10-Q 1 apc20161q-10q.htm 10-Q 10-Q

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 March 31, 2016
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)
 
(Zip Code)
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  ☒    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  ☒    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  ☒    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  ☒
The number of shares outstanding of the Company’s common stock at April 19, 2016, is shown below:
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
510,426,628


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 
 March 31,
millions except per-share amounts
 
2016
 
2015
Revenues and Other
 
 
 
 
Oil and condensate sales
 
$
850

 
$
1,419

Natural-gas sales
 
366

 
641

Natural-gas liquids sales
 
178

 
232

Gathering, processing, and marketing sales
 
240

 
293

Gains (losses) on divestitures and other, net
 
40

 
(264
)
Total
 
1,674

 
2,321

Costs and Expenses
 
 
 
 
Oil and gas operating
 
208

 
296

Oil and gas transportation
 
242

 
305

Exploration
 
126

 
1,083

Gathering, processing, and marketing
 
215

 
254

General and administrative
 
449

 
307

Depreciation, depletion, and amortization
 
1,149

 
1,256

Other taxes
 
117

 
182

Impairments
 
16

 
2,783

Other operating expense
 
16

 
63

Total
 
2,538

 
6,529

Operating Income (Loss)
 
(864
)
 
(4,208
)
Other (Income) Expense
 
 
 
 
Interest expense
 
220

 
216

(Gains) losses on derivatives, net
 
297

 
152

Other (income) expense, net
 
—

 
47

Tronox-related contingent loss
 
—

 
5

Total
 
517

 
420

Income (Loss) Before Income Taxes
 
(1,381
)
 
(4,628
)
Income tax expense (benefit)
 
(383
)
 
(1,392
)
Net Income (Loss)
 
(998
)
 
(3,236
)
Net income (loss) attributable to noncontrolling interests
 
36

 
32

Net Income (Loss) Attributable to Common Stockholders
 
$
(1,034
)
 
$
(3,268
)
 
 
 
 
 
Per Common Share
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
(2.03
)
 
$
(6.45
)
Net income (loss) attributable to common stockholders—diluted
 
$
(2.03
)
 
$
(6.45
)
Average Number of Common Shares Outstanding—Basic
 
509

 
507

Average Number of Common Shares Outstanding—Diluted
 
509

 
507

Dividends (per common share)
 
$
0.05

 
$
0.27


See accompanying Notes to Consolidated Financial Statements.

2

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 March 31,
millions
 
2016
 
2015
Net Income (Loss)
 
$
(998
)
 
$
(3,236
)
Other Comprehensive Income (Loss)
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on
derivatives, net
 
3

 
2

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

 
1

Adjustments for pension and other postretirement plans
 
 
 
 
Net gain (loss) incurred during period
 
(166
)
 
—

Income taxes on net gain (loss) incurred during period
 
61

 
—

Prior service credit (cost) incurred during period
 
(1
)
 
—

Income taxes on prior service credit (cost) incurred during period
 
1

 
—

Amortization of net actuarial (gain) loss to general and administrative expense
 
8

 
13

Income taxes on amortization of net actuarial (gain) loss to general and
administrative expense
 
(3
)
 
(4
)
Amortization of net prior service (credit) cost to general and administrative expense
 
(15
)
 
—

Income taxes on amortization of net prior service (credit) cost to general and administrative expense
 
5

 
—

Total adjustments for pension and other postretirement plans, net of taxes
 
(110
)
 
9

Total
 
(108
)
 
10

Comprehensive Income (Loss)
 
(1,106
)
 
(3,226
)
Comprehensive income (loss) attributable to noncontrolling interests
 
36

 
32

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
(1,142
)
 
$
(3,258
)


See accompanying Notes to Consolidated Financial Statements.

3

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
millions
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents ($111 and $100 related to VIEs)
 
$
2,947

 
$
939

Accounts receivable (net of allowance of $12 and $11)
 
 
 
 
Customers ($47 and $81 related to VIEs)
 
633

 
652

Others ($81 and $84 related to VIEs)
 
1,759

 
1,817

Other current assets
 
428

 
573

Total
 
5,767

 
3,981

Properties and Equipment
 
 
 
 
Cost
 
71,541

 
70,683

Less accumulated depreciation, depletion, and amortization
 
38,015

 
36,932

Net properties and equipment ($4,940 and $4,859 related to VIEs)
 
33,526

 
33,751

Other Assets ($624 and $644 related to VIEs)
 
2,304

 
2,268

Goodwill and Other Intangible Assets ($1,244 and $1,220 related to VIEs)
 
6,325

 
6,331

Total Assets
 
$
47,922

 
$
46,331

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable ($183 and $179 related to VIEs)
 
$
2,505

 
$
2,850

Current asset retirement obligations
 
297

 
309

Interest payable
 
158

 
247

Other taxes payable ($28 and $18 related to VIEs)
 
339

 
318

Accrued expenses
 
333

 
424

Short-term debt
 
3,025

 
32

Total
 
6,657

 
4,180

Long-term Debt
 
15,726

 
15,636

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
4,940

 
5,400

Asset retirement obligations ($131 and $127 related to VIEs)
 
1,760

 
1,750

Other
 
4,138

 
3,908

Total
 
10,838

 
11,058

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share (1.0 billion shares authorized, 531.1 million and 528.3 million shares issued)
 
53

 
52

Paid-in capital
 
9,328

 
9,265

Retained earnings
 
3,821

 
4,880

Treasury stock (20.7 million and 20.0 million shares)
 
(1,025
)
 
(995
)
Accumulated other comprehensive income (loss)
 
(491
)
 
(383
)
Total Stockholders’ Equity
 
11,686

 
12,819

Noncontrolling interests
 
3,015

 
2,638

Total Equity
 
14,701

 
15,457

Total Liabilities and Equity
 
$
47,922

 
$
46,331

__________________________________________________________________
Parenthetical references on this statement provide March 31, 2016 amounts followed by December 31, 2015 amounts.

