6. 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).

6. Derivative Instruments (Continued)

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, gains and losses associated with derivative instruments are recognized currently in earnings. Net derivative losses attributable to 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 9—Accumulated Other Comprehensive Income (Loss).

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 and IntercontinentalExchange, Inc. (ICE) Brent Blend prices. The following is a summary of the Company’s derivative instruments related to its Oil and Natural-Gas Production/Processing Activities at March 31, 2014:



	2014 Settlement		2015 Settlement
Natural Gas
Three-Way Collars (thousand MMBtu/d)	600		635
Average price per MMBtu
Ceiling sold price (call)	$	5.01	$	4.76
Floor purchased price (put)	$	3.75	$	3.75
Floor sold price (put)	$	2.75	$	2.75
Fixed-Price Contracts (thousand MMBtu/d)	600		—
Average price per MMBtu	$	4.26	$	—
Extendable Fixed-Price Contracts (thousand MMBtu/d) ⁽¹⁾	400		—
Average price per MMBtu	$	4.19	$	—
Crude Oil
Fixed-Price Contracts (MBbls/d)	107		—
Average price per barrel	$	100.58	$	—

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⁽¹⁾	The extendable fixed-price contracts have a remaining contract term of April 2014 to June 2014 with an option to extend the contract term to December 2014 at the same price.

MMBtu—million British thermal units

MMBtu/d—million British thermal units per day

MBbls/d—thousand barrels per day

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.

Marketing and Trading Derivative Activities The Company had financial derivative transactions with notional volumes totaling 1 billion cubic feet (Bcf) of natural gas at March 31, 2014, and 16 Bcf at December 31, 2013, that were entered into to mitigate commodity-price risk related to fixed-price purchase and sales contracts and storage activity.

6. Derivative Instruments (Continued)

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 (LIBOR). 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 March 31, 2014:



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	March 31,		December 31,		March 31,			December 31,
Balance Sheet Classification	2014		2013		2014			2013
Commodity derivatives
Other current assets	$	40	$	181	$	(15	)	$	(102	)
Other assets	23		89		(9		)	(66		)
Accrued expenses	52		106		(166		)	(149		)
Other liabilities	1		4		(3		)	(15		)
	116		380		(193		)	(332		)
Interest-rate and other derivatives
Accrued expenses	—		—		(628		)	(480		)
Other liabilities	—		—		(264		)	(174		)
	—		—		(892		)	(654		)
Total derivatives	$	116	$	380	$	(1,085	)	$	(986	)

Effect of Derivative Instruments—Statement of Income The following summarizes gains and losses related to derivative instruments:



millions	Three Months Ended March 31,
Classification of (Gain) Loss Recognized	2014		2013
Commodity derivatives
Gathering, processing, and marketing sales ⁽¹⁾	$	8	$	8
(Gains) losses on derivatives, net	215		283
Interest-rate and other derivatives
(Gains) losses on derivatives, net	238		(92		)
Total (gains) losses on derivatives, net	$	461	$	199

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

6. Derivative Instruments (Continued)

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 gains and 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 March 31, 2014, $73 million of the Company’s $1.1 billion gross derivative liability balance, and at December 31, 2013, $76 million of the Company’s $986 million 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 maturing in September 2015 ($5.0 billion Facility).

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 $77 million (net of collateral) at March 31, 2014, and $42 million (net of collateral) at December 31, 2013. 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.

6. Derivative Instruments (Continued)

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
March 31, 2014	Level 1		Level 2			Level 3		Netting ⁽¹⁾			Collateral		Total
Assets
Commodity derivatives
Financial institutions	$	—	$	90		$	—	$	(73	)	$	—	$	17
Other counterparties	—		26			—		(4		)	—		22
Total derivative assets	$	—	$	116		$	—	$	(77	)	$	—	$	39
Liabilities
Commodity derivatives
Financial institutions	$	—	$	(171	)	$	—	$	73		$	13	$	(85	)
Other counterparties	—		(22		)	—		4			—		(18		)
Interest-rate and other derivatives	—		(892		)	—		—			—		(892		)
Total derivative liabilities	$	—	$	(1,085	)	$	—	$	77		$	13	$	(995	)

December 31, 2013
Assets
Commodity derivatives
Financial institutions	$	—	$	211		$	—	$	(153	)	$	—	$	58
Other counterparties	—		169			—		(126		)	—		43
Total derivative assets	$	—	$	380		$	—	$	(279	)	$	—	$	101
Liabilities
Commodity derivatives
Financial institutions	$	—	$	(200	)	$	—	$	153		$	7	$	(40	)
Other counterparties	—		(132		)	—		126			—		(6		)
Interest-rate and other derivatives	—		(654		)	—		—			—		(654		)
Total derivative liabilities	$	—	$	(986	)	$	—	$	279		$	7	$	(700	)

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⁽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.