10-Q 1 apc09301310q.htm 10-Q APC 09.30.13 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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 No. 1-8968
ANADARKO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
76-0146568
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1201 Lake Robbins Drive, The Woodlands, Texas 77380-1046
(Address of principal executive offices)
Registrant’s telephone number, including area code (832) 636-1000
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the Company’s common stock at October 31, 2013, is shown below:
 
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
503,266,938


TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions except per-share amounts
 
2013
 
2012
 
2013
 
2012
Revenues and Other
 
 
 
 
 
 
 
 
Natural-gas sales
 
$
805

 
$
613

 
$
2,547

 
$
1,682

Oil and condensate sales
 
2,389

 
2,163

 
6,761

 
6,629

Natural-gas liquids sales
 
325

 
289

 
889

 
913

Gathering, processing, and marketing sales
 
270

 
218

 
750

 
671

Gains (losses) on divestitures and other, net
 
64

 
49

 
296

 
106

Total
 
3,853

 
3,332

 
11,243

 
10,001

Costs and Expenses
 
 
 
 
 
 
 
 
Oil and gas operating
 
277

 
241

 
769

 
732

Oil and gas transportation and other
 
255

 
247

 
763

 
710

Exploration
 
272

 
297

 
714

 
1,662

Gathering, processing, and marketing
 
217

 
185

 
638

 
552

General and administrative
 
255

 
285

 
787

 
816

Depreciation, depletion, and amortization
 
996

 
979

 
2,958

 
2,936

Other taxes
 
294

 
267

 
819

 
970

Impairments
 
593

 
4

 
632

 
166

Algeria exceptional profits tax settlement
 
—

 
7

 
33

 
(1,797
)
Deepwater Horizon settlement and related costs
 
5

 
4

 
12

 
15

Total
 
3,164

 
2,516

 
8,125

 
6,762

Operating Income (Loss)
 
689

 
816

 
3,118

 
3,239

Other (Income) Expense
 
 
 
 
 
 
 
 
Interest expense
 
177

 
185

 
513

 
561

(Gains) losses on derivatives, net
 
72

 
251

 
(393
)
 
(77
)
Other (income) expense, net
 
(23
)
 
(10
)
 
69

 
(264
)
Total
 
226

 
426

 
189

 
220

Income (Loss) Before Income Taxes
 
463

 
390

 
2,929

 
3,019

Income tax expense (benefit)
 
240

 
248

 
1,263

 
764

Net Income (Loss)
 
223

 
142

 
1,666

 
2,255

Net income attributable to noncontrolling interests
 
41

 
21

 
95

 
67

Net Income (Loss) Attributable to Common Stockholders
 
$
182

 
$
121

 
$
1,571

 
$
2,188

 
 
 
 
 
 
 
 
 
Per Common Share
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
0.36

 
$
0.24

 
$
3.11

 
$
4.35

Net income (loss) attributable to common stockholders—diluted
 
$
0.36

 
$
0.24

 
$
3.10

 
$
4.34

Average Number of Common Shares Outstanding—Basic
 
503

 
500

 
502

 
499

Average Number of Common Shares Outstanding—Diluted
 
505

 
502

 
504

 
501

Dividends (per Common Share)
 
$
0.18

 
$
0.09

 
$
0.36

 
$
0.27



See accompanying Notes to Consolidated Financial Statements.

2

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
 
2013
 
2012
 
2013
 
2012
Net Income (Loss)
 
$
223

 
$
142

 
$
1,666

 
$
2,255

Other Comprehensive Income (Loss), net of taxes
 
 
 
 
 
 
 
 
Reclassification of previously deferred derivative losses to
   (gains) losses on derivatives, net (1)
 
2

 
2

 
5

 
6

Adjustments for pension and other postretirement plans
 
 
 
 
 
 
 
 
Amortization of net actuarial (gain) loss to general and
   administrative expense (2)
 
18

 
15

 
56

 
44

Amortization of net prior service (credit) cost to general and
   administrative expense
 
1

 
—

 
1

 
1

Total adjustments for pension and other postretirement plans
 
19

 
15

 
57

 
45

Total
 
21

 
17

 
62

 
51

Comprehensive Income (Loss)
 
244

 
159

 
1,728

 
2,306

Comprehensive income attributable to noncontrolling interests
 
41

 
21

 
95

 
67

Comprehensive Income (Loss) Attributable to
Common Stockholders
 
$
203

 
$
138

 
$
1,633

 
$
2,239

 __________________________________________________________________
(1) 
Net of income tax benefit (expense) of $(1) million for the three months ended September 30, 2013, $(1) million for the three months ended September 30, 2012, $(3) million for the nine months ended September 30, 2013, and $(3) million for the nine months ended September 30, 2012.
(2) 
Net of income tax benefit (expense) of $(11) million for the three months ended September 30, 2013, $(8) million for the three months ended September 30, 2012, $(32) million for the nine months ended September 30, 2013, and $(25) million for the nine months ended September 30, 2012.


See accompanying Notes to Consolidated Financial Statements.

3

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
 
December 31,
millions
 
2013
 
2012
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
3,939

 
$
2,471

Accounts receivable (net of allowance of $6 million and $7 million)
 
 
 
 
Customers
 
1,266

 
1,473

Others
 
1,199

 
1,274

Algeria exceptional profits tax settlement
 
—

 
730

Other current assets
 
736

 
847

Total
 
7,140

 
6,795

Properties and Equipment
 
 
 
 
Cost
 
69,167

 
63,598

Less accumulated depreciation, depletion, and amortization
 
28,682

 
25,200

Net properties and equipment
 
40,485

 
38,398

Other Assets
 
2,006

 
1,716

Goodwill and Other Intangible Assets
 
5,663

 
5,680

Total Assets
 
$
55,294

 
$
52,589

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
3,070

 
$
2,989

Current asset retirement obligations
 
311

 
298

Accrued expenses
 
1,357

 
707

Total
 
4,738

 
3,994

Long-term Debt
 
13,647

 
13,269

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
9,372

 
8,759

Asset retirement obligations
 
1,673

 
1,587

Other
 
1,963

 
3,098

Total
 
13,008

 
13,444

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share
(1.0 billion shares authorized, 521.7 million and 518.6 million shares issued)
 
52

 
51

Paid-in capital
 
8,521

 
8,230

Retained earnings
 
15,218

 
13,829

Treasury stock (18.5 million and 18.1 million shares)
 
(871
)
 
(841
)
Accumulated other comprehensive income (loss)
 
(578
)
 
(640
)
Total Stockholders’ Equity
 
22,342

 
20,629

Noncontrolling interests
 
1,559

 
1,253

Total Equity
 
23,901

 
21,882

Total Liabilities and Equity
 
$
55,294

 
$
52,589



See accompanying Notes to Consolidated Financial Statements.

