10-Q 1 apc20173q-10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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  þ    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  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The number of shares outstanding of the Company’s common stock at October 20, 2017, is shown below:
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
547,157,557


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


COMMONLY USED TERMS AND DEFINITIONS
Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. In addition, the following company or industry-specific terms and abbreviations are used throughout this report:
364-Day Facility - Anadarko’s $2.0 billion 364-day senior unsecured RCF maturing in January 2018
APC RCF - Anadarko’s $3.0 billion senior unsecured RCF maturing in January 2021
ASR Agreement - Anadarko’s accelerated share-repurchase agreement with an investment bank to repurchase the Company’s common stock
ASU - Accounting Standards Update
Bcf - Billion cubic feet
BOE - Barrels of oil equivalent
CBM - Coalbed methane
DBJV - Delaware Basin JV Gathering LLC
DBJV system - A gathering system and related facilities located in the Delaware basin in Loving, Ward, Winkler, and Reeves Counties in West Texas
DBM complex - The processing plants, gas gathering system, and related facilities and equipment in West Texas that serve production from Reeves, Loving, and Culberson Counties, Texas and Eddy and Lea Counties, New Mexico
DD&A - Depreciation, depletion, and amortization
EPA - U.S. Environmental Protection Agency
FPSO - Floating production, storage, and offloading unit
G&A - General and administrative expenses
GAAP - U.S. Generally Accepted Accounting Principles
GOM Acquisition - The acquisition of oil and natural-gas assets in the Gulf of Mexico that closed on December 15, 2016
IPO - Initial public offering
LIBOR - London Interbank Offered Rate
LNG - Liquefied natural gas
MBbls/d - Thousand barrels per day
MBOE/d - Thousand barrels of oil equivalent per day
Mcf - Thousand cubic feet
MMBbls - Million barrels
MMBOE - Million barrels of oil equivalent
MMBtu - Million British thermal units
MMBtu/d - Million British thermal units per day
MMcf/d - Million cubic feet per day
Moody’s - Moody’s Investors Service
NGLs - Natural gas liquids
NM - Not meaningful
NTSB - National Transportation Safety Board
NYMEX - New York Mercantile Exchange
NYSE - New York Stock Exchange
Oil - Includes crude oil and condensate
OPEC - Organization of the Petroleum Exporting Countries
RCF - Revolving credit facility
S&P - Standard and Poor’s
TEN - Tweneboa/Enyenra/Ntomme
TEU or TEUs - Tangible equity units
VIE - Variable interest entity
WES - Western Gas Partners, LP, a publicly traded limited partnership, which is a consolidated subsidiary of Anadarko
WES RCF - WES’s $1.2 billion senior unsecured RCF maturing in February 2020
WGP - Western Gas Equity Partners, LP, a publicly traded limited partnership, which is a consolidated subsidiary of Anadarko
WGP RCF - WGP’s $250 million three-year senior secured RCF maturing in March 2019
Zero Coupons - Anadarko’s Zero-Coupon Senior Notes due 2036

2

PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions except per-share amounts
 
2017
 
2016
 
2017
 
2016
Revenues and Other
 
 
 
 
 
 
 
 
Oil sales
 
$
1,567

 
$
1,239

 
$
4,652

 
$
3,214

Natural-gas sales
 
269

 
435

 
1,090

 
1,121

Natural-gas liquids sales
 
265

 
227

 
768

 
640

Gathering, processing, and marketing sales
 
509

 
350

 
1,417

 
895

Gains (losses) on divestitures and other, net
 
(114
)
 
(358
)
 
1,052

 
(388
)
Total
 
2,496

 
1,893

 
8,979

 
5,482

Costs and Expenses
 
 
 
 
 
 
 
 
Oil and gas operating
 
257

 
198

 
748

 
608

Oil and gas transportation
 
220

 
256

 
698

 
744

Exploration
 
751

 
304

 
2,371

 
506

Gathering, processing, and marketing
 
398

 
291

 
1,108

 
758

General and administrative
 
280

 
362

 
840

 
1,116

Depreciation, depletion, and amortization
 
1,083

 
1,069

 
3,235

 
3,202

Production, property, and other taxes
 
159

 
148

 
449

 
422

Impairments
 
—

 
27

 
383

 
61

Other operating expense
 
123

 
31

 
157

 
54

Total
 
3,271

 
2,686

 
9,989

 
7,471

Operating Income (Loss)
 
(775
)
 
(793
)
 
(1,010
)
 
(1,989
)
Other (Income) Expense
 
 
 
 
 
 
 
 
Interest expense
 
230

 
220

 
680

 
657

Loss on early extinguishment of debt
 
—

 
—

 
2

 
124

(Gains) losses on derivatives, net
 
82

 
25

 
(33
)
 
629

Other (income) expense, net
 
(21
)
 
(31
)
 
(43
)
 
(86
)
Total
 
291

 
214

 
606

 
1,324

Income (Loss) Before Income Taxes
 
(1,066
)
 
(1,007
)
 
(1,616
)
 
(3,313
)
Income tax expense (benefit)
 
(425
)
 
(260
)
 
(366
)
 
(957
)
Net Income (Loss)
 
(641
)
 
(747
)
 
(1,250
)
 
