate the amountofthese costs in periodically establishing reserves based on progress made in determining the magnitude ofremediation costs, the timing iOOO and extent ofremedial actions required by the applicable governmental authorities and the amount ofthe Company's liability in proportion to the other responsible parties. \s a the scope of the Company's obligations becomes more dearly defined, there may be so PNYC 00013,42 chanees in these estimated costs, which might resuit in future charges against the Company's earnings. The Company's reserve covers federal Superfund and comparable state sites as well as ocher clean-up sites, including ser- nCe stations, refineries, terminals, chemical facilities, third-parry landfills, former nuclear processing facilities and sites associated with discontinued operations. The Company accrues for all its estimated liabilities associated with environmen ts remediation, including sites as to which no claims have been asserted. During 1991, the Company charged to income Slid million for environmental remediation costs and made related payments of SI56 million for a net reduction in the envi ronmental reserve of S8 million. At December $1, 1991, such reserve totaled S*29 million. Approximately half of the reserve was related to sites associated with the Company's discontinued operations. Another significant component is related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities. The remainder related to other sites with reserves ranging from $1 million to SlO million per site. No one site represents mote than 15 percent ofthe total reserve. Substantially all amounts accrued in the reserve are expected to be paid out over the next five to six years. s t a t f me n t s o f f in a n c ia l a c c o u n t in g s t a n o a s os n o t v e t a d o p t e d In December 1990, the Financial Accounting Standards Board tFASB) issued Statement of Financial Accounting Standards (SFAS) N"o. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective for fiscal years beginning after December 15, 1992. The standard requires companies to accrue the actuarially determined costs of postretirement benefits during the rears that the employee renders the necessary service. The Company currently recognizes an expense when an obligation is paid. The Company has not yet determined whether it will adopt the new standard in 1992 or 1993. The new standard allows an employer to record the unrecognized accumulated postretirement benefit liability (transition obligation) immediately in the year ofadoption as die effect of an accounting change. Alternatively, an employer can choose to record the transition obligation prospectively over the average remaining service life of active participants. If that period is less than 20 years, the Company may elect to use a 20-year period. If the Company uses the prospective basis for recognition of the transition obligation, then the unrecognized amount must be disclosed. The Company has not yet determined in which manner it will choose to recognize its transition obligation, which is esti mated to be approximately $600 million before tax, based on current data and assumptions. The Company does not anticipate that adoption of the new standard will have a material adverse effect on its consolidated financial position or results ofoperations. During the first quarter of 1992, the FASB issued SFAS No. 109 "Accounting for Income Taxes." effective for fiscal years beginning after December 15,1992. SFAS No. 109 will increase the ability to record deferred tax assets because anticipated future income will now be considered when assessing realizability. The standard may also impact deferred taxes related to previous acquisitions ofsome companies. SFAS No. 109 Ca s h Div id e n d s Pe r Sh a r e Cttitut is not expected to have an adverse impact on AilCO's financial statements. e f f e c t s o f in f l a t io n While die annual rate ofinflation remained moderate during die three-year period ended December 31.1991, the Company continued to 87 88 89 90 91 experience certain inflationary effects. The Company will achieve some benefits by using current, inflated dollars to satisfy its debt obligations and other monetary lia bilities, because the Company's monetary assets are Ik s than its monetary liabilities at December 31,1991. Based on the age ofthe Company's property, plant and equipment, it is estimated that the replacement cost ofthose assets is greater than the historical cost reflected in the Company's financial statements. Accordingly, the Company's depreciation, depletion and amortization expense for the three years ended December 31, 1991, would be greater if the expense were stated on a current-cost basis. T o the extent that die Company uses foe last-in, first-out (LIFO) inventory accounting method, the replacement cost ofinventory is greater than foe historical cost reflected on the Company's balance sheet, while the costs of products sold reflected in the Com pany's income statement approximate current cost. VYC 00013143 39 Co n s o l i d a t e d St a t e me n t o f In c o me a n d Re t a in e d Ea r n in g s **: o \littims afdollars. exetpt pershare amount! Faribtytar ended Dtcrmbrr 3/, 1991 1990 ' 1989 stvrufs Sates and other operating revenues (including excise taxes) Income from equity investments Interest Ocher revenues EXPENSES Costs and other operating expenses Selling, general and administrative expenses Taxes other than excise and income taxes Excise taxes Depreciation, depletion and amortization Interest Unusual items Income before gain on subsidiary stock transaction Gain on subsidiary stock transaction Income before income taxes, minoricy interest and cumulative effect ofchange in accounting principle Provision for taxes on income Minority interest in earnings ofsubsidiaries Income before cumulative effect of change in accounting principle Cumulative effect ofchange in accounting for income taxes Net Income ear ned per shar e Before cumulative effect ofchange in accounting principle Cumulative effect of change in accounting forincome taxes Net Income per Share RETAINED EARNINGS Balance, January 1 Net income Cash dividends: Preference stocks Common stock Cancellation of treasury stock Balance, December 31 Set Soto tu pages*) ehrtufh S3. $18,157 119 261 385 518,808 $16,021 277 240 368 : 355 443 199 18,922 19,896 16,815 * 10,525 1,784 1,131 1,120 1,807 892 503 17,762 1,160 10,763 1,652 1,303 800 1,723 8_35 17,076 2,820 - 8,975 1,476 943 670 1,748 7_99 14,611 2,204 957 1,160 420 31 2,820 1,076 56 3,161 1,142 66 709 1,688 1,953 323 | - S 709 S 2,011 j$ 1,953 i' __S 4.39 $ 10.20 [S 11.26 1.95 - S 4.39 S 12.15 j$ 11.26 S 6,83? 709 ! S 5.636 $ 7,562 2,011 j 1,953 (3) (869) (684) (3) 1 (807) j -I (4) (756) (3,119) S 5,990 S 6,937 I S 5,636 PNYC 00013144 40 CONSOLIDATED BALANCE SHEET 9 \UUiont ofdciian Otcmbrr 1991 1990 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses and other current assets Total current assets Investments and long-term receivables: Investments accounted for on the equity method Other investments and long-term receivables Fixed assets: Property, plant and equipment Less accumulated depreciation, depletion and amortization Deferred charges and other assets Total Assets LIABILITIES AND STOCKHOLDERS' EQCITV Current liabilities: Motes payable Accounts payable Taxes payable, including excise taxes Long-term debt due within one year Accrued interest Other Total current liabilities Long-term debt Deferred income b t Other deferred liabilities and credits Minority interest Stockholders' equity: Preference stocks Common stock, $2.50 parvalue; shares issued 160,743,361 (1991), 167,679,563(1990); shares outstanding 157,627,284(199JX 158,912.873 (1990) Capital in excess ofparvalue ofstock Retained earnings Treasury stock, at cost Foreign currency translation Total stockholders' equity - Total Liabilities and Stockholders' Equity The CemptnyftUavt lit nutteful ffftra mnitiefutmrmgfrrHttnd/ttfndutmgteminti. Str \ottimv p*g*i 43 tbrngb S3. S 1,228 1.321 1,680 861 248 S 1,102 1.929 1.963 760 294 5.338 6,048 428 124 291 66 552 357 32,273 30,164 14,721 ' 13,764 17,552 1,050 16,400 1,059 $24,492 $23,864 S 1,807 1,221 329 $ 932 1,394 529 644 502 214 233 998 ' 670 5,213 ' 4,260 5,989 3,224 2,912 . 322 5,997 3,440 2,709 309 11 402 688 5,990 (325): 76 419 740 . 6,837 (890) 42 6,832 7.149 $24,492 . $23,864 P*W 00013t45 Co n s o l i d a t e d St a t e me n t "o f Ca s h Fl o w s Millions ofdollars ( \\H FLOW S FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided bv operating activities: Depreciation, depletion and amortization Gain on subsidiary stock Transaction Income from equity investments Dividends from equity investments Noncash provisions greater (less) chan cash payments Net change in deferred taxes Dry-hole expense Net change in accounts receivable, inventories and accounts payable Net change in other working capital accounts Other Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets (including dry-hole costs) Net cash provided by (used in) short-term investments Proceeds from asset sales Net proceeds from subsidiary stock transaction Investments and long-term receivables Other Netcash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repayments oflong-term debt Proceeds from issuance oflong-term debt Net cash provided by notes payable Dividends paid Treasury stock purchases Other Net cash used in financing activities Effect ofexchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginningofyear Cash and cash equivalents at end ofyear SteStmnpagts*3rbroagb Si. a ar For rbiyear aided Dumber It. 199J 1990 1989 S 709 S 2.011 S 1,953 1,807 __ (U9) 112 440 (216). 