4

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
 
 
Total Stockholders’ Equity
 
 
 
 
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
millions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
51

 
$
8,230

 
$
13,829

 
$
(841
)
 
$
(640
)
 
$
1,253

 
$
21,882

Net income (loss)
 
—

 
—

 
1,571

 
—

 
—

 
95

 
1,666

Common stock issued
 
1

 
230

 
—

 
—

 
—

 
—

 
231

Dividends—common stock
 
—

 
—

 
(182
)
 
—

 
—

 
—

 
(182
)
Repurchase of common stock
 
—

 
—

 
—

 
(30
)
 
—

 
—

 
(30
)
Subsidiary equity transactions (1)
 
—

 
61

 
—

 
—

 
—

 
320

 
381

Distributions to noncontrolling
interest owners
 
—

 
—

 
—

 
—

 
—

 
(111
)
 
(111
)
Contributions from noncontrolling
interest owners
 
—

 
—

 
—

 
—

 
—

 
2

 
2

Reclassification of previously
deferred derivative losses to
(gains) losses on derivatives, net
 
—

 
—

 
—

 
—

 
5

 
—

 
5

Adjustments for pension and other
postretirement plans
 
—

 
—

 
—

 
—

 
57

 
—

 
57

Balance at September 30, 2013
 
$
52

 
$
8,521

 
$
15,218

 
$
(871
)
 
$
(578
)
 
$
1,559

 
$
23,901

 __________________________________________________________________
(1) 
The $61 million increase to paid-in capital, together with the Company’s net income (loss) attributable to common stockholders totaled $1,632 million for the nine months ended September 30, 2013.


See accompanying Notes to Consolidated Financial Statements.

5

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended 
 September 30,
millions
 
2013
 
2012
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
1,666

 
$
2,255

Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
2,958

 
2,936

Deferred income taxes
 
535

 
95

Dry hole expense and impairments of unproved properties
 
423

 
1,389

Impairments
 
632

 
166

(Gains) losses on divestitures, net
 
(165
)
 
23

Unrealized (gains) losses on derivatives, net
 
(359
)
 
539

Other
 
174

 
174

Changes in assets and liabilities
 
 
 
 
Deepwater Horizon settlement and related costs
 
3

 
25

Algeria exceptional profits tax settlement
 
730

 
(1,183
)
Tronox-related contingent loss
 
—

 
(250
)
(Increase) decrease in accounts receivable
 
246

 
409

Increase (decrease) in accounts payable and accrued expenses
 
(37
)
 
(486
)
Other items—net
 
(22
)
 
27

Net cash provided by (used in) operating activities
 
6,784

 
6,119

Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment and dry hole costs
 
(5,327
)
 
(5,448
)
Acquisition of businesses
 
(473
)
 
—

Divestitures of properties and equipment and other assets
 
451

 
440

Other—net
 
(552
)
 
(188
)
Net cash provided by (used in) investing activities
 
(5,901
)
 
(5,196
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
843

 
885

Repayments of debt
 
(495
)
 
(2,005
)
Increase (decrease) in outstanding checks
 
63

 
12

Dividends paid
 
(182
)
 
(136
)
Repurchase of common stock
 
(30
)
 
(26
)
Issuance of common stock, including tax benefit on share-based compensation awards
 
123

 
68

Sale of subsidiary units
 
418

 
212

Distributions to noncontrolling interest owners
 
(111
)
 
(81
)
Contributions from noncontrolling interest owners
 
2

 
14

Net cash provided by (used in) financing activities
 
631

 
(1,057
)
Effect of Exchange Rate Changes on Cash
 
(46
)
 
(31
)
Net Increase (Decrease) in Cash and Cash Equivalents
 
1,468

 
(165
)
Cash and Cash Equivalents at Beginning of Period
 
2,471

 
2,697

Cash and Cash Equivalents at End of Period
 
$
3,939

 
$
2,532



See accompanying Notes to Consolidated Financial Statements.

6

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Summary of Significant Accounting Policies

General    Anadarko Petroleum Corporation is engaged in the exploration, development, production, and marketing of natural gas, crude oil, condensate, and natural gas liquids (NGLs). In addition, the Company engages in the gathering, processing, treating, and transporting of natural gas, crude oil, and NGLs. Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries.

Basis of Presentation    The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s Consolidated Balance Sheets at September 30, 2013, and December 31, 2012, the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and the Consolidated Statement of Equity for the nine months ended September 30, 2013. Certain prior-period amounts have been reclassified to conform to the current-period presentation.

Use of Estimates    The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, including those related to the value of properties and equipment; proved reserves; goodwill; intangible assets; asset retirement obligations; litigation reserves; environmental liabilities; pension assets, liabilities, and costs; income taxes; and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.

2. Inventories

       The following summarizes the major classes of inventories included in other current assets:
 
September 30,
 
December 31,
millions
2013
 
2012
Crude oil
$
102

 
$
91

Natural gas
41

 
48

NGLs
66

 
37

Total
$
209

 
$
176


3. Acquisitions and Divestitures

Acquisitions    Anadarko and Western Gas Partners, LP (WES), a consolidated subsidiary of the Company, made several unrelated acquisitions during the nine months ended September 30, 2013. In March 2013, WES acquired a 33.75% interest in gas-gathering systems located in the Marcellus shale in north-central Pennsylvania for $135 million. In June 2013, WES acquired a 25% interest in a joint venture formed to design, construct, and own two fractionators located in Mont Belvieu, Texas for $78 million. In August 2013, Anadarko acquired certain oil and gas properties and related assets in the Moxa area of Wyoming for $310 million, including $306 million that represents the fair value of the oil and gas properties acquired. In September 2013, WES acquired an intrastate pipeline in southwestern Wyoming for $28 million.

Divestitures    For the nine months ended September 30, 2013, proceeds from divestitures of $451 million and net gains on divestitures of $165 million were primarily related to the Company’s divestiture of its interests in a soda ash joint venture during the first quarter of 2013. In August 2013, the Company entered into a definitive agreement to sell a 10% working interest in Mozambique’s Offshore Area 1 for $2.64 billion. The transaction is subject to governmental approvals and other customary closing conditions, and is expected to close in late 2013 or early 2014.