(2,356
)
Net income (loss) attributable to noncontrolling interests
 
58

 
83

 
182

 
200

Net Income (Loss) Attributable to Common Stockholders
 
$
(699
)
 
$
(830
)
 
$
(1,432
)
 
$
(2,556
)
 
 
 
 
 
 
 
 
 
Per Common Share
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
(1.27
)
 
$
(1.61
)
 
$
(2.60
)
 
$
(5.00
)
Net income (loss) attributable to common stockholders—diluted
 
$
(1.27
)
 
$
(1.61
)
 
$
(2.61
)
 
$
(5.00
)
Average Number of Common Shares Outstanding—Basic
 
553

 
517

 
552

 
512

Average Number of Common Shares Outstanding—Diluted
 
553

 
517

 
552

 
512

Dividends (per common share)
 
$
0.05

 
$
0.05

 
$
0.15

 
$
0.15


See accompanying Notes to Consolidated Financial Statements.

3


ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
 
2017
 
2016
 
2017
 
2016
Net Income (Loss)
 
$
(641
)
 
$
(747
)
 
$
(1,250
)
 
$
(2,356
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
1

 
2

 
3

 
7

Income taxes on reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
—

 
(1
)
 
(1
)
 
(3
)
Total adjustments for derivative instruments, net of taxes
 
1

 
1

 
2

 
4

Adjustments for pension and other postretirement plans
 
 
 
 
 
 
 
 
Net gain (loss) incurred during period
 
(14
)
 
(157
)
 
1

 
(347
)
Income taxes on net gain (loss) incurred during period
 
5

 
58

 
—

 
128

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
 
29

 
114

 
100

 
156

Income taxes on amortization of net actuarial (gain) loss to general and administrative expense
 
(11
)
 
(43
)
 
(37
)
 
(59
)
Amortization of net prior service (credit) cost to general and administrative expense
 
(7
)
 
(6
)
 
(19
)
 
(27
)
Income taxes on amortization of net prior service (credit) cost to general and administrative expense
 
3

 
2

 
7

 
10

Total adjustments for pension and other postretirement plans, net of taxes
 
5

 
(32
)
 
52

 
(139
)
Total
 
6

 
(31
)
 
54

 
(135
)
Comprehensive Income (Loss)
 
(635
)
 
(778
)
 
(1,196
)
 
(2,491
)
Comprehensive income (loss) attributable to noncontrolling interests
 
58

 
83

 
182

 
200

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
(693
)
 
$
(861
)
 
$
(1,378
)
 
$
(2,691
)


See accompanying Notes to Consolidated Financial Statements.

4


ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
millions
 
September 30, 
 2017
 
December 31, 
 2016
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents ($153 and $359 related to VIEs)
 
$
5,251

 
$
3,184

Accounts receivable (net of allowance of $16 and $14)
 
 
 
 
   Customers ($104 and $70 related to VIEs)
 
1,009

 
1,007

   Others ($12 and $80 related to VIEs)
 
873

 
721

Other current assets
 
340

 
354

Total
 
7,473

 
5,266

Properties and Equipment
 
 
 
 
Cost
 
64,855

 
69,013

Less accumulated depreciation, depletion, and amortization
 
37,023

 
36,845

Net properties and equipment ($5,508 and $5,050 related to VIEs)
 
27,832

 
32,168

Other Assets ($589 and $609 related to VIEs)
 
2,152

 
2,226

Goodwill and Other Intangible Assets ($1,200 and $1,221 related to VIEs)
 
5,671

 
5,904

Total Assets
 
$
43,128

 
$
45,564

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
 
 
 
Trade ($280 and $234 related to VIEs)
 
$
1,770

 
$
1,617

Other
 
225

 
303

Short-term debt - Anadarko (1)
 
149

 
42

Current asset retirement obligations
 
336

 
129

Other current liabilities
 
1,203

 
1,237

Total
 
3,683

 
3,328

Long-term Debt
 
 
 
 
Long-term debt - Anadarko (1)
 
12,052

 
12,162

Long-term debt - WES and WGP
 
3,372

 
3,119

Total
 
15,424

 
15,281

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
3,378

 
4,324

Asset retirement obligations ($144 and $140 related to VIEs)
 
2,747

 
2,802

Other
 
3,974

 
4,332

Total
 
10,099

 
11,458

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share
(1.0 billion shares authorized, 574.0 million and 572.0 million shares issued)
 
57

 
57

Paid-in capital
 
11,972

 
11,875

Retained earnings
 
160

 
1,704

Treasury stock (21.4 million and 20.8 million shares)
 
(1,070
)
 
(1,033
)
Accumulated other comprehensive income (loss)
 
(337
)
 
(391
)
Total Stockholders’ Equity
 
10,782

 
12,212

Noncontrolling interests
 
3,140

 
3,285

Total Equity
 
13,922

 
15,497

Total Liabilities and Equity
 
$
43,128

 
$
45,564

__________________________________________________________________
Parenthetical references reflect amounts as of September 30, 2017, and December 31, 2016.
VIE amounts relate to WGP and WES. See Note 15—Variable Interest Entities.
(1) 
Excludes WES and WGP.

See accompanying Notes to Consolidated Financial Statements.

