10-Q 1 d435312d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 001-32395

 

 

ConocoPhillips

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   01-0562944

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

600 North Dairy Ashford, Houston, TX 77079

(Address of principal executive offices) (Zip Code)

281-293-1000

(Registrant’s telephone number, including area code)

 

 

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  

 

Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The registrant had 1,216,949,231 shares of common stock, $.01 par value, outstanding at June 30, 2017.

 

 

 


Table of Contents

CONOCOPHILLIPS

TABLE OF CONTENTS

 

     Page  

Part I—Financial Information

  

Item 1. Financial Statements

  

Consolidated Income Statement

     1  

Consolidated Statement of Comprehensive Income

     2  

Consolidated Balance Sheet

     3  

Consolidated Statement of Cash Flows

     4  

Notes to Consolidated Financial Statements

     5  

Supplementary Information—Condensed Consolidating Financial Information

     29  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     56  

Item 4. Controls and Procedures

     56  

Part II—Other Information

  

Item 1. Legal Proceedings

     57  

Item 1A. Risk Factors

     57  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     58  

Item 6. Exhibits

     59  

Signature

     60  


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

Consolidated Income Statement    ConocoPhillips

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  
  

 

 

   

 

 

 

Revenues and Other Income

        

Sales and other operating revenues

   $ 6,781       5,348       14,299       10,469  

Equity in earnings (losses) of affiliates

     178       80       378       (69

Gain on dispositions

     1,876       128       1,898       151  

Other income

     47       19       78       39  

 

 

Total Revenues and Other Income

     8,882       5,575       16,653       10,590  

 

 

Costs and Expenses

        

Purchased commodities

     2,922       2,002       6,114       4,227  

Production and operating expenses

     1,327       1,445       2,625       2,799  

Selling, general and administrative expenses

     134       167       291       353  

Exploration expenses

     98       610       649       1,115  

Depreciation, depletion and amortization

     1,625       2,329       3,604       4,576  

Impairments

     6,294       62       6,469       198  

Taxes other than income taxes

     198       197       429       377  

Accretion on discounted liabilities

     92       112       187       221  

Interest and debt expense

     306       312       621       593  

Foreign currency transaction (gains) losses

     13       (17     23       (1

Other expense

     234             234        

 

 

Total Costs and Expenses

     13,243       7,219       21,246       14,458  

 

 

Loss before income taxes

     (4,361     (1,644     (4,593     (3,868

Income tax benefit

     (935     (586     (1,766     (1,354

 

 

Net loss

     (3,426     (1,058     (2,827     (2,514

Less: net income attributable to noncontrolling interests

     (14     (13     (27     (26

 

 

Net Loss Attributable to ConocoPhillips

   $ (3,440     (1,071     (2,854     (2,540

 

 

Net Loss Attributable to ConocoPhillips Per Share of

Common Stock (dollars)

        

Basic

   $ (2.78     (0.86     (2.30     (2.04

Diluted

     (2.78     (0.86     (2.30     (2.04

 

 

Dividends Paid Per Share of Common Stock (dollars)

   $ 0.27       0.25       0.53       0.50  

 

 

Average Common Shares Outstanding (in thousands)

        

Basic

     1,236,831       1,244,892       1,240,037       1,244,724  

Diluted

     1,236,831       1,244,892       1,240,037       1,244,724  

 

 

See Notes to Consolidated Financial Statements.

 

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Consolidated Statement of Comprehensive Income    ConocoPhillips

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  
  

 

 

   

 

 

 

Net Loss

   $ (3,426     (1,058     (2,827     (2,514

Other comprehensive income (loss)

        

Defined benefit plans

        

Reclassification adjustment for amortization of prior service credit included in net loss

     (10     (9     (19     (18

Net actuarial loss arising during the period

     (32     (69     (39     (300

Reclassification adjustment for amortization of net actuarial losses included in net loss

     66       74       156       182  

Income taxes on defined benefit plans

     (8     3       (34     53  

 

 

Defined benefit plans, net of tax

     16       (1     64       (83

 

 

Unrealized holding loss on securities

     (424           (424      

 

 

Unrealized loss on securities, net of tax

     (424           (424      

 

 

Foreign currency translation adjustments

     27       (224     211       959  

 

 

Foreign currency translation adjustments, net of tax

     27       (224     211       959  

 

 

Other Comprehensive Income (Loss), Net of Tax

     (381     (225     (149     876  

 

 

Comprehensive Loss

     (3,807     (1,283     (2,976     (1,638

Less: comprehensive income attributable to noncontrolling interests

     (14     (13     (27     (26

 

 

Comprehensive Loss Attributable to ConocoPhillips

   $ (3,821     (1,296     (3,003     (1,664

 

 

See Notes to Consolidated Financial Statements.

 

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Consolidated Balance Sheet    ConocoPhillips

 

                             
     Millions of Dollars  
     June 30     December 31  
     2017     2016  
  

 

 

 

Assets

    

Cash and cash equivalents

   $ 7,534       3,610  

Short-term investments

     2,733       50  

Accounts and notes receivable (net of allowance of $4 million in 2017 and $5 million in 2016)

     3,020       3,249  

Accounts and notes receivable—related parties

     143       165  

Investment in Cenovus Energy

     1,533        

Inventories

     1,019       1,018  

Prepaid expenses and other current assets

     3,897       517  

 

 

Total Current Assets

     19,879       8,609  

Investments and long-term receivables

     9,681       21,091  

Loans and advances—related parties

     522       581  

Net properties, plants and equipment (net of accumulated depreciation, depletion and amortization of $62,018 million in 2017 and $73,075 million in 2016)

     46,846       58,331  

Other assets

     1,076       1,160  

 

 

Total Assets

   $ 78,004       89,772  

 

 

Liabilities

    

Accounts payable

   $ 3,401       3,631  

Accounts payable—related parties

     33       22  

Short-term debt

     3,798       1,089  

Accrued income and other taxes

     791       484  

Employee benefit obligations

     509       689  

Other accruals

     1,394       994  

 

 

Total Current Liabilities

     9,926       6,909  

Long-term debt

     19,670       26,186  

Asset retirement obligations and accrued environmental costs

     7,631       8,425  

Deferred income taxes

     6,335       8,949  

Employee benefit obligations

     2,499       2,552  

Other liabilities and deferred credits

     1,444       1,525  

 

 

Total Liabilities

     47,505       54,546  

 

 

Equity

    

Common stock (2,500,000,000 shares authorized at $.01 par value)

    

Issued (2017—1,784,927,181 shares; 2016—1,782,079,107 shares)

    

Par value

     18       18  

Capital in excess of par

     46,558       46,507  

Treasury stock (at cost: 2017—567,977,950 shares; 2016—544,809,771 shares)

     (37,981     (36,906

Accumulated other comprehensive loss

     (6,342     (6,193

Retained earnings

     28,033       31,548  

 

 

Total Common Stockholders’ Equity

     30,286       34,974  

Noncontrolling interests

     213       252  

 

 

Total Equity

     30,499       35,226  

 

 

Total Liabilities and Equity

   $ 78,004       89,772  

 

 

See Notes to Consolidated Financial Statements.

 

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Consolidated Statement of Cash Flows    ConocoPhillips

 

                             
     Millions of Dollars  
     Six Months Ended
June 30
 
     2017       2016  
  

 

 

 

Cash Flows From Operating Activities

    

Net loss

   $ (2,827     (2,514

Adjustments to reconcile net loss to net cash provided by operating activities

    

Depreciation, depletion and amortization

     3,604       4,576  

Impairments

     6,469       198  

Dry hole costs and leasehold impairments

     428       823  

Accretion on discounted liabilities

     187       221  

Deferred taxes

     (2,548     (1,457

Distributions received greater than equity losses (undistributed equity earnings)

     (121     222  

Gain on dispositions

     (1,898     (151

Other

     175       (17

Working capital adjustments

    

Decrease in accounts and notes receivable

     313       1,097  

Increase in inventories

     (3     (23

Increase in prepaid expenses and other current assets

     (135     (51

Decrease in accounts payable

     (178     (454

Increase (decrease) in taxes and other accruals

     75       (790

 

 

Net Cash Provided by Operating Activities

     3,541       1,680  

 

 

Cash Flows From Investing Activities

    

Capital expenditures and investments

     (1,986     (2,954

Working capital changes associated with investing activities

     (113     (363

Proceeds from asset dispositions

     10,742       363  

Net purchases of short-term investments

     (2,653     (1,292

Collection of advances/loans—related parties

     57       53  

Other

     176       6  

 

 

Net Cash Provided by (Used in) Investing Activities

     6,223       (4,187

 

 

Cash Flows From Financing Activities

    

Issuance of debt

           4,594  

Repayment of debt

     (4,079     (827

Issuance of company common stock

     (63     (45

Repurchase of company common stock

     (1,075      

Dividends paid

     (662     (626

Other

     (64     (79

 

 

Net Cash Provided by (Used in) Financing Activities

     (5,943     3,017  

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     103       (15

 

 

Net Change in Cash and Cash Equivalents

     3,924       495  

Cash and cash equivalents at beginning of period

     3,610       2,368  

 

 

Cash and Cash Equivalents at End of Period

   $ 7,534       2,863  

 

 

See Notes to Consolidated Financial Statements.

