-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S8yHanrToWWGvHCqqteaI3+FCyJjhGHGUSPMxxPF8RWp/zWJU/3lP6UIJtglBckB RFwuzFSAPlkY0zfS6amJAQ== 0000898430-98-000751.txt : 19980304 0000898430-98-000751.hdr.sgml : 19980304 ACCESSION NUMBER: 0000898430-98-000751 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980303 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC RICHFIELD CO /DE CENTRAL INDEX KEY: 0000775483 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 230371610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-01196 FILM NUMBER: 98555837 BUSINESS ADDRESS: STREET 1: 515 S FLOWER ST CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134863511 10-K405 1 FORM 10-K 1997 --------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1997 Commission file number 1--1196 [LOGO OF ARCO] ATLANTIC RICHFIELD COMPANY (Exact name of registrant as specified in its charter) Delaware 23-0371610 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 South Flower Street, Los Angeles, California 90071 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 486-3511 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ------------------------------- Common Stock ($2.50 par value) New York Stock Exchange Pacific Exchange, Inc. Elektronische Borse Schweiz EBS London Stock Exchange $3.00 Cumulative Convertible New York Stock Exchange Preference Stock ($1 par value) Pacific Exchange, Inc. $2.80 Cumulative Convertible New York Stock Exchange Preference Stock ($1 par value) Pacific Exchange, Inc. Twenty year 10 7/8% Debentures Due July 15, 2005 New York Stock Exchange Thirty year 9 7/8% Debentures Due March 1, 2016 New York Stock Exchange Twenty-five year 9 1/8% Deben- tures Due March 1, 2011 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by nonaffiliates of the registrant on December 31, 1997, based on the closing price on the New York Stock Exchange composite tape on that date, was $26,135,000,809. Number of shares of Common Stock, $2.50 par value, outstanding as of December 31, 1997: 320,369,895. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997 are incorporated by reference under Part III. TABLE OF CONTENTS PART I
ITEM PAGE ---- ---- 1. and 2. Business and Properties....................................... 1 Corporate History and Organization........................ 1 Recent Developments....................................... 1 Financial Information about Industry Segments............. 2 Worldwide Exploration and Production Operations........... 2 Refining and Marketing.................................... 7 Chemicals................................................. 8 Other Operations.......................................... 9 Capital Program........................................... 9 Patents................................................... 9 Competition............................................... 9 Human Resources........................................... 10 Research and Development.................................. 10 Environmental Matters..................................... 10 3. Legal Proceedings............................................. 13 4. Submission of Matters to a Vote of Security Holders........... 15 ---------------- Executive Officers of the Registrant.......................... 16 Description of Capital Stock.................................. 19 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................... 22 6. Selected Financial Data....................................... 22 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 23 8. Financial Statements and Supplementary Data................... 56 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 58 PART III 10. Directors and Executive Officers of the Registrant............ 58 11. Executive Compensation........................................ 58 12. Security Ownership of Certain Beneficial Owners and Management................................................... 58 13. Certain Relationships and Related Transactions................ 58 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................................... 58
(i) PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES CORPORATE HISTORY AND ORGANIZATION Atlantic Richfield Company ("ARCO" or the "Company") was incorporated in 1870 under the laws of Pennsylvania as The Atlantic Refining Company. Atlantic Petroleum Storage Company, a predecessor to The Atlantic Refining Company, began operations in 1866. The Company's principal executive offices are at 515 South Flower Street, Los Angeles, California 90071 (Telephone (213) 486-3511). ARCO's present name was adopted subsequent to the merger of Richfield Oil Corporation into The Atlantic Refining Company in 1966. In 1969, Sinclair Oil Corporation was merged into ARCO. In 1977, The Anaconda Company was merged into a wholly-owned subsidiary of ARCO and, on December 31, 1981, that subsidiary was merged into ARCO. On May 7, 1985, ARCO was reincorporated in the State of Delaware. Unless indicated otherwise, the terms "ARCO" or the "Company" as used herein refer to Atlantic Richfield Company or Atlantic Richfield Company and one or more of its consolidated subsidiaries. ARCO, including its subsidiaries, constitutes one of the largest integrated enterprises in the petroleum industry. ARCO's exploration and production ("E&P") segment includes the worldwide exploration, development, production and transportation of petroleum, which includes petroleum liquids (crude oil, condensate and natural gas liquids ("NGLs")) and natural gas, and the purchase and sale of petroleum liquids and natural gas. The Company's investment in LUKOIL Common Stock is included in the E&P segment as well. ARCO's refining and marketing ("R&M") segment includes the refining and transportation of petroleum and petroleum products and the marketing of petroleum products on the U.S. West Coast. The Company's equity investment in Zhenhai Refining and Chemical Company ("Zhenhai") is also included in the R&M segment. ARCO's chemicals segment includes the worldwide manufacture and sale of chemical products. ARCO's corporate structure consists of wholly-owned and majority-owned subsidiaries and various divisions or units of the parent company, ARCO, that have been delineated or defined for various operational reasons. Many of the wholly-owned subsidiaries are formed to conduct ARCO's numerous international operations. The principal majority-owned subsidiaries are Vastar Resources, Inc. ("Vastar") and ARCO Chemical Company ("ARCO Chemical"). Vastar was formed in September 1993, and in July 1994 sold under 20% of its common stock to the public; ARCO currently owns 82.2% of Vastar. Vastar is the primary vehicle through which ARCO conducts natural gas and, to a lesser extent oil, exploration, production and marketing in the Lower 48 States (the "Lower 48"). ARCO Chemical was formed in July 1987, and it sold just under 20% of its common stock to the public in October 1987; ARCO currently owns 82.3% of ARCO Chemical, through which ARCO conducts its chemicals operations. ARCO's principal subsidiaries are Vastar, ARCO Alaska, Inc. (a wholly-owned subsidiary through which ARCO conducts its Alaska operations) ARCO Transportation Alaska, Inc. (a wholly-owned subsidiary through which ARCO holds its interest in the Trans Alaska Pipeline System ("TAPS")), and ARCO Chemical. The information included or incorporated by reference in this report is provided solely for the benefit of ARCO shareholders. Such information is not provided for the benefit of the shareholders of Vastar, ARCO Chemical, Lyondell Petrochemical Company ("Lyondell"), LUKOIL, or Zhenhai and should not be relied upon by those shareholders or by anyone considering an investment in those companies. This report does not reflect information that could be considered material to an investment in Vastar, ARCO Chemical, Lyondell, LUKOIL or Zhenhai. For information concerning those companies, reference should be made to their publicly available reports. RECENT DEVELOPMENTS In April 1997, ARCO announced its intent to divest its worldwide coal business, which has coal mining operations in the United States and Australia. The coal business no longer is considered a core part of the Company's business. On February 27, 1998, ARCO announced that it has entered into exclusive final discussions with Alliance Coal Corporation, an affiliate of The Beacon Group, for the sale of the U.S. assets. No final decision regarding the Australian assets has been made. See "Other Operations" on page 9. 1 In September 1997, ARCO disposed of its remaining interest in Lyondell, which operates petrochemical processing and petroleum refining businesses. ARCO settled the outstanding principal amount of $988 million of its 9% Exchangeable Notes due September 15, 1997 with substantially all of its 39.9 million shares of Lyondell Common Stock. ARCO sold its remaining shares in a privately negotiated transaction in late September. See Note 23 of Notes to Consolidated Financial Statements on page 51. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Reference is made to Note 2 of Notes to Consolidated Financial Statements on page 40 for segment information concerning sales and other operating revenues, earnings, total assets and additional information for certain operations of the Company. WORLDWIDE EXPLORATION AND PRODUCTION OPERATIONS General ARCO conducts its worldwide oil and gas exploration and production operations primarily in the United States, the United Kingdom, Indonesia, China, Algeria, Tunisia, Dubai and Qatar, and has additional interests in producing fields in Kazakhstan and Turkey. Exploration and planned developments are underway in other countries, including Venezuela and Ecuador. Reserves Estimated net quantities of ARCO's proved oil and gas reserves at December 31, 1997 were as follows:
PETROLEUM LIQUIDS NATURAL GAS (MILLION BARRELS) (BILLION CUBIC FEET) ------------------------ ------------------------ U.S.(a) INTERNATIONAL(b) U.S.(c) INTERNATIONAL(d) ------- ---------------- ------- ---------------- Proved reserves............... 2,131 568 4,988 3,484 Proved developed reserves..... 1,821 211 4,467 1,653
- -------- (a) Includes 129 million barrels ("MMB") proved and 96 MMB developed attributable to Vastar. (b) Includes 48 MMB proved and 7 MMB developed attributable to the equity interest in the LUKARCO joint venture. (c) Includes 2,379 billion cubic feet ("BCF") proved and 1,954 BCF developed attributable to Vastar. (d) Includes 67 BCF proved and 10 BCF developed attributable to the equity interest in the LUKARCO joint venture. Reference is made to Supplemental Information, Oil and Gas Producing Activities, beginning on page 52, for additional information concerning oil and gas producing activities and estimates of proved oil and gas reserves. Production Net quantities of petroleum liquids and natural gas produced by ARCO were as follows:
NATURAL GAS PETROLEUM LIQUIDS (MILLION CUBIC FEET (BARRELS PER DAY) PER DAY) --------------------- --------------------- YEARS ENDED DECEMBER 31, U.S.(A) INTERNATIONAL U.S.(B) INTERNATIONAL - ------------ ------- ------------- ------- ------------- 1997............................... 557,900 82,600 1,066 844 1996............................... 564,500 66,100 1,044 730 1995............................... 583,100 66,800 999 557
- -------- (a) Includes 50,700, 48,800, and 45,300 barrels per day produced by Vastar in 1997, 1996, and 1995, respectively. (b) Includes 882, 872, and 810 million cubic feet per day ("MMCFD") produced by Vastar in 1997, 1996, and 1995, respectively. 2 Average sales prices and average production costs per unit of petroleum liquids and natural gas were as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- -------------------- U.S. INTERNATIONAL U.S. INTERNATIONAL U.S. INTERNATIONAL ------ ------------- ------ ------------- ------ ------------- Average sales price (including transfers) per barrel of petroleum liquids produced....... $15.63 $18.20 $16.07 $19.02 $12.17 $15.96 Average lifting cost per equivalent barrel of production............. 3.85 4.07 3.86 4.14 3.73 3.98 Average sales price per thousand cubic feet ("MCF") of natural gas produced.............. 2.04 2.64 1.80 2.54 1.35 2.56
Delivery Commitments ARCO has various long-term natural gas sales contracts covering the majority of its production in Indonesia, the United Kingdom North Sea, and China, substantially all of which are reservoir specific. While annual delivery requirements may vary under these contracts, delivery obligations under the agreements are essentially limited to producible reserves from specific fields. In the Lower 48, Vastar has various long-term natural gas sales contracts. In connection with the formation of Southern Company Energy Marketing L.P. ("SCEM"), a strategic alliance limited partnership with the Southern Company, Vastar has entered into a gas purchase and sale agreement for a primary term expiring December 31, 2007, under which Vastar has contracted to sell, and SCEM is obligated to purchase, substantially all of the gas produced and owned or controlled by Vastar at market-based prices. Excluded from this contract is gas which Vastar is committed to deliver under certain longer-term gas marketing contracts with cogeneration facilities pursuant to which Vastar delivered an average of 81 MMCFD in 1997. These contracts have an average contract term of approximately 19 years, of which an average of 12 years remain. In 1997, the average price of gas sold under these contracts was approximately $2.54 per MCF. There have been no instances in the last three years in which Vastar was unable to meet any significant natural gas delivery commitment. Exploration and Drilling Activity The following table shows the number of wells drilled to completion by the Company:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 --------------------- --------------------- --------------------- U.S.(A) INTERNATIONAL U.S.(B) INTERNATIONAL U.S.(C) INTERNATIONAL ------- ------------- ------- ------------- ------- ------------- Net productive exploratory wells drilled................ 33 3 28 2 17 8 Net dry exploratory wells drilled.......... 27 10 48 7 37 13 Net productive development wells drilled................ 563 23 332 23 315 12 Net dry development wells drilled.......... 37 -- 33 -- 30 --
- -------- (a) Includes 18, 15, 162, and 27 wells, respectively, drilled by Vastar. (b) Includes 17, 29, 156, and 25 wells, respectively, drilled by Vastar. (c) Includes 15, 26, 133, and 23 wells, respectively, drilled by Vastar. The Company's current activities, as of December 31, 1997, were as follows:
U.S. INTERNATIONAL ---- ------------- Gross wells in process of drilling (including wells temporarily suspended)..................................... 62 11 Net wells in process of drilling (including wells temporarily suspended)..................................... 47 7 Waterflood projects in process.............................. 3 -- Enhanced oil recovery operations............................ 12 1
3 The following table shows the approximate number of productive wells at December 31, 1997:
OIL GAS --------------------------- --------------------- U.S.(a)(b) INTERNATIONAL(c) U.S.(d) INTERNATIONAL ---------- ---------------- ------- ------------- Total gross productive wells.................. 11,628 591 3,623 255 Total net productive wells.................. 5,849 246 1,705 76
- -------- (a) Includes approximately 1,566 gross and 308 net multiple completions for ARCO, of which there are 280 gross and 136 net multiple completions for Vastar. (b) Includes approximately 1,414 gross and 703 net wells, respectively, attributable to Vastar. (c) Includes approximately 89 gross and 36 net multiple completions. (d) Includes approximately 2,790 gross and 1,364 net wells, respectively, attributable to Vastar. As of December 31, 1997, the Company's holdings of petroleum rights acreage (including options and exploration rights) were as follows (in thousands):
DEVELOPED UNDEVELOPED ACREAGE ACREAGE ----------- ------------- NET GROSS NET GROSS ----- ----- ------ ------ U.S. Alaska.............................................. 194 315 732 1,189 Lower 48(a)......................................... 1,659 3,123 2,840 5,304 ----- ----- ------ ------ Total U.S......................................... 1,853 3,438 3,572 6,493 International......................................... 149 399 36,656 61,109 ----- ----- ------ ------ Total............................................. 2,002 3,837 40,228 67,602 ===== ===== ====== ======
- -------- (a) Includes 1,328 net developed acreage, 2,144 gross developed acreage, 2,506 net undeveloped acreage and 3,831 gross undeveloped acreage, respectively, held by Vastar. Alaska Approximately 59% of ARCO's worldwide petroleum liquids production came from ARCO's interests in Alaska, primarily in the Prudhoe Bay, Kuparuk River and the Greater Point McIntyre Area fields on the North Slope of Alaska. ARCO's net liquids production from Alaska in 1997 decreased 4% to 377,200 barrels per day. ARCO's interests in Alaska included net proved reserves of 1,848 million barrels of oil equivalent at December 31, 1997. ARCO operates the eastern half of the Prudhoe Bay field and has a 21.87% working interest in the oil rim production from the field and a 42.56% working interest in the gas cap production. ARCO's net petroleum liquids production from the Prudhoe Bay field averaged 198,500 barrels per day in 1997, compared to 210,800 barrels per day in 1996. ARCO is the sole operator of the Kuparuk River field and holds a 55.2% working interest in the field. Its share of production from the field was 128,200 net barrels per day of petroleum liquids during 1997, compared to 130,500 net barrels per day during 1996. The Kuparuk Large Scale Enhanced Oil Recovery project, which began operations in September 1996, added 7,500 net barrels of oil to daily gross production in 1997, and is expected to add 35,000 to 40,000 barrels of oil to daily gross production by 1999. NGLs, obtained from the Prudhoe Bay field, are injected into existing wells in the Kuparuk River field in order to recover additional barrels of oil and offset natural field decline. ARCO estimates that this project will result in an additional 200 million gross barrels (97 million net barrels to ARCO) of incremental oil from the Kuparuk River field. ARCO has established working interests in four of five Greater Point McIntyre Area fields as follows: 30.1% in Point McIntyre, 40.0% in Lisburne, and 50.0% in both West Beach and North Prudhoe Bay State. Additionally, ARCO 4 has a working interest in the Niakuk field, which is currently being negotiated among the owners of that field. All five of the fields are processed through the Lisburne Production Center, which ARCO operates. During 1997, liquids processed through the Lisburne Production Center averaged 201,900 gross barrels per day, or 50,200 net barrels per day. In 1997, the Company started several projects and had several successes that it believes will stop the decline in production after 1999. The Prudhoe Bay Miscible Injectant Expansion ("MIX") project was approved by ARCO and its partners. This $160 million expansion of the gas handling facilities is expected to add 50 million gross barrels of petroleum liquids and 20 thousand net barrels of petroleum liquids per day to the field when it becomes operational, targeted for 1999. The Alpine field was approved for development. In late December 1997, ARCO began commercial production from West Sak, a heavy oil accumulation. Commercial development of West Sak has become feasible because of lower costs, new drilling technologies and a production facility sharing arrangement with the Kuparuk production facility. The first phase of West Sak development has resulted in proved gross reserves of 50 million barrels of oil (25 net to ARCO). ARCO also had success drilling in a number of satellite accumulations, including the Tarn field. All of ARCO's petroleum liquids shipped from the North Slope fields are transported to market through TAPS, an 800-mile pipeline system used to transport petroleum liquids from the North Slope of Alaska to the port of Valdez in south central Alaska. ARCO has a 22.3% weighted average undivided ownership interest in TAPS. ARCO also owns approximately 22% of the stock of Alyeska Pipeline Service Company, which constructed and now operates TAPS for the owners. ARCO's undivided interest in TAPS is proportionately consolidated for financial reporting purposes. TAPS 1997 throughput averaged approximately 1,335,000 barrels per day. From Valdez the liquids are shipped to West Coast locations by ARCO's ocean-going tankers. Lower 48 During 1997, ARCO's consolidated Lower 48 operations had net production of 385 BCF of natural gas (including consumption) and 66 MMB of petroleum liquids as compared to 380 BCF and 63 MMB in 1996, respectively. Exploration, development and purchases (net of sales) replaced 141% of 1997 production on a barrel-of-oil-equivalent ("BOE") basis. The primary vehicle for ARCO's Lower 48 exploration and production operations is Vastar, of which ARCO owns 82.2%. Vastar, headquartered in Houston, Texas, is engaged in the exploration for and the development, production and marketing of natural gas and petroleum liquids in selected major producing basins in the Gulf of Mexico, the Gulf Coast, the San Juan Basin/Rockies and the Midcontinent areas. For additional information about Vastar, a copy of Vastar's 1997 Annual Report to Stockholders and 1997 Annual Report on Form 10-K can be obtained by writing to Manager, Investor Relations, Vastar Resources, Inc., 15375 Memorial Drive, Houston, Texas 77079. Vastar's telephone number is (281) 584-6000. ARCO's other Lower 48 operations accounted for reserves at December 31, 1997 of 589 MMBOE, of which 84% were petroleum liquids. In 1997 net production from ARCO's other Lower 48 interests was 57 MMB of oil equivalent, up slightly from 54 MMB in 1996. International ARCO's international operations include both exploration and production. ARCO's 1997 international production of petroleum liquids averaged 82,600 barrels per day, and came primarily from Indonesia, the North Sea and Algeria. Natural gas production averaged 844 MMCFD. Natural gas production from the North Sea accounted for 46%, the Java Sea accounted for 37% and the South China Sea accounted for 17% of ARCO's 1997 international natural gas production. ARCO's net proved reserves from international interests at December 31, 1997 were 1,148 MMBOE. 5 Natural gas production from ARCO's Yacheng 13 field, situated in the South China Sea, began on January 1, 1996. With net production to ARCO of 142 MMCFD during 1997, the Yacheng 13 field contributed 64% of the increase in ARCO's international natural gas production for 1997. In 1996, ARCO signed an agreement with Sonatrach, the Algerian state oil company, to undertake a major enhanced oil recovery ("EOR") project in the Rhourde El Baguel oil field. The agreement provides for ARCO to make an investment of over $1.3 billion in the project, of which over $400 million was spent during 1997. Under the production sharing contract, ARCO will receive up to 49% of the project's annual production. ARCO believes its EOR efforts should yield over 500 million incremental barrels of crude oil equivalent over the 25-year life of the project and increase production rates to a peak of 125,000 barrels per day within the next five years. ARCO began receiving production on July 1, 1996, and received 17,100 net barrels per day during 1997. Exploration activities by an ARCO-operated consortium in which ARCO holds a 27.5% interest led to the discovery of an oil field called Al-Rayyan, in the Arabian Gulf offshore Qatar, from which production commenced in late 1996. Delineation and appraisal of the discovery were completed in 1997. ARCO, along with its co-venturers, is currently negotiating with the governments of Qatar and Dubai a contractual framework for the supply of natural gas to Dubai from the huge Qatar North field, which is located in close proximity to the Al- Rayyan field. In the United Kingdom North Sea, ARCO added 100 million barrels of oil- equivalent reserves for the Shearwater, Elgin, and Franklin gas condensate fields for 1997. Production is expected to begin in 2000. In early 1997, ARCO finalized a joint venture with LUKOIL, one of Russia's largest oil companies, to pursue exploration and production projects in the Commonwealth of Independent States ("CIS"). The joint venture entity, LUKARCO, is owned 54% by LUKOIL and 46% by ARCO. LUKARCO may invest up to $5 billion in various projects over the next 18 years. ARCO has agreed to provide most of the financing to LUKARCO only for those projects approved by ARCO. In April 1997, LUKARCO acquired a 5% interest in the joint venture operating the Tengiz oil field in the Republic of Kazakhstan. A second investment is an interest in the Caspian Pipeline Consortium, a multi-party $2 billion project to construct a 900-mile pipeline from the Tengiz oil field in Kazakhstan to the Black Sea via Russia. LUKARCO holds a 12.5% interest, which obligates LUKARCO to fund 25% of the construction costs. This project is in the final stages of acquiring necessary governmental approvals. In addition to the joint venture participation, ARCO owns approximately 8% of LUKOIL's total equity. In Tunisia, ARCO purchased a 50% interest in the offshore Ashtart oil field, adding 24 million barrels of oil to its proved reserves in 1997. The Ashtart field is adjacent to ARCO's exploration block. ARCO announced the Tangguh liquefied natural gas ("LNG") project located in eastern Indonesia. The reserves for the project are located primarily on the Wiriagar and Berau blocks, in which ARCO has an 80% and 40% interest, respectively. Pertamina, the Indonesian state oil company, which already operates two of the world's largest LNG plants, will market the LNG produced from the Tangguh project. Plans for development include a two-train LNG production facility. In Venezuela, ARCO and its partners submitted successful bids for contracts on four blocks, Kaki, Maulpa, LL-652 and La Vela, in which ARCO has a 56%, 56%, 20% and 50% interest, respectively. ARCO and its partners expect to produce more than 800 million gross barrels from these projects over the next 20 years, which will require over $2 billion in additional investment. Future development of these blocks will require approvals by the Government of Venezuela and PDVSA, the state oil company. The Hamaca Project, a joint venture to produce and upgrade extra-heavy crude oil production from Venezuela's Orinoco Belt, received final governmental approval during 1997. Still remaining to be completed are certain agreements among the joint venture partners for construction and operation of the production and upgrading module. Oil produced from the Hamaca region will be transported via pipeline to an upgrading plant for processing. 6 REFINING AND MARKETING ARCO operates two U.S. petroleum refineries on the West Coast, the Los Angeles Refinery in Carson, California and the Cherry Point Refinery near Ferndale, Washington. Both of these refineries are accessible to major supply sources and major markets through ocean-going tankers, pipelines and other transportation facilities. The combined annual average operable crude distillation capacities of these two refineries, as measured pursuant to the standards of the American Petroleum Institute, are shown in the following table:
ANNUAL AVERAGE OPERABLE CRUDE DISTILLATION CAPACITY (BARRELS PER DAY) ----------------------- 1997 1996 1995 ------- ------- ------- Los Angeles Refinery.................................... 260,000 260,000 237,000 Cherry Point Refinery................................... 202,000 200,500 185,000 ------- ------- ------- Total................................................. 462,000 460,500 422,000 ======= ======= =======
ARCO's crude oil refinery runs and petroleum products manufactured at its refining facilities were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ------- ------- ------- (EQUIVALENT BARRELS PER DAY) Crude oil refinery runs................................. 452,200 452,700 438,800 ======= ======= ======= Petroleum products manufactured: Gasoline.............................................. 224,200 214,800 217,400 Jet fuels............................................. 106,700 105,700 101,300 Distillate fuels...................................... 73,100 66,000 70,700 Other (a)............................................. 85,300 100,500 82,700 ------- ------- ------- Total (b)........................................... 489,300 487,000 472,100 ======= ======= =======
- -------- (a) Includes chemical products, NGLs, petroleum coke (green and calcined) and feedstocks, sulfur, middle-of-barrel specialties and changes in unfinished stocks. (b) Total manufactured petroleum products volumes exceed total crude oil runs as a result of the expansion of petroleum product through rearrangement of molecular structure and refinery blending of oxygenates. In connection with its refining operations, ARCO produces calcined coke and operates electric cogeneration facilities. ARCO markets gasoline and other refined petroleum products to both consumers and resellers. Gasoline is marketed under the ARCO(R) trademark through independent dealers and distributors and directly to motorists at branded retail outlets located in Arizona, California, Nevada, Oregon and Washington. ARCO also sells gasoline to unbranded resellers. NGLs are sold directly to end-use customers including the Watson Cogeneration Facility, which is 51% owned by ARCO, and are also marketed through distributors. Jet fuels are sold directly to airlines and the United States Department of Defense. Calcined coke is sold to U.S. and international industrial consumers. Cargo and bulk sales of petroleum products are also made to commercial and industrial consumers, and certain products are marketed through other channels. During 1997 ARCO expanded its retail gasoline sites within its marketing region, and expanded the marketing region to include western Canada. In Southern California the Company integrated more than 200 former Thrifty gasoline stations into its network through a long-term lease arrangement. ARCO also initiated the purchase of over 30 retail outlets in Vancouver, which was completed in early 1998. The Company currently has over 1,700 branded retail outlets, which included franchisee and Company-operated am/pm(R) convenience stores and SMOGPROS(R) Service Centers, and traditional service stations. 7 Total refined petroleum product sales, which include insignificant sales to ARCO Chemical, for the periods indicated, were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 -------- ------- ------- (EQUIVALENT BARRELS PER DAY) Petroleum product sales: Gasoline.............................................. 281,900 266,400 256,800 Jet fuels............................................. 117,300 117,000 106,200 Distillate fuels...................................... 76,600 69,000 69,100 Other(a).............................................. 68,000 80,700 61,800 ------- ------- ------- Total................................................. 543,800 533,100 493,900 ======= ======= =======
- -------- (a) Includes heavy fuel oils, NGLs, calcined and green coke. Total petroleum product sales differ from total petroleum products manufactured due to the consumption of some products as refinery fuel, the exchange of products with other companies, change in inventory levels, and the purchase and resale of products not manufactured by ARCO. The R&M segment also operates 8 ocean-going U.S. oil tankers which transport crude oil and petroleum products from the Valdez terminal or the Gulf Coast to the West Coast. The Company's equity investment in Zhenhai Refining and Chemical Company is also included in the R&M segment. CHEMICALS The Company's chemicals operation consists of the businesses owned by ARCO Chemical. ARCO currently owns 80,000,001 shares of common stock of ARCO Chemical, which represent 82.3% of the outstanding shares. ARCO Chemical is an international manufacturer and marketer of chemicals used in a broad range of consumer products. ARCO Chemical's core product is propylene oxide ("PO"), which it produces through two distinct technologies based on indirect oxidation (peroxidation) processes that yield co-products. One process yields tertiary butyl alcohol ("TBA") as the co-product; the other process yields styrene monomer ("SM") as the co-product. The two technologies are mutually exclusive such that either a dedicated PO/TBA plant or a dedicated PO/SM plant must be built. ARCO Chemical also manufactures numerous derivatives of PO and TBA. Key PO derivatives are polyols and propylene glycols ("PG"); methyl tertiary butyl ether ("MTBE"), an oxygenate, is the principal derivative of TBA. In 1995, the Company began selling toluene diisocyanate ("TDI") obtained under long-term supply agreements with Rhone-Poulenc. With the 1996 acquisition of TDI production facilities from Olin Corporation, the Company also manufactures TDI. TDI and polyols are combined in the manufacture of polyurethanes. ARCO Chemical's principal chemical facilities are located in: Bayport, Texas; Channelview, Texas; Rotterdam, the Netherlands; Fos-sur-Mer, France; Lake Charles, Louisiana and a joint venture in Chiba, Japan. ARCO Chemical also owns a majority equity interest in a second PO/SM plant at Channelview, Texas. The other equity investors in the plant each take a portion of the SM output of the plant through long-term processing agreements. In 1997, ARCO Chemical entered into an engineering and construction contract for a new PO/SM plant in Rotterdam; the plant is scheduled for completion in 2000. Expansion of the Channelview, Texas PO/SM capacity is expected to be completed in early 1998. The following table shows ARCO Chemical's worldwide production capacity (in millions of pounds per year, except where otherwise noted) for PO, SM and certain key derivatives:
PRODUCT U.S. INTERNATIONAL ------- ------ ------------- PO 2,335 1,395 Polyols 740 610 PG 565 345 TDI 250 -- SM 2,570 830 MTBE--Bbls/day 30,000 28,500
8 Capacities shown are the production capacities that, as of December 31, 1997, ARCO Chemical believes it can obtain based upon plant design and subject to certain onstream factors, product mix and other variable factors. Capacities shown include the full capacity of joint-venture facilities. Plants can and have exceeded these capacities for extended periods of time. In addition to raw material purchase agreements and product sales or processing agreements with unrelated third parties, ARCO Chemical has entered into a long-term sales agreement with ARCO providing for delivery of fixed quantities of MTBE. Heightened public awareness about MTBE has resulted in certain state and federal initiatives that either seek to rescind the oxygenate requirement for reformulated gasoline in California or restrict the use of MTBE. Restrictions on the use of MTBE in California, if adopted, could affect ARCO Chemical's MTBE sales in California. For additional information about ARCO Chemical, a copy of ARCO Chemical's 1997 Annual Report to Stockholders and 1997 Annual Report on Form 10-K can be obtained by writing to Manager, Investor Relations, ARCO Chemical Company, 3801 West Chester Pike, Newtown Square, Pennsylvania 19073-2387. ARCO Chemical's telephone number is (610) 359-2000. OTHER OPERATIONS Historical results of ARCO's former equity interest in the operations of Lyondell for the three years ended December 31, 1997 are reflected in the Consolidated Financial Statements. See Note 23 of Notes to Consolidated Financial Statements on page 51. ARCO has interests in nine surface and underground coal mines in the western United States and in northeastern Australia. In the United States, ARCO owns and operates two mines in Wyoming's Powder River Basin, Black Thunder and Coal Creek, and West Elk, in western Colorado. ARCO also has a 65% interest in Canyon Fuel Company, a limited liability company that owns three mines--SUFCO, Skyline and Soldier Creek--located in Utah's Uinta Basin. In Queensland, Australia, ARCO has interests in three mines: Curragh, Gordonstone and Blair Athol. Reference is made to Supplemental Information, Coal Operations on page 55 for further information concerning reserves and shipments of coal. In the Lower 48, ARCO manages facilities for transportation and terminalling of petroleum liquids, refined petroleum products, petrochemicals and natural gas. CAPITAL PROGRAM The Company's capital expenditures for additions to fixed assets (including dry hole costs) totaled approximately $3.0 billion in 1997. The capital program for additions to fixed assets is budgeted at $3.8 billion for 1998. The levels of future capital expenditures may be affected by business conditions in the industry, particularly possible changes in prices of and demand for crude oil, natural gas and petroleum products. Changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements, and other changes in environmental rules and regulations may also affect future capital expenditures. PATENTS ARCO owns numerous patents, many of which are available for license to the petroleum industry, and is itself a licensee under certain patents which are available generally to the industry. The Company's operations are not dependent upon any particular patent or patents or upon any exclusive patent rights. COMPETITION The petroleum industry is competitive in all its phases, including manufacturing, distribution and marketing of petroleum products and petrochemicals. Methods of competition for new sources of supply include finding and developing such sources and competition in bidding for leases which may contain such sources and the acquisition of 9 producing properties. Competitive factors in manufacturing, distribution and marketing include price, methods and reliability of delivery, product quality, new product development and, with respect to consumer products, advertising and sales promotion. Crude oil and natural gas supplies are currently abundant relative to demand in the worldwide markets for those commodities. Market prices are typically volatile as a result of uncertainties caused by world events. ARCO's emphasis on the cost-efficient exploration and development of petroleum resources and on innovative marketing strategies make the Company well situated to compete in this environment. In the refining and marketing segment of the industry, refining operations that yield a higher proportion of high-margin products and marketing operations that put a premium on high volume and innovation are of primary importance. The U.S. coal mines primarily serve competitive U.S. markets, where the availability of specific transportation arrangements, primarily rail transportation, are often a key element in competition because transportation costs are a significant component of the delivered price of coal. Almost all of the Company's U.S. coal customers are electric utilities. The Company's Australian mines are export-oriented, largely to Japan, and face worldwide competition from Canadian, Indonesian, South African, U.S. and other Australian producers. Key competitive factors in the chemicals markets include research and development, product price, quality, reliability of supply, technical support, customer service and potential substitute materials. The Company ranked as the sixth largest U.S.-based oil company on the basis of revenues in the most recent Fortune 500 list of U.S. industrial companies. HUMAN RESOURCES As of December 31, 1997, ARCO had approximately 24,000 full-time equivalent employees, of whom approximately 11% were represented by collective bargaining agents. RESEARCH AND DEVELOPMENT ARCO engages in research for new and improved products and methods for operating its businesses principally at two facilities located at Newtown Square, Pennsylvania and Plano, Texas. Total research and development expenses were $120 million, $106 million and $104 million in 1997, 1996 and 1995, respectively. ENVIRONMENTAL MATTERS Site Remediation The Company is subject to federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), and the Superfund Amendments and Reauthorization Act of 1986 and the Resource Conservation Recovery Act of 1976 ("RCRA"). These regulations require the Company to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, to perform certain restoration work on these sites and to pay damages for loss of use and non-use values. The Company is currently participating in environmental assessments and cleanups under these laws at federal Superfund and state-managed sites, as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites that were formerly owned by ARCO. The Company may in the future be involved in additional environmental assessments and cleanups, including the restoration of natural resources and damages for loss of use and non-use values. The ultimate amount of the future costs associated with such environmental assessments and cleanups is indeterminable due to 10 such unknown factors as the nature and/or extent of contaminants at many sites, the timing, extent and method of the remedial actions which may be required and the determination of the Company's liability in proportion to other responsible parties. In addition, environmental loss contingencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO. The Company continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the magnitude of remediation costs, experience gained from sites on which remediation has been completed, the timing, extent and method of remedial actions required by the applicable governmental authorities and an evaluation of the amount of the Company's liability considered in light of the liability and financial wherewithal of the other responsible parties. As the scope of the Company's obligation becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against the Company's earnings. The Company's environmental remediation reserve of $767 million at December 31, 1997 covers federal Superfund and state-managed sites as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. The Company has been named a potentially responsible party ("PRP") for 133 sites. The number of PRP sites in and of itself does not represent a relevant measure of liability, because the nature and extent of environmental concerns vary from site to site and the Company's share of responsibility varies from sole responsibility to very little responsibility. The Company reviews all of the PRP sites along with other sites as to which no claims have been asserted, in estimating the amount of accrual. The Company's future remediation costs for these sites could exceed the amount reserved by as much as $500 million. Approximately 58% of the reserve relates to sites associated with the Company's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component relates to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites that received wastes from these facilities. The Company is also the subject of certain material legal proceedings described below under the caption "Material Environmental Litigation." The remainder relates to sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total reserve. Substantially all amounts reserved are expected to be paid out over the next five to six years. Clean Air The Federal Clean Air Act Amendments of 1990 (the "1990 Clean Air Act Amendments") and various state and local laws and regulations impose certain air quality requirements. Among other things, the 1990 Clean Air Act Amendments effectively require the manufacture and sale of reformulated and oxygenated gasolines in areas not meeting specified air quality standards. The Environmental Protection Agency ("EPA") wintertime oxygenate gasoline program became effective in the fall of 1993. The EPA reformulated gasoline requirements became effective January 1, 1995 for the nine U.S. cities, including Los Angeles and San Diego, and other areas with the worst ozone pollution. The specifications for reformulated gasoline of the California Air Resources Board ("CARB"), which are stricter than the EPA requirements, became effective for retail sales on and after June 1, 1996. To comply with the EPA air quality requirements and CARB standards, in 1995 ARCO completed major modifications at its Los Angeles Refinery. The Company does not anticipate any material adverse effect upon its consolidated financial position as a result of compliance with such environmental laws and regulations. In 1993 the South Coast Air Quality Management District ("AQMD"), which sets air quality standards for a five-county area of southern California, including Los Angeles County, adopted regulations requiring phased reductions of certain pollutants. By 2003 the Los Angeles Refinery and the Wilmington calciner will be required to achieve cumulative reductions from 1992 levels of oxides of nitrogen (NOx) of 63% and oxides of sulfur (SOx) of 83%. As part of the regulations, AQMD created a Regional Clean Air Incentives Market ("RECLAIM") program under which regulated firms can earn credits for achieving emission reductions below targeted levels. Those credits may then be bought and sold. The Los Angeles Refinery plans to achieve the requisite levels of emission reductions by a combination of reductions and acquisitions of credits, substantial amounts of which have already been purchased. The AQMD is currently considering modifications to the RECLAIM program, but nothing has yet been finalized. 