5


ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
 
 
Total Stockholders’ Equity
 
 
 
 
millions
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance at December 31, 2016
 
$
57

 
$
11,875

 
$
1,704

 
$
(1,033
)
 
$
(391
)
 
$
3,285

 
$
15,497

Net income (loss)
 
—

 
—

 
(1,432
)
 
—

 
—

 
182

 
(1,250
)
Common stock issued (1)
 
—

 
123

 
—

 
—

 
—

 
—

 
123

Dividends—common stock
 
—

 
—

 
(84
)
 
—

 
—

 
—

 
(84
)
Repurchase of common stock
 
—

 
—

 
—

 
(37
)
 
—

 
—

 
(37
)
Subsidiary equity transactions
 
—

 
(23
)
 
—

 
—

 
—

 
—

 
(23
)
Distributions to noncontrolling interest owners
 
—

 
—

 
—

 
—

 
—

 
(327
)
 
(327
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
—

 
—

 
—

 
—

 
2

 
—

 
2

Adjustments for pension and other postretirement plans
 
—

 
—

 
—

 
—

 
52

 
—

 
52

Cumulative effect of accounting change
 
—

 
(3
)
 
(28
)
 
—

 
—

 
—

 
(31
)
Balance at September 30, 2017
 
$
57

 
$
11,972

 
$
160

 
$
(1,070
)
 
$
(337
)
 
$
3,140

 
$
13,922

__________________________________________________________________
(1) 
Represents share-based compensation expense.



See accompanying Notes to Consolidated Financial Statements.

6


ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended 
 September 30,
millions
 
2017
 
2016
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
(1,250
)
 
$
(2,356
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
3,235

 
3,202

Deferred income taxes
 
(1,026
)
 
(1,121
)
Dry hole expense and impairments of unproved properties
 
2,144

 
300

Impairments
 
383

 
61

(Gains) losses on divestitures, net
 
(815
)
 
516

Loss on early extinguishment of debt
 
2

 
124

Total (gains) losses on derivatives, net
 
(33
)
 
634

Operating portion of net cash received (paid) in settlement of derivative instruments
 
21

 
229

Other
 
225

 
256

Changes in assets and liabilities
 
 
 
 
(Increase) decrease in accounts receivable
 
(32
)
 
810

Increase (decrease) in accounts payable and other current liabilities
 
(95
)
 
(637
)
Other items, net
 
(140
)
 
(141
)
Net cash provided by (used in) operating activities
 
2,619

 
1,877

Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment
 
(3,538
)
 
(2,618
)
Divestitures of properties and equipment and other assets
 
3,480

 
1,281

Other, net
 
32

 
81

Net cash provided by (used in) investing activities
 
(26
)
 
(1,256
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
249

 
5,840

Repayments of debt
 
(42
)
 
(6,023
)
Financing portion of net cash received (paid) for derivative instruments
 
(160
)
 
(639
)
Increase (decrease) in outstanding checks
 
(58
)
 
(126
)
Dividends paid
 
(84
)
 
(78
)
Repurchase of common stock
 
(37
)
 
(32
)
Issuance of common stock
 
—

 
2,188

Sale of subsidiary units
 
—

 
1,163

Distributions to noncontrolling interest owners
 
(327
)
 
(260
)
Proceeds from conveyance of future hard minerals royalty revenues, net of transaction costs
 
—

 
413

Payments of future hard minerals royalty revenues conveyed
 
(50
)
 
(25
)
Other financing activities
 
(18
)
 
—

Net cash provided by (used in) financing activities
 
(527
)
 
2,421

Effect of Exchange Rate Changes on Cash
 
1

 
(1
)
Net Increase (Decrease) in Cash and Cash Equivalents
 
2,067

 
3,041

Cash and Cash Equivalents at Beginning of Period
 
3,184

 
939

Cash and Cash Equivalents at End of Period
 
$
5,251

 
$
3,980



See accompanying Notes to Consolidated Financial Statements.

7

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 sale of oil, natural gas, and NGLs and in advancing its Mozambique LNG project toward a final investment decision. In addition, the Company engages in the gathering, processing, treating, and transporting of oil, natural gas, and NGLs as well as gathering and disposal of produced water. The Company also participates in the hard-minerals business through royalty arrangements.

Basis of Presentation  The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed or omitted. The accompanying interim financial statements reflect 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. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
During the second quarter of 2017, the Company revised its reporting segments to reflect a change in how management reviews financial information and makes operating decisions. The Company has reclassified prior-period amounts to conform to the current period’s presentation. See Note 17—Segment Information for additional information on the change in reporting segments.
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 VIEs for which Anadarko is the primary beneficiary. The Company has determined that WGP and WES are VIEs. Anadarko is considered the primary beneficiary and consolidates WGP and WES. WGP and WES function with capital structures that are separate from Anadarko, consisting of their own debt instruments and publicly traded common units. 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 noncontrolled entities that 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 included in other assets.