 

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Notes to Consolidated Financial Statements      ConocoPhillips  

Note 1—Basis of Presentation

The interim-period financial information presented in the financial statements included in this report is unaudited and, in the opinion of management, includes all known accruals and adjustments necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature unless otherwise disclosed. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2016 Annual Report on Form 10-K.

Note 2—Variable Interest Entities (VIEs)

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on our significant VIEs follows:

Australia Pacific LNG Pty Ltd (APLNG)

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary of APLNG because we share with Origin Energy and China Petrochemical Corporation (Sinopec) the power to direct the key activities of APLNG that most significantly impact its economic performance, which involve activities related to the production and commercialization of coalbed methane, as well as liquefied natural gas (LNG) processing and export marketing. As a result, we do not consolidate APLNG, and it is accounted for as an equity method investment.

As of June 30, 2017, we have not provided any financial support to APLNG other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of APLNG. See Note 5—Investments, Loans and Long-Term Receivables, and Note 11—Guarantees, for additional information.

Marine Well Containment Company, LLC (MWCC)

MWCC provides well containment equipment and technology and related services in the deepwater U.S. Gulf of Mexico. Its principal activities involve the development and maintenance of rapid-response hydrocarbon well containment systems that are deployable in the Gulf of Mexico on a call-out basis. We have a 10 percent ownership interest in MWCC, and it is accounted for as an equity method investment because MWCC is a limited liability company in which we are a Founding Member and exercise significant influence through our permanent seat on the ten-member Executive Committee responsible for overseeing the affairs of MWCC. In 2016, MWCC executed a $154 million term loan financing arrangement with an external financial institution whose terms required the financing be secured by letters of credit provided by certain owners of MWCC, including ConocoPhillips. In connection with the financing transaction, we issued a letter of credit of $22 million which can be drawn upon in the event of a default by MWCC on its obligation to repay the proceeds of the term loan. The fair value of this letter of credit is immaterial and not recognized on our consolidated balance sheet. MWCC is considered a VIE, as it has entered into arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary and do not consolidate MWCC because we share the power to govern the business and operation of the company and to undertake certain obligations that most significantly impact its economic performance with nine other unaffiliated owners of MWCC.

At June 30, 2017, the carrying value of our equity method investment in MWCC was $143 million. We have not provided any financial support to MWCC other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of MWCC.

 

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Note 3—Inventories

Inventories consisted of the following:

 

                             
     Millions of Dollars  
     June 30      December 31  
     2017      2016  
  

 

 

 

Crude oil and natural gas

   $ 447        418  

Materials and supplies

     572        600  

 

 
   $ 1,019        1,018  

 

 

Inventories valued on the last-in, first-out (LIFO) basis totaled $296 million and $269 million at June 30, 2017 and December 31, 2016, respectively. The estimated excess of current replacement cost over LIFO cost of inventories was approximately $45 million and $104 million at June 30, 2017 and December 31, 2016, respectively.

Note 4—Assets Held for Sale, Sold or Other Planned Dispositions

Assets Held for Sale

On April 12, 2017, we signed a definitive agreement with an affiliate of Hilcorp Energy Company to sell our interests in the San Juan Basin for up to $3.0 billion of total proceeds, comprised of $2.7 billion in cash and a contingent payment of up to $300 million. The six-year contingent payment is effective beginning January 1, 2018, and is due annually for the periods in which the monthly U.S. Henry Hub price is at or above $3.20 per million British thermal units. On the date of signing, we received a $135 million deposit, which is included in the “Cash Flows From Investing Activities” section of our consolidated statement of cash flows. The transaction closed on July 31, 2017, with cash proceeds of $2.5 billion after customary adjustments.

In the second quarter of 2017, we recorded a before-tax impairment of $3.3 billion to reduce the carrying value of our interests in the San Juan Basin to fair value. As of June 30, 2017, our San Juan Basin interests had a net carrying value of approximately $2.5 billion and were considered held for sale, resulting in the reclassification of $2.9 billion of properties, plants and equipment (PP&E) to “Prepaid expenses and other current assets” and $400 million of noncurrent liabilities, primarily asset retirement obligations, to “Other accruals” on our consolidated balance sheet. The before-tax loss associated with our interests in the San Juan Basin, including the $3.3 billion impairment noted above, was $3.3 billion and $200 million for the six months ended June 30, 2017 and June 30, 2016, respectively. The San Juan Basin results of operations are reported within our Lower 48 segment.

On June 28, 2017, we signed a definitive agreement with an affiliate of Miller Thomson & Partners LLC to sell our interests in the Barnett for $305 million in cash, subject to customary adjustments. The transaction is subject to specific conditions precedent being satisfied, including regulatory approval, and is expected to close in the third quarter of 2017. We recorded a before-tax impairment of $566 million in the second quarter of 2017 to reduce the carrying value of our investment to fair value. As of June 30, 2017, our Barnett interests had a net carrying value of approximately $302 million and were considered held for sale resulting in the reclassification of $345 million of PP&E to “Prepaid expenses and other current assets” and $49 million of noncurrent liabilities, primarily asset retirement obligations, to “Other accruals” on our consolidated balance sheet. The before-tax loss associated with our interests in the Barnett, including the $566 million impairment noted above, was $585 million and $40 million for the six months ended June 30, 2017 and June 30, 2016, respectively. The Barnett results of operations are reported within our Lower 48 segment.

 

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Assets Sold

On March 29, 2017, we signed a definitive agreement with Cenovus Energy to sell our 50 percent nonoperated interest in the Foster Creek Christina Lake (FCCL) oil sands partnership, as well as the majority of our western Canada gas assets. The transaction closed on May 17, 2017. As of closing, consideration for the transaction was $10.4 billion of cash, a five-year uncapped contingent payment and 208 million Cenovus Energy common shares. Subsequent to closing, we received $600 million related to environmental claims, $317 million of which was received in the second quarter of 2017, and the remainder received in July 2017. The cash proceeds are included in the “Cash Flows From Investing Activities” section of our consolidated statement of cash flows. The value of the shares at closing was $1.96 billion based on a price of $9.41 per share on the New York Stock Exchange. The contingent payment, calculated and paid on a quarterly basis, is $6 million Canadian dollars (CAD) for every $1 CAD by which the Western Canada Select (WCS) quarterly average crude price exceeds $52 CAD per barrel.

At closing, the carrying value of our equity investment in FCCL was $8.9 billion. The carrying value of our interest in the western Canada gas assets was $1.9 billion consisting primarily of $2.6 billion of PP&E, partly offset by asset retirement obligations of $585 million and approximately $100 million of environmental and other accruals. A before-tax gain of $1.85 billion is included in the “Gain on disposition” line on our consolidated income statement for the second quarter of 2017. An additional before-tax gain of $283 million will be recognized in the third quarter of 2017. We reported before-tax losses of $30 million and $324 million for the western Canada gas producing properties for the six-month periods ending June 30, 2017 and June 30, 2016, respectively. We reported before-tax equity earnings of $197 million and a before-tax equity loss of $98 million for FCCL for the same periods, respectively. Both FCCL and the western Canada gas assets were reported within our Canada segment.

For more information on the Canada disposition and our investment in Cenovus Energy see Note 6—Investment in Cenovus Energy, Note 14—Fair Value Measurement, and Note 15—Accumulated Other Comprehensive Loss.

Other Planned Dispositions

On July 25, 2017, we signed a definitive agreement to sell our interest in the Panhandle assets for $184 million subject to customary adjustments. The transaction is expected to close in the third quarter of 2017. As of June 30, 2017, the net carrying value was approximately $207 million, consisting primarily of $280 million of PP&E and $72 million of asset retirement obligations. The assets met the held for sale criteria in July 2017 and a noncash impairment will be recorded in the third quarter of 2017. The Panhandle results are reported within our Lower 48 segment.

Note 5—Investments, Loans and Long-Term Receivables

APLNG

APLNG’s $8.5 billion project finance facility consists of financing agreements executed by APLNG with the Export-Import Bank of the United States for approximately $2.9 billion, the Export-Import Bank of China for approximately $2.7 billion, and a syndicate of Australian and international commercial banks for approximately $2.9 billion. All amounts have been drawn from the facility. APLNG made its first principal and interest repayment in March 2017 and will continue to make bi-annual payments until March 2029. At June 30, 2017, a balance of $8.2 billion was outstanding on the facility. In connection with the execution of the project financing, we provided a completion guarantee for our pro-rata share of the project finance facility until the project achieves financial completion. In October 2016, we reached financial completion for Train 1, which reduced our associated guarantee by 60 percent. See Note 11—Guarantees, for additional information.

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. See Note 2—Variable Interest Entities (VIEs), for additional information.

During the first and second quarters of 2017, the outlook for crude oil prices deteriorated, and as a result of significantly reduced price outlooks, the estimated fair value of our investment in APLNG declined to an

 

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amount below carrying value. Based on a review of the facts and circumstances surrounding this decline in fair value, we concluded in the second quarter of 2017 the impairment was other than temporary under the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 323, “Investments – Equity Method and Joint Ventures,” and the recognition of an impairment of our investment to fair value was necessary. In reaching this conclusion, we primarily considered the length of time and the extent to which fair value has been less than carrying value, as well as the trend in market outlook. Fair value has been estimated based on an internal discounted cash flow model using estimated future production, an outlook of future prices from a combination of exchanges (short-term) and pricing service companies (long-term), costs, a market outlook of foreign exchange rates provided by a third party, and a discount rate believed to be consistent with those used by principal market participants.