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, 2015
 
$
52

 
$
9,265

 
$
4,880

 
$
(995
)
 
$
(383
)
 
$
2,638

 
$
15,457

Net income (loss)
 
—

 
—

 
(1,034
)
 
—

 
—

 
36

 
(998
)
Common stock issued
 
1

 
62

 
—

 
—

 
—

 
—

 
63

Dividends—common stock
 
—

 
—

 
(25
)
 
—

 
—

 
—

 
(25
)
Repurchase of common stock
 
—

 
—

 
—

 
(30
)
 
—

 
—

 
(30
)
Subsidiary equity transactions
 
—

 
1

 
—

 
—

 
—

 
419

 
420

Distributions to noncontrolling interest owners
 
—

 
—

 
—

 
—

 
—

 
(78
)
 
(78
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
—

 
—

 
—

 
—

 
2

 
—

 
2

Adjustments for pension and other postretirement plans
 
—

 
—

 
—

 
—

 
(110
)
 
—

 
(110
)
Balance at March 31, 2016
 
$
53

 
$
9,328

 
$
3,821

 
$
(1,025
)
 
$
(491
)
 
$
3,015

 
$
14,701



See accompanying Notes to Consolidated Financial Statements.

5

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended 
 March 31,
millions
 
2016
 
2015
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
(998
)
 
$
(3,236
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
1,149

 
1,256

Deferred income taxes
 
(413
)
 
(1,198
)
Dry hole expense and impairments of unproved properties
 
35

 
1,009

Impairments
 
16

 
2,783

(Gains) losses on divestitures, net
 
(2
)
 
334

Total (gains) losses on derivatives, net
 
299

 
152

Operating portion of net cash received (paid) in settlement of derivative instruments
 
105

 
91

Other
 
115

 
45

Changes in assets and liabilities
 
 
 
 
Tronox-related contingent liability
 
—

 
(5,210
)
(Increase) decrease in accounts receivable
 
46

 
357

Increase (decrease) in accounts payable and accrued expenses
 
(403
)
 
(279
)
Other items, net
 
(86
)
 
(608
)
Net cash provided by (used in) operating activities
 
(137
)
 
(4,504
)
Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment and dry hole costs
 
(1,022
)
 
(1,957
)
Divestitures of properties and equipment and other assets
 
35

 
22

Other, net
 
14

 
10

Net cash provided by (used in) investing activities
 
(973
)
 
(1,925
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
4,682

 
4,583

Repayments of debt
 
(1,608
)
 
(2,830
)
Financing portion of net cash received (paid) for derivative instruments
 
(555
)
 
(146
)
Increase (decrease) in outstanding checks
 
(150
)
 
(39
)
Dividends paid
 
(25
)
 
(139
)
Repurchase of common stock
 
(30
)
 
(36
)
Issuance of common stock, including tax benefit on share-based compensation awards
 
30

 
12

Sale of subsidiary units
 
440

 
31

Distributions to noncontrolling interest owners
 
(78
)
 
(67
)
Proceeds from conveyance of future hard minerals royalty revenues, net of transaction costs
 
413

 
—

Net cash provided by (used in) financing activities
 
3,119

 
1,369

Effect of Exchange Rate Changes on Cash
 
(1
)
 
(1
)
Net Increase (Decrease) in Cash and Cash Equivalents
 
2,008

 
(5,061
)
Cash and Cash Equivalents at Beginning of Period
 
939

 
7,369

Cash and Cash Equivalents at End of Period
 
$
2,947

 
$
2,308



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 oil, condensate, natural gas, and natural gas liquids (NGLs), and in the marketing of anticipated production of liquefied natural gas (LNG). In addition, the Company engages in the gathering, processing, treating, and transporting of oil, condensate, natural gas, 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 Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP). The Consolidated Financial Statements include the accounts of Anadarko and subsidiaries in which Anadarko holds, directly or indirectly, more than 50% of the voting rights and variable interest entities (VIEs) for which Anadarko is the primary beneficiary. All intercompany transactions have been eliminated. Undivided interests in oil and natural-gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in non-controlled entities over which Anadarko has the ability to exercise significant influence over operating and financial policies and VIEs for which Anadarko is not the primary beneficiary are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost, and subsequently adjusted for the Company’s proportionate share of earnings, losses, and distributions. Other investments are carried at original cost. Investments accounted for using the equity method and cost method are reported as a component of other assets. Certain prior-period amounts have been reclassified to conform to the current-year presentation.

Use of Estimates  The preparation of financial statements in accordance with GAAP 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 835-30)—Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30)—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASUs require capitalized debt issuance costs, except for those related to revolving credit facilities, to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than as an asset. The Company adopted these ASUs on January 1, 2016, using a retrospective approach. The adoption resulted in a reclassification that reduced other current assets and short-term debt by $1 million and reduced other assets and long-term debt by $82 million on the Company’s Consolidated Balance Sheet at December 31, 2015.
The FASB issued ASU 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis. The Company adopted this ASU on January 1, 2016. In accordance with the new ASU, Western Gas Equity Partners, LP (WGP) and Western Gas Partners, LP (WES), publicly traded consolidated subsidiaries of the Company, are considered VIEs for which the Company is the primary beneficiary. Prior to adoption of the ASU, WGP and WES were consolidated by the Company under the voting interest model and, after adoption, the Company will continue to consolidate WGP and WES under the variable interest model. While this ASU requires additional financial statement disclosure, it has no impact on the Company’s consolidated results of operations, cash flows, or financial position. See Note 17—Variable Interest Entities.

7

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

The FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU will simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual and interim periods beginning in 2017 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 2016-02, Leases (Topic 842). This ASU requires the lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet and disclose key information about their leasing transactions. This ASU is effective for annual and interim periods beginning in 2019. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.
The FASB issued ASU 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). This ASU amends existing requirements on the classification and measurement of financial instruments. Changes to the current requirements primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This ASU is effective for annual periods beginning in 2018 with early adoption of certain provisions 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 (Topic 606), ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and ASU 2016-10, Revenues from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which supersede 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 require 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. The Company is required to adopt the new standards in the first quarter of 2018 using one of two retrospective application methods. The Company is continuing to evaluate the provisions of these ASUs, and has not determined the impact these standards may have on its consolidated financial statements and related disclosures or decided upon the method of adoption.