Recently Adopted Accounting Standards  ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, assists in determining whether a transaction should be accounted for as an acquisition or disposal of assets or as a business. This ASU provides a screen that when substantially all of the fair value of the gross assets acquired, or disposed of, are concentrated in a single identifiable asset, or a group of similar identifiable assets, the assets will not be considered a business. If the screen is not met, the assets must include an input and a substantive process that together significantly contribute to the ability to create an output to be considered a business. The Company’s adoption of this ASU on January 1, 2017, using a prospective approach, could have a material impact on consolidated financial statements as goodwill will not be allocated to divestitures or recorded on acquisitions that are not considered businesses. See Note 3—Acquisitions, Divestitures, and Assets Held for Sale.
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. The Company adopted this ASU on January 1, 2017, using a modified retrospective approach, and recognized a cumulative adjustment to retained earnings of $31 million during the first quarter of 2017.

8
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Summary of Significant Accounting Policies (Continued)

ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, simplifies the accounting for share-based payment transactions, including the income tax consequences, classification on the statement of cash flows, accounting for forfeitures, and classification of awards as either equity or liabilities. As a result of adopting this ASU on January 1, 2017, excess tax benefits and tax deficiencies related to share-based compensation are reflected on a prospective basis in the income statement as a component of the provision for income taxes rather than additional paid-in capital as previously recognized. For the nine months ended September 30, 2017, the Company recognized a $13 million tax deficiency as an increase to the provision for income taxes. Cash flows related to excess tax benefits are classified on a prospective basis as operating activities in the statement of cash flows rather than cash inflows from financing activities and cash outflows from operating activities as previously recognized. Prior periods of the statement of cash flows were not adjusted as there was no material impact. In addition, the Company elected to begin accounting for share-based compensation award forfeitures when they occur instead of estimating the number of forfeitures expected. This change in accounting policy for share-based compensation award forfeitures did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Issued But Not Yet Adopted  ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requires presentation of service cost in the same line item(s) as other compensation costs arising from services rendered by employees during the period and presentation of the remaining components of net benefit cost in a separate line item outside operating items. Additionally, only the service cost component of net benefit cost will be eligible for capitalization. The Company will adopt this ASU on January 1, 2018, with retrospective presentation of the service cost component and the other components of net benefit cost in the income statement and prospective presentation for the capitalization of the service cost component of net benefit cost in assets. Upon adoption, non-service cost components of net periodic benefit costs of $225 million for the year ended 2016 and $94 million for the nine months ended September 30, 2017, will be reclassified to other (income) expense, net, from G&A; oil and gas operating; gathering, processing, and marketing; and exploration expense. The Company does not expect any other material changes upon adoption of this ASU.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, requires an entity to explain the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement of cash flows and to provide a reconciliation of the totals in that statement to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. This ASU is effective for annual and interim periods beginning after December 15, 2017, and is required to be adopted using a retrospective approach, with early adoption permitted. The Company will adopt this ASU on January 1, 2018, and does not expect the adoption to have a material impact on its consolidated financial statements.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides clarification on how certain cash receipts and cash payments are presented and classified on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2017, and is required to be adopted using a retrospective approach if practicable, with early adoption permitted. The Company will adopt this ASU on January 1, 2018, and does not expect the adoption to have a material impact on its Consolidated Statement of Cash Flows.

9
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Summary of Significant Accounting Policies (Continued)

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), supersedes current revenue recognition requirements 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. Additional disclosures will be required to describe the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with customers. The Company has completed an initial review of contracts in each of its revenue streams and is developing accounting policies to address the provisions of the ASU. While the Company does not currently expect net earnings to be materially impacted, the Company has concluded that it is acting as an agent in the sale of certain volumes on behalf of its midstream service customers based on the requirements of the new ASU. This conclusion will result in the reduction of gathering and processing revenues and a corresponding reduction to gathering and processing expense related to its contracts with these customers. In addition, the Company expects to recognize revenue for commodities received as noncash consideration in exchange for services provided by our midstream business and revenue and associated cost of product for the subsequent sale of those same commodities. This recognition will result in an increase to revenues and expenses for gathering and processing activities with no impact on net earnings. The Company also expects changes in the timing of recognizing revenue for certain fees earned from its midstream business and hard minerals royalties due to the fee structure of certain contracts. Anadarko continues to evaluate the impact of these and other provisions of the ASU on its accounting policies, internal controls, and consolidated financial statements. Although the Company has not finalized the quantitative impact of the new standard, based on the assessment completed to date, the Company does not expect the adoption of this standard will have a material impact on its net earnings. The Company will complete its evaluation during the fourth quarter of 2017 and will adopt this new standard on January 1, 2018, using the modified retrospective method with a cumulative adjustment to retained earnings.
ASU 2016-02, Leases (Topic 842), requires 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. The provisions of ASU 2016-02 also modify the definition of a lease and outline the requirements for recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. Anadarko plans to elect certain practical expedients when implementing the new lease standard, which means the Company will not have to reassess the accounting for contracts that commenced prior to adoption. Anadarko has preliminarily determined its portfolio of leased assets and is reviewing all related contracts to determine the impact that adoption will have on its consolidated financial statements. The Company is also evaluating the impact of this ASU on its systems, processes, and internal controls. The Company will complete its evaluation in 2018 and adopt this new standard on January 1, 2019, using a modified retrospective approach for all comparative periods presented.