Accordingly, we recorded a noncash $2,384 million, before- and after-tax impairment, in our second-quarter 2017 results. The impairment, which is included in the “Impairments” line on our consolidated income statement, had the effect of reducing our carrying value to $7,656 million, based on the present value of discounted expected future cash flows as of June 30, 2017. This carrying value is included in the “Investments and long-term receivables” line on our consolidated balance sheet.

FCCL

On May 17, 2017, we closed on the sale of our 50 percent nonoperated interest in the FCCL oil sands partnership, as well as the majority of our western Canada gas assets to Cenovus Energy. For additional information on the Canada disposition and our investment in Cenovus Energy, see Note 4—Assets Held for Sale, Sold or Other Planned Dispositions and Note 6—Investment in Cenovus Energy.

Loans and Long-Term Receivables

As part of our normal ongoing business operations, and consistent with industry practice, we enter into numerous agreements with other parties to pursue business opportunities. Included in such activity are loans made to certain affiliated and non-affiliated companies. At June 30, 2017, significant loans to affiliated companies included $639 million in project financing to Qatar Liquefied Gas Company Limited (3) (QG3).

The long-term portion of these loans is included in the “Loans and advances—related parties” line on our consolidated balance sheet, while the short-term portion is in “Accounts and notes receivable—related parties.”

Note 6—Investment in Cenovus Energy

On March 29, 2017, we signed a definitive agreement with Cenovus Energy to sell our 50 percent nonoperated interest in the FCCL oil sands partnership, as well as the majority of our western Canada gas assets. The transaction closed on May 17, 2017. Consideration for the transaction included 208 million Cenovus Energy common shares. See Note 4—Assets Held for Sale, Sold or Other Planned Dispositions, for additional information on the Canada disposition.

At closing, the fair value and cost basis of our investment in 208 million Cenovus Energy common shares was $1.96 billion based on a price of $9.41 per share on the New York Stock Exchange. Our ownership approximates to 16.9 percent of issued and outstanding Cenovus common shares, and under an investor agreement with Cenovus Energy, we have agreed not to transfer any of our Cenovus Energy common shares until six months from the closing date (the “Lock-up Termination Date”).

We have classified our investment as an available-for-sale equity security on our consolidated balance sheet and, as of June 30, 2017, our investment is carried at fair value of $1.53 billion, reflecting the closing price of Cenovus Energy shares on the New York Stock Exchange of $7.37 per share. The carrying value reflects a before- and after-tax unrealized loss of $424 million over our cost basis of $1.96 billion. The unrealized loss is reported as a component of accumulated other comprehensive loss. See Note 14—Fair Value Measurement, for additional information. Following the Lock-up Termination Date, we intend to decrease our investment over time through market transactions, private agreements or otherwise.

 

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Note 7—Suspended Wells and Other Exploration Expenses

The capitalized cost of suspended wells at June 30, 2017, was $860 million, a decrease of $203 million from $1,063 million at year-end 2016. Two suspended wells in Shenandoah in the Gulf of Mexico totaling $94 million, one suspended well in Alaska totaling $17 million, and one suspended well in Malaysia totaling $23 million were charged to dry hole expense during the first six months of 2017 relating to exploratory well costs capitalized for a period greater than one year as of December 31, 2016.

We reached a settlement agreement on our contract for the Athena drilling rig, initially secured for our four-well commitment program in Angola. As a result of the cancellation, we recorded a before-tax charge of $43 million net in the first quarter of 2017. This charge is included in the “Exploration expenses” line on our consolidated income statement.

Note 8—Impairments

During the three- and six-month periods ended June 30, 2017 and 2016, we recognized before-tax impairment charges within the following segments:

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2017      2016      2017      2016  
  

 

 

    

 

 

 

Alaska

   $ 3               177         

Lower 48

     3,885        51        3,885        60  

Canada

     18               18         

Europe and North Africa

     4        10        5        137  

Asia Pacific and Middle East

     2,384        1        2,384        1  

 

 
   $ 6,294        62        6,469        198  

 

 

In the three-month period ended June 30, 2017, our Lower 48 segment included impairments of $3,885 million primarily due to certain developed properties which were classified as held for sale at June 30, 2017, and were written down to fair value less costs to sell. See Note 4—Assets Held for Sale, Sold or Other Planned Dispositions, for additional information on our dispositions.

See the “APLNG” section of Note 5—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment included within the Asia Pacific and Middle East segment during the three-month period ended June 30, 2017.

The six-month period of 2017 included an impairment in our Alaska segment in the first quarter of $174 million for the associated PP&E carrying value of our small interest in a nonoperated producing property.

Our Europe and North Africa segment included impairments of $137 million in the six-month period of 2016, primarily as a result of lower natural gas prices in the United Kingdom. Our Lower 48 segment included impairments of $51 million and $60 million respectively, in the three- and six-month periods of 2016, primarily as a result of lower natural gas prices and increased asset retirement obligation estimates.

The charges discussed below are included in the “Exploration expenses” line on our consolidated income statement and are not reflected in the table above.

Exploration expenses in the three- and six-month periods of 2017 and 2016 were aligned with our decision announced in 2015 to reduce deepwater exploration spending.

 

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In the first quarter of 2017, we recorded a before-tax impairment of $51 million for the associated carrying value of capitalized undeveloped leasehold costs of Shenandoah in deepwater Gulf of Mexico following the suspension of appraisal activity by the operator.

In the second quarter of 2016, we recorded a $203 million before-tax impairment for the associated carrying value of our Gibson and Tiber undeveloped leaseholds in deepwater Gulf of Mexico. Additionally, in the first quarter of 2016, we recorded a $95 million before-tax impairment for the associated carrying value of capitalized undeveloped leasehold costs of the Melmar prospect, and a $73 million impairment in deepwater Gulf of Mexico, primarily as a result of changes in the estimated market value following the completion of an initial marketing effort.

Note 9—Debt

As of June 30, 2017, our revolving credit facility, expiring in June 2019, was $6.75 billion. The credit facility supports two commercial paper programs: the ConocoPhillips $6.25 billion program, primarily a funding source for short-term working capital needs, and the ConocoPhillips Qatar Funding Ltd. $500 million program, which is used to fund commitments relating to QG3. Commercial paper maturities are generally limited to 90 days.

At June 30, 2017 and December 31, 2016, we had no direct outstanding borrowings under the revolving credit facility and no letters of credit. We had no commercial paper outstanding at June 30, 2017 or December 31, 2016, under both the ConocoPhillips and the ConocoPhillips Qatar Funding Ltd. commercial paper programs. Since we had no commercial paper outstanding and had issued no letters of credit, we had access to $6.75 billion in borrowing capacity under our revolving credit facility at June 30, 2017.

In the first quarter of 2017, we made a prepayment of $805 million on our floating rate term loan facility due in 2019. We have the right at any time and from time to time to prepay the term loan, in whole or in part, without premium or penalty upon notice to the Administrative Agent.

The term loan facility contains customary covenants regarding, among other matters, material compliance with laws and restrictions against certain consolidations, mergers and asset sales, and creation of certain liens on our assets and consolidated subsidiaries. The term loan facility also contains financial covenants including a total debt to capitalization ratio, excluding the impacts of certain noncash impairments and foreign currency translation adjustments as defined in the Term Loan Agreement, which may not exceed 65 percent. At June 30, 2017, we were in compliance with this covenant.

The term loan facility includes customary events of default (subject to specified cure periods, materiality qualifiers and exceptions), including the failure to pay any interest, principal or fees when due, the failure to perform or the violation of any covenant contained in the term loan facility, the making of materially inaccurate or false representations or warranties, a default on certain material indebtedness, insolvency or bankruptcy, a change of control and the occurrence of material Employee Retirement Income Security Act of 1974 (ERISA) events and certain judgments against us or our material subsidiaries.

On July 5, 2017, we prepaid the remaining balance of $645 million on our floating rate term loan facility.

In the second quarter of 2017, we redeemed $3.0 billion of debt across the following instruments:

 

   

6.65% Debentures due 2018 with principal of $297 million

   

5.75% Notes due 2019 with principal of $1.7 billion (partial redemption)

   

6.00% Notes due 2020 with principal of $1.0 billion

We incurred premiums above book value to redeem the debt instruments resulting in $234 million of expense which is reported in the “Other expense” line on our consolidated income statement.

 

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In the second quarter, we gave notice to redeem the following debt instruments totaling $1.8 billion. The prepayments will occur on August 1, 2017, and we expect to incur approximately $50 million in premiums above book value, subject to pricing, related to these redemptions when paid.

 

   

5.20% Notes due 2018 with principal of $500 million

   

1.50% Notes due 2018 with principal of $750 million

   

5.75% Notes due 2019 with principal of $550 million

At June 30, 2017, we reclassified $2.7 billion from long-term to short-term debt, including the $1.8 billion of notes and the $645 million term loan facility discussed above.