218 1,725 (277) 192 (472) 33 299 1*48 (634) (240) 84 570 (363) 163 9 21 3 2,984 (214) 272 (58) 3,509 380 57 II 3.729 (3,239)1 608 117 --: (205) 28 (2.718) (93) 358 -- (13) (74) (2.105) (814) (49 1,241 10 (344) (2,691): (2,560): (1.863) (9S7)> 1,079 873 (872) (204). (31). (8(0)' 1.062 277 (810) (704) (33): (486) 459 85 (760) (810)- (29) (112) i (1,018) (1.541) (55): (2) (28) 126 (71) 297 1.102 : 1,173 876 S 1.228 S 1.102 S 1,173 . PNYC 00013146 pj pr e s t o Co n s o l i d a t e d -7a N C I A L STATEMENTS <0T[ l UtlUMlM, PDIHI V RCO'S accounting policies conform to generally accept accounting principles, including the "successful efforts" method ot accounting for oil and gas producing unities. principles (tfCmiwhiLmon The consolidated tinancialstatements include the accounts of all subsidiaries, ventures and partnerships ,n which a controlling interest is held. The Company also consolidates its interests in undivided interest pipeline companies and in oil 3nd gas and coal mining joint ven tures. The Company uses the equity method ofaccounting for companies where its ownership is between 20 and 50 percent and for other ventures and partnerships in which less than a controlling interest is held. Cash Equivalents; Short Term Investments Cash equivalents consist c>fhighly liquid investments, such as time deposits, certificates ofdeposit and market able securities other than equity securities, maturing within three months ofpurchase. Short-term investments consist of similar investments maturing in more than three months of purchase. Cash equivalents and short term investments are stated at cost, which approximates market value. Oiland Gas Unpwed Property Costs U nproved property costs are capitalized and amortized on a composite basis, considering past success experience and average property life. In general, costs ofproperties surrendered or otherwise disposed ofare charged to accu mulated amortization. Costs ofsuccessful properties are transferred to developed properties. Dismantlement. Restoration and Reclamation Costs 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 cost ofrestoration and reclamation of land associated with such protects and land associated with mining operations are accrued during operations and classified as a long-term liability. Such costs are taken 13C0 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. FixedAssets Fixed assets are recorded at cost and are written offon either a unit-of-production method or a straight-line method based on the expected lives of individual assets or groups of assets. Disposal ofFixed 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. Minority Interest Minority interest represents the minority stockholders' proportionate sham of the equity and the income or loss of certain consolidated subsidiaries, primarily ARCO Chemical Company (ACC). At December 1!. 1991, ARCO owned approximately 83.4 percent of the outstanding shares ofACC. Reclassifications Certain previously reported amounts have been restated to conform to classifications adopted in 1991. NOTE 2 I'NTSVAL ITEMS In the third quarter of 1991, the Company announced a reorganization ofits oil and gas operations in the Lower 48 states and a company wide work force reduction. The Company provided as unusual items an estimated $177 million, net of tax benefits of 111 million, for the cost of these programs. The Company also provided as unusual items approximately 135 million, net of tax benefits of 580 million, for the anticipated loss on the sale of certain Lower 48 oil and gas properties and the write down of certain coal assets. PNYC 00013^47 41 No t e s t o Co n s o l i d a t e d Fi n a n c i a l St a t e me n t s NOTE 3 UI.MfNl r\K)RW\TIO\ The Company operates primarily in the Resources and Products segments. The Resources segment includes the Company's oil and gas operations, which comprise the exploration, development and production of petroleum, including petroleum liquids (crude oil, condensate and natural gas liquids) and natural gas; the purchase and sale of petroleum liquids and natural gas; and the mining and sale of coal. The Products segment includes die refining and transportation ofpetroleum and petroleum products; the marketing of petroleum products; and the manufac ture and sale of intermediate chemicals and specialty products, including propylene oxide, tertiary butyl alcohol, methyl tertiary butyl ether and styrene monomer. Segment information for the years 1991.1990 and 1989 was as follows; MiUiont e/Jo/ler: SALES AND OTHEA OAE RATING IIV(Mt) Resources: Oil and gas Coal Products. Refining and marketing Transportation Intermediate chemicals and specialty products Other Elimination ofintersegment amounts Total 1991 1919 5 8.859 S 9,42} S 8.138 56) 541 519 j 7.989 849 8.649 946 6.789 , 862 ; 2.990 30 2.950 33 2.663 | 55 (3,123) (3.736) (3.005) 518.157 $18,808 516.021 ; Intersegment sales were made at prices approximating current market values. The amounts for intersegment sales included in sales and ocher operating revenues were as follows: Resources: Oil and gas Products: Refining and marketing Transportation Intermediate chemicals and specialty products Othtt Total 1991 1990 )9>9 $ 2,694 5 3.311 5 2.632 ! 19 25 18 >46 350 312 41 23 5 3.123 24 26 5 3.736 15 : 28 : S 3.005 \Ulb*nt offoiUrt META* SEGMENT EteVINCS Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Equity earnings from Liondell PerrochemjcaJ Company Gain on subudiifv stock transaction Unallocated expenses and other Interest Income taxes Minority interest Cumulative effect ofchange in accounting principle Net income 1991 1990 ij IT 5 641 S 2.J4T S 1.461 25 HO 394 333 806 4)6 377 48* 111 (29) (892) (420) (31) 250 __ 1601) 1835) (1.076) (561 424 596 214 l*9i li -- 323 -- 5 709 S 2,011 S 1.9'J *FT||.Ta X trCMEVT Ea KMNCI Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products'*' Equity earnings from Lrondel] Petrochemical Company Gain on subsidiary stock transaction Unallocated expenses and other Interest Cumulative effect ofchange in accounting principle Net income 5 549 s 1.364 s as* 33 91 92 266 212 439 274 2 1 266 192 271 336 1U 223 214 -- (60) (594) -- 1410> l564> 6)4 i250) |J17) -- 323 -- 5 709 s 2.0)1 s 1.9?5 1*1 StttfmwtynttrnffSiiU.HHy ndStMl m iftt M0*4i9t9. 'ttptitiv/is MtUniu /i*U*n TOTAt ASSETS Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty ptoducts Other Total PtPfttCUTION, OIM.ITIO* AND AMORTIZATION Resources: Oil and gas Coal Products'. Refiningand marketing Transportation Intermediate chemicals and specialty products Other Total 1991 1990 511,509 i $11,146 $10,920 1,095 929 857 2.732 2.223 2.503 2.162 2.175 2.1-0 3,676 3.739 3.257 3,385 524.492 S23.864 2.655 1.584 $22,261 5 1.316 S 1,247 $ 1-311 46 43 44 161 144 94 108 132 io: 164 : 26 . 155 26 5 1.807 5 1.723 128 26 S I .*48 PNYC 00013148 A ylilheu effalfan ,COITIONS TO SIXES) ASSETS Resources: Oil md eai C.oal Products: Refining and marketing Transportation intermedim chermctls jnd spec:jkv products Other Total 1991 /999 1919 S 1.890 i 1.560 S 1.504 SOS 109 148 448 3*0 314 124 103 43 435 37 S 3.239 539 57 S 2.718 *9 $ 2.105 Foreign operations are conducted principally in the following geographic regions: Oil and gas -- United Kingdom, Netherlands, Indonesia and Dubai; Coal -- Australia; Refining and marketing -- Brazil (marketing only); Intermediate chemicals and specialty products -- Europe and .Asia Pacific. Milheereffallen 1991 1990 1999 1 rOIE'CN OPERATIONS Sales and other operating tevtnues'- Oil and gas Coal Refining and marketing Intermediate chemicals and specialty products Other Elimination of intersegment amounts -- oil and gas Total S 980 S 719 $ >77 243 : 288 256 1,751; 2.052 j 1.427 1,172 23 , 1.146 . 26 : 920 28 ; <11)1 (303>: <276): S 4,208 5 3,928 j S 2.932 ' Net income lloss): Oil and gas Coal Refining and marketing Intermediate chemicals and specialty products'*' Other Total Total assets: Oil and gas Coal Refining and marketing Intermediate chemicals and specialty products Other Total S 79 $ <!)< 57 76 ; S 34 , 29 <8>: 34 i 7 22 ) <38)i 148 <*3) | 89 ' (3)1 S 104 1 S 244 1 S 119 ! 111 1 | " , 1. S 2,466 i S 2.205 1 S 1.902 i 693 i 569 i 519 j 305 j 321 : 244 ; 1.751 ! 5.154 i 5.662 ' - 710 i 141 , 167 1 & 5,905 ' i 4,898 ; S 3.986 ; I.\, Iwtlafai leraimji (letsttlefnwjejfillem. pnenpeHyAjieepul-fnnmi. of'.S22>. Sit. < S. ml99l. IWiWIIB, nipemeili NOTE 4 INVENTORIES I nventorics are recorded when purchased, produced or manufactured and are seated at the lower of cost o t market. In 1991, approximately 65 percent of inventories excluding materials and supplies were determined by the last-in, first-out (LIFO) method. Materials and supplies and other non-LIFO inventories are determined predomi nantly on an average cost basis. Total inventories at December 31,1991 and 1990 com prised the following categories: \hiiioxtofdeh/n Crude oil and petroleum products Chemical products Other products Materials and supplies Total 1991 $209 jji 33 288 S861 1999 $184 :><> 47 ro $*60 The excess of the current cost ofinventories over book value was approximately $304 million at December 31, 1991. NOTE S FIXED ASSETS . P roperty, plant and equipment, and related accumulated depreciation, depletion and amortization at December 31,1991 and 1990 were as follows: MiUtemreffallen Resources: Oil and gas Cotl Products: Refining and marketing Transportation Intermediate chemicals and specialty products Other Accumulated depreciation, depletion and amortization Total 1991 1999 S21.034 520.17* 1.529 876 3.320 3.479 2.915 3.398 2.968 343 32.273 2.467 331 30.164 14.725 5 3.764 517.552 $16,400 Expenses for maintenance and repairs for 1991,1990 and 1989 were $523 million, $519 million and S5I8 million, respectively. PNYc oi 3u; 45 No t e s t o Co n s o l i d a t e d Fi n a n c i a l S t a t e m e n t s NO TE 6 TAXES T Axes other chan excise and income taxes for the years ended December )l. [991, [990 and \989 comprised the following-. Propertv Prodoc11 onAeverj nc? Value idded Other Total 1991 1990 5 206 406 250 269 ' $1,131 S (92 4<e 296 356 SI.303 rexv SIT7 305 130 241 $943 The components of the provision for taxes on income for die years ended December 31,1991,1990 and 1989 were as follows: AWliwM tfinlltn Federal: Current Deferred Foreign: Current Deferred State: Current Deferred Totxl provision for taxes on income Total taxes paid in cash 1991 1990 1939 $355 (66) 289 S 517 $1,074 277 (206) *94 . 