10-Q 1 apc20152q-10q.htm 10-Q APC 2015 2Q - 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 June 30, 2015
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 June 30, 2015, is shown below:

Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
508,012,188


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 
 June 30,
 
Six Months Ended 
 June 30,
millions except per-share amounts
 
2015
 
2014
 
2015
 
2014
Revenues and Other
 
 
 
 
 
 
 
 
Natural-gas sales
 
$
487

 
$
991

 
$
1,128

 
$
2,208

Oil and condensate sales
 
1,616

 
2,705

 
3,035

 
5,129

Natural-gas liquids sales
 
229

 
411

 
461

 
797

Gathering, processing, and marketing sales
 
305

 
278

 
598

 
589

Gains (losses) on divestitures and other, net
 
(1
)
 
54

 
(265
)
 
1,560

Total
 
2,636

 
4,439

 
4,957

 
10,283

Costs and Expenses
 
 
 
 
 
 
 
 
Oil and gas operating
 
226

 
273

 
522

 
586

Oil and gas transportation and other
 
289

 
281

 
650

 
547

Exploration
 
103

 
502

 
1,186

 
801

Gathering, processing, and marketing
 
255

 
250

 
509

 
502

General and administrative
 
278

 
305

 
588

 
603

Depreciation, depletion, and amortization
 
1,214

 
1,048

 
2,470

 
2,172

Other taxes
 
151

 
361

 
333

 
675

Impairments
 
30

 
117

 
2,813

 
120

Deepwater Horizon settlement and related costs
 
—

 
93

 
4

 
93

Total
 
2,546

 
3,230

 
9,075

 
6,099

Operating Income (Loss)
 
90

 
1,209

 
(4,118
)
 
4,184

Other (Income) Expense
 
 
 
 
 
 
 
 
Interest expense
 
201

 
186

 
417

 
369

(Gains) losses on derivatives, net
 
(311
)
 
323

 
(159
)
 
776

Other (income) expense, net
 
15

 
(13
)
 
62

 
(12
)
Tronox-related contingent loss
 
—

 
19

 
5

 
4,319

Total
 
(95
)
 
515

 
325

 
5,452

Income (Loss) Before Income Taxes
 
185

 
694

 
(4,443
)
 
(1,268
)
Income tax expense (benefit)
 
77

 
428

 
(1,315
)
 
1,092

Net Income (Loss)
 
108

 
266

 
(3,128
)
 
(2,360
)
Net income attributable to noncontrolling interests
 
47

 
39

 
79

 
82

Net Income (Loss) Attributable to Common Stockholders
 
$
61

 
$
227

 
$
(3,207
)
 
$
(2,442
)
 
 
 
 
 
 
 
 
 
Per Common Share
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
0.12

 
$
0.45

 
$
(6.32
)
 
$
(4.84
)
Net income (loss) attributable to common stockholders—diluted
 
$
0.12

 
$
0.45

 
$
(6.32
)
 
$
(4.84
)
Average Number of Common Shares Outstanding—Basic
 
508

 
505

 
507

 
505

Average Number of Common Shares Outstanding—Diluted
 
509

 
507

 
507

 
505

Dividends (per common share)
 
$
0.27

 
$
0.27

 
$
0.54

 
$
0.45


See accompanying Notes to Consolidated Financial Statements.

2

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2015
 
2014
 
2015
 
2014
Net Income (Loss)
 
$
108

 
$
266

 
$
(3,128
)
 
$
(2,360
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
3

 
3

 
5

 
5

Income taxes on reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
(1
)
 
(1
)
 
(2
)
 
(2
)
Total adjustments for derivative instruments, net of taxes
 
2

 
2

 
3

 
3

Adjustments for pension and other postretirement plans
 
 
 
 
 
 
 
 
Amortization of net actuarial (gain) loss to general and administrative expense
 
13

 
7

 
26

 
14

Income taxes on amortization of net actuarial (gain) loss to general and administrative expense
 
(5
)
 
(3
)
 
(9
)
 
(5
)
Amortization of net prior service (credit) cost to general and administrative expense
 
1

 
—

 
1

 
—

Total adjustments for pension and other postretirement plans, net of taxes
 
9

 
4

 
18

 
9

Total
 
11

 
6

 
21

 
12

Comprehensive Income (Loss)
 
119

 
272

 
(3,107
)
 
(2,348
)
Comprehensive income attributable to noncontrolling interests
 
47

 
39

 
79

 
82

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
72

 
$
233

 
$
(3,186
)
 
$
(2,430
)


See accompanying Notes to Consolidated Financial Statements.

3

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
millions
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
2,173

 
$
7,369

Accounts receivable (net of allowance of $6 million and $7 million)
 
 
 
 
Customers
 
1,028

 
1,118

Others
 
1,574

 
1,409

Other current assets
 
635

 
1,325

Total
 
5,410

 
11,221

Properties and Equipment
 
 
 
 
Cost
 
75,608

 
75,107

Less accumulated depreciation, depletion, and amortization
 
37,788

 
33,518

Net properties and equipment
 
37,820

 
41,589

Other Assets
 
2,474

 
2,310

Goodwill and Other Intangible Assets
 
6,420

 
6,569

Total Assets
 
$
52,124

 
$
61,689

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
3,034

 
$
3,683

Current asset retirement obligations
 
267

 
257

Accrued expenses
 
1,244

 
994

Short-term debt
 
33

 
—

Deepwater Horizon settlement and related costs
 
91

 
90

Tronox-related contingent liability
 
—

 
5,210

Total
 
4,669

 
10,234

Long-term Debt
 
16,025

 
15,092

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
7,594

 
9,249

Asset retirement obligations
 
1,714

 
1,796

Other
 
2,763

 
3,000

Total
 
12,071

 
14,045

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share (1.0 billion shares authorized, 527.7 million and 525.9 million shares issued)
 
52

 
52

Paid-in capital
 
9,169

 
9,005

Retained earnings
 
8,641

 
12,125

Treasury stock (19.7 million and 19.3 million shares)
 