At June 30, 2017, we had $283 million of certain variable rate demand bonds (VRDBs) outstanding with maturities ranging through 2035. The VRDBs are redeemable at the option of the bondholders on any business day. The VRDBs are included in the “Long-term debt” line on our consolidated balance sheet.

Note 10—Noncontrolling Interests

Activity attributable to common stockholders’ equity and noncontrolling interests for the first six months of 2017 and 2016 was as follows:

 

                                                                                         
     Millions of Dollars  
     2017     2016  
     Common
Stockholders’
Equity
    Non-
Controlling
Interest
    Total
Equity
    Common
Stockholders’
Equity
    Non-
Controlling
Interest
    Total
Equity
 
  

 

 

   

 

 

 

Balance at January 1

   $ 34,974       252       35,226       39,762       320       40,082  

Net income (loss)

     (2,854     27       (2,827     (2,540     26       (2,514

Dividends

     (662           (662     (626           (626

Repurchase of company common stock

     (1,075           (1,075                  

Distributions to noncontrolling interests

           (67     (67           (59     (59

Other changes, net*

     (97     1       (96     948             948  

 

 

Balance at June 30

   $ 30,286       213       30,499       37,544       287       37,831  

 

 

*Includes components of other comprehensive income (loss), which are disclosed separately in the Consolidated Statement of Comprehensive Income.

Note 11—Guarantees

At June 30, 2017, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

 

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APLNG Guarantees

At June 30, 2017, we had outstanding multiple guarantees in connection with our 37.5 percent ownership interest in APLNG. The following is a description of the guarantees with values calculated utilizing June 2017 exchange rates:

 

   

We have guaranteed APLNG’s performance with regard to a construction contract executed in connection with APLNG’s issuance of the Train 1 and Train 2 Notices to Proceed. Our maximum potential amount of future payments related to this guarantee became immaterial in the second quarter of 2017.

 

   

We have issued a construction completion guarantee related to the third-party project financing secured by APLNG. In October 2016, we reached financial completion for Train 1, releasing a portion of our guarantee. Our remaining guarantee of the project financing will be released upon completion of a two-train test with milestones which we estimate should occur in the third quarter of 2017. Our maximum exposure at June 30, 2017, is $1.25 billion based upon our pro-rata share of the facility used at that date. At June 30, 2017, the carrying value of this guarantee was approximately $46 million.

 

   

During the third quarter of 2016, we issued a guarantee for our pro-rata portion of the funds in a project finance reserve account. We estimate the remaining term of this guarantee is 12 years. Our maximum exposure under this guarantee is approximately $100 million and may become payable if an enforcement action is commenced by the project finance lenders against APLNG. At June 30, 2017, the carrying value of this guarantee was approximately $9 million.

 

   

In conjunction with our original purchase of an ownership interest in APLNG from Origin Energy in October 2008, we agreed to reimburse Origin Energy for our share of the existing contingent liability arising under guarantees of an existing obligation of APLNG to deliver natural gas under several sales agreements with remaining terms of up to 25 years. Our maximum potential liability for future payments, or cost of volume delivery, under these guarantees is estimated to be $1 billion ($1.74 billion in the event of intentional or reckless breach), and would become payable if APLNG fails to meet its obligations under these agreements and the obligations cannot otherwise be mitigated. Future payments are considered unlikely, as the payments, or cost of volume delivery, would only be triggered if APLNG does not have enough natural gas to meet these sales commitments and if the co-venturers do not make necessary equity contributions into APLNG.

 

   

We have guaranteed the performance of APLNG with regard to certain other contracts executed in connection with the project’s continued development. The guarantees have remaining terms of up to 28 years or the life of the venture. Our maximum potential amount of future payments related to these guarantees is approximately $160 million and would become payable if APLNG does not perform.

Other Guarantees

We have other guarantees with maximum future potential payment amounts totaling approximately $540 million, which consist primarily of a guarantee of the residual value of a leased office building, guarantees of the residual value of leased corporate aircraft, and a guarantee for our portion of a joint venture’s project finance reserve accounts. These guarantees have remaining terms of up to six years and would become payable if, upon sale, certain asset values are lower than guaranteed amounts, business conditions decline at guaranteed entities, or as a result of nonperformance of contractual terms by guaranteed parties.

 

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Indemnifications

Over the years, we have entered into agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. These agreements include indemnifications for taxes, environmental liabilities, employee claims and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at June 30, 2017, was approximately $100 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount at June 30, 2017, were approximately $40 million of environmental accruals for known contamination that are included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.

On March 1, 2015, a supplier to one of the refineries included in Phillips 66 as part of the separation of our downstream businesses formally registered Phillips 66 as a party to the supply agreement, thereby triggering a guarantee we provided at the time of separation. Our maximum potential liability for future payments under this guarantee, which would become payable if Phillips 66 does not perform its contractual obligations under the supply agreement, is approximately $1.31 billion. At June 30, 2017, the carrying value of this guarantee is approximately $98 million and the remaining term is seven years. Because Phillips 66 has indemnified us for losses incurred under this guarantee, we have recorded an indemnification asset from Phillips 66 of approximately $98 million. The recorded indemnification asset amount represents the estimated fair value of the guarantee; however, if we are required to perform under the guarantee, we would expect to recover from Phillips 66 any amounts in excess of that value, provided Phillips 66 is a going concern.

Note 12—Contingencies and Commitments

A number of lawsuits involving a variety of claims arising in the ordinary course of business have been filed against ConocoPhillips. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated but no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. With respect to income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to factors such as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

 

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Environmental

We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for other sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the agency concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit and some of the indemnifications are subject to dollar limits and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state and international sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated.

At June 30, 2017, our balance sheet included a total environmental accrual of $188 million, compared with $247 million at December 31, 2016, for remediation activities in the United States and Canada. We expect to incur a substantial amount of these expenditures within the next 30 years. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

We are subject to various lawsuits and claims including but not limited to matters involving oil and gas royalty and severance tax payments, gas measurement and valuation methods, contract disputes, environmental damages, personal injury, and property damage. Our primary exposures for such matters relate to alleged royalty and tax underpayments on certain federal, state and privately owned properties and claims of alleged environmental contamination from historic operations. We will continue to defend ourselves vigorously in these matters.

Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.

 

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Other Contingencies

We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at June 30, 2017, we had performance obligations secured by letters of credit of $265 million (issued as direct bank letters of credit) related to various purchase commitments for materials, supplies, commercial activities and services incident to the ordinary conduct of business.

In 2007, we announced we had been unable to reach agreement with respect to our migration to an empresa mixta structure mandated by the Venezuelan government’s Nationalization Decree. As a result, Venezuela’s national oil company, Petróleos de Venezuela S.A. (PDVSA), or its affiliates, directly assumed control over ConocoPhillips’ interests in the Petrozuata and Hamaca heavy oil ventures and the offshore Corocoro development project. In response to this expropriation, we filed a request for international arbitration on November 2, 2007, with the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). An arbitration hearing was held before an ICSID tribunal during the summer of 2010. On September 3, 2013, an ICSID arbitration tribunal held that Venezuela unlawfully expropriated ConocoPhillips’ significant oil investments in June 2007. On January 17, 2017, the Tribunal reconfirmed the decision that the expropriation was unlawful. A separate arbitration phase is currently proceeding to determine the damages owed to ConocoPhillips for Venezuela’s actions. Separate arbitrations for contractual compensation against PDVSA are also pending before International Chamber of Commerce (ICC) arbitration tribunals. In addition, ConocoPhillips brought fraudulent transfer actions in the U.S. District Court of Delaware, alleging that PDVSA has taken actions to improperly expatriate assets from the United States to Venezuela in an effort to avoid judgment creditors.

In 2008, Burlington Resources, Inc., a wholly owned subsidiary of ConocoPhillips, initiated arbitration before ICSID against The Republic of Ecuador, as a result of the newly enacted Windfall Profits Tax Law and government-mandated renegotiation of our production sharing contracts. Despite a restraining order issued by the ICSID tribunal, Ecuador confiscated the crude oil production of Burlington and its co-venturer and sold the seized crude oil. In 2009, Ecuador took over operations in Blocks 7 and 21, fully expropriating our assets. In June 2010, the ICSID tribunal concluded it has jurisdiction to hear the expropriation claim. On April 24, 2012, Ecuador filed supplemental counterclaims asserting environmental damages, which we believe are not material. The ICSID tribunal issued a decision on liability on December 14, 2012, in favor of Burlington, finding that Ecuador’s seizure of Blocks 7 and 21 was an unlawful expropriation in violation of the Ecuador-U.S. Bilateral Investment Treaty. In February 2017, the tribunal unanimously awarded Burlington $380 million for Ecuador’s unlawful expropriation and breach of the U.S.-Ecuador bilateral investment treaty. The tribunal also issued a separate decision finding Ecuador to be entitled to $42 million for limited environmental and infrastructure impacts associated with the operations of Burlington and its co-venturer. Ecuador filed a request for annulment of this decision with ICSID and the annulment phase is ongoing.

In December 2016, ConocoPhillips Angola filed a notice of arbitration against Sonangol E.P. under the Block 36 Production Sharing Contract relating to disputes arising thereunder. The arbitration is being conducted under the United Nations Commission on International Trade Laws (UNCITRAL) rules using a three-person tribunal. The arbitration is ongoing.