868 104 (36): 68 : 204 . ____(4)' 200 116 14 130 76 (13)i j; 183 39 (39) 63 82 ; 144 $420 $1,076 ; $1,142 $776 S 732 : $1,267 T he sources of deferred income tax for die years ended December 31,1991,1990 and 1989 were as follows: Militantaftaiiart Federa!: Depreciation Capitalized interest Oil and gas lease amortization Intangible drilling costs Reserve provisions Equity earmngs/subsidiary stock transaction Other Foreign State Total JW1 [ $ 6i --. usv 4< (98)| 2! 35 i (66), (36)' (13)1 $(115)i 1990 1919 1 S 31 ' 13 ; (14)1 11 : 17! ! $ 38 i 23 i 09): <M); (2*1) ; 24 : 41 i 277 ; (4) 39 : $312 1 (60) 4 (206)' 14 . (39)! $(231)1 The domestic and foreign components ofincome before income taxes, minority interest and cumulative effect of change in accounting principle, and a reconciliation of income tax expense with tax at the effective federal 44 statutory rate for the years ended December 31,199], 1990 and 1989 were as follows: MiUtPHt tfdilitn 1991 Income before income Domestic Foreign Total Tax at >4% Increase (reduction) in taws resulting ftonv Dividend exclusion Taxes on foreign income in excess of statutory race State income taxes (net of federal effect) Other Provision for taxes on income I MO Income before income taxes. Domestic Foreign Total Tax at 34% Increase (reduction) in taxes resulting from: Dividend exclusion Taxes on foreign income in excess of statutory rate State income taxes (net offederal effect) Other Provision for taxes on income 1989 Income before income taxes: Domestic Foreign Total Tax at 34% Increase (reduction) in taxes resultingfrom: Subsidiary stock transaction/dividend exclusion Taxes on foreign income in excess of Statutory rate State income axes (net offederal effect) Other Provision for taxes on income Amaant Pmri 'iPf'taa /,., S 900 260 Si.160 S 394 (30) 54 42 (40) S 420 77.6 22.4 100.0 34.0 (2.6) 4.7 3.6 (3.5) 36.2 $2,260 560 S2.820 T*959 (48) 92 34 19 $1,076 80 1 19.9 100.0 J4.0 (1.7) 3.3 1.9 I?7 $2,830 331 $3,161 51.075 . 89.3 10.5 100.0 34.0 (83) 63 05 ____ (8) St,142 (2.6) 2.0 3.0 O) 36.1 EffectiveJanuary 1,1990, the Company adopted State ment ofFinincial Accounting Standards No. 96, "Accounting for Income Taxes." The cumulative effect ofthis accounting change on yean prior to 1990 was a $323 million reduction in the Company's deferred tax liability as ofDecember 31,1989. The reduction resulted in an increase in net income for 1990 of$323 million, or $1.95 per share. The effect ofthe change on 1991 znd 1990 net income, excluding the cumulative effect upon adop tion, was not material. PNYC 00013150 is NOTE 7 i o\(.. rr r M m b t Lone-wrm debt at December 31. |W1 and 1990 com prised the following: \ttihw 9l4*lLr< tv.Vduem t'*>" '-.%, due in ;()00 Q%.d\KiniOGU **%. Joe in J003 10`/%.duem 195 lO'-'V due in 2005 l0'9%.due in 1995 P'C'fc.dtiem |99d 9'/.%. due in )993 9V%. due in 1016 Q'/>%,due >n '0!) 9*A%,duein 199} 5,90%. due in 2007 %.due in 1991 Zero-eoupon notes, due in 199'; $500 less unamornted discount of S6. effective rate 13.04% 10'/.%, due in 2000 Third Series Medium-Term Notes 6'/i%, due in 1996 9%.due in 2021 9%. due in 2031 9!*%, due in 2031 ARCO Tresop Notes A Series Medium-Term Notes ARCO British Limited: Tricentrol Debt Eurobonds, due in 1999 Eurobonds, due in 2000 ARCO Chemical Companv: french banlcloans 9.35%. due in 2019 Medium-Term Notes 9.9%, due in 2000 9.575%. due in 2005 t0.25%.due in 2010 9.8%, due in 2020 ACN'L bank loans Capitalized lease obligations Other Total, including debt due within one year Less: Debt due within one veer Bonds held in sinking fund Long-ttrm debt 1991 S 27 82 i* 132 500 500 150 150 250 450 300 200 265 IffVO S 5! 8' 139 500 ?00 150 150 250 450 300 200 -65 377 494 431 250 250 137 162 102 102 300 -- 150 -- 350 -- 22) 148 200 -- 66 69 -- 290 145 142 123 65 200 100 100 224 175 26 >04 6.791 123 80 200 100 100 224 178 27 387 6,636 644 1 158 ] 55.989 ' 502 137 S5.997 Maturities and sinking fund obligations for the five years subsequent to December 31,1991 ire is follows (millions of dollars): 1992 -- $644; 1993 -- $541; 1994 -- $101; 1995 --$789; 1996--$337. NOTE 8 BtN'K CREDIT FVCRITIFS *.\D COMPENSATING BttANCfS In 1991. the Company and certain wholly owned sub sidiaries had committed bank credit facilities of approxi mately S5.2 billion. Included in this total is a credit facility negotiated on behalfofa subsidiary that is denominated in pounds sterling. At December 31,1991, there were no borrowings under these committed facilities. ACC maintains its own credit facility of $500 million which is not guaranteed by ARCO. At December 31,1991. there were no borrowings against the ACC credit facility. Notes payable on the balance sheet 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 Company has no requirements for compensating balances. The Company does maintain balances for some of its banking services and products. Such balances are solely at the Company's discretion, so that on any given date, none ofthe Company's cash is restricted. NOTE 9 INTEREST EXPENSE Interest expense for the years ended December 31,1991, 1990 and 1989 was comprised ofthe following: MiUmuc)Mitn Long-term debt Short-termdebt Otlier Capitalized interest Total interest expense Total interest paid in cash 1991 $684 ' 92 195 971 (79) $892 $912 1990 S616 118 180 914 (79) $835 $802 iviv S5* > 232 894 (95) 5799 $818 PNYC 00013151 4? No t e s t o Co n s o l id a t e d Fi n a n c i a l St a t e me n t s n o t e 10 o r h f s imminiivu ISD( ON I INf, f NCIKS The Company has commitments, including those related to the acquisition, construction and development of facilities, all made in the normal course ofbusiness. At December 31.1991 and December 31.1990. there were contingent liabilities with respect to guarantees of secu rities of ocher issuers of approximately $382 million and S-VTO million, respectively, of which approximately $42 million and S34 million, respectively, are indemnified. SinceJune 1975, the Company and certain ocher petro leum companies have been named as defendants in a number of civil antitrust actions brought against them by state agencies or by private entities as class actions which allege violations of federal and state monopoly and restraint of trade statutes. The various types of relief sought in such acrions include injunctive relief and damages. The Company is unable to predict the outcome of these actions at this time, but believes chat they can be successfully defended; however, adverse decisions in certain such actions could have a significant effect on the scope and nature of the Company's operations. Final judi cial determination of these actions is expected to take a number ofyears. Claims brought by private parties ofalleged violations of pricing regulations previously in effect that were estab lished by the Department of Energy are pending in two actions against the Company, one of which has been certi fied as a class action. These two matters, when resolved, are not expected to have i material adverse effect on the consolidated financial position ofthe Company. On March 24,1989, an oil tanker, the EXXON VALDEZ, ran aground near Bljgh Island, Alaska, after taking on crude oil from the Valdez Marine Terminal operated by Alveska Pipeline Service Company (Alyeska), of which ARCO Transportation Alaska, Inc. (ATAI) owns approx imately 21 percent Roughly 240,000 barrels ofcrude oil were discharged into the waters ofPrince William Sound. As a result numerous lawsuits seeldng compensatory and punitive damages and injunctions have been filed in state and federal court in Alaska by the State ofAlaska, the United States and others against Exxon, Alyeska and A1vesica's owner companies (including ATAI), alleging, among other things, that Alyeska responded inadequately to the oil spill. On October 8,1991, the Alaska federal District Court approved an Agreement and Consent Decree under which Exxon will pay S900 million over the next ten years (with a possible additional SI00 million to be paid under a re-opener provision) in settlement of all federal and state civil damage claims. In further consid eration of the Exxon payments under the .Agreement and Consent Decree. Alyeska and its owner companies are released from federal and stare natural resource civil damage claims. The Company does not believe that resolution of die remaining claims will have a material adverse effect on its consolidated financial position. There is pending against the Company a consolidated class action lawsuit alleging certain misstatements and omissions in the prospectus relating to the sale to the public by die Company in January 1989 of just over 50 percent ofthe common stock of Lyondell, the Company's then wholly owned subsidiary. The suit seeks to recover from the Company, Lyondell and others damages for stockholders who purchased stock during the period from January 18,1989 through November 14,1989. On July 17,1991, the court entered an order dismissing the consol idated class action, and the plaintiffs have appealed. The Company does not believe that resolution ofthese claims will have a material adverse effect on its consolidated financial position. The Company andformer producers oflead pigments and lead pains have been named as defendants in cases filed by the cities of New York, Philadelphia and New Orleans and/or their respective housing authorities seeking damages and injunctive reliefas a consequence of the presence of lead-based paint in housing units owned or operated by these plaintiffs and in privately owned buildings located in New York and Philadelphia. The Philadelphia case also purports to be a class action on behalf of all cities in the United States with over 100.000 residents that are engaged in or contemplating a program involving any aspect oflead paint and its alleged hazards. The Company and former manufacturers of lead pig ments and/or lead paints have also been named as defendants in a suit filed by four individuals and their respective spouses; this suit also purports to be a class PNYC 00013152 48 action on behalf of all current and retired residential, commercial and industrial painters, and their spouses, residing