2. Inventories

The following summarizes the major classes of inventories included in other current assets:
millions
September 30, 
 2017
 
December 31, 
 2016
Oil
$
127

 
$
169

Natural gas
29

 
38

NGLs
108

 
106

Total inventories
$
264

 
$
313



10
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


3. Acquisitions, Divestitures, and Assets Held for Sale

Acquisition On December 15, 2016, the Company closed the GOM Acquisition for $1.8 billion using a portion of the net proceeds from the September 2016 issuance of 40.5 million shares of its common stock. The GOM Acquisition constituted a business combination and was accounted for using the acquisition method of accounting. Fair-value measurements of the assets acquired and liabilities assumed at the acquisition date were finalized during the quarter ended June 30, 2017. There were no material changes to the fair value of the assets acquired and liabilities assumed from the amounts included on the Company’s Consolidated Balance Sheet at December 31, 2016.

Property Exchange On March 17, 2017, WES acquired a third party’s 50% nonoperated interest in the DBJV system in exchange for WES’s 33.75% interest in nonoperated Marcellus midstream assets and $155 million in cash. WES recognized a gain of $126 million as a result of this transaction. After the acquisition, the DBJV system is 100% owned by WES and consolidated by Anadarko.

Divestitures and Assets Held for Sale  The following summarizes the proceeds received and gains (losses) recognized on divestitures and assets held for sale for the nine months ended September 30:
millions
2017
 
2016
Proceeds received, net of closing adjustments
$
3,480

 
$
1,281

Gains (losses) on divestitures, net (1)
815

 
(516
)
__________________________________________________________________
(1) 
Includes the $126 million gain related to the property exchange discussed above.

2017 During the nine months ended September 30, 2017, the Company divested of the following assets:
•
Eagleford assets in South Texas, included in the Exploration and Production reporting segment, for net proceeds of $2.1 billion and a net gain of $730 million
•
Eaglebine assets in Southeast Texas, included in the Exploration and Production reporting segment, for net proceeds of $533 million and a net gain of $282 million
•
Utah CBM assets, included in the Exploration and Production and Midstream reporting segments, for net proceeds of $69 million and a net loss of $52 million
•
Marcellus assets in Pennsylvania, included in the Exploration and Production and Midstream reporting segments, for net proceeds of $758 million and net losses of $129 million in the fourth quarter of 2016 and $56 million for the nine months ended September 30, 2017
Certain Marcellus assets in Pennsylvania, included in the Exploration and Production and Midstream reporting segments, satisfied criteria to be considered held for sale during the fourth quarter of 2016, at which time the Company remeasured these assets to their current fair value using a market approach and Level 2 fair-value inputs and recognized the losses discussed above. Proceeds of $196 million associated with these assets were held in escrow by the purchaser and reflected as Accounts Receivable, Others on the Company’s Consolidated Balance Sheet as of September 30, 2017. In October 2017, proceeds of $193 million were released from escrow. The remaining $3 million is expected to be released by early 2018.
Certain Moxa Arch assets in Wyoming, included in the Exploration and Production reporting segment, satisfied criteria to be considered held for sale during the third quarter of 2017, at which time the Company remeasured these assets to their current fair value using a market approach and Level 2 fair-value inputs and recognized a loss of $197 million. At September 30, 2017, the Company’s Consolidated Balance Sheet included long-term assets of $557 million and long-term liabilities of $37 million associated with the Moxa Arch assets held for sale. Losses on assets held for sale are included in gains (losses) on divestitures and other, net in the Company’s Consolidated Statements of Income.

11
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


3. Acquisitions, Divestitures, and Assets Held for Sale (Continued)

2016 During the nine months ended September 30, 2016, the Company divested of the following assets:
•
Wamsutter assets in Wyoming, included in the Exploration and Production reporting segment, for net proceeds of $588 million and a net loss of $59 million
•
Ozona and Steward assets in West Texas, included in the Exploration and Production and Midstream reporting segments, for net proceeds of $223 million and a net loss of $50 million
•
East Chalk assets in East Texas/Louisiana, included in the Exploration and Production reporting segment, for net proceeds of $99 million and a net gain of $13 million
•
Elm Grove assets in East Texas/Louisiana, included in the Exploration and Production reporting segment, for net proceeds of $100 million and a net loss of $54 million
The Carthage assets in East Texas, included in the Exploration and Production and Midstream reporting segments, satisfied criteria to be considered held for sale during the third quarter of 2016, at which time the Company remeasured these assets to their current fair value using a market approach and Level 2 fair-value measurement and recognized a loss of $355 million. The sale of these assets closed in the fourth quarter of 2016.

4. Impairments

Impairments of Long-Lived Assets 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:
  
Nine Months Ended
millions
Impairment
 
Fair Value (1)
September 30, 2017
 
 
 
Exploration and Production
 
 
 
U.S. onshore properties
$
2

 
$
3

Gulf of Mexico properties
211

 
231

Midstream
169

 
58

Other
1

 
—

Total
$
383

 
$
292

__________________________________________________________________
(1) 
Measured as of the impairment date using the income approach and Level 3 inputs. The primary assumptions used to estimate undiscounted future net cash flows include anticipated future production, commodity prices, and capital and operating costs.

Impairments during the nine months ended September 30, 2017, were primarily related to oil and gas properties in the Gulf of Mexico due to lower forecasted commodity prices and a U.S. onshore midstream property due to a reduced throughput fee as a result of a producer’s bankruptcy.