7

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Impairments

       The following summarizes impairments by segment:
  
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
2013
 
2012
 
2013
 
2012
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
U.S. onshore properties
$
—

 
$
2

 
$
—

 
$
81

Gulf of Mexico properties
593

 
—

 
593

 
67

Cost-method investment
—

 
1

 
10

 
12

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
—

 
1

 
29

 
6

Impairments
$
593

 
$
4

 
$
632

 
$
166


       During the third quarter of 2013, certain Gulf of Mexico properties were impaired due to a reduction in estimated future net cash flows per barrel and downward revisions of reserves that the Company no longer plans to develop. The Company impaired its Venezuelan cost-method investment in 2013 and 2012 due to declines in estimated recoverable value. In addition, a midstream property was impaired during 2013 due to a reduction in estimated future cash flows. In 2012, certain U.S. onshore and midstream properties were impaired primarily due to lower natural-gas prices and a Gulf of Mexico property was impaired as a result of downward reserves revisions for a property that was near the end of its economic life.
       The following summarizes the post-impairment fair value of the above-described assets, by asset category and input level within the fair-value hierarchy:
millions
 
 
 
 
 
 
 
2013
Level 1
 
Level 2
 
Level 3 (1)
 
Total
Long-lived assets held for use
$
—

 
$
—

 
$
266

 
$
266

Cost-method investment (2) 
—

 
—

 
32

 
32

2012
 
 
 
 
 
 
 
Long-lived assets held for use
$
—

 
$
—

 
$
38

 
$
38

Cost-method investment (2)
—

 
—

 
34

 
34

 __________________________________________________________________
(1) 
The income approach was used to measure fair value.
(2) 
This represents the Company’s after-tax net investment.

5. Suspended Exploratory Well Costs

       The Company’s suspended exploratory well costs were $2.2 billion at September 30, 2013, and $2.1 billion at December 31, 2012. The increase in suspended exploratory well costs during 2013 is primarily related to the capitalization of costs associated with successful exploration drilling in the Gulf of Mexico, Brazil, and Mozambique. Management believes projects with suspended exploratory well costs exhibit sufficient quantities of hydrocarbons to justify potential development and is actively pursuing efforts to assess whether reserves can be attributed to these projects. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time. During the nine months ended September 30, 2013, $95 million of exploratory well costs previously capitalized as suspended exploratory well costs for greater than one year at December 31, 2012, were charged to dry hole expense.



8

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Noncontrolling Interests

       Western Gas Equity Partners, LP (WGP) is a consolidated subsidiary formed by Anadarko to own partnership interests in WES. At September 30, 2013, Anadarko’s ownership interest in WGP consisted of a 91.0% limited partner interest and the entire general partner interest.
       WES is a limited partnership formed by Anadarko to own, operate, acquire, and develop midstream assets. During 2013, WES has issued approximately seven million common units to the public, raising net proceeds of $419 million. At September 30, 2013, WGP’s ownership interest in WES consisted of a 43.1% limited partner interest, the entire 2.0% general partner interest, and all WES incentive distribution rights. At September 30, 2013, Anadarko also owned a 0.4% limited partner interest in WES through another subsidiary.

7. Derivative Instruments

Objective and Strategy    The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks. Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations, such as Henry Hub, Louisiana for natural gas and Cushing, Oklahoma or Sullom Voe, Scotland for oil. Basis swaps are periodically used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (Marketing and Trading Derivative Activities).
       Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest-rate changes. The fair value of the Company’s interest-rate swap portfolio increases (decreases) when interest rates increase (decrease).
       The Company does not apply hedge accounting to any of its derivative instruments. As a result, both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings. Net derivative losses attributable to interest-rate derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. See Note 10—Accumulated Other Comprehensive Income (Loss).


9

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities    The natural-gas prices listed below are New York Mercantile Exchange (NYMEX) Henry Hub prices. The crude-oil prices listed below are a combination of NYMEX West Texas Intermediate (WTI) and IntercontinentalExchange, Inc. (ICE) Brent prices. The following is a summary of the Company’s derivative instruments related to its Oil and Natural-Gas Production/Processing Derivative Activities at September 30, 2013:
 
2013
Settlement
 
2014
Settlement
Natural Gas
 
 
 
Two-Way Collars (thousand MMBtu/d)
600

(1) 
—

Average price per MMBtu
 
 
 
Ceiling sold price (call)
$
4.00

 
$
—

Floor purchased price (put)
$
3.18

 
$
—

Three-Way Collars (thousand MMBtu/d)
—

(2) 
600

Average price per MMBtu
 
 
 
Ceiling sold price (call)
$
—

 
$
5.01

Floor purchased price (put)
$
—

 
$
3.75

Floor sold price (put)
$
—

 
$
2.75

Fixed-Price Contracts (thousand MMBtu/d)
1,185

 
600

Average price per MMBtu
$
4.00

 
$
4.26

Crude Oil
 
 
 
Three-Way Collars (MBbls/d)
26

 
—

Average price per barrel
 
 
 
Ceiling sold price (call)
$
125.15

 
$
—

Floor purchased price (put)
$
105.00

 
$
—

Floor sold price (put)
$
85.00

 
$
—

Fixed-Price Contracts (MBbls/d)
167

 
—

Average price per barrel
$
102.74

 
$
—

__________________________________________________________________
(1) 
The two-way collars have a contract term of April 2013 to October 2013.
(2) 
The Company entered into offsetting purchased and sold natural-gas three-way collars of 450,000 MMBtu/d for 2013 settlement.
MMBtu—million British thermal units
MMBtu/d—million British thermal units per day
MBbls/d—thousand barrels per day

       A two-way collar is a combination of two options: a sold call and a purchased put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes.
       A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.


10

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Derivative Instruments (Continued)

Marketing and Trading Derivative Activities    In addition to the positions in the previous table, the Company also engages in marketing and trading activities. These activities include physical product sales and related fixed-to-floating derivative transactions used to manage commodity-price risk. At September 30, 2013, and December 31, 2012, the Company had fixed-price physical transactions related to natural gas totaling 10 billion cubic feet (Bcf), offset by fixed-to-floating derivative transactions totaling 10 Bcf.