in Pennsylvania and New Jersey, who have been occupationally exposed to lead pigment and/or lead paint products, in addition, the Company, former manufac turers of lead pigments and/or lead paints, the City and Housing Authorin'of Philadelphia and the U.S. Department of Housing and Urban Development (HUD) have been named in a suit tiled by four individuals on behalfofthemselves and their children; this suit also pur ports to be a class action on behalf of all current residents of the Philadelphia Housing Authorin' and/or HUD homes built and/or repainted before 1978 in the City of Philadelphia. The Company has also been added as a defendant in a pending suit that seeks to recover the costs of abating lead-based paint in the buildings that comprise 150 schools in Orleans Parish. Louisiana. The Company does not believe that the resolution of these claims will have a material adverse effect on its consolidated financial position. The Company and its subsidiary, Atlantic Richfield Hanford Company (ARHCO), and several other com panies have been named as defendants in a consolidated complaint filed on behalf of individual persons and seven purported classes. The consolidated complaintcontains allegations that radioactive and non-radioactive tone and hazardous substances generated at the Hanford Nuclear Reservation in Richland, Washington (HNR) have been accidentally and deliberately released by the defendants into the air, water and ground. The claims against the Company and .ARHCO arise out ofthe performance by ARHCO ofa contract with the Atomic Energy Commis sion to provide chemical processing, waste management and support services at HNR from 1967 to 1977. The court has limited the reliefsought to compensatory dam ages. The Company does not believe chat the resolution of these actions will have a material adverse effect on its consolidated financial position. T he Company is also the subject ofor party to a number of pending or threatened legal actions for which the legal responsibility and financial impact cannot presently be ascertained. The Company does not anticipate chat any ultimate liability arising from any of these suits would have a material adverse effect on its consolidated financial position. 50 The Company is subject to other loss contingencies pur suant 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 and petroleum sub stances at various sites. The Company is currently participating in environmental assessments and cleanups under these laws at federal Superfund and comparable state sites, as well as other cleanup sires, including service stations, refineries, terminals, chemical facilities, third party landfills, former nuclear processing facilities, and sites associated with discontinued operations. The Com pany may in the future be involved in additional environmental assessments and cleanups. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of clean-up costs, the unknown timing and extent of the remedial actions which may be required, the determination of the Company's liability in proportion to other responsible parties. These contin gencies also include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by the Company. Although these contingencies could result in significant expenses or judgments, such expenses or judgments are not expected to have a material adverse effect on the Company's consolidated financial position. The operations and consolidated financial position of the Company continue to be affected from time to time in varying degrees by domestic andforeign political devel opments as well as legislation, regulations and litigation pertaining to restrictions on production, imports and exports, natural gas regulation, tax increases, environ mental regulations, cancellation of contract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on the Company vary greatly and are not predictable. These uncertainties art part ofa number ofitems that the Company has taken and will continue to take into account in periodically establishing reserves. ^ 00,3,S3 No t e s t o Co n s o l i d a t e d Fi n a n c i a l St a t e me n t s T NOTE 11 RSI IRS MS\T PI V\S Pension costs related to Company-sponsored pians. on a The Company and its subsidiaries have defined benefit pretax basis, including amortization of unfunded pro pension pians to provide pension benefits to substantially all employees. The benefits are based on years of service tected benefit obligations for!991,1990 and 1989 were as follows: and the employee's compensation, primarily during die last three years of service. The Company's funding policv is to make annual contributions as required by applicable regulations. The Company charges pension costs as accrued, based or. an actuarial valuation for each plan, and funds the plans through contributions to trust funds chat are kept apart from Company funds. Million: oifoliar: Service cost-benefits earned during the period Interest cost on proiected benefit obligation Actual return on plan assets Set amortization and deferral Net periodic pension cost ibenefit) S 4} 137 (370) 201 S 11 S 38 1)0 12" (317) $ (22) $ 32 ir (349) 190 s Tk ), The following table sets forth the plans' funded status and amounts recognized in the Company's balance sheet at December 31.1991 and 1990: In addition to the Sll million pension cost above, the Company recorded SI03 million before tax as pension expense in connection with the company wide workforce Million: offoliar: 1991 Actuarial present value ofbenefit obligations: Vested benefit obligation ,^;mi Ejrtfed .l.'fumvUifd Btatfirt AtniPiviaftd Stated E*ett4 Asseti $1,501 $ 296 reduction in 1991. T he Company's assumptions used as of December 31. 1991,1990 and 1989 in determining the pension cost and pension liability shown above were as follows: Prrrfn/ 1991 1990 IW Accumulated benefit obligation Protected benefit obligation Plan assets at fair value, primarily stocks and bonds Projected benefit obligation (in excess of) or less chin plan usees Unrecognized net gun Prior service cost not yet recognized in net periodic pension cost Remaining unrecognized 1 asset) obligation from January 1,1986 Adjustment required to recognize minimum liability Prepaid pension cost (pension liability) recognized in tht balance sheet 1990 Actuarial present value of benefit obligations: Vested benefit obligation Accumulated benefit obligation Proiected benefit obligation Plan assets at lair value, primarily stocks and bonds Protected benefit obligation (in excess of) or less than plan assets Unrecognized net gain Prior service cost not yet recognized in net periodic pension cost Remaining unrecognized (asset) obligation from January 1. 1986 Adiustment required to recognize minimum liability Prepaid pension cost (pension liability) recognized in the balance sheet St.512 S1.727 2,528 801 (201) >: (459) _ sm $i,314; 51.322 i SM99 - 2.193 694 ' (36) i (2). (498): _ $ 158 $300 . $332 (316) 128) 165 65 (172) *286) $244 $247 $270 14 (256) (18) 10) 82 044) $(233) Discount rate Rate ofsalary progression Long-term rate of return on assets 8.75 5.0 9.5 9,5 9.75 S.O 5.0 9.5 9.5 NOTE 13 OTHER POSTRETIREMENT BENEFITS The Company currently recognizes an expense for health care and life insurance benefits for retired employees when incurred. In 1991,1990 and 1989 these costs totaled S35 million, S3 9 million, and S25 million, respectively. In December 1990. the Financial Accounting Standards Board issued Statement of Financial Accounting Stan dards (SFAS) No. 106, "Employers' Accounting for PostTCtirement Benefits Other Than Pensions." The standard requires companies to accrue the actuarially determined costs of postretirement benefits during the years that the employee renders the necessary service. SFASNo. 106 requires adoption by mostcompanies for fiscal years beginning after December IS, 1992. The Company has not yet determined whether it will adopt the new standard in 1992 or 1993. The new standard allows an employer to record the unrecognized accumulated postretirement benefit liability (transition obligation) immediately in theyear of adoption as the effect of an accountingchange. Alternatively, an employer can choose to record the transition obligation prospectively over the average remaining service life of PNYC 00013154 so active participants. The Company has not yet determined in which manner it will choose to recognise ies transition obligation, which is estimated to be approximately S600 million before tax based on current data and assumptions. The Company does not anticipate that adoption of the new standard will have a material adverse effect on its consolidated financial position or results ofoperations. NOTE IS slill Mini 1)1 KV MMIIl Detail of the Company s capital stock as of December 31, 1991 and 1990 was as follows: SJ.OOCumulative convertible preference stock, par S1: Shares authorized Shares issued and outstanding Aggregate value in liquidation -- (thousands) $2.80 Cumulative convertible preferencescock. par Si: Shares authorised Shares issued and outstanding Aggregate value in liquidation -- (thousands) Common stock, par S'.50: Shares authorized Shares issued Shares outstanding Shares held m treasury /*/ 1990 245.714 99,970 S7.998 245.714 114.352 $9,148 4.785.041 986.513 4.785,041 1.0:0.285 S69.056 $74,920 600.000,000 600.000,000 160.743,361 ' 167,679,563 157,627.284 158.912.873 3,116.077 8,766.690 The changes in preference stocks were due solely to con versions. The S3.00 cumulative convertible preference stock is convertible into 6.8 shares ofcommon stock. The S2.80 cumulative convertible preference stock is con vertible into 2 4 shares ofcommon stock. The common stock is subordinate to die preference stocks for dividends and assets. The $3.00 and $2.80 preference stocks may be redeemed at the option of the Company for $82 and $70 per share, respectively. The Company has authorized 352,000 shares ofSeries B, 3.75 percent cumulative preferred stock, $100 par; of which none were issued or outstanding at December 31, 1991 and 1990. By Board authorization, effective December 31,1991 and 1989, the Company canceled 7 million and 50 million shares of common stock held in treasury, respectively. As a resultofthese cancellations, common stock decreased by $17 million and $125 million, capital in excess of par value ofstock decreased by $30 million and $228 million, and retained earnings decreased by $684 million and $3,119 million in 1991 and 1989, respectively. T he balance in the Company's common stock was $402 million at December 31,1991 and $419 million at 4j December 31.1990 and 1989. The change in 1991 was due to the cancellation of treasury stock. Detail ofchanges in the Company's treasury stock in 1991,1990 and 1989 was as follows: iffoUart Balance. January 1. 