11 Environment-Related Expenditures For the past three years, the Company's environment-related expenditures have been comprised of both capital expenditures and operating expenses. Environment-related capital expenditures include the cost of projects to reduce and/or eliminate pollution and contamination in the future and the cost of modifications to the Company's manufacturing facilities necessary to comply with the aforementioned federal, state and local air quality laws and regulations. Environment-related operating costs include both costs to eliminate, control or dispose of, pollutants, as well as costs to remediate previously contaminated sites. Sites are remediated using a variety of techniques, including on-site stabilization, bioremediation, soil removal, pump and treat and other methods as deemed appropriate for each specific site. For the past three years, the Company's environment-related capital expenditures have averaged approximately $153 million per year. The Company anticipates environment-related capital expenditures of approximately $300 million and $200 million for 1997 and 1998, respectively. For the past three years, the Company's operating expenses for the remediation of previously contaminated properties either compelled or likely to be compelled in the foreseeable future by government or third parties have averaged approximately $125 million per year. Cash payments for site remediation have averaged $118 million per year over the same period. The Company's operating expenses also include ongoing costs of controlling or disposing of pollutants. For the past three years, the Company estimates that its operating expenses related to these ongoing costs have averaged approximately $220 million per year. In addition to the reserve for environmental remediation costs, the Company has also accrued, as of December 31, 1997, $1 billion for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and the estimated costs of restoration and reclamation of land associated with such facilities. Material Environmental Litigation Pursuant to the authority provided under Superfund, the State of Montana has asserted claims against ARCO for compensation for damage to natural resources up to the maximum amount allowed by 42 United States Code (S)9607. These alleged damages, arising out of ARCO's or its predecessors' alleged activities, include restoration and compensable damages, assessment costs, and prejudgment interest. On December 12, 1983, a lawsuit, styled Montana v. ARCO, ex rel. (Case No. CV-83-317-HLN-PGH), was filed in the United States District Court for the District of Montana. The State's claim, as of January 1, 1997, was for damages of $764 million for alleged injuries to natural resources resulting from mining and mineral processing operations. ARCO is contesting this demand. In addition, on January 21, 1997, the court granted the Confederated Salish and Kootenai Tribes of the Flathead Reservation ("Tribes") a limited form of intervention in Montana v. ARCO. The Tribes, as alleged trustees, have asserted claims against ARCO for alleged injury to and loss of natural resources located in the Clark Fork River Basin in southwest Montana. On March 3, 1997, trial commenced and is continuing. The United States Department of Interior also has stated an intention to make a claim for natural resource damages in the Clark Fork River Basin. On June 23, 1989, the EPA filed a CERCLA cost-recovery action against ARCO (amended October 15, 1992), styled U.S. v. ARCO, et al. (Case No. CV-89-039- BU-PGH), in the United States District Court for the District of Montana, for oversight costs at several of the Upper Clark Fork River Basin Superfund sites. Litigation is proceeding on the EPA's claims (in the approximate amount of $80 million) and ARCO's counterclaims against various federal agencies. In the counterclaims, ARCO seeks contributions from the federal agencies for remediation costs and for any natural resource damage liability ARCO might incur in Montana v. ARCO. ARCO and its subsidiary, Atlantic Richfield Hanford Company ("ARHCO"), and several other companies who have served as government contractors at the Hanford Nuclear Reservation in south central Washington State are named as defendants in a consolidated complaint in the United States District Court for the Eastern District of Washington, titled In re Hanford Nuclear Reservation Litigation (CY-91-3015-AAM). In October 1994, the Department of Energy determined that the government will indemnify ARCO and ARHCO for any judgment or settlement in the action pursuant to the contract between ARHCO and the Atomic Energy Commission and the provisions of the Price-Anderson Act. On April 4, 1997, ARCO was served with a new complaint making allegations similar to those already pending in the litigation, filed by six individual Native Americans in the United States District Court for the Western District of 12 Washington, purportedly on behalf of classes of Native Americans living near the Hanford Nuclear Reservation. The DOE has indicated that it will indemnify ARCO and ARHCO with respect to this new action as well. This action has been transferred to the United States District Court for the Eastern District of Washington. Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking compensatory and punitive damages and injunctions were filed by the State of Alaska, the United States, and private plaintiffs against Exxon, Alyeska, and Alyeska's owner companies (including ARCO Transportation Alaska, Inc.). Alyeska and its owner companies have settled the civil damage claims by federal and state governments and the lawsuits by private plaintiffs. Certain issues relating to liability for the spill remain unresolved between the Exxon companies, on the one hand, and Alyeska and its owner companies, on the other hand. On November 21, 1990, ARCO filed a complaint in Los Angeles County Superior Court, Atlantic Richfield Company v. AETNA Casualty and Surety Company of America, et al. (Case No. BC 015575), seeking recovery under numerous insurance policies in effect at times during past years for certain environmental expenses incurred by ARCO. The claims arise from the activities of ARCO and its predecessor companies, including The Anaconda Company, at sites and locations throughout the United States. ARCO has settled with most of the insurance company defendants. Conclusion Environmental concerns, including the minimization and prevention of environmental contamination from ongoing operations, and the cost-effective remediations of existing contaminated sites, continue to be vital factors in the Company's future planning. See Note 13 of Notes to Consolidated Financial Statements on page 45, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 3. LEGAL PROCEEDINGS THE COMPANY On June 7, 1989, the City of New York, the New York City Housing Authority, and the New York City Health and Hospitals Corporation brought suit in the Supreme Court of the State of New York for the County of New York (Case No. 14365/89) against six alleged former lead pigment manufacturers or their successors (including ARCO as successor to International Smelting and Refining Company ("IS&R"), a former subsidiary of The Anaconda Company), and the Lead Industries Association ("LIA"), a trade association. Plaintiffs seek to recover damages in excess of $50 million including (i) past and future costs of abating lead-based paint from housing owned by New York City and the New York City Housing Authority; (ii) other costs associated with dealing with the presence of lead-based paint in that housing and privately-owned housing; and (iii) any amounts paid by the City or the Housing Authority to tenants because of injuries caused by the ingestion of lead-based paint. Plaintiffs also seek punitive damages and attorney fees. As a result of various court rulings, the plaintiffs' only remaining claims are for fraud and restitution and indemnity. On January 24, 1996, ARCO (as successor to IS&R) was added as a defendant to a class action suit pending in the United States District Court for the Southern District of New York, German, et al. v. Federal Home Loan Mortgage Corp., et al. (Case No. 93 Civ 6941), by plaintiff intervenors Naquan and Naiya Thomas, minors, and their mother and guardian Kaii Henry. The complaint in intervention names as defendants, in addition to ARCO, eight alleged former processors of lead pigment and lead paint, the LIA, the City of New York and its Housing Authority, and the owner of the building where plaintiffs reside. Plaintiffs seek on behalf of themselves, and a purported class of children under seven and pregnant women residing in dwellings in the City of New York containing or presumed to contain lead paint, injunctive relief from all defendants including orders to abate lead paint and to contribute to court- administered funds to pay for abatement and medical monitoring and treatment. The complaint alleges causes of action against the lead pigment defendants and the LIA for negligence, strict product liability, fraud and misrepresentation, breach of express and implied warranty, nuisance, conspiracy, concert of action, and enterprise and market share liability. The City of New York, its Housing Authority, and the owner of the building where plaintiffs reside have filed cross-claims against ARCO, the other alleged former processors of lead pigment and paint, and the LIA seeking indemnification against or contribution toward any liability they (cross-claimants) may have to plaintiffs. 13 On August 25, 1992, ARCO (as successor to IS&R) was added as a defendant to a purported class action suit pending in the Court of Common Pleas in Cuyahoga County (Cleveland), Ohio, Jackson, et al. v. The Glidden Company, et al. (Case No. 236835), which seeks on behalf of the three named plaintiffs, and all other persons similarly situated in the state of Ohio, money damages for injuries allegedly suffered from exposure to lead paint, punitive damages, and an order requiring defendants to remove and abate all lead paint applied to any building in Ohio. The suit names as defendants, in addition to ARCO, the LIA and 16 companies alleged to have participated in the manufacture and sale of lead pigments and paints and includes causes of action for strict product liability, negligence, breach of warranty, fraud, nuisance, restitution, negligent infliction of emotional distress, and enterprise, market share and alternative liability. In addition, the Company is a defendant in several lawsuits brought by individuals that allege injury from exposure to lead paint. Such cases, in the aggregate, are not material to the financial condition of the Company. In 1993, natural gas royalty owners filed an action in Zapata County, Texas titled Stanley Marshall, et al. v. ARCO (Case No. 3217). The plaintiffs claimed breach of lease, breach of Texas Railroad Commission rules and regulations, conversion, and fraud. On September 8, 1997, a jury found in favor of the plaintiffs and on January 20, 1998 the trial court entered Judgment on the verdict awarding $69.2 million in damages, comprised of $3.8 million in actual damages, $50 million in exemplary damages, $13.4 million in attorney's fees and $1.9 million in pre-judgment interest. ARCO has appealed this judgment to the Court of Appeals for the Fourth District of Texas in San Antonio. On March 29, 1994, Siemens Solar Industries ("Siemens") filed a complaint in the Supreme Court of the State of New York for the County of New York, titled Siemens Solar Industries v. Atlantic Richfield Company (Case No. 94-109092). Siemens' complaint alleged breach of contract and misrepresentation in connection with the February 1990 sale by ARCO to Siemens of the stock of ARCO Solar, Inc. Siemens sought damages in the amount of the purchase price, operating losses incurred after the sale, prejudgment interest, and punitive damages. ARCO denied the allegations of the complaint. On December 8, 1997, the court granted ARCO's motion for summary judgment, and dismissed the complaint. Siemens has filed a notice of appeal from this decision. On April 13, 1995, a lawsuit was filed in United States District Court for the Central District of California titled ARCO, et al. v. UNOCAL (Case No. 95- 2379-KMW-JRx). ARCO and five other refiners sought a declaration that UNOCAL's U.S. Patent No. 5,288,393 ("the '393 patent") is invalid and unenforceable. The '393 patent purports to cover a substantial portion of the reformulated gasoline compositions that were required by the State of California when the Phase II regulations of the California Air Resources Board ("CARB") went into effect in March 1996. In the same lawsuit, UNOCAL filed a claim for infringement of the '393 patent against ARCO and the five other refiners. On July 15, 1997, the first phase of trial commenced and on October 14, 1997, the jury found in UNOCAL's favor on the issues of whether ARCO and the other refiners had infringed the '393 patent and whether that patent is valid. The jury also found that ARCO had produced approximately 149 million gallons of infringing gasoline during the first five months of production. On November 3, 1997, the jury found that each refiner owed UNOCAL $.0575 for each gallon of gasoline which infringed on UNOCAL's patent. The court has instructed the parties to establish a method for updating, through the date of judgment, the volumes of infringing gallons. The inequitable conduct phase was tried in December 1997 without a jury. To date, no decision on that phase has been rendered by the court. The last phase, in which UNOCAL seeks $2.6 million in attorneys fees, will be tried without a jury in March 1998. Final judgment is expected to be entered in May or June 1998, after which an appeal to the Court of Appeals for the Federal Circuit is available. On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et al. (Case No. 700810) was brought in the Superior Court of California for the County of San Diego against ARCO and eight other refiner-marketers of CARB reformulated gasoline. The plaintiffs allege that the defendants conspired to restrict the supply, and thereby to raise the price, of CARB gasoline in violation of California state antitrust and unfair competition law. The plaintiffs seek to recover treble damages, restitution, attorneys fees, and injunctive relief. The court has certified a class of California residents who bought CARB gasoline after March 1, 1996 other than for resale. On October 17, 1997, the court granted the defendants' motion for summary judgment. On January 23, 1998, the court granted the plaintiffs' motion for a new trial. On January 23, 1998, the case of Gilley v. Atlantic Richfield, et al., [Case No. CV UU132BTM (RBB)] was filed in the United States District Court for the Southern District of California. The case, which is brought on behalf of a 14 purported class of wholesale purchasers of CARB gasoline including lessee and contract gasoline dealers, claims violations of federal antitrust laws based upon factual allegations that are essentially the same as those contained in the Aguilar complaint. ENVIRONMENTAL PROCEEDINGS As discussed under the caption "Environmental Matters," ARCO is currently participating in environmental assessments and cleanups at numerous operating and non-operating sites under Superfund and comparable state laws, RCRA, and other state and local laws and regulations, and pursuant to third party indemnification requests, and is the subject of material legal proceedings relating to certain of these sites. See "Environmental Matters--Material Environmental Litigation." Set forth below is a description, in accordance with SEC rules, of certain fines and penalties imposed by governmental agencies in respect of environmental rules and regulations. Certain substances are present in the soil and ground water at the site of a plant, formerly owned by ARCO Chemical and located in Monaca, Pennsylvania (Beaver Valley). In October 1997, ARCO Chemical, Beazer East, Inc. and the Pennsylvania Department of Environmental Protection ("PADEP") entered into a second consent agreement that acknowledged the completion of remedial investigations pursuant to the work plan performed under the 1994 consent agreement relating to the Beaver Valley site. The second consent agreement also conditionally approved the proposed remediation methods at the Beaver Valley site. Final approval of the remediation methods is subject to PADEP's approval of risk assessment studies to be submitted by ARCO Chemical. Under the second consent agreement, the monetary penalties contained in the 1994 consent agreement will be imposed only if ARCO Chemical fails to meet the deadlines for submitting the risk assessment studies to PADEP. Following the 1996 sale of the Beaver Valley plant assets to NOVA Chemicals Inc. ("NOVA"), NOVA agreed to assume ownership of certain portions of the Beaver Valley land, which was temporarily leased to NOVA until ARCO Chemical finalized the second consent agreement. Title to the leased land was transferred to NOVA in November 1997. ARCO Chemical will retain responsibility for the remediation of the land as required by the second consent agreement. In addition to the matters reported herein, from time to time, certain of ARCO's operating divisions and subsidiaries receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Such alleged violations may become the subject of enforcement actions or other legal proceedings and may involve monetary sanctions of $100,000 or more (exclusive of interest and costs). OTHER LITIGATION The Company and its subsidiaries are defendants in numerous suits in which they are not covered by insurance which involve smaller amounts than the matters described above. Although the legal responsibility and financial impact in respect to such litigation cannot be ascertained, it is not anticipated that these suits will result in the payment by the Company or its subsidiaries of monetary damages which in the aggregate would be material in relation to the net assets of the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1997. ---------------- 15 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of Registrant as of February 27, 1998.
NAME, AGE AND PRESENT POSITION WITH ATLANTIC BUSINESS EXPERIENCE DURING PAST RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b) ---------------------- --------------------------------------------- Mike R. Bowlin, 55 Mr. Bowlin has been Chairman of the Board of ARCO since July Chairman of the Board 1995, Chief Executive Officer since July 1994, and a director and Chief Executive since June 1992. He served as President (June 1993-January Officer 1998), an Executive Vice President (June 1992-May 1993) and a Senior Vice President of ARCO (August 1985-June 1992), Presi- dent of ARCO International Oil and Gas Company (November 1987-June 1992), President of ARCO Coal Company (August 1985- July 1987), a Senior Vice President of International Oil and Gas Acquisitions (July 1987-November 1987), a Vice President of ARCO (October 1984-July 1985) and a Vice President of ARCO Oil and Gas Company (April 1981-December 1984). He has been an officer of the Company since 1984. William E. Wade, Jr., 55 Mr. Wade has been President of ARCO since January 1998 and a President and Director director since June 1993. He served as an Executive Vice President (June 1993-January 1998) and a Senior Vice Presi- dent of ARCO (May 1987-May 1993), President of ARCO Oil and Gas Company (October 1990-May 1993), President of ARCO Alas- ka, Inc. (July 1987-July 1990), a Vice President of ARCO (1985-1987) and a Vice President of ARCO Exploration Company (1981-1985). He has been an officer of the Company since 1985. He also serves as a Director of Vastar. Anthony G. Fernandes, 52 Mr. Fernandes has been an Executive Vice President of ARCO Executive Vice and a director since September 1994. He served as a Senior President and Director Vice President of ARCO and President of ARCO Coal Company (September 1990-September 1994), Vice President and Control- ler of ARCO (July 1987-July 1990), a Vice President of ARCO Oil and Gas Company (January 1985-July 1987) and a Vice Pres- ident of Anaconda Minerals (May 1981-January 1985). He has been an officer of the Company since 1987. He also serves as Chairman of the Board of ARCO Chemical. Marie L. Knowles, 51 Mrs. Knowles has been an Executive Vice President and the Executive Vice Chief Financial Officer of ARCO and a director since July President, Chief 1996. She served as a Senior Vice President of ARCO and Pres- Financial Officer and ident of ARCO Transportation Company (June 1993- July 1996), Director Vice President and Controller of ARCO (July 1990-May 1993), Vice President of Finance, Control and Planning of ARCO In- ternational Oil and Gas Company (July 1988-July 1990), and Assistant Treasurer of Banking of ARCO (October 1986-July 1988). She has been an officer of the Company since 1990. She also serves as a Director of ARCO Chemical and Vastar. J. Kenneth Thompson, 46 Mr. Thompson has been an Executive Vice President of ARCO Executive Vice since January 1998. He was a Senior Vice President of ARCO President and President of ARCO Alaska, Inc. (June 1994-January 1998). He was a Vice President of ARCO and a Vice President of ARCO Exploration and Production Technology (June 1993-June 1994) and a Senior Vice President, Western District of ARCO Oil and Gas Company (January 1990-June 1993). He has been an officer of the Company since 1993. Michael E. Wiley, 47 Mr. Wiley has been an Executive Vice President of ARCO since Executive Vice March 1997 and a director since June 1997. He served as Chief President and Director Executive Officer of Vastar (January 1994-March 1997) and President (September 1993-March 1997). Prior to the formation of Vastar, he was Senior Vice President of ARCO (June 1993- June 1994), President of ARCO Oil and Gas Company (June-Octo- ber 1993) and Vice President of ARCO and Manager of ARCO Ex- ploration and Production Technology (1991-1993). He has been an officer of the Company since 1997. He also serves as Chairman of the Board of Vastar.
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NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH ATLANTIC RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b) --------------------------------- --------------------------------------------- H. L. Bilhartz, 51 Mr. Bilhartz has been a Senior Vice President of ARCO since Senior Vice President July 1990 and President of ARCO Exploration and Production Technology since June 1994. He served as President of ARCO Alaska, Inc. (July 1990-May 1994), a Vice President of ARCO (June 1987-July 1990), President of ARCO Coal Company (July 1987-July 1990), Vice President and Managing Director for ARCO British Limited and ARCO Netherlands in London (1985- 1987), Vice President of Finance, Control and Planning of ARCO International Oil and Gas Company (1984-1985) and Vice President and District Manager for ARCO Oil and Gas Company (1983-1984). He has been an officer of the Company since 1987. John B. Cheatham IV, 50 Mr. Cheatham has been a Senior Vice President of ARCO since Senior Vice President December 1995. He was President of ARCO International Oil and Gas Company (December 1995-January 1998), Senior Vice Presi- dent, Operations and New Business Development (November 1993- November 1995) and Senior Vice President, New Business Ven- tures (November 1992-November 1993) of ARCO International Oil and Gas Company, and Senior Vice President, Eastern District (August 1991-November 1992) and Vice President, Southeastern District (November 1989-August 1991) of ARCO Oil and Gas Com- pany. He has been an officer of the Company since 1995. Terry G. Dallas, 47 Mr. Dallas has been a Senior Vice President of ARCO since Senior Vice President November 1996 and Treasurer since January 1994. He was a Vice and Treasurer President of ARCO (June 1993-November 1996), the Vice President, Corporate Planning (June 1993-January 1994), and Assistant Treasurer, Corporate Finance of ARCO (1990-1993) and Manager, Finance, Control and Planning, ARCO British, Ltd. (1988-1990). He has been an officer of the Company since 1993. He also serves as a Director of Vastar. Mark L. Hazelwood, 47 Mr. Hazelwood has been a Senior Vice President of External Senior Vice President Affairs of ARCO since July 1997. He served as President of ARCO Alaska Transportation, Inc. (September 1996-July 1997), President of ARCO Pipe Line Company (1994-March 1996), Senior Vice President of Marketing of ARCO Oil and Gas Company (1991-1994), and Vice President and General Tax Officer of ARCO (August 1988-March 1991). He has been an officer of the Company since 1997. John H. Kelly, 43 Mr. Kelly has been a Senior Vice President, Human Resources Senior Vice President of ARCO since January 1997. He was Vice President, Corporate Units Human Resources of ARCO (June 1993-January 1997) and Vice President, Human Resources of ARCO Oil and Gas Company (July 1991-June 1993). He has been an officer of the Company since 1993. Stephen R. Mut, 47 Mr. Mut has been a Senior Vice President of ARCO since Sep- Senior Vice President tember 1994. He was President of ARCO Global Energy Ventures (August 1996-January 1998), President of ARCO Coal Company (September 1994-August 1996) and Senior Vice President of Op- erations of ARCO International Oil and Gas Company (1991- 1994). He has been an officer of the Company since 1994. He also serves as a Director of ARCO Chemical. John M. Slater, 54 Mr. Slater has been a Senior Vice President of ARCO since Senior Vice President July 1997 and President of ARCO Coal Company since August 1997. He previously worked for BP Coal for 19 years. His most recent positions for BP were Chief Executive Officer BP Coal and Chairman, Kaltim Prima Coal.
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NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH ATLANTIC RICHFIELD FIVE YEARS AND PERIOD SERVED AS OFFICER(a)(b) -------------------------------- --------------------------------------------- Roger E. Truitt, 52 Mr. Truitt has been a Senior Vice President of ARCO and Senior Vice President President of ARCO Products Company since November 1997. He was Senior Vice President, Asia Region, ARCO International Oil and Gas Company (November 1994-November 1997), a Senior Vice President of ARCO Products Company (January 1994- November 1994) and a Vice President of ARCO International Oil and Gas Company (December 1991-December 1993). He has been an officer of the Company since 1997. Donald R. Voelte, Jr., 45 Mr. Voelte has been a Senior Vice President of ARCO since Senior Vice President April 1997. He previously worked for the Mobil Corporation for 22 years. His most recent position was President of Mobil Oil Company's New Exploration and Producing Ventures (1994- April 1997). He has been an officer of the Company since 1997. Bruce G. Whitmore, 53 Mr. Whitmore has been the Senior Vice President, General Senior Vice President, Counsel and Corporate Secretary of ARCO since December 1994. General Counsel and He served as Vice President and General Counsel of ARCO Chem- Corporate Secretary ical Company (October 1990-December 1994) and as Associate General Counsel, Finance and Corporate Affairs of ARCO (June 1986-September 1990). He has been an officer of the Company since 1994. Allan L. Comstock, 54 Mr. Comstock has been a Vice President and Controller of ARCO Vice President and since June 1993. He was a Vice President of ARCO Chemical Controller Company (October 1989-June 1993) and General Auditor of ARCO (November 1985-October 1989). He has been an officer of the Company since 1993.
- -------- (a) Division names used in the descriptions of business experience of executive officers of the Company are the names which were in effect at the time such officers held such positions. In some instances, divisions have been combined or reorganized and, accordingly, activities thereof are presently conducted under different division names. (b) The By-Laws of the Company provide that each officer shall hold office until the officer's successor is elected or appointed and qualified or until the officer's death, resignation or removal by the Board of Directors. 18 DESCRIPTION OF CAPITAL STOCK The following description of the Company's capital stock is included in order to facilitate incorporation by reference of such description in filings by the Company under the federal securities laws. Certain statements under this heading are summaries of provisions of the Restated Certificate of Incorporation of ARCO, dated June 27, 1994, and do not purport to be complete. The summaries make use of certain terms defined in the Certificate of Incorporation and are qualified in their entirety by reference thereto. The term "$3.00 Preference Stock" refers to the Company's $3.00 Cumulative Convertible Preference Stock, par value $1 per share. The term "$2.80 Preference Stock" refers to the Company's $2.80 Cumulative Convertible Preference Stock, par value $1 per share. The term "Preferred Stock" refers to the Company's Preferred Stock, par value $.01 per share; this class of Preferred Stock was authorized by stockholders on May 3, 1993. The term "Common Stock" refers to the Company's Common Stock, par value $2.50 per share. The following is a summary of the capital stock of ARCO as of December 31, 1997.
SHARES SHARES AUTHORIZED OUTSTANDING ----------- ----------- $3.00 Preference Stock.......................... 78,089 55,941 $2.80 Preference Stock.......................... 833,776 615,653 Preferred Stock................................. 75,000,000 -- Common Stock.................................... 600,000,000 320,369,895*
- -------- * Excludes treasury stock. Certain Open Market Stock Purchases. Pursuant to the 1985 Executive Long- Term Incentive Plan, as amended through July 28, 1997 (the "LTIP"), officers and key employees are eligible to receive shares of Common Stock upon exercises of stock options, surrender of dividend share credits, and upon grants of Restricted Stock. Pursuant to the compensation program for outside directors, effective January 1, 1998, outside directors are eligible to receive shares of Common Stock upon grants of Restricted Stock, including Restricted Stock granted in lieu of some or all of their cash compensation for serving as directors and in connection with the termination of the Outside Directors Retirement Plan. Pursuant to the Company's Capital Accumulation Plans, employees are eligible to receive Common Stock in satisfaction of employer and employee contributions thereunder. ARCO may satisfy these obligations by issuing new shares of Common Stock. From time to time ARCO may also purchase Common Stock on the open market and contribute it to treasury to provide for current and future obligations to deliver Common Stock under each of these plans; in addition, ARCO may purchase Common Stock on the open market and contribute it to treasury in satisfaction of its obligations upon conversion of the $3.00 Preference Stock and the $2.80 Preference Stock. Power of Board to Determine Terms of Preferred Stock. Under the Certificate of Incorporation, as amended following approval by stockholders on May 3, 1993, the Board is authorized to issue, at any time or from time to time, one or more series of Preferred Stock at its discretion. In addition, the Board has the power to determine all designations, powers, preferences and the rights of such stock and any qualifications, limitations and restrictions, including but not limited to: (i) the designation of series and numbers of shares; (ii) the dividend rights, if any; (iii) the rights upon liquidation or distribution of the assets of the Company, if any; (iv) the conversion or exchange rights, if any; (v) the redemption provisions, if any; and (vi) the voting rights, if any. No shares of Preferred Stock have been issued. So long as the Preference Stocks are outstanding, and only for that period of time, the rights of the Preferred Stock are subordinate to the rights of the holders of Preference Stocks. Dividend Rights. Holders of $3.00 Preference Stock and holders of $2.80 Preference Stock are entitled to receive cumulative dividends at the annual rate of $3.00 per share and $2.80 per share, respectively, payable quarterly, before cash dividends are paid on the Preferred Stock, if any, and the Common Stock. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock rank on a parity as to dividends. After provision for payment in full of cumulative dividends on the outstanding $3.00 Preference and $2.80 Preference Stocks, and the payment in full of cumulative 19 dividends on the outstanding Preferred Stock, if any, dividends may be paid on the Common Stock as the Board of Directors may deem advisable, within the limits and from the sources permitted by law. Conversion Rights. Each share of $3.00 Preference Stock is convertible, at the option of the holder, into 13.6 shares of Common Stock of the Company at any time, and each share of $2.80 Preference Stock is convertible, at the option of the holder, into 4.8 shares of Common Stock of the Company at any time. These conversion rates are subject to adjustment as set forth in the Certificate of Incorporation. Shares of Preferred Stock would be convertible, if at all, on such terms as were designated by the Board of Directors. Voting Rights. The holders of $3.00 Preference Stock are entitled to sixteen votes per share; holders of $2.80 Preference Stock are entitled to four votes per share; and holders of Common Stock are entitled to one vote per share. Holders of $3.00 Preference and $2.80 Preference Stocks are entitled to vote cumulatively for directors; holders of Common Stock have no cumulative voting rights. The $3.00 Preference, $2.80 Preference and Common Stocks vote together as one class, except as provided by law and except as to certain matters which require a vote by the holders of $3.00 Preference Stock or by the holders of $2.80 Preference Stock as a separate class as set forth below. The Certificate of Incorporation provides that if the Company shall be in default with respect to dividends on the $3.00 Preference Stock in an amount equal to six quarterly dividends, the number of directors of the Company shall be increased by two at the first annual meeting thereafter, and at such meeting and at each subsequent annual meeting until all dividends on the $3.00 Preference Stock shall have been paid in full, the holders of the $3.00 Preference Stock shall have the right, voting as a class, to elect such two additional directors. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock. The Certificate of Incorporation provides that the Company shall not, without the assent of the holders of two-thirds of the then outstanding shares of $3.00 Preference Stock, (a) change any of the terms of the $3.00 Preference Stock in any material respect adverse to the holders, or (b) authorize any prior ranking stock; and that the Company shall not, without the assent of the holders of a majority of the then outstanding shares of $3.00 Preference Stock, (1) authorize any additional $3.00 Preference Stock or stock on a parity with it; (2) sell, lease or convey all or substantially all of the property or business of the Company; or (3) become a party to a merger or consolidation unless the surviving or resulting corporation will have immediately after such merger or consolidation no stock either authorized or outstanding (except such stock of the Company as may have been authorized or outstanding immediately before such merger or consolidation of such stock of the surviving or resulting corporation as may be issued upon conversion thereof or in exchange therefor) ranking as to dividends or assets prior to or on a parity with the $3.00 Preference Stock or the stock of the surviving or resulting corporation issued upon conversion thereof or in exchange therefor. The Certificate of Incorporation contains identical provisions with respect to the $2.80 Preference Stock. The holders of Preferred Stock, if any, would have such voting rights, if any, as were designated by the Board. Redemption Provisions. The $3.00 Preference Stock is redeemable at the option of the Company as a whole or in part at any time on at least thirty days' notice at $82 per share plus accrued dividends to the redemption date. The $2.80 Preference Stock is redeemable at the option of the Company as a whole or in part at any time on at least thirty days' notice at $70 per share plus accrued dividends to the redemption date. The holders of Preferred Stock, if any, would have such redemption provisions, if any, as were designated by the Board. Liquidation Rights. In the event of liquidation of the Company, the holders of $3.00 Preference Stock and holders of $2.80 Preference Stock will be entitled to receive, before any payment to holders of Common Stock, $80 per share and $70 per share, respectively, together in each case with accrued and unpaid dividends. Shares of $3.00 Preference Stock and shares of $2.80 Preference Stock will rank on a parity as to assets of the Company upon its liquidation. Subject to the rights of creditors and the holders of $3.00 Preference Stock and $2.80 Preference Stock, the holders of Common Stock are entitled pro rata to the assets of the Company upon its liquidation. The holders of Preferred Stock, if any, would have such liquidation rights, if any, as were designated by the Board. Preemptive Rights. No holders of shares of capital stock of the Company have or will have any preemptive rights to acquire any securities of the Company. 20 Liability to Assessment. The shares of Common Stock are fully paid and non- assessable. Prohibition of Greenmail. Article VII of the Certificate of Incorporation provides in general that any direct or indirect purchase by the Company of any of its voting stock (or rights to acquire voting stock) known to be beneficially owned by any person or group which holds more than 3% of a class of its voting stock and which has owned the securities being purchased for less than two years must be approved by the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the voting stock. Such approval shall not be required with respect to any purchase by the Company of such securities made (i) at or below fair market value (based on average New York Stock Exchange closing prices over the preceding 90 days) or (ii) as part of a Company tender offer or exchange offer made on the same terms to all holders of such securities and complying with the Securities Exchange Act of 1934 or (iii) in a Public Transaction (as defined). Rights to Purchase Common Stock. On July 24, 1995, the Board of Directors of the Company declared a dividend of one common share purchase right (a "Right") for each outstanding share of Common Stock, par value $2.50 per share (the "Common Shares"), of the Company. The dividend was paid on August 18, 1995 to the stockholders of record on that date. Each Right entitled the registered holder to purchase from the Company one Common Share at a price of $400.00 per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and First Chicago Trust Company of New York, as Rights Agent. The Rights will be evidenced by and will be transferred with the Common Share certificates until the Distribution Date. The Distribution Date is defined as the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding Common Shares (an "Acquiring Person") or (ii) 10 business days following the commencement of, or announcement of an intention to make, a tender or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights will be issued. The Rights are not exercisable until the Distribution Date. The Rights will expire on August 18, 2005 unless redeemed prior to that date by the Company. The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be void), will have the right to receive, upon exercise of each Right, that number of Common Shares having a market value of two times the Purchase Price. If, after the Distribution Date, the Company is acquired in a merger or other business combination with, or 50% or more of its consolidated assets or earning power are sold to, the Acquiring Person, each holder of a Right will have the right to receive, upon exercise of each Right, that number of shares of common stock of the acquiring company with a market value of two times the Purchase Price. At any time after an Acquiring Person crosses the 15% threshold and prior to the acquisition by such person of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio of one Common Share per Right. The Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right prior to the acquisition by an Acquiring Person of 15% or more of the outstanding Common Shares. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that after any person becomes an Acquiring Person no such amendment may adversely affect the interests of the other holders of the Rights. A copy of the Rights Agreement is filed as an exhibit hereto. This summary description of the Rights is qualified in its entirety by reference thereto. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1997 1996 ------------------------------------ ----------------------------------- 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST ------- ------- --------- ------- ------- -------- -------- -------- Common Stock: Market price per share High................. $87 1/4 $86 15/16 $75 5/8 $69 3/8 $71 1/4 $64 $61 1/2 $59 15/16 Low.................. $74 $67 3/8 $63 11/16 $62 3/16 $63 3/8 $57 3/16 $56 1/4 $53 3/4 Cash dividends per share................. $0.7125 $0.7125 $0.7125 $0.6875 $0.6875 $0.6875 $0.6875 $0.6875 $3.00 Cumulative Con- vertible Preference Stock: Market price per share High................. $1,040 $ -- $977 1/2 $864 1/2 $873 $822 3/4 $822 $778 3/8 Low.................. $1,040 $ -- $930 $864 1/2 $873 $794 $812 5/8 $748 1/2 Cash dividends per share................. $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75 $2.80 Cumulative Con- vertible Preference Stock: Market price per share High................. $408 $408 $361 3/4 $330 $337 1/2 $305 1/8 $290 1/2 $283 5/8 Low.................. $362 1/2 $331 3/16 $307 $300 $303 5/8 $277 $270 1/2 $260 Cash dividends per share................. $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
Prices in the foregoing table are from the New York Stock Exchange composite tape. On February 27, 1998 the high price per share was $77 3/4 and the low price per share was $75 3/4. As of December 31, 1997, the approximate number of holders of record of Common Stock of ARCO was 85,100. The principal markets in which ARCO's Common Stock is traded are listed on the cover page. The quarterly dividend rate for Common Stock was increased to $0.7125 per share effective June 13, 1997. On January 26, 1998, a dividend of $0.7125 per share was declared on Common Stock, payable on March 13, 1998 to stockholders of record on February 13, 1998. Future cash dividends will depend on earnings, financial conditions and other factors; however, the Company presently expects that dividends will continue to be paid. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for ARCO:
YEARS ENDED DECEMBER 31, --------------------------------------- 1997(1) 1996(1) 1995(2) 1994(3) 1993(4) ------- ------- ------- ------- ------- (MILLIONS EXCEPT PER SHARE AMOUNTS) Sales and other operating revenues..... $18,684 $18,592 $15,819 $15,035 $17,189 Net income............................. 1,771 1,663 1,376 919 269 Earned per share-basic (5)............. 5.51 5.17 4.27 2.85 .83 Earned per share-diluted (5)........... 5.41 5.09 4.22 2.81 .82 Cash dividends per common share (5).... 2.825 2.75 2.80 2.75 2.75 Total assets........................... 25,322 25,715 23,999 24,563 23,894 Long-term debt and capital lease obligations........................... 4,414 5,593 6,708 7,198 7,089
- -------- (1) See Notes 3 and 5 of Notes to Consolidated Financial Statements regarding unusual items and an extraordinary item on page 41. (2) Dividends include a $0.05 per share redemption payment for Common Stock purchase rights. (3) Includes after-tax gain of $273 million from issuance of stock by Vastar Resources, Inc. and a $210 million after-tax charge for the costs associated with the elimination of approximately 2,400 positions company wide. (4) Includes charges of $404 million after tax related to the writedown for sale or other disposition of oil and gas properties and excess office space, and the costs associated with the elimination of approximately 1,300 positions. (5) Restated for the effect of 100% stock dividend issued June 13, 1997. 22 ARCO ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. [PHOTO APPEARS HERE] Operating Review ARCO had a number of operating achievements in 1997, including the discovery and certification of a major natural gas field in Indonesia. These achievements also included increases in production, a 164% reserves replacement and growth in earnings. ARCO's overriding goals are to increase global oil and natural gas production and reserves and the profitability and market share of its downstream refining and marketing segment. The Operating Review that follows explains the major changes in Exploration and Production, Refining and Marketing, and Chemicals as related to prices, production volumes, sales, and expenses for the years 1997 and 1996. Other operations, including Lower 48 pipelines, aluminum, coal and ARCO's divested interest in Lyondell Petrochemical Company (Lyondell), are also examined. The consolidated results of these operations are examined in relation to the Consolidated Statement of Income on page 28. 23 ARCO Results of Segment Operations - -----------------------------
Exploration and Production Millions 1997 1996 1995 ----------------------- Net income $1,347 $1,329 $ 784 Special items (benefit) -- (7) (23) ----------------------- Operating results $1,347 $1,322 $ 761 =======================
Higher natural gas prices and continued growth in international natural gas volumes contributed to improved operating results. These factors were partially offset by higher operating and depreciation, depletion and amortization (DD&A) expenses associated with increased production. Exploration expense was also higher in 1997. In 1996, higher crude oil and natural gas prices, growth in natural gas volumes and lower exploration expenses combined to benefit earnings.