2. Inventories

The following summarizes the major classes of inventories included in other current assets:
millions
March 31,
2016
 
December 31,
2015
Oil
$
96

 
$
116

Natural gas
25

 
36

NGLs
67

 
64

Total inventories
$
188

 
$
216


3. Assets Held for Sale

Certain U.S. onshore assets in East Texas/Louisiana included in the oil and gas exploration and production reporting segment satisfied criteria to be considered held for sale during the first quarter of 2016. The sale of these assets closed in April 2016 for a sales price of $107 million, subject to closing adjustments. At March 31, 2016, the balances of assets and liabilities associated with assets held for sale were not material.


8

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Impairments

Impairments of long-lived assets are included in impairment expense in the Company’s Consolidated Statements of Income. The following summarizes impairments of long-lived assets and the related post-impairment fair values by segment:
  
Three Months Ended
millions
Impairment
 
Fair Value (1)
March 31, 2016
 
 
 
Oil and gas exploration and production
 
 
 
Long-lived assets held for use
 
 
 
U.S. onshore properties
$
4

 
$
585

Gulf of Mexico properties
1

 
—

Cost-method investment (2)
1

 
32

Midstream
 
 
 
Long-lived assets held for use
10

 
3

Total
$
16

 
$
620

 
 
 
 
March 31, 2015
 
 
 
Oil and gas exploration and production
 
 
 
Long-lived assets held for use
 
 
 
U.S. onshore properties
$
2,307

 
$
1,299

Midstream
 
 
 
Long-lived assets held for use
476

 
206

Total
$
2,783

 
$
1,505

__________________________________________________________________
(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 first quarter of 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 forecasted commodity prices.
In addition to the long-lived asset impairments above, the Company recognized a $935 million impairment of unproved Greater Natural Buttes properties during the first quarter of 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.

Potential for Future Impairments  During 2015, the Company recognized significant impairments of proved oil and gas and midstream properties and impairments of unproved oil and gas properties, primarily as a result of lower forecasted commodity prices and related changes to the Company’s drilling plans. While commodity prices continued to decline during the first quarter of 2016, the Company did not recognize any material impairments. At March 31, 2016, the Company’s estimate of undiscounted future cash flows attributable to a certain depletion group with a net book value of approximately $2.1 billion indicated that the carrying amount was expected to be recovered; however, this depletion group may be at risk for impairment if the estimates of future cash flows decline. The Company estimates that, if this depletion group becomes impaired in a future period, the Company could recognize non-cash impairments in that period in excess of $1.0 billion. It is also reasonably possible that prolonged low or further declines in commodity prices, changes to the Company’s drilling plans in response to lower prices, or increases in drilling or operating costs could result in additional impairments.

 


9

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $1.1 billion at March 31, 2016, and December 31, 2015. During the three months ended March 31, 2016, suspended exploratory well costs previously capitalized for a period greater than one year since the completion of drilling at December 31, 2015, charged to exploration expense were not material. 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.

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 Cushing, Oklahoma or Sullom Voe, Scotland for oil and Henry Hub, Louisiana for natural gas. 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 15—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 oil prices listed below are a combination of New York Mercantile Exchange (NYMEX) West Texas Intermediate and Intercontinental Exchange, Inc. (ICE) Brent Blend prices. The natural-gas prices listed below are NYMEX Henry Hub prices. The NGLs prices listed below are Oil Price Information Services prices. The following is a summary of the Company’s derivative instruments related to oil and natural-gas production/processing derivative activities at March 31, 2016:
 
2016 Settlement
Oil
 
Three-Way Collars (MBbls/d)
83

Average price per barrel
 
Ceiling sold price (call)
$
63.82

Floor purchased price (put)
$
54.46

Floor sold price (put)
$
42.77

Natural Gas
 
Fixed-Price Contracts (thousand MMBtu/d)
43

Average price per MMBtu
$
2.24

NGLs
 
Fixed-Price Contracts (MBbls/d)
4

Average price per barrel
$
12.93

__________________________________________________________________
MBbls/d—thousand barrels per day
MMBtu/d—million British thermal units per day
MMBtu—million British thermal units

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 4 billion cubic feet (Bcf) at March 31, 2016, and 8 Bcf at December 31, 2015, 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). The Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.25 billion of its $2.0 billion 6.375% Senior Notes due September 2017 in April 2016 pursuant to a tender offer and to redeem the $1.750 billion 5.950% Senior Notes due September 2016 in May 2016. The outstanding interest-rate swaps with a notional amount of $1.7 billion due prior to or at September 2021 will manage interest-rate risk associated with the potential refinancing of the Company’s $900 million Senior Notes due 2019 and the Zero-Coupon Senior Notes due 2036 (Zero Coupons), should the Zero Coupons be put to the Company prior to the swap termination dates. At the next put date in October 2016, the accreted value of the Zero Coupons will be $839 million. See Note 8—Debt and Interest Expense. Depending on market conditions, liability-management actions, or other factors, the Company may enter into offsetting interest-rate swap positions, or settle or amend, certain or all of the currently outstanding interest-rate swaps. 
In February 2016, in exchange for amended terms with certain counterparties, the Company modified the mandatory termination dates from 2021 to 2018 and, in some cases, the related fixed interest rates on interest-rate swaps with an aggregate notional principal amount of $500 million. Additionally, an interest-rate swap agreement was settled in March 2016, resulting in a cash payment of $193 million.
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 March 31, 2016: 
millions except percentages
 
 
 
Mandatory
 
Weighted-Average
Notional Principal Amount
 
Reference Period
 
Termination Date
 
Interest Rate
$
50

 
 
September 2016 – 2026
 
September 2016
 
5.910%
$
50

 
 
September 2016 – 2046
 
September 2016
 
6.290%
$
500

 
 