Interest-Rate Derivatives    Anadarko has outstanding interest-rate swap contracts as a fixed-rate payer to mitigate the interest-rate risk associated with anticipated debt issuances. The Company locked in a fixed interest rate in exchange for a floating interest rate indexed to the three-month London Interbank Offered Rate. The swap instruments include a provision that requires both the termination of the swaps and cash settlement in full at the start of the reference period.
       The Company had the following outstanding interest-rate swaps at September 30, 2013: 
millions except percentages
 
Reference Period
 
Weighted-Average
Notional Principal Amount
 
Start
 
End
 
Interest Rate
$
750

 
 
June 2014
 
June 2024
 
6.00%
$
1,100

 
 
June 2014
 
June 2044
 
5.57%
$
50

 
 
September 2016
 
September 2026
 
5.91%
$
750

 
 
September 2016
 
September 2046
 
5.86%

Effect of Derivative Instruments—Balance Sheet    The following summarizes the fair value of the Company’s derivative instruments:
 
 
Gross
Derivative Assets
 
Gross
Derivative Liabilities
millions
 
September 30,
 
December 31,
 
September 30,
 
December 31,
Balance Sheet Classification
 
2013
 
2012
 
2013
 
2012
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
359

 
$
475

 
$
(170
)
 
$
(197
)
Other assets
 
50

 
24

 
(13
)
 
(7
)
Accrued expenses
 
48

 
6

 
(61
)
 
(14
)
Other liabilities
 
—

 
1

 
(2
)
 
(7
)
 
 
457

 
506

 
(246
)
 
(225
)
Interest-rate and other derivatives
 
 
 
 
 
 
 
 
Accrued expenses (1)
 
—

 
—

 
(550
)
 
—

Other liabilities (1)
 
—

 
—

 
(215
)
 
(1,194
)
 
 
—

 
—

 
(765
)
 
(1,194
)
Total derivatives
 
$
457

 
$
506

 
$
(1,011
)
 
$
(1,419
)
 __________________________________________________________________
(1)
Interest-rate swaps with June 2014 maturity dates were reclassified from other liabilities to accrued expenses during the second quarter of 2013.


11

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Derivative Instruments (Continued)

Effect of Derivative Instruments—Statement of Income    The following summarizes realized and unrealized gains and losses related to derivative instruments:
millions
 
Three Months Ended 
 September 30, 2013
 
Nine Months Ended 
 September 30, 2013
Classification of (Gain) Loss Recognized
 
Realized
 
Unrealized
 
Total
 
Realized
 
Unrealized
 
Total
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
$
2

 
$
(10
)
 
$
(8
)
 
$
9

 
$
(12
)
 
$
(3
)
(Gains) losses on derivatives, net
 
26

 
120

 
146

 
(46
)
 
81

 
35

Interest-rate and other derivatives
 
 
 
 
 
 
 
 
 
 
 
 
(Gains) losses on derivatives, net
 
—

 
(74
)
 
(74
)
 
—

 
(428
)
 
(428
)
Total (gains) losses on derivatives, net
 
$
28

 
$
36

 
$
64

 
$
(37
)
 
$
(359
)
 
$
(396
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2012
 
Nine Months Ended 
 September 30, 2012
Classification of (Gain) Loss Recognized
 
Realized
 
Unrealized
 
Total
 
Realized
 
Unrealized
 
Total
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
$
3

 
$
5

 
$
8

 
$
—

 
$
18

 
$
18

(Gains) losses on derivatives, net
 
(200
)
 
437

 
237

 
(600
)
 
369

 
(231
)
Interest-rate and other derivatives
 
 
 
 
 
 
 
 
 
 
 
 
(Gains) losses on derivatives, net
 
—

 
14

 
14

 
2

 
152

 
154

Total (gains) losses on derivatives, net
 
$
(197
)
 
$
456

 
$
259

 
$
(598
)
 
$
539

 
$
(59
)
__________________________________________________________________
(1) 
Represents the effect of marketing and trading derivative activities.

Credit-Risk Considerations    The financial integrity of exchange-traded contracts, which are subject to nominal credit risk, is assured by NYMEX or ICE through systems of financial safeguards and transaction guarantees. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact on fair value of its counterparties’ creditworthiness. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure. The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities, and routinely exercises its contractual right to offset realized gains against realized losses when settling with derivative counterparties.
       In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across derivative types. At September 30, 2013, $305 million of the Company’s $1.0 billion gross derivative liability balance, and at December 31, 2012, $339 million of the Company’s $1.4 billion gross derivative liability balance, would have been eligible for setoff against the Company’s gross derivative asset balance in the event of default. Other than in the event of default, the Company does not net settle across derivative types.
       Some of the Company’s derivative instruments are subject to provisions that can require full or partial collateralization or immediate settlement of the Company’s obligations if certain credit-risk-related provisions are triggered. However, most of the Company’s derivative counterparties maintain secured positions with respect to the Company’s derivative liabilities under the Company’s $5.0 billion senior secured revolving credit facility ($5.0 billion Facility), the available capacity of which is sufficient to secure potential obligations to such counterparties.


12

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Derivative Instruments (Continued)

       Unsecured derivative obligations may require immediate settlement or full collateralization if certain credit-risk-related provisions are triggered, such as the Company’s credit rating from major credit rating agencies declining to a level below investment grade. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $52 million (net of collateral) at September 30, 2013, and $94 million (net of collateral) at December 31, 2012. The current portion of these amounts was included in accrued expenses and the long-term portion of these amounts was included in other long-term liabilities—other on the Company’s Consolidated Balance Sheets.
 
Fair Value    Fair value of futures contracts is based on quoted prices in active markets for identical assets or liabilities, which represent Level 1 inputs. Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, implied market volatility and discount factors. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments.
       The following summarizes the fair value of the Company’s derivative assets and liabilities, by input level within the fair-value hierarchy:
millions
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
4

 
$
379

 
$
—

 
$
(226
)
 
$
(1
)
 
$
156

Other counterparties
—

 
74

 
—

 
(6
)
 
—

 
68

Total derivative assets
$
4

 
$
453

 
$
—

 
$
(232
)
 
$
(1
)
 
$
224

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
(4
)
 
$
(232
)
 
$
—

 
$
226

 
$
1

 
$
(9
)
Other counterparties
—

 
(10
)
 
—

 
6

 
—

 
(4
)
Interest-rate and other derivatives
—

 
(765
)
 
—

 
—

 
—

 
(765
)
Total derivative liabilities
$
(4
)
 
$
(1,007
)
 
$
—

 
$
232

 
$
1

 
$
(778
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
6

 
$
453

 
$
—

 
$
(206
)
 
$
—

 
$
253

Other counterparties
—

 
47

 
—

 
(5
)
 
—

 
42

Total derivative assets
$
6

 
$
500

 
$
—

 
$
(211
)
 
$
—

 
$
295

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
(6
)
 
$
(202
)
 
$
—

 
$
206

 
$
1

 
$
(1
)
Other counterparties
—

 
(17
)
 
—

 
5

 
—

 
(12
)
Interest-rate and other derivatives
—

 
(1,194
)
 
—

 
—

 
—

 
(1,194
)
Total derivative liabilities
$
(6
)
 
$
(1,413
)
 
$
—

 
$
211

 
$
1

 
$
(1,207
)
 __________________________________________________________________
(1) 
Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.