Natural Gas Production Million cubic feet/day-net 1997 1996 1995 -------------------------- U.S., including Vastar 1,066 1,044 999 International United Kingdom 368 330 265 Indonesia 314 311 270 China 142 69 -- Other 20 20 22 -------------------------- Total International 844 730 557
International natural gas production increased 16% in 1997, reflecting increased production from the Yacheng 13 field in the South China Sea and from fields in the United Kingdom. Average Natural Gas Sales Prices (per thousand cubic feet) [BAR GRAPH APPEARS HERE] U.S., including Vastar International $1.00 $1.00 97 $2.04 $2.64 96 $1.80 $2.54 95 $1.35 $2.56 In 1996, international natural gas production increased as a result of the startup of the Yacheng 13 field and higher production volumes in the U.K. and Indonesia. A full year of production from the Gawain field contributed to the increase in U.K. natural gas sales. Production from Indonesian natural gas fields grew as a result of greater contract takes by purchasers. Petroleum Liquids Production Barrels/day-net 1997 1996 1995 --------------------------- Prudhoe Bay 198,500 210,800 226,600 Kuparuk River 128,200 130,500 140,700 Greater Point McIntyre 50,500 51,400 46,300 Lower 48, including Vastar 180,700 171,800 169,500 International 82,600 66,100 66,800 --------------------------- Total 640,500 630,600 649,900 =========================== In 1997, increased petroleum liquids production in the Lower 48 partially offset a net decrease in production from Alaskan fields, primarily Prudhoe Bay. ARCO's goal is to increase production modestly in the Lower 48 and stabilize production in Alaska after 1999. In late 1997, ARCO started production from the West Sak field in Alaska and started development of the Tarn and Alpine fields and other satellite discoveries. West Sak and the satellite discoveries will help stabilize production in Alaska. The 1997 decline in Alaska production was 4% compared with a 5% decline in 1996. [PHOTO APPEARS HERE] 24 ARCO Average Petroleum Liquids Sales Prices (per barrel) [BAR GRAPH APPEARS HERE] U.S. including Vastar International $10.00 $10.00 97 $15.63 $18.20 96 $16.07 $19.02 95 $12.17 $15.96 The 25% increase in international petroleum liquids production reflected increased contributions from Algeria and Qatar along with new production from interests in Tunisia and Kazakhstan. These volumes were partially offset by a natural field decline in Indonesia. The overall increase in petroleum liquids production offset the decline in average petroleum liquids prices. In 1996, production from the Greater Point McIntyre fields increased but was more than offset by production declines in the Prudhoe Bay and Kuparuk River fields. Refining and Marketing Millions 1997 1996 1995 ------------------------ Net income $ 325 $ 287 $ 200 Special items charge 38 12 23 ------------------------ Operating results $ 363 $ 299 $ 223 ======================== Improved operating results for ARCO's refining and marketing operations in 1997 reflected higher margins and sales volumes. The 6% increase in gasoline sales volumes was partially attributable to the integration of over 200 former Thrifty gasoline stations into ARCO's retailing network. Increased sales volumes more than offset the higher operating and selling expenses related to those stations. ARCO's goal is to increase the profitability and market share of its refining and marketing operations. A major cost reduction program was initiated in 1997 and starting in 1998, the company began operating gasoline stations in Vancouver, British Columbia. In 1996, higher refined product prices and sales volumes were partially offset by the impact of higher crude oil prices, higher prices and volumes of purchased refined products and increased operating costs associated with maintenance turnarounds and charges for environmental and other remediation. The 1997 special items charges primarily included an organizational restructuring to achieve greater operating efficiencies. The 1996 special items included a charge related to environmental and other remediation. The 1995 special items charges related to terminating certain contractual agreements and future environmental remediation. Petroleum Products Sales Thousand barrels/day 1997 1996 1995 ------------------------ Gasoline 281.9 266.4 256.8 Jet 117.3 117.0 106.2 Distillate 76.6 69.0 69.1 Other 68.0 80.7 61.8 ------------------------ Total 543.8 533.1 493.9 ======================== ARCO increased its refining capacity as a result of modifications and debottlenecking projects completed in 1996 that were necessary to make reformulated gasolines. The volume increase in other sales in 1996 reflected the sale of intermediate products, produced in larger quantity as a result of turnarounds which limited gasoline production. To support its growing market volumes, refined products were purchased from third parties to supplement ARCO's refinery production in both 1997 and 1996. [PHOTO APPEARS HERE] 25 ARCO Chemicals Millions 1997 1996 1995 -------------------- ARCO Chemical Net income (reported) $ 111 $ 348 $ 508 ARCO's share* $ 128 $ 320 $ 460 * Reflects ARCO's share of ARCO Chemical net income after segment adjustments, primarily for interest expense and minority interest. ARCO Chemical Company's (ARCO Chemical) reported earnings for 1997 included an after-tax charge of $116 million for its organizational restructuring and asset review programs. The operating earnings decline reflected lower product margins and higher scheduled plant turnaround costs. ARCO Chemical's selling, general and administrative expenses decreased in 1997, compared to 1996, as it began to realize some of the initial benefits of its restructuring program. Volumes for core products (propylene oxide (PO), PO derivatives and isocyanates) increased by 16%, compared to 1996. The increase reflected higher volumes of PO derivatives, which benefited from improved demand and temporary industry supply shortages of certain products. Core product sales also included higher toluene di-isocyanate (TDI) volumes due to the December 1996 Olin acquisition. In 1996, ARCO Chemical's earnings declined primarily as a result of lower styrene monomer (SM) margins. SM sale prices fell more than raw material costs, because production from increased industry capacity depressed SM market prices. [PHOTO APPEARS HERE] In 1997, ARCO Chemical continued to move forward with its plans to build a worldscale PO/SM plant in Rotterdam, the Netherlands, and expand its existing PO/SM capacity in Channelview, Texas. Other Operations Millions 1997 1996 1995 -------------------- Net income $ 257 $ 200 $ 394 Special items charge 17 6 10 -------------------- Operating results $ 274 $ 206 $ 404 ==================== Results from ARCO's other operations included the earnings from Lower 48 pipeline, coal and aluminum operations as well as ARCO's equity in the earnings of Lyondell. Following the settlement of ARCO's 9% Exchangeable Notes with Lyondell stock in September 1997, ARCO no longer holds an interest in Lyondell. The increase in 1997 earnings and the decrease in 1996 earnings primarily reflected fluctuations in earnings from ARCO's 49.9% interest in Lyondell. In 1997, ARCO earned $119 million from its equity interest in Lyondell, compared to $53 million and $194 million in 1996 and 1995, respectively. The 1997 special items primarily included restructuring charges for coal and Lower 48 pipeline operations. The 1996 special items included a net after- tax charge for the writedown of ARCO's interest in the Point Arguello Pipeline, partially offset by a gain on a pipeline sale. The 1995 special items included a charge related to coal operations for the impact on deferred taxes of an Australian tax rate increase. In April 1997, ARCO announced its intent to divest its worldwide coal business which has coal mining operations in the United States and Australia. The coal business is no longer considered part of the company's core growth agenda. The manner of disposition is currently under study. 26 ARCO Unallocated Items Millions 1997 1996 1995 -------------------------- Unallocated benefit (expense) $ (156) $ (27) $ 38 Interest (303) (446) (500) Gain on disposition of Lyondell common stock 291 -- -- Extraordinary loss on extinguishment of debt (118) -- -- -------- ------ ------ Total $ (286) $(473) $(462) ======== ====== ====== The increase in the unallocated net expense in 1997 primarily resulted from charges of $184 million after tax for future environmental remediation and reclamation. These charges related both to current operations and natural resource damage liabilities in the state of Montana associated with previously discontinued mining operations, as well as the adoption of a new environmental accounting standard. Interest revenue was also lower in 1997. The increase in unallocated expense in 1997 was partially offset by tax benefits related to affiliate stock transactions. In September 1997, all of ARCO's 9% Exchangeable Notes due September 15, 1997 with an outstanding principal amount of $988 million were settled with Lyondell common stock owned by ARCO. ARCO then sold its remaining Lyondell shares in a privately negotiated transaction in late September. ARCO realized an aggregate pretax gain of $633 million, or $291 million after tax, on the two transactions. The company incurred a loss of $192 million before tax, or $118 million after tax, on early retirement of long-term debt during 1997. The early retirements will result in a pretax reduction in interest expense of approximately $100 million in 1998. In 1996 and 1995, the company received insurance settlements related to certain past environmental expenses. The benefits from those settlements were greater in 1995. In addition, the recording of final charges for previously reported personnel reductions, and less interest income from short-term investments resulted in an after-tax expense in 1996, compared to a net benefit in 1995. Impact of the Year 2000 Issue [PHOTO APPEARS HERE] The Year 2000 issue arises from computer programs having been written using two digits rather than four to designate the year. Date-sensitive computer software may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failures or miscalculations, causing operational disruptions. ARCO will spend approximately $20 million to avoid potential Year 2000 problems. Plans call for accounting, inventory, revenue, and financial system modifications to be completed by the first quarter of 1999, with the bulk of this work completed by the end of 1998. 27 ARCO Consolidated Statement of Income - --------------------------------
December 31, Millions, except per share amounts 1997 1996 1995 -------------------------- REVENUES Sales and other operating revenues $18,684 $18,592 $15,819 Other revenues 588 577 920 -------------------------- Total revenues 19,272 19,169 16,739 ========================== EXPENSES Trade purchases 7,881 7,949 6,116 Operating expenses 4,372 3,953 3,790 Selling, general and administrative expenses 1,083 1,018 1,029 Depreciation, depletion and amortization 1,746 1,633 1,641 Exploration expenses (including undeveloped leasehold amortization) 508 413 523 Taxes other than income taxes 766 800 717 Interest 422 668 750 Unusual items 250 26 -- -------------------------- Total expenses 17,028 16,460 14,566 ========================== Income before gain on investee stock transaction 2,244 2,709 2,173 Gain on disposition of Lyondell Petrochemical Company stock 633 -- -- -------------------------- Income before income taxes, minority interest and extraordinary item 2,877 2,709 2,173 Provision for taxes on income 920 941 687 Minority interest in earnings of subsidiaries 68 105 110 -------------------------- Net income before extraordinary item 1,889 1,663 1,376 Extraordinary loss on extinguishment of debt, net of income taxes of $74 million 118 -- -- -------------------------- Net income $ 1,771 $ 1,663 $ 1,376 ========================== Net income per share: Basic $ 5.51 $ 5.17 $ 4.27 Diluted $ 5.41 $ 5.09 $ 4.22 Weighted average equivalent shares outstanding: Basic 321.2 321.7 321.7 Diluted 327.4 326.5 326.5 See Notes on pages 38 through 51.
Results of Consolidated Operations - ---------------------------------- ARCO's earnings continued to grow in 1997. The earnings increase primarily reflected higher natural gas prices and volumes, lower interest expense, and higher refined product margins. Partially offsetting factors were higher DD&A and exploration expenses, as well as lower earnings from ARCO Chemical. In 1996, operating results benefited from higher crude oil and natural gas prices, increased natural gas volumes, higher refining and marketing volumes, and lower exploration and interest expense. These combined benefits were partially offset by lower earnings from ARCO's chemical interests. 28 ARCO Earnings from Consolidated Operations Millions 1997 1996 1995 ------------------------- Net income $1,771 $1,663 $1,376 - ------------------------------------------------------------------------- Special items (benefit) charge (65) - (45) - ------------------------------------------------------------------------- Operating results $1,706 $1,663 $1,331 ========================= - ------------------------- Special items after tax - ------------------------- Millions 1997 1996 1995 -------------------------- Gain on disposition of Lyondell Petrochemical Company stock $ (291) $ - $ - Tax-related benefits (248) - - Insurance settlements - (47) (82) Environmental charges 184 19 30 Restructuring charges 141 19 - Loss on debt redemptions 118 - - Other, net 31 9 7 -------------------------- Total (benefit) charge $ (65) $ - $ (45) ========================== Revenues The 1997 exploration and production revenues reflected higher natural gas production volumes and prices, partially offset by decreased natural gas marketing activity. Effective September 1, 1997, Vastar Resources, Inc. (Vastar) contributed certain of its natural gas marketing operations to a joint venture with the Southern Company. As a result of the transfer of those operations, the natural gas marketing sales and purchases volumes for 1997 were lower compared to the same period in 1996. The natural gas marketing sales will significantly decrease in future years as the result of Vastar's joint venture, which is accounted for on the equity method. Sales and Other Operating Revenues Millions 1997 1996 1995 ----------------------------- Exploration and production $ 9,548 $ 9,353 $ 8,376 Refining and marketing 6,856 6,939 5,555 Chemicals 3,995 3,955 4,282 Other operations 832 977 1,012 Intersegment eliminations (2,547) (2,632) (3,406) ----------------------------- Total $18,684 $18,592 $15,819 ============================= In 1996, exploration and production revenues reflected higher crude oil and natural gas prices, increased natural gas marketing activity and higher natural gas production volumes. These increases were partially offset by decreased crude oil trading activity. The majority of the increase in natural gas marketing and production volumes was generated by Vastar, where natural gas revenues increased from $1.3 billion in 1995 to $2.5 billion in 1996. The remainder of the increase came from production in China, the U.K. and Indonesia. Natural Gas Trade Sales and Purchases Volumes Million cubic feet/day 1997 1996 1995 ------------------------- Sales Marketing 1,804 2,049 1,231 Production 1,910 1,774 1,556 -------------------------- Total trade sales 3,714 3,823 2,787 Marketing purchases 1,865 2,132 1,312 In 1997, increased refining and marketing sales volumes were more than offset by the expiration near the end of 1996 of a crude-oil-for-refined-product exchange agreement. In 1997, increased net chemicals volumes were substantially offset by lower average sales prices. Increased chemicals volumes reflected higher PO derivatives volumes, which benefited from improved demand and temporary industry supply shortages for certain products. Contributing to the lower chemicals prices were the effects of a stronger U.S. dollar, stronger competition in PO derivatives and TDI markets, the expiration of most of ARCO Chemical's long-term fixed-fee methyl tertiary butyl ether (MTBE) contracts and excess SM industry capacity. In 1997, revenues from other operations declined primarily as the result of lower coal sales volumes. In 1996, increased refining and marketing sales revenues reflected higher refined products prices and volumes. Decreased chemicals sales revenues reflected a decline in chemical products prices and volumes. Other Revenues Other revenues declined in 1996 primarily because of lower earnings from ARCO's equity interest in 29 ARCO Lyondell and lower benefits from insurance settlements and a lower average balance of short-term investments. Expenses ARCO's 1997 trade purchases were lower primarily as a result of decreased natural gas marketing activity, partially offset by increased purchases of refined products. Natural gas purchases will significantly decrease in future years as a result of Vastar's joint venture with the Southern Company. In 1996, trade purchases were higher as a result of increased natural gas marketing activity and increased third-party purchases of refined products. Prices for purchased volumes of natural gas, crude oil and refined products were also higher in 1996. In 1997, operating expenses included charges of $300 million before tax for future environmental remediation and reclamation. These charges related both to current operations and to natural resource damage liabilities in the state of Montana associated with previously discontinued mining operations, as well as the adoption of a new environmental accounting standard. In addition, higher operating costs included costs associated with increased production from Rhourde El Baguel in Algeria and other new field production and scheduled plant turnaround maintenance expenses at ARCO Chemical. ARCO's 1996 operating expenses included higher oil and gas lease operating and other support costs for new international operations, partially offset by lower operating costs in Alaska. In addition, refining and marketing and coal operating expenses were higher in 1996. The refining and marketing expenses were associated with maintenance turnarounds, marketing improvements and charges for environmental and other remediation. The coal expenses were associated with increased production volumes and maintenance. The higher depreciation, depletion and amortization in 1997 reflected new crude oil and natural gas production from international operations. In 1997, ARCO's international exploration operations incurred increased geological and geophysical expense and dry hole costs. In 1996, the lower exploration expense primarily reflected lower dry hole costs in ARCO's international exploration and production operations. The lower taxes other than income taxes in 1997 primarily result from the impact of lower crude oil prices and volumes on U.S. production taxes. In 1996, the higher taxes other than income taxes primarily reflected the impact of higher crude oil prices on U.S. production taxes and the impact of higher crude oil prices and production volumes in the U.K. The reversal of reserves for tax-related interest which resulted from the partial resolution of certain federal and state income tax audits and reduction in long-term debt resulted in a decline in interest expense in 1997. In 1996, the decline in interest expense reflected lower average long-term debt balances outstanding during the year, compared to prior years. Unusual items in 1997 were organizational restructuring charges primarily for ARCO Chemical, ARCO's refining and marketing operations and corporate headquarters. The charge for the ARCO Chemical organizational restructuring and other ARCO Chemical management actions was $175 million before tax. See Note 3 to Consolidated Financial Statements regarding unusual items. In 1996, unusual items were final charges for previously reported personnel reductions, the majority of which were reported as unusual items in 1994. Income Taxes The company's effective tax rate was 32.0% in 1997, compared to 34.7% in 1996 and 31.6% in 1995. The lower effective tax rate in 1997 primarily reflected the net effect of affiliate stock transactions. The higher effective tax rate in 1996 primarily reflected a decrease in the benefit from the dividends received tax deduction and the absence of a 1995 foreign deferred asset valuation allowance benefit. 30 ARCO Consolidated Balance Sheet - -------------------------- December 31, Millions 1997 1996 --------------------- ASSETS Current assets: Cash and cash equivalents $ 533 $ 1,460 Short-term investments 222 784 Accounts receivable 1,588 1,936 Inventories 1,004 995 Prepaid expenses and other current assets 229 258 --------------------- Total current assets 3,576 5,433 --------------------- Investments and long-term receivables: Investments accounted for on the equity method 1,194 1,174 Other investments and long-term receivables 1,872 1,188 --------------------- 3,066 2,362 Net property, plant and equipment 16,998 16,195 Deferred charges and other assets 1,682 1,725 --------------------- Total assets $25,322 $25,715 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 1,599 $ 1,157 Accounts payable 1,292 1,443 Long-term debt due within one year 188 1,102 Taxes payable 390 438 Other 1,276 1,163 --------------------- Total current liabilities 4,745 5,303 --------------------- Long-term debt 4,414 5,593 Deferred income taxes 3,083 2,884 Other deferred liabilities and credits 3,621 3,450 Minority interest 779 684 --------------------- Total liabilities 16,642 17,914 --------------------- Stockholders' equity: Preference stocks 1 1 Common stock, $2.50 par value; shares issued 322,719,890 (1997), 161,086,174 (1996) shares outstanding 320,369,895 (1997), 161,082,043 (1996) 807 403 Capital in excess of par value of stock 640 628 Retained earnings 7,054 6,592 Treasury stock (170) (1) Equity adjustments 348 178 --------------------- Total stockholders' equity 8,680 7,801 --------------------- Total liabilities and stockholders' equity $25,322 $25,715 ===================== See Notes on pages 38 through 51. 31 ARCO Consolidated Statement of Cash Flows - ------------------------------------
December 31, Millions 1997 1996 1995 --------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,771 $ 1,663 $ 1,376 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,746 1,633 1,641 Dry hole expense and undeveloped leasehold amortization 235 209 317 Gain on disposition of Lyondell Petrochemical Company stock (291) - - Extraordinary loss on extinguishment of debt 118 - - Income from equity investments (150) (74) (243) Dividends from equity investments 102 77 89 Cash payments (greater) less than noncash provisions 247 (220) (183) Minority interest in earnings of subsidiaries 68 105 110 Net gain on asset sales (59) (41) (16) Deferred income taxes 91 11 26 Changes in working capital accounts (158) 121 (204) Other 2 (79) 6 --------------------------------------- Net cash provided by operating activities 3,722 3,405 2,919 --------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets, including dry hole costs (2,985) (2,141) (1,699) Net cash provided by short-term investments 558 778 1,500 Acquisition of businesses - (576) - Investment in/advances to LUKARCO (227) - - Investment in LUKOIL and Zhenhai securities - (218) (252) Proceeds from asset sales 197 208 66 Investments and long-term receivables (204) (515) (73) Other 56 85 (92) --------------------------------------- Net cash used by investing activities (2,605) (2,379) (550) --------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (1,741) (861) (1,138) Proceeds from issuance of long-term debt 413 680 178 Net cash provided (used) by notes payable 466 (79) (293) Dividends paid (908) (887) (902) Treasury stock purchases (256) (57) (39) Other (4) 100 (31) --------------------------------------- Net cash used by financing activities (2,030) (1,104) (2,225) --------------------------------------- Effect of exchange rate changes on cash (14) 1 (1) ---------------------------------------- Net increase (decrease) in cash and cash equivalents (927) (77) 143 Cash and cash equivalents at beginning of year 1,460 1,537 1,394 ---------------------------------------- Cash and cash equivalents at end of year $ 533 $ 1,460 $ 1,537 =======================================
See Notes on pages 38 through 51. 32 ARCO Analysis of Cash Flows and Financial Condition - ---------------------------------------------- 1997 Cash Inflows - (millions) - ----------------------------- [PIE CHART APPEARS HERE] Operations $3,722 Short-term debt $ 466 Short-term investments $ 558 Long-term debt $ 413 Other $ 253 Driven by investment opportunities to achieve ARCO's growth goals, ARCO's 1998 capital spending program includes $3.8 billion for additions to fixed assets, compared to $3.0 billion in 1997. Future capital expenditures remain subject to business conditions affecting the industry, as well as changes in environmental rules and regulations and the tax laws. Cash and cash equivalents and short-term investments totaled $755 million at year-end 1997, short-term borrowings were $1.6 billion and long-term debt due within one year was $188 million. In 1997, the company used approximately $1.7 billion in cash for repayment of long-term debt. Approximately $1 billion of that total was used for the early retirement of debt. By retiring this high-coupon debt, the company will have better opportunities to adjust its debt portfolio using a combination of short- and long-term debt and floating rate as well as fixed rate debt as ARCO continues to invest in its businesses. 1998 Adds to Fixed Assets - (millions) - ------------------------------------- [PIE CHART APPEARS HERE] International Exploration & Production $1,260 Vastar $ 660 Alaska $ 515 Other Lower 48 $ 160 Refining & Marketing $ 600 ARCO Chemical $ 565 Other $ 20 1997 Cash Outflows - (millions) - ------------------------------ [PIE CHART APPEARS HERE] Adds to fixed assets $2,985 Long-term debt $1,741 Dividends $ 908 Other $ 691 Primarily as a result of the long-term debt redemptions in July 1997 and the increased use of short-term borrowing, the company is in a working capital deficit position of approximately $1.2 billion at December 31, 1997. It is expected that future cash requirements for working capital, capital expenditures, dividends and debt repayments will come from cash generated from operating activities, existing cash balances, and future financings. At December 31, 1997, ARCO had unused committed bank credit facilities totaling $3.1 billion and ARCO Chemical had an unused bank credit facility totaling $500 million. Vastar had an unused revolving credit facility of $1.1 billion. In September 1997, ARCO exchanged substantially all of its 39.9 million shares of Lyondell stock in full payment of the $988 million principal amount of 9% Exchangeable Notes due September 15, 1997. Effective June 13, 1997, ARCO declared a 2-for-1 stock split in the form of a 100% stock dividend and a 4% increase in the quarterly dividend. Environmental Matters ARCO is subject to federal, state and local environmental laws and regulations that require the company to remove or mitigate the effect on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites. ARCO is currently participating in environmental assessments and cleanups at numerous sites under these 33 ARCO laws and may in the future be involved in additional environmental assessments and cleanups. Environmental Reserves Millions 1997 1996 1995 ------------------------------- Beginning balance $ 577 $ 658 $ 670 Charges 300 49 101 Payments (110) (130) (113) ------------------------------- Ending balance $ 767 $ 577 $ 658 =============================== The amount accrued represents the estimated undiscounted costs that ARCO will incur to complete the remediation of sites with known contamination. In view of the uncertainties associated with estimating these costs (such as differences of opinion between ARCO and various regulatory agencies with respect to the appropriate method for remediating contaminated sites, uncertainty as to the extent of contamination at various sites, and uncertainty regarding ARCO's ultimate share of costs at various sites), it is possible that actual costs could exceed the amount accrued by as much as $500 million. See Notes 4 and 13 to Consolidated Financial Statements regarding environmental matters. In addition to the provision for environmental remediation costs, $1 billion has been accrued for the estimated cost, net of salvage value, of dismantling facilities as required by contract, regulation or law, and for the estimated costs of restoration and reclamation of land associated with such facilities. Market-Sensitive Instruments and Risk Management - ------------------------------------------------ The following discussion of the company's risk-management activities includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. This analysis presents the hypothetical loss in earnings, cash flows or fair value of the financial instruments, derivative instruments, and derivative- commodity instruments which are held by the company at December 31, 1997 and are sensitive to changes in interest rates, foreign exchange rates and commodity prices. To minimize the effects of interest rate and foreign currency fluctuations, ARCO enters into the following transactions using derivatives: 1) foreign currency forward, option and swap contracts; 2) interest rate swaps; and 3) financial futures contracts and over-the-counter Treasury options which are limited to investment portfolio hedging, alteration of portfolio duration and changing asset mix. ARCO and its subsidiaries also engage in hedging strategies involving forward and futures contracts, swaps and options covering part of its natural gas and crude oil production to minimize the effects of commodity price fluctuations. The company uses simple, non-leveraged derivative instruments that are placed with major institutions whose creditworthiness is continually monitored. Risk management strategies are reviewed and approved by senior management before being implemented. Policy controls limit the maximum amount of positions that can be taken in any given instrument. In the normal course of business, the company also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include country risk, credit risk and legal risk and are not represented in the following analyses. Interest Rate Risk The fair value of the company's cash and short-term investment portfolio at December 31, 1997, approximated carrying value due to its short-term duration. Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates for 34 ARCO the issues contained in the investment portfolio and was not materially different from the year-end carrying value. At December 31, 1997, the fair value of notes payable approximated carrying value due to its short-term maturities. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the company's weighted average short-term borrowing rate at December 31, 1997, and was not materially different from the year-end carrying value. The fair value of the company's long-term debt, including current maturities, was estimated to be $5.4 billion at December 31, 1997, and exceeded the carrying value by $798 million. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the company's weighted average long-term borrowing rate at December 31, 1997, or $185 million. Foreign Exchange Rate Risk The company has bought foreign currency contracts (principally involving European currencies and Australian dollars) to hedge anticipated foreign currency commitments and future cash flows from overseas operations with varying maturities ranging from 1998 to 2000. The hypothetical loss in cash flows of the combined foreign-exchange positions at year end is estimated to be $17 million. A hypothetical adverse change of 10% in year-end exchange rates (a weakening of the U.S. dollar), is assumed. The future cash flows were translated to U.S. dollars by using the hypothetical exchange rate and the cash value of the currency contract, multiplied by the difference between the hypothetical and strike exchange rates to the contract amount. At December 31, 1997, approximately $1 billion of financial instruments, primarily short-term debt, were denominated in foreign currencies. Assuming a hypothetical adverse change of 10% in year-end exchange rates (a weakening of the U.S. dollar), the fair value of those instruments would increase by $80 million. Commodity Price Risk From time to time, the company uses various hedging arrangements, predominantly natural gas swaps and crude oil futures and options, to manage the company's exposure to price risk from its natural gas and petroleum liquids production. These hedging arrangements have the effect of locking in for specified periods (at predetermined prices or ranges of prices) the prices the company will receive for the volumes to which the hedge relates. As a result, while these hedging arrangements are structured to reduce the company's exposure to decreases in price associated with the hedging community, they also limit the benefit the company might otherwise have received from any price increases associated with the hedged commodity. At December 31, 1997, ARCO had entered into a series of crude oil futures and options contracts and a series of forward natural gas contracts. Based on year-end forward prices ARCO had a net deferred loss of $5 million on those contracts. The hypothetical incremental loss in earnings for the combined commodity positions at year end is estimated to be $14 million, assuming an increase in crude oil and natural gas year-end forward prices of 10%. To calculate the hypothetical loss, the relevant parameters of the commodity contracts are the type of commodity and the delivery price. The hypothetical loss on the commodity contracts was estimated by calculating the cash value of the contracts as the difference between the hypothetical and contract delivery prices, then multiplying it by the contract amount. Equity Price Risk Other investments at December 31, 1997, included marketable equity securities which are recorded at a fair value of $1.4 billion, including net unrealized gains of $979 million. Those securities have exposure to price risk. The estimated potential loss in fair value resulting from a hypothetical 10% decrease in prices quoted by stock exchanges is $140 million. 35 ARCO Consolidated Statement of Changes in Stockholders' Equity - ---------------------------------------------------------
Common Stock Preference Capital in Treasury Stock Equity Retained Millions Shares Dollars Stock Excess of Par Shares Dollars* Adjustments Earnings Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance January 1, 1995 160.8 $402 $ 1 $647 0.1 $ (5) $(109) $5,342 $6,278 Net income 1,376 1,376 Common stock dividends (900) (900) Preference stock dividends (2) (2) Common stock issued 0.1 -- -- -- Treasury stock purchases 0.3 (39) (39) Treasury stock issued (15) (0.3) 39 24 Unrealized gain on securities 27 27 Foreign currency translation 34 34 Minimum pension liability (40) (40) - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1995 160.9 $402 $ 1 $632 0.1 $ (5) $ (88) $5,816 $6,758 ==================================================================================================================================== Net income 1,663 1,663 Common stock dividends (885) (885) Preference stock dividends (2) (2) Common stock issued 0.2 1 12 13 Treasury stock purchases 0.5 (57) (57) Treasury stock issued (16) (0.5) 61 45 Unrealized gain on securities 236 236 Foreign currency translation (2) (2) Minimum pension liability 32 32 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1996 161.1 $403 $ 1 $628 0.1 $ (1) $ 178 $6,592 $7,801 ==================================================================================================================================== Net income 1,771 1,771 Common stock dividends (906) (906) Preference stock dividends (2) (2) 100% stock dividend 161.3 403 (403) -- Common stock issued 0.3 1 8 9 Treasury stock purchases 3.5 (256) (256) Treasury stock issued 4 (1.3) 87 91 Unrealized gain on securities 381 381 Foreign currency translation (185) (185) Minimum pension liability (26) (26) Other 2 2 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1997 322.7 $807 $ 1 $640 2.3 $ (170) $ 348 $7,054 $8,680 ====================================================================================================================================