(977
)
 
(940
)
Accumulated other comprehensive income (loss)
 
(496
)
 
(517
)
Total Stockholders’ Equity
 
16,389

 
19,725

Noncontrolling interests
 
2,970

 
2,593

Total Equity
 
19,359

 
22,318

Total Liabilities and Equity
 
$
52,124

 
$
61,689


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, 2014
 
$
52

 
$
9,005

 
$
12,125

 
$
(940
)
 
$
(517
)
 
$
2,593

 
$
22,318

Net income (loss)
 
—

 
—

 
(3,207
)
 
—

 
—

 
79

 
(3,128
)
Common stock issued
 
—

 
105

 
—

 
—

 
—

 
—

 
105

Dividends—common stock
 
—

 
—

 
(277
)
 
—

 
—

 
—

 
(277
)
Repurchase of common stock
 
—

 
—

 
—

 
(37
)
 
—

 
—

 
(37
)
Subsidiary equity transactions
 
—

 
59

 
—

 
—

 
—

 
85

 
144

Issuance of tangible equity units
 
—

 
—

 
—

 
—

 
—

 
348

 
348

Distributions to noncontrolling interest owners
 
—

 
—

 
—

 
—

 
—

 
(135
)
 
(135
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
—

 
—

 
—

 
—

 
3

 
—

 
3

Adjustments for pension and other postretirement plans
 
—

 
—

 
—

 
—

 
18

 
—

 
18

Balance at June 30, 2015
 
$
52

 
$
9,169

 
$
8,641

 
$
(977
)
 
$
(496
)
 
$
2,970

 
$
19,359



See accompanying Notes to Consolidated Financial Statements.

5

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended 
 June 30,
millions
 
2015
 
2014
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
(3,128
)
 
$
(2,360
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
2,470

 
2,172

Deferred income taxes
 
(1,187
)
 
188

Dry hole expense and impairments of unproved properties
 
1,040

 
609

Impairments
 
2,813

 
120

(Gains) losses on divestitures, net
 
425

 
(1,468
)
Total (gains) losses on derivatives, net
 
(158
)
 
786

Operating portion of net cash received (paid) in settlement of derivative instruments
 
172

 
(186
)
Other
 
74

 
108

Changes in assets and liabilities
 
 
 
 
Deepwater Horizon settlement and related costs
 
1

 
92

Tronox-related contingent liability
 
(5,210
)
 
4,319

(Increase) decrease in accounts receivable
 
(105
)
 
(183
)
Increase (decrease) in accounts payable and accrued expenses
 
(199
)
 
21

Other items—net
 
(269
)
 
(27
)
Net cash provided by (used in) operating activities
 
(3,261
)
 
4,191

Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment and dry hole costs
 
(3,501
)
 
(5,100
)
Acquisition of businesses
 
(3
)
 
(4
)
Divestitures of properties and equipment and other assets
 
700

 
3,286

Other—net
 
19

 
(282
)
Net cash provided by (used in) investing activities
 
(2,785
)
 
(2,100
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
4,787

 
1,077

Repayments of debt
 
(3,857
)
 
(1,255
)
Financing portion of net cash received (paid) for derivative instruments
 
(77
)
 
(222
)
Increase (decrease) in outstanding checks
 
(109
)
 
178

Dividends paid
 
(277
)
 
(230
)
Repurchase of common stock
 
(37
)
 
(35
)
Issuance of common stock, including tax benefit on share-based compensation awards
 
19

 
73

Sale of subsidiary units
 
187

 
92

Issuance of tangible equity units — equity component
 
348

 
—

Distributions to noncontrolling interest owners
 
(135
)
 
(102
)
Net cash provided by (used in) financing activities
 
849

 
(424
)
Effect of Exchange Rate Changes on Cash
 
1

 
—

Net Increase (Decrease) in Cash and Cash Equivalents
 
(5,196
)
 
1,667

Cash and Cash Equivalents at Beginning of Period
 
7,369

 
3,698

Cash and Cash Equivalents at End of Period
 
$
2,173

 
$
5,365



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, oil, condensate, natural gas liquids (NGLs), and the anticipated production of liquefied natural gas (LNG). In addition, the Company engages in the gathering, processing, treating, and transporting of natural gas, oil, and NGLs. The Company also participates in the hard-minerals business through royalty arrangements. 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 financial statements. 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 proved reserves; the value of properties and equipment; goodwill; intangible assets; asset retirement obligations; litigation liabilities; 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.

Recently Issued Accounting Standards  The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest (Subtopic 853-30)—Simplifying the Presentation of Debt Issuance Costs. This ASU will simplify the presentation of debt issuance costs by requiring such costs to be presented in the balance sheet as a reduction from the corresponding debt liability rather than as an asset. This ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective approach, with early adoption permitted. The Company does not expect the adoption to have a material impact on its consolidated financial statements.
The FASB issued ASU 2015-02, Consolidation—Amendments to the Consolidation Analysis. This ASU will simplify existing requirements by reducing the number of acceptable consolidation models and placing more emphasis on risk of loss when determining a controlling financial interest. The provisions will affect how limited partnerships and similar entities are assessed for consolidation, including the elimination of the presumption that a general partner should consolidate a limited partnership. This ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.
The FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance in Subtopic 932-605, Extractive Activities—Oil and Gas—Revenue Recognition, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This ASU is effective for annual and interim periods beginning in 2018 and is required to be adopted using one of two retrospective application methods, with early adoption permitted in 2017. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.


7

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Acquisitions, Divestitures, and Assets Held for Sale

Acquisitions  In November 2014, Western Gas Partners, LP (WES), a publicly traded consolidated subsidiary, acquired Nuevo Midstream, LLC (Nuevo) for $1.554 billion. Following the acquisition, WES changed the name of Nuevo to Delaware Basin Midstream, LLC (DBM). The acquisition constitutes a business combination and was accounted for using the acquisition method of accounting. The fair-value measurements of the assets acquired and liabilities assumed at the acquisition date were preliminary as of June 30, 2015, pending final review of certain support related to the acquired entity’s assets and liabilities. There were no material changes to the fair value of assets acquired and liabilities assumed from the amounts included on the Company’s Consolidated Balance Sheet at December 31, 2014.