13

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense

Debt    The Company’s outstanding debt is senior unsecured, except for borrowings, if any, under the $5.0 billion Facility. The following summarizes the Company’s outstanding debt:
 
September 30,
 
December 31,
millions
2013
 
2012
Total debt at face value
$
15,302

 
$
14,952

Net unamortized discounts and premiums (1)
(1,655
)
 
(1,683
)
Total long-term debt
$
13,647

 
$
13,269

__________________________________________________________________
(1) 
Unamortized discounts and premiums are amortized over the term of the related debt.

       Anadarko’s $500 million aggregate principal amount of 7.625% Senior Notes due March 2014 and $275 million aggregate principal amount of 5.750% Senior Notes due June 2014 are classified as long-term debt on the Company’s Consolidated Balance Sheets, as the Company has the ability and intent to refinance these obligations using long-term debt. The Zero-Coupon Senior Notes due 2036 (Zero Coupons) can be put to the Company in October of each year, which would cause the Company to repay up to the then-accreted value of the outstanding Zero Coupons. None of the Zero Coupons (accreted value of $718 million) were put to the Company in October 2013.

Fair Value    The Company uses a market approach to determine fair value of its fixed-rate debt using observable market data, which results in a Level 2 fair-value measurement. The carrying amount of floating-rate debt approximates fair value as the interest rates are variable and reflective of market rates. The estimated fair value of the Company’s total borrowings was $15.8 billion at September 30, 2013, and $16.2 billion at December 31, 2012.

Debt Activity    The following summarizes the Company’s debt activity during the nine months ended September 30, 2013:
 
Carrying
 
 
 
 
millions
Value
 
Description
Balance at December 31, 2012
$
13,269

 
 
 
 
Borrowings
385

 
WES revolving credit facility
Other, net
9

 
Amortization of debt discounts and premiums
Balance at March 31, 2013
$
13,663

 
 
 
 
Borrowings
110

 
WES revolving credit facility
Repayments
(245
)
 
WES revolving credit facility
Other, net
10

 
Amortization of debt discounts and premiums
Balance at June 30, 2013
$
13,538

 
 
 
 
Issuance
250

 
WES 2.600% Senior Notes due 2018
Borrowings
100

 
WES revolving credit facility
Repayments
(250
)
 
WES revolving credit facility
Other, net
9

 
Amortization of debt discounts and premiums
Balance at September 30, 2013
$
13,647

 
 
 
 

WES Borrowings    During the third quarter of 2013, WES repaid $250 million of outstanding borrowings under its five-year, $800 million senior unsecured revolving credit facility maturing in March 2016 (RCF) with net proceeds from its public offering of $250 million aggregate principal amount of 2.600% Senior Notes due 2018. At September 30, 2013, WES was in compliance with all covenants contained in its RCF, had outstanding borrowings under its RCF of $100 million at an interest rate of 1.68%, and had available borrowing capacity of $687 million ($800 million maximum capacity, less $100 million of outstanding borrowings and $13 million of outstanding letters of credit).


14

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Interest Expense    The following summarizes interest expense:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
2013
 
2012
 
2013
 
2012
Current debt, long-term debt, and other
$
240

 
$
238

 
$
710

 
$
724

Capitalized interest
(63
)
 
(53
)
 
(197
)
 
(163
)
Interest expense
$
177

 
$
185

 
$
513

 
$
561


9. Stockholders’ Equity

The reconciliation between basic and diluted earnings per share attributable to common stockholders is as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions except per-share amounts
2013
 
2012
 
2013
 
2012
Net income (loss)
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
182

 
$
121

 
$
1,571

 
$
2,188

Less distributions on participating securities
—

 
—

 
1

 
1

Less undistributed income allocated to participating securities
1

 
1

 
9

 
13

Basic
$
181

 
$
120

 
$
1,561

 
$
2,174

Diluted
$
181

 
$
120

 
$
1,561

 
$
2,174

Shares
 
 
 
 
 
 
 
Average number of common shares outstanding—basic
503

 
500

 
502

 
499

Dilutive effect of stock options
2

 
2

 
2

 
2

Average number of common shares outstanding—diluted
505

 
502

 
504

 
501

Excluded (1)
3

 
6

 
4

 
6

Net income (loss) per common share
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.24

 
$
3.11

 
$
4.35

Diluted
$
0.36

 
$
0.24

 
$
3.10

 
$
4.34

 
 
 
 
 
 
 
 
Dividends per common share
$
0.18

 
$
0.09

 
$
0.36

 
$
0.27

 __________________________________________________________________
(1) 
Inclusion of certain shares would have had an anti-dilutive effect.

10. Accumulated Other Comprehensive Income (Loss)

       The following summarizes the after-tax changes in the balances of each component of accumulated other comprehensive income (loss):
millions
Interest-rate
Derivatives
Previously
Subject to Hedge
Accounting
 
Pension and Other Postretirement
Plans
 
Total
Balance at December 31, 2012
$
(61
)
 
$
(579
)
 
$
(640
)
Reclassifications to Consolidated Statement of Income
5

 
57

 
62

Balance at September 30, 2013
$
(56
)
 
$
(522
)
 
$
(578
)

15

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Commitments

       In June 2013, the Company entered into a three-year operating lease agreement for a deepwater drillship expected to be delivered in late 2014. The lease obligation totals $464 million, with aggregate future annual minimum lease payments of $33 million in 2014, $154 million in 2015, $155 million in 2016, and $122 million in 2017.

12. Contingencies

General    The Company is a defendant in a number of lawsuits and is involved in governmental proceedings and regulatory controls arising in the ordinary course of business, including, but not limited to, personal injury claims; title disputes; tax disputes; royalty claims; contract claims; contamination claims relating to oil and gas production, transportation, and processing; and environmental claims, including claims involving assets owned by acquired companies. Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state, and local laws and regulations. While the ultimate outcome and impact on the Company cannot be predicted with certainty, after consideration of recorded expense and liability accruals, management believes that the resolution of pending proceedings will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
       The following is a discussion of the material developments with respect to the contingencies previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and material matters that have arisen since the filing of such report.