Impairments of Unproved Properties Impairments of unproved properties are included in exploration expense in the Company’s Consolidated Statements of Income. The Company recognized $586 million of impairments of unproved Gulf of Mexico properties during the nine months ended September 30, 2017, primarily due to an impairment of $463 million to the Shenandoah project. The unproved property balance related to the Shenandoah project originated from the purchase price allocated to Gulf of Mexico exploration projects from the acquisition of Kerr-McGee Corporation in 2006. For additional details on the Shenandoah project, see Note 5—Exploratory Well Costs.

It is reasonably possible that significant declines in commodity prices, further changes to the Company’s drilling plans in response to lower prices, reduction of proved and probable reserve estimates, or increases in drilling or operating costs could result in other additional impairments.


12
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


5. Exploratory Well Costs

During the nine months ended September 30, 2017, exploratory well costs were expensed for certain exploratory wells that did not encounter commercial quantities of hydrocarbons or that the Company determined were no longer making sufficient progress for continued capitalization of the exploratory well costs.

Gulf of Mexico The Company expensed exploratory well costs of $801 million during the nine months ended September 30, 2017, primarily related to the following projects:
•
Shenandoah The Company expensed $438 million related to the Shenandoah-6 appraisal well and subsequent sidetrack, which completed appraisal activities in April 2017 and did not encounter the oil-water contact in the eastern portion of the field. Given the results of this well and the commodity-price environment at that time, the Company suspended further appraisal activities.
•
Phobos The Company expensed $221 million in the third quarter of 2017 related to wells at the Phobos project. These wells found insufficient quantities of oil pay to justify development in the current price environment.
•
Warrior The Company expensed $110 million in the third quarter of 2017 related to the northern appraisal well and sidetrack at the Warrior project. These wells found insufficient quantities of oil pay to justify development of the northern portion of the field in the current price environment. Evaluation of the remaining appraisal well in the southern portion of the field is ongoing.

Colombia During the nine months ended September 30, 2017, the Company expensed exploratory well costs of $243 million related to wells in the Grand Fuerte area in Colombia due to insufficient progress on contractual and fiscal reforms needed for deepwater gas development. All leases remain contractually in good standing.

Côte d’Ivoire During the second quarter of 2017, the Company expensed exploratory well costs of $119 million in Côte d’Ivoire due to unsuccessful drilling activities in the south channel of the Paon prospect and in Block CI-527. During the third quarter of 2017, after further evaluation of recent well results, Anadarko initiated relinquishment of the Company’s interests in its Côte d’Ivoire blocks and expensed the remaining $206 million of exploratory well and appraisal costs related to the Paon project.

Suspended Exploratory Well Costs The Company’s suspended exploratory well costs were $530 million at September 30, 2017, and $1.2 billion at December 31, 2016. For exploratory wells, drilling costs are capitalized, or “suspended,” on the balance sheet when the well has found a sufficient quantity of reserves to justify its completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time. During the nine months ended September 30, 2017, $488 million of suspended exploratory well costs previously capitalized for greater than one year at December 31, 2016, were charged to exploration expense.


13
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


6. Current Liabilities

Accounts Payable Accounts payable, trade included liabilities of $204 million at September 30, 2017, and $262 million at December 31, 2016, representing the amount by which checks issued but not presented to the Company’s banks for collection exceeded balances in applicable bank accounts. Changes in these liabilities are classified as cash flows from financing activities.

Other Current Liabilities The following summarizes the Company’s other current liabilities:
millions
September 30, 
 2017
 
December 31, 
 2016
Accrued income taxes
$
211

 
$
6

Interest payable
161

 
244

Production, property, and other taxes payable
249

 
239

Accrued employee benefits
207

 
355

Derivatives
233

 
175

Other
142

 
218

Total other current liabilities
$
1,203

 
$
1,237


7. Derivative Instruments

Objective and Strategy  The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks. Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations such as 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 is subject to changes in interest rates.
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.


14
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities  The oil prices listed below are a combination of 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 September 30, 2017:
 
2017 Settlement
 
2018 Settlement
Oil
 
 
 
Three-Way Collars (MBbls/d)
91

 
—

Average price per barrel

 
 
Ceiling sold price (call)
$
59.80

 
$
—

Floor purchased price (put)
$
50.00

 
$
—

Floor sold price (put)
$
40.00

 
$
—

Natural Gas
 
 
 
Three-Way Collars (thousand MMBtu/d)
857

 
250

Average price per MMBtu
 
 
 
Ceiling sold price (call)
$
3.64

 
$
3.54

Floor purchased price (put)
$
2.85

 
$
2.75

Floor sold price (put)
$
2.10

 
$
2.00


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 15 Bcf at September 30, 2017, and 2 Bcf at December 31, 2016, that were entered into to mitigate commodity-price risk related to fixed-price purchase and sales contracts and storage activity.