Divestitures and Assets Held for Sale  For the six months ended June 30, 2015, the Company received $700 million in proceeds from divestitures and recognized net losses of $425 million primarily related to assets that were included in the oil and gas exploration and production reporting segment. The sale of certain enhanced oil recovery (EOR) assets in the Rocky Mountains Region (Rockies), with an original sales price of $703 million, closed in April 2015 for net proceeds of $686 million after closing adjustments. During the first quarter of 2015, these EOR assets satisfied criteria to be considered held for sale. These assets were remeasured to their then-current fair value using a market approach and Level 2 fair-value measurement, and the Company recognized a loss of $340 million.
During the second quarter of 2015, certain U.S. onshore oil and gas exploration and production properties and related midstream assets in East Texas satisfied criteria to be considered held for sale. These assets were remeasured to their fair value using a market approach and Level 2 fair-value measurement, and the Company recognized a loss of $97 million. Gains and losses on assets held for sale are included in gains (losses) on divestitures and other, net in the Company’s Consolidated Statements of Income. The sale of these assets is expected to close in the third quarter of 2015 for a sales price of $440 million, subject to closing adjustments. At June 30, 2015, the Company’s Consolidated Balance Sheet included long-term assets of $440 million associated with assets held for sale.

3. Inventories

The following summarizes the major classes of inventories included in other current assets:
millions
June 30,
2015
 
December 31,
2014
Oil
$
111

 
$
133

Natural gas
30

 
27

NGLs
62

 
83

Total inventories
$
203

 
$
243



8

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Impairments

The following summarizes impairments of proved properties and the related post-impairment fair values by segment:
  
Three Months Ended
 
Six Months Ended
millions
Impairment
 
Fair Value (1)
 
Impairment
 
Fair Value (1)
June 30, 2015
 
 
 
 
 
 
 
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
U.S. onshore properties
$
4

 
$
12

 
$
2,303

 
$
1,303

Gulf of Mexico properties
17

 
—

 
25

 
—

Cost-method investment (2)
1

 
32

 
1

 
32

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
8

 
199

 
484

 
202

Total
$
30

 
$
243

 
$
2,813

 
$
1,537

 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
Gulf of Mexico properties
$
115

 
$
327

 
$
115

 
$
327

Cost-method investment (2)
1

 
32

 
2

 
32

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
1

 
—

 
3

 
—

Total
$
117

 
$
359

 
$
120

 
$
359

__________________________________________________________________
(1) 
Measured as of the impairment date using the income approach and Level 3 inputs.
(2) 
Represents the after-tax net investment.

Impairments during the six months ended June 30, 2015, were primarily related to the Company’s Greater Natural Buttes oil and gas and midstream properties in the Rockies, which were impaired due to lower commodity prices. Impairments of proved properties are included in impairment expense in the Company’s Consolidated Statements of Income. During the second quarter of 2014, the Company impaired a Gulf of Mexico property due to a reduction in estimated future cash flows.
In addition to the proved property impairments above, the Company also recognized a $935 million impairment of unproved Greater Natural Buttes properties during the six months ended June 30, 2015, as a result of lower commodity prices. Impairments of unproved properties are included in exploration expense in the Company’s Consolidated Statements of Income.


9

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $1.7 billion at June 30, 2015, and $1.5 billion at December 31, 2014. The increase in suspended exploratory well costs during 2015 is primarily related to the capitalization of costs associated with exploration drilling in the Gulf of Mexico and Mozambique. Projects with suspended exploratory well costs are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development and where management 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 six months ended June 30, 2015, no exploratory well costs previously capitalized as suspended exploratory well costs for greater than one year at December 31, 2014, were charged to dry hole expense.

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).
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 10—Accumulated Other Comprehensive Income (Loss).


10

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. 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 and Intercontinental Exchange, Inc. (ICE) Brent Blend prices. The following is a summary of the Company’s derivative instruments related to oil and natural-gas production/processing derivative activities at June 30, 2015:
 
2015
Settlement
 
2016
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

 
$
—

Fixed-Price Contracts (thousand MMBtu/d)
7

 
28

Average price per MMBtu
$
2.56

 
$
3.22

Extendable Fixed-Price Contracts (thousand MMBtu/d) (1)
170

 
—

Average price per MMBtu
$
4.17

 
$
—

Oil
 
 
 
Three-Way Collars (MBbls/d)
—

 
28

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

 
$
69.29

Floor purchased price (put)
$
—

 
$
61.43

Floor sold price (put)
$
—

 
$
46.43

__________________________________________________________________
(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
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 of natural gas totaling 6 billion cubic feet at June 30, 2015 and December 31, 2014, that were entered into to mitigate commodity-price risk related to fixed-price purchase and sales contracts and storage activity.


11

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

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 London Interbank Offered Rate (LIBOR). These swap instruments currently include a provision that requires both the termination of the swaps and cash settlement in full at the start of the reference period.
Derivative settlements and collateralization are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization 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, any settlements or collateralization 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 June 30, 2015: 
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
 
6.06%

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
 
June 30,
 
December 31,
 
June 30,
 
December 31,
Balance Sheet Classification
 
2015
 
2014
 
2015
 
2014
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
238

 
$
421

 
$
(73
)
 
$
(118
)
Other assets
 
5

 
1

 
—

 
—

Accrued expenses
 
60

 
71

 
(89
)
 
(114
)
Other liabilities
 
34

 
—

 
(40
)
 
(6
)
 
 
337

 
493

 
(202
)
 
(238
)
Interest-rate derivatives
 
 
 
 
 
 
 
 
Other liabilities
 
—

 
—

 
(1,110
)
 
(1,217
)
Total derivatives
 
$
337

 
$
493

 
$
(1,312
)
 