Deepwater Horizon Events    In April 2010, the Macondo well in the Gulf of Mexico blew out and an explosion occurred on the Deepwater Horizon drilling rig. The well was operated by BP Exploration and Production Inc. (BP) and Anadarko held a 25% nonoperated interest. In October 2011, the Company and BP entered into a settlement agreement relating to the Deepwater Horizon events (Settlement Agreement). Pursuant to the Settlement Agreement, the Company is fully indemnified by BP against claims and damages arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and assessment costs, and other potential damages. This indemnification is guaranteed by BP Corporation North America Inc. (BPCNA) and, in the event that the net worth of BPCNA declines below an agreed-upon amount, BP p.l.c. has agreed to become the sole guarantor. Under the Settlement Agreement, BP does not indemnify the Company against fines and penalties, punitive damages, shareholder derivative or securities laws claims, or certain other claims. The Company has not recorded a liability for any costs that are subject to indemnification by BP. For additional disclosure of the Deepwater Horizon events, the Company’s Settlement Agreement with BP, environmental claims under OPA, NRD claims, potential penalties and fines, and civil litigation, see Note 17—Contingencies—Deepwater Horizon Events in the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Penalties and Fines    In December 2010, the U.S. Department of Justice (DOJ), on behalf of the United States, filed a civil lawsuit in the U.S. District Court in New Orleans, Louisiana (Louisiana District Court) against several parties, including Anadarko, seeking an assessment of civil penalties under the Clean Water Act (CWA) in an amount to be determined by the Louisiana District Court. In February 2012, the Louisiana District Court entered a declaratory judgment that, as a partial owner of the Macondo well, Anadarko is liable for civil penalties under Section 311 of the CWA. The declaratory judgment addresses liability only, and does not address the amount of any civil penalty. The assessment of a civil penalty against Anadarko has been reserved until a later proceeding to be scheduled by the Louisiana District Court. In August 2012, Anadarko filed a notice of appeal in the U.S. Court of Appeals for the Fifth Circuit concerning that portion of the February 2012 declaratory judgment finding Anadarko liable for civil penalties under the CWA. The appeal is pending and oral arguments are set for December 2013.


16

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

       As discussed below, numerous Deepwater Horizon event-related civil lawsuits have been filed against BP and other parties, including the Company. Certain state and local governments have appealed, or have provided indication of a likely appeal of, the Louisiana District Court’s decision that only federal law, and not state law, applies to Deepwater Horizon event-related claims. If any such appeal is successful, state and/or local laws and regulations could become sources of penalties or fines against the Company.
       Applicable accounting guidance requires the Company to accrue a liability if it is probable that a liability is incurred and the amount of the liability can be reasonably estimated. The Louisiana District Court’s declaratory judgment in February 2012 satisfies the requirement that a loss, arising from the future assessment of a civil penalty against Anadarko, is probable. Notwithstanding the declaratory judgment, the Company currently cannot estimate the amount of any potential civil penalty. The CWA sets forth subjective criteria, including degree of fault and history of prior violations, which significantly influence the magnitude of CWA penalty assessments. As a result of the subjective nature of CWA penalty assessments, the Company currently cannot estimate the amount of any such penalty nor determine a range of potential loss. Furthermore, neither the February 2012 settlement of Deepwater Horizon-related civil penalties (including those under the CWA) by the other nonoperating partner with the United States and five affected Gulf states (Texas, Louisiana, Mississippi, Alabama, and Florida) nor the January 2013 settlement of CWA civil and criminal penalties by the drilling contractor with the United States affects the Company’s current conclusion regarding its ability to estimate potential fines and penalties. The Company lacks insight into those settlements, retains legal counsel separate from the other parties, and was not involved in any manner with respect to those settlements. Events or factors that could assist the Company in estimating the amount of any potential civil penalty or a range of potential loss related to such penalties include (i) an assessment by the DOJ, (ii) a ruling by a court of competent jurisdiction, or (iii) the initiation of substantive settlement negotiations between the Company and the DOJ.
       Given the Company’s lack of direct operational involvement in the event, as was reconfirmed by the Louisiana District Court in September 2013, and the subjective criteria of the CWA, the Company believes that its exposure to CWA penalties will not materially impact the Company’s consolidated financial position, results of operations, or cash flows.

Civil Litigation Damage Claims    Numerous Deepwater Horizon event-related civil lawsuits have been filed against BP and other parties, including the Company. This litigation has been consolidated into a federal Multidistrict Litigation (MDL) action pending before Judge Carl Barbier in the Louisiana District Court. In March 2012, BP and the Plaintiffs’ Steering Committee entered into a tentative settlement agreement to resolve the substantial majority of economic loss and medical claims stemming from the Deepwater Horizon events, which the Louisiana District Court approved in orders issued in December 2012 and January 2013. Only OPA claims seeking economic loss damages against the Company remain. In addition, certain state and local governments have appealed, or have provided indication of a likely appeal of, the MDL court’s decision that only federal law, and not state law, applies to Deepwater Horizon event-related claims. The Company, pursuant to the Settlement Agreement, is fully indemnified by BP against losses arising as a result of claims for damages, irrespective of whether such claims are based on federal (including OPA) or state law.
       The first phase of the trial in the proceeding filed in the MDL by Transocean Ltd. (Transocean) under the Limitation of Liability Act commenced in February 2013 (Phase I). In April 2013, the evidence closed and all parties rested. Findings of fact, post-trial briefs, and responsive briefs were submitted in July 2013. BP, BP p.l.c., the United States, state and local governments, Halliburton Energy Services, Inc. (Halliburton), and Transocean participated in Phase I of the trial. Anadarko was excused from participation in Phase I of the trial. The issues tried in Phase I included the cause of the blow-out and all related events leading up to April 22, 2010, the date the Deepwater Horizon sank, as well as allocation of fault. The allocation of fault remains in the Phase I trial because Halliburton and Transocean have not settled with any of the parties and each wishes to prove to the court that their respective company was not at fault. The second phase of trial began in September 2013 (Phase II) and in October 2013 the evidence closed and all parties rested. The issues tried in Phase II included spill-source control and quantification of the spill for the period from April 22, 2010, until the well was capped. The Company, BP, BP p.l.c., the United States, state and local governments, Halliburton, and Transocean participated in Phase II of the trial. The judge entered an order prior to commencement of the Phase II trial excluding any evidence of Anadarko’s culpability or fault during Phase II of the trial.    