*At cost See Notes on pages 38 through 51. Devaluation of the Indonesian Rupiah - ------------------------------------ The company's exploration and production operations in Indonesia are likely to be affected by the recent devaluation in that country's currency. While the company's natural gas sales are made in U.S. dollars, ARCO customers may lower their contract takes, resulting in lower revenues and net income in 1998. In addition, customers may have difficulty making payments on natural gas purchases, which are made in U.S. dollars. Substantially all of the Indonesian natural gas sales projected for 1998 are covered by standby letters of credit, which are due to be renewed, issued by two Indonesian state banks. ARCO Chemical's Asia Pacific revenues and assets, including Indonesia, were not material to ARCO's consolidated financial condition or results of operations in 1997. 36 ARCO Safe Harbor* - ----------- From time to time ARCO's management may wish to make forward-looking statements to more fully inform existing and potential security holders regarding various matters. Such statements are generally accompanied by words such as estimate, project, predict or expect, that convey the uncertainty of future events or outcomes. Price, Political, Economic and Regulatory Instability Volatility in prices and margins affects all of the company's businesses. Volatility is caused by a number of factors, including changes in market supply and demand balances and fluctuations in political, regulatory and economic climates throughout the world. The ability to operate ARCO's businesses is dependent on the politics and regulations in the U.S. and in the particular geographic regions where the company operates. The ability to negotiate and implement specific projects in a timely and favorable manner may be impacted by political considerations unrelated to or beyond the control of the company. Exploration and Production Projections as to the level of future earnings are based on assumptions as to the future prices of crude oil and natural gas. Any substantial or extended decline in actual prices could have a material adverse effect on ARCO's financial position, results of operations and on the quantities of crude oil and natural gas reserves that may be economically produced. Projecting future rates of oil and gas production is inherently imprecise. Production rates of oil and gas reservoirs generally decline. Future production rates can be affected by price volatility and the company's ability to replace depleting reservoirs. There can be no assurances as to the level or timing of success, if any, that the company will have in acquiring or finding and developing economically recoverable reserves. Refining and Marketing Overall profitability of the company's refining and marketing operations depends heavily on the margin between the price of crude oil and/or purchased products and the sales price of products produced and/or purchased. Volumes produced and margins historically have been volatile and are impacted by market demand, regulatory changes (particularly environmental regulations regarding gasoline), the price of crude oil, and the ability of regional refiners and the company to provide a sufficient supply of refined products. Chemicals Results of chemical operations typically are cyclical and depend heavily on the margin between the price of raw materials and sales prices of products produced. They are also influenced by changes in the cost of raw materials, the availability of substitutes and changes in the industry capacity and in the supply/demand balance. Operating Hazards Operations are subject to various hazards common to the industry, including explosions, fires, uncontrollable spills, and damage from severe weather conditions. *The company desires to take advantage of the "safe harbor" provisions contained in Section 27A of the Securities Act and Section 21B of the Exchange Act and is including this statement in order to do so. 37 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ Note 1 Accounting Policies ARCO's accounting policies conform to generally accepted accounting principles, including the "successful efforts" method of accounting for oil and gas producing activities. Principles of Consolidation The consolidated financial statements include the accounts of all subsidiaries, ventures and partnerships in which a controlling interest is held, including ARCO Chemical Company and Vastar Resources, Inc., of which ARCO owned 82.3% and 82.2% of the outstanding shares, respectively, at December 31, 1997. ARCO also consolidates its interests in undivided interest pipeline companies and in oil and gas and coal mining joint ventures. ARCO uses the equity method of accounting for companies where its ownership is between 20% and 50% and for other ventures and partnerships in which an effective controlling interest is not held. Cash Equivalents Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit and marketable securities other than equity securities, maturing within three months of purchase. Cash equivalents are stated at cost, which approximates fair value. Oil and Gas Unproved Property Costs Unproved property costs are capitalized and amortized on a composite basis, considering past success experience and average property life. In general, costs of properties surrendered or otherwise disposed of are charged to accumulated amortization. Costs of successful properties are transferred to developed properties. Fixed Assets Fixed assets are recorded at cost and are written off on either the unit- of-production or straight-line method based on the expected lives of individual assets or groups of assets. Upon disposal of assets depreciated on an individual basis, residual cost less salvage value is included in current income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage value is charged against accumulated depreciation. Dismantlement, Restoration and Reclamation Costs The estimated costs, net of salvage value, of dismantling facilities or projects with limited lives or that are required to be dismantled by contract, regulation or law, and the estimated costs of restoration and reclamation associated with oil and gas and mining operations are accrued during production and classified as a long-term liability. Such costs are taken into account in determining the cost of production in all operations, except oil and gas production, in which case such costs are considered in determining depreciation, depletion and amortization. Environmental Remediation Environmental remediation costs are accrued as operating expenses based on the estimated timing and extent of remedial actions required by applicable governmental authorities and the amount of ARCO's liability in consideration of the liability and financial wherewithal of other responsible parties. Estimated liabilities are not discounted to present value. Stock-based Compensation Employee stock options are accounted for under the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25. Derivative Instruments The company uses a variety of derivative instruments, both financial and commodity based, to minimize the effects of commodity price, interest rate and foreign currency fluctuations. The company does not hold or issue derivative instruments for trading purposes and is not a party to leveraged instruments. All derivative instruments are off-balance sheet instruments; however, net receivable or payable positions related to derivative instruments are carried on the balance sheet. The nature of the transaction underlying a risk management strategy, primarily whether or not the instrument qualifies as a hedge, determines which accounting method is used. 38 ARCO The conditions that must be met for a derivative instrument to qualify as a hedge are: (1) the item to be hedged exposes the company to price or interest rate risk; (2) the derivative reduces the risk exposure and is designated as a hedge at the time the derivative contract is entered into; and (3) at the inception of the hedge and throughout the hedge period there is a high correlation between changes in market value of the derivative instrument and fair value of the underlying items being hedged. Deferral accounting is used for the following types of transactions (if the instrument qualifies as a hedge): future crude oil and natural gas production, fixed-price crude oil and natural gas purchase and sale commitments, U.S. dollar-denominated debt issued by a foreign subsidiary, debt denominated in a foreign currency or anticipated foreign currency commitments. Under the deferral method, gains and losses are deferred and included in other assets or accrued liabilities until the designated underlying item is recognized in income. Recognized gains and losses under the deferral method are recorded in sales and other operating revenues, other revenues or trade purchases depending on the underlying item associated with the derivative instrument. Instruments typically used in these transactions are crude oil and natural gas swap and price collar contracts and some foreign currency swap, forward and option contracts. The accrual method of accounting is used for interest rate swap agreements entered into by the company which convert the interest rate on variable-rate debt to a fixed rate. Under the accrual method, each net payment or receipt due or owed under the derivative instrument is recognized in income during the period to which the payment or receipt relates. Amounts to be paid or received under these agreements are recognized as an adjustment to interest expense. The related amounts payable to, or receivable from, the counterparties are included in other accrued liabilities. The fair value method of accounting is used for any derivative instrument that does not qualify as a hedge. The fair value method, whereby gains and losses associated with changes in fair value of a derivative instrument are recognized currently in income or stockholders' equity, is used for the following derivative instruments: foreign currency forward and option contracts associated with anticipated future cash flows related to overseas operations and foreign currency swap contracts associated with foreign-denominated intercompany debt with maturities exceeding one year. Presently, changes in fair value of all transactions accounted for under this method are recognized currently in income and reported as other revenues. Under each method of accounting used by the company the cash flows related to any recognized gains or losses associated with derivative instruments are reported as cash flows from operations. If a derivative instrument designated as a hedge is terminated prior to expected maturity, gains or losses are deferred and included in income when the underlying hedged item is recognized in income. When the designated item associated with a derivative instrument matures, is sold, extinguished or terminated, gains or losses are recognized as part of the gain or loss on sale or settlement of the underlying item. When a derivative instrument is associated with an anticipated transaction that is no longer expected to occur, the gain or loss on the derivative is recognized immediately in income. Earnings per Share Basic earnings per share is based on the average number of common shares outstanding during each period. Diluted earnings per share includes certain outstanding options and all convertible or potentially issuable securities. All historical earnings per share have been restated to give effect to the 100% stock dividend effective June 13, 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain previously reported amounts have been restated to conform to classifications adopted in 1997. 39 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ Note 2 Segment Information
1997 ---------------------------------------------------------------------------------- Millions Exploration Refining & Unallocated & Production Marketing Chemicals All Other Items Totals ---------------------------------------------------------------------------------- Sales and other operating revenue: U.S. $ 7,918 $6,853 $2,446 $ 521 $ 3 $17,741 International 1,630 3 1,549 293 15 3,490 Intersegment revenues (2,171) (17) (263) (81) (15) (2,547) ---------------------------------------------------------------------------------- Total 7,377 6,839 3,732 733 3 18,684 Income (loss) from equity affiliates 5 8 (2) 139 - 150 Interest revenue 12 3 2 4 104 125 Interest expense - - - - 422 422 Depreciation, depletion and amortization 1,184 226 229 70 37 1,746 Income tax expense (benefit) 653 161 70 56 (20) 920 Net income (loss) 1,347 325 128 257 (286) 1,771 Investment in equity affiliates 336 98 47 713 - 1,194 Property, plant and equipment (net): U.S. 6,734 2,714 1,774 881 153 12,256 International 3,496 - 760 486 - 4,742 Additions to fixed assets 2,276 330 263 113 3 2,985 Segment assets 13,269 3,561 4,116 2,742 1,634 25,322 1996 ---------------------------------------------------------------------------------- Sales and other operating revenue: U.S. $ 7,966 $6,934 $2,363 $ 594 $ - $17,857 International 1,387 5 1,592 362 21 3,367 Intersegment revenues (2,311) (28) (180) (92) (21) (2,632) ---------------------------------------------------------------------------------- Total 7,042 6,911 3,775 864 - 18,592 Income (loss) from equity affiliates 13 - (1) 62 - 74 Interest revenue 1 1 2 3 186 193 Interest expense - - - - 668 668 Depreciation, depletion and amortization 1,061 227 222 107 16 1,633 Income tax expense (benefit) 767 150 136 68 (180) 941 Net income (loss) 1,329 287 320 200 (473) 1,663 Investment in equity affiliates 94 - 54 1,026 - 1,174 Property, plant and equipment (net): U.S. 6,434 2,621 1,723 858 194 11,830 International 2,866 - 899 600 - 4,365 Additions to fixed assets 1,684 121 244 84 8 2,141 Segment assets 11,838 3,380 4,394 3,168 2,935 25,715 1995 ---------------------------------------------------------------------------------- Sales and other operating revenue: U.S. $ 7,207 $5,555 $2,505 $ 604 $ 3 $15,874 International 1,169 - 1,777 378 27 3,351 Intersegment revenues (2,908) (195) (195) (81) (27) (3,406) ---------------------------------------------------------------------------------- Total 5,468 5,360 4,087 901 3 15,819 Income (loss) from equity affiliates 14 - 14 215 - 243 Interest revenue 4 - 3 2 203 212 Interest expense - - - - 750 750 Depreciation, depletion and amortization 1,063 219 233 105 21 1,641 Income tax expense (benefit) 422 121 230 92 (178) 687 Net income (loss) 784 200 460 394 (462) 1,376 Investment in equity affiliates 95 - 75 541 - 711 Property, plant and equipment (net): U.S. 6,472 2,729 1,346 857 200 11,604 International 2,215 - 947 589 - 3,751 Additions to fixed assets 1,190 212 195 90 12 1,699 Segment assets 10,468 3,165 4,135 2,645 3,586 23,999
40 ARCO Segment information has been prepared in accordance with Statement of Financial Accounting Standards (SFAS) No.131, "Disclosure about Segments of an Enterprise and Related Information." ARCO has three reportable segments: exploration and production (E&P), refining and marketing (R&M) and chemicals. The segments were determined based upon types of products produced/sold by each segment. Segment performance is evaluated based upon net income, excluding interest expense and minority interests in consolidated subsidiaries. The E&P segment is an aggregation of several business units engaged in one or more of the following: the worldwide 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 transportation via pipeline of petroleum liquids within the State of Alaska. The company's investment in the LUKARCO joint venture and LUKOIL common stock are included in the E&P segment as well. The R&M segment comprises the refining of crude oil, primarily from the North Slope of Alaska; the marketing of petroleum products, primarily in the West Coast region of the U.S.; and the transportation of petroleum and petroleum products via ocean-going tankers, primarily between Alaska and the West Coast. The company's equity investment in Zhenhai Refining and Chemical Company is included in the R&M segment as well. The chemicals segment comprises the worldwide manufacture and sale of chemical products, including propylene oxide and derivatives, toluene di-isocyanate, styrene monomer and methyl tertiary butyl ether. Revenue from other operating segments is attributable to the following: the mining and sale of coal in the western U.S. and Australia; the pipeline transportation and storage of petroleum and petroleum products in the 48 contiguous United States; the processing and marketing of aluminum sheet. The company's equity interest in Lyondell Petrochemical Company is included with other operating segment information until September 1997 when ARCO disposed of its interest. Intersegment sales were made at prices approximating current market value. Note 3 Unusual Items During 1997, the company recorded pretax charges of $250 million for several restructuring actions. ARCO Chemical Company announced a charge of $175 million consisting of $75 million of personnel-related costs, $23 million of exit costs, and $77 million related to the review of certain assets including $52 million of valuation adjustments. In a separate action, ARCO accrued an additional $75 million in personnel-related costs, related to organizational restructuring, primarily in refining and marketing operations and corporate headquarters. The following table summarizes the personnel-related costs of both actions.
($ Millions) Funded Unfunded Short-term Long-Term Long-term Terminations Benefits/(a)/ Benefits/(b)/ Benefits/(c)/ Total - ------------------------------------------------------------------------------------------------------- 1,200 $133 $5 $12 $150
(a) Severance and ancillary benefits (b) Net increase in pension benefits to be paid from assets of qualified pension plans. (c) Net increase in non-qualified pension benefits and other postretirement benefits to be paid from Company funds. As of December 31, 1997, approximately 480 employees have been terminated and approximately $14 million of short-term benefits have been paid. Payments do not correlate with the number of terminations because certain short-term benefits may be deferred. Note 4 Accounting Changes Effective January 1, 1997, the company adopted Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." The provisions include standards affecting the measurement, recognition and disclosure of environmental remediation liabilities. The effect of initially applying the provisions of SOP 96-1 in 1997 was a decrease in the company's net income of $30 million, or $0.09 per share (basic and diluted). Note 5 Extraordinary Item During 1997, ARCO retired debt with a face value of $756 million prior to maturity. The debt repurchases resulted in an extraordinary charge of $118 million against net income, after tax of $74 million. The impact of the extraordinary item on basic and diluted earnings per share was as follows:
Millions Basic Diluted ------------------------------- Income before extraordinary item $ 1,889 $ 5.88 $ 5.77 Extraordinary loss (118) (0.37) (0.36) ------------------------------- Net income $ 1,771 $ 5.51 $ 5.41 ===============================
41 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ Note 6 Inventories Inventories are recorded when purchased, produced or manufactured and are stated at the lower of cost or market. In 1997, approximately 83% of inventories, excluding materials and supplies, were determined by the last-in, first-out (LIFO) method. Materials and supplies and other non-LIFO inventories are determined predominantly on an average cost basis. Total inventories at December 31 comprised the following: Millions 1997 1996 ------------------ Crude oil and petroleum products $ 247 $ 204 Chemical products 439 488 Other products 43 48 Materials and supplies 275 255 ------------------ Total $ 1,004 $ 995 ================== The excess of the current cost of inventories over book value was approximately $271 million and $293 million at December 31, 1997 and 1996, respectively. Note 7 Investments At December 31, 1997 and 1996, investments in debt securities were primarily composed of U.S. Treasury securities and corporate debt instruments. Maturities generally ranged from two days to 22 months. These investments were principally included in short-term investments. ARCO's investments in LUKOIL common stock and Zhenhai Refining and Chemical Company convertible bonds were included in other investments and long-term receivables. At December 31, 1997 and 1996, all investments were classified as available-for-sale and investments were reported at fair value, with unrealized holding gains and losses, net of tax, reported in a separate component of stockholders' equity. The following summarizes investments at December 31: Millions 1997 1996 ---------------------- Aggregate fair value $ 1,897 $ 2,311 Gross unrealized holding losses 1 3 Gross unrealized holding gains (985) (365) ---------------------- Amortized cost $ 913 $ 1,949 ====================== Investment activity for the years ended December 31 was as follows: Millions 1997 1996 ---------------------- Gross purchases $ 6,902 $ 7,799 Gross sales 1,753 2,371 Gross maturities 6,111 5,920 Gross realized gains and losses were insignificant and were determined by the specific identification method. Note 8 Fixed Assets Property, plant and equipment at December 31 was as follows: 1997 1996 ---------------------------------- Millions Gross Net Gross Net ---------------------------------- Exploration and production $25,145 $10,230 $23,238 $ 9,300 Refining and marketing 5,017 2,714 4,743 2,621 Chemicals 4,149 2,534 4,152 2,622 Other operations 2,117 1,367 2,197 1,458 Unallocated 358 153 407 194 ---------------------------------- Total $36,786 $16,998 $34,737 $16,195 ================================== Expenses for maintenance and repairs for 1997, 1996 and 1995 were $506 million, $497 million and $475 million, respectively. Note 9 Short-term Borrowings and Bank Credit Facilities Notes payable consist primarily of commercial paper issued to a variety of financial investors and institutions and any amounts outstanding under ARCO or ARCO Chemical credit facilities. The weighted average interest rate on notes payable outstanding at December 31, 1997 and 1996, was 6.7% and 5.7%, respectively. In 1997, ARCO and certain wholly owned subsidiaries had committed bank credit facilities of approximately $3.1 billion. At December 31, 1997, there were no borrowings under these committed facilities. ARCO Chemical maintains its own credit facility, not guaranteed by ARCO, under which it may borrow up to $500 million. At December 31, 1997, there were no borrowings against this credit facility. At December 31, 1997, ARCO had unused letters of credit totaling approximately $480 million. 42 ARCO Note 10 Long-term Debt Long-term debt at December 31 comprised the following: Millions 1997 1996 ----------------- 8 1/4%, due in 2022 $ 245 $ 250 8 1/2%, due in 2012 178 178 8 3/4%, due in 2032 159 198 9% exchangeable notes, due in 1997 - 988 9%, due in 2021 209 286 9%, due in 2031 97 136 9 1/8%, due in 2011 253 300 9 1/8%, due in 2031 155 345 9 7/8%, due in 2016 181 450 10 1/4%, due in 2000 - 250 10 7/8%, due in 2005 410 500 Medium-Term Notes -- A Series, 8.70%/(a)/ 182 197 Medium-Term Notes -- B Series, 8.34%/(a)/ 250 250 ARCO Tresop Notes, 5.06%/(a)/ 163 224 Variable rate, due in 2031, 3.80%/(a)/ 265 265 Variable rate, due in 2032 6.66%/(a)/ 108 - ARCO Chemical: 9.375%, due in 2005 100 100 9.8%, due in 2020 224 224 9.9%, due in 2000 200 200 10.25%, due in 2010 100 100 French bank loans, 7.2%/(a)/ 33 55 Dutch bank loans 149 173 Vastar: Commercial paper, 6.2%/(a)/ 373 554 6.95%, due in 2006 75 75 6.96%, due in 2007 75 - 8 3/4%, due in 2005 149 149 Other 269 248 ----------------- Total, including debt due within one year 4,602 6,695 Less debt due within one year 188 1,102 ----------------- Long-term debt $4,414 $5,593 ================= (a) Weighted average of interest rates at December 31, 1997. Maturities for the five years subsequent to December 31, 1997, are as follows: Millions 1998 1999 2000 2001 2002 ------------------------------------- Maturities $188 $143 $219 $66 $584 In 1996, Vastar established a $1.1 billion Commercial Paper Program for issuance of unsecured notes with maturities of up to 270 days from the date of issue. Vastar has agreed to maintain credit lines sufficient to support payment on the notes. In 1996, Vastar consolidated existing unsecured revolving credit agreements into a single facility. As of December 31, 1997, commitments under this facility, as amended to date, totaled $1.1 billion. The commitment expires March 31, 2002. During 1997, no debt was outstanding under this facility. The credit facility is not guaranteed by ARCO. The agreement contains covenants, the most restrictive of which require Vastar to maintain certain financial ratios and minimum levels of tangible stockholders' equity and restrict encumbrance of assets. ARCO periodically enters into interest rate swap agreements with the objective of managing interest rate risk by converting the interest rate on variable-rate debt to a fixed rate. The fixed rate is accrued and charged to interest expense through the term of the interest rate swap agreement. All interest rate swaps are intended to be held until maturity. At December 31, 1997, ARCO Chemical had outstanding interest rate swaps on one loan of 300 million Dutch guilders (approximately $149 million) due in 2002. The swaps mature when the related debt becomes due. The swaps effectively change the loan's floating interest rate to a fixed rate of 4.8%. At December 31, 1997 and 1996, approximately $180 million and $230 million, respectively, of long-term debt was denominated in foreign currencies. No material amounts of long-term debt are collateralized by ARCO assets. Note 11 Interest Interest for the years ended December 31 comprised the following: Millions 1997 1996 1995 ------------------------ Long-term debt $ 491 $ 579 $ 637 Short-term debt 95 83 90 Other /(a)/ (117) 28 72 ------------------------ 469 690 799 Capitalized interest (47) (22) (49) ------------------------ Total interest expense $ 422 $ 668 $ 750 ======================== Total interest paid in cash $ 469 $ 675 $ 780 ======================== Interest income $ 125 $ 193 $ 212 ======================== (a) Includes $145 million reversal from partial tax audit settlements in 1997. 43 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ Note 12 Financial Instruments and Fair Value ARCO does not hold or issue financial instruments for trading purposes. ARCO enters into various types of foreign currency forward, option and swap contracts. Foreign currency forward and option contracts are used to minimize foreign exchange exposures associated with U.S. dollar-denominated debt issued by a foreign subsidiary, anticipated foreign currency commitments and anticipated future cash flows related to overseas operations. Foreign currency swap contracts are used to minimize foreign exchange exposures related to foreign-denominated intercompany debt with maturities exceeding one year. At December 31, 1997, the notional amounts of foreign currency contracts outstanding (principally involving European currencies and Australian dollars) were approximately $613 million, with various maturities ranging from 1998 to 2000. At December 31, 1996, the notional amounts of foreign currency contracts outstanding were approximately $804 million. Gains and losses on foreign currency forward contracts covering anticipatory cash flows are recognized currently as other income or expense. Gains and losses on foreign currency swaps associated with intercompany debt are recognized currently in income and offset foreign exchange gains and losses on the underlying intercompany loans. Gains and losses on other foreign currency contracts are generally deferred and offset the transactions being hedged. ARCO periodically enters into interest rate swaps to manage interest rate risk. Interest rate swaps are used in conjunction with debt (see Note 10). ARCO also uses various hedging arrangements to manage the exposure to price risk for future natural gas and crude oil transactions. Gains and losses resulting from these transactions are deferred and included in other assets or accrued liabilities until realized in sales and other operating revenues as the physical production required by the contracts is delivered. During 1997, Vastar entered into a series of natural gas swap and price collar agreements which at December 31, 1997, covered 201 million cubic feet per day of its 1998 natural gas production. These swap agreements will serve as hedges which secure prices on these volumes at an average price of $2.13 per thousand cubic feet for 1998 (on a Henry Hub basis). At December 31, the carrying value and estimated fair value of ARCO's financial instruments are shown as assets (liabilities) in the table below: 1997 1996 ------------------------------------------ Millions Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------ Non-derivatives: Short-term investments $ 222 $ 222 $ 784 $ 784 Equity method investments 1,194 1,204 1,174 1,779 Other investments and long-term receivables 1,872 1,872 1,188 1,188 Notes payable (1,599) (1,599) (1,157) (1,157) Long-term debt, including current maturities (4,602) (5,400) (6,695) (7,213) Derivatives: Foreign currency forwards $ (1) $ (1) $ (14) $ (14) Foreign currency options 4 4 6 6 Foreign currency swaps 3 2 (4) (4) Interest rate swaps on debt -- -- (1) (3) Oil & gas price swaps (7) (7) (21) (21) Commodity futures 2 2 (6) (6) All derivative instruments are off-balance-sheet instruments; however, net receivable or payable positions related to derivative instruments are carried on the balance sheet. Short-term investments are carried at fair value. The fair value of notes payable approximates carrying value due to its short-term maturities. Equity method investments and other investments and long-term receivables were valued at quoted market prices if available. For unquoted investment securities, the reported fair value was estimated on the basis of financial and other information. The fair value of ARCO's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to ARCO for debt of the same remaining maturities. The fair value of foreign currency contracts and interest rate swaps represented the amount to be exchanged if the existing contracts had been settled at year end and was estimated based on market quotes. ARCO is exposed to credit risk in the event of nonperformance by the counterparties. ARCO does not generally require collateral or other security to support these financial instruments. The counterparties to these instruments are major institutions deemed creditworthy by ARCO; ARCO does not anticipate nonperformance by the counterparties. 44 ARCO Note 13 Other Commitments and Contingencies ARCO has commitments, including those related to the acquisition, construction and development of facilities, all made in the normal course of business. Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits seeking compensatory and punitive damages and injunctions were filed by the State of Alaska, the United States and private plaintiffs against Exxon, Alyeska Pipeline Service Company (Alyeska) and Alyeska's owner companies (including ARCO, which owns approximately 22%). Alyeska and its owner companies have settled the civil damage claims by federal and state governments and the lawsuits by private plaintiffs. Certain issues relating to the liability for the spill remain unresolved between the Exxon companies, on the one hand, and Alyeska and its other owner companies. ARCO and former producers of lead pigments have been named as defendants in cases filed by a municipal housing authority, two purported classes and several individuals seeking damages and injunctive relief as a consequence of the presence of lead-based paint in certain housing units. ARCO is also the subject of or party to other pending or threatened legal actions. The State of Montana is seeking recovery from ARCO of $764 million based on alleged injuries to natural resources resulting from mining and mineral processing businesses formerly operated by Anaconda, ARCO's predecessor in Montana. ARCO is contesting this demand. ARCO is subject to other loss contingencies pursuant to federal, state and local environmental laws and regulations. These require ARCO to remove or mitigate the effects on the environment of the disposal or release of certain chemical, mineral and petroleum substances at various sites, perform certain restoration work on these sites and to pay damages for loss of use and non-use values. ARCO is currently participating in environmental assessments and cleanups under these laws at federal Superfund and state-managed sites, as well as other clean-up sites. ARCO may in the future be involved in additional environmental assessments and cleanups, including restoration of natural resources and damages for loss of use and non-use values. The amount of future costs will depend on such unknown factors as the nature and extent of contamination, the timing, extent and method of remedial actions which may be required and the determination of ARCO's liability in proportion to other responsible parties. Environmental loss contingencies include claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by ARCO. ARCO continues to estimate the amount of these costs in periodically establishing reserves based on progress made in determining the magnitude of remediation costs, experience gained from sites on which remediation has been completed, the timing and extent of remedial actions required by the applicable governmental authorities and an evaluation of the amount of ARCO's liability considered in light of the liability and financial wherewithal of the other responsible parties. At December 31, 1997, the environmental remediation accrual was $767 million. As the scope of ARCO's obligations becomes more clearly defined, there may be changes in these estimated costs, which might result in future charges against ARCO's earnings. ARCO's environmental remediation accrual covers federal Superfund and state-managed sites as well as other clean-up sites, including service stations, refineries, terminals, chemical facilities, third-party landfills, former nuclear processing facilities, sites associated with discontinued operations and sites formerly owned by ARCO. ARCO has been named a potentially responsible party (PRP) for 133 sites. The number of PRP sites in and of itself is not a relevant measure of liability because the nature and extent of environmental concerns varies by site and ARCO's share of responsibility varies from sole responsibility to very little responsibility. ARCO reviews all PRP sites, along with other sites as to which no claims have been asserted, in estimating the amount of the accrual. ARCO's future costs at these sites could exceed the amount accrued by as much as $500 million. Approximately 58% of the reserve related to sites associated with ARCO's discontinued operations, primarily mining activities in the states of Montana, Utah and New Mexico. Another significant component related to currently and formerly owned chemical, nuclear processing, and refining and marketing facilities, and other sites which received wastes from these facilities. The remainder related to other sites with reserves ranging from $1 million to $10 million per site. No one site represents more than 10% of the total accrual. Substantially all amounts accrued are expected to be paid out over the next five to six years. Claims for recovery of remediation costs already incurred and to be incurred in the future have been filed against various third parties. Many of these claims have been resolved. ARCO has neither recorded any asset nor reduced any liability in connection with unresolved claims. Although any ultimate liability arising from any of the matters described herein could result in significant expenses or judgments that, if aggregated and assumed to occur within a single fiscal year, would be material to ARCO's results of operations, the likelihood of such occurrence is considered remote. On the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on ARCO's consolidated financial statements. 45 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ The operations and consolidated financial position of ARCO continue to be affected by domestic and foreign political developments as well as legislation, regulations and litigation pertaining to restrictions on production, imports and exports, tax increases, environmental regulations, cancellation of contract rights and expropriation of property. Both the likelihood of such occurrences and their overall effect on ARCO vary greatly and are not predictable. These uncertainties are part of a number of items that ARCO has taken and will continue to take into account in periodically establishing reserves. Note 14 Taxes The income tax provision for the years ended December 31 comprised the following: Millions 1997 1996 1995 --------------------------- Federal: Current $ 614 $ 662 $ 497 Deferred 129 (9) 42 --------------------------- 743 653 539 Foreign: Current 117 155 108 Deferred (35) 24 (40) --------------------------- 82 179 68 State: Current 98 113 56 Deferred (3) (4) 24 --------------------------- 95 109 80 --------------------------- Total provision for taxes on income $ 920 $ 941 $ 687 =========================== Total income taxes paid in cash $ 831 $ 930 $ 785 =========================== A deferred tax expense of $242 million and $144 million was recorded in 1997 and 1996, respectively, related to unrealized investment gains included in stockholders' equity. Major components of the net deferred tax liability at December 31 were as follows: Millions 1997 1996 ---------------------- Depreciation, depletion and amortization $ (3,713) $ (3,741) Other (878) (510) ---------------------- Total deferred tax liabilities (4,591) (4,251) ---------------------- Dismantlement and environmental 604 518 Postretirement benefits 321 330 Foreign excess tax basis/loss carryforwards 279 299 Other 431 350 ---------------------- Total deferred tax assets 1,635 1,497 ---------------------- Valuation allowance (127) (130) ---------------------- Net deferred income tax liability $ (3,083) $ (2,884) ====================== The valuation allowance was $113 million at December 31, 1995. Taxes other than income taxes for the years ended December 31 comprised the following: Millions 1997 1996 1995 --------------------------- Property $ 189 $ 178 $ 180 Production/severance 397 445 343 Other 180 177 194 --------------------------- Total $ 766 $ 800 $ 717 =========================== ARCO has foreign loss carryforwards of $490 million which begin expiring in 1998. The domestic and foreign components of income before income taxes and minority interest, and a reconciliation of income tax expense with tax at the effective federal statutory rate for the years ended December 31 were as follows:
1997 1996 1995 ------------------------ ------------------------ ----------------------- Millions Amount % Pretax Income Amount % Pretax Income Amount % Pretax Income ------------------------ ------------------------ ----------------------- Income before income taxes: Domestic $2,582 89.7 $2,279 84.1 $1,896 87.3 Foreign 295 10.3 430 15.9 277 12.7 ------------------------ ------------------------ ----------------------- Total $2,877 100.0 $2,709 100.0 $2,173 100.0 ======================== ======================== ======================= Tax at 35% $1,007 35.0 $ 948 35.0 $ 761 35.0 Increase (reduction) in taxes resulting from: Dividend exclusion (33) (1.1) (15) (0.6) (54) (2.5) Taxes on foreign income in excess of statutory rate 32 1.1 41 1.5 46 2.1 Affiliate stock transactions (109) (3.8) -- -- -- -- Disposition of equity investment 90 3.1 -- -- -- -- Foreign deferred tax asset valuation -- -- 28 1.0 (30) (1.4) State income taxes (net of federal effect) 62 2.2 71 2.6 52 2.4 Tax credits (106) (3.7) (95) (3.5) (81) (3.7) Other (23) (0.8) (37) (1.3) (7) (0.3) ------------------------ ------------------------ ----------------------- Provision for taxes on income $ 920 32.0 $ 941 34.7 $ 687 31.6 ======================== ======================== =======================
46 ARCO Note 15 Retirement Plans The following table sets forth the plans' funded status and amounts recognized in the balance sheet at December 31:
1997 1996 ------------------------------ ------------------------------ Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Millions Benefits Exceed Assets Benefits Exceed Assets ------------------------------ ------------------------------ Actuarial present value of benefits: Vested benefits $(2,285) $(249) $(2,131) $(213) Non-vested benefits (37) (4) (31) (1) ------------------------------ ------------------------------ Accumulated benefits (2,322) (253) (2,162) (214) Effect of future projected salary increases (254) (31) (359) (78) ------------------------------ ------------------------------ Projected benefit obligation (PBO) (2,576) (284) (2,521) (292) Plan assets at fair value, primarily stocks and bonds 3,100 1 2,895 2 ------------------------------ ------------------------------ PBO(greater) less than plan assets 524 (283) 374 (290) Unrecognized net loss 76 115 178 123 Prior service cost not yet recognized in net periodic pension cost 129 20 136 22 Remaining unrecognized (asset) obligation from transition (234) 5 (263) 7 Adjustment for minimum liability - (110) - (76) ------------------------------ ------------------------------ Prepaid pension asset (liability) recognized in the balance sheet $ 495 $(253) $ 425 $(214) ============================== ==============================
ARCO and its subsidiaries have defined benefit pension plans to provide pension benefits to substantially all employees. The benefits are based on years of service and the employee's compensation, primarily during the last three years of service. ARCO's funding policy is to make annual contributions as required by applicable regulations. ARCO accrues pension costs based on an actuarial valuation for each plan and funds the plan through contributions to trust funds that are kept apart from company funds. The assumptions used as of December 31 in determining the pension cost and pension liability were as follows: Percent 1997 1996 1995 ---------------------- Discount rate 7.0 7.25 7.0 Rate of salary progression 4.0 5.0 5.0 Long-term rate of return on assets 10.5 10.5 10.5 Pension costs related to ARCO-sponsored plans, on a pretax basis, for the years ended December 31 were as follows: Millions 1997 1996 1995 ---------------------- Service cost-benefits earned during the period $ 73 $ 79 $ 62 Interest cost on PBO 196 198 195 Actual (return) loss on plan assets (427) (454) (517) Net amortization and deferral 130 190 272 ---------------------- Net pension (income) cost $ (28) $ 13 $ 12 ====================== Note 16 Other Postretirement Benefits ARCO and its subsidiaries sponsor defined postretirement benefit plans which provide other postretirement benefits to substantially all employees who retire with ARCO having rendered the required years of service, and to their spouses and eligible dependents. Health care benefits are provided primarily through comprehensive indemnity plans or health maintenance organizations (HMOs), as chosen by the employee. Beginning January 1, 1997, ARCO paid for the cost of the benchmark HMO with employees responsible for the differential cost, if any, of their selected option. Previously, ARCO paid approximately 80% of the cost of a comprehensive indemnity plan. This change resulted in an unrecognized prior service benefit. Life insurance benefits are based primarily on the employee's final compensation and are partially paid for by retiree contributions, which vary based upon coverage chosen by the retiree. ARCO has the right to modify the plans at any time. ARCO's current policy is to fund the cost of postretirement health care and life insurance plans on a pay-as-you-go basis. The significant assumptions used in determining postretirement benefit cost and the accumulated postretirement benefit obligation (APBO) were as follows: Percent 1997 1996 1995 ---------------------- Discount rate 7.0 7.25 7.0 Rate of salary progression 4.0 5.0 5.0 47 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ ARCO accrues postretirement benefit costs based on actuarial calculations for each plan. Net postretirement benefit costs for the years ended December 31 included the following:
1997 1996 1995 ------------------------------------------------------------------------------------------------------ Health Life Health Life Health Life Millions Care Insurance Total Care Insurance Total Care Insurance Total ------------------------------------------------------------------------------------------------------ Service cost-benefits earned during the period $ 8 $ 3 $ 11 $ 7 $ 3 $ 10 $ 8 $ 2 $ 10 Interest cost on APBO 30 13 43 32 13 45 49 13 62 Net amortization (15) - (15) (13) - (13) - (1) (1) ------------------------------------------------------------------------------------------------------ Net postretirement benefit cost $ 23 $ 16 $ 39 $ 26 $ 16 $ 42 $ 57 $ 14 $ 71 ======================================================================================================
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care trend rate) for the health plans is 9% for 1995 and 1996, 7% for 1997 to 2001, and 5% thereafter. The effect of a one- percentage-point increase in the assumed trend rate would increase the APBO as of December 31, 1997, by approximately $52 million, and the aggregate of the service and interest cost components of net annual postretirement benefit cost by approximately $5 million. The plans' combined postretirement benefit liability at December 31 was as follows:
1997 1996 ----------------------------------------------------------- Millions Health Life Total Health Life Total Care Insurance Care Insurance ----------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $(345) $(156) $(501) $(370) $(153) $(523) Employees fully eligible (18) (7) (25) (16) (7) (23) Other active participants (98) (31) (129) (88) (33) (121) ----------------------------------------------------------- Total APBO (461) (194) (655) (474) (193) (667) Unrecognized prior service (benefit) cost (217) 2 (215) (233) 2 (231) Unrecognized net (gain) loss 46 (14) 32 65 (13) 52 ----------------------------------------------------------- Accrued postretirement benefit cost recognized in the balance sheet $(632) $(206) $(838) $(642) $(204) $(846) ===========================================================