$
(1,455
)

Effect of Derivative Instruments—Statement of Income  The following summarizes gains and losses related to derivative instruments:
millions
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Classification of (Gain) Loss Recognized
 
2015
 
2014
 
2015
 
2014
Commodity derivatives
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
1

 
$
2

 
$
1

 
$
10

(Gains) losses on derivatives, net
 
1

 
164

 
(52
)
 
379

Interest-rate derivatives
 
 
 
 
 
 
 
 
(Gains) losses on derivatives, net
 
(312
)
 
159

 
(107
)
 
397

Total (gains) losses on derivatives, net
 
$
(310
)
 
$
325

 
$
(158
)
 
$
786

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


12

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 June 30, 2015, $198 million of the Company’s $1.312 billion gross derivative liability balance, and at December 31, 2014, $289 million of the Company’s $1.455 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.
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 declines to below investment grade. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $976 million (net of collateral) at June 30, 2015, and $97 million (net of collateral) at December 31, 2014. The increase is primarily a result of derivative counterparties no longer maintaining secured positions under the Company’s credit facilities and, therefore, the derivative instruments are now subject to credit-risk-related provisions. For information on the Company’s revolving credit facilities, see Note 8—Debt and Interest Expense—Anadarko Revolving Credit Facilities and Commercial Paper Program.


13

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. 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
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
—

 
$
314

 
$
—

 
$
(163
)
 
$
(3
)
 
$
148

Other counterparties
—

 
23

 
—

 
(4
)
 
—

 
19

Total derivative assets
$
—

 
$
337

 
$
—

 
$
(167
)
 
$
(3
)
 
$
167

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
—

 
$
(192
)
 
$
—

 
$
163

 
$
—

 
$
(29
)
Other counterparties
—

 
(10
)
 
—

 
4

 
—

 
(6
)
Interest-rate derivatives
—

 
(1,110
)
 
—

 
—

 
100

 
(1,010
)
Total derivative liabilities
$
—

 
$
(1,312
)
 
$
—

 
$
167

 
$
100

 
$
(1,045
)
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
—

 
$
(47
)
Other counterparties
—

 
(4
)
 
—

 
2

 
—

 
(2
)
Interest-rate derivatives
—

 
(1,217
)
 
—

 
—

 
23

 
(1,194
)
Total derivative liabilities
$
—

 
$
(1,455
)
 
$
—

 
$
189

 
$
23

 
$
(1,243
)
 __________________________________________________________________
(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.

14

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Tangible Equity Units

In June 2015, the Company issued 9.2 million 7.50% tangible equity units (TEUs) at a stated amount of $50.00 per TEU, raising net proceeds of $446 million. Each TEU is comprised of a prepaid equity purchase contract for common units of Western Gas Equity Partners, LP (WGP), a publicly traded consolidated subsidiary, and a senior amortizing note. Subsequent to issuance, each TEU may be legally separated into the two components. The prepaid equity purchase contract is considered a freestanding financial instrument, indexed to WGP common units, and meets the conditions for equity classification.
Anadarko allocated the proceeds from the issuance of the TEUs to equity and debt based on the relative fair values of their respective components as follows:
millions, except price per TEU
Equity Component
 
Debt Component
 
Total
Price per TEU
$
39.05

 
$
10.95

 
$
50.00

Gross proceeds
359

 
101

 
460

Less issuance costs
11

 
3

 
14

Net proceeds
$
348

 
$
98

 
$
446


The prepaid equity purchase contracts were recorded in noncontrolling interests, net of issuance costs, and the senior amortizing notes were recorded in short-term debt and long-term debt on the Company’s Consolidated Balance Sheet.

Equity Component  Unless settled earlier at the holder’s option, each purchase contract has a mandatory settlement date of June 7, 2018. Anadarko has a right to elect to issue and deliver shares of Anadarko Petroleum Corporation common stock (APC shares) in lieu of delivering WGP common units at settlement. The Company will deliver WGP common units (or APC shares) on the settlement date at the settlement rate based upon the applicable market value of WGP common units (or APC shares) as follows:
 
 
Settlement Rate per Purchase Contract
Applicable Market Value of WGP Common Units (1)
 
WGP Common Units
 
APC Shares (if elected) (1)
Exceeds $69.8422 (Threshold Appreciation Price)
 
0.7159 units (Minimum Settlement Rate)
 
a number of shares equal to (a) the Minimum Settlement Rate, multiplied by the applicable market value of WGP common units, divided by (b) 98% of the applicable market value of APC shares
Less than or equal to the Threshold Appreciation Price, but greater than or equal to $58.20 (Reference Price)
 
a number of units equal to $50.00, divided by the applicable market value of WGP common units
 
a number of shares equal to $50.00, divided by 98% of the applicable market value of APC shares
Less than the Reference Price
 
0.8591 units (Maximum Settlement Rate)
 
a number of shares equal to (a) the Maximum Settlement Rate, multiplied by the applicable market value of WGP common units, divided by (b) 98% of the applicable market value of APC shares
 __________________________________________________________________
(1) 
The applicable market value is the average of the daily volume-weighted average prices of WGP common units (or APC shares) for the 20 consecutive trading days beginning on, and including, the 23rd scheduled trading day immediately preceding June 7, 2018.

The WGP common units underlying the purchase contract are currently issued and outstanding, and are owned by a wholly owned subsidiary of Anadarko. In the event Anadarko elects to settle in APC shares, the number of such shares issued and delivered upon settlement of each purchase contract is subject to adjustment and cannot exceed four shares under any circumstance (APC share cap). The above fixed settlement rates for WGP common units and the APC share cap are subject to adjustment upon the occurrence of certain specified dilutive events.