September 2016 – 2046
 
September 2018
 
6.559%
$
300

 
 
September 2016 – 2046
 
September 2020
 
6.509%
$
450

 
 
September 2017 – 2047
 
September 2018
 
6.445%
$
100

 
 
September 2017 – 2047
 
September 2020
 
6.891%
$
250

 
 
September 2017 – 2047
 
September 2021
 
6.570%


12

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

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
 
2016
 
2015
 
2016
 
2015
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
322

 
$
462

 
$
(116
)
 
$
(177
)
Other assets
 
7

 
8

 
—

 
—

Accrued expenses
 
—

 
—

 
(2
)
 
(3
)
 
 
329

 
470

 
(118
)
 
(180
)
Interest-rate derivatives
 
 
 
 
 
 
 
 
Other current assets
 
2

 
2

 
—

 
—

Other assets
 
20

 
54

 
—

 
—

Accrued expenses
 
—

 
—

 
(90
)
 
(54
)
Other liabilities
 
—

 
—

 
(1,550
)
 
(1,488
)
 
 
22

 
56

 
(1,640
)
 
(1,542
)
Total derivatives
 
$
351

 
$
526

 
$
(1,758
)
 
$
(1,722
)

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
 
2016
 
2015
Commodity derivatives
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
2

 
$
—

(Gains) losses on derivatives, net
 
(28
)
 
(53
)
Interest-rate derivatives
 
 
 
 
(Gains) losses on derivatives, net
 
325

 
205

Total (gains) losses on derivatives, net
 
$
299

 
$
152

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


13

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 the 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, 2016, $238 million of the Company’s $1.758 billion gross derivative liability balance, and at December 31, 2015, $347 million of the Company’s $1.722 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 portfolio 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 a level that is below investment grade. In February 2016, Moody’s Investors Service (Moody’s) downgraded the Company’s long-term debt credit rating from “Baa2” to “Ba1,” which is below investment grade. The downgrade triggered credit-risk-related features with certain derivative counterparties and required the Company to post collateral under its derivative instruments. The amount of cash posted as collateral pursuant to the contractual requirements applicable to derivative instruments with financial institutions was $420 million at March 31, 2016, and $58 million at December 31, 2015. No counterparties have requested termination or full settlement of derivative positions. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $1.1 billion (net of collateral) at March 31, 2016, and $1.3 billion (net of collateral) at December 31, 2015.


14

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Fair Value  Fair value of futures contracts is based on unadjusted 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 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
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
1

 
$
328

 
$
—

 
$
(116
)
 
$
(1
)
 
$
212

Interest-rate derivatives
—

 
22

 
—

 
—

 
—

 
22

Total derivative assets
$
1

 
$
350

 
$
—

 
$
(116
)
 
$
(1
)
 
$
234

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
—

 
$
(118
)
 
$
—

 
$
116

 
$
—

 
$
(2
)
Interest-rate derivatives
—

 
(1,640
)
 
—

 
—

 
421

 
(1,219
)
Total derivative liabilities
$
—

 
$
(1,758
)
 
$
—

 
$
116

 
$
421

 
$
(1,221
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
10

 
$
460

 
$
—

 
$
(178
)
 
$
(8
)
 
$
284

Interest-rate derivatives
—

 
56

 
—

 
—

 
—

 
56

Total derivative assets
$
10

 
$
516

 
$
—

 
$
(178
)
 
$
(8
)
 
$
340

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
(1
)
 
$
(179
)
 
$
—

 
$
178

 
$
—

 
$
(2
)
Interest-rate derivatives
—

 
(1,542
)
 
—

 
—

 
58

 
(1,484
)
Total derivative liabilities
$
(1
)
 
$
(1,721
)
 
$
—

 
$
178

 
$
58

 
$
(1,486
)
 __________________________________________________________________
(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.

15

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 and raised net proceeds of $445 million. Each TEU is comprised of a prepaid equity purchase contract for common units of WGP 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. 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 Sheets.

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 not more than 0.8591 WGP common units and not less than 0.7159 WGP common units (or a computed number of APC shares) per TEU on the settlement date, subject to adjustment, at the settlement rate based upon the applicable market value of WGP common units (or APC shares).

Debt Component Each senior amortizing note has an initial principal amount of $10.95 and bears interest at 1.50% per year. On September 7, 2015, Anadarko began paying equal quarterly cash installments of $0.9375 per amortizing note (except for the September 7, 2015 installment payment, which was $0.9063 per amortizing note). The payments 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 Activity  The following summarizes the Company’s debt activity, after eliminating the effect of intercompany transactions, during the three months ended March 31, 2016:
 
Carrying Value
 
 
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Anadarko Consolidated
 
Description
Balance at December 31, 2015
$
2,691

 
$
—

 
$
12,957

 
$
15,648

 
 
Issuances
—

 
—

 
794

 
794

 
4.850% Senior Notes due 2021
 
—

 
—

 
1,088

 
1,088

 
5.550% Senior Notes due 2026
 
—

 
—

 
1,088

 
1,088

 
6.600% Senior Notes due 2046
Borrowings
—

 
—

 
1,350

 
1,350

 
364-Day Facility
 
330

 
—

 
—

 
330

 
WES RCF
 
—

 
28

 
—

 
28

 
WGP RCF
Repayments
—

 
—

 
(1,350
)
 
(1,350
)
 
364-Day Facility
 
—

 
—

 
(250
)
 
(250
)
 
Commercial paper notes, net
 
—

 
—

 
(8
)
 
(8
)
 
TEUs - senior amortizing notes
Other, net
—

 
—

 
13

 
13

 
Amortization of discounts, premiums, and debt issuance costs
Balance at March 31, 2016
$
3,021

 
$
28

 
$
15,682

 
$
18,731

 
 
__________________________________________________________________
(1) 
Excludes WES.
(2) 
Excludes WES and WGP.



16

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Debt  The Company’s outstanding debt, excluding the capital lease obligation and any borrowings under the WGP revolving credit facility, is senior unsecured. The following summarizes the Company’s outstanding debt after eliminating the effect of intercompany transactions:
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Anadarko Consolidated
March 31, 2016
 