Note 17 Lease Commitments Capital lease obligations are recorded at the present value of future rental payments. The related assets are amortized on a straight-line basis. At December 31, 1997, future minimum rental payments due under leases were as follows: Capital Operating Millions Leases Leases ---------------------- 1998 $ 3 $ 249 1999 3 209 2000 3 178 2001 3 120 2002 3 103 Later years 67 632 ---------------------- Total minimum lease payments 82 $ 1,491 ======== Imputed interest (rates ranging from 9.75% to 12%) 56 --------- Present value of minimum lease payments included in long-term debt $ 26 ====================== Minimum future rental income under noncancellable subleases at December 31, 1997, amounted to $63 million. Operating lease net rental expense for the years ended December 31 was as follows: Millions 1997 1996 1995 -------------------------------- Minimum rentals $ 257 $ 215 $ 225 Contingent rentals 1 2 10 Sublease rental income (11) (11) (12) -------------------------------- Net rental expense $ 247 $ 206 $ 223 ================================ No restrictions on dividends or on additional debt or lease financing exist under ARCO's lease commitments. Under certain conditions, options exist to purchase certain leased properties. 48 ARCO Note 18 Stock Options Options to purchase shares of ARCO's common stock have been granted to executives, outside directors and key employees. The exercise price of each option is equal to the fair market value of common stock at the date of grant. These options become exercisable in varying installments and expire 10 years after the date of grant. Options granted prior to 1997 vest over two years in equal installments. Options granted in 1997 vest equally over three years. Transactions during 1997, 1996 and 1995 were as follows (restated to give effect to June 13, 1997 100% stock dividend): Weighted Average Exercise Price ----------------------------------- Balance, January 1, 1995 7,147,484 $ 52.13 Granted 973,196 54.50 Exercised (442,172) 43.66 Cancelled (2,236) 52.11 ----------------------------------- Balance, December 31, 1995 7,676,272 $ 52.92 =================================== Granted 1,101,834 56.61 Exercised (1,110,326) 46.15 Cancelled (34,358) 58.47 ----------------------------------- Balance, December 31, 1996 7,633,422 $ 54.41 =================================== Granted 1,414,048 64.47 Exercised (1,022,100) 52.21 Cancelled (18,224) 61.18 ----------------------------------- Balance, December 31, 1997 8,007,146 $ 56.45 =================================== A summary of ARCO's fixed stock options as of December 31, 1997, 1996 and 1995, was as follows: 1997 1996 1995 ---------------------------------------- Shares available for option 6,605,106 8,672,714 7,166,892 Options exercisable 6,064,856 6,067,976 6,149,752 Weighted average exercise price of options exercisable $ 54.58 $ 54.01 $ 52.89 Weighted average fair value of options granted during the year $ 14.27 $ 25.90 $ 28.63 Used to calculate fair value: Risk-free interest rate 6.38% 6.00% 7.36% Expected life (years) 10 10 10 Expected volatility 18.17% 14.42% 17.33% Expected dividends 4.29% 0.00% 0.00% At December 31, 1997, exercise prices for options outstanding ranged from $39.50 to $85.875 and the weighted average remaining contractual life was 5.92 years. ARCO applies APB 25 in accounting for its fixed stock options. Accordingly, no compensation cost has been recognized for options granted. The pro forma impact to net income and earnings per share from calculating compensation expense consistent with the fair value method under SFAS No. 123 was less than 1% for the years ended December 31, 1997, 1996 and 1995. Beginning in 1997, ARCO awards contingent performance-based restricted stock to executives and key employees. The number of shares of restricted stock ultimately issued depends on the attainment of certain performance criteria over a specified evaluation period. Restricted stock ultimately issued is subject to a two-year restriction on transferring. During 1997, 326,688 shares of contingent performance-based restricted stock were awarded at a weighted-average price of $64.06, net of forfeitures and retirements, with varying evaluation periods. During 1997, 62,422 shares of restricted stock were issued, net of forfeitures, at a weighted-average price of $63.63. During 1997, $23 million was recognized as expense for performance-based restricted stock. Holders of options granted prior to 1997 accrue dividend share credits (DSCs) on all shares under option. The amount of DSCs accrued is determined based upon the quarterly dividend rate and fair market value of ARCO common stock as of each quarterly record date. Upon exercise of options, holders receive additional shares of common stock equal to DSCs accumulated. DSC activity during 1997 was as follows: Accrued 2,039,102 Paid out (396,250) Cancelled (287) --------------- Balance, December 31, 1997 1,642,565 =============== During 1997, $35 million was recognized as expense for DSCs. Note 19 Stockholders' Equity Detail of capital stock as of December 31 was as follows: 1997 1996 ---------------------------------- $3.00 Cumulative convertible preference stock, par $1: Shares authorized 78,089 78,089 Shares issued and outstanding 55,941 60,759 Aggregate value in liquidation - (thousands) $ 4,475 $ 4,861 $2.80 Cumulative convertible preference stock, par $1: Shares authorized 833,776 833,776 Shares issued and outstanding 615,653 673,855 Aggregate value in liquidation - (thousands) $ 43,096 $ 47,170 Common stock, par $2.50: Shares authorized 600,000,000 600,000,000 Shares issued 322,719,890 161,086,174 Shares outstanding 320,369,895 161,082,043 Shares held in treasury 2,349,995 4,131 49 ARCO Notes to Consolidated Financial Statements - ------------------------------------------ Changes in preference stocks were due to conversions. The $3.00 cumulative convertible preference stock is convertible into 13.6 shares of common stock. The $2.80 cumulative convertible preference stock is convertible into 4.8 shares of common stock. Common stock is subordinate to the preference stocks for dividends and assets. The $3.00 and $2.80 preference stocks may be redeemed at the option of ARCO for $82 and $70 per share, respectively. ARCO has authorized 75,000,000 shares of preferred stock, $.01 par, of which none were issued or outstanding at December 31, 1997. At December 31, 1997, shares of ARCO's authorized and common stock were reserved as follows: Conversions: $3.00 Preference stock 760,797 $2.80 Preference stock 2,955,134 Stock option plans 16,254,817 Employee benefit plans 9,974,482 --------------- Total 29,945,230 =============== Under ARCO's incentive compensation plans, awards of ARCO's common stock may be made to officers, outside directors and key employees. Stockholders' equity adjustments at December 31, 1997 and 1996 were as follows: Millions 1997 1996 ----------------------- Unrealized gain on investments $ 606 $ 225 Foreign currency adjustments (204) (19) Pension liability adjustment (54) (28) ----------------------- Total $ 348 $ 178 ======================= Note 20 Supplemental Cash Flow Information The following is supplemental cash flow information for the years ended December 31: Millions 1997 1996 1995 --------------------------------- Short-term investments: Gross sales and maturities $ 1,784 $ 3,335 $ 4,216 Gross purchases (1,226) (2,557) (2,716) --------------------------------- Net cash provided $ 558 $ 778 $ 1,500 ================================= Notes payable: Gross proceeds $ 9,866 $ 5,806 $ 8,058 Gross repayments (9,400) (5,885) (8,351) --------------------------------- Net cash provided (used) $ 466 $ (79) $ (293) ================================= Gross noncash provisions charged to income $ 714 $ 295 $ 444 Reserve reversal from partial tax audit settlements (145) - - Cash payments of previously accrued items (322) (515) (627) --------------------------------- Cash payments (greater) less than noncash provisions $ 247 $ (220) $ (183) ================================= Changes in working capital -- increase (decrease) to cash: Accounts receivable $ 332 $ (235) $ (239) Inventories (19) (96) (75) Accounts payable (147) 279 159 Other working capital (324) 173 (49) --------------------------------- $ (158) $ 121 $ (204) ================================= Note 21 Foreign Currency Transactions Foreign currency transactions resulted in net losses of $39 million, $17 million and $15 million in 1997, 1996 and 1995, respectively. Note 22 Earnings Per Share
1997 1996 1995 ------------------------------------------------------------------------------------------ (Millions, except per share amounts) Income Shares Per Share Income Shares Per Share Income Shares Per Share ------------------------------------------------------------------------------------------ Net income $ 1,771 $1,663 $1,376 Less: Preference stock dividends (2) (2) (2) ------------------------------------------------------------------------------------------ Income available to common stockholders -- basic EPS 1,769 321.2 $ 5.51 1,661 321.7 $5.17 1,374 321.7 $4.27 Effect of dilutive securities: Contingently issuable shares (primarily options) 2.3 0.6 0.1 $3.00 Convertible preference stock 0.8 0.9 1.0 $2.80 Convertible preference stock 2 3.1 2 3.3 2 3.7 ------------------------------------------------------------------------------------------ Income available to common stockholders and assumed conversions -- diluted EPS $ 1,771 327.4 $ 5.41 $1,663 326.5 $5.09 $1,376 326.5 $4.22 ==========================================================================================
50 ARCO Note 23 Lyondell Petrochemical Company Lyondell is engaged in the manufacture and marketing of basic commodity chemicals, including ethylene, propylene, methanol and polymers, and, through its approximately 90% interest in LYONDELL-CITGO Refining Company Ltd., the refining and marketing of petroleum products, primarily in the southwestern United States. In September 1997, all of ARCO's 9% Exchangeable Notes due September 15, 1997 with an outstanding principal amount of $988 million were settled with Lyondell common stock owned by ARCO. All remaining Lyondell shares were sold by ARCO in a privately negotiated transaction in late September. ARCO realized an aggregate pretax gain of $633 million, or approximately $291 million after tax, on the two transactions. Summarized financial information for Lyondell was as follows: Nine months ended Year ended September 30, December 31, ----------------------------------- Millions 1997 1996 1995 ----------------------------------- Revenues/(a)/ $2,343 $5,052 $4,936 Operating income 378 278 706 Income before income taxes 371 196 618 Net income $ 235 $ 126 $ 389 =================================== ARCO's equity in net income of Lyondell $ 119 $ 53 $ 194 =================================== Cash dividends received from Lyondell $ 27 $ 36 $ 36 =================================== At December 31: Current assets $ 831 $ 678 Noncurrent assets 2,445 1,928 Current liabilities 771 750 Long-term debt 1,194 807 Other liabilities 271 210 Minority interest 609 459 Stockholders' equity/(b)/ 431 380 /(a)/Includes $229, $318 and $325 of sales to ARCO in 1997, 1996 and 1995, respectively, which approximated 3%, 4% and 5% of ARCO's purchases in those years. /(b)/ARCO's investment in Lyondell comprised 49.9% of Lyondell's stockholders' equity plus $72 of dividends received in excess of basis of investment. Note 24 Research and Development Expenditures for research and development totaled $120 million, $106 million and $104 million for the years ended December 31, 1997, 1996 and 1995, respectively. Note 25 Unaudited Quarterly Results Millions, except per share amounts 1997 1996 ----------------------------- Sales and other operating revenues Quarter ended: March 31 $ 5,044 $ 4,156 June 30 4,587 4,559 September 30 4,553 4,748 December 31 4,500 5,129 ----------------------------- Total $18,684 $18,592 ============================= Income before income taxes, minority interest and extraordinary item Quarter ended: March 31 $ 740 $ 620 June 30 770 720 September 30 890 791 December 31 477 578 ----------------------------- Total $ 2,877 $ 2,709 ============================= Net income Quarter ended: March 31 $ 483 $ 370 June 30 390/(a)/ 434 September 30 516/(b)/ 479 December 31 382/(c)/ 380 ----------------------------- Total $ 1,771 $ 1,663 ============================= Earned per share--basic Quarter ended: March 31 $ 1.50 $ 1.15 June 30 $ 1.21 $ 1.35 September 30 $ 1.61 $ 1.49 December 31 $ 1.19 $ 1.18 (a) See Note 5 to Consolidated Financial Statements. (b) Includes $291 gain on disposition of Lyondell stock (Note 23). (c) See Note 3 to Consolidated Financial Statements. 51 ARCO Supplemental Information (Unaudited) - ------------------------------------- Oil and Gas Producing Activities The Securities and Exchange Commission (SEC) defines proved oil and gas reserves as those estimated quantities of crude oil, natural gas, and natural gas liquids 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 recovered through existing wells with existing equipment and operating methods. Petroleum reserves are estimated by ARCO engineers. The estimates include reserves in which ARCO holds an economic interest under production-sharing and other types of operating agreements with foreign governments. Reserves attributable to certain oil and gas discoveries were not considered proved as of December 31, 1997 due to geological, technical or economic uncertainties. Proved reserves do not include amounts that may result from extensions of currently proved areas or from application of enhanced recovery processes not yet determined to be commercial in specific reservoirs. Proved reserves also do not include any reserves attributable to ARCO's 8% interest in LUKOIL, a Russian oil company. Natural gas liquids comprise 14% of petroleum liquid proved reserves. ARCO has no long-term supply contracts to purchase petroleum liquids or natural gas from foreign governments. The changes in proved reserves for the years ended December 31 were as follows:
Petroleum Liquids (million barrels) ------------------------------------------------------- Consolidated --------------------------- Other U.S. International Total Reserves/1/ Worldwide ---------------------------------------------------------- Reserves at January 1, 1995 2,246 222 2,468 - 2,468 Revisions 76 2 78 - 78 Improved recovery 15 - 15 - 15 Purchases 16 1 17 - 17 Extensions and discoveries 33 5 38 - 38 Production (213) (24) (237) - (237) Consumed - - - - - Sales (10) - (10) - (10) ---------------------------------------------------------- Reserves at December 31, 1995 2,163 206 2,369 - 2,369 ========================================================== Revisions 60 4 64 - 64 Improved recovery 5 - 5 - 5 Purchases 16 218 234 - 234 Extensions and discoveries 76 5 81 - 81 Production (207) (24) (231) - (231) Consumed - - - - - Sales (1) - (1) - (1) ---------------------------------------------------------- Reserves at December 31, 1996 2,112 409 2,521 - 2,521 ========================================================== Revisions 115 60 175 - 175 Improved recovery 10 - 10 - 10 Purchases 10 25 35 49 84 Extensions and discoveries 89 55 144 - 144 Production (204) (29) (233) (1) (234) Consumed - - - - - Sales (1) - (1) - (1) ---------------------------------------------------------- Reserves at December 31, 1997 2,131 520 2,651 48 2,699 ========================================================== Proved developed reserves: At January 1, 1995 1,915 87 2,002 - 2,002 At December 31, 1995 1,896 92 1,988 - 1,988 At December 31, 1996 1,828 150 1,978 - 1,978 At December 31, 1997 1,821 204 2,025 7 2,032 Natural Gas (billion cubic feet) ----------------------------------------------------------- Consolidated -------------------------------- Other U.S. International Total Reserves/1/ Worldwide ---------------------------------------------------------- Reserves at January 1, 1995 4,615 3,493 8,108 - 8,108 Revisions 184 7 191 - 191 Improved recovery 8 - 8 - 8 Purchases 78 89 167 - 167 Extensions and discoveries 252 302 554 - 554 Production (365) (203) (568) - (568) Consumed (93) (5) (98) - (98) Sales (13) - (13) - (13) ---------------------------------------------------------- Reserves at December 31, 1995 4,666 3,683 8,349 - 8,349 ========================================================== Revisions 103 (94) 9 - 9 Improved recovery 14 - 14 - 14 Purchases 114 - 114 - 114 Extensions and discoveries 343 30 373 - 373 Production (382) (267) (649) - (649) Consumed (78) (5) (83) - (83) Sales (4) - (4) - (4) ---------------------------------------------------------- Reserves at December 31, 1996 4,776 3,347 8,123 - 8,123 ========================================================== Revisions 187 17 204 - 204 Improved recovery 28 3 31 - 31 Purchases 165 16 181 67 248 Extensions and discoveries 308 352 660 - 660 Production (389) (308) (697) - (697) Consumed (79) (10) (89) - (89) Sales (8) - (8) - (8) ---------------------------------------------------------- Reserves at December 31, 1997 4,988 3,417 8,405 67 8,472 ========================================================== Proved developed reserves: At January 1, 1995 4,301 1,142 5,443 - 5,443 At December 31, 1995 4,294 1,806 6,100 - 6,100 At December 31, 1996 4,310 1,780 6,090 - 6,090 At December 31, 1997 4,467 1,643 6,110 10 6,120
/1/Comprises reserves attributable to ARCO's ownership interest in equity affiliates 52 ARCO Supplemental Information (Unaudited) - ------------------------------------- Included in ARCO's reserves are 100% of the reserves of Vastar, a consolidated subsidiary of which ARCO owned 82.2% at December 31, 1997. Vastar's reserves comprised 6% and 48% of U.S. petroleum liquids and natural gas reserves, respectively, at December 31, 1997. During 1997, net reserve additions, including a purchase by LUKARCO, an equity affiliate, replaced 164% of worldwide oil-equivalent production. During the three-year period 1995-1997, ARCO's net reserve additions replaced 127% of worldwide oil-equivalent production. Significant changes in 1997 related to the classification as proved of the previously discovered Shearwater gas condensate field in the U.K. North Sea, the acquisition (by LUKARCO) of an interest in the Tengiz field in Kazakhstan, and the extension of the estimated life of the Kuparuk River field in Alaska. Natural gas from the North Slope of Alaska, other than that used in providing fuel in North Slope operations or sold to others on the North Slope, is not presently economically marketable. ARCO is actively evaluating various technical options for commercializing North Slope gas. Among the options being studied are the construction of gas transportation and liquefied natural gas (LNG) manufacturing facilities and the development of a gas-to-liquids conversion process. ARCO is also working with the State of Alaska to enhance the fiscal and regulatory climate for the ultimate commercialization of North Slope gas resources. Significant technical uncertainties and existing market conditions still preclude gas from such potential projects being included in ARCO's reserves. ARCO reports reserve estimates to various federal government agencies and commissions. These estimates may cover various regions of crude oil and natural gas classifications within the United States and may be subject to mandated definitions. There have been no reports since the beginning of the last fiscal year of total ARCO reserve estimates furnished to federal government agencies or commissions which vary from those reported to the SEC. The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of December 31 were as follows:
1997 1996 1995 ------------------------------------------------------------------------------------------------------ Millions U.S. International Total U.S. International Total U.S. International Total ------------------------------------------------------------------------------------------------------- Proved properties $ 15,845 $ 6,026 $ 21,871 $ 15,004 $ 5,245 $ 20,249 $ 14,355 $ 4,304 $ 18,659 Unproved properties 365 447 812 257 297 554 182 236 418 ------------------------------------------------------------------------------------------------------- 16,210 6,473 22,683 15,261 5,542 20,803 14,537 4,540 19,077 Accumulated depreciation, depletion and amortization 10,559 2,959 13,518 9,924 2,668 12,592 9,257 2,302 11,559 ------------------------------------------------------------------------------------------------------- Net capitalized costs 5,651 3,514 9,165 5,337 2,874 8,211 5,280 2,238 7,518 ------------------------------------------------------------------------------------------------------- Net capitalized costs of equity affiliates* - 55 55 - - - - - - ------------------------------------------------------------------------------------------------------- Total $ 5,651 $ 3,569 $ 9,220 $ 5,337 $ 2,874 $ 8,211 $ 5,280 $ 2,238 $ 7,518 =======================================================================================================
Costs, both capitalized and expensed, incurred in oil and gas producing activities during the three years ended December 31 are set forth below. Property acquisition costs represent costs incurred to purchase or lease oil and gas properties. Exploration costs include costs of geological and geophysical activity and drilling exploratory wells. Development costs include costs of drilling and equipping development wells and construction of production facilities to extract, treat and store oil and gas.
1997 1996 1995 ------------------------------------------------------------------------------------------------------ Millions U.S. International Total U.S. International Total U.S. International Total ------------------------------------------------------------------------------------------------------- Property acquisition costs: Proved properties $ 92 $ 224 $ 316 $ 82 $ 275 $ 357 $ 56 $ 34 $ 90 Unproved properties 100 8 108 98 11 109 24 15 39 Exploration costs 328 332 660 277 213 490 212 309 521 Development costs 692 794 1,486 481 482 963 389 328 717 ------------------------------------------------------------------------------------------------------- Total expenditures 1,212 1,358 2,570 938 981 1,919 681 686 1,367 ------------------------------------------------------------------------------------------------------- Costs incurred of equity affiliates* - 109 109 - - - - - - ------------------------------------------------------------------------------------------------------- Total $ 1,212 $1,467 $ 2,679 $ 938 $ 981 $ 1,919 $ 681 $ 686 $ 1,367 =======================================================================================================
*ARCO's share 53 ARCO Results of operations from oil and gas producing activities (including operating overhead) for the three years ended December 31 were as follows:
1997 1996 1995 ------------------------------------------------------------------------------------------------ Millions U.S. International Total U.S. International Total U.S. International Total ------------------------------------------------------------------------------------------------ Revenues: Sales $1,974 $1,349 $3,323 $1,892 $1,140 $3,032 $1,460 $ 920 $2,380 Transfers 2,074 - 2,074 2,199 - 2,199 1,679 - 1,679 Other 42 45 87 47 45 92 83 44 127 ------------------------------------------------------------------------------------------------ 4,090 1,394 5,484 4,138 1,185 5,323 3,222 964 4,186 Production costs 615 286 901 587 234 821 648 204 852 Production taxes 420 43 463 457 50 507 373 28 401 Exploration expenses 263 245 508 238 175 413 212 311 523 Depreciation, depletion and amortization 681 429 1,110 691 305 996 713 264 977 Other operating expenses 258 247 505 277 227 504 218 188 406 ------------------------------------------------------------------------------------------------ Results before income taxes 1,853 144 1,997 1,888 194 2,082 1,058 (31) 1,027 Income tax expense 609 11 620 628 109 737 332 7 339 ------------------------------------------------------------------------------------------------ Results of operations from oil and gas producing activities 1,244 133 1,377 1,260 85 1,345 726 (38) 688 ------------------------------------------------------------------------------------------------ Results from equity affiliates* - (6) (6) - - - - - - ------------------------------------------------------------------------------------------------ Total $1,244 $ 127 $1,371 $1,260 $ 85 $1,345 $ 726 $ (38) $ 688 ================================================================================================
The difference between the above results of operations and the amounts reported for exploration and production segment net income in Note 2 of Notes to Consolidated Financial Statements is primarily marketing-related activities, minority interest adjustments, the exclusions of gains on property sales and unusual items related to the oil and gas operations. The standardized measure of discounted estimated future net cash flows related to proved oil and gas reserves at December 31 was as follows:
1997 1996 1995 ------------------------------------------------------------------------------------------------ Billions U.S. International Total U.S. International Total U.S. International Total ------------------------------------------------------------------------------------------------ Future cash inflows $36.7 $16.6 $53.3 $48.8 $17.8 $66.6 $32.5 $12.1 $44.6 Future development and production costs 15.0 7.1 22.1 14.2 7.3 21.5 13.2 4.4 17.6 Future income tax expense 7.3 3.5 10.8 12.0 3.2 15.2 6.5 2.5 9.0 ------------------------------------------------------------------------------------------------ Future net cash flows 14.4 6.0 20.4 22.6 7.3 29.9 12.8 5.2 18.0 10% annual discount 6.5 2.8 9.3 10.3 3.6 13.9 5.7 2.4 8.1 ------------------------------------------------------------------------------------------------ Standardized measure of discounted future net cash flows 7.9 3.2 11.1 12.3 3.7 16.0 7.1 2.8 9.9 ------------------------------------------------------------------------------------------------ Standardized measure of discounted future net cash flows of equity affiliates* - 0.1 0.1 - - - - - - ------------------------------------------------------------------------------------------------ Total $ 7.9 $ 3.3 $11.2 $12.3 $ 3.7 $16.0 $ 7.1 $ 2.8 $ 9.9 ================================================================================================
*ARCO's share 54 ARCO Supplemental Information (Unaudited) - ------------------------------------- Primary changes in the standardized measure of discounted estimated future net cash flows for the years ended December 31 were as follows:
Billions 1997 1996 1995 ---------------------------- Sales and transfers of oil and gas, net of production costs $ (4.0) $ (3.9) $ (2.9) Extensions, discoveries and improved recovery, less related costs 0.9 1.2 0.7 Revisions of estimates of reserves proved in prior years: Quantity estimates 0.7 0.5 0.4 Net changes in price and production costs (8.4) 8.4 1.8 Purchases/sales 0.5 1.0 0.1 Other (0.7) (0.4) (0.4) Accretion of discount 2.4 1.5 1.3 Development costs incurred during the period 1.5 1.0 0.7 Net change in income taxes 2.3 (3.2) (0.7) ---------------------------- Net change $ (4.8) $ 6.1 $ 1.0 ============================
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flows to ARCO. Management's investment and operating decisions are based on reserve estimates that include proved reserves prescribed by the SEC as well as probable reserves, and on different price and cost assumptions from those used here. It should be recognized that applying current costs and prices and a 10% standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves. Coal Operations Supplemental operating statistics for the coal operations of ARCO for the three years ended December 31 were as follows:
1997 1996 1995 ------------------------------ Coal shipments -- thousand tons: U.S. 46,939 51,615 45,853 Canyon Fuel* 6,286 - - International 8,837 10,851 11,772 ------------------------------ Total 62,062 62,466 57,625 ============================== Coal reserves -- million tons recoverable: U.S. 1,154 1,201 1,265 Canyon Fuel* 169 175 - International 192 198 216 ------------------------------ Total 1,515 1,574 1,481 ============================== Average market price per ton: U.S. $ 7.33 $ 7.58 $ 8.38 Canyon Fuel* $ 25.50 $ - $ - International $ 33.14 $ 33.37 $ 32.09 Composite price $ 13.50 $ 12.06 $ 13.22
*ARCO's share of domestic equity affiliate 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
SCHEDULE NO. PAGE --- ---- Independent Accountants' Report.................................... 57 Financial Statements: Consolidated Statement of Income.............................. 28 Consolidated Balance Sheet.................................... 31 Consolidated Statement of Cash Flows.......................... 32 Consolidated Statement of Changes in Stockholders' Equity..... 36 Notes to Consolidated Financial Statements.................... 38 Supplemental Information...................................... 52 Supporting Financial Statement Schedule Covered by the Foregoing Independent Accountants' Report: II Valuation and Qualifying Accounts............................. 65
Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. Financial statements with respect to unconsolidated subsidiaries and 50% owned companies are omitted per Rule 3-09(a) of Regulation S-X. 56 INDEPENDENT ACCOUNTANTS' REPORT To the Stockholders and Board of Directors of Atlantic Richfield Company We have audited the accompanying consolidated balance sheets of Atlantic Richfield Company as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997 and the related financial statement schedule. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above (appearing on pages 28, 31, 32, 36 and 38 through 51) present fairly, in all material respects, the consolidated financial position of Atlantic Richfield Company as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above (appearing on page 65), when considered in relation to the basic financial statement taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Los Angeles, California February 12, 1998 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 4, 1998, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997, and which is incorporated herein by reference, except for the material included under the captions "Committee Report on Executive Compensation" and "Performance Graph." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1 and 2. Financial Statements and Financial Statement Schedules: These documents are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule. 3. Exhibits: 3.1 Restated Certificate of Incorporation of Atlantic Richfield Company ("ARCO") as of June 27, 1994, filed with the Securi- ties and Exchange Commission (the "Commission") as Exhibit 3 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1994, under File No. 1-1196 and incorporated herein by reference. 3.2 By-Laws of ARCO as amended through January 23, 1989, filed with the Commission as Exhibit 3.2 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chicago Trust Company of New York, as Rights Agent, filed with the Commission as Exhibit 4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1995, under File No. 1-1196 and incorporated herein by reference. 4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhattan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1985, under File No. 1-1196 and incorporated herein by reference. 4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of New York, filed with the Commission on January 6, 1992 as Exhibit 4.3 to ARCO's Registration Statement on Form S-3 (No. 33-44925) and incorporated herein by reference. 58 4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities authorized under any such instrument does not exceed 10% of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request. 10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of ARCO on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplemen- tary Executive Retirement Plan, effective as of March 22, 1993, filed with the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1993, under File No. 1-1196 and incorporated herein by reference. 10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplemen- tary Executive Retirement Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.1(d)* Amendment No. 3 to the Atlantic Richfield Company Supplemen- tary Executive Retirement Plan, effective as of August 1, 1997, filed herewith. 10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral Plan, effective as of July 27, 1992, filed with the Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Deferral Plan, effective as of January 1, 1997, filed here- with. 10.3(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective as of July 1, 1988, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1988, under File No. 1-1196 and incorporated herein by reference. 10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of January 1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1989, under File No. 1-1196 and incorporated herein by reference. 10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of July 1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of August 5, 1996, filed with the Commission as Exhibit 10.4(d) to ARCO's report on Form 10-K for the year 1996, under File No. 1-1196 and incorporated herein by reference. 10.4* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised and effective January 1, 1997, filed with the Commission as Exhibit 10.5 to ARCO's report on Form 10-K for the year 1996, under File No. 1-1196 and incorporated herein by reference. 59 10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on November 26, 1984, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by refer- ence. 10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January 1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of February 24, 1997, filed herewith. 10.6* Atlantic Richfield Company's 1985 Executive Long-Term Incen- tive Plan, as adopted by the Board of Directors of ARCO on May 28, 1985, and effective as of that date, as amended through July 28, 1997, filed herewith. 10.7* Atlantic Richfield Company Executive Life Insurance Plan--Sum- mary Plan Description, effective as of June 28, 1990, filed with the Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.8(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--Summary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.9 to ARCO's re- port on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long-Term Disability Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and in- corporated herein by reference. 10.9 Form of Indemnity Agreement adopted by the Board of Directors of ARCO on January 26, 1987 and executed in February 1987 by ARCO and each of its directors and officers, included in Ex- hibit A to the 1987 Proxy Statement, filed with the Commission under File No. 1-1196 and incorporated herein by reference. 10.10(a)* Stock Option Plan for Outside Directors effective as of Decem- ber 17, 1990, filed with the Commission as Exhibit 10.14 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.10(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors, effective as of June 22, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.10(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed herewith. 10.10(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed herewith. 10.11(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990, filed with the Commission as Exhibit 10.13(a) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.11(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 60 10.11(c)* Amendment No. 2 to the Deferral Plan for Outside Directors effective as of July 22, 1996, filed herewith. 10.12* Special Incentive Plan, as adopted by the Board of Directors of ARCO on February 28, 1994, and as effective on that date, is included in Appendix C to the Company's 1994 Proxy Statement filed with the Commission under File No. 1-1196 and incorporated herein by reference. 10.13* 1997 Restricted Stock Plan For Outside Directors effective as of January 1, 1997, filed herewith. 21 Subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 24 Power of Attorney. 27 Financial Data Schedule. Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Corporate Secretary. - -------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K. (b) REPORTS ON FORM 8-K: The following Current Report on Form 8-K was filed during the quarter ended December 31, 1997, and thereafter through February 27, 1998:
DATE OF REPORT ITEM NO. FINANCIAL STATEMENTS -------------- -------- -------------------- January 25, 1998 5 None
61 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company; Registration Statement on Form S-8 (No. 333-33151), Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Registration Statement on Form S-8 (No. 333-33153), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Registration Statement on Form S-8 (No. 333-26901), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21552), and Registration Statement on Form S-8 (No. 333-33245), of our report dated February 12, 1998, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Los Angeles, California March 2, 1998 62 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. ATLANTIC RICHFIELD COMPANY By *Mike R. Bowlin ___________________________________ Mike R. Bowlin Chairman of the Board and Chief Executive Officer February 27, 1998 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- *Mike R. Bowlin Chairman of the Board and February 27, 1998 ____________________________________ Chief Executive Officer Mike R. Bowlin Principal executive officer *William E. Wade, Jr. President and Director February 27, 1998 ____________________________________ William E. Wade, Jr. *Anthony G. Fernandes Executive Vice President and February 27, 1998 ____________________________________ Director Anthony G. Fernandes *Marie L. Knowles Executive Vice President, February 27, 1998 ____________________________________ Chief Financial Officer and Marie L. Knowles Director Principal financial officer *Michael E. Wiley Executive Vice President and February 27, 1998 ____________________________________ Director Michael E. Wiley
63
SIGNATURE TITLE DATE --------- ----- ---- *Frank D. Boren Director February 27, 1998 ____________________________________ Frank D. Boren *John Gavin Director February 27, 1998 ____________________________________ John Gavin *Hanna H. Gray Director February 27, 1998 ____________________________________ Hanna H. Gray *Kent Kresa Director February 27, 1998 ____________________________________ Kent Kresa *David T. McLaughlin Director February 27, 1998 ____________________________________ David T. McLaughlin *John B. Slaughter Director February 27, 1998 ____________________________________ John B. Slaughter *Gary L. Tooker Director February 27, 1998 ____________________________________ Gary L. Tooker *Henry Wendt Director February 27, 1998 ____________________________________ Henry Wendt *Allan L. Comstock Vice President and February 27, 1998 ____________________________________ Controller Allan L. Comstock Principal accounting officer
*By: /s/ Bruce G. Whitmore -------------------------- Bruce G. Whitmore (Attorney-in-Fact) 64 SCHEDULE II ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(COLUMN A) (COLUMN B) (COLUMN C) (COLUMN D) (COLUMN E) - ------------------------------------------------------------------------------ ADDITIONS ---------------- BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE AT BEGINNING TO TO OTHER FROM CLOSE OF DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES PERIOD - ------------------------------------------------------------------------------ YEAR 1997 Amounts deducted from applicable assets: Accounts receivable....... $ 20 -- -- 5(a) $ 15 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 950 84 -- 26 1,008 Reduction in force........ -- 174 18 21 171 Insurance ................ 169 20 -- 31 158 Environmental remediation. 577 300 -- 110 767 Other..................... 221 16 (18) 60 158 YEAR 1996 Amounts deducted from applicable assets: Accounts receivable....... $ 16 4 -- -- $ 20 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 882 75 -- 7 950 Reduction in force........ 75 -- -- 75 -- Insurance ................ 201 15 -- 47 169 Environmental remediation. 658 49 -- 130 577 Other..................... 201 31 -- 11 221 YEAR 1995 Amounts deducted from applicable assets: Accounts receivable....... $ 15 5 -- 4(a) $ 16 Affiliated companies accounted for on the equity method............ 8 -- -- -- 8 Other investments and long-term receivables.... 50 -- -- 50 -- Reserves included in other deferred liabilities and credits and other current liabilities: Dismantlement, restoration and reclamation.......... 848 65 -- 31 882 Reduction in force........ 177 -- -- 102 75 Insurance ................ 202 47 -- 48 201 Environmental remediation. 670 101 -- 113 658 Other..................... 249 15 -- 63 201