1980 Treasury stock purchases Conversions Cancellation of treasury stock Balance. December )!. logo Treasury stock purchases Conversions Balance. December31. 1490 Treasury stock purchases Conversions Cancellation of treasury stock Balance, December 31,1991 SJ/W g;- i J.47') ^gj *o q 202 (j(,j (731) $ J25 The net decrease in capital in excess ofpar value of stock in 1991,1990 and 1989 of $52 million, $24 million and $252 million, respectively, was due primarily to the con version of preference stock to common stock and the cancellation of treasury stock in 1991 and 1989. The Company's Certificate ofIncorporation contains a provision restricting dividend payments; however, at December 31,1991, retained earnings were free from such restriction. At December 31,1991, shares of die Com pany's authorized.and unissued common stock were reserved as follows: Conversions: S3.00Preferencestock SZ.SOPreferencestock Stoelcoption plans Employee benefit plans Total 679,796 2.367,631 2.960.472 9,974,482 15,982,381 Under the Company's incentive compensation plans, awards ofdie Company's common stock may be made to officers, outside directors and key employees. NOTE 14 EARNED PER SHARE Earned per share is based on the average number of com mon shares outstanding during each period including common stock equivalents that consist ofcertain out standing options and all outstandingconvertible securities. The average shares used in the calculauon ofearned per share for theyears ended December 31,1991,1990, and 1989 were 161.7 million, 165.5 million and 173.4 million, respectively. ^000,3,55 No t e s t o Co n s o l i d a t e d Fi n a n c i a l St a t e me n t s NOTE IS stock OPTIONS Options to purchase shares of the Company's common stock have heen granted to executives, outside directors and key employees. These options become exercisable in varying installments and expire eight to ten years after the date of grant. Transactions during 1991,1990 and 1989 were as follow s: NOTE 17 LEASE COMMITMENTS Commitments under capital financial leases are capi talized with the obligation recorded at the present value of Future rental payments. The related assecs are amor tized on a straight-line basis. At December 31.1991. Future minimum rental payments due under leases were as follows; T Bounce. January I. 1`>X9 Gamed Canceled or expired Exercoed average option price per share: S50.19) Balance. December 31.1989 Granted Canceled or expired Exercised (average option price per share: $63.80) Balance. December 31. 1990 Granted Canceled or expired Exercised (average option price per share: $77.67) Balance. December 31. 1991 - At December 31. 1991 Shares exercisable Shares available for option U.369,264 at Dtcembtr 31.1990) Average option price per share: Shares under option Shares exercisable 1.182.998 424,496 (5.479) (113,480! 1.4B8.535 474.610 (14.404) (157.6081 1.79M33 528.686 (1.7401 (199,988) 2,118.091 1,257,020 842,381 $98.36 $85.98 NOTE 16 SUPPLEMENTAL CASH FLOW INFORMATION T he following is supplemental cash flow information for the years ended December 31,1991,1990 and 1989: '(((/'"! afdniUn IPS! 1990 Gross maturities ofshort-tem investments Gross purchases of short-term investments Net cash provided by (used in) short-term investments $ 7.480 S 7,859 S 5,551 (6.872>i (7,952). (6.365) S 608 : S (93): S (814) Gross procteds from issuance ofnotes payable S 7,877 1 S 7,448 : S 2.891 Gross repavmems of notes payable (7.004): (7,171), (2,806) Net cash provided by notes payable 1 S 873 ; S 277 S 85 Gross noncash provisionscharged to income Cash payments of previously deferred items' Noncash provisions greater (less) than cash payments $ 1.003 ^ i 1,027 ' S 961 <563)1 (1.499)1 (291) S 440 1 S (472). 5 570 * In :9f'K pjmainn ineladinffrnximnittnStott n tbt Ixrc--tl Rrrman Sf-vif* t*4S210 in 'I* ''mu ntAUiin in iriileminx nfaiifnlrn zinifaUamjil tutt andmynlxy unxi in JSCOi liiil.n W,* SUpxirmixfnjanmn. M/fUtnj ofdollar: 1992 1993 19*4 1905 1996 Latervears Total minimum lease payments Imputed interest iratesranging from 9.7 5 % to 14.875%) Present value of minimum lease payments included in long-term debt Cupltdi Oprtarnt^ Leasts Ct4/Stl S3 3 3 3 3 93 98 * 72 S 163 133 120 112 96 469 SI.093 S 26 Minimum Future rental income under noncancelabie sub leases at December 31,1991 amounted to $160 million. Operating lease net rental expense for the years ended December 31,1991,1990 and 1989 was as Follows: MillimaxtfdaUnn Minimum rentals Contingent rentals Sublease rental income Net rental expense 1991 $197 1 (16) $182 1990 $206 3 (15). $194 19.1V Si 69 : (23l $148 N o restrictions on dividends or on additional debt or lease financing exist under lease commitments of the Company. Under certain conditions, options and obliga tions exist to purchase certain leased properties. NOTE 18 FOREIGN CLRRENCY TRANSACTION CAIN/LOSS In 1991, the Company began discounting and/or reclassifying certain Brazilian transactions to eliminate distortions in the Statement ofIncome otherwise created by translating financial statements From high-inflation countries. Therefore, Foreign exchange transactions, which relate primarily to Brazilian operations, resulted in a net gain of $41 million in 1991, which is not comparable to net losses of $102 million and $89 million in 1990 and 1989, respectively PNYC 00013156 *9 NOTE 19 I \nsi.H I | PM RO( III 'III \| l IIMI'IM Lyondell Petrochemical Company (Lyondell) is engaged in the manufacture, refining and marketing of basic commodity chemicals, including ethylene, propylene, methanol and aromatics, and petroleum products. In January 1989. ARCO completed an initial public offer ing of its Lyondell common stock. The Company recognised an after-tax gain of S634 million from this transaction- Effective January 1989, ARCO accounts for its investment in Lyondell on the equity method. At December 31.1991. ARCO owned 49.9 percent of Lyondell common stockoutstanding. The market value ofARCO's shares ofLyondell common stock, based on the closing quoted market price at December 31,1991, was $903 million. S ummariaed financial information for Lyondell was as follows: \hOiciu ofdollan i99t ifto Veer Ended December } I: Revenues'*1 Operating margin Income before income taxes Net income ARCO's equiry in net income of Lyondell"" $5,729 S 522 S 340 1S 222 $6,495 5 :i8 $ 5J7 1S 356 $ m; $ $5,>58 $ 717 S $38 r$ 574 $ 214 Cash dividends received from Lyondell $ 70 $ 164 $ 48 At December >1: Current assets Noncurrent assets Current liabilities Long-term debt Other liabilities Stockholders' equity"1 S 889 : . s 590 ; s 514 : $ 554 : s 289 ' $ 122 I S 788 S $84 S 550 $ 471 S JIJ ; S 38 : j> Ir.ludriSIZt. 319l/tdSr,A a( isin t 1 1991.19*0r*d 1919. nrriattrU i-W jfpnxmnH t%. `,Mll<IStfAIK0'i9tn9*mni9utjtm. ih i'..va>'**' 9*, efLmdtU\im I fivs i* i 9SC S*S tfmtaxfnm r.-KtJi* arm rfAMC&ittw I't/mumm. 1,1 AtCO) ' rirmriti 11 LttriiUirmfnn *9. 9% tfLynfUWi nutMdm' S~Z of4ni4r4r rtitli'tthr 1990 it tstw l/9ni] (Ita NOTE 20 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK At December 31,1991, the Company had letters ofcredit outstanding totaling $2 88 million, ofwhich approxi mately SlOO million guarantee obligations carried on the balance sheet. At December 31,1991, the Company had outstanding numerous foreign currency forward contracts, foreign cross-currency forward contracts and foreign currency swaps, maturing at various dates. In the aggregate, these transactions require the exchange of 520 million for 35 million Deutsche marks, 57 million for 1 billion ven and S3" million for 202 million French francs. Approximately 5)00 million of the Company's long-term debt is denominated in foreign currencies. To reduce exposure to foreign currency fluctuations, the Company has entered into a swap agreement on an 18 billion yen debt issue due in 1996 which Axes the principal balance at $102 million with an effective rate of 8.14 percent. The counterparties to these transactions are major inter national financial institutions; the Company does not anticipate nonperformance by the counterparties. NOTE 21 UNAUDITED QURTERU RESU.TS Milhm tjitlUn rzctpt per tbtn 9*rottu ) ) 19V0 Sales and ocher operating revenues (including excise taxes) Quarter ended: MarchJ 1 June JO September JO December J! Tout S 4.696 4.257 4.J77 4.827 $18,157 S 4.215 4.055 4.818 5.740 $18,808 Income (loss) before income taxes, minority interest and cumulative effectof change in accounting principle Quattet ended: March J1 June JO September JO1** December JVW Total s 564 S J62 (24S) 479 468 684 '25 04? $ 1.160 S 2.820 Net Income (loss) Quarter ended: March J1,M June JO September JO**1 December 31*' Total Earned per Share Quarter ended: March 31 June JO September JO December Jl S 351 S * 246 (156) 268 592 301 462 >66 s 709 S 2.011 $2-17 S1.J1 $(.99) $1.67 S3.55 $2-36 S2.*o $1.4? Inlrrlmln iu mImmitfS(5]l>9tftrtta. !<!!!