In June 2017, FAR Ltd. initiated arbitration before the ICC against ConocoPhillips Senegal B.V. in connection with the sale of ConocoPhillips Senegal B.V. to Woodside Energy Holdings (Senegal) Limited in 2016. The arbitral tribunal has not yet been constituted.

 

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Note 13—Derivative and Financial Instruments

Derivative Instruments

We use futures, forwards, swaps and options in various markets to meet our customer needs and capture market opportunities. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and natural gas liquids.

Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented on a net basis. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the normal purchase normal sale exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.

The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

 

                             
     Millions of Dollars  
     June 30
2017
     December 31
2016
 
  

 

 

 

Assets

     

Prepaid expenses and other current assets

   $ 196        268  

Other assets

     42        44  

Liabilities

     

Other accruals

     182        300  

Other liabilities and deferred credits

     29        34  

 

 

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  
  

 

 

   

 

 

 

Sales and other operating revenues

   $ 52       (163     103       (166

Other income

     (1     (3           (2

Purchased commodities

     (31     130       (69     129  

 

 

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts:

 

                             
     Open Position
Long/(Short)
 
     June 30
2017
    December 31
2016
 
  

 

 

 

Commodity

    

Natural gas and power (billions of cubic feet equivalent)

    

Fixed price

     (41     (31

Basis

     40       2  

 

 

 

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Foreign Currency Exchange Derivatives

We have foreign currency exchange rate risk resulting from international operations. Our foreign currency exchange derivative activity primarily relates to managing our cash-related and foreign currency exchange rate exposures, such as firm commitments for capital programs or local currency tax payments, dividends, and cash returns from net investments in foreign affiliates. We do not elect hedge accounting on our foreign currency exchange derivatives.

The following table presents the gross fair values of our foreign currency exchange derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

 

                             
     Millions of Dollars  
     June 30
2017
     December 31
2016
 
  

 

 

 

Assets

     

Prepaid expenses and other current assets

   $ 1        1  

Liabilities

     

Other accruals

            168  

 

 

The (gains) losses from foreign currency exchange derivatives incurred, and the line item where they appear on our consolidated income statement were:

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2017     2016      2017      2016  
  

 

 

    

 

 

 

Foreign currency transaction (gains) losses

   $ (4     86        3        183  

 

 

We had the following net notional position of outstanding foreign currency exchange derivatives:

 

                                            
     In Millions
Notional Currency
 
     June 30
2017
     December 31
2016
 
  

 

 

Sell U.S. dollar, buy other currencies*

   USD      28        13  

Buy U.S. dollar, sell other currencies**

   USD             25  

Buy British pound, sell other currencies***

   GBP      6        1,069  

Sell British pound, buy Norwegian krone

   GBP             51  

 

 

    *Primarily Canadian dollar.

  **Primarily British pound.

***Primarily Euro and Canadian dollar.

 

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Financial Instruments

We invest excess cash in financial instruments with maturities based on our cash forecasts for the various currency pools we manage. The maturities of these investments may from time to time extend beyond 90 days. The types of financial instruments in which we currently invest include:

 

   

Time deposits: Interest bearing deposits placed with approved financial institutions.

   

Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank, or government agency purchased at a discount to mature at par.

   

Government or government agency obligations: Short-term securities issued by the U.S. government or U.S. government agencies.

These financial instruments appear in the “Cash and cash equivalents” line of our consolidated balance sheet if the maturities at the time we made the investments were 90 days or less; otherwise, these financial instruments are included in the “Short-term investments” line on our consolidated balance sheet.

 

                                                           
     Millions of Dollars  
     Carrying Amount  
     Cash and Cash Equivalents      Short-Term Investments  
     June 30
2017
     December 31
2016
     June 30
2017
     December 31
2016
 
  

 

 

    

 

 

 

Cash

   $ 779        623                

Time deposits

           

Remaining maturities from 1 to 90 days

     5,316        2,987        1,510        39  

Remaining maturities from 91 to 180 days

                   78        11  

Commercial paper

           

Remaining maturities from 1 to 90 days

     999               524         

Remaining maturities from 91 to 180 days

                   621         

Government obligations

           

Remaining maturities from 1 to 90 days

     440                       

 

 
   $ 7,534        3,610        2,733        50  

 

 

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, short-term investments, over-the-counter (OTC) derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, money market funds, government debt securities and time deposits with major international banks and financial institutions.

The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

Our trade receivables result primarily from our petroleum operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We do not generally require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due to us.

 

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Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral, such as transactions administered through the New York Mercantile Exchange.

The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position on June 30, 2017 and December 31, 2016, was $37 million and $42 million, respectively. For these instruments, no collateral was posted as of June 30, 2017 or December 31, 2016. If our credit rating had been downgraded below investment grade on June 30, 2017, we would be required to post $37 million of additional collateral, either with cash or letters of credit.

Note 14—Fair Value Measurement

We carry a portion of our assets and liabilities at fair value that are measured at a reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy:

 

   

Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities.

   

Level 2: Inputs other than quoted prices that are directly or indirectly observable.

   

Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.

The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. Transfers occur at the end of the reporting period. There were no material transfers in or out of Level 1 during 2017 or 2016.

Recurring Fair Value Measurement

Financial assets and liabilities reported at fair value on a recurring basis primarily include commodity derivatives. Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are valued using unadjusted prices available from the underlying exchange. Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service companies that are all corroborated by market data. This also includes our investment in common shares of Cenovus Energy, currently subject to a trading restriction, which is valued using quotes for shares on the New York Stock Exchange. Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale contracts where a significant portion of fair value is calculated from underlying market data that is not readily available. The derived value uses industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value. Level 3 activity was not material for all periods presented.

 

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The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e., unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring basis):

 

                                                                                                                       
     Millions of Dollars  
     June 30, 2017      December 31, 2016  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
  

 

 

    

 

 

 

Assets

                       

Investment in Cenovus Energy

   $        1,533               1,533                              

Commodity derivatives

     130        82        26        238        194        96        22        312  

 

 

Total assets

   $ 130        1,615        26        1,771        194        96        22        312  

 

 

Liabilities

                       

Commodity derivatives

   $ 131        69        11        211        207        105        22        334  

 

 

Total liabilities

   $ 131        69        11        211        207        105        22        334  

 

 

The following table summarizes those commodity derivative balances subject to the right of setoff as presented on our consolidated balance sheet. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of setoff exists.

 

                                                                                         
     Millions of Dollars  
     Gross
Amounts
Recognized
     Gross
Amounts
Offset
     Net
Amounts
Presented
     Cash
Collateral
     Gross Amounts
without
Right of Setoff
     Net
Amounts
 
  

 

 

 

June 30, 2017

                 

Assets

   $ 238        143        95               5        90  

Liabilities

     211        143        68        3        5        60  

 

 

December 31, 2016

                 

Assets

   $ 312        221        91               5        86  

Liabilities

     334        221        113        12        12        89  

 

 

At June 30, 2017 and December 31, 2016, we did not present any amounts gross on our consolidated balance sheet where we had the right of setoff.

Non-Recurring Fair Value Measurement

The following table summarizes the fair value hierarchy by major category and date of remeasurement for assets accounted for at fair value on a non-recurring basis:

 

                                                           
     Millions of Dollars  
            Fair Value
Measurements Using
 
     Fair Value      Level 1
Inputs
     Level 3
Inputs
     Before-
Tax Loss
 
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2017

           

Net PP&E (held for sale)

   $ 2,830           2,830               3,882  

Cost and equity method investments

     7,656                  7,656        2,384  

 

 

 

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During the second quarter of 2017, net PP&E held for sale was written down to fair value, less costs to sell. The fair value of each asset was determined by its negotiated selling price. For additional information see Note 4—Assets Held for Sale, Sold or Other Planned Dispositions.

During the second quarter of 2017, our equity method investment in APLNG was determined to have fair value below its carrying value, and the impairment was considered to be other than temporary. See the “APLNG” section of Note 5Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment.

Reported Fair Values of Financial Instruments

We used the following methods and assumptions to estimate the fair value of financial instruments:

 

   

Cash and cash equivalents and short-term investments: The carrying amount reported on the balance sheet approximates fair value.

   

Accounts and notes receivable (including long-term and related parties): The carrying amount reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of fixed-rate related party loans is consistent with Loans and advances—related parties.

   

Investment in Cenovus Energy shares: See Note 6—Investment in Cenovus Energy for a discussion of the carrying value and fair value of our investment in Cenovus Energy shares.

   

Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair value. The fair value of fixed-rate loan activity is measured using market observable data and is categorized as Level 2 in the fair value hierarchy. See Note 5—Investments, Loans and Long-Term Receivables, for additional information.

   

Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts payable and floating-rate debt reported on the balance sheet approximates fair value.

   

Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data; therefore, these liabilities are categorized as Level 2 in the fair value hierarchy.