17

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

       Two separate class action complaints were filed in June and August 2010, in the U.S. District Court for the Southern District of New York (New York District Court) on behalf of purported purchasers of the Company’s stock between June 9, 2009, and June 12, 2010, against Anadarko and certain of its officers. The complaints allege causes of action arising pursuant to the Securities Exchange Act of 1934 for purported misstatements and omissions regarding, among other things, the Company’s liability related to the Deepwater Horizon events. In November 2010, the New York District Court consolidated the two cases. In March 2012, the New York District Court granted the plaintiffs’ motion to transfer venue to the U.S. District Court for the Southern District of Texas - Houston Division (Texas District Court). In May 2012, the Texas District Court granted the defendants’ motion to transfer the consolidated action within the district to Judge Keith P. Ellison. In July 2012, the plaintiffs filed their First Amended Consolidated Class Action Complaint. The defendants filed a renewed motion to dismiss in the Texas District Court in September 2012. In July 2013, the Texas District Court dismissed the claims relating to all but one of the alleged misstatements asserted in the plaintiffs’ complaint. The Texas District Court gave the plaintiffs 30 days to amend the complaint to attempt to rehabilitate the claims that were dismissed. The plaintiffs declined to amend the complaint. The Company filed its answer to the complaint in September 2013.
       In September 2010, a purported shareholder made a demand on the Company’s Board of Directors (the Board) to investigate allegations of breaches of duty by members of management related to the Deepwater Horizon events. The Board received a supplemental demand letter from the shareholder in March 2012. The Board considered each of the demand letters in January 2011 and April 2012 and determined that it would not be in the best interest of the Company to pursue the issues alleged in the demand letters. In May 2013, a shareholder derivative petition was filed in the 215th District Court of Harris County, Texas by the shareholder against Anadarko (as a nominal defendant) and certain current and former directors and officers. The petition alleges breach of fiduciary duties, unjust enrichment, abuse of control, and gross mismanagement in connection with the Deepwater Horizon events. The plaintiff seeks an unspecified amount of damages, certain changes to the Company’s governance and internal procedures, disgorgement of profits, and reimbursement of litigation fees and costs.
       Given the various stages of these matters, the Company currently cannot assess the probability of losses, or reasonably estimate a range of any potential losses, related to ongoing proceedings. The Company intends to vigorously defend itself, its officers, and its directors in each of these matters, and will avail itself of the indemnities provided by BP against civil damages.

Remaining Liability Outlook    It is reasonably possible that the Company may recognize additional Deepwater Horizon event-related liabilities for potential fines and penalties, shareholder claims, and certain other claims not covered by the indemnification provisions of the Settlement Agreement; however, the Company does not believe that any potential liability attributable to the foregoing items, individually or in the aggregate, will have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. This assessment takes into account certain qualitative factors, including the subjective and fault-based nature of CWA penalties, the Company’s indemnification by BP against certain damage claims as discussed above, BP’s creditworthiness, the merits of the shareholder claims, and directors’ and officers’ insurance coverage related to outstanding shareholder claims.
       The Company will continue to monitor the MDL and other legal proceedings discussed above as well as federal investigations related to the Deepwater Horizon events. The Company cannot predict the nature of evidence that may be discovered during the course of legal proceedings or the timing of completion of any legal proceedings.
       Although the Company is fully indemnified by BP against OPA damage claims, NRD claims and assessment costs, and certain other potential liabilities, the Company may be required to recognize a liability for these amounts in advance of or in connection with recognizing a receivable from BP for the related indemnity payment. In all circumstances, however, the Company expects that any additional indemnified liability that may be recognized by the Company will be subsequently recovered from BP itself or through the guarantees of BPCNA or BP p.l.c.
 

18

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

Tronox Litigation    In January 2009, Tronox Incorporated (Tronox), a former subsidiary of Kerr-McGee Corporation (Kerr-McGee), which is a current subsidiary of Anadarko, and certain of Tronox’s subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court). Subsequently, in May 2009, Tronox and certain of its affiliates filed a lawsuit against Anadarko and Kerr-McGee asserting a number of claims, including claims for actual and constructive fraudulent conveyance (Adversary Proceeding). Tronox alleges, among other things, that it was insolvent or undercapitalized at the time it was spun off from Kerr-McGee and seeks, among other things, to recover damages, including interest, in excess of $18.9 billion from Kerr-McGee and Anadarko, as well as litigation fees and costs. In accordance with Tronox’s Plan of Reorganization, the Adversary Proceeding is being pursued by the Anadarko Litigation Trust. Pursuant to the Anadarko Litigation Trust Agreement, the Anadarko Litigation Trust was “deemed substituted” for Tronox in the Adversary Proceeding as the party in such litigation. For purposes of this Form 10-Q, references to “Tronox” after February 2011 refer to the Anadarko Litigation Trust. For additional disclosure related to the Tronox Litigation, see Note 17—Contingencies—Tronox Litigation in the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
       The U.S. government was granted authority to intervene in the Adversary Proceeding, and in May 2009 asserted separate claims against Anadarko and Kerr-McGee under the Federal Debt Collection Procedures Act (FDCPA Complaint). Anadarko and Kerr-McGee moved to dismiss the claims of the U.S. government, but that motion has been stayed by the Bankruptcy Court. In April 2012, Anadarko and Kerr-McGee filed an answer to the FDCPA Complaint.
       In February 2012, the Company filed a motion for partial summary judgment seeking dismissal of several claims, including all actual and constructive fraudulent transfer claims protected by Section 546(e) of the Bankruptcy Code. The court has not yet ruled on that issue. Trial began in May 2012 and in September 2012, the evidence closed and both sides rested. In November 2012, the parties filed post-trial briefs and closing arguments were presented in December 2012. The parties filed final post-trial briefs in January 2013. The matter is pending before the court. To date, we have no information concerning the timing or form of decision that can be expected from the Bankruptcy Court in the Adversary Proceeding. Furthermore, Executive Benefits Insurance Agency v. Arkison, a case pending before the U.S. Supreme Court, raises certain legal issues including, but not limited to, whether affirmative consent is required for a bankruptcy court to have authority to enter a final judgment in a fraudulent transfer case. The Company is unable to determine the impact, if any, of this case on the substance or timing of a decision related to the Adversary Proceeding.
       The Company remains confident in the merits of its position and does not believe a loss resulting from litigating the Adversary Proceeding is probable. Accounting guidance requires that contingent losses be probable in nature for loss recognition to be appropriate. Accordingly, the Company’s Consolidated Balance Sheet at September 30, 2013, does not include a loss-contingency liability related to the litigation of the Adversary Proceeding.
       Although the Company does not consider a loss related to the litigation of the Adversary Proceeding to be probable, it is reasonably possible that the Company could incur a loss as a result of litigating this matter. Despite the plaintiffs’ damage claims in excess of $18.9 billion, the Company currently believes a reasonable range of potential loss is zero to $1.4 billion. The low end of the Company’s estimated range of potential loss is based on the Company’s current belief that it will more likely than not prevail in defending against the claims asserted in the Adversary Proceeding. The high end of the Company’s estimated range of potential loss represents the amount of consideration received by Kerr-McGee at the time of the Tronox spin-off, approximately $985 million, plus interest thereon.
       The Company’s estimated range of potential loss is based on the Company’s opinion regarding the current status of and likelihood of final resolution through litigation and could change as a result of developments in the Adversary Proceeding, or if the likelihood of settlement ceases to be remote. The Company’s ultimate financial obligation resulting from resolution of the Adversary Proceeding could vary, perhaps materially, from the Company’s above-stated estimated range of potential loss.