15

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Tangible Equity Units (Continued)

Debt Component Each senior amortizing note has an initial principal amount of $10.95 and bears interest at 1.50% per year. Beginning September 7, 2015, Anadarko will pay equal quarterly cash installments of $0.9375 per amortizing note (except for the September 7, 2015 installment payment, which will be $0.9063 per amortizing note). The payments will constitute a payment of interest and partial repayment of principal, with the aggregate per-year payments of principal and interest equating to a 7.50% cash payment with respect to each TEU. The senior amortizing notes have a final installment payment date of June 7, 2018, and are senior unsecured obligations of the Company.

8. Debt and Interest Expense

Debt  The Company’s outstanding debt, excluding the capital lease obligation, is senior unsecured. The following summarizes the Company’s outstanding debt:
millions
June 30,
2015
 
December 31,
2014
Total debt at face value
$
17,640

 
$
16,687

Net unamortized discounts and premiums (1)
(1,603
)
 
(1,616
)
Total borrowings
16,037

 
15,071

Capital lease obligation
21

 
21

Less short-term debt
33

 
—

Total long-term debt (2)
$
16,025

 
$
15,092

__________________________________________________________________
(1) 
Unamortized discounts and premiums are amortized over the term of the related debt.
(2) 
Includes WES debt of $2.7 billion at June 30, 2015, and $2.4 billion at December 31, 2014.

Anadarko’s Zero-Coupon Senior Notes due 2036 (Zero Coupons) can be put to the Company in October of each year, in whole or in part, for the then-accreted value, which will be $796 million at the next put date in October 2015. Anadarko’s Zero Coupons 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.

Fair Value  The Company uses a market approach to determine the 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 variable interest rates are reflective of market rates. The estimated fair value of the Company’s total borrowings was $17.9 billion at June 30, 2015, and $17.4 billion at December 31, 2014.


16

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Debt Activity  The following summarizes the Company’s debt activity during the six months ended June 30, 2015:
 
Carrying
 
 
millions
Value
 
Description
Balance at December 31, 2014
$
15,071

 
 
Issuances
494

 
WES 3.950% Senior Notes due 2025
 
101

 
Tangible Equity Units - senior amortizing notes
Borrowings
1,500

 
$5.0 billion revolving credit facility
 
1,800

 
364-Day Facility
 
280

 
WES revolving credit facility
 
592

 
Commercial paper notes, net (1)
Repayments
(1,500
)
 
$5.0 billion revolving credit facility
 
(1,800
)
 
364-Day Facility
 
(520
)
 
WES revolving credit facility
Other, net
19

 
Amortization of debt discounts and premiums
Balance at June 30, 2015
$
16,037

 
 
__________________________________________________________________
(1) 
Includes repayments of $37 million related to commercial paper notes with maturities greater than 90 days.

Anadarko Revolving Credit Facilities and Commercial Paper Program  In January 2015, upon satisfaction of certain conditions, including the settlement payment related to the Tronox Adversary Proceeding, the Company’s $5.0 billion senior secured revolving credit facility was replaced by a $3.0 billion five-year senior unsecured revolving credit facility (Five-Year Facility), which is expandable to $4.0 billion, and a $2.0 billion 364-day senior unsecured revolving credit facility (364-Day Facility). For additional information, see Note 12—Contingencies—Tronox Litigation.
Borrowings under the Five-Year and 364-Day Facilities generally bear interest under one of two rate options, at Anadarko’s election, using either LIBOR (or Euro Interbank Offered Rate in the case of borrowings under the Five-Year Facility denominated in Euro) or an alternate base rate, in each case plus an applicable margin ranging from 0.00% to 1.65% for the Five-Year Facility and 0.00% to 1.675% for the 364-Day Facility. The applicable margin will vary depending on Anadarko’s credit ratings.
The Five-Year and 364-Day Facilities contain certain customary affirmative and negative covenants, including a financial covenant requiring maintenance of a consolidated indebtedness to total capitalization ratio of no greater than 65% and limitations on certain secured indebtedness, sale-and-leaseback transactions, and mergers and other fundamental changes. At June 30, 2015, the Company had no outstanding borrowings under the Five-Year and 364-Day Facilities and was in compliance with all covenants contained therein.
During the first quarter of 2015, the Company initiated a commercial paper program, which allows a maximum of $3.0 billion of unsecured commercial paper notes and is supported by the Company’s Five-Year Facility. The maturities of the commercial paper notes vary, but may not exceed 397 days. The commercial paper notes are sold under customary terms in the commercial paper market and are issued either at a discounted price to their principal face value or will bear interest at varying interest rates on a fixed or floating basis. Such discounted price or interest amounts are dependent on market conditions and the ratings assigned to the commercial paper program by credit rating agencies at the time of issuance of the commercial paper notes. At June 30, 2015, the Company had $592 million of commercial paper notes outstanding at a weighted-average interest rate of 0.51%. Anadarko classified the outstanding commercial paper notes as long-term debt on the Company’s Consolidated Balance Sheet, as the Company currently intends to refinance these obligations at maturity with additional commercial paper notes supported by Anadarko’s Five-Year Facility.

WES Borrowings  During the second quarter of 2015, WES completed a public offering of $500 million aggregate principal amount of 3.950% Senior Notes due 2025. At June 30, 2015, WES was in compliance with all covenants contained in its five-year $1.2 billion senior unsecured revolving credit facility maturing in February 2019 (RCF), which is expandable to $1.5 billion. At June 30, 2015, WES had outstanding borrowings under its RCF of $270 million at an interest rate of 1.49%, had outstanding letters of credit of $13 million, and had available borrowing capacity of $917 million.