> tfur minn ihrdfrr'itr 1991 ikl Irtirdri rrvuitr tfrnrmtird rrnrrt nrmtrfSZOH/rrtir*. Slitftrris* it6tfeurrr jyjB*TTt9 1995. W !liudtiCtrmiUtftr rffrrrtfrk**ft i* *ep**tt*gfpr iMmt iMMtt tfSUi trSl.91 per tbtfint i*4ntr I99C PNYC 00013157 S) 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 I (> Mir > I (>( k HOLD! R N OF \ 11 i \i i i miimuniD'ipiM r \r < O) The Company's management assumes responsibility for the 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 ofassets. The fair presentation of the Com pany's financial position and results of operations, in conformity with generally accepted accounting princi ples. is reported on by die independent accountants. I n addition to the accounting and control systems and die use of independent accountants, the Company maintains a staff of internal auditors who conduct internal control audits as well as special audits, coordinating their activi ties with the independent accountants. The Company has had an Audit Committee ofthe Board of Directors for more than 20 years. The Committee currently consists exclusively of directors who are not employees of the 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 itselfas to the integrity of the Company's accounting and financial reporting, maintaining communications between die Board of Directors and external and internal auditors, continuously emphasizing the need for internal financial controls, and initiating special investigations as deemed necessary. The independent accountants and the internal auditors have full and free access to die Audit Committee and meet with it, with and without man agement being present, to discuss asll appropriate matters. I N P E FE N O E NT ACCOUNTANTS' REPORT ro THI STOCKKOI.DFRS \%n 8IMRD OF DIRECTORS OF 111 III If Rl( HHFIO COMPWV iVRCOI We have audited the accompanying consolidated balance sheets ofAtlantic Richfield Company as of December 31. 1991 and 1990, and die related consolidated statements of income and retained earnings and cash flows for each of die three years in the period ended December 31. 1991. These financial statements are the responsibility of the Com pany'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 ofmaterial misstatement An audit includes examining, on a test basis, evidence supporting the amounts and dis closures 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. 1 n our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atlantic Richfield Company as of December 31, 1991 and 1990, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,1991, in con formity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial state ments, the Companychanged its method ofaccounting for income taxes in 1990. Lodwrick M. Cook Chairman ofthe Board and Chief Executive Officer Coopers & Lybrand Los Angeles, California February 14,1992 PNYC 000131S8 5* Su p p l e me n t a l In f o r ma t i o n (Un a u d i t e d ) A on \m> <.\s vh o i)i ( iv. \ mnio 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 reason able certainty to be recoverable in fijture years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. ARCO reports reserve estimates to various federal gov ernment agencies and commissions. These estimates may cover various regions of crude oil and natural gas classi fications within the United States and may be subject to mandated definitions. There have been no reports of total Company reserve estimates furnished to federal govern ment agencies or commissions which vary from those reported to the SEC since the beginning of the last fiscal year. Estimated quantities ofproved oil and gas reserves ofthe Company were as follows: Petroitrm Liquids (milium bsrrrUi Dommtt Forrttn .Ndtirsl Gti (biUnn fstt) Dements . Ferril* January 1,1989: Proved reserves Proved developed reserves December 11. 1989-. Proved reserves Proved developed reserves December31, 1990: Proved reserves Proved developed reserves December Jl.ll: Proved reserves Proved developed reserves 2.829 : 2.184 2,265 2,15? . 2.720 1 2.152 : 1,642 i 2.094 1 264 ` 6.37J 1,249 115 ; 5,420 , 363 23* ' 6.452 ; 1.206 ioi : 5,473 ; 324 210 1 6.256 : 1.796 154 | 5.343 j 475 189 ! 5.798 i 2.40$ mj 5.069 | 534 The changes in proved reserves for the years ended December 31.1989,1990 and 1991 were as follows: Reserves at January 1, 1989 Revisions of estimates Improved recovery Purchases ofmineralsin-piace Extensions and discoveries Production Consumed in production Sales of minerali-in-place Reserves at December)!, 1989 Revisions of estimates Improved recovery Purchases of mineralsin-place Extensions and discoveries Production Consumed in production Sales of minerals-in-place Reserves sc December3l, 1990 Revisions of estimates Improved recovery Purchases of mineralsia-pUce Extensions and discoveries Production Consumed in production Sales ofminersts-in-piace Reserves at December 31,1991 Ptrn/mm Lipids (million btretls) Domenu Pore/fn C,as ibi/iion ,uh> feen Dome)a, fo'vrg* 2.829 38 31 39 79 (241) __ 110) 264 (2) 2 (24) U). 6.3M 204 12 s 507 1558) (68) (23) 1.24V 13 6 i62> _ 2,765 55 115 . 15 ' 19 (233)' _. (16>i ! 2.720 (8): 89 i 137 35 i (244)1 -- (87) 237 6.452 1.206 22 (70) (14) 16 2 10 103 6 499 (24) (567) _ (74) (57) (89) 6*8 (*1) _ (3) 210 6.256 3 42 __. 3 1.796 69 _ 2 2 (28)' -- --i 27 213 (511) (78) (154) 247 392 (95) (4) -- 2,642 i 189 5.798 2.405 Significant changes to proved oil ind gas reserves during 1991 were due to the addition of reserves from the acquisi tion of Oryx Energy Company's oil properties in the Midway-Sunset field in Kern County, California and the addition ofnatural gas reserves from the Offshore North west Java contract am and the United Kingdom sector ofthe North Sea. PNVC 00013159 55 Su p p l e me n t a l In f o r ma t i o n (Un a u d i t e d ) Estimates ofpetroleum reserves have been made by Com pany engineers. These estimates include reserves in which the Company holds an economic interest under production-sharing and other types ofoperating agree ments with foreign governments. These estimates do not include probable or possible reserves. Natural gas liquids comprise I ' percent of'petroleum liquid proved reserves. The sale ot'natural gas from the North Slope of .Alaska, which is not used in providing fuel in North Slope opera tions or sold toothers on the North Slope, is dependent upon construction of a natural gas transportation system or another marketing alternative. Such gas is not included in rite Company's reserves. There are currently several projects under consideration, including the Alaska Natu ral Gas Transportation System and the Trans Alaska Gas System. However, there are a number of regulatory, financial, legal and marketing questions regarding the projects that remain unresolved. The Company has studied various options for marketing North Slope gas over the past few years. However. ARCO .Alaska believes that market conditions are not likely to permit implementation of any large gas sates project within the foreseeable future. ARCO Oil and Gas increased ownership in theTHUMS Long Beach Unit to 80 percent and obtained approval from the State of California to initiate a waterflood program. The increase in ownership and the approval from the State resulted in ARCO adding 9$ million barrels ofcrude oil equivalent to proved reserves. F ollowing California approval ofthe THUMS Long Beach project, ARCO agreed to dismiss its Coal Oil Point lawsuit, surrendering two disputed offshore leases to the State. This resulted in .ARCO removing approximately 90 million barrels of crude oil equivalent from proved reserves. The Company had been prevented from com pleting development of Coal Oil Point, located offshore near the city ofSana Barbara. The aggregate amounts ofcapitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of December 31,1991.1990 and 1989 were as follows; Mtihons afjofori 1991 Gross Accumulated depre ciation, depletion and amortization Net 1990 Gross Accumulated depre ciation, depletion and amortization Net 5989 Gross Accumulated depre ciation, depletion and amortization Net Pre-Mi Pnpimn OoUtf/fK L'at*>v<4 ?npmt,, DwmJn fVrfp* $16,700 $2,93) $7*7 9,2)2 S 7.468 1.521 $1,412 112 $655 93 $509 $16,140 $2,647 S786 $573 8,859 S 7.28) RHUS 1,118 SI.529 $15,751 $2,547 $693 $826 $496 $477 8.507 S 7,444 1.108 $1.2)9 89 $7)7 74 5403 Costs, both capialized and expensed, incurred in oil and gas producing activities (including operating overhead) during the three years ended December 31.1991,1990 and 1989 were as follows: \UlUnu ofMiMn 1991 Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs 1990 Property acquisition costs: Proved properties Unproved properties Exploration costs Development coses 1989 Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs Oemmu Fenton Toui $351 S 50 $416 $776 S 55 S9 $275 $258 $ *06 '$ 59 $ 691 $1,034 S 38 $113 ' $483 $657 S 64 S5 $232 $233 $ 102 $ 118 $ 715 sm $7 $121 $384 $625 ; -- S6 $175 $216 s- $ 127 S 5 >7 S 841 PNYC 00013160 Results of operations from oil and gas producing activi f ties (including operating overhead) for the three years ended December 31. !99t, ]990 and 1989 were as follows: 1091 Revenues ValeIrjn.fert Other Production costs Exploration expenses Depreciation, depletion and amortization Other Income tax expense Results of operations from production activities 100 Revenues: Sales Transfers Other Production costs Exploration expenses Depreciation, depletion and amortisation Other Income tax expense Resuits of operations from production activities |089 Revenues-. Sales Transfers Production costs Exploration expenses Depreciation, depletion and amortization Income tax expense Results ofoperations from production activities F/iwtn T9Ui $2,271 1.819 99 4.189 1.868 226 1.046 JOS 644 21$ $ 429 $874 _ 41 91$ J07 2)3 $3,145 1.819 140 5.104 2,17$ 559 244 1.290 305 1)1 77$ $2 267 $ 79 $ 508 $2,523 2.415 244 5.184 1.626 404 1.002 . 167 1.985 732 $416 30) 86 $2,939 2.718 3)2 805 : 240 ' 244 5.989 1.866 648 215 1.217 167 106 2.09! )0 762 $1,253 S 76 $1,329 $1,679 2,487 156 ' 4.322 1.392 - 283 1,094 i 134, 1.419 . 533 $301 ' $1,980 276 2.76) 15 - 171 592 4.914 21) 1.603 15* 440 192 ; --. 