19

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

Other    During the nine months ended September 30, 2013, the Company recognized a pretax loss of $131 million, reported in other (income) expense, net in the Consolidated Statement of Income, related to the cost to decommission wells and production facilities previously sold to a third party. In June 2013, as a result of a Chapter 11 bankruptcy declaration by the third party, the U.S. Department of the Interior ordered Anadarko to perform the decommissioning of the facility and related wells. These wells and production facilities are no longer owned by the Company nor are they related to its current operations. Anadarko expects to complete decommissioning of the production facilities in 2014 and the wells in 2015. Decommissioning obligations of $44 million were included in accrued expenses and $85 million were included in other long-term liabilities on the Consolidated Balance Sheet at September 30, 2013. Actual costs may vary from this estimate; however, the Company does not believe that such variation will materially impact its consolidated financial position, results of operations, or cash flows.

13. Income Taxes

       The following summarizes income tax expense (benefit) and effective tax rates:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions except percentages
2013
 
2012
 
2013
 
2012
Income tax expense (benefit)
$
240

 
$
248

 
$
1,263

 
$
764

Effective tax rate
52
%
 
64
%
 
43
%
 
25
%

       The increase from the 35% U.S. federal statutory rate for the three and nine months ended September 30, 2013, and the three months ended September 30, 2012, was primarily attributable to the tax impact from foreign operations and Algerian exceptional profits taxes. The decrease from the 35% U.S. federal statutory rate for the nine months ended September 30, 2012, was primarily attributable to the non-taxable resolution of the Algeria exceptional profits tax dispute, partially offset by the tax impact from foreign operations and Algerian exceptional profits taxes.

14. Supplemental Cash Flow Information

       The following summarizes cash paid (received) for interest (net of amounts capitalized) and income taxes, as well as non-cash investing transactions:
 
Nine Months Ended 
 September 30,
millions
2013
 
2012
Cash paid (received)
 
 
 
Interest
$
569

 
$
613

Income taxes
$
137

 
$
(13
)
Non-cash investing activities
 
 
 
Fair value of properties and equipment received in non-cash exchange transactions
$
13

 
$
65

 
15. Segment Information

       Anadarko’s business segments are separately managed due to distinct operational differences and unique technology, distribution, and marketing requirements. The Company’s three reporting segments are oil and gas exploration and production, midstream, and marketing. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and NGLs. The midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production. The midstream reporting segment consists of two operating segments, WES and other midstream, which are aggregated into one reporting segment due to similar financial and operating characteristics. The marketing segment sells much of Anadarko’s production, as well as third-party purchased volumes.

20

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15. Segment Information (Continued)

       To assess the performance of Anadarko’s operating segments, the chief operating decision maker analyzes Adjusted EBITDAX. The Company defines Adjusted EBITDAX as income (loss) before income taxes; exploration expense; depreciation, depletion, and amortization (DD&A); impairments; interest expense; unrealized (gains) losses on derivatives, net; realized (gains) losses on interest-rate and other derivatives, net; and certain items not related to the Company’s normal operations, less net income attributable to noncontrolling interests. During the periods presented, these items included Deepwater Horizon settlement and related costs, Algeria exceptional profits tax settlement, Tronox-related contingent loss, and certain other nonoperating items included in other (income) expense, net. The Company’s definition of Adjusted EBITDAX excludes exploration expense, as it is not an indicator of operating efficiency for a given reporting period. However, exploration expense is monitored by management as part of costs incurred in exploration and development activities. Similarly, DD&A and impairments are excluded from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Anadarko’s financing methods or capital structure. Finally, unrealized (gains) losses on derivatives, net and realized (gains) losses on interest-rate and other derivatives, net are excluded from Adjusted EBITDAX because these (gains) losses are not considered a measure of asset operating performance.
       Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures, and make distributions to stockholders. Adjusted EBITDAX, as defined by Anadarko, may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income (loss) attributable to common stockholders and other performance measures, such as operating income or cash flows from operating activities. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) before income taxes:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
2013
 
2012
 
2013
 
2012
Income (loss) before income taxes
$
463

 
$
390

 
$
2,929

 
$
3,019

Exploration expense
272

 
297

 
714

 
1,662

DD&A
996

 
979

 
2,958

 
2,936

Impairments
593

 
4

 
632

 
166

Interest expense
177

 
185

 
513

 
561

Unrealized (gains) losses on derivatives, net
36

 
456

 
(359
)
 
539

Realized (gains) losses on interest-rate and other derivatives, net
—

 
—

 
—

 
2

Deepwater Horizon settlement and related costs
5

 
4

 
12

 
15

Algeria exceptional profits tax settlement
—

 
7

 
33

 
(1,797
)
Tronox-related contingent loss
—

 
—

 
—

 
(250
)
Certain other nonoperating items
(10
)
 
—

 
75

 
—

Less net income attributable to noncontrolling interests
41

 
21

 
95

 
67

Consolidated Adjusted EBITDAX
$
2,491

 
$
2,301

 
$
7,412

 
$
6,786

 

21

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15. Segment Information (Continued)

       Information presented below as “Other and Intersegment Eliminations” includes results from hard-minerals royalty arrangements and corporate, financing, and certain hedging activities. The following summarizes selected financial information for Anadarko’s reporting segments:
millions
Oil and Gas
Exploration
& Production
 
Midstream
 
Marketing
 
Other and
Intersegment
Eliminations
 
Total
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Sales revenues
$
1,916

 
$
95

 
$
1,778

 
$
—

 
$
3,789

Intersegment revenues
1,516

 
287

 
(1,629
)
 
(174
)
 
—

Gains (losses) on divestitures and other, net
7

 
—

 
—

 
57

 
64

Total revenues and other
3,439

 
382

 
149

 
(117
)
 
3,853

Operating costs and expenses (1)
930

 
216

 
164

 
(12
)
 
1,298

Realized (gains) losses on commodity
   derivatives, net
—

 
—

 
—

 
26

 
26

Other (income) expense, net (2)
—

 
—

 
—

 
(13
)
 
(13
)
Net income attributable to noncontrolling interests
—