17

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 
 June 30,
 
Six Months Ended 
 June 30,
millions
2015
 
2014
 
2015
 
2014
Debt and other
$
244

 
$
233

 
$
498

 
$
473

Capitalized interest
(43
)
 
(47
)
 
(81
)
 
(104
)
Total interest expense
$
201

 
$
186

 
$
417

 
$
369


9. Stockholders’ Equity

The Company’s basic earnings per share (EPS) is computed based on the average number of shares of common stock outstanding for the period and includes the effect of any participating securities and TEUs as appropriate. Diluted EPS includes the effect of the Company’s outstanding stock options, restricted stock awards, restricted stock units, and TEUs, if the inclusion of these items is dilutive.
The following provides a reconciliation between basic and diluted earnings per share attributable to common stockholders:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except per-share amounts
2015
 
2014
 
2015
 
2014
Net income (loss)
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
61

 
$
227

 
$
(3,207
)
 
$
(2,442
)
Less distributions on participating securities
1

 
1

 
2

 
1

Basic
$
60

 
$
226

 
$
(3,209
)
 
$
(2,443
)
Diluted
$
60

 
$
226

 
$
(3,209
)
 
$
(2,443
)
Shares
 
 
 
 
 
 
 
Average number of common shares outstanding—basic
508

 
505

 
507

 
505

Dilutive effect of stock options
1

 
2

 
—

 
—

Average number of common shares outstanding—diluted
509

 
507

 
507

 
505

Excluded due to anti-dilutive effect
6

 
4

 
11

 
11

Net income (loss) per common share
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.45

 
$
(6.32
)
 
$
(4.84
)
Diluted
$
0.12

 
$
0.45

 
$
(6.32
)
 
$
(4.84
)

10. Accumulated Other Comprehensive Income (Loss)

The following summarizes the after-tax changes in the balances 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, 2014
$
(48
)
 
$
(469
)
 
$
(517
)
Reclassifications to Consolidated Statement of Income
3

 
18

 
21

Balance at June 30, 2015
$
(45
)
 
$
(451
)
 
$
(496
)


18

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Noncontrolling Interests

WGP, a publicly traded consolidated subsidiary, is a limited partnership that owns interests in WES. During the three months ended June 30, 2015, Anadarko sold 2.3 million WGP common units to the public, raising net proceeds of $130 million. At June 30, 2015, Anadarko’s ownership interest in WGP consisted of an 87.3% limited partner interest and the entire non-economic general partner interest. The remaining 12.7% limited partner interest in WGP was owned by the public. In June 2015, Anadarko issued 9.2 million TEUs, which include an equity component that may be settled in WGP common units. For additional disclosure of the TEU effect on noncontrolling interests, see Note 7—Tangible Equity Units.
WES, a publicly traded consolidated subsidiary, is a limited partnership that acquires, owns, develops, and operates midstream assets. During the six months ended June 30, 2015, WES issued 874 thousand common units to the public under its continuous offering program, raising net proceeds of $57 million. In 2014, WES issued 11 million Class C units to Anadarko to partially fund the acquisition of DBM. These Class C units receive distributions in the form of additional Class C units until conversion into common units at the end of 2017 unless WES elects to convert the units earlier or Anadarko extends the conversion date. During the six months ended June 30, 2015, WES distributed 164 thousand Class C units to Anadarko. At June 30, 2015, WGP’s ownership interest in WES consisted of a 34.7% limited partner interest, the entire 1.8% general partner interest, and all of the WES incentive distribution rights. At June 30, 2015, Anadarko also owned an 8.3% limited partner interest in WES through other subsidiaries’ ownership of common and Class C units. The remaining 55.2% limited partner interest in WES was owned by the public.

12. Contingencies

Litigation  The following is a discussion of any material developments in previously reported contingencies and any other material matters that have arisen since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Tronox Litigation  On April 3, 2014, Anadarko and Kerr-McGee Corporation and certain of its subsidiaries entered into a settlement agreement to resolve all claims asserted by Tronox Incorporated (Tronox) and certain of its affiliates, including claims for actual and constructive fraudulent conveyance (Adversary Proceeding), for $5.15 billion. In addition, the Company agreed to pay interest on that amount from April 3, 2014, through the payment of the settlement. In January 2015, the Company paid $5.2 billion after the settlement agreement became effective. For additional disclosure of the Tronox Adversary Proceeding, see Note 17—Contingencies—Tronox Litigation in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Anadarko recognized Tronox-related contingent losses of $850 million in the fourth quarter of 2013 and $4.3 billion in the first quarter of 2014. In addition, Anadarko recognized settlement-related interest expense, included in Tronox-related contingent loss in the Company’s Consolidated Statement of Income, of $60 million during the year ended December 31, 2014, and $5 million during the first quarter of 2015. For information on the tax effects of the settlement agreement, see Note 13—Income Taxes.

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, resulting in an oil spill. 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 all claims and damages arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and assessment costs, and any claims arising under the Operating Agreement with BP. 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 penalties and fines, 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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.