 
 
 
 
 
 
Total borrowings at face value
$
3,050

 
$
28

 
$
17,333

 
$
20,411

Net unamortized discounts, premiums, and debt issuance costs (3)
(29
)
 
—

 
(1,651
)
 
(1,680
)
Total borrowings
3,021

 
28

 
15,682

 
18,731

Capital lease obligation
—

 
—

 
20

 
20

Less short-term debt
—

 
—

 
3,025

 
3,025

Total long-term debt
$
3,021

 
$
28

 
$
12,677

 
$
15,726

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Total borrowings at face value
$
2,720

 
$
—

 
$
14,592

 
$
17,312

Net unamortized discounts, premiums, and debt issuance costs (3)
(29
)
 
—

 
(1,635
)
 
(1,664
)
Total borrowings
2,691

 
—

 
12,957

 
15,648

Capital lease obligation
—

 
—

 
20

 
20

Less short-term debt
—

 
—

 
32

 
32

Total long-term debt
$
2,691

 
$
—

 
$
12,945

 
$
15,636

__________________________________________________________________
(1) 
Excludes WES.
(2) 
Excludes WES and WGP.
(3) 
Unamortized discounts, premiums, and debt issuance costs are amortized over the term of the related debt. Debt issuance costs related to revolving credit facilities are included in other current assets and other assets on the Company’s Consolidated Balance Sheets.

Anadarko’s $1.750 billion 5.950% Senior Notes due September 2016 and $1.25 billion of the Company’s $2.0 billion 6.375% Senior Notes due September 2017 were classified as short-term debt on the Company’s Consolidated Balance Sheet at March 31, 2016. The Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.25 billion of its $2.0 billion Senior Notes in April 2016 pursuant to a tender offer and to redeem the $1.750 billion Senior Notes in May 2016.
Anadarko’s 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 $839 million at the next put date in October 2016. Anadarko’s Zero Coupons were classified as long-term debt on the Company’s Consolidated Balance Sheet at March 31, 2016, as the Company has the ability and intent to refinance these obligations using long-term debt, should the put be exercised.

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 interest rates are variable and reflective of market rates. The estimated fair value of the Company’s total borrowings was $18.9 billion at March 31, 2016, and $15.7 billion at December 31, 2015.


17

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Anadarko Revolving Credit Facilities and Commercial Paper Program  Anadarko has a $3.0 billion five-year senior unsecured revolving credit facility maturing in January 2021 (Five-Year Facility). In addition, in January 2016 the Company replaced its previous $2.0 billion 364-day senior unsecured revolving credit facility with a new $2.0 billion 364-day senior unsecured revolving credit facility (364-Day Facility), on identical terms, that will mature in January 2017. At March 31, 2016, the Company had no outstanding borrowings under the Five-Year Facility or the 364-Day Facility and was in compliance with all covenants contained therein.
In January 2015, the Company initiated a commercial paper program, which allows for a maximum of $3.0 billion of unsecured commercial paper notes and is supported by the Five-Year Facility. The maturities of the commercial paper notes may vary, but may not exceed 397 days. In February 2016, Moody’s downgraded the Company’s commercial paper program credit rating, which essentially eliminated the Company’s access to the commercial paper market. As a result, the Company has not issued commercial paper notes since the downgrade. At March 31, 2016, the Company had no outstanding borrowings under the commercial paper program.

WES and WGP Borrowings  At March 31, 2016, WES was in compliance with all covenants contained in its five-year $1.2 billion senior unsecured revolving credit facility maturing in February 2019 (WES RCF), which is expandable to $1.5 billion. At March 31, 2016, WES had outstanding borrowings under its RCF of $630 million at an interest rate of 1.74%, had outstanding letters of credit of $5 million, and had available borrowing capacity of $565 million.
In March 2016, WGP entered into a three-year $250 million senior secured revolving credit facility maturing in March 2019 (WGP RCF), which is expandable to $500 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions. Obligations under the WGP RCF are secured by a first priority lien on all of WGP’s assets (not including the consolidated assets of WES), as well as all equity interests owned by WGP. Borrowings under the WGP RCF bear interest at LIBOR (with a floor of 0%), plus applicable margins ranging from 2.00% to 2.75% depending on WGP’s consolidated leverage ratio, or at a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.00%, in each case plus applicable margins ranging from 1.00% to 1.75% based upon WGP’s consolidated leverage ratio. At March 31, 2016, WGP was in compliance with all covenants contained in its RCF, had outstanding borrowings under its RCF of $28 million at an interest rate of 2.69%, and had available borrowing capacity of $222 million.

Interest Expense  The following summarizes interest expense:
 
Three Months Ended 
 March 31,
millions
2016
 
2015
Debt and other
$
258

 
$
254

Capitalized interest
(38
)
 
(38
)
Total interest expense
$
220

 
$
216



18

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Income Taxes

The following summarizes income tax expense (benefit) and effective tax rates:
 
Three Months Ended 
 March 31,
millions except percentages
2016
 
2015
Income tax expense (benefit)
$
(383
)
 
$
(1,392
)
Income (loss) before income taxes
(1,381
)
 
(4,628
)
Effective tax rate
28
%
 
30
%

The Company reported a loss before income taxes for the three months ended March 31, 2016 and 2015. 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 three months ended March 31, 2016 and 2015, was primarily attributable to non-deductible Algerian exceptional profits tax for Algerian income tax purposes, the tax impact from foreign operations, and net changes in uncertain tax positions.
At March 31, 2016, the Company’s Consolidated Balance Sheet included $1.1 billion of income taxes receivable presented in accounts receivable—others.