- -------- (a) Write-off for uncollectible accounts, net of recoveries. 65 EXHIBIT INDEX EXHIBIT DESCRIPTION 3.1 Restated Certificate of Incorporation of Atlantic Richfield Company ("ARCO") as of June 27, 1994, filed with the Securities and Exchange Commission (the "Commission") as Exhibit 3 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1994, under File No. 1- 1196 and incorporated herein by reference. 3.2 By-Laws of ARCO as amended through January 23, 1989, filed with the Commission as Exhibit 3.2 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 4.1 Rights Agreement dated as of July 24, 1995 between ARCO and First Chicago Trust Company of New York, as Rights Agent, filed with the Commission as Exhibit 4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1995, under File No. 1-1196 and incorporated herein by reference. 4.2 Indenture dated as of May 15, 1985 between ARCO and The Chase Manhat- tan Bank, N.A., filed as Exhibit 4.4 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1985, under File No. 1-1196 and incorporated herein by reference. 4.3 Indenture, dated as of January 1, 1992, between ARCO and The Bank of New York, filed with the Commission on January 6, 1992 as Exhibit 4.3 to ARCO's Registration Statement on Form S-3 (No. 33-44925) and incorporated herein by reference. 4.4 Instruments defining the rights of holders of long-term debt which is not registered under the Securities Exchange Act of 1934 are not filed because the total amount of securities authorized under any such instrument does not exceed 10% of the consolidated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Commission upon request. 10.1(a)* Atlantic Richfield Company Supplementary Executive Retirement Plan, as adopted by the Board of Directors of ARCO on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.2 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.1(b)* Amendment No. 1 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of March 22, 1993, filed with the Commission as Exhibit 10 to ARCO's report on Form 10-Q for the quarterly period ended June 30, 1993, under File No. 1-1196 and incorporated herein by reference. 10.1(c)* Amendment No. 2 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.1(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.1(d)* Amendment No. 3 to the Atlantic Richfield Company Supplementary Executive Retirement Plan, effective as of August 1, 1997, filed herewith. 10.2(a)* Atlantic Richfield Company Executive Deferral Plan, as adopted by the Board of Directors of the Company on March 26, 1990 and effective as of October 1, 1990, filed with the Commission as Exhibit 10.3 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.2(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Deferral Plan, effective as of July 27, 1992, filed with the Commission as Exhibit 10.2(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. EXHIBIT DESCRIPTION 10.2(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Deferral Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.2(c) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.2(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Deferral Plan, effective as of January 1, 1997, filed herewith. 10.3(a)* Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended, restated and effective as of July 1, 1988, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1988, under File No. 1-1196 and incorporated herein by reference. 10.3(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of January 1, 1989, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1989, under File No. 1-1196 and incorporated herein by reference. 10.3(c)* Amendment No. 2 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of July 1, 1994, filed with the Commission as Exhibit 10.4(c) to ARCO's report on Form 10-K for the year 1994, under File No. 1-1196 and incorporated herein by reference. 10.3(d)* Amendment No. 3 to the Atlantic Richfield Company Executive Supplementary Savings Plan II, as amended and effective as of August 5, 1996, filed with the Commission as Exhibit 10.4(d) to ARCO's report on Form 10-K for the year 1996, under File No. 1-1196 and incorporated herein by reference. 10.4* Atlantic Richfield Company Policy on Financial Counseling and Individual Income Tax Service, as revised and effective January 1, 1997, filed with the Commission as Exhibit 10.5 to ARCO's report on Form 10-K for the year 1996, under File No. 1-1196 and incorporated herein by reference. 10.5(a)* Annual Incentive Plan, as adopted by the Board of Directors of ARCO on November 26, 1984, and effective as of that date, as amended through February 28, 1994, filed with the Commission as Exhibit 10.6 to ARCO's report on Form 10-K for the year 1994, under File No. 1- 1196 and incorporated herein by reference. 10.5(b)* Amendment No. 3 to the Annual Incentive Plan, effective as of January 1, 1995, filed with the Commission as Exhibit 10.6(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.5(c)* Amendment No. 4 to the Annual Incentive Plan, effective as of February 24, 1997, filed herewith. 10.6* Atlantic Richfield Company's 1985 Executive Long-Term Incentive Plan, as adopted by the Board of Directors of ARCO on May 28, 1985, and effective as of that date, as amended through July 28, 1997, filed herewith. 10.7* Atlantic Richfield Company Executive Life Insurance Plan--Summary Plan Description, effective as of June 28, 1990, filed with the Commission as Exhibit 10.8 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.8(a)* Atlantic Richfield Company Executive Long-Term Disability Plan--Sum- mary Plan Description, effective as of January 1, 1994, filed with the Commission as Exhibit 10.9 to ARCO's report on Form 10-K for the year 1993, under File No. 1-1196 and incorporated herein by reference. 10.8(b)* Amendment No. 1 to the Atlantic Richfield Company Executive Long- Term Disability Plan, effective as of February 28, 1994, filed with the Commission as Exhibit 10.9(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. EXHIBIT DESCRIPTION 10.9 Form of Indemnity Agreement adopted by the Board of Directors of ARCO on January 26, 1987 and executed in February 1987 by ARCO and each of its directors and officers, included in Exhibit A to the 1987 Proxy Statement, filed with the Commission under File No. 1- 1196 and incor-porated herein by reference. 10.10(a)* Stock Option Plan for Outside Directors effective as of December 17, 1990, filed with the Commission as Exhibit 10.14 to ARCO's report on Form 10-K for the year 1990, under File No. 1-1196 and incorporated herein by reference. 10.10(b)* Amendment No. 1 to the Stock Option Plan for Outside Directors, effec-tive as of June 22, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1992, under File No. 1-1196 and incorporated herein by reference. 10.10(c)* Amendment No. 2 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed herewith. 10.10(d)* Amendment No. 3 to the Stock Option Plan for Outside Directors amended effective as of April 1, 1997, filed herewith. 10.11(a)* Deferral Plan for Outside Directors, effective as of October 1, 1990, filed with the Commission as Exhibit 10.13(a) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.11(b)* Amendment No. 1 to the Deferral Plan for Outside Directors, effective as of July 27, 1992, filed with the Commission as Exhibit 10.13(b) to ARCO's report on Form 10-K for the year 1995, under File No. 1-1196 and incorporated herein by reference. 10.11(c)* Amendment No. 2 to the Deferral Plan for Outside Directors effective as of July 22, 1996, filed herewith. 10.12* Special Incentive Plan, as adopted by the Board of Directors of ARCO on February 28, 1994, and as effective on that date, is included in Appendix C to the Company's 1994 Proxy Statement filed with the Com-mission under File No. 1-1196 and incorporated herein by reference. 10.13* 1997 Restricted Stock Plan For Outside Directors effective as of January 1, 1997, filed herewith. 21 Subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 24 Power of Attorney. 27 Financial Data Schedule. - ------- * Management compensatory plans filed as exhibits hereto pursuant to Item 14(c) of Form 10-K. EX-10.1(D) 2 AMEND #3 TO SUPP EXEC RETIREMT PLAN AMENDMENT NO. 3 TO ATLANTIC RICHFIELD COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN -------------------------- Pursuant to the power of amendment reserved therein, the following amendment is hereby made to the Atlantic Richfield Company Supplementary Executive Retirement Plan (the "Plan") effective as of August 1, 1997. Article IX, Section 6 of the Plan is amended to read as follows: "SECTION 6. CHANGE OF CONTROL 6.1 Upon the occurrence of a Change of Control as defined in the Supplemental Executive Benefit Plans Trust Agreement between Atlantic Richfield Company and State Street Bank and Trust Company, as amended through August 1, 1997, and incorporated herein by reference, notwithstanding any other provision of this Plan, the following provisions shall apply: (a) The Plan shall be terminated with respect to all Participants who were employed on or after October 1, 1990 and who either are in receipt of an annuity or who are entitled to a benefit, a portion of which is attributable to the Supplemental Benefit calculated under Article II of the Plan. (b) Benefits of Participants described in Subparagraph (a) shall be treated as follows: (1) With respect to any Participant or Beneficiary in receipt of an annuity form of payment, such annuity shall be converted to an actuarially equivalent Lump Sum 1 in accordance with actuarial factors established by the Independent Plan Administrator, with verification by an independent actuary. (2) With respect to any Participant who is not in receipt of an annuity and a portion of whose benefit is attributable to the Supplemental Benefit calculated under Article II of the Plan, the total accrued benefit under the Plan as of the date of the Change of Control shall be calculated by the Independent Plan Administrator and the Participant shall be fully entitled to such accrued benefit. (3) The Actuarially Equivalent Lump Sum value of the accrued benefit calculated by the Independent Plan Administrator under the preceding subparagraph shall also be calculated by the Independent Plan Administrator, using the actuarial factors established under Subparagraph (a), with verification by an independent actuary, with respect to Participants: (i) Who were employed by the Company on the date of the Change of Control or were employed by the Company on or after October 1, 1990; and (ii) Who have yet to commence a distribution. (c) Participants and Beneficiaries described under Subparagraph (a) shall be permitted to elect disposition of the benefit, in accordance with procedures established by the Independent Plan Administrator, as follows: (1) Single payment of the Lump Sum value calculated under Subparagraph (b) in cash as soon as possible following the Change of Control; (2) Transfer of assets from the Plan equaling the Lump Sum value calculated under Subparagraph (b) to the Atlantic Richfield Executive Deferral Plan as soon as possible following the Change of Control, under which such amount shall be -2- maintained as a new deferral account, payable in accordance with an election made pursuant to procedures established by the Independent Plan Administrator under the Atlantic Richfield Executive Deferral Plan. (d) The Independent Plan Administrator appointed pursuant to the Trust Agreement described above shall assume full responsibility of the Plan Administrator under Article VII of the Plan, subject to any approvals, concurrences or authority reserved to the Advisory and Claims Committee established under the Trust Agreement described above. " Executed this 15th day of September, 1997. ATTEST: ATLANTIC RICHFIELD COMPANY /s/ Armineh Simonian By: /s/ JOHN H. KELLY - -------------------- --------------------------- John H. Kelly Senior Vice President Human Resources -3- EX-10.2(D) 3 AMEND #3 TO EXEC DEFERRAL PLAN AMENDMENT NO. 3 TO ATLANTIC RICHFIELD COMPANY EXECUTIVE DEFERRAL PLAN -------------------------- Pursuant to the power of amendment reserved therein, the following amendment is hereby made to the Atlantic Richfield Company Executive Deferral Plan (the "Plan") effective as of January 1, 1997, except as otherwise indicated. 1. Article I, Section 1.1 of the Plan is amended to read as follows: "1.1 This Plan is intended to provide the opportunity for eligible Employees to accumulate supplemental funds through the deferral of portions of their Salary, Awards and Executive Supplementary Savings Plan benefits for retirement or special needs prior to retirement." 2. Article I, Section 3.1 of the Plan is amended to read as follows: "3.1 Account means a separate bookkeeping account maintained by the Company for each Employee and which measures and determines the amounts to be paid to the Employee under the Plan for each component of Deferred Compensation. Separate subaccounts will be established for separate components of Deferred Compensation, as applicable, deferred by an Employee." 3. Effective December 1, 1995, Article I, Section 3.3 of the Plan is amended to read as follows: "3.3 Awards means cash awards made under the Atlantic Richfield Company Annual Incentive Plan, the Atlantic Richfield Company Special Incentive Plan or the ARCO Investment Management Company Annual Bonus Plan." 4. Article I, Section 3.9 of the Plan is amended to read as follows: "3.9 Deferral Commitment means a promise made by an Employee to defer compensation pursuant to Article III for which a Participation Agreement has been submitted by the Employee to the Company." 5. Article I, Section 3.11 of the Plan is deleted and Sections 3.12 through 3.32 are redesignated as Sections 3.11 through 3.31. 6. Article II, Section 1 of the Plan is amended to read as follows: "SECTION 1. ELIGIBILITY AND PARTICIPATION 1.1 ELIGIBILITY. Eligibility to make a Deferral Commitment shall be limited to Employees who (a) (i) are eligible to receive an Award and (ii) either are classified in the executive Payroll Grade Structure of the Company, or are Grades 007, 008, 009 or 0010 in the regular Payroll Grade Structure of the Company, (b) are a Participant in the Executive Supplementary Savings Plan or (c) have been designated as eligible by a specific resolution of the Administrative Committee upon recommendation of the Vice President, Human Resources of the Company." 7. Article II, Section 2 of the Plan is amended to read as follows: "SECTION 2. BASIC FORMS OF DEFERRAL 2.1 A Participant may elect to defer the following forms of compensation in a Participation Agreement: (a) SALARY DEFERRAL. Commencing with Salary earned during pay periods ending on and after October 1, 1990, a Participant may elect to defer Salary earned during a Deferral Period, subject to any limitations, conditions or 2 restrictions, such as minimum or maximum amounts that may be deferred, as are prescribed by the Administrative Committee in advance of the Deferral Period. (b) AWARD DEFERRAL. A Participant may elect to defer Awards to be paid by the Company during a Deferral Period, subject to any limitations, conditions or restrictions, such as minimum or maximum amounts that may be deferred, as are prescribed by the Administrative Committee in advance of the Deferral Period. (c) ESSP BENEFIT DEFERRAL. A Participant may elect to defer the ESSP Benefit earned during the Deferral Period, subject to any limitations, conditions or restrictions, such as minimum or maximum amounts that may be deferred, as are prescribed by the Administrative Committee in advance of the Deferral Period. (d) CAP PLAN MAKE-UP DEFERRAL. Any amount of Salary that the Participant elected to contribute to defer into the CAP Plan during each Deferral Period and which was not permitted due to legal restrictions, other than the limitation on the amount of deferrals under Section 402(g) of the Code, precluding such deferrals to the CAP Plan shall be deferred under this Plan to the extent that such contributions or deferrals would have received the Matching Company Contribution under the CAP Plan, as applicable. To the extent that such amounts are deferred into this Plan during the Deferral Period, the Company will contribute an additional amount to this Plan based upon the Matching Company Contribution formula then in effect under the CAP Plan, as applicable." 8. Article II, Section 4 of the Plan is amended to read as follows: 3 "4.1 Except as otherwise permitted for accelerated Deferred Compensation, as defined in Section 7.1(b) of this Article, Deferral Commitments shall be subject to the following limitations: (a) A Participant may not defer more than fifty percent (50%) of the Participant's Salary, except that the limit shall be seventy-five percent (75%) of the Participant's Salary payable during the first Plan Year, which commences on the Effective Date and ends on December 31, 1990 and during the Plan Year commencing on January 1, 1991. (b) The minimum amount that may be deferred for the Deferral Period relating to a Deferral Commitment, shall be established by the Administrative Committee in advance of the Deferral Period and shall be allocable among the forms of Deferred Compensation described in Article II, Section 2.1(a) thru (c)." 9. Article III, Section 1 of the Plan is amended to read as follows: "SECTION 1. ACCOUNTS 1.1 For record-keeping purposes only, an Account shall be maintained for each Participant." 10. Article III, Section 3 of the Plan is amended to read as follows: "SECTION 3. INTEREST RATE 3.1 (a) Except with respect to payments made pursuant to Article IV, Section 4.1(b)(i), a Participant's Account shall be credited as of each Valuation Date during each Plan Year at the interest rate previously announced by the Company to be applicable for the Plan Year, compounded annually. Interest shall be credited as of each Valuation Date from the dates when deferred amounts are credited to Accounts based on the balance of each Account. 4 (b) Guaranteed Interest Rate. In no event will the Interest Rate applicable to a Participant's Account during the Participant's lifetime and Transferred Accounts from the Atlantic Richfield Annual Incentive Plan be less than the Citibank Base Rate and in no event will the Interest Rate applicable to Transferred Accounts from the Atlantic Richfield Executive Supplementary Savings Plan be less than the Money Market Rate of interest under the Savings Plan for the period of time commencing on the date of transfer and ending on the date the Accounts are paid." 11. Article IV, Section 1 of the Plan is amended to read as follows: "SECTION 1. PLAN BENEFIT 1.1 If a Participant has a Termination of Employment for any reason the Company shall pay a Plan benefit equal to the Participant's Account balance, as determined below: (a) A Participant's Account shall be credited with the rate of interest previously determined under Article III, Section 3.1(a) or (b), and communicated in advance of each Deferral Period, to be applicable for each Plan Year that the Account has been maintained. (b) The Interest Rates provided under Section 1.1(a) of this Article, shall be payable until the Participant's Account is distributed in full." 12. Article IV, Section 2, Paragraph 2.1 of the Plan is amended to read as follows: "2.1 Retirement Distributions shall be paid at the time and in the form of benefit elected by the Participant for the total Deferred Compensation (Salary, Awards and ESSP), at the time of the Deferral Commitment establishing such 5 deferral, on the Participation Agreement. A Participant's election shall be irrevocable, except as follows: (a) Once each Plan year prior to a Plan Year previously designated by the Administrative Committee and communicated to Participants, at a time and on a form prescribed by the Administrative Committee, each Participant may change the time and/or form of the Retirement Distribution of the total Deferred Compensation in the Participant's Account. Effective as of the plan year previously designated by the Administrative Committee under the preceding sentence, the election by the Participant on file on such date shall govern the time and form of the retirement distribution for all amounts in the Participant's account, whether attributable to deferrals before or after such date. (b) A Participant may request, by application to the Administrative Committee, approval of a change of the prior election at any time prior to retirement or commencement of benefits, or in the case of installment payments, following commencement of payments, (i) without any reduction in, or imposition of any penalty on, the Participant's Account, provided that the Administrative Committee determines, upon application of the Participant, that the Participant has experienced a Financial Hardship justifying the request for a change of election; or (ii) the Administrative Committee, in its sole discretion, determines that it is appropriate to grant the Participant's request. (c) Absent an election by the Participant of the form and/or commencement date of the Retirement Distribution, payment will be made in a lump sum immediately following the Participant's date of retirement." 13. Article IV, Section 4 of the Plan is amended to read as follows: 6 "SECTION 4. SURVIVOR BENEFITS 4.1 (a) Prior to Change of Control the following provisions shall apply: (i) Death After Age 65. If the Participant dies on or after ------------------ attaining age 65 the Survivor Benefits shall be equal to the Participant's Account balance, payable in the form previously elected by the Participant. (ii) Death Prior to Termination of Employment and Prior to Age 65. ------------------------------------------------------------ If the Participant dies prior to attaining age 65 and prior to Termination of Employment, the Survivor Benefit shall be paid in monthly installments and shall be the greater of (i) forty percent (40%) of the Participant's total Deferral Commitment, or (ii) the actual Account balance of the Participant, assuming a payout for the number of years between the Participant's death and the year the Participant would have attained age 65, increased by the applicable Interest Rate credited on unpaid Account balances of deceased Participants during each year of the payment period to the survivor. (iii) Death After Termination of Employment and Prior to Age 65. ---------------------------------------------------------- If the Participant dies after Termination of Employment and prior to age 65, the Participant's Account balance, if any, shall be paid by continuation of the form of benefit which was payable to the Participant for the remaining payments which would have been made to the Participant if the Participant had lived, increased by the applicable Interest Rate credited on unpaid Account balances of deceased Participants during each year of the payment period to the survivor. (iv) Special Rule. If the Participant dies before age 65, the ------------ Survivor Benefit will be paid in monthly installments until the Participant would have attained age 65; provided, however, that if payment is made pursuant to Section 4.1(a)(ii) of this Article, and the number of years between the Participant's death and the year the Participant would have attained age 65 is 7 less than the period of installments elected by the Participant to be payable upon retirement, then the Survivor Benefit will be paid in accordance with the Participant's retirement election of installments to be payable upon retirement. (b) Following Change of Control the following provisions shall apply: (i) If a Participant dies following a Change of Control the Survivor Benefit shall be equal to the Participant's Account balance, payable in a lump sum to the Participant's Beneficiary." 14. Article IV, Section 5 of the Plan is amended to read as follows: "SECTION 5. IN-SERVICE DISTRIBUTIONS 5.1 A Participant may elect to receive an In-Service Distribution from the Participant Account subject to the following restrictions: (a) TIMING OF ELECTION. The election to take an In-Service Distribution from an Account must be made at the same time the Participant makes the annual Deferral Commitment. (b) AMOUNT OF WITHDRAWAL. The amount which a Participant can elect to receive as an In-Service Distribution with respect to an Account shall be such portions of the Participant's Account balance, as prescribed by the Administrative Committee in advance of the Deferral Period. If a previously elected amount exceeds the Account balance when an In-Service Distribution is to be made, only the Account balance will be paid. (c) TIMING AND FORM OF IN-SERVICE DISTRIBUTION. The In-Service Distribution shall commence at the time and in the form elected by the Participant on the Participant Agreement at the time of the Deferral Commitment; 8 provided, however, that if the Participant terminates employment without a right to commence a retirement allowance under the Retirement Plan, the In- Service Distribution election will be canceled and distribution will be made pursuant to Section 3 of this Article, and provided, further, that if the Participant terminates employment with a right to commence a retirement allowance, the In-Service Distribution election will be canceled and distribution will be made pursuant to Section 2 of this Article. In no event shall an In-Service Distribution be made prior to seven years following the start of the Deferral Period. (d) Amounts paid to a Participant pursuant to this section shall be treated as distributions from the Participant's Account." 15. Sections 7 through 11 of Article IV of the Plan, with the effective date of Section 11 being August 1, 1997, are amended to read as follows: "SECTION 7. DISABILITY 7.1 If a Participant suffers a Disability under the provisions of the Atlantic Richfield Executive Long-Term Disability Plan, the Participant's Deferral Commitments will cease except for any Awards or ESSP Benefits which may be payable thereafter. Distribution of the Deferred Compensation will not be made due to the Disability. The Participant's Account will be distributed in accordance with the method which the Participant had elected for payment of retirement benefits with respect to such Deferred Compensation if and when the Participant retires following his Disability. Absent a retirement election by the Participant, payment will be made in a lump sum upon Termination of Employment. SECTION 8. TERMINATION OF EMPLOYMENT DUE TO SPECIAL CIRCUMSTANCES 8.1 If a Participant terminates employment involuntarily in conjunction with a sale of assets or a reorganization (including termination due to a specific job elimination) the Participant's Account will be distributed in accordance with 9 the method which the Participant had elected for payment of retirement benefits with payment commencing on the earliest date the Participant would have become eligible to commence receiving the retirement benefit. During the period between the Participant's termination and the commencement of payments, interest will be credited to the Participant's Account each year at the applicable rate of interest. Absent a retirement election by the Participant, payment will be made in a lump sum upon Termination of Employment. SECTION 9. VALUATION AND SETTLEMENT 9.1 The date on which a lump sum is paid or the date on which installment payments commence shall be the "Settlement Date." The Settlement Date shall be no more than thirty (30) days after the last day of the month in which the Participant or his Beneficiary becomes entitled to payments on account of retirement, other Termination of Employment or death, unless the Participant elects to defer commencement of payments following retirement to a later date in the Participation Agreement. The Settlement Date for an In-Service Distribution or delayed payments following retirement shall be the month which the Participant elects for commencement of such payments in the election form for designation of form of payment. The amount of a lump sum and the initial amount of installment payments shall be based on the value of the Participant's Account as of the Valuation Date at the end of the immediately preceding month before the Settlement Date. For example, the Valuation Date at the end of December shall be used to determine lump sum or the initial amount of installment payments which will be made in the following January. SECTION 10. SMALL BENEFIT 10.1 Notwithstanding any election made by the Participant, the Administrative Committee, in its sole discretion, may pay any benefit in the form of a lump sum payment to the Participant or any Beneficiary, if the lump sum amount of the Account balance which remains in the Account following a 10 distribution for any reason, or which is payable to the Participant or Beneficiary when payments to such Participant or Beneficiary would otherwise commence is less than $2,000. SECTION 11. CHANGE OF CONTROL 11.1 (a) Subject to the provisions of Section 11.1(b) hereof, upon a Change of Control as defined in the Supplemental Executive Benefit Plans Trust Agreement between Atlantic Richfield Company and the State Street Bank and Trust Company, as amended through August 1, 1997, and incorporated herein by reference and notwithstanding any other provision to the contrary in this Plan, the following provisions shall apply: (i) The Independent Plan Administrator appointed under the Trust Agreement shall assume all responsibilities relating to Administration under Article VI of the Plan with the exception that the disposition of any claim for benefits by a Participant or Beneficiary, following an initial determination by the Independent Plan Administrator, shall be the sole responsibility of the Advisory and Claims Committee established under the Trust Agreement, described above. (ii) No individual may commence participation following the Change of Control. (iii) No deferrals relating to previously elected Deferral Commitments may be made following the Change of Control, except that any Salary or Executive Supplementary Savings Plan amounts earned through the date of the Change of Control during the relevant Plan year shall be credited in accordance with the prior deferral election. (iv) Any amounts determined by the Independent Plan Administrator to be transferable to this Plan from the Atlantic Richfield Company 11 Supplementary Executive Retirement Plan pursuant to an eligible Participant's election under such plan following a Change of Control shall be accepted by the Independent Plan Administrator and credited to the affected Participant's Deferral Account. (b) Time and form of distribution of Deferred Compensation Accounts following a Change of Control: (i) Following a Change of Control, any prior elections with respect to the form of payment of any Deferred Compensation Accounts shall be canceled and the Participant will be given the option to elect, in accordance with procedures established by the Independent Plan Administrator, including the time and manner of election, distribution of the Participant's Deferred Compensation Account in one of the following forms. Absent such election within the time period determined by the Independent Plan Administrator, the Deferred Compensation Account will be distributed to the Participant in a single payment: (1) Single payment, constituting all or a portion (selected in percentages and/or amounts prescribed by the Independent Plan Administrator) of the Account, as elected by the Participant. If a portion of the Account is distributed, the remainder will be distributed under one of the following installment methods, as elected by the Participant: (2) Five annual installments (3) Ten annual installments (4) Fifteen annual installments (5) Twenty annual installments (ii) Following a Change of Control, any prior elections with respect to the time of payment of any Deferred Compensation shall be canceled 12 and the Participant will be given the option to elect, in accordance with procedures established by the Independent Plan Administrator, described above, distribution of the entire Deferred Compensation Account elected under Subparagraph (ii), at one the following times: (1) A single payment will be distributed to the Participant as soon as possible following the Change of Control; (2) The Participant may elect commencement of any of the installment schedules elected under Subparagraph (i) above in the January immediately following the Change of Control or any succeeding January, provided that in no event may distributions continue after the end of the 20th calendar year following a Change of Control." 16. Article V of the Plan is amendment to read as follows: "ARTICLE V DESIGNATION OF BENEFICIARY Section 1. Designation of Beneficiary 1.1 Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive Participant's interest in Participant's Account upon Participant death. Such designation shall be made on a form prescribed by and delivered to the Company. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. 13 SECTION 2. FAILURE TO DESIGNATE BENEFICIARY 2.1 If a Participant shall fail to designate a Beneficiary before Participant's death, or if no designated Beneficiary survives the Participant, the Administrative Committee shall direct the Company to pay the balance in Participant's Account in a lump sum to the executor or administrator for Participant's estate." Executed This 15th day of September, 1997. ATTEST: ATLANTIC RICHFIELD COMPANY BY: /s/ Armineh Simonian BY: /s/ John H. Kelly ------------------------ ------------------------ JOHN H. KELLY Senior Vice President Human Resources 14 EX-10.5(C) 4 AMEND #4 TO ANNUAL INCENTIVE PLAN AMENDMENT NO. 4 TO ATLANTIC RICHFIELD COMPANY ANNUAL INCENTIVE PLAN --------------------------- Pursuant to authority contained in resolutions adopted by the Board of Directors on February 24, 1997, the following amendment is hereby made to the Atlantic Richfield Company Annual Incentive Plan (the "Plan"), effective February 24, 1997, unless otherwise indicated. 1. Sections 1 and 2 of the Plan are amended to read as follows: "Section 1. Purpose The purpose of the Plan is to provide annual cash Awards to those executives who make substantial contributions to the success of the Company by their ability, industry and exceptional performance. It is intended that the Plan will thereby enable the Company to attract and motivate management employees of high caliber and potential. SECTION 2. DEFINITIONS As used herein, the following terms shall have the following meanings: (a) "Adjusted Net Income" means after-tax income as adjusted to exclude non-routine or "special" items. (b) "Average Reserve Replacement Cost Per BOE" means the weighted average of a Corporation's Reserve Replacement Cost Per BOE during the immediately three preceding fiscal years, except that the Comparison Group Average Reserve Replacement Cost Per BOE will lag the Company's cost by one year (e.g., for the Performance Year 1996, the Comparison Group cost will be based on the average of the years 1993, 1994 and 1995). For purposes of this definition, weighted average is calculated by dividing the sum of the costs incurred during the immediately three preceding years by the sum of the Changes in Proved Reserves, excluding the effect of sales, during the immediately three preceding years. (c) "Average Reserve Replacement Ratio" means the weighted average of a Corporation's Reserve Replacement Ratio during the immediately three preceding fiscal years, except that the Comparison Group Average Reserve Replacement Ratio will lag the Company's ratio by one year (e.g., for the Performance Year 1996, the Comparison Group Ratio will be based on the average of the years 1993, 1994 and 1995). For purposes of this definition, weighted average is calculated by dividing the sum of the Changes in Proved Reserves during the immediately three preceding years by the barrels of oil equivalent produced or consumed during the immediately three preceding years. (d) "Average Return on Shareholders' Equity" or "Average ROSE" means the simple average of a Corporation's Return on Shareholders' Equity during the immediately three preceding fiscal years. (e) "Average Shareholders' Equity" means, for a Corporation, the average of shareholders' equity at the end of the year in question and at the end of the immediately preceding fiscal year. (f) "Award" means an annual award to a participant pursuant to Section 6 of the Plan. (g) "Award Multiple" means the multiplier applicable to the Company's rank for each Performance Criterion, as described in Subsection 5(a)(2) of the Plan. (h) "Awards Fund" means the aggregate amount of money determined by the Committee to be available for Awards under the Plan for a Performance Year pursuant to Section 5 of the Plan. (i) "Base Salary" means the annualized regular biweekly wages of a Participant, effective as of December 31 of the year immediately preceding the Performance Year to which the Award relates, paid by the Company for the Participant's personal service, excluding all extra pay such as overtime, premiums, bonuses and other allowances. (j) "Board" means the Board of Directors of Atlantic Richfield Company. (k) "Changes in Proved Reserves" means the sum of the number of barrels of oil equivalent (BOE) added to and/or subtracted from a Corporation's and its Equity Affiliates' reserves from the following sources (6 Mcf = 1BOE): . Revisions of Estimates . Improved Recovery . Extensions and Discoveries . Purchases . Sales (l) "Committee" means the Organization and Compensation Committee of the Board of Directors of the Company. 2 (m) "Company" means Atlantic Richfield Company, its successors and assigns, and its Subsidiaries. (n) "Comparison Corporations" or "Comparison Group" means Amoco Corporation, Chevron Corporation, Exxon Corporation, Mobil Corporation, Occidental Corporation, Phillips Petroleum Company, Texaco Inc. and Unocal Corporation. (o) "Corporation" means the Company or any Comparison Corporation and its Subsidiaries. (p) "Equity Affiliate" means any entity accounted for under the equity or proportional consolidation method in a Corporation's financial statements. (q) "Employee" means an employee of the Company. (r) "Participant" means, with respect to a Performance Year, an Employee who has been granted an Award under the Plan for such Performance Year. (s) "Performance Criteria" or "Performance Criterion", as the context applies, means the Adjusted Net Income, Average Reserve Replacement Ratio and Average ROSE, measured pursuant to Section 5 of the Plan in calculating the Awards Fund. (t) "Performance Year" means the calendar year immediately preceding the year in which Awards are granted. (u) "Plan" means the Annual Incentive Plan as set forth herein and as may be amended from time to time. (v) "Reserve Replacement Cost Per BOE" means the costs (both capitalized and expensed) incurred in the acquisition, exploration and development of petroleum liquids and natural gas reserves by a Corporation and its Equity Affiliates divided by the Changes in Proved Reserves of petroleum liquids and natural gas, excluding the effect of sales. (w) "Reserve Replacement Ratio" means the percentage computed by dividing the Changes in Proved Reserves of petroleum liquids and natural gas during the year in question (before production) by a Corporation's and its Equity Affiliates' reported total number of barrels of oil equivalent (BOE) of petroleum liquids and natural gas produced and consumed during that year. (6 Mcf = 1BOE). 3 (x) "Return on Shareholders' Equity" or "ROSE" means, for a Corporation, the percentage computed by dividing Adjusted Net Income by Average Shareholders' Equity. (y) "Salary Grade" means the classification assigned to an Employee by Atlantic Richfield Company. (z) "Subsidiary" means any corporation, the majority of the voting stock of which, or any partnership or joint venture, the majority of the profits interest or capital interest of which, is owned directly or indirectly by the Company or a Corporation, as applicable. (aa) "Total Award Multiple" means the sum of each of the three Award Multiples applicable to the Company's ranking on each Performance Criterion multiplied by its one-third weight. 2. Subsection 3(b) of the Plan is deleted and Subsection 3(c) is amended and redesignated as Subsection 3(b) to read as follows: "(b) No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member, or on such member's behalf, in such member's capacity as a member of the Committee or for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee, and each other officer, employee or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan unless arising out of such person's own fraud or bad faith." 3. Subsections 4(a) and (c) of the Plan are amended to read as follows: "(a) An Employee who has served as an officer or in another key position at any time during a Performance Year is eligible for selection by the Committee to receive an Award with respect to that Performance Year. No member of the Committee may be selected to receive an Award under the Plan." "(c) The Committee may make an Award to an Employee (or the Employee's beneficiary or estate) who has terminated service with the Company prior to the end of a Performance Year, if the Committee determines that such Employee has made an outstanding contribution to the Company during the Performance Year." 4 4. Section 5 of the Plan is amended to read as follows: "SECTION 5. DETERMINATION OF AWARDS FUND (a) PERFORMANCE CRITERIA (1) PERFORMANCE COMPARISON As soon as possible following the close of each Performance Year, the Committee shall calculate the following comparisons of the Company with the Comparison Group and rank the Company accordingly: (i) Compare the percentage change in Adjusted Net Income from the prior year. (ii) Compare Average Reserve Replacement Ratio. (iii) Compare Average ROSE. (2) RANKING OF PERFORMANCE CRITERIA AND CALCULATION OF FUND (i) Subject to adjustments described under Subsections 5(a)(2)(ii), (iii) and (iv), each Performance Criterion is weighted one- third, with Award Multiples relating to the Company's rank for each measure as follows: ------------------------------------------------------- Award RANK MULTIPLE ------------------------------------------------------- 1 2.0 2 2.0 3 1.5 4 1.0 5 1.0 6 1.0 7 0.5 8 0 9 0 ------------------------------------------------------- (ii) The Total Award Multiple calculated under Subsection 5(a)(2)(i) may be superseded, in the sole discretion of the Committee, by a special adjustment in the following circumstances: ------------------------------------------------------------------ COMPANY RANKING ON ALL THREE TOTAL AWARD PERFORMANCE CRITERIA MULTIPLE ------------------------------------------------------------------ 1 Not to Exceed 3.0 1 or 2 Not to Exceed 2.5 ------------------------------------------------------------------ 5 (iii) The Award Multiple relating to the Average Reserve Replacement Ratio measure shall be adjusted as follows: (1) For Average Reserve Replacement Cost Per BOE:
------------------------------------------------------------------------ Average Reserve Replacement Cost Per Adjustment BOE Multiplier ---------------------------------------------------------------------------- (less than)$4.00/BOE 1.25 $4.00-5.00/BOE 1.00 (greater than)$5.00/BOE 0.75 ----------------------------------------------------------------------------