19

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

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 for the Eastern District of Louisiana in New Orleans, Louisiana (Louisiana District Court) against several parties, including the Company, 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 was affirmed in June 2014 by the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit). In March 2015, Anadarko filed a petition for a writ of certiorari with the U.S. Supreme Court appealing the Fifth Circuit’s decision, which was denied in June 2015. The declaratory judgment addresses liability only, and does not address the amount of any civil penalty. The assessment of a civil penalty against Anadarko will be determined by the Louisiana District Court upon its ruling in the penalty phase of trial discussed below under Civil Litigation Damage Claims.
Applicable accounting guidance requires the Company to accrue a liability if it is probable that a liability has been 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 liability arising from the future assessment of a civil penalty against Anadarko is probable. In an effort to resolve this matter, the Company made a settlement offer to the DOJ in July 2014 of $90 million and recorded a contingent liability for this amount at June 30, 2014. The Company subsequently engaged in further discussions regarding settlement, but the parties have not been able to reach agreement on either the amount of, or the terms and conditions governing, a settlement. The Company’s settlement offer of $90 million remains outstanding and the Company remains open to resolving the matter through settlement discussions. The Company believes that $90 million under a settlement scenario is a better estimate of loss at this time than any other amount. Based on the above accounting guidance, the Company’s contingent liability for CWA penalties and fines remains $90 million at June 30, 2015. However, the Company may ultimately incur a liability related to CWA penalties in excess of the current accrued liability.
The actual amount of a CWA penalty is subject to uncertainty, including whether the Company will be able to reach a settlement with the DOJ or will await the Louisiana District Court’s opinion in the penalty phase trial. The CWA sets forth subjective criteria to be considered by the court in assessing the magnitude of any CWA penalty: economic benefit to the violator; degree of culpability; seriousness of the violation; the nature, extent, and degree of success of any efforts to minimize or mitigate the effects of the discharge; prior history of violations; other penalties for the same incident; economic impact of the penalty on the violator; and other matters as justice may require. For the Phase I and II trials (defined in Civil Litigation Damage Claims below) and again for the penalty phase trial in January 2015, the Louisiana District Court ruled that no evidence of Anadarko’s alleged culpability or fault could be presented. In addition, in its Phase I Findings of Fact and Conclusions of Law (Phase I Findings and Conclusions), the Louisiana District Court did not allocate any fault to Anadarko. Given the subjective nature of the CWA criteria used to determine penalty assessments and the Louisiana District Court’s prior rulings related to culpability and allocation of fault, the Company currently cannot reasonably estimate the amount of any such penalty to be assessed or determine a reasonable range of potential loss if the matter is resolved by the Louisiana District Court following trial. Furthermore, BP’s July 2015 announcement of a settlement agreement in principle with the DOJ and the five Gulf states (Texas, Louisiana, Mississippi, Alabama, and Florida) regarding essentially all of the outstanding claims against BP related to the Deepwater Horizon event, including $5.5 billion to resolve CWA penalties, does not affect the Company’s current conclusion concerning its ability to estimate potential fines and penalties. The Company lacks insight into that settlement, which has yet to be finalized, retains legal counsel separate from BP, and was not involved in any manner with respect to that settlement. In addition, the consent decree covering the terms and conditions of BP’s announced settlement has yet to be disclosed.
Although the Company currently cannot reasonably estimate the amount of any such penalty to be assessed or determine a reasonable range of potential loss, the Company believes the following factors should limit the magnitude of any CWA penalties assessed:
•
the Company’s lack of direct operational involvement in the event as a non-operator,
•
the Louisiana District Court’s rulings excluding any evidence of Anadarko’s alleged culpability or fault, and
•
the Phase I Findings and Conclusions that did not allocate any fault to Anadarko.
In addition, the Company is not aware that any court has ever assessed a substantial CWA penalty against a party who has been found by a court to bear no fault for a spill.

20

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

Events or factors that could assist the Company in estimating the amount of settlement or potential civil penalty or a range of potential loss related to such penalty include a ruling by the Louisiana District Court or substantive settlement negotiations between the Company and the DOJ.
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 appealed, or 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. It is unclear whether these appeals will be dismissed as part of BP’s announced settlement. If any such appeal proceeds and is successful, state and/or local laws and regulations could become sources of penalties or fines against the Company.

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.
The first phase of the trial in the MDL (Phase I) commenced in February 2013. The issues tried in Phase I included the cause of the blowout and all related events leading up to April 22, 2010, the date the Deepwater Horizon sank, as well as allocation of fault. In September 2014, the Louisiana District Court issued its Phase I Findings and Conclusions. The Louisiana District Court found that BP and BP America Production Company (BPAP), Transocean Ltd. (Transocean), and Halliburton Energy Services, Inc. (Halliburton), but not Anadarko, are each liable under general maritime law for the blowout, explosion, and oil spill. The court determined that BP’s and BPAP’s conduct was reckless and that both Transocean’s and Halliburton’s conduct was negligent. The Louisiana District Court apportioned 67% of the fault to BP and BPAP, 30% to Transocean, and 3% to Halliburton. No fault was allocated to Anadarko. The plaintiffs and BP have appealed the Phase I Findings and Conclusions.
The second phase of trial (Phase II) began in September 2013. The issues tried in Phase II included spill-source control and quantification of the spill for the period from April 20, 2010, until the well was capped. In January 2015, the Louisiana District Court issued its Phase II Findings of Fact and Conclusions of Law (Phase II Findings and Conclusions). The Louisiana District Court found that, for purposes of calculating the maximum possible civil penalty under the CWA, 3.19 million barrels of oil were discharged into the Gulf of Mexico. The United States has appealed the Phase II Findings and Conclusions.
The penalty phase of the trial began in January 2015. In March 2014, the Louisiana District Court ruled that no evidence of Anadarko’s alleged culpability or fault could be presented during the penalty phase trial. The parties rested their case in February 2015, post-trial briefing concluded in April 2015, and the matter is pending before the Louisiana District Court. The trial included Anadarko, BP, and the United States, and will assess findings and penalties under the CWA.

Remaining Liability Outlook  In addition to the assessment of civil penalties under the CWA discussed above, it is possible that the Company may recognize additional Deepwater Horizon event-related liabilities for potential fines and penalties and certain other claims not covered by the indemnification provisions of the Settlement Agreement.
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.
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 additional evidence that may be discovered during the course of legal proceedings or the timing of completion of any legal proceedings.


21

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Contingencies (Continued)

Other Litigation  In December 2008, Anadarko sold its interest in the Peregrino heavy-oil field offshore Brazil. The Company is currently litigating a dispute with the Brazilian tax authorities regarding the tax rate applicable to the transaction. In August 2013, following a determination by an administrative court in a related matter that the amount of tax in dispute was not calculated properly, the Company filed a petition requesting the withdrawal of a portion of the judicial deposit to the extent it exceeds the amount of tax currently in dispute, and any interest on such amount. In April 2015, the Company’s petition was denied. For additional disclosure on this matter, see Note 17—Contingencies—Other Litigation in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The Company believes that it will more likely than not prevail in Brazilian courts. Therefore, no tax liability has been recorded for Peregrino divestiture-related litigation at June 30, 2015.

