11. 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 interest-rate changes. The fair value of the Company’s current 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 14—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 following is a summary of the Company’s derivative instruments related to natural-gas production/processing derivative activities at December 31, 2014:



	2015 Settlement
Natural Gas
Three-Way Collars (thousand MMBtu/d)	635
Average price per MMBtu
Ceiling sold price (call)	$	4.76
Floor purchased price (put)	$	3.75
Floor sold price (put)	$	2.75
Extendable Fixed-Price Contracts (thousand MMBtu/d)⁽¹⁾	170
Average price per MMBtu	$	4.17

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⁽¹⁾	The extendable fixed-price contracts have a contract term of January 2015 to December 2015 with an option for the counterparty to extend the contract term to December 2016 at the same price.

MMBtu—million British thermal units

MMBtu/d—million British thermal units 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.

In 2014, the Company terminated or offset then-existing 2015 oil three-way collars with a notional volume of 25 thousand barrels per day due to lower oil prices, resulting in a cash receipt of $126 million.

11. Derivative Instruments (Continued)

Marketing and Trading Derivative Activities The Company had financial derivative transactions with notional volumes of natural gas totaling 6 billion cubic feet (Bcf) at December 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.

Interest-Rate Derivatives Anadarko has outstanding interest-rate swap contracts to manage interest-rate risk associated with anticipated debt issuances. The Company has locked in a fixed interest rate in exchange for a floating interest rate indexed to the three-month LIBOR. These 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.

To align the interest-rate swap portfolio with anticipated future debt financing, in 2014 the Company extended the reference-period start dates from June 2014 to September 2016 and adjusted the related fixed interest rates for interest-rate swaps with an aggregate notional principal amount of $1.1 billion, and in 2012 the Company extended the reference-period start dates from October 2012 to September 2016 and adjusted the related fixed interest rates for interest-rate swap agreements with an aggregate notional principal amount of $800 million. In addition, in anticipation of the July 2014 issuance of an aggregate $1.25 billion of Senior Notes, interest-rate swap agreements with an aggregate notional principal amount of $750 million were settled in 2014, resulting in a cash payment of $222 million. Interest-rate swap agreements with an aggregate notional principal amount of $200 million were also settled in October 2012, resulting in a cash payment of $64 million.

Derivative settlements are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements are classified as cash flows from financing activities. As a result of prior extensions of reference-period start dates without settlement of the related interest-rate derivative obligations, the interest-rate derivatives in the Company’s portfolio contain an other-than-insignificant financing element and, therefore settlements related to these extended interest-rate derivatives are classified as cash flows from financing activities.

The Company had the following outstanding interest-rate swaps at December 31, 2014:



millions except percentages		Reference Period		Weighted-Average
Notional Principal Amount		Start	End	Interest Rate
$	50	September 2016	September 2026	5.91%
$	1,850	September 2016	September 2046	6.05%

11. Derivative Instruments (Continued)

Effect of Derivative Instruments—Balance Sheet The following summarizes the fair value of the Company’s derivative instruments at December 31:



millions	Gross Derivative Assets				Gross Derivative Liabilities
Balance Sheet Classification	2014		2013		2014			2013
Commodity derivatives
Other current assets	$	421	$	181	$	(118	)	$	(102	)
Other assets	1		89		—			(66		)
Accrued expenses	71		106		(114		)	(149		)
Other liabilities	—		4		(6		)	(15		)
	493		380		(238		)	(332		)
Interest-rate and other derivatives
Accrued expenses	—		—		—			(480		)
Other liabilities	—		—		(1,217		)	(174		)
	—		—		(1,217		)	(654		)
Total derivatives	$	493	$	380	$	(1,455	)	$	(986	)

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



millions
Classification of (Gain) Loss Recognized	2014			2013			2012
Commodity derivatives
Gathering, processing, and marketing sales ⁽¹⁾	$	10		$	6		$	18
(Gains) losses on derivatives, net	(589		)	141			(387		)
Interest-rate and other derivatives
(Gains) losses on derivatives, net	786			(539		)	61
Total (gains) losses on derivatives, net	$	207		$	(392	)	$	(308	)

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⁽¹⁾	Represents the effect of Marketing and Trading Derivative Activities.

11. 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 IntercontinentalExchange, Inc. 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 December 31, 2014, $289 million of the Company’s $1.455 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.

The Company’s derivative instruments are subject to individually negotiated credit provisions that may require collateral of cash or letters of credit depending on the derivative’s valuation versus negotiated credit thresholds. These credit thresholds may also require full or partial collateralization or immediate settlement of the Company’s obligations if certain credit-risk-related provisions are triggered, such as if the Company’s credit rating from major credit rating agencies declined to below investment grade. However, most of the Company’s derivative counterparties maintained secured positions at December 31, 2014, with respect to the Company’s derivative liabilities under the Company’s $5.0 billion senior secured revolving credit facility ($5.0 billion Facility). In January 2015, the Company’s $5.0 billion Facility was replaced by new unsecured facilities under which the Company’s derivative counterparties no longer maintain security interests in any of the Company’s assets. As a result, the Company may be required from time to time to post collateral of cash or letters of credit based on the negotiated terms of the individual derivative agreements. For information on the Company’s revolving credit facilities, see Note 12—Debt and Interest Expense—Anadarko Revolving Credit Facilities and Commercial Paper Program.

The aggregate fair value of unsecured derivative instruments with credit-risk-related contingent features for which a net liability position existed was $97 million (net of collateral) at December 31, 2014, and $42 million 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.

11. Derivative Instruments (Continued)

Fair Value 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 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. 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, discount factors and implied market volatility.

The following summarizes the fair value of the Company’s derivative assets and liabilities, by input level within the fair-value hierarchy:



millions	Level 1		Level 2			Level 3		Netting⁽¹⁾			Collateral			Total
December 31, 2014
Assets
Commodity derivatives
Financial institutions	$	—	$	471		$	—	$	(187	)	$	(13	)	$	271
Other counterparties	—		22			—		(2		)	—			20
Total derivative assets	$	—	$	493		$	—	$	(189	)	$	(13	)	$	291
Liabilities
Commodity derivatives
Financial institutions	$	—	$	(234	)	$	—	$	187		$	23		$	(24	)
Other counterparties	—		(4		)	—		2			—			(2		)
Interest-rate and other derivatives	—		(1,217		)	—		—			—			(1,217		)
Total derivative liabilities	$	—	$	(1,455	)	$	—	$	189		$	23		$	(1,243	)


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.