10. Conveyance of Future Hard Minerals Royalty Revenues

During the first quarter of 2016, the Company conveyed a limited-term nonparticipating royalty interest in certain of its coal and trona leases to a third party for $413 million, net of transaction costs. Such conveyance entitles the third party to receive up to $553 million in future royalty revenue over a period of not less than 10 years and not greater than 15 years. Additionally, such third party is entitled to receive 3% of the aggregate royalties earned during the first 10 years between $800 million and $900 million and 4% of the aggregate royalties earned during the first 10 years that exceed $900 million. Generally, such third party relies solely on the royalty payments to recover its investment and, as such, has the risk of the royalties not being sufficient to recover its investment over the term of the conveyance.
Proceeds from this transaction have been accounted for as deferred revenues and are included in accrued expenses and other long-term liabilities on the Company’s Consolidated Balance Sheet. The deferred revenues will be amortized to other revenues, included in gains (losses) on divestitures and other, net on a unit-of-revenue basis over the term of the agreement. During the first quarter of 2016, the Company amortized $12 million of deferred revenues as a result of this agreement. Proceeds from the transaction and payments to the third party are reported in financing activities in the Company’s Consolidated Statement of Cash Flows.
The third party will receive the first payment for royalties in September 2016. The specified future amounts that the third party expects to receive and the payment timing are subject to change based upon the actual royalties received by the Company during the term of the conveyance. The following summarizes the future amounts, prior to the 3% to 4% of any excess described above, that the third party expects to receive:
millions
 
2016
$
25

2017
50

2018
50

2019
52

2020
56

Later years
320

Total
$
553



19

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. 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, 2015.

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.
Numerous Deepwater Horizon event-related civil lawsuits were filed against BP and other parties, including the Company. Generally, the plaintiffs sought actual damages, punitive damages, declaratory judgment, and/or injunctive relief. This litigation was consolidated into a federal Multidistrict Litigation (MDL) action pending before Judge Carl Barbier in the U.S. District Court for the Eastern District of Louisiana in New Orleans, Louisiana (Louisiana District Court).

BP Consent Decree In July 2015, BP announced a settlement agreement in principle with the U.S. Department of Justice (DOJ) and certain states and local government entities regarding essentially all of the outstanding claims against BP related to the Deepwater Horizon event (BP Settlement) and, in October 2015, lodged a proposed consent decree with the Louisiana District Court. In April 2016, the Louisiana District Court approved the consent decree. As a result of the BP Settlement and approval of the consent decree, all liability relating to OPA-related environmental costs was resolved and all NRD claims and claims by the United States and the Gulf states impacted by the event relating to the MDL action were dismissed. For any remaining claims relating to the MDL action, the Company is fully indemnified by BP against any losses pursuant to the Settlement Agreement. For additional disclosure related to the Deepwater Horizon events, see Note 15—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, 2015.

Penalties and Fines  In December 2010, the DOJ, on behalf of the United States, filed a civil lawsuit in the 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. After previously finding that Anadarko, as a nonoperating investor in the Macondo well, was not culpable with respect to the Deepwater Horizon events, the Louisiana District Court found Anadarko liable for civil penalties under Section 311 of the CWA as a working-interest owner in the Macondo well and entered a judgment of $159.5 million in December 2015. Neither party appealed the decision and the Company paid the penalty in the first quarter of 2016.


20

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Restructuring Charges

In the first quarter of 2016, the Company initiated a workforce reduction program to align the size and composition of Anadarko’s workforce with the Company’s expected future operating and capital plans. Employee notifications related to the workforce reduction program were substantially complete by March 31, 2016, and all restructuring charges will be recognized in 2016, with the exception of $10 million of expense for retirement benefits expected to be recognized in the first quarter of 2017. The following summarizes the total expected restructuring charges and the amounts expensed during the first quarter of 2016, which were included in general and administrative expenses in the Company’s Consolidated Statement of Income:
millions
Total Expected Costs
 
Three Months Ended March 31, 2016
Costs by category
 
 
 
Cash severance
$
154

 
$
131

Retirement benefits (1)
203

 
49

Share-based compensation
32

 
23

Total
$
389

 
$
203

__________________________________________________________________
(1) 
Includes termination benefits, curtailments, and settlements. There were no settlements recognized during the three months ended March 31, 2016. See Note 13—Pension Plans and Other Postretirement Benefits.

The following summarizes the changes in the cash severance-related liability included in accounts payable on the Company’s Consolidated Balance Sheet:
millions
2016
Balance at January 1
$
—

Accruals
131

Payments
(79
)
Balance at March 31
$
52



21

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

13. Pension Plans and Other Postretirement Benefits

The Company has contributory and non-contributory defined-benefit pension plans, which include both qualified and supplemental plans. The Company also provides certain health care and life insurance benefits for certain retired employees. Retiree health care benefits are funded by contributions from the retiree and, in certain circumstances, contributions from the Company. The Company’s retiree life insurance plan is noncontributory. The following summarizes the Company’s pension and other postretirement benefit cost:
 
Pension Benefits
 
Other Benefits
millions
2016
 
2015
 
2016
 
2015
Three Months Ended March 31
 
 
 
 
 
 
 
Service cost
$
26

 
$
30

 
$
1

 
$
3

Interest cost
26

 
25

 
3

 
4

Expected return on plan assets
(27
)
 
(27
)
 
—

 
—

Amortization of net actuarial loss (gain)
8

 
13

 
—

 
—

Amortization of net prior service cost (credit)
—

 
—

 
(6
)
 
—

Termination benefits expense
44

 
—

 
—

 
—

Curtailment expense
8

 
—

 
(3
)
 
—

Net periodic benefit cost
$
85

 
$
41

 
$
(5
)
 
$
7


In the first quarter of 2016, the Company initiated a workforce reduction program that resulted in a remeasurement of its pension and other postretirement benefit obligations. The Company recognized curtailment expense for both the curtailment-related increase in the benefit obligation and a proportionate share of prior service cost from other comprehensive income (loss). The Company also recognized termination benefits expense related to benefit enhancements to certain employees affected by the workforce reduction program. In addition, the remeasurement resulted in increases in the benefit obligation of $146 million for the pension benefit plans and $26 million for the other postretirement benefit plans, with a corresponding decrease in other comprehensive income.
The Company expects to contribute an additional $82 million in 2016 and $23 million in 2017 to unfunded pension plans related to the workforce reduction program. See Note 12—Restructuring Charges.