13. Income Taxes

The following summarizes income tax expense (benefit) and effective tax rates:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
2015
 
2014
 
2015
 
2014
Income tax expense (benefit)
$
77

 
$
428

 
$
(1,315
)
 
$
1,092

Income (loss) before income taxes
185

 
694

 
(4,443
)
 
(1,268
)
Effective tax rate
42
%
 
62
%
 
30
%
 
(86
)%

The increase from the 35% U.S. federal statutory rate for the three months ended June 30, 2015 and 2014, was primarily attributable to the tax impact from foreign operations and Algerian exceptional profits taxes. The increase from the 35% U.S. federal statutory rate for the three months ended June 30, 2014, was also attributable to net changes in uncertain tax positions and the non-deductible contingent CWA-penalty accrual.
The Company reported a loss before income taxes for the six months ended June 30, 2015 and 2014. As a result, items that ordinarily increase or decrease the tax rate will have the opposite effect. The decrease from the 35% U.S. federal statutory rate for the six months ended June 30, 2015, was primarily attributable to Algerian exceptional profits taxes and the tax impact from foreign operations. The decrease from the 35% U.S. federal statutory rate for the six months ended June 30, 2014, was primarily attributable to net changes in uncertain tax positions related to the settlement agreement associated with the Tronox Adversary Proceeding, the tax impact from foreign operations, Algerian exceptional profits taxes, and the non-deductible contingent CWA-penalty accrual.
At June 30, 2015, the Company had recorded a $577 million tax benefit related to the Tronox settlement. This benefit was net of a $1.3 billion uncertain tax position due to the uncertainty related to the deductibility of the settlement payment. The Company is a participant in the U.S. Internal Revenue Service’s (IRS) Compliance Assurance Process and has regular discussions with the IRS concerning the Company’s tax positions. Depending on the outcome of such discussions, it is reasonably possible that the amount of the uncertain tax position related to the settlement could change, perhaps materially. See Note 12—Contingencies—Tronox Litigation.
At June 30, 2015, the Company’s Consolidated Balance Sheet included $675 million of income taxes receivable presented in accounts receivable—others and $289 million of accrued income taxes presented in accrued expenses.


22

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14. Supplemental Cash Flow Information

The following summarizes cash paid (received) for interest and income taxes, as well as non-cash investing and financing activities:
 
Six Months Ended 
 June 30,
millions
2015
 
2014
Cash paid (received)
 
 
 
Interest, net of amounts capitalized (1)
$
1,621

 
$
342

Income taxes, net of refunds
6

 
655

Non-cash investing activities
 
 
 
Fair value of properties and equipment from non-cash transactions
$
126

 
$
5

Asset retirement cost additions
90

 
122

Accruals of property, plant, and equipment
901

 
1,344

Net liabilities assumed (divested) in acquisitions and divestitures
(29
)
 
(32
)
Non-cash investing and financing activities
 
 
 
Floating production, storage, and offloading vessel construction period obligation
$
43

 
$
53

__________________________________________________________________
(1) 
Includes $1.2 billion of interest related to the Tronox settlement payment in 2015.

23

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, oil, condensate, and NGLs, and plans for the development and operation of the Company’s LNG project in Mozambique. 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 oil, natural-gas, and NGLs production, as well as third-party purchased volumes.
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; total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives; and certain items not related to the Company’s normal operations, less net income attributable to noncontrolling interests. During the periods presented, items not related to the Company’s normal operations included Deepwater Horizon settlement and related costs, 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. Total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives are excluded from Adjusted EBITDAX because these (gains) losses are not considered a measure of asset operating performance. Finally, net income attributable to noncontrolling interests is excluded from the Company’s measure of Adjusted EBITDAX because it represents earnings that are not attributable to the Company’s common stockholders.
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 
 June 30,
 
Six Months Ended 
 June 30,
millions
2015
 
2014
 
2015
 
2014
Income (loss) before income taxes
$
185

 
$
694

 
$
(4,443
)
 
$
(1,268
)
Exploration expense
103

 
502

 
1,186

 
801

DD&A
1,214

 
1,048

 
2,470

 
2,172

Impairments
30

 
117

 
2,813

 
120

Interest expense
201

 
186

 
417

 
369

Total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives
(229
)
 
237

 
14

 
600

Deepwater Horizon settlement and related costs
—

 
93

 
4

 
93

Tronox-related contingent loss
—

 
19

 
5

 
4,319

Certain other nonoperating items
—

 
—

 
22

 
—

Less net income attributable to noncontrolling interests
47

 
39

 
79

 
82

Consolidated Adjusted EBITDAX
$
1,457

 
$
2,857

 
$
2,409

 
$
7,124


24

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15. Segment Information (Continued)

Information presented below as “Other and Intersegment Eliminations” includes corporate costs, results from hard-minerals royalties, and net cash from settlement of commodity derivatives. 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 June 30, 2015
 
 
 
 
 
 
 
 
 
Sales revenues
$
1,356

 
$
191

 
$
1,090

 
$
—

 
$
2,637

Intersegment revenues
885

 
303

 
(954
)
 
(234
)
 
—

Gains (losses) on divestitures and other, net
(95
)
 
3

 
—

 
91

 
(1
)
Total revenues and other
2,146

 
497

 
136

 
(143
)
 
2,636

Operating costs and expenses (1)
832

 
234

 
192

 
(59
)
 
1,199

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(82
)
 
(82
)
Other (income) expense, net (2)
—

 
—

 
—

 
15

 
15

Net income attributable to noncontrolling interests
—

 
47

 
—

 
—

 
47

Total expenses and other
832

 
281

 
192

 
(126
)
 
1,179

Total (gains) losses on derivatives, net included in marketing revenue, less net cash from settlement
—

 
—

 
—

 
—

 
—

Adjusted EBITDAX
$
1,314

 
$
216

 
$
(56
)
 
$
(17
)
 
$
1,457

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Sales revenues
$
2,223

 
$
119

 
$
2,043

 
$
—

 
$
4,385

Intersegment revenues
1,790

 
326

 
(1,906
)
 
(210
)
 
—

Gains (losses) on divestitures and other, net
10

 
(1
)
 
—

 
45

 
54

Total revenues and other
4,023

 
444

 
137

 
(165
)
 
4,439

Operating costs and expenses (1)
<