The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of setoff exists for commodity derivatives):

 

                                                           
     Millions of Dollars  
     Carrying Amount      Fair Value  
     June 30      December 31      June 30      December 31  
     2017      2016      2017      2016  
  

 

 

    

 

 

 

Financial assets

           

Investment in Cenovus Energy

   $ 1,533               1,533         

Commodity derivatives

     95        91        95        91  

Total loans and advances—related parties

     644        701        644        701  

Financial liabilities

           

Total debt, excluding capital leases

     22,624        26,423        25,501        29,307  

Commodity derivatives

     65        101        65        101  

 

 

 

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Note 15—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the equity section of our consolidated balance sheet included:

 

                                                           
     Millions of Dollars  
     Defined
Benefit Plans
    Net
Unrealized
Loss on
Securities
    Foreign
Currency
Translation
    Accumulated
Other
Comprehensive
Loss
 
  

 

 

 

December 31, 2016

   $ (547           (5,646     (6,193

Other comprehensive income (loss)

     64       (424     211       (149

 

 

June 30, 2017

   $ (483     (424     (5,435     (6,342

 

 

There were no items within accumulated other comprehensive loss related to noncontrolling interests.

The following table summarizes reclassifications out of accumulated other comprehensive loss:

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2017      2016      2017      2016  
  

 

 

    

 

 

 

Defined benefit plans

   $ 36        42        90        105  

 

 
Above amounts are included in the computation of net periodic benefit cost and are presented net of tax expense of:    $ 20        23        47        59  

See Note 17—Employee Benefit Plans, for additional information.

Note 16—Cash Flow Information

 

                             
     Millions of Dollars  
     Six Months Ended
June 30
 
     2017     2016  
  

 

 

 

Cash Payments (Receipts)

    

Interest

   $ 676       526  

Income taxes*

     337       (366

 

 

Net Sales (Purchases) of Short-Term Investments

    

Short-term investments purchased

   $ (2,952     (1,599

Short-term investments sold

     299       307  

 

 
   $ (2,653     (1,292

 

 

*Net of $569 million in 2016 related to refunds received from the Internal Revenue Service.

During the first quarter of 2017, we recognized a $180 million adverse cash impact from the settlement of cross-currency swap transactions which is included in the “Cash Flows From Operating Activities” section of our consolidated statement of cash flows.

 

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In April 2017, we received a $135 million deposit from an affiliate of Hilcorp Energy Company on the date of signing the definitive agreement to sell our interests in the San Juan Basin. This deposit is included in the “Other” line of the “Cash Flows From Investing Activities” section of our consolidated statement of cash flows. See Note 4—Assets Held for Sale, Sold or Other Planned Dispositions, for additional information on our dispositions.

Note 17—Employee Benefit Plans

Pension and Postretirement Plans

 

                                                                                         
     Millions of Dollars  
     Pension Benefits     Other Benefits  
     2017     2016     2017     2016  
  

 

 

   

 

 

   

 

 

 
     U.S.     Int’l.     U.S.     Int’l.              
  

 

 

   

 

 

   

 

 

   

 

 

     

Components of Net Periodic Benefit Cost

            

Three Months Ended June 30

            

Service cost

   $ 23       20       28       20       1        

Interest cost

     29       25       32       32       2       4  

Expected return on plan assets

     (31     (39     (35     (41            

Amortization of prior service cost (credit)

     1       (2     1       (2     (9     (8

Recognized net actuarial loss (gain)

     17       12       23       7             (1

Settlements

     37             45                    

 

 

Net periodic benefit cost

   $ 76       16       94       16       (6     (5

 

 

Six Months Ended June 30

            

Service cost

   $ 46       39       55       40       1       1  

Interest cost

     61       51       72       63       4       7  

Expected return on plan assets

     (65     (78     (78     (82            

Amortization of prior service cost (credit)

     2       (3     2       (3     (18     (17

Recognized net actuarial loss (gain)

     36       24       42       14       (1     (1

Settlements

     97             127                    

 

 

Net periodic benefit cost

   $ 177       33       220       32       (14     (10

 

 

During the first six months of 2017, we contributed $119 million to our domestic benefit plans and $62 million to our international benefit plans. In 2017, we expect to contribute approximately $460 million to our domestic qualified and nonqualified pension and postretirement benefit plans and $120 million to our international qualified and nonqualified pension and postretirement benefit plans.

We recognized a proportionate share of prior actuarial losses from other comprehensive loss as pension settlement expense of $37 million and $97 million during the three- and six-month periods ended June 30, 2017, respectively.

 

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Severance Accrual

As a result of selling our 50 percent nonoperated interest in the FCCL Partnership as well as the majority of our western Canada gas assets, and entering into a definitive agreement to sell our interests in the San Juan Basin, a reduction in our overall employee workforce began during the second quarter of 2017. Severance accruals of $16 million and $55 million were recorded during the three- and six-month periods ended June 30, 2017. The following table summarizes our severance accrual activity for the six-month period ended June 30, 2017:

 

              
     Millions of Dollars  

Balance at December 31, 2016

   $ 80  

Accruals

     55  

Benefit payments

     (68

 

 

Balance at June 30, 2017

   $ 67  

 

 

Of the remaining balance at June 30, 2017, $43 million is classified as short-term.

Note 18—Related Party Transactions

Our related parties primarily include equity method investments and certain trusts for the benefit of employees.

Significant transactions with our equity affiliates were:

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  
  

 

 

   

 

 

 

Operating revenues and other income

   $ 30       28       59       55  

Purchases

     25       25       48       49  

Operating expenses and selling, general and administrative expenses

     14       12       26       28  

Net interest (income) expense*

     (3     (3     (6     (6

 

 

*We paid interest to, or received interest from, various affiliates. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on loans to affiliated companies.

Note 19—Segment Disclosures and Related Information

We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and natural gas liquids on a worldwide basis. We manage our operations through six operating segments, which are primarily defined by geographic region: Alaska, Lower 48, Canada, Europe and North Africa, Asia Pacific and Middle East, and Other International.

Corporate and Other represents costs not directly associated with an operating segment, such as most interest expense, corporate overhead and certain technology activities, including licensing revenues. Corporate assets include all cash and cash equivalents and short-term investments.

We evaluate performance and allocate resources based on net income (loss) attributable to ConocoPhillips. Intersegment sales are at prices that approximate market.

 

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Analysis of Results by Operating Segment

 

                                                           
     Millions of Dollars  
     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  
  

 

 

   

 

 

 

Sales and Other Operating Revenues

        

Alaska

   $ 1,071       936       2,078       1,714  

 

 

Lower 48

     3,090       2,395       6,320       4,540  

Intersegment eliminations

     (2     (5     (5     (12

 

 

Lower 48

     3,088       2,390       6,315       4,528  

 

 

Canada

     788       391       1,658       816  

Intersegment eliminations

     (89     (30     (175     (65

 

 

Canada

     699       361       1,483       751  

 

 

Europe and North Africa

     1,011       736       2,454       1,659  

Asia Pacific and Middle East

     896       897       1,918       1,734  

Corporate and Other

     16       28       51       83  

 

 

Consolidated sales and other operating revenues

   $ 6,781       5,348       14,299       10,469  

 

 

Net Income (Loss) Attributable to ConocoPhillips

        

Alaska

   $ 199       147       188       145  

Lower 48

     (2,536     (771     (2,898     (1,591

Canada

     1,379       (175     2,327       (469

Europe and North Africa

     123       20       294       (31

Asia Pacific and Middle East

     (2,172     72       (1,936     67  

Other International

     (9     (29     (57     (53

Corporate and Other

     (424     (335     (772     (608

 

 

Consolidated net loss attributable to ConocoPhillips

   $ (3,440     (1,071     (2,854     (2,540

 

 

 

                             
     Millions of Dollars  
     June 30
2017
     December 31
2016
 
  

 

 

 

Total Assets

     

Alaska

   $ 12,163        12,314  

Lower 48

     17,637        22,673  

Canada

     6,122        17,548  

Europe and North Africa

     11,564        11,727  

Asia Pacific and Middle East

     17,389        20,451  

Other International

     116        97  

Corporate and Other

     13,013        4,962  

 

 

Consolidated total assets

   $ 78,004        89,772  

 

 

 

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Note 20—Income Taxes

Our effective tax rates for the second quarter and six-month period ended June 30, 2017, were 21 percent and 38 percent, respectively, compared with 36 percent and 35 percent for the same periods of 2016. The amounts of U.S. and foreign income (loss) from continuing operations before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes were:

 

                                                                                                                       
     Millions of Dollars     Percent of Pre-Tax Income (Loss)  
     Three Months Ended
June  30
    Six Months Ended
June  30
    Three Months Ended
June  30
    Six Months Ended
June  30
 
     2017     2016     2017     2016     2017     2016     2017     2016  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

                

United States

   $ (4,269     (1,373     (5,063     (2,964     97.9     83.5       110.2       76.6  

Foreign

     (92     (271     470       (904     2.1       16.5       (10.2     23.4  

 

 
   $ (4,361     (1,644     (4,593     (3,868     100.0     100.0       100.0       100.0  

 

 

Federal statutory income tax

   $ (1,526     (575     (1,608     (1,354     35.0     35.0       35.0       35.0  

Non-U.S. effective tax rates

     69       104       335       173       (1.6     (6.3     (7.3     (4.5

Canada disposition

     (172           (1,168           3.9             25.4        

Recovery of outside basis

     (4     (12     (839     (23     0.1       0.7       18.3       0.6  

Adjustment to tax reserves

                 822                         (17.9      

APLNG impairment

     834             834             (19.1           (18.2      

State income tax

     (99     (78     (88     (110     2.3       4.7       1.9       2.8  

Enhanced oil recovery credit

     (29     (17     (45     (34     0.7       1.0       1.0       0.9  

Other

     (8     (8     (9     (6     0.1       0.5       0.2       0.2  

 

 
   $ (935     (586     (1,766     (1,354     21.4     35.6       38.4       35.0  

 

 

The impairment of our APLNG investment did not generate a tax benefit. See the “APLNG” section of Note 5—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment.