22

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14. 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, TEUs, and WES Series A Preferred units, 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 
 March 31,
millions except per-share amounts
2016
 
2015
Net income (loss)
 
 
 
Net income (loss) attributable to common stockholders
$
(1,034
)
 
$
(3,268
)
Income (loss) effect of TEUs
(1
)
 
—

Less distributions on participating securities
—

 
1

Basic
$
(1,035
)
 
$
(3,269
)
Diluted
$
(1,035
)
 
$
(3,269
)
Shares
 
 
 
Average number of common shares outstanding—basic
509

 
507

Average number of common shares outstanding—diluted
509

 
507

Excluded due to anti-dilutive effect
10

 
11

Net income (loss) per common share
 
 
 
Basic
$
(2.03
)
 
$
(6.45
)
Diluted
$
(2.03
)
 
$
(6.45
)

23

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15. 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, 2015
$
(42
)
 
$
(341
)
 
$
(383
)
Other comprehensive income (loss), before reclassifications
—

 
(105
)
 
(105
)
Reclassifications to Consolidated Statement of Income
2

 
(5
)
 
(3
)
Balance at March 31, 2016
$
(40
)
 
$
(451
)
 
$
(491
)

16. Noncontrolling Interests

WGP, a publicly traded consolidated subsidiary, is a limited partnership formed by Anadarko to own partnership interests in WES. At March 31, 2016, 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.
WES, a publicly traded consolidated subsidiary, is a limited partnership formed by Anadarko to acquire, own, develop, and operate midstream assets. During the three months ended March 31, 2016, WES issued 14 million Series A Preferred units to private investors and raised net proceeds of $440 million, and issued 1.3 million common units to the Company. Proceeds were used to acquire interests in Springfield Pipeline LLC from the Company. In April 2016, WES issued an additional eight million Series A Preferred units to private investors, pursuant to the full exercise of an option granted in connection with the initial issuance, and raised net proceeds of $248 million.
Class C units issued to Anadarko will receive quarterly distributions in the form of additional Class C units until the end of 2017, unless WES elects to convert the units to common units earlier or Anadarko elects to extend the conversion date. WES distributed 324 thousand Class C units to Anadarko during the three months ended March 31, 2016, and 498 thousand Class C units to Anadarko during 2015. During 2015, WES issued approximately 874 thousand common units to the public and raised net proceeds of $57 million.
At March 31, 2016, WGP’s ownership interest in WES consisted of a 31.5% limited partner interest, the entire 1.6% general partner interest, and all of the WES incentive distribution rights. At March 31, 2016, Anadarko also owned an 8.7% limited partner interest in WES through other subsidiaries’ ownership of common and Class C units. The remaining 58.2% limited partner interest in WES was owned by the public.


24

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

17. Variable Interest Entities

Consolidated VIEs The Company determined that the partners in WGP and WES with equity at risk lack the power, through voting rights or similar rights, to direct the activities that most significantly impact WGP’s and WES’s economic performance; therefore, WGP and WES are considered VIEs. Anadarko, through its ownership of the general partner interest in WGP, has the power to direct the activities that most significantly affect economic performance and the obligation to absorb losses or the right to receive benefits that could be potentially significant to WGP and WES, therefore Anadarko is considered the primary beneficiary and consolidates WGP and WES. See Note 16—Noncontrolling Interests for additional information on WGP and WES.

Assets and Liabilities of VIEs The assets of WGP and WES cannot be used by Anadarko for general corporate purposes and are both included in and disclosed parenthetically on the Company’s Consolidated Balance Sheets. The carrying amounts of liabilities related to WGP and WES for which the creditors do not have recourse to other assets of the Company are both included in and disclosed parenthetically on the Company’s Consolidated Balance Sheets.
All outstanding debt for WES at March 31, 2016, and December 31, 2015, including any borrowings under the WES RCF, is recourse to WES’s general partner, which in turn has been indemnified in certain circumstances by certain wholly owned subsidiaries of the Company for such liabilities. All outstanding debt for WGP at March 31, 2016, and December 31, 2015, including any borrowings under the WGP RCF, is recourse to WGP’s general partner, which is a wholly owned subsidiary of the Company. See Note 8—Debt and Interest Expense for additional information on WGP and WES long-term debt balances.

VIE Financing WGP’s sources of liquidity include borrowings under its RCF and distributions from WES. WES’s sources of liquidity include cash and cash equivalents, cash flows generated from operations, interest income from a note receivable from Anadarko as discussed below, borrowings under its RCF, the issuance of additional partnership units, or debt offerings. See Note 8—Debt and Interest Expense and Note 16—Noncontrolling Interests for additional information on WGP and WES financing activity.

Financial Support Provided to VIEs Concurrent with the closing of its May 2008 initial public offering, WES loaned the Company $260 million in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly. The related interest income for WES was $4 million for the three months ended March 31, 2016 and 2015. The note receivable and related interest income is eliminated in consolidation.
In March 2015, WES acquired the Company’s interest in Delaware Basin JV Gathering LLC. The acquisition was financed using a deferred purchase price obligation which requires a cash payment from WES to the Company due on March 31, 2020. The net present value of this obligation was $193 million at March 31, 2016, and $189 million at December 31, 2015.
In order to reduce WES’s exposure to a majority of the commodity-price risk inherent in certain of their contracts, Anadarko has commodity price swap agreements in place with WES expiring in 2016. WES has recorded a capital contribution from Anadarko in its Consolidated Statement of Equity and Partners’ Capital for the amount by which the swap price exceeds the applicable market price. WES recorded a $4 million capital contribution from Anadarko for the three months ended March 31, 2016, and a capital contribution of zero for the three months ended March 31, 2015.