15
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7. 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 LIBOR.
In June 2017, the Company amended certain interest-rate swaps with an aggregate notional principal amount of $625 million, extending the mandatory termination dates from 2018 to 2020, 2022, and 2023 in exchange for cash payments of approximately $57 million. In July 2017, the Company amended an interest-rate swap with a notional principal amount of $125 million, extending the mandatory termination date from 2018 to 2022 in exchange for a cash payment of approximately $15 million.
At September 30, 2017, the Company had outstanding interest-rate swaps with a notional amount of $1.6 billion due prior to or in September 2023 that manage interest-rate risk associated with the potential refinancing of the Company’s future debt maturities. 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. The Company had the following outstanding interest-rate swaps at September 30, 2017: 
millions except percentages
 
 
 
Mandatory
 
Weighted-Average
Notional Principal Amount
 
Reference Period
 
Termination Date
 
Interest Rate
$
550

 
 
September 2016 - 2046

September 2020
 
6.418%
$
250

 
 
September 2016 - 2046
 
September 2022
 
6.809%
$
200

 
 
September 2017 - 2047
 
September 2018
 
6.049%
$
100

 
 
September 2017 - 2047
 
September 2020
 
6.891%
$
250

 
 
September 2017 - 2047
 
September 2021
 
6.570%
$
250

 
 
September 2017 - 2047
 
September 2023
 
6.761%

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, collateralization, or cash payments for amendments related to these extended interest-rate derivatives are classified as cash flows from financing activities. Net cash payments related to settlements and amendments of interest-rate swap agreements were $118 million during the nine months ended September 30, 2017, and $275 million during the nine months ended September 30, 2016.


16
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7. 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
 
September 30,
 
December 31,
 
September 30,
 
December 31,
Balance Sheet Classification
 
2017
 
2016
 
2017
 
2016
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
58

 
$
10

 
$
(40
)
 
$
(3
)
Other assets
 
33

 
9

 
(29
)
 
—

Other current liabilities
 
38

 
66

 
(44
)
 
(201
)
Other liabilities
 
163

 
—

 
(166
)
 
(12
)
 
 
292

 
85

 
(279
)
 
(216
)
Interest-rate derivatives
 

 
 
 
 
 
 
Other current assets
 
12

 
8

 
—

 
—

Other assets
 
42

 
23

 
—

 
—

Other current liabilities
 
—

 
—

 
(237
)
 
(48
)
Other liabilities
 
—

 
—

 
(1,176
)
 
(1,328
)
 
 
54

 
31

 
(1,413
)
 
(1,376
)
Total derivatives
 
$
346

 
$
116

 
$
(1,692
)
 
$
(1,592
)

Effect of Derivative Instruments—Statement of Income  The following summarizes gains and losses related to derivative instruments:
millions
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Classification of (Gain) Loss Recognized
 
2017
 
2016
 
2017
 
2016
Commodity derivatives
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
—

 
$
(1
)
 
$
—

 
$
5

(Gains) losses on derivatives, net
 
43

 
(59
)
 
(164
)
 
7

Interest-rate derivatives
 

 

 
 
 

(Gains) losses on derivatives, net
 
39

 
84

 
131

 
622

Total (gains) losses on derivatives, net
 
$
82

 
$
24

 
$
(33
)
 
$
634

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


17
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7. 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.
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 S&P and Moody’s declines to a level that is below investment grade. As of September 30, 2017, the Company’s long-term debt was rated investment grade (BBB) by both S&P and Fitch Ratings and below investment grade (Ba1) by Moody’s. Although certain counterparties required the Company to post collateral due to the Moody’s rating, 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 $1.2 billion (net of $159 million of collateral) at September 30, 2017, and $1.4 billion (net of $117 million of collateral) at December 31, 2016.


18
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7. 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
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
—

 
$
292

 
$
—

 
$
(271
)
 
$
—

 
$
21

Interest-rate derivatives
—

 
54

 
—

 
—

 
—

 
54

Total derivative assets
$
—

 
$
346

 
$
—

 
$
(271
)
 
$
—

 
$
75

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
—

 
$
(279
)
 
$
—

 
$
271

 
$
—

 
$
(8
)
Interest-rate derivatives
—

 
(1,413
)
 
—

 
—

 
159

 
(1,254
)
Total derivative liabilities
$
—

 
$
(1,692
)
 
$
—

 
$
271

 
$
159

 
$
(1,262
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
2

 
$
83

 
$
—

 
$
(69
)
 
$
—

 
$
16

Interest-rate derivatives
—

 
31

 
—

 
—

 
—

 
31

Total derivative assets
$
2

 
$
114

 
$
—

 
$
(69
)
 
$
—

 
$
47

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
(3
)
 
$
(213
)
 
$
—

 
$
69

 
$
6

 
$
(141
)
Interest-rate derivatives
—

 
(1,376
)
 
—

 
—

 
117

 
(1,259
)
Total derivative liabilities
$
(3
)
 
$
(1,589
)
 
$
—

 
$
69

 
$
123

 
$
(1,400
)
 __________________________________________________________________
(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.