Our effective tax rate for the second quarter and six-month period ended June 30, 2017, was favorably impacted by tax benefits of $172 million and $1,168 million, respectively, associated with our Canada disposition. The benefit was primarily associated with a deferred tax recovery related to the Canadian capital gains exclusion component of the transaction and the recognition of previously unrealizable Canadian capital asset tax basis. The disposition, along with the associated restructuring of our Canadian operations, may generate an additional tax benefit of $822 million related to the recovery of outside basis. However, since we believe it is not likely we will receive a corresponding cash tax savings of this amount, the benefit has been offset by a full reserve. See Note 4—Assets Held for Sale, Sold or Other Planned Dispositions, for additional information on our Canada disposition.

During the second quarter of 2016, previously unrecognized state deferred tax assets were recognized. As a result, a $68 million tax benefit is reflected in the “Income tax benefit” line on our consolidated income statement.

 

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Note 21—New Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers” (ASU No. 2014-09), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts.

In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date,” which defers the effective date of ASU No. 2014-09. The ASU is now effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. Entities may choose to adopt the standard using either a full retrospective approach or a modified retrospective approach.

ASU No. 2014-09 was amended in March 2016 by the provisions of ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” in April 2016 by the provisions of ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” in May 2016 by the provisions of ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and in December 2016 by the provisions of ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts With Customers.”

We will adopt the provisions of ASU No. 2014-09, as amended, with effect from January 1, 2018, and have elected not to early adopt the standard. We intend to adopt the new standard using the modified retrospective approach which we will apply only to contracts within the scope of the standard that are not complete at the date of initial application. Under this approach, we will apply the guidance retrospectively only to the most current period presented in the financial statements. We continue to assess the impact of adoption of the standard on our current accounting policies and revenue-related disclosures. The impact to our financial statements is expected to be immaterial.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU No. 2016-01), to meet its objective of providing more decision-useful information about financial instruments. The ASU, among other things, requires entities to record the changes in fair value of equity investments, other than investments accounted for using the equity method, within net income. Under this ASU, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale securities in other comprehensive income. The ASU also requires additional disclosures relating to fair value measurement categories for financial assets and liabilities and eliminates certain disclosure requirements related to financial instruments measured at amortized cost. ASU No. 2016-01 is effective for interim and annual periods beginning after December 15, 2017, and the ASU should be adopted using a cumulative-effect adjustment to retained earnings as of the date of adoption.

Upon adoption of the standard, we will make a cumulative-effect adjustment to reclassify the accumulated unrealized holding gains and losses related to our investment in Cenovus Energy from other comprehensive income to retained earnings, and from the date of adoption, we will begin reporting the changes in the fair value of our investment within net income. The impact on our consolidated financial statements and disclosures will depend on the amount of accumulated unrealized holding gains and losses recognized in other comprehensive income at December 31, 2017, and changes in the fair value of our investment in Cenovus Energy subsequent to that date. For additional information on our investment in Cenovus Energy, see Note 6—Investment in Cenovus Energy, Note 14—Fair Value Measurement, and Note 15—Accumulated Other Comprehensive Loss.

 

27


Table of Contents

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (ASU No. 2016-02), which establishes comprehensive accounting and financial reporting requirements for leasing arrangements. This ASU supersedes the existing requirements in FASB ASC Topic 840, “Leases,” and requires lessees to recognize substantially all lease assets and lease liabilities on the balance sheet. The provisions of ASU No. 2016-02 also modify the definition of a lease and outline requirements for recognition, measurement, presentation and disclosure of leasing arrangements by both lessees and lessors. The ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption of the standard is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. While we continue to evaluate the ASU, we expect the adoption of the ASU to have a material impact on our consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (ASU No. 2016-13), which sets forth the current expected credit loss model, a new forward-looking impairment model for certain financial instruments based on expected losses rather than incurred losses. The ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption of the standard is permitted. Entities are required to adopt ASU No. 2016-13 using a modified retrospective approach, subject to certain limited exceptions. We are currently evaluating the impact of the adoption of this ASU.

 

28


Table of Contents

Supplementary Information—Condensed Consolidating Financial Information

We have various cross guarantees among ConocoPhillips, ConocoPhillips Company and ConocoPhillips Canada Funding Company I, with respect to publicly held debt securities. ConocoPhillips Company is 100 percent owned by ConocoPhillips. ConocoPhillips Canada Funding Company I is an indirect, 100 percent owned subsidiary of ConocoPhillips Company. ConocoPhillips and/or ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Canada Funding Company I, with respect to its publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

 

   

ConocoPhillips, ConocoPhillips Company and ConocoPhillips Canada Funding Company I (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).

   

All other nonguarantor subsidiaries of ConocoPhillips.

   

The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.

In May 2017, ConocoPhillips Company received a $9.8 billion return of capital from a nonguarantor subsidiary to settle certain accumulated intercompany balances. The transaction had no impact on our consolidated financial statements.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

 

29


Table of Contents
                                                                                         
     Millions of Dollars  
     Three Months Ended June 30, 2017  
Income Statement    ConocoPhillips     ConocoPhillips
Company
    ConocoPhillips
Canada
Funding
Company I
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 

Revenues and Other Income

            

Sales and other operating revenues

   $       2,954             3,827             6,781  

Equity in earnings (losses) of affiliates

     (3,235     (2,297           153       5,557       178  

Gain on dispositions

           16             1,860             1,876  

Other income

     1       13             33             47  

Intercompany revenues

     12       74       41       792       (919      

 

 

Total Revenues and Other Income

     (3,222     760       41       6,665       4,638       8,882  

 

 

Costs and Expenses

            

Purchased commodities

           2,637             1,038       (753     2,922  

Production and operating expenses

           139             1,189       (1     1,327  

Selling, general and administrative expenses

     2       110             22             134  

Exploration expenses

           33             65             98  

Depreciation, depletion and amortization

           204             1,421             1,625  

Impairments

           1,074             5,220             6,294  

Taxes other than income taxes

           36             162             198  

Accretion on discounted liabilities

           10             82             92  

Interest and debt expense

     125       171       36       139       (165     306  

Foreign currency transaction (gains) losses

     (15     2       19       7             13  

Other expenses

     217       17                         234  

 

 

Total Costs and Expenses

     329       4,433       55       9,345       (919     13,243  

 

 

Loss before income taxes

     (3,551     (3,673     (14     (2,680     5,557       (4,361

Income tax provision (benefit)

     (111     (438     11       (397           (935

 

 

Net loss

     (3,440     (3,235     (25     (2,283     5,557       (3,426

Less: net income attributable to noncontrolling interests

                       (14           (14

 

 

Net Loss Attributable to ConocoPhillips

   $ (3,440     (3,235     (25     (2,297     5,557       (3,440

 

 

Comprehensive Income (Loss) Attributable to ConocoPhillips

   $ (3,821     (3,616     30       (2,263     5,849       (3,821

 

 
Income Statement    Three Months Ended June 30, 2016  

Revenues and Other Income

            

Sales and other operating revenues

   $       2,284             3,064             5,348  

Equity in earnings (losses) of affiliates

     (1,003     (21           145       959       80  

Gain on dispositions

           63             65             128  

Other income

           1             18             19  

Intercompany revenues

     26       68       60       928       (1,082      

 

 

Total Revenues and Other Income

     (977     2,395       60       4,220       (123     5,575  

 

 

Costs and Expenses

            

Purchased commodities

           1,998             682       (678     2,002  

Production and operating expenses

           488             1,191       (234     1,445  

Selling, general and administrative expenses

     2       136             29             167  

Exploration expenses

           551             59             610  

Depreciation, depletion and amortization

           306             2,023             2,329  

Impairments

           37             25             62  

Taxes other than income taxes

           39             158             197  

Accretion on discounted liabilities

           12             100             112  

Interest and debt expense

     126       164       57       135       (170     312  

Foreign currency transaction (gains) losses

     2             (79     60             (17

 

 

Total Costs and Expenses

     130       3,731       (22     4,462       (1,082     7,219  

 

 

Income (Loss) before income taxes

     (1,107     (1,336     82       (242     959       (1,644

Income tax provision (benefit)

     (36     (333     19       (236           (586

 

 

Net income (loss)

     (1,071     (1,003     63       (6     959       (1,058

Less: net income attributable to noncontrolling interests

                       (13           (13

 

 

Net Income (Loss) Attributable to ConocoPhillips

   $ (1,071     (1,003     63       (19     959       (1,071

 

 

Comprehensive Income (Loss) Attributable to ConocoPhillips

   $ (1,296     (1,228     51       (215     1,392       (1,296

 