25

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

18. Supplemental Cash Flow Information

The following summarizes cash paid (received) for interest and income taxes, as well as non-cash investing and financing activities:
 
Three Months Ended 
 March 31,
millions
2016
 
2015
Cash paid (received)
 
 
 
Interest, net of amounts capitalized (1)
$
299

 
$
1,532

Income taxes, net of refunds
(8
)
 
(5
)
Non-cash investing activities
 
 
 
Fair value of properties and equipment from non-cash transactions
$
—

 
$
54

Asset retirement cost additions
27

 
63

Accruals of property, plant, and equipment
623

 
1,080

Net liabilities assumed (divested) in acquisitions and divestitures
—

 
19

Non-cash investing and financing activities
 
 
 
Floating production, storage, and offloading vessel construction period obligation
$
2

 
$
25

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

26

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

19. 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 oil, condensate, natural gas, 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, condensate, 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; gains (losses) on divestitures, net; 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 (loss) attributable to noncontrolling interests. During the periods presented, items not related to the Company’s normal operations included restructuring charges related to the workforce reduction program included in general and administrative expenses, other operating expenses such as 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 gains (losses) on divestitures, net and exploration expense as they are not indicators 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 (loss) 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 
 March 31,
millions
2016
 
2015
Income (loss) before income taxes
$
(1,381
)
 
$
(4,628
)
(Gains) losses on divestitures, net
(2
)
 
334

Exploration expense
126

 
1,083

DD&A
1,149

 
1,256

Impairments
16

 
2,783

Interest expense
220

 
216

Total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives
404

 
243

Restructuring charges
203

 
—

Other operating expense
1

 
4

Tronox-related contingent loss
—

 
5

Certain other nonoperating items
—

 
22

Less net income (loss) attributable to noncontrolling interests
36

 
32

Consolidated Adjusted EBITDAX
$
700

 
$
1,286


27

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

19. 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 March 31, 2016
 
 
 
 
 
 
 
 
 
Sales revenues
$
711

 
$
125

 
$
798

 
$
—

 
$
1,634

Intersegment revenues
601

 
302

 
(663
)
 
(240
)
 
—

Other
—

 
—

 
—

 
38

 
38

Total revenues and other (1)
1,312

 
427

 
135

 
(202
)
 
1,672

Operating costs and expenses (2)
773

 
183

 
176

 
(89
)
 
1,043

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(103
)
 
(103
)
Other (income) expense, net
—

 
—

 
—

 
—

 
—

Net income (loss) attributable to noncontrolling interests
—

 
36

 
—

 
—

 
36

Total expenses and other
773

 
219

 
176

 
(192
)
 
976

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

 
—

 
4

 
—

 
4

Adjusted EBITDAX
$
539

 
$
208

 
$
(37
)
 
$
(10
)
 
$
700

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
Sales revenues
$
1,070

 
$
174

 
$
1,341

 
$
—

 
$
2,585

Intersegment revenues
1,117

 
302

 
(1,191
)
 
(228
)
 
—

Other
—

 
—

 
—

 
70

 
70

Total revenues and other (1)
2,187

 
476

 
150

 
(158
)
 
2,655

Operating costs and expenses (2)
1,002

 
240

 
198

 
(37
)
 
1,403

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(90
)
 
(90
)
Other (income) expense, net (3)
—

 
—

 
—

 
25

 
25

Net income (loss) attributable to noncontrolling interests
—

 
32

 
—

 
—

 
32

Total expenses and other
1,002

 
272

 
198

 
(102
)
 
1,370

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

 
—

 
1

 
—

 
1

Adjusted EBITDAX
$
1,185

 
$
204

 
$
(47
)
 
$
(56
)
 
$
1,286

 __________________________________________________________________
(1) 
Total revenues and other excludes gains (losses) on divestitures, net since these gains and losses are excluded from Adjusted EBITDAX.
(2) 
Operating costs and expenses excludes exploration expense, DD&A, impairments, restructuring charges, and other operating expense since these expenses are excluded from Adjusted EBITDAX.
(3) 
Other (income) expense, net excludes certain other nonoperating items since these items are excluded from Adjusted EBITDAX.

28

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

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. The Company has made in this Form 10-Q, and may from time to time make in other public filings, press releases, and management discussions, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning the Company’s operations, economic performance, and financial condition. These forward-looking statements include, among other things, information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, marketing and midstream activities, and also include those statements preceded by, followed by, or that otherwise include the words “may,” “could,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should,” “would,” “will,” “potential,” “continue,” “forecast,” “future,” “likely,” “outlook,” or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will be realized. Anadarko undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

These forward-looking statements involve risk and uncertainties. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the following risks and uncertainties:

•
the Company’s assumptions about energy markets
•
production and sales volume levels
•
levels of oil, natural-gas, and natural-gas liquids (NGLs) reserves
•
operating results
•
competitive conditions
•
technology
•
availability of capital resources, levels of capital expenditures, and other contractual obligations
•
supply and demand for, the price of, and the commercialization and transporting of oil, natural gas, NGLs, and other products or services
•
volatility in the commodity-futures market
•
weather
•
inflation
•
availability of goods and services, including unexpected changes in costs
•
drilling risks
•
processing volumes and pipeline throughput
•
general economic conditions, nationally, internationally, or in the jurisdictions in which the Company is, or in the future may be, doing business
•
the Company’s inability to timely obtain or maintain permits or other governmental approvals, including those necessary for drilling and/or development projects
•
legislative or regulatory changes, including changes relating to hydraulic fracturing; retroactive royalty or production tax regimes; deepwater drilling and permitting regulations; derivatives reform; changes in state, federal, and foreign income taxes; environmental regulation; environmental risks; and liability under federal, state, foreign, and local environmental laws and regulations
•
civil or political unrest or acts of terrorism in a region or country
•
the creditworthiness and performance of the Company’s counterparties, including financial institutions, operating partners, and other parties

29

•
volatility in the securities, capital, or credit markets and related risks such as general credit, liquidity, and interest-rate risk
•
the Company’s ability to successfully monetize select assets, repay or refinance its debt, and the impact of changes in the Company’s credit ratings