32 : 40 ' 1.286 134 1.451 57) $ 886 : $ (81' $ 878 A 9C0 The difference between the above results of operations for 1991, 1990 and 1989 and the amounts reported for after-tax oil and gas segment earnings in Note 3 ofNotes to Consolidated Financial Statements is primarily marketing-related activities. T he standardized measure ofdiscounted estimated future net cash flows, and changes therein, related to proved oil and gas reserves was as follows: 9f\tolUfJ mi future cash inflows Future development and production costs Future income tax expense Future net cash flows !0% annual discount Standardised measure of discounted future net cash flows 1900 Future cash inflows Future development and production costs Future income tax expense Future net cash flows 10% annual discount Standardised measure of discounted future net cash Bows 1089 Future cash inflows Future development and production costs Future income tax expense Future netcash flows |0% annual discount Standardised measure of discounted future net cash flows Dtmtstu forr/f" Total $35.7 23.1 3.6 9.0 3.6 $9.2 4.2 1.7 3.3 l.S $44.9 27.3 $-3 12.3 $.3 S 5.2 ' $61.4 27.3 11.8 22.3 10.2 SI.8 -- $9.4 1.2 2.4 3.8 1.7 S 7.0 S*0.8 30.5 14.2 26-1 11.9 SI2.1 " $48.6 24.0 8.2 16.4 7.3 S'.l SI4.2 $6.9 3.1 1.4 2.4 1.1 555 5 2M 9.6 18.* 8.4 $ 9.1 51.) S10.4 PNYC 00013161 Sf Su p p l e .me n t a l In f o r ma t i o n (Un a u d i t e d ) Primary changes in the standardized measure of dis counted estimated future net cash flows were as follows: HUUhh* wd*U<ir> t uSalev jnJ tern-.ter .it'oil ind s. rttff < rf pr>iiut ft ct>vrs 199! /9W /v*v S< 2.8) St.U\ jfid impro'ed rect>\erv. Rcvi>mn% iiftfMinuteMrt reserve* nrmvJ tn prior years: fjuancirv estimates Net chonees in price jrni production cows Purchases/ Sales Other Accretion or discount Development costs incurred during the period Net change in income tases Net change .4 i.j .0 -- m.s> .4 (1.6) 2.1 4t..7l S< 7.2) .6 j 6.) -- (.6) 1.6 . 5.3 ,2 i.t .9 <2.51 S 1.8 , .8 (2.0) . S 5.4 Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves- Furure price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end ofthe year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates (adjusted for perma nent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis ofthe properties involved. These estimates are furnished and calculated in accord ance with requirements of the Financial Accounting Standards Board and the SEC. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, largely influenced and con trolled by U.S. and foreign governmental actions, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows presented do not represent management's assessment of future profit ability or future cash flow to the Company. Management's investmentandoperating decisions ate 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 applyingcurrent costs and prices and a ID percent standard discount rate does not convey absolute value. The discounted amounts arrived at areonlyone measure of the value of proved reserves. Regarding the information on estimated reserve quan tities and discounted future netcash flows, the Company has no long-term supply contracts to purchase from foreign governments or any interest in equity affiliates involved in oil and gas producing activities. COAL OPERATIONS Supplemental operatingstatistics forthe coal operations of die Company for the three years ended December 31, 1991,1990 and 1989 were as follows: Coal shipments - thousand tons: Domestic Foreign Total Coal reserves - million tons recoverable'. Domestic Foreign Total Average market price pec con of coal: Domestic Foreign Composite price 1.990 19*9 52,598 8,961 41.559 ! 29.43* 8.819 38.256 51.114 8.355 59.44* 876 ; 242 1.118 . 854 411 i.265 869 521 1.19|) s 9.2o; $52.70 : $14.27 $ 9.45 S32.70 $14.81 S 9.29 S31.33 513.95 P*YC 000,3, 58 Co n s o l i d a t e d Fi n a n c i a l Da t a R0 Millions of dollars, ezctprpfrshort amounts 1991 1990 1989 198$ 198' 'UH \\ 1) O 1 III R (UI R \ l ! N(, RU'fVUi Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing**1 Other Elimination of intersegment amounts S 8.859 563 7,989 849 2,990 -- 30 (3,123) S 9.425 541 8,649 946 2,950 -- 33 (3.736) $ 8.138 519 6,789 862 2,663 ___ 55 (3,005) S 6.949 403 6.138 931 2,700 4.696 48 (3,541) S 7,724 320 5,960 967 1.967 3,926 64 (3.951) Total S18.1S7 SI 8.808 $16,021 $18,324 $16,977 NET INCOME Resources: Oil and gas Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processings Equity earnings from Lyondell Petrochemical Company Gain on subsidiarystock transaction Unallocated expenses and other Interest Cumulative effect of change in accounong for income taxes Net Income Earned per shared Retained earnings s 549 $ 1,364 $ 887 S 542 S 835 33 91 92 79 67 266 I 212 192 439 274 271 291 266 336 368 308 400 . ISO 340 404 --i 111 --. <60)| (594) i - ' . 223 -- (410): (564): - 214 : 634 : (250)' (517); 529 _ -- (104) (539) 132 _ -- (126) (578) :-- 323 i -- -- -- s 709 : S 2,011 , $ 1,953 , $ 1,583 . $ 1.224 S 4.39 12.15 iS 11.26 .$ 8.78 $ 6.68 S 5,990 I S 6.837 ! $ 5,636 i $ 7.562 S 6.683 ADDITION'S TO FIXED ASSETS Resources: Oil and gas (includingdry-hole costs) Coal Products: Refining and marketing Transportation Intermediate chemicals and specialty products Integrated petrochemical and petroleum processing^ Other Total S 1,890 : $ 1,560 : S 1,309 S 2,555 S 721 305 ! 109 ! 148 ! 107 12 448 i 124 : 435 ! 370 i 103 1 539 | 314 43 i 262 251 53 245 318 26 312 65 27 37 37 i 29 28 47 $ 3,239 S 2,718 ;.S 2,105 ; S 3,304 S 1.463 (4/ Prior it 1919. LyonitU PorroebmuMComptny vuilOOftntnmntimmhdtttinhiiarj. Ftryitn mbuqunt n 1988. LnndtU. maud as a* e4*,r7 tnvrrtmuttwad is at langrr taasaJidaud. (k) Tbr ewmtUative tfftaaftbt thtngt m secnnttngfarsacwma tuts* 1990 vas Si.9fpershort. pNYC 00013163 S9 Se g me n t Op e r a t i n g Da t a on. i\n (, is After-tax oil and gas earnings (millions): .Alaska Lower 4k Foreign Total Crude oil. condensate and NGL production (thousand barrels/day-- net): Domestic: Prudhoe Bay Kuparuk Lisbume Other Alaska NGLs Total Alaska Lower 48 -- Crude oil -- N'GLs Total Domestic Foreign: Indonesia Dubai United Kingdom Other N'GLs Total Foreign Total Natural gas production (million cubic fett/day -- net): Domestic: Onshore Offshore Total Domestic Foreign: United Kingdom Indonesia Netherlands Colombia Total Foreign Total !!')99 i9S9 im i9r S 413 57 79 S 549 S 700 588 76 Si.364 S 546 349 (8) S 887 S 582 231 ('!) S 542 S 487 335 13 S 835 262.9 146.3 12.8 4.3 20.3 440.6 168.4 39.5 668.5 42.5 11.6 15.2 1.2 5.2 75.7 744.2 263.1 138.4 13.9 3.4 15.0 433.8 168.2 36.3 638.3 38.4 12.9 10.7 .6 4.5 67.1 705.4 280.5 H7.1 12.5 4.3 15.0 459.4 166.2 34.4 : 660X1 304.9 146.3 13.6 5.2 17.3 487.3 151.2 35.7 674.2 47.2 ' 8.1 9.6 .9 4.3 42.4 8.7 6.8 .6 5.1 70.1 63.6 730.1 737.8 313.4 13.9 470.4 157.1 37.5 665.0 ~ 46.6 9.6 1.0 .8 5.2 63.2 ' 728.2 862.8 939.3 536.0 : 614.3 855.0 674.0 708.0 681.0 1,398.8 : 1,553.6 : 1,529.0 ; 1.389.0 587.0 . 685.0 1.272.0 221.1 15.3 24.8 -- 261.2 1.660.0 155.5; 13.6 24.4 -- 117.9 14.2 31.1 6.0 99.8 17.S 29.4 7.4 193.5 169.2 154.1 1.747.1 : 1.698.2 1,543.1 108.3 . 21.9 26.1 8.1 164.4 1,436.4 ' PNYC 00013164 o i Se g me n t Op e r a t i n g Da t a 5 199! mo im 19m I9S' oil \\L) .\s (continued) Exploration expense (millions): Alaska: Drv-hole costs Lease amortization Geological and geophysical Other Total Alaska Lower 48: Drv-hole costs Lease amortization Geological and geophysical Other Total Lower 48 Total Domestic Foreign: Drv-hole costs Lease amortization Geological and geophysical Other*4* Total Foreign Total Average sales prices: Crude oil and condensate (dollars/barrel): Alaska Lower 48 Composite average Foreign N'GLs, lease and plant (dollars/barrel): Domestic Foreign Natural gas (dollarsAhousand cubic feet): Domestic Foreign $ 28 16 10 22 76 S 91 17 20 19 147 S6 23 21 19 69 S8 24 10 14 56 S2 24 9 !0 45 118 108 107 82 33 89 90 95 90 95 44 44 34 42 30 88 92 76 83 74 339 334 312 297 232 415 481 381 353 T" 7i ; 8. 21 78 . 100 6 19 45 50 6 19 23 178 170 98 S 593 S 651 $ 479 MW ' mmmomm 59 6 25 42 132 $ 485 41 -- 28 36 105 S 382 SI 1.23 S16.72 $12.93 S18.67 $14.84 S20.85 $16.56 $20.15 $11.71 $16.92 $13.13 $16.25 $ 8.51 $14.20 $ 9.90 $14.20 $10.95 517.23 $12.56 $16.44 S12.86 $14.40 $10.38 $ 9.25 $10.43 $11.51 ; $10.89 $ 6.60 $ 7.53 $ 9.02 S 1.54 S 3.16 S 1.66 : $ 1.67 $ 3.08 ; $ 2.71 $ 1.68 $ 1.63 $ 2.64 ; S 2.36 Proved oil and gas reserves -- net Crude oil and NGLs (million barrels): Alaska Lower 48 Foreign 1,822 820 189 ' 1,966 754 . 210 . 1,985 780 . 237 ` 2,064 765 264 Tool Natural gas (billion cubic feet): Alaska Lower 48 Foreign Total 2.831 2.369 3,429 2,405 8,203 2,930 l 3,002 3,093 wwm 2,367 3,889 1,796 8,052 1 2,486 3,966 1,206 7,658 2,484 3,889 1,249 7,622 (a) Indudtt cosu ofiuctasfultxpkrstory vtUs txpenjtdu*dtr eon moverr -sh*rmg eontroa ocminii*g. 2,136 682 223 3,041 2.20' 3,647 897 6,751 PNYC 00013165 Se g me n t Op e r a t i n g Da t a ARC0 1991 1990 19S9 I9gt J937 on. \ND (;\s (continued) Net wells completed: Domestic: Exploratory -- oil gas drv Development -- oil gas dry Foreign: Exploratory --oil gas dry Development -- oil gas dry Net producingwells: oil ps 8 18 42 265 168 173* 5 22 +8 225 137 44 44 22 19 18 24 21 53 --I IWlI 8,372 1,704 7,582 2,009 4 21 41 188 131 32 2 1 15 22 3 -- 8,138 1,889 6 22 42 271 85 36 3 -- 17 $4 -- -- 8,418 1,796 4 15 28 150 59 16 5 2 8 17 1 _ 7,582 1.672 Net acreage (thousand acres): Domestic: " Developed Undeveloped Foreign: Developed Undeveloped 2,333 ' 6,302 ' 76 29,251 ; 2,379 6,144 75 17,319 2,453 5,858 69 16,752 2.508 5,839 69 16,236 2,458 5,575 64 10,849 COAL Coal shipments (thousand tons): Domestic Foreign 1 f 32,598 29,437 8,961 ! 8,859 31,114 8.333 26,936 . 22,888 5,511 3,249 Total Coal reserves (million tons recoverable): Domestic Foreign Total 41,559 I I 876 ' 242 , 38,256 ; 854 411 ; 39,447 869 : 321 , 32.447 . f 877 306 26,137 910 118 1,118 ! U65 . 