(2) If the Company's Average Reserve Replacement Ratio is less than 90 percent, the Award Multiple for this Performance Criterion cannot exceed 1.0, regardless of actual ranking. (3) If the Company's Average Reserve Replacement Ratio is greater than 120 percent, the Award Multiple for this Performance Criterion cannot be less than 1.5, regardless of actual ranking. (iv) The Committee may, in its sole discretion, increase by up to 0.5 the Award Multiple relating to each Performance Criterion for a Performance Year in which the Committee determines there has been a substantial improvement in such Performance Criterion on an absolute basis. (b) SALARY GRADE TARGET AWARD PERCENTAGES Each Salary Grade among the Employees has a target award which shall be the percentage of Base Salary representing the 50th percentile of annual incentive awards payable by the Comparison Group, as derived annually from market data. (c) ADJUSTMENT OF SALARY GRADE TARGET AWARD PERCENTAGES The target award percentage determined under Subsection 5(b) to be applicable to a Salary Grade shall be adjusted by multiplying such target award percentage by the total award multiple. Each Salary Grade fund shall be determined by multiplying the adjusted target percentage by the Base Salary of each Employee in that Salary Grade. (d) AWARDS FUND Subject to any adjustments pursuant to Subsection 5(e), the total fund available for the grant of individual Awards under the Plan shall be the sum of each of the Salary Grade funds determined under Subsection 5(c). 6 (e) AWARDS FUND LIMITATION In no event may the aggregate dollar amount of Awards granted for a Performance Year exceed two percent of the Company's Adjusted Net Income for such Performance Year. to the extent that the determination of Awards under Subsections 5(a), (b) and (c) would result in an amount exceeding two percent of the Company's Adjusted Net Income, each individual Award shall be reduced proportionately, with the result that the total Awards Fund shall be an amount equal to two percent of Adjusted Net Income. (f) INDIVIDUAL AWARD ADJUSTMENTS In addition to any adjustments resulting from the application of Subsections 5(a), (c) and/or (e), the Award of a Participant may be increased or decreased from the amount determined under Subsection 5(c), as determined to be appropriate by the Committee based on the individual, group or business unit goals and accomplishments or any other criteria deemed relevant by the Committee. the amount of any reduction may be reallocated to other individuals within the same Salary Grade. (g) BASIS FOR CALCULATIONS All calculations described in this Section 5 shall be based on the audited financial statements of each of the Comparison Corporations, to the extent these are publicly available, or on the income statement and balance sheet and dividend payments as reported to stockholders, or otherwise publicly available." 5. Subsection 6(b) of the Plan is amended to read as follows: "(b) Prior to the commencement of each Performance Year, prospective Participants shall be afforded the right to elect irrevocably to defer all or a portion of the payment of their Awards for the Performance Year pursuant to the terms and conditions of the Atlantic Richfield Executive Deferral Plan." 6. Subsection 8(a) of the Plan is amended to read as follows: "(a) the company intends to establish a grantor trust to aid in accumulating the amounts necessary to pay any amount awarded to a participant for a performance year, or an award deferred pursuant to section 6 or any interest credited thereon. all awards, and any interest credited thereon, shall be paid from the general funds of the company to the extent not paid from the grantor trust. under no circumstances shall a participant or other person have any interest whatsoever in any particular property or assets of the company as a result of this plan or an award made thereunder." 7 7. Section 10 of the Plan is amended to read as follows: "Section 10. Effective Date The effective date of the Plan is November 26, 1984." Executed this 2nd day of October, 1997 ATTEST ATLANTIC RICHFIELD COMPANY BY: /s/ Donna McGugan BY: /s/ John H. Kelly -------------------------- --------------------------- John H. Kelly Senior Vice President Human Resources 8 EX-10.6 5 1985 EXECUTIVE LONG-TERM INCENTIVE PLAN ARCO [LOGO APPEARS HERE] - -------------------------------------------------------------------------------- 1985 EXECUTIVE LONG-TERM INCENTIVE PLAN AS AMENDED THROUGH JULY 28, 1997 ARCO 1985 EXECUTIVE LONG-TERM INCENTIVE PLAN TABLE OF CONTENTS -----------------
PAGE NO. ---- ARTICLE I. GENERAL PROVISIONS Section 1 Purposes of the Plan............................. 1 Section 2 Definitions...................................... 1 Section 3 Administration of the Plan....................... 8 ARTICLE II. STOCK OPTIONS Section 1 Grant of Stock Options........................... 9 Section 2 Terms and Conditions of Stock Options............ 9 ARTICLE III. RESTRICTED STOCK Section 1 Grant of Contingent Restricted Stock............. 12 Section 2 Grant of Restricted Stock........................ 12 Section 3 Grant of Performance-Based Restricted Stock...... 12 Section 4 Waiver of Restrictions........................... 14 Section 5 Termination of Employment........................ 14 ARTICLE IV. PERFORMANCE-BASED DIVIDEND SHARE CREDITS Section 1 Cancellation of Credits Upon Exercise, Expiration or Surrender of Stock Option..................... 16 Section 2 Performance-Based Criterion for Dividend Share Credits.................................... 16 Section 3 Calculation For Payment.......................... 17 Section 4 Prospective Dividend Share Credits............... 17 ARTICLE V. MISCELLANEOUS PROVISIONS Section 1 Option and Restricted Stock Limits............... 18 Section 2 Adjustment in Terms of Award..................... 18 Section 3 Governmental Regulations......................... 19 Section 4 No Guaranty of Employment........................ 19 Section 5 Relation to Benefit Plans........................ 19 Section 6 Assignment or Transfer........................... 20 Section 7 Rights as Shareholder............................ 20 Section 8 Withholding Taxes................................ 20 Section 9 Amendment and Discontinuance of the Plan......... 21 Section 10 Effective Date................................... 22 Section 11 Term of Plan..................................... 22
ARTICLE I GENERAL PROVISIONS SECTION 1. PURPOSES OF THE PLAN The purposes of the Plan are to provide a select group of management and other key employees with a specific incentive to work for the long-range growth and success of the Company and to enable the Company to attract, retain and motivate employees of superior capability. SECTION 2. DEFINITIONS As used herein, the following terms shall have the following meanings: (a) "Anticipatory Change of Control" means (i) the execution of an agreement or a written document which, if the subject thereof were consummated, would result in a Change of Control; (ii) a public announcement by any Person, including ARCO, of an intent to take an action(s) which, if consummated, would result in a Change of Control; or (iii) the delivery of a signed, written statement to the Trustee of the Change of Control Trust and ARCO's Independent Auditor by the Chief Financial Officer and General Counsel of ARCO that an Anticipatory Change of Control is in effect, provided that, with respect to any of the above three circumstances, the Anticipatory Change of Control shall not be effective until approved by either the Board or the Executive Committee of the Board. (b) "ARCO" means Atlantic Richfield Company, its successors and assigns. (c) "Base Salary" means the annualized regular biweekly wages of an Eligible Employee. (d) "Board" means the Board of Directors of ARCO. (e) "Change of Control" means: (i) Consummation/1/ of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of ARCO - ----------------------- /1/ In the case of the vesting of Restricted Stock and Performance-Based Restricted Stock under Article III, Section 4(c) and the vesting of Stock Options under Article II, Section 2(f), "approval by the shareholders of the Company" shall be substituted for "consummation" and the exceptions under clause (1) thru (3) shall not apply. 1 (a "Business Combination"), unless, in each case, following such Business Combination: (1) All or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of common stock (the "Outstanding Common Stock") of ARCO and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors (the "Outstanding Voting Securities") of ARCO immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then Outstanding Common Stock and the combined voting power of the then Outstanding Voting Securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which, as a result of such transaction, owns ARCO or all or substantially all of ARCO's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be; (2) No Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of ARCO or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25 percent or more of, respectively, the then Outstanding Common Stock of such corporation resulting from such Business Combination or the combined voting power of the then Outstanding Voting Securities of such corporation, except to the extent that such ownership existed immediately prior to the Business Combination; and (3) At least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (ii) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 or Rule 13d-5 promulgated under the Exchange Act) of 25 percent/2/ or more of either (A) the Outstanding Common Stock of ARCO or (B) the Outstanding Voting Securities of ARCO; provided, however, that for purposes of this Subsection (ii), the following shall not constitute a Change of Control: (aa) any acquisition by any employee benefit plan (or related trust) - ------------------------------ /2/ This percentage shall be 40% in the case of the Vesting of Prospective Dividend Share Credits under Article IV, Section 4 of the Plan and the Pro Rata Payment of Contingent Restricted Stock under Article III, Section b(v) of the Plan. 2 sponsored or maintained by ARCO or any corporation controlled by ARCO; (bb) any acquisition by ARCO or any increase in beneficial ownership resulting solely from an acquisition by ARCO; (cc) any acquisition by any corporation pursuant to a Business Combination which complies with clauses (1), (2) and (3) of Subsection (i); or (dd) any acquisition directly from ARCO pursuant to a transaction (other than a Business Combination) approved by the Board after July 28, 1997; and provided, further, that in any event, without regard to the manner in which the level of ownership is attained, the ownership by any Person of 40 percent or more of the Outstanding Common Stock of ARCO or Outstanding Voting Securities of ARCO shall constitute a Change of Control; or (iii) Individuals who, as of July 28, 1997, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by ARCO's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, except that any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person shall not be considered an Incumbent Director/3/; or (iv) Approval by the stockholders of ARCO of a complete liquidation or dissolution of ARCO. (f) "Change of Control Trust" means the trust established by ARCO to provide for the payment of any benefits, in whatever form is required, under the Plan on and after a Change of Control. (g) "Committee" means the Organization and Compensation Committee of the Board. (h) "Common Stock" means the common stock of ARCO having a par value of $2.50 per share. (i) "Company" means ARCO and its Subsidiaries. - ------------------- /3/ This provision shall not apply in the case of the Vesting of Prospective Dividend Share Credits under Article IV, Section 4 of the Plan and the Pro Rata Payment of Contingent Restricted Stock under Article III, Section b(v) of the Plan. 3 (j) "Comparison Group" means Amoco Corporation, Chevron Corporation, Exxon Corporation, Mobil Corporation, Occidental Corporation, Phillips Petroleum Company, Texaco, Inc. and Unocal Corporation. (k) "Compensation Subcommittee" or "Subcommittee" means the members of the Committee who qualify as outside directors under Section 162(m) of the Internal Revenue Code of 1986, and as "Non-Employee Directors" within the meaning of Section 16 of the 1934 Exchange Act, as amended, and are empowered to establish, and certify to the attainment of, performance criteria prescribed under the Plan. (l) "Contingent Restricted Stock" means a contingent grant of shares of Performance-Based Restricted Stock under the terms and conditions set forth in Article III, Section 1, that has no indicia of ownership of Common Stock, that is granted at the commencement of a Performance Period and will be converted to an actual award of Performance-Based Restricted Stock, if any, pursuant to the Performance-Based Restricted Stock Payment Schedule. (m) "Dividend Rights" means, as of any date, (i) the total number of shares of Common Stock subject to all outstanding and unexercised Stock Options held by an optionee pursuant to the Plan, and (ii) the total number of Dividend Share Credits credited to an optionee on such date. (n) "Dividend Share Credits" means, with respect to a Stock Option granted prior to February 24, 1997, the total number of credits allocated to an optionee on any date. The number of Dividend Share Credits credited as of any record date for cash dividends declared on Common Stock shall be the aggregate number derived by (i) multiplying the dividend rate declared per share of Common Stock by the number of Dividend Rights held by an optionee as of the dividend record date, and then (ii) dividing the resulting figure by the Fair Market Value of a share of Common Stock on such record date. Dividend Share Credits attributable to exercised, expired or surrendered Stock Options shall be canceled upon such exercise, expiration or surrender and their treatment shall be as provided in Article IV of the Plan. (o) "Eligible Employee" means a member of a select group of management or other key employee of the Company who, in the opinion of the Committee, is in a position to contribute significantly to long-term profit and growth objectives; provided, however, that no member of the Committee nor any person owning stock possessing more than ten percent of the total combined voting power of all classes of stock of ARCO shall be an Eligible Employee. 4 (p) "Employment" means continuous employment with the Company. (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (r) "Fair Market Value" of a share of Common Stock means the mean between the highest and lowest sales prices, or the closing sales price of a share of Common Stock, whichever is higher, on the date in question as reported on the composite tape for issues listed on the New York Stock Exchange. If no transaction was reported on the composite tape in the Common Stock on such date, the prices used shall be the prices reported on the nearest day preceding the date in question. If the Common Stock should not then be listed or admitted to trading on such Exchange, Fair Market Value shall be the mean between the closing bid and asked prices on the date in question as furnished by any member firm of the New York Stock Exchange selected from time to time by the Committee for that purpose. (s) "Performance Period" means the period of time established by the Subcommittee at the time of a grant of Contingent Restricted Stock over which the Company's Performance Ranking will be determined. (t) "Performance Ranking" means the ranking of the Company in Total Shareholder Return as measured against the Comparison Group over the applicable Performance Period. (u) "Performance-Based Restricted Stock" means restricted Common Stock which is granted by the Compensation Subcommittee following its determination of the Company's Performance Ranking in relation to a grant of Contingent Restricted Stock and calculation of the payment pursuant to the Performance- Based Restricted Stock Payment Schedule. Such Performance-Based Restricted Stock shall be non-transferable and non-assignable during the applicable Restriction Period and may be forfeited if there is a termination of Employment during the Restriction Period for reasons specified in the Plan. (v) "Performance-Based Restricted Stock Payment Schedule" means the schedule which is used to calculate the amount of Performance-Based Restricted Stock available to pay Eligible Employees as determined by multiplication of the amount of a grant of Contingent Restricted Stock by the Award Multiple relating to the Company's Performance Ranking as follows: 5 (i) General Calculation:
---------------------------------------------- COMPANY PERFORMANCE AWARD RANKING MULTIPLE ---------------------------------------------- 1 3.0 2 2.5 3 2.0 4 1.5 5 1.0 6 0.5 7 0 8 0 9 0 ----------------------------------------------
(ii) Special Adjustments: (1) If one or more companies in the Comparison Group is within one percentage point of the Company's TSR, the Company's TSR rank Award Multiple shall be the average of the Company's Award Multiple and the Award Multiple that would be applicable to such other companies. (2) If the Company's TSR is within one percentage point of the average of the Comparison Group, weighted for market capitalization, the Award Multiple shall be the greater of the Company's TSR rank Award Multiple or 1.0. The Subcommittee retains discretion to lower the Award Multiple. (w) "Person" means any individual, corporation, firm, partnership, governmental body, entity or group and shall include any person within the meaning of (S)13(d)(3) or (S)14(d)(2) of the Exchange Act. (x) "Plan" means this 1985 Executive Long-Term Incentive Plan, including any amendments hereof and rules and regulations hereunder. (y) "Prospective Dividend Share Credits" means the amount of Dividend Share Credits which would be earned with respect to a Stock Option during the period commencing on the date of a Change of Control and concluding on the expiration date of the term of the Stock Option, assuming (i) no exercise of the Option; (ii) a fixed Fair Market Value of a share of Common Stock, and (iii) a fixed dividend, on such Common Stock. Both Fair Market Value and the dividend rate shall be determined as of the record date of the quarterly dividend on such Common Stock immediately preceding the Change of Control. (z) "Restriction Period" means the period specified by the Subcommittee at the time of grant of Restricted Stock during which the restriction and forfeitability conditions described under Section 2 of Article III apply. 6 (aa) "Restricted Stock" means Common Stock awarded under the Plan which is subject to certain forfeiture and transferability restrictions as provided in the Plan, in regulations of the Committee promulgated thereunder, and in the agreement evidencing the grant of such Restricted Stock. (bb) "Salary Grade Level" means the classification assigned to an Eligible Employee, based on salary and grade ranking, by Atlantic Richfield Company. (cc) "Special Plan Administrator" means the entity designated in the Change of Control Trust as having full Administrative powers under Article I, Section 3 of the Plan on and after a Change of Control, including, but not limited to, all interpretive and decision powers reserved to the Committee or the Subcommittee prior to a Change of Control. (dd) "Stock Options" means options to purchase Common Stock under the terms and conditions set forth in Article II of the Plan. Such options shall not be "Incentive Stock Options" as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended. (ee) "Subsidiary" means any corporation, the majority of the voting stock of which, or any partnership or joint venture, the majority of the profits interest or capital interest of which, is owned directly or indirectly by ARCO or a member of the Comparison Group, as applicable. (ff) "Target Investment Value" means one-half of the Total Investment Value. (gg) "Total Investment Value" means, with respect to each Salary Grade Level, that value which represents the 50th percentile of long-term compensation payable by the Comparison Group, determined annually based on an analysis of market data. (hh) "Total Shareholder Return" or "TSR" means the sum of the dividends and appreciation or depreciation of the price of a share of Common Stock over the established measurement period. The beginning and ending stock price, as applicable, used to calculate the Total Shareholder Return shall be the average of the closing price on the ten trading days prior to the last trading day of the calendar year, on the last trading day of the calendar year, and on the ten trading days following the last trading day of the calendar year. 7 SECTION 3. ADMINISTRATION OF THE PLAN (a) Prior to a Change of Control, the Plan shall be administered by the Committee or, where specified herein, by the Subcommittee. The Committee or Subcommittee, as applicable, is authorized to interpret the Plan, to adopt such rules and regulations as may from time to time be deemed necessary for the effective operation of the Plan, and to act upon all matters relating to the granting of awards under the Plan. Any determination, interpretation, construction or other action made or taken pursuant to the provisions of the Plan by or on behalf of the Committee or Subcommittee, as applicable, shall be final, binding and conclusive for all purposes and upon all persons including, without limitation, the Company, the Company's shareholders and Eligible Employees and their respective successors in interest. (b) On and after a Change of Control the Plan shall be administered by the Special Plan Administrator which shall have all powers of the Committee and Subcommittee described under Subsection 3(a). (c) No member of the Committee, Subcommittee or the Special Plan Administrator, as applicable, shall be personally liable by reason of any contract or other instrument executed by such member, or on such member's behalf, in such member's capacity as a member of the Committee or Subcommittee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee or Subcommittee, as applicable, and each other officer, employee or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee or Subcommittee) arising out of any act or omission in connection with the Plan unless arising out of such person's own fraud or bad faith. (d) Subject to the terms and limitations of Subsection 1(a) of Article II and Section 1 of Article III of the Plan, the Committee, Subcommittee or Special Plan Administrator, as applicable, may at the time of the annual grants, make adjustments within the Total Investment Value applicable to all Eligible Employees provided that any reallocation resulting from changes in individual grants may be made only to Eligible Employees in the same Salary Grade Level as the affected individuals, so that the Total Investment Value by Salary Grade Level may not be exceeded. 8 ARTICLE II STOCK OPTIONS SECTION 1. GRANT OF STOCK OPTIONS (a) REGULAR GRANTS. The Committee may make an annual grant of Stock Options to Eligible Employees in an aggregate amount equal to the Target Investment Value (i.e., one-half of the Total Investment Value), subject to the terms and conditions set forth in the Plan and on such other terms and conditions as are not inconsistent with the purposes and provisions of the Plan, provided, that, the Committee, in its sole discretion, may, at the time of the annual grant, adjust such aggregate amount from zero to three times the Target Investment Value. (b) SPECIAL GRANTS. The Committee, in its sole discretion, may make grants of Stock Options in amounts determined to be appropriate by the Committee to: (i) Employees of the Company who are not regular Eligible Employees, either at the same time as the regular, annual grant of Stock Options or at other times, and (ii) Eligible Employees at times other than the time of the regular, annual grant of Stock Options due to special circumstances, such as commencement of Employment or special achievement. The Committee may, by resolution, delegate to the Chairman of the Board the power to make special grants of Stock Options at times other than the regular, annual grants. Any such grants of Stock Options by the Chairman of the Board will be based upon the recommendations of the Senior Vice President, Human Resources and shall be reported to (or, if necessary, ratified by) the Subcommittee at its next meeting. SECTION 2. TERMS AND CONDITIONS OF STOCK OPTIONS All Stock Options granted under the Plan shall be subject to the following terms and conditions: (a) OPTION PRICE. The option price per share with respect to each Stock Option shall be fixed by the Committee, but shall not be less than the Fair Market Value of the Common Stock on the date the Stock Option is granted. 9 (b) PERIOD OF OPTION. A Stock Option shall expire and all rights thereunder shall end at the expiration of such period (not exceeding ten years) after the date the Stock Option is granted as shall be fixed by the Committee at the time it grants the Stock Option. (c) EXERCISE OF OPTION. Stock Options may be exercised during the remaining term of the options in accordance with the following schedule, subject to the provisions of Subsection 2(d) of this Article II:
---------------------------------------------- CONTINUOUS PORTION OF EMPLOYMENT FOLLOWING GRANT GRANT EXERCISABLE ---------------------------------------------- 1 year 33-1/3% 2 years 66-2/3% 3 years 100% ----------------------------------------------
(d) TERMINATION OF EMPLOYMENT. (i) If an optionee's Employment is terminated prior to entitlement to exercise all or a portion of a grant of Stock Options, the optionee will be immediately entitled to exercise all of his or her outstanding Stock Options during the remainder of the term of the Stock Options, if the optionee's termination is due to (1) total and permanent disability, (2) termination, other than for cause, with a right to an immediate allowance under a retirement plan of the Company, or (3) involuntary termination, other than for cause. (ii) If an optionee's Employment is terminated for cause, regardless of retirement eligibility, or the optionee voluntarily terminates Employment without a right to an immediate retirement allowance under a retirement plan of the Company, any outstanding Stock Options which the optionee is not entitled to exercise shall be canceled and, except as may be provided under Subsection 2(d)(iii) of this Article II, the optionee will be permitted to exercise any Stock Options which the optionee is entitled to exercise immediately prior to his or her date of termination of Employment only during the 60 calendar days following such Employment termination date. (iii) The Committee, in its sole discretion, may increase the portion of a grant of Stock Options which an optionee who terminates Employment under Subsection 2(d)(ii) of this Article II is entitled to exercise and/or the post-termination of Employment period during which some or all of his or her Stock Options may be exercised, provided that in no event may the amount of exercisable Stock Options exceed the amount of the original grant nor may the post-termination of Employment exercise period of such an optionee be longer than 24 months following termination of Employment. The Committee may, by resolution, delegate 10 this power to the Chairman of the Board of the Company, whose decisions shall be based upon the recommendations of the Senior Vice President, Human Resources and shall be reported to the Committee at its next meeting. (e) DEATH. If an optionee dies prior to entitlement to exercise all or a portion of a grant of Stock Options, the designated beneficiary of the optionee or, absent a beneficiary designation, the executor or administrator of his or her estate, will be entitled, commencing on the optionee's date of death, to exercise all of the optionee's outstanding Stock Options during the remainder of the period applicable to such Stock Options under Subsection 2(b) of this Article II. (f) CHANGE OF CONTROL. Upon the occurrence of a Change of Control, a Participant shall be entitled to exercise any outstanding Stock Options which are not otherwise exercisable immediately preceding such a Change of Control. (g) PAYMENT FOR SHARES. Every share purchased through the exercise of a Stock Option shall be paid for in full, in cash, within ten business days following the time of exercise or, unless the Stock Option expressly provides otherwise, at the time of exercise in shares of Common Stock valued at their Fair Market Value on the date on which such Stock Option is exercised, or in a combination of cash and such shares. 11 ARTICLE III RESTRICTED STOCK SECTION 1. GRANT OF CONTINGENT RESTRICTED STOCK The Subcommittee may make an annual grant of Contingent Restricted Stock to Eligible Employees in an amount of contingent shares equal to the quotient of the Target Investment Value divided by the Fair Market Value of a share of Common Stock on the date of grant. SECTION 2. GRANT OF RESTRICTED STOCK The Subcommittee may grant Restricted Stock under the Plan to Eligible Employees, and shall, in each case, determine the number of shares of Restricted Stock to be granted and the terms or duration of the restrictions to be imposed upon those shares. SECTION 3. GRANT OF PERFORMANCE-BASED RESTRICTED STOCK (a) The Subcommittee may grant Performance-Based Restricted Stock under the Plan to Eligible Employees who have been granted Contingent Restricted Stock and the Subcommittee shall in each case determine the number of shares to be granted in accordance with the Performance-Based Restricted Stock Payment Schedule. (b) RESTRICTIONS APPLICABLE TO PERFORMANCE-BASED RESTRICTED STOCK. (i) Subject to the provisions of Subsections 3(b)(iii) and (iv) of this Article III, shares of Performance-Based Restricted Stock shall become vested 24 months following the date of grant, if the Participant remains in Employment during this period. (ii) During the period in which Performance-Based Restricted Stock is not vested, such stock shall be non-transferable and may not be pledged or otherwise encumbered. (iii) If a grantee's Employment is terminated within 24 months following the grant of Performance-Based Restricted Stock due to (1) total and permanent disability; (2) involuntary termination, other than for cause; (3) termination, other than for cause, with a right to an immediate retirement 12 allowance under a retirement plan of the Company; or (4) death, such stock shall be deemed vested on the day the grantee's employment is terminated. (iv) If a grantee terminates Employment within 24 months following the grant of Performance-Based Restricted Stock due to a reason other than described under Subsection 3(b)(iii) of this Article III, all stock pursuant to such grant will be forfeited unless the Subcommittee accelerates the vesting of all or a portion of such stock upon its determination that such vesting is in the best interest of the Company. The Subcommittee may, by resolution, delegate this power to the Chairman of the Board, whose decisions will be based upon the recommendations of the Senior Vice President, Human Resources and shall be reported to the Subcommittee at its next meeting. (v) (1) If a Change of Control occurs following any grant of Contingent Restricted Stock, any actual award of Performance-Based Restricted Stock to which the grantee would otherwise be entitled in respect of such Contingent Restricted Stock, based on the Company's Performance Ranking for the year of the Performance Period on the date of the Change of Control under the applicable Restricted Stock Payment Schedule, shall be satisfied by the grant of shares of Common Stock. The number of shares shall be determined by multiplying the Contingent Restricted Stock by a fraction, the numerator of which is the number of completed months (or fraction thereof) in the Performance Period as of the date of the Change of Control and the denominator of which is the number of months in such Performance Period. (2) If a Change of Control under Article I, Section 2(e)(i), other than by reason of the application of Footnote 1, occurs, and a grantee of Contingent Restricted Stock is terminated by the Company prior to a Person attaining an ownership level of 40 percent or more of the Outstanding Shares of Stock of the Company or the corporation resulting from a Business Combination, as defined in Article I, Section 2(e)(i), any actual award of Performance-Based Restricted Stock to which the grantee would otherwise be entitled, based on the Company's performance ranking as of the earlier of (A) the end of the Performance Period, or (B) the occurrence of a Change of Control by reason of the application of Footnote 1 to such subsection, shall be multiplied by a fraction, the numerator of which is the number of completed months (or fraction thereof) of the Performance Period as of the grantee's date of termination and the denominator of which is the number of months in such Performance Period, with payment to be made in shares of Common Stock. (c) No grant of Performance-Based Restricted Stock may be made to a "Covered Employee", as defined in proposed Treasury Regulations Section 1.162(m), unless the Subcommittee has certified in writing that the performance 13 criteria set forth in the Performance-Based Restricted Stock Payment Schedule have been attained. SECTION 4. WAIVER OF RESTRICTIONS (a) Restrictions upon vesting and transferability of Restricted Stock may be permitted to lapse as originally provided by the Subcommittee at the time of grant, as provided in the Plan or otherwise as the Subcommittee may determine in its sole discretion. (b) Restrictions upon vesting and transferability of Performance-Based Restricted Stock shall lapse as provided in Section 3 of this Article III. (c) All shares of Restricted Stock and Performance-Based Restricted Stock shall be deemed vested upon the occurrence of a Change of Control. SECTION 5. TERMINATION OF EMPLOYMENT (a) If a grantee of Contingent Restricted Stock commences Employment following the beginning of a Performance Period, or terminates Employment prior to the end of a Performance Period, as the case may be, except as provided below, any actual award of Performance-Based Restricted Stock to which the grantee would otherwise be entitled under the applicable Restricted Stock Payment Schedule, shall be multiplied by a fraction, the numerator of which is the number of months employed during the Performance Period and the denominator of which is the number of months in such Performance Period, provided that in no event may an award of Performance-Based Restricted Stock be made unless the grantee has been in Employment for at least six months during the Performance Period. (b) If, prior to the end of a Performance Period, a grantee of Contingent Restricted Stock terminates Employment due to (i) total and permanent disability; (ii) involuntary termination, other than for cause; or (iii) termination, other than for cause, with a right to an immediate retirement allowance under a retirement plan of the Company, the grantee shall be paid the value determined under Subsection 5(a) of this Article III as of the date of the grantee's termination, with payment to be made in shares of Common Stock at the end of the Performance Period. (c) If, prior to the end of a Performance Period, a grantee of Contingent Restricted Stock terminates Employment due to death, the designated 14 beneficiary of the grantee or, absent a beneficiary designation, his or her estate, shall be paid the value determined under Subsection 5(a) of this Article III, in cash, based on the Company's Performance Ranking for the year of the Performance Period which ends closest to the grantee's death, with payment to be made in shares of Common Stock as soon as practicable following the end of such year of the Performance Period. (d) If, prior to the end of a Performance Period, a grantee of Contingent Restricted Stock terminates Employment for cause, regardless of retirement eligibility, or voluntarily terminates Employment, other than with a right to an immediate retirement allowance under a retirement plan of the Company, all such Contingent Restricted Stock held by the grantee shall be canceled. 15 ARTICLE IV PERFORMANCE-BASED DIVIDEND SHARE CREDITS SECTION 1. CANCELLATION OF CREDITS UPON EXERCISE, EXPIRATION OR SURRENDER OF STOCK OPTION Dividend Share Credits shall be credited as provided in Article 1, Subsection 2(n) of the Plan. Upon exercise of any Stock Option, in whole or in part, the credited Dividend Share Credits attributable to the exercised Stock Options shall be canceled. Upon expiration of any Stock Option at the end of its original maximum term, the credited Dividend Share Credits attributable to the expired Stock Options shall be canceled. An optionee may elect to surrender for cancellation exercisable Stock Options in whole or in part. Upon surrender and cancellation of any such Stock Options, the Dividend Share Credits attributable to the surrendered Stock Options shall also be canceled. The shares of Common Stock underlying Stock Options exercised, surrendered or expired pursuant to this Section shall be referred to as the "affected shares" for purposes of the application of the performance criterion set forth in Section 2 of this Article IV. For purposes of the application of such criterion, the date of exercise, surrender or expiration shall be referred to as the "determination date." SECTION 2. PERFORMANCE-BASED CRITERION FOR DIVIDEND SHARE CREDITS Upon the exercise, expiration or surrender of any Stock Option, the Committee shall apply the following performance-based criterion to the Dividend Share Credits allocable to the affected shares: In order for the performance criterion to be attained, the aggregate Fair Market Value of the canceled Dividend Share Credits must exceed the aggregate option price of the affected shares less their aggregate Fair Market Value on the determination date. The criterion shall be applied independently to each grant in the event of the exercise, cancellation or surrender of Stock Options attributable to multiple grants on the same date. 16 SECTION 3. CALCULATION FOR PAYMENT If the performance criterion set forth in Section 2 of this Article IV is attained, a payment in shares of Common Stock shall be made to the optionee, which shall have a value equal to the Fair Market Value of a share of Common Stock multiplied by the total number of any canceled Dividend Share Credits, less the amount by which the aggregate option price of the affected shares exceeds the aggregate Fair Market Value of underlying shares related to such Stock Options on the determination date. The optionee may elect to receive a cash payment in respect of such shares, in which case the shares of Common Stock otherwise payable to the optionee shall be sold by the Company, at no cost to the optionee, and the equivalent cash payment shall be made to the optionee. No payment may be made to a "Covered Employee", as defined in proposed Treasury Regulations Section 1.162(m), unless the Subcommittee has certified in writing that the performance criterion set forth in Section 2 of this Article IV has been attained. SECTION 4. PROSPECTIVE DIVIDEND SHARE CREDITS (a) Upon the occurrence of a Change of Control, the Prospective Dividend Share Credits allocable to an optionee, as of the date of the Change of Control, shall be credited to the account of the optionee, as described in Subsection (b), and no further Dividend Share Credits shall accrue with respect to such optionee. (b) As of the date of a Change of Control, the Dividend Share Credits that would be earned under each outstanding Stock Option for the remaining term of the Stock Option shall be calculated, assuming no further exercises of the Stock Option and using the dividend rate and the Fair Market Value of a Share of Common Stock as of the most recent dividend record date relating to Common Stock. The resulting number of Dividend Share Credits shall be added to the Dividend Share Credits held in the Participant's account as of the date of the Change of Control and all such Dividend Share Credits shall be treated as credited under Article I, Subsection 2(n) of the Plan, and the Participant shall be entitled to payment in shares of Common Stock of the number of Dividend Share Credits relating to an exercise of Stock Options in accordance with Article IV of the Plan. 17 ARTICLE V MISCELLANEOUS PROVISIONS SECTION 1. OPTION AND RESTRICTED STOCK LIMITS (a) The number of shares of Common Stock upon which Stock Options may be granted or which may be the subject of a grant of Restricted Stock or Performance-Based Restricted Stock during a calendar year shall be eight-tenths of one percent (0.8%) of the total issued and outstanding shares of Common Stock as of December 31 of the immediately preceding calendar year. Any shares of Common Stock available for grant that are not made the subject of a grant during a calendar year, or portion thereof, will be available for grant in any subsequent year, or portion thereof, until the end of the term of the Plan. The number of available shares described in the preceding sentences is subject to adjustment as provided in Section 2 of this Article V. The shares shall be made available from authorized Common Stock, issued or unissued, or from Common Stock issued and held in the treasury of the Company as shall be determined by the Committee. Shares of Common Stock subject to Stock Options, shares of Restricted Stock and shares of Performance-Based Restricted Stock that are canceled pursuant to Subsection 2(d) of Article II, Section 2 of Article III or Section 5 of Article III of the Plan may be reallocated under the Plan. (b) No individual may be granted more than 500,000 shares of Restricted Stock, Performance-Based Restricted Stock and/or Stock Options, regardless of the combination, in any calendar year. SECTION 2. ADJUSTMENT IN TERMS OF AWARD In the event of a reorganization, recapitalization, stock split, stock dividend, distribution of assets other than pursuant to a normal cash dividend, combination of shares, merger, consolidation, rights offering, split-up, split- off, spin-off or any other change in the corporate structure or shares of the Company (other than a Change of Control), the Committee may, in its discretion, after consultation with the Chairman of the Board and the President of ARCO, make appropriate adjustments to reflect such event in respect of (a) the limitation in Section 1 of this Article V on the maximum number of shares of Common Stock upon which Stock Options may be granted or which may be the subject of a grant of Restricted Stock or Performance-Based Restricted Stock, (b) the number of shares of Common Stock covered by, and the exercise price per share applicable to, outstanding Stock Options, (c) the number of shares of Common Stock covered by outstanding awards of Restricted Stock or Performance-Based Restricted Stock, and (d) the number of outstanding Dividend Share Credits allocated to optionees' accounts. In the event 18 that the Committee, after consultation with the Chairman of the Board and the President of ARCO, determines that, because of a change (other than a Change of Control) in the Company's business, operations, corporate structure, capital structure, assets or manner in which it conducts business, which it deems to be extraordinary and material, the terms of awards theretofore made are no longer suitable to the objectives which the Committee sought to achieve when it made such awards, it may modify the terms of any or all of such awards in such manner as it may decide is advisable; provided, however, that no award may be modified in a manner which would be inconsistent with the intent of Subsection 1(b) or Section 9 of this Article V, or which would result in an increase in the shares of Performance-Based Restricted Stock. SECTION 3. GOVERNMENTAL REGULATIONS The Plan and the grant and exercise of Stock Options, the crediting and payment of Dividend Share Credits and the award of Contingent Restricted Stock, Restricted Stock and Performance-Based Restricted Stock hereunder, shall be subject to all applicable rules and regulations of governmental or other authorities. SECTION 4. NO GUARANTY OF EMPLOYMENT The grant of a Stock Option, credit of a Dividend Share Credit, or award of Contingent Restricted Stock, Restricted Stock or Performance-Based Restricted Stock under the Plan shall not confer upon a recipient any right to continue in the employ of the Company nor shall it interfere with or restrict in any way the right of the Company to discharge an Eligible Employee at any time for any reason, with or without good cause. SECTION 5. RELATION TO BENEFIT PLANS Stock Options, Dividend Share Credits, Contingent Restricted Stock, Restricted Stock and Performance-Based Restricted Stock will not be considered as compensation for the purpose of any other benefit plans maintained by the Company. 