 

 

30


Table of Contents
                                                                                         
     Millions of Dollars  
     Six Months Ended June 30, 2017  
Income Statement    ConocoPhillips     ConocoPhillips
Company
    ConocoPhillips
Canada
Funding
Company I
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 

Revenues and Other Income

            

Sales and other operating revenues

   $       6,069             8,230             14,299  

Equity in earnings (losses) of affiliates

     (2,578     (1,124           313       3,767       378  

Gain on dispositions

           29             1,869             1,898  

Other income

     1       15             62             78  

Intercompany revenues

     29       145       83       1,586       (1,843      

 

 

Total Revenues and Other Income

     (2,548     5,134       83       12,060       1,924       16,653  

 

 

Costs and Expenses

            

Purchased commodities

           5,402             2,228       (1,516     6,114  

Production and operating expenses

           280             2,347       (2     2,625  

Selling, general and administrative expenses

     6       246             44       (5     291  

Exploration expenses

           405             244             649  

Depreciation, depletion and amortization

           455             3,149             3,604  

Impairments

           1,074             5,395             6,469  

Taxes other than income taxes

           85             344             429  

Accretion on discounted liabilities

           20             167             187  

Interest and debt expense

     254       336       73       278       (320     621  

Foreign currency transaction (gains) losses

     (22     2       68       (25           23  

Other expense

     217       17                         234  

 

 

Total Costs and Expenses

     455       8,322       141       14,171       (1,843     21,246  

 

 

Loss before income taxes

     (3,003     (3,188     (58     (2,111     3,767       (4,593

Income tax provision (benefit)

     (149     (610     6       (1,013           (1,766

 

 

Net loss

     (2,854     (2,578     (64     (1,098     3,767       (2,827

Less: net income attributable to noncontrolling interests

                       (27           (27

 

 

Net Loss Attributable to ConocoPhillips

   $ (2,854     (2,578     (64     (1,125     3,767       (2,854

 

 

Comprehensive Income (Loss) Attributable to ConocoPhillips

   $ (3,003     (2,727     17       (901     3,611       (3,003

 

 
Income Statement    Six Months Ended June 30, 2016  

Revenues and Other Income

            

Sales and other operating revenues

   $       4,356             6,113             10,469  

Equity in earnings of affiliates

     (2,430     (771           (299     3,431       (69

Gain on dispositions

           85             66             151  

Other income (loss)

           (5           44             39  

Intercompany revenues

     44       149       116       1,453       (1,762      

 

 

Total Revenues and Other Income

     (2,386     3,814       116       7,377       1,669       10,590  

 

 

Costs and Expenses

            

Purchased commodities

           3,846             1,561       (1,180     4,227  

Production and operating expenses

           741             2,295       (237     2,799  

Selling, general and administrative expenses

     5       290             64       (6     353  

Exploration expenses

           982             133             1,115  

Depreciation, depletion and amortization

           563             4,013             4,576  

Impairments

           41             157             198  

Taxes other than income taxes

           96             281             377  

Accretion on discounted liabilities

           24             197             221  

Interest and debt expense

     250       298       112       272       (339     593  

Foreign currency transaction (gains) losses

     (42     2       233       (194           (1

 

 

Total Costs and Expenses

     213       6,883       345       8,779       (1,762     14,458  

 

 

Loss before income taxes

     (2,599     (3,069     (229     (1,402     3,431       (3,868

Income tax provision (benefit)

     (59     (639     1       (657           (1,354

 

 

Net loss

     (2,540     (2,430     (230     (745     3,431       (2,514

Less: net income attributable to noncontrolling interests

                       (26           (26

 

 

Net Loss Attributable to ConocoPhillips

   $ (2,540     (2,430     (230     (771     3,431       (2,540

 

 

Comprehensive Income (Loss) Attributable to ConocoPhillips

   $ (1,664     (1,554     4       230       1,320       (1,664

 

 

 

31


Table of Contents
                                                                                         
     Millions of Dollars  
     June 30, 2017  
Balance Sheet    ConocoPhillips     ConocoPhillips
Company
     ConocoPhillips
Canada
Funding
Company I
    All Other
Subsidiaries
     Consolidating
Adjustments
    Total
Consolidated
 

Assets

              

Cash and cash equivalents

   $       1,162        34       6,338              7,534  

Short-term investments

                        2,733              2,733  

Accounts and notes receivable

     82       1,656        35       3,608        (2,218     3,163  

Investment in Cenovus Energy

           1,533                           1,533  

Inventories

           112              907              1,019  

Prepaid expenses and other current assets

     1       436        7       3,480        (27     3,897  

 

 

Total Current Assets

     83       4,899        76       17,066        (2,245     19,879  

Investments, loans and long-term receivables*

     34,470       56,453        2,377       18,838        (101,935     10,203  

Net properties, plants and equipment

           4,330              42,516              46,846  

Other assets

     43       2,906        203       1,235        (3,311     1,076  

 

 

Total Assets

   $ 34,596       68,588        2,656       79,655        (107,491     78,004  

 

 

Liabilities and Stockholders’ Equity

              

Accounts payable

   $       2,357        2       3,293        (2,218     3,434  

Short-term debt

     1,688       2,000        6       104              3,798  

Accrued income and other taxes

           76              715              791  

Employee benefit obligations

           382              127              509  

Other accruals

     102       680        45       594        (27     1,394  

 

 

Total Current Liabilities

     1,790       5,495        53       4,833        (2,245     9,926  

Long-term debt

     3,784       11,338        1,706       2,842              19,670  

Asset retirement obligations and accrued environmental costs

           560              7,071              7,631  

Deferred income taxes

                        9,111        (2,776     6,335  

Employee benefit obligations

           1,874              625              2,499  

Other liabilities and deferred credits*

     5,298       8,972        824       15,285        (28,935     1,444  

 

 

Total Liabilities

     10,872       28,239        2,583       39,767        (33,956     47,505  

Retained earnings

     21,510       11,437        (605     10,852        (15,161     28,033  

Other common stockholders’ equity

     2,214       28,912        678       28,823        (58,374     2,253  

Noncontrolling interests

                        213              213  

 

 

Total Liabilities and Stockholders’ Equity

   $ 34,596       68,588        2,656       79,655        (107,491     78,004  

 

 

*Includes intercompany loans.

              
Balance Sheet    December 31, 2016  

Assets

              

Cash and cash equivalents

   $       358        13       3,239              3,610  

Short-term investments

                        50              50  

Accounts and notes receivable

     22       1,968        23       6,103        (4,702     3,414  

Inventories

           84              934              1,018  

Prepaid expenses and other current assets

     2       116        8       415        (24     517  

 

 

Total Current Assets

     24       2,526        44       10,741        (4,726     8,609  

Investments, loans and long-term receivables*

     37,901       64,434        2,296       31,643        (114,602     21,672  

Net properties, plants and equipment

           6,301              52,030              58,331  

Other assets

     40       2,194        220       1,240        (2,534     1,160  

 

 

Total Assets

   $ 37,965       75,455        2,560       95,654        (121,862     89,772  

 

 

Liabilities and Stockholders’ Equity

              

Accounts payable

   $       4,683        1       3,671        (4,702     3,653  

Short-term debt

     (10     999        6       94              1,089  

Accrued income and other taxes

           85              399              484  

Employee benefit obligations

           489              200              689  

Other accruals

     171       271        40       536        (24     994  

 

 

Total Current Liabilities

     161       6,527        47       4,900        (4,726     6,909  

Long-term debt

     8,975       12,635        1,710       2,866              26,186  

Asset retirement obligations and accrued environmental costs

           925              7,500              8,425  

Deferred income taxes

                        10,972        (2,023     8,949  

Employee benefit obligations

           1,901              651              2,552  

Other liabilities and deferred credits*

     417       10,391        748       17,832        (27,863     1,525  

 

 

Total Liabilities

     9,553       32,379        2,505       44,721        (34,612     54,546  

Retained earnings

     25,025       14,015        (541     12,883        (19,834     31,548  

Other common stockholders’ equity

     3,387       29,061        596       37,798        (67,416     3,426  

Noncontrolling interests

                        252              252  

 

 

Total Liabilities and Stockholders’ Equity

   $ 37,965       75,455        2,560       95,654        (121,862     89,772  

 

 

*Includes intercompany loans.

              

 

32


Table of Contents
                                                                                         
     Millions of Dollars  
     Six Months Ended June 30, 2017  
Statement of Cash Flows    ConocoPhillips     ConocoPhillips
Company
    ConocoPhillips
Canada
Funding
Company I
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 

Cash Flows From Operating Activities

            

Net Cash Provided by (Used in) Operating Activities

   $ (137     (1,475     21       5,926       (794     3,541  

 

 

Cash Flows From Investing Activities

            

Capital expenditures and investments

           (1,125           (1,729     868       (1,986

Working capital changes associated with investing activities

           39             (152           (113

Proceeds from asset dispositions

           9,909             10,716       (9,883     10,742  

Purchases of short-term investments

                       (2,653           (2,653

Long-term advances/loans—related parties

           (63           (20     83        

Collection of advances/loans—related parties

     658       63             2,138       (2,802     57  

Intercompany cash management