1,190 ; 1.183 | 1,028 Net coal acreage (thousand acres): Domestic Foreign Average market price (dollars/ton): Domestic Foreign 73 ; 13 i 73 ; 17 : 76 ' >4 ; 78 ' 12 122 6 ; $ 9.80 $ 9.45 I $ 9.29 : $10.60 ' $11.42 $82.70 ; $82.70 i $31.33 1 $28.87 : $25.27 ' Indajtt HZirjdnihfmm! vtlU i ibiiinntlMntrhtntgdipnjtatttuttltmtftS.S millim. pHYC 00013166 62 i 1 1 i j Se g me n t Op e r a t i n g Da t a ao RKFINIM. WO MXRKETING Refiner.' runs (thousand barrels/day): Blended crude oil: Los .Angeles. California Cherry Point. Washington Unfinished stock: Los .Angeles. California Total Petroleum product sales volumes, including intersegment sales (thousand barrels/day): Domestic: Gasoline Distillate fuels Jet fuels Coke Natural gas liquids Other Total Domestic Foreign Total Domestic branded retail outlets TRANSPORTATION Crude pipelines (miles! Product and petrochemical pipelines (miles) TAPS throughput (thousand barrels/day) Crude transported (million barrel miles) Product transported (million barrel miles) Tankers owned or under long-term charter Tonnage (thousand tons) INTERMEDIATE CHEMICALS AND SPECIALTY PRODUCTS Chemical product sales volumes, including intersegment sales (millions)-. Propylene oxide and derivatives (pounds) TBA and derivatives (gallons) Styrene monomer and derivatives (pounds) Chemical sales revenue, including intersegment sales (millions) 1991 1990 19S9 tm w: 230.4 174.S ,, 404.9 231.4 167.2 398.6 2.7 407.6 2.5 401.1 233.6 167.3 400.9 1.0 401.9 224.4 172.5 396.9 -- 396.9 2U.8 160.8 372.6 2.4 375.0 234.5 : 84.6 95.6 17.0 13.9 : 20.8 466.4 i 97.0 563.4 : 1,632 1 231.2 . 78.3 88.0 14.8 12.5 19.2 444.0 j 92.0 536.0 .. 1,547 ; 223.1 85.4 84.3 13.3 12.8 16.6 435.5 93.0 528.5 1,700 214.8 87.2 ' 78.5 16.2 9.8 12.3 209.2 84.9 72.0 13.6 7.0 19.5 418.8 406.2 85.1 503.9 86.2 492.4 1.700 1.750 6,600 7,500 7,500 7,500 2,700 l 3,000 : 3,000 3,000 1,822 ' 1,789 1,880 2,034 143,300 144,200 158,500 182,600 6,100 8,500 9,500 10 i 10 i 10 10,300 10 1,500 | 1,500 : 1.500 - 1.500 7.500 3,000 1.959 163,000 10,400 10 1.500 1 i > ' 1 2,729 1 2,563 2,586 996 ! U78 ! i 955 : 1,098 11 912 1,478 ' $2,990 $2,950 : $2,663 2,812 917 1.665 $2,700 2,334 794 1,290 $1,967 PNYC 00013,s? Se g me n t Op e r a t i n g Da t a R0 Millions ofdolUrs.exctpiptrsbarr amounts I99J 1990 im IW !9S~ OTHER DATA Dividends: Common stock -- total -- per share Total dividends declared $ 869 S 807 S 756 S 700 $ 710 s s.so s 5.00 S 4.50 s 4.00 $ 4.00 sS 872 S 810 760 s 704 $ 714 Common stock; Average shares outstanding, including equivalents (million ofshares) 161.7 Earned per share S 4,39 Book value per share $ 42.95 Market price per share -- high 135% -- low 99% --close 106% Stockholders (thousands) 116 165.5 $ 12.15 5 44.82 142% 105% 123% 120 173.4 S 11.26 S 39.64 114% 80% 111% 126 180.4 183.3 s 8.78 $ 6.68 S 35.59 $ 32.38 90% 99% 67% 58% 80% , 69 158 166 Employees (thousands): Resources: Chi and Gas Coal Products: Refining and marketing Transportation intermediate chemicals and specialty products Integrated petrochemical and petroleum processing Other operations Total Payroll expense 10.0 10.7 10-5 10.6 10.1 1.8 1.7 1.6 1.2 1.2 8.4 8.1 7.7 7.1 7.2 1.7 : 1.8 1.6 1.6 1.6 4.2 . 4.0 3.6 3.0 2`.5 -- i.6 ; 27.7 i -- 1.5 27.8 -- 1.9 26.9 2.0 2.0 ; 27.5 1.9 1.8 26.3 $ 1,449 $ 1,367 S 1,221 $ 1,164 S 1,056 f in an c ial d at a Total assets Working capital Current ratio Long-term debt Stockholders' equity RESEARCH AND DEVELOPMENT EXPENSE i S24.492 $23,864 S 125 S 1,788 1.02 : 1.42 S 5,989 i $ 5,997 $ 6,832 : $ 7.149 522,261 5 1,977 1.58 5 5,313 5 6,562 j $21,514 : $22,890 $ 1,493 $ 2,885 1.46 l 1.64 5 5.400 $ 6,028 $ 6,247 : $ 5,878 s 130 ; s 136 S 112 $ 119 ; $ 109 PNYC 00013168 *4 Bo a r d o f Di r e c t o r s r oi>v\ mik vi. c o o k Lkatrmtn ofthe Board and Cbttj Extsurtie Offiter KOBI R 1 1 . I COIF P'eliJiiii Jij ChiefOperating Offictr KOSM 1) | \KV\UT f.xr.'Ht/i 1 t>e Pt't<nf<nT 1 V \H v \ M ) l><) | t 1 ON txr.'HUi e f Vv Prcijf/it J \ Ml N V MORR l%<>N rr.urn t l ue Prtndtntand CbttfFinancial OfiUtr RO\ V. WDFRSON ffirmer Chairman ofthe Boards Lockhttd Corporation FRANK D. BOREN Conttr.ation Fellev. IHwU MUlffi Fai Put Prtndtnt and Chairman. The Xoture Conservancy RICHARD H. DEIHL Chairman ofthe Bard and ChiefExecutive Officer. H.F.Ahnttutn Company THE HON. JOHN GAVIN Gamma Strvutt International Former C S. Amhoaedcrto Mtxao H *NNA H. GRAY president. C>vfTj*pi e/Cfeuaj* PHILIP M. HAWLEV Chntrmnti oftkt Board mi ChiefEamnct Offieer. Carter Hevctey Halt Stem. Inc. DON ALD St. KENDALL Co-Founder. Former Cheirmaa end ChiefExecutive Officer. PtptiCe. Inc. WILLIAM f. K1ESCHMCK Hatred Preiident. ARCO JOHN e. SLAUGHTER Prtiident, Colkp HICKS B. WALDRON Former Chairman ofthe Board, Avon Pndutti. Int. HENRV U E.NOT Chairman oftht Board, SmiihKliae Betcbam Of f i c e r s I.ODWRICK M. COOK Chairmen ofthe Board and ChiefErteuuve Officer ROBERT f . W\< OFF Preiidentend ChiefOperating Officer RON Sl.O .1 \RN \L I r Executive IV./ Prendent JAMES A. MIDDLETON Executive lice Preiident JAMES S. MORRISON Exttutr. t lice Preudtntand ChiefFinancial Officer CFORGt H. BA&tkUN Sutler 1 let Prtstdtnt Prtndtnt. ARCO Products Company H.L. 8ILHARTZ Senior lice Prtndtnt President. ARCO Alatho, Int. MIKE R- BOWLIN Senior Viet Prtiident Preiident. ARCO International Oiland Gas Company CAMRON COOPER Senior lice Preudentand Treasurer E. Ke n t o .a mo n . j r . Senior lice Prtndent, Planningand Control KENNETH R. DICKERSON Sfir IV Prtndtnt. Government Affair! ANTHONY 0- FERNANDES Senior Vito President Prtndnt. AItCO CmI Compony FRANCIS X. McCORMACK Snw Vkt Prmdnt and Gmeroi Crnuei WILLIAM C. Rl/SSACk Snrar Vitt Pnndni Pnsrdfnu ARCO Transportation Company WILLIAM E. WADE. JR. Senior Viet Prtiident Prttidtnt. ARCO Oiland Gat Company STEPHEN J. GIOA'ANISCl Vice Prtndent. PaUicAffatn BEVERLY L. HAMILTON I?cr Preiident end lavtimtnt Officer Prtiident. ARCO ImtrtmtntManagement Company ALLEN C. HOLMES Viet President and General Tax Officer MARIE L. KNOWLES Vice Preudentand Controller WILLIAM D. LEAKE Vice President, Ewvinnmrntal Protrctton DONALD A. MURRAY Vice Preiident. Human Rctourm DAN F. SMITH Vttt Prtiident. Corporatr Planning MICHAEL E. AVILEY Vue PresidentandManager ARCO Exploration and Production Technology HOWARD L. EDWARDS Corporate Secretary PNYC 00013169 65 INDEX Accountants' Report - >4 Accounting Policies - 43 Acreage - ft2 Additions to Fised Asstss-4.4$, >9 Alaska's North Slope - *, 3; Alycsk.i Pipeline Service Co. -10 Amethi't-22 jm/pm*mini markets - 1} ARCO Alaska, Inc. -",30. 32 ARCO Chemical Company - 2ft. 3 5,3" ARCO Coal Company - 24,32.35.58 ARCO Foundation - 50 ARCO international Oil and Gas Companv - 21.31 ARCO Oil and Gas Company -17.20 ARCO Products Companv-1). 30, 35 ARCO Solar. Inc. -->8 ARCO Transportation Company-10.31 Arkoma Basin -10 Assets- 1,44,45 .Austin Chalk-IS Australia -24 Balance Sheet - 41 Bank Credit Facilities - 47 Black Thunder - 2 4 Blair Athol-24 Board ofDirectors - 65 Book Value per Share - 64 Brasil-15.45 Business strategies - 2 BZZ field-22.36 Calcined coke-14 California Air Resources Board (CARB) - 4,14 Capital expenditures-4.38 Cash Flows. Statement of- 42 Cendere held - 22 Channelview-26 Cheneyboro field -17 Cherry Point Refinery -10, [4 Children'sTelevision Workshop - 30 Clean Air Act-28 Coal Creek-24 Coal Resources ofQueensland (CRQ) - 24.36 Cogeneration Utility -14 Commitments ft Contingencies, Other - 48 Cook ln)et-7.9 Corporate Responsibility - 29 Crude oil reserves - 55.61 Curragh - 24 Current Ratio-64 Dallas YWCA-29 Depreciation, Depletion and Amortiaation -44 Dividends-1,64 Dubai-22 Earnings per share -1.40,64 EC-1 Regular-5.14,35 EC-Premium*-5,14,35 EC-X-5,14 J Ecuador- 23,31 Egypt-23 Employees-64 Environment, Health and Safety-31 Environmental Matters -- 38 Expenses -- 35 Exploration-8.18.22 Exploration expense - 60 Financial Instruments - 53 Financial Position and Liquidity - 38 Financial Review - 3 3 Fixed .Assets-45 Foreign Currency - 52 Foreign Operations-21.45 Fos-sur-Mer. France - 26 Gabon-23 Gas Handling Facilirv Expansion (GHX-U GHX-21-8 German North Sta - 2 3 Cordonstone-24 Gulf of Mexico - 19 Health ft Safety-31 Highlights of 1991 -1 Housion-to-Cushing Pipeline -10 Income Statement -40 Indonesia-22 Interest Expense - 47 Inventories - 45 Investor Information- 67 Java Sea - 22 Joint Education Project - 30 Junior Achievement - 29 Kupiruk River field - 7,36 Kuparuk Transportation Company-10 Lease Commitments - 5 2 Letter to Stockholders - 2 Liabilities-41 Lisburne field-7 Long-Term Debt-47,64 Los Angeles Educational Alliance for Restructuring Now (LEARN) - 30 Los Angeles Refinery -14 Lower 48 and International Operations - \7 Lyondell Petrochemical Company-28,34. 37.53 MSS-5,14 Malacca Sctait-22 Management's Discussion and Analysis - 34 Margham field - 22 Marine Preaervitjon Association . |0 Middle Eastcrisis-2,14 Midway-Sunset field -17 MTBE-26.28 Murdoch field-22 Natural Gas Production - 61 NaturalGas Reserves - 55,61 Net Income -1,40.59 Netherlands-21 New Zealand-23 North Dauphin Island -18 ' North Sea-21 Northwest Dauphin field - M Notes to Consolidated Financial Statements -43 Officerx-65 Oil and Gas Information - 5 5 Oklahoma-32 Olympic Pipeline Co. -10 Operating Statistics - 60 Orwell field-22 Pagerungan field - 22 PayPoint*-15 Payroll-64 Permian Basin -18 Philippines-23 Pickers!! field-22 Point McIntyre- 8 Points of Light Foundation -29 Postretirement Benefits. Other- 50 Powder River Basin - 24 Prices: CtudeOi)->6,61 Coal-58.62 Natural Gas-36.61 NGLs-61 Stock-64 Production-1.36.60 Prudhoe Bay field- 7. 36 Quarterly Results - 53 Queensland-24 Ravenspurn North-22 Refining ft Marketing -13,37 Reformulated gasoline - 4.10.13 Remediation - 32,37 Retained Earnings - 40 Retirement plana - 50 Return on Capital Employed -1 Rttum on Stockholders' Equity -1 Rotterdam-24 Safety--32 Sales and Other Operating Revenues - 44.59 SCEeorp-14 Segment Information -44.45 Selected Financial Information - 34 Shabwa Province-23,22 Ship Escort/Response Veaael System (SERV$> -31 Singapore - 26 SMOGPROS*-14 South Korea - 26 South Ptsa 60-18 Southern California Edison -14.18 Southern Gts Basin - 22 Stock Options-52 Stockholders - 64,67 Stockholders'Equity-41,51.64 Sunfish-7,9 Supplemental Information - 5 5 Syria-23 TAPS Settlement Methodology Agreement -10.37 Taxes-46 Texas City Marine Terminal -10Thamet-22 THUMS Long Beach Company -17 Tosco Corporation -14 Trail Mountain-24 Trana Alaska Pipeline System -10.3 7 Turkey-22 United Arab Emirates - 22 United Kingdom -21.36 Unuiusl Items - 43 Utah-24 Venezueis-24.36 Watson Cogeneration Company -14 Welland field -22 Wella-62 West Coau Operations- 7 West Elk-24 Wilmington oil field -17 Working Capital - 64 Wyoming-24 Wytch Farm - ZJ Yemen-22 PNYC 00013170