19 SECTION 6. ASSIGNMENT OR TRANSFER No Stock Option, Dividend Share Credit or share of Contingent Restricted Stock, Restricted Stock or Performance-Based Restricted Stock shall be assignable or transferable by an Eligible Employee otherwise than by will or the laws of descent and distribution. SECTION 7. RIGHTS AS SHAREHOLDER (a) An Eligible Employee under the Plan shall have no rights of a holder of Common Stock by virtue of an award of Stock Option or Contingent Restricted Stock hereunder, unless and until certificates for shares of Common Stock, Restricted Stock or Performance-Based Restricted Stock are issued to him or her pursuant to the Plan. (b) Dividend Share Credits shall not be considered as dividends on Common Stock for any purpose. (c) An Eligible Employee who has received an award of Restricted Stock or Performance-Based Restricted Stock shall have the right to vote such stock. All dividends paid with respect to Restricted Stock or Performance-Based Restricted Stock shall be reinvested in additional shares of Restricted Stock, subject to the same restrictions, including the date on which such restrictions lapse, as the shares of Restricted Stock or Performance-Based Restricted Stock with respect to which the dividends are paid. Stock received with respect to an award of Restricted Stock or Performance-Based Restricted Stock pursuant to a stock split, stock dividend or other change in the capitalization of the Company will be held subject to the same restrictions on transferability that are applicable to such shares of Restricted Stock or Performance-Based Restricted Stock. SECTION 8. WITHHOLDING TAXES (a) The Company shall have the right to withhold from salary or otherwise or to cause the employee (or the executor or administrator of his or her estate or his or her distributee) to make payment of any federal, state, local or foreign taxes required to be withheld with respect to any exercise of a Stock Option, stock or cash settlement of a Dividend Share Credit, or award or vesting or deemed vesting of Restricted Stock or Performance-Based Restricted Stock. (b) In the case of an exercise of Stock Options, the payment in respect of Dividend Share Credits allocable to the affected shares, or the vesting or deemed vesting of Restricted Stock or Performance-Based Restricted Stock, an 20 Eligible Employee may elect to have the withholding obligation satisfied by having the Company withhold shares of Common Stock received upon an exercise of Stock Option's, the payment in respect of Dividend Share Credits allocable to the affected shares or the vesting or deemed vesting of Restricted Stock or Performance-Based Restricted Stock, as the case may be. SECTION 9. AMENDMENT AND DISCONTINUANCE OF THE PLAN The Board may amend or discontinue the Plan as it shall from time to time consider desirable, provided that: (a) Except as provided under Subsection (c) hereof, no amendment shall, without further approval by the holders of a majority of the shares which are represented in person or by proxy and entitled to vote on the subject at a meeting of shareholders of ARCO, change the terms of the Plan so as to increase the maximum number of shares upon which Stock Options may be granted or which may be issued upon a grant of Restricted Stock or Performance-Based Restricted Stock or the payment of Dividend Share Credits from the amounts described in Subsections 1(a) and (b) of this Article V, reduce the minimum Stock Option price, or extend the maximum Stock Option period. (b) Except as provided under Subsection (c) hereof, no amendment, discontinuance or termination shall deprive persons who hold shares of Contingent Restricted Stock, Restricted Stock or Performance-Based Restricted Stock, or who are entitled to exercise Stock Options, or to receive a settlement of Dividend Share Credits pursuant to the terms and provisions of the Plan, of their rights with respect thereto. (c) No amendment may be made during the period of an Anticipatory Change of Control, except that the Board may amend the Plan during such a period as it may deem necessary, upon advice of counsel, to further the interest of the Company, its shareholders and the Plan participants regarding any legal requirements that may be applicable to a Change of Control, including, without limitation, satisfaction of any requirements relating to accomplishing "Pooling" treatment under applicable accounting rules, and any Securities Exchange Act rules or tax rules. (d) The Plan may not be amended or terminated on or after a Change of Control until all Outstanding Stock Options have been exercised or expired and all payments of Contingent Restricted Stock under the Plan have been made. 21 SECTION 10. EFFECTIVE DATE The effective date of the Plan is May 28, 1985. SECTION 11. TERM OF PLAN No Stock Options or Contingent Restricted Stock, Restricted Stock or Performance-Based Restricted Stock may be granted after February 24, 2007. 22 EX-10.10(C) 6 AMEND #2 TO SOP FOR OUTSIDE DIRECTORS AMENDMENT NO. 2 TO ATLANTIC RICHFIELD COMPANY STOCK OPTION PLAN FOR OUTSIDE DIRECTORS --------------------------- Pursuant to the authority contained in resolutions adopted by Board of Directors on March 24, 1997, the Atlantic Richfield Company Stock Option Plan For Outside Directors (the "Plan") is hereby amended effective as of April 1, 1997. Section 5.7 of the Plan is amended to read as follows: "5.7 Dividend Share Credits. Dividend Share Credits shall be credited as ---------------------- provided in Paragraph 2.6 of the Plan. Upon exercise of any Stock Option, in whole or in part, a payment in shares of Common Stock shall be made to the optionee in an amount equal to the Fair Market Value of a share of Common Stock multiplied by the total number of Dividend Share Credits attributable to the shares of Common Stock as to which the Stock Option was exercised on such date. Upon expiration of any Stock Option at the end of its original maximum term or upon an optionee's election to surrender for cancellation, to the extent then exercisable, Stock Options held by the optionee, a payment in shares of Common Stock shall be made to the optionee in an amount equal to the Fair Market Value of a share of Common Stock multiplied by the total number of Dividend Share Credits attributable to the shares of Common Stock relating to the expired or canceled Stock Option, less the amount by which the aggregate option price of the shares subject to such expired or canceled options exceeds the Fair Market Value of such shares on such date. In any circumstance in which an optionee is due payment with respect to Dividend Share Credits as described in the preceding paragraph, the optionee may elect to receive a cash payment in respect of such shares, in which case the shares of Common Stock otherwise payable to the optionee shall be sold by the Company, at no cost to the optionee, and the equivalent cash payment shall be made to the optionee." Executed This 26th day of March, 1997. ATTEST: ATLANTIC RICHFIELD COMPANY BY: /s/ Roberta F. Spohn BY: /s/ JOHN H. KELLY --------------------------------- --------------------------------- JOHN H. KELLY Senior Vice President Human Resources 2 EX-10.10(D) 7 AMEND #3 TO SOP FOR OUTSIDE DIRECTORS AMENDMENT NO. 3 TO ATLANTIC RICHFIELD COMPANY STOCK OPTION PLAN FOR OUTSIDE DIRECTORS --------------------- Pursuant to the authority contained in resolutions adopted by Board of Directors on March 24, 1997, the Atlantic Richfield Company Stock Option Plan For Outside Directors (the "Plan") is hereby amended effective as of April 1, 1997. 1. Section 2.6 of the Plan is amended to read as follows: "2.6 "Dividend Share Credits" means, with respect to a Stock Option granted prior to February 24, 1997, the number of units to be recorded as credited to an Outside Director, as of the record date established by the Board of Directors of the Company for each cash dividend declared on issued and outstanding shares of Common Stock, with respect to the Dividend Rights held by an Outside Director on such record date. The number of units constituting each Dividend Share Credit shall be the aggregate number derived by (i) multiplying the dividend rate declared per share of Common Stock by the number of Dividend Rights held by an Outside Director as of the dividend record date, and then (ii) dividing the resulting figure by the Fair Market Value of a share of Common Stock on such record date." 2. Section 4 of the Plan is amended to read as follows: "Grant of Stock Options ---------------------- There is hereby granted to each Outside Director, effective on the date of the adoption of this Plan, a Stock Option to purchase 1,000 shares of Common Stock and, further, effective February 24, 1997, there is hereby granted to each person who becomes an Outside Director in the future, effective on the later of the date such person becomes an Outside Director or the date which is 185 days after such Outside Director's last sale of ARCO Common Stock, whichever date is later, a Stock Option to purchase 2,500 shares of Common Stock, such Stock Options being subject to the terms, conditions, purposes and provisions of the Plan. No Stock Options may be granted under the Plan after December 31, 2000." Executed This 2nd day of October, 1997. ATTEST: ATLANTIC RICHFIELD COMPANY BY: /s/ Donna McDugan BY: /s/ JOHN H. KELLY --------------------------------- --------------------------------- JOHN H. KELLY Senior Vice President Human Resources 2 EX-10.11(C) 8 AMEND #2 TO DEFERRAL PLAN FOR OUTSIDE DIRECTORS AMENDMENT NO. 2 TO ATLANTIC RICHFIELD COMPANY DEFERRAL PLAN FOR OUTSIDE DIRECTORS --------------------------- Pursuant to the power of amendment reserved therein, the following amendment is hereby made to the Atlantic Richfield Company Deferral Plan For Outside Directors (the "Plan") effective as of July 22, 1996, except as otherwise indicated. 1. Article I, Section 3.1 of the Plan is amended to read as follows: "3.1 Account means a separate bookkeeping account maintained by the Company for each Participant and which measures and determines the amounts to be paid to the Participant under the Plan for each component of Deferred Compensation. Separate subaccounts will be established for separate components of Deferred Compensation, as applicable, deferred by a Participant." 2. Article I, Section 3.9 of the Plan is amended to read as follows: "3.9 Deferral Commitment means a promise made by a Participant to defer compensation pursuant to Article II for which a Participation Agreement has been submitted by the Participant to the Company." 3. Article I, Section 3.11 of the Plan is deleted and Sections 3.12 through 3.29 are redesignated as Sections 3.11 through 3.28. 4. Article II, Section 2 of the Plan is amended to read as follows: "SECTION 2. BASIC FORMS OF DEFERRAL 2.1 A Participant may elect to defer the following forms of compensation in a Participation Agreement: (a) BOARD RETAINER AND BOARD MEETING FEES DEFERRAL UNIT. Commencing with Board Retainer and Board Meeting Fees earned on and after October 1, 1990, a Participant may elect to defer such amounts earned during a Deferral Period, subject to any limitations, conditions or restrictions, such as minimum or maximum amounts that may be deferred, as are prescribed by the Administrative Committee in advance of the Deferral Period. (b) BOARD COMMITTEE RETAINER AND BOARD COMMITTEE MEETING FEES DEFERRAL UNIT. Commencing with Committee Retainer and Committee Meeting Fees earned on and after October 1, 1990, Participant may elect to defer such amounts during a Deferral Period, subject to any limitations, conditions or restrictions, such as minimum or maximum amounts that may be deferred, as are prescribed by the Administrative Committee in advance of the Deferral Period." 5. Article III, Section 3 of the Plan is amended to read as follows: "SECTION 3. INTEREST RATE 3.1 The Accounts shall be credited as of each Valuation Date with interest, based on the rates specified hereafter, compounded annually as follows: As of each Valuation Date during each Plan Year at the Interest Rate previously announced by the Company to be applicable for the Plan Year. The Interest Rate for the first Plan Year shall be 125% of the rolling average Ten-Year Treasury Note Rate. Interest shall be credited as of each Valuation Date from the dates when deferred amounts are credited to Accounts based on the balance of each Account." 6. Article IV, Section 1 of the Plan is amended to read as follows: "SECTION 1. PLAN BENEFIT 1.1 If a Participant has a Termination of Service for any reason the Company shall pay a Plan benefit equal to the Participant's Account balance, as determined below: 2 (a) A Participant's Account shall be credited with the rate of interest previously determined under Article III, Section 3.1, and communicated in advance of each Deferral Period, to be applicable for each Plan Year that the Account has been maintained. (b) The Interest Rate provided under Section 1.1(a) of this Article, shall be payable until the Participant's Account is distributed in full." 7. Article IV, Section 2 of the Plan is amended to read as follows: "SECTION 2. FORM AND TIME OF RETIREMENT DISTRIBUTION 2.1 Retirement Distributions shall be paid at the time and in the form of benefit elected by the Participant for the total Deferred Compensation under Article II, Section II, at the time of the Deferral Commitment, on the Participation Agreement. A Participant's election shall be irrevocable, except that a Participant may request, by application to the Administrative Committee, approval of a change of the prior election at any time prior to retirement or commencement of benefits, or in the case of installment payments, following commencement of payments, (i) without any reduction in, or imposition of any penalty on, the Participant's Account, provided that the Administrative Committee determines, upon application of the Participant, that the Participant has experienced a Financial Hardship justifying the request for a change of election; or (ii) the Administrative Committee, in its sole discretion, determines that it is appropriate to grant the Participant's request. Absent an election by the Participant of the form and/or commencement date of the Retirement Distribution, payment will be made in a lump sum immediately following the Participant's date of retirement." 8. Article IV, Section 4 of the Plan is amended to read as follows: "SECTION 4. SURVIVOR BENEFITS 4.1 (a) Prior to Change of Control the following provisions shall apply: 3 (i) Death Prior to Termination of Service. If the Participant ------------------------------------- dies prior to Termination of Service, the Survivor Benefit shall be paid to the Participant's Beneficiary in a Lump Sum or in monthly installments, as elected by the Participant, and shall be the sum of the Participant's Account balance plus one hundred percent (100%) of the Participant's unfulfilled Deferral Commitment, if any. (ii) Death After Termination of Service. If the Participant dies ---------------------------------- after Termination of Service, the Participant's Account balance, if any, shall be paid to the Participant's Beneficiary by continuation of the form of benefit which was payable to the Participant for the remaining payments which would have been made to the Participant if the Participant had lived, increased by the applicable Interest Rate credited on unpaid Account balances of deceased Participants during each year of the payment period to the Beneficiary. (b) If a Participant dies following a Change of Control the Survivor Benefit shall be equal to the Participant's Account balance, payable in a lump sum to the Participant's Beneficiary." 9. Article IV, Section 5 of the Plan is amended to read as follows: "SECTION 5. IN-SERVICE DISTRIBUTIONS 5.1 A Participant may elect to receive an In-Service Distribution from his or her Account subject to the following restrictions: (a) TIMING OF ELECTION. The election to take an In-Service Distribution from an Account must be made at the same time the Participant makes the annual Deferral Commitment. (b) AMOUNT OF DISTRIBUTION. The amount which a Participant can elect to receive as an In-Service Distribution with respect to an Account shall be such 4 portions of the Participant's Account balance, as prescribed by the Administrative Committee in advance of the Deferral Period. If a previously elected amount exceeds the Account balance when an In-Service Distribution is to be made, only the Account balance will be paid. (c) TIMING AND FORM OF IN-SERVICE DISTRIBUTION. The In-Service Distribution shall commence at the time and in the form elected by the Participant on the Participant Agreement at the time of the Deferral Commitment; provided, however, that if the Participant terminates service, the In-Service Distribution election will be canceled and distribution will be made pursuant to Section 3 of this Article, and provided, further, that if the Participant commences retirement, the In-Service Distribution election will be canceled and distribution will be made pursuant to Section 2 of this Article. In no event shall an In-Service Distribution be made prior to seven years following the start of the Deferral Period. (d) Amounts paid to a Participant pursuant to this section shall be treated as distributions from the Participant's Account." 10. Sections 7 through 9 of Article IV, with Section 9 being effective August 1, 1997, of the Plan are amended to read as follows: "SECTION 7. VALUATION AND SETTLEMENT 7.1 The date on which a lump sum is paid or the date on which installment payments commence shall be the "Settlement Date." The Settlement Date shall be no more than thirty (30) days after the last day of the month in which the Participant or his Beneficiary becomes entitled to payments on account of retirement, other Termination of Employment or death, unless the Participant elects to defer commencement of payments following retirement to a later date in the Participation Agreement. The Settlement Date for an In- Service Distribution or delayed payments following retirement shall be the month which the 5 Participant elects for commencement of such payments in the election form for designation of form of payment. The amount of a lump sum and the initial amount of installment payments shall be based on the value of the Participant's Account as of the Valuation Date at the end of the immediately preceding month before the Settlement Date. For example, the Valuation Date at the end of December shall be used to determine a lump sum or the initial amount of installment payments which will be made in the following January. SECTION 8. SMALL BENEFIT 8.1 Notwithstanding any election made by the Participant, the Administrative Committee, in its sole discretion, may pay any benefit in the form of a lump sum payment to the Participant or any Beneficiary, if the lump sum amount of the Account balance which remains in the Account following a distribution for any reason, or which is payable to the Participant or Beneficiary when payments to such Participant or Beneficiary would otherwise commence is less than $2,000. SECTION 9. CHANGE OF CONTROL 9.1 (a) Subject to the provisions of Section 9.1(b) hereof, upon a Change of Control as defined in the Trust Agreement For Outside Directors Benefit Plans between Atlantic Richfield Company and the State Street Bank and Trust Company, as amended through August 1, 1997, and incorporated herein by reference and notwithstanding any other provision to the contrary in this Plan, the following provisions shall apply: (i) The Independent Plan Administrator appointed under the Trust Agreement shall assume all responsibilities relating to Administration under Article VI of the Plan with the exception that the disposition of any claim for benefits by a Participant or Beneficiary, following an initial determination by the Independent Plan Administrator, shall be the sole responsibility of the Advisory and Claims Committee established under the Trust Agreement, described above. 6 (ii) No individual may commence participation following the Change of Control. (iii) No deferrals relating to previously elected Deferral Commitments may be made following the Change of Control, except that any amounts earned through the date of the Change of Control during the relevant Plan year shall be credited in accordance with the prior deferral election. (iv) Any amounts determined by the Independent Plan Administrator to be transferable to this Plan from the Atlantic Richfield Retirement Plan for Outside Directors pursuant to an eligible Participant's election under such plan following a Change of Control shall be accepted by the Independent Plan Administrator and credited to the affected Participant's Deferral Account. (b) Time and form of distribution of Deferred Compensation Accounts following a Change of Control: (i) Following a Change of Control, any prior elections with respect to the form of payment of any Deferred Compensation Accounts shall be canceled and the Participant will be given the option to elect, in accordance with procedures established by the Independent Plan Administrator, including the time and manner of election, the form of distribution of the Participant's entire Deferred Compensation Account in one of the following forms. Absent such election within the time period determined by the Independent Plan Administrator, the Deferred Compensation Account will be distributed to the Participant in a single payment: (1) Single payment, constituting all or a portion of the Account, as elected by the Participant. If a portion of the Account is distributed, the remainder will be distributed under one of the installment methods. 7 (2) Five annual installments (3) Ten annual installments (4) Fifteen annual installments (ii) Following a Change of Control, any prior elections with respect to the time of payment of any Deferred Compensation shall be canceled and the Participant will be given the option to elect, in accordance with procedures established by the Independent Plan Administrator, described above, distribution of the entire Deferred Compensation Account elected under Subparagraph (ii), at one the following times: (1) A single payment will be distributed to the Participant as soon as possible following the Change of Control; (2) The Participant may elect commencement of any of the installment schedules elected under Subparagraph (i) above in the January immediately following the Change of Control or any succeeding January, provided that in no event may distributions continue after the end of the 20th calendar year following a Change of Control." 11. Article V of the Plan is amendment to read as follows: "ARTICLE V DESIGNATION OF BENEFICIARY Section 1. Designation of Beneficiary 1.1 Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive Participant's interest in Participant's Account upon Participant death. Such designation shall be made on a form prescribed by and delivered to the Company. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice 8 of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. SECTION 2. FAILURE TO DESIGNATE BENEFICIARY 2.1 If a Participant shall fail to designate a Beneficiary before Participant's death, or if no designated Beneficiary survives the Participant, the Administrative Committee shall direct the Company to pay the balance in Participant's Account in a lump sum to the executor or administrator for Participant's estate." Executed This 15th day of September, 1997. ATTEST: ATLANTIC RICHFIELD COMPANY BY: /s/ Armineh Simonian BY: /s/ John H. Kelly ------------------------- ------------------------------- ARMINEH SIMONIAN JOHN H. KELLY Senior Vice President Human Resources 9 EX-10.13 9 1977 RESTRICTED STOCK PLAN FOR OUTSIDE DIRECTORS [LOGO OF ARCO APPEARS HERE] - -------------------------------------------------------------------------------- 1997 Restricted Stock Plan For Outside Directors Effective January 1, 1997 ATLANTIC RICHFIELD COMPANY 1997 RESTRICTED STOCK PLAN FOR OUTSIDE DIRECTORS To record the adoption of the Atlantic Richfield Company 1997 Restricted Stock Plan for Outside Directors, effective January 1, 1997, the undersigned, being duly authorized to act on behalf of Atlantic Richfield Company has executed this plan document at Los Angeles, California on the 11th day of June, 1997. ATTEST: ATLANTIC RICHFIELD COMPANY BY: /s/ ARMINEH SIMONIAN BY: /s/ JOHN H. KELLY ------------------------- --------------------------- JOHN H. KELLY Senior Vice President Human Resources ATLANTIC RICHFIELD COMPANY 1997 RESTRICTED STOCK PLAN FOR OUTSIDE DIRECTORS TABLE OF CONTENTS -----------------
PAGE NO. ------- SECTION 1. PURPOSE OF THE PLAN.................................... 1 SECTION 2. DEFINITIONS............................................ 1 SECTION 3. ADMINISTRATION OF THE PLAN............................. 2 SECTION 4. GRANT OF RESTRICTED STOCK.............................. 2 SECTION 5. TERMS AND CONDITIONS OF RESTRICTED STOCK............... 3 SECTION 6. COMMON STOCK SUBJECT TO PLAN........................... 4 SECTION 7. ADJUSTMENTS............................................ 4 SECTION 8. GENERAL PROVISIONS..................................... 4 SECTION 9. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN...... 5 SECTION 10. EFFECTIVE DATE......................................... 5
ATLANTIC RICHFIELD COMPANY 1997 RESTRICTED STOCK PLAN FOR OUTSIDE DIRECTORS The Restricted Stock Plan for Outside Directors of Atlantic Richfield Company, a Delaware corporation, is set forth as follows: I. PURPOSES OF THE PLAN The purposes of this Plan are to provide nonemployee members of the Board of Directors with a specific incentive to work for the long-range growth and success of ARCO, to enable such members to acquire stock ownership and further alignment with the goal of increasing the value of such stock, and to facilitate the attraction and retention of directors of superior capability. II. DEFINITIONS As used herein, the following terms shall have the following meanings: 2.1 "ARCO" shall mean Atlantic Richfield Company. 2.2 "Board" means the Board of Directors of ARCO. 2.3 "Administrative Committee" shall mean the Outside Director Restricted Stock Plan Committee which is comprised of a Committee consisting of employees of the Company who are members of the Board and are appointed by the Chairman of the Board with the concurrence of the Corporate Governance Committee. The Committee is authorized to administer the Plan. 2.4 "Change of Control" shall mean Change of Control as defined in the Atlantic Richfield Trust Agreement For Outside Directors Benefit Plans between Atlantic Richfield Company and the State Street Bank and Trust Company, effective as of July 1, 1994. 2.5 "Common Stock" shall mean the common stock of ARCO having a par value of $2.50 per share. 2.6 "Fair Market Value" of a share of Common Stock shall be the mean between the highest and lowest sales prices, or the closing sales price of a share of Common Stock, whichever is higher, on the date in question as reported on the composite tape for issues listed on the New York Stock Exchange. 1 2.7 "Normal Retirement Age" means the normal retirement age for Outside Directors established by the Board of Directors. 2.8 "Outside Director" means a member of the Board of Directors of ARCO that is not an employee of ARCO. 2.9 "Plan" shall mean this Restricted Stock Plan for Outside Directors, including any amendments hereof and rules and regulations hereunder. 2.10 "Restricted Stock" shall mean Common Stock awarded under this Plan, which is subject to certain forfeiture and transferability restrictions as provided in the Plan, in regulations of the Administrative Committee promulgated thereunder, and in the agreement evidencing the grant of such Restricted Stock. III. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Administrative Committee, which is authorized to determine the maximum number of shares of Common Stock that may be issued under the Plan and the source of such shares, to adopt rules regarding the time and form of distributions and elections related thereto and to delegate any responsibility to one or more employees of the Company. The Administrative Committee shall act upon all matters relating to the interpretation and construction of the Plan. Any interpretation, construction or any other action made or taken pursuant to the provisions of the Plan by the Administrative Committee shall be final, binding and conclusive for all purposes and upon all persons including the Company, its Outside Directors and their respective successors in interest. IV. GRANT OF RESTRICTED STOCK A. Effective January 1, 1997, there shall be a grant of shares of Restricted Stock representing the converted value of the accrued benefit of each Outside Director who was an active participant in the Atlantic Richfield Company Retirement Plan for Outside Directors as of December 31, 1996, and who elected such conversion effective January 1, 1997. B. Effective March 31, 1997, there shall be a grant of shares of Restricted Stock representing the converted value of the account balance of each Outside Director who was an active Participant in the Atlantic Richfield Company Deferral Plan For Outside Directors as of March 31, 1997 and who elected such conversion effective March 31, 1997. 2 C. After January 1, 1997, there shall be an additional annual grant of shares of Restricted Stock representing the percentage of applicable director and Committee Chairman retainer fees elected by the Outside Director in advance of each calendar year pursuant to procedures adopted by the Administrative Committee. D. Dividends earned on any grant of Restricted Stock under Subparagraphs A, B and C shall be reinvested in additional shares of Restricted Stock on the date such dividends are earned and such additional shares of Restricted Stock shall be subject to the terms and conditions generally applicable to Restricted Stock under the Plan. V. TERMS AND CONDITIONS OF RESTRICTED STOCK All Restricted Stock granted or issued under the Plan shall be subject to the following terms and conditions: A. The Administrative Committee shall grant Restricted Stock under the Plan to Outside Directors and the Administrative Committee shall in each case determine the number of shares of Restricted Stock to be awarded, consistent with the provisions of Article IV of the Plan. B. Each share of Restricted Stock shall become nonforfeitable upon the earlier of (i) retirement at Normal Retirement Age, (ii) Change of Control, (iii) death, (iv) disability, or (v) termination prior to Normal Retirement Age with the consent of a majority of the remaining members of the Board, provided that failure to be nominated for re-election or to be re-elected after standing for re-election shall constitute termination with such consent. If the Outside Director terminates membership on the Board prior to Normal Retirement Age for any reason other than Change of Control, death, disability or termination with the consent of the majority of the remaining members of the Board, the shares of Restricted Stock in the Outside Director's account shall be forfeited. C. For the period during which shares of Restricted Stock are subject to forfeiture under Subparagraph B hereof or are being held for later distribution pursuant to a deferral election under Subparagraph D hereof, such shares shall be nontransferable and nonassignable and may not be pledged or otherwise encumbered by the Outside Director. D. Each Outside Director shall be permitted to elect a distribution subsequent to Normal Retirement Age subject to any time, form and other procedures regarding such election as are prescribed by the Administrative Committee, in which case the Restricted Stock shall continue to be nontransferable and nonassignable prior to the end of the deferral period. 3 E. Dividends accruing on shares of Restricted Stock shall be reinvested in shares of Restricted Stock and be subject to the terms and conditions of the Plan. VI. COMMON STOCK SUBJECT TO PLAN The maximum number of shares of Common Stock that may be issued under the Plan shall not in the aggregate exceed 75,000 shares of Common Stock, subject to the adjustments under Paragraph VII. Common Stock issued under the Plan shall be Common Stock which is treasury stock. Shares of Common Stock subject to forfeited Restricted Stock may again become available for the grant of Restricted Stock under this Plan. VII. ADJUSTMENTS If the class of shares then subject to the Plan is changed into or exchanged for a different number or kind of shares or securities, as the result of any one or more reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends or similar events, an adjustment shall be made in the number and/or type of shares or securities for which Restricted Stock has been or may thereafter be granted under this Plan. VIII. GENERAL PROVISIONS A. Each member of the Administrative Committee may rely upon information reported to him or her by officers or employees of ARCO with delegated responsibilities and shall not be liable for any act of commission or omission of others or, except in circumstances involving his or her own bad faith, for any act taken or omitted by himself or herself. B. The grant of shares of Restricted Stock under the Plan shall not constitute an assurance of service on the Board, such service being subject to election by the stockholders. C. The Plan and the grant of Restricted Stock hereunder shall be subject to all applicable rules and regulations of governmental and other authorities. D. Shares of Common Stock received with respect to an award of Restricted Stock pursuant to a stock split, stock dividend or other change in the capitalization of the Company will be held subject to the same restrictions on transferability that are applicable to such shares of Restricted Stock. 4 IX. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN The Board of Directors of ARCO may suspend, terminate or amend the Plan. No amendment, suspension or termination of the Plan shall deprive Outside Directors to any Restricted Stock granted under the Plan on or before such date. X. EFFECTIVE DATE The effective date of the Plan is January 1, 1997. 5 EX-21 10 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
PERCENTAGE OF VOTING SECURITIES OWNED BY ORGANIZED IMMEDIATE NAME OF COMPANY UNDER LAWS OF PARENT --------------- ------------- ------------- Atlantic Richfield Company (Registrant)........... Delaware Subsidiaries of Registrant in consolidated financial statements, as of December 31, 1997: ARCO Alaska, Inc................................ Delaware 100.0 ARCO Chemical Company........................... Delaware 82.3 ARCO Transportation Alaska, Inc. ............... Delaware 100.0 Vastar Resources, Inc. ......................... Delaware 82.2
The subsidiaries whose names are not listed above, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 11 CONSENT OF COOPERS LYBRAND L.L.P. EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Atlantic Richfield Company; Registration Statement on Form S-8 (No. 333-33151), Registration Statement on Form S-8 (No. 33-43830), Registration Statement on Form S-8 (No. 33-21558), Registration Statement on Form S-8 (No. 333-33153), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21160), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23639), Registration Statement on Form S-8 (No. 333-26901), Post- Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21162), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-21553), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33-23640), Registration Statement on Form S-8 (No. 333-26901), Post-Effective Amendment No. 4 to Registration Statement on Form S-8 (No. 33- 21552), and Registration Statement on Form S-8 (No. 333-33245), of our report dated February 12, 1998, on our audits of the consolidated financial statements and financial statement schedule of Atlantic Richfield Company as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Los Angeles, California March 2, 1998 EX-24 12 POWER OF ATTORNEY POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Marie L. Knowles, Anthony G. Fernandes, William E. Wade, Jr., Michael E. Wiley, Bruce G. Whitmore, Terry G. Dallas and Allan L. Comstock, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, in connection with the issuance of any securities authorized by the Board of Directors of Atlantic Richfield Company (the "Company") or by the Executive Committee thereof pursuant to due authorization by such Board for issuance by the Company, (1) to execute and file, or cause to be filed, with the Securities and Exchange Commission (the "Commission"), (A) Registration Statements and any and all amendments (including post-effective amendments) thereto and to file, or cause to be filed, all exhibits thereto and other documents in connection therewith as required by the Commission in connection with such registration under the Securities Act of 1933, as amended, and (B) any report or other document required to be filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended, (2) to execute and file, or cause to be filed, any application for registration or exemption therefrom, any report or any other document required to be filed by the Company under the Blue Sky or securities laws of any of the United States, and to furnish any other information required in connection therewith, (3) to execute and file, or cause to be filed, any application for registration or exemption therefrom under the securities laws of any jurisdiction outside the United States, including any reports or other documents required to be filed subsequent to the issuance of such securities, and (4) to execute and file, or cause to be filed, any application for listing such securities on the New York Stock Exchange, the Pacific Stock Exchange, the London Stock Exchange or any other securities exchange in any other jurisdiction where any such securities are proposed to be sold, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act required to be done as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, and each of them, may lawfully do or cause to be done by virtue of this power of attorney. Each person whose signature appears below may at any time revoke this power of attorney as to himself or herself only by an instrument in writing specifying that this power of attorney is revoked as to him or her as of the date of execution of such instrument or at a subsequent specified date. This power of attorney shall be revoked automatically with respect to any person whose signature appears below effective on the date he or she ceases to be a member of the Board of Directors or an officer of the Company. Any revocation hereof shall not void or otherwise affect any acts performed by any attorney-in-fact and agent named herein pursuant to this power of attorney prior to the effective date of such revocation. Dated as of January 25, 1998.
Signature Title --------- ----- /s/ Mike R. Bowlin Chairman of the Board, - ----------------------------- Chief Executive Officer Mike R. Bowlin Principal executive officer
Signature Title --------- ----- /s/ Marie L. Knowles Executive Vice President, - ------------------------------ Chief Financial Officer Marie L. Knowles and Director Principal financial officer /s/ Anthony G. Fernandes Executive Vice President - ----------------------------- and Director Anthony G. Fernandes /s/ William E. Wade, Jr. President - ----------------------------- and Director William E. Wade, Jr. /s/ Michael E. Wiley Executive Vice President - ----------------------------- and Director Michael E. Wiley /s/ Frank D. Boren Director - ----------------------------- Frank D. Boren /s/ John Gavin Director - ----------------------------- John Gavin /s/ Hanna H. Gray Director - ----------------------------- Hanna H. Gray /s/ Kent Kresa Director - ----------------------------- Kent Kresa
2
Signature Title --------- ----- /s/ David T. McLaughlin - -------------------------------- Director David T. McLaughlin /s/ John B. Slaughter - -------------------------------- Director John B. Slaughter /s/ Gary L. Tooker - -------------------------------- Director Gary L. Tooker /s/ Henry Wendt - -------------------------------- Director Henry Wendt /s/ Allan L. Comstock - -------------------------------- Vice President and Allan L. Comstock Controller Principal accounting officer
3 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 533 222 1,588 0 1,004 3,576 36,786 19,788 25,322 4,745 4,414 0 1 807 7,873 25,322 18,684 19,272 14,765 15,273 250 0 422 2,877 920 1,889 0 118 0 1,771 5.51 5.41
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