19
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8. Debt

Debt  The following summarizes the Company’s outstanding debt, including capital lease obligations, after eliminating the effect of intercompany transactions:
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Consolidated
September 30, 2017
 
 
 
 
 
 
 
Total borrowings at face value
$
3,370

 
$
28

 
$
13,523

 
$
16,921

Net unamortized discounts, premiums, and debt issuance costs (3)
(26
)
 
—

 
(1,563
)
 
(1,589
)
Total borrowings (4)
3,344

 
28

 
11,960

 
15,332

Capital lease obligations
—

 
—

 
241

 
241

Less short-term debt
—

 
—

 
149

 
149

Total long-term debt
$
3,344

 
$
28

 
$
12,052

 
$
15,424

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Total borrowings at face value
$
3,120

 
$
28

 
$
13,558

 
$
16,706

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

 
(1,599
)
 
(1,628
)
Total borrowings (4)
3,091

 
28

 
11,959

 
15,078

Capital lease obligations
—

 
—

 
245

 
245

Less short-term debt
—

 
—

 
42

 
42

Total long-term debt
$
3,091

 
$
28

 
$
12,162

 
$
15,281

__________________________________________________________________
(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 RCFs are included in other current assets and other assets on the Company’s Consolidated Balance Sheets.
(4) 
The Company’s outstanding borrowings, except for borrowings under the WGP RCF, are senior unsecured.

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 $17.4 billion at September 30, 2017, and $17.1 billion at December 31, 2016.


20
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8. Debt (Continued)

Anadarko Borrowings  Anadarko has a $3.0 billion senior unsecured RCF maturing in January 2021 (APC RCF) and a $2.0 billion 364-day senior unsecured RCF maturing in January 2018 (364-Day Facility). At September 30, 2017, the Company had no outstanding borrowings under the APC RCF or the 364-Day Facility and was in compliance with all covenants.
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 of the outstanding Zero Coupons. None of the Zero Coupons were put to the Company in October 2017. The Zero Coupons can next be put to the Company in October 2018, in whole or in part, for the then-accreted value of $930 million.
The Company also has notes payable related to its ownership of certain noncontrolling mandatorily redeemable interests that are not included in the Company’s reported debt balance and do not affect consolidated interest expense. See Note 8—Equity Method Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

WES and WGP Borrowings  At September 30, 2017, WES was in compliance with all covenants contained in its $1.2 billion senior unsecured RCF maturing in February 2020 (WES RCF), which is expandable to $1.5 billion. During the nine months ended September 30, 2017, WES borrowed $250 million under its RCF, which was used for general partnership purposes. At September 30, 2017, WES had outstanding borrowings under its RCF of $250 million at an interest rate of 2.54%, had outstanding letters of credit of $5 million, and had available borrowing capacity of $945 million. WES’s $350 million 2.60% Senior Notes due August 2018 were classified as long-term debt on the Company’s Consolidated Balance Sheet at September 30, 2017, as WES has the ability and intent to refinance these obligations using long-term debt.
At September 30, 2017, WGP was in compliance with all covenants contained in its $250 million three-year senior secured RCF 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. At September 30, 2017, WGP had outstanding borrowings under its RCF of $28 million at an interest rate of 3.24% and had available borrowing capacity of $222 million.

21
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 
 September 30,
 
Nine Months Ended 
 September 30,
millions except percentages
2017
 
2016
 
2017
 
2016
Current income tax expense (benefit)
$
430

 
$
64

 
$
670

 
$
212

Deferred income tax expense (benefit)
(855
)
 
(324
)
 
(1,036
)
 
(1,169
)
Total income tax expense (benefit)
$
(425
)
 
$
(260
)
 
$
(366
)
 
$
(957
)
Income (loss) before income taxes
(1,066
)
 
(1,007
)
 
(1,616
)
 
(3,313
)
Effective tax rate
40
%
 
26
%
 
23
%
 
29
%

The Company’s tax provision for interim periods is determined using an estimate of its annual current and deferred effective tax rates, adjusted for discrete items. Each quarter, the Company updates these rates and records a cumulative adjustment to current and deferred tax expense by applying the rates to the year-to-date pre-tax income excluding discrete items. The Company’s quarterly estimate of its annual current and deferred effective tax rates can vary significantly based on various forecasted items including future commodity prices, capital expenditures, expenses for which tax benefits are not recognized, and the geographic mix of pre-tax income and losses.
The Company reported a loss before income taxes for the three and nine months ended September 30, 2017 and 2016. The increase from the 35% U.S. federal statutory rate for the three months ended September 30, 2017, was primarily attributable to the following:
•
tax impact from foreign operations
•
income attributable to noncontrolling interests
•
federal manufacturing deduction
These increases from the 35% U.S. federal statutory rate were partially offset by the following:
•non-deductible Algerian exceptional profits tax for Algerian income tax purposes
•
net changes in uncertain tax positions
The decrease from the 35% U.S. federal statutory rate for the nine months ended September 30, 2017, was primarily attributable to the following:
•
non-deductible Algerian exceptional profits tax for Algerian income tax purposes
•
tax impact from foreign operations
•
net changes in uncertain tax positions
These decreases from the 35% U.S. federal statutory rate were partially offset by the following:
•income attributable to noncontrolling interests
•federal manufacturing deduction
The decrease from the 35% U.S. federal statutory rate for the three and nine months ended September 30, 2016, was primarily attributable to non-deductible Algerian exceptional profits tax for Algerian income tax purposes, the tax impact from foreign operations, non-deductible goodwill related to divestitures, and net changes in uncertain tax positions. These decreases were partially offset by increases to state taxes, net of federal benefit, and income attributable to noncontrolling interests. See Note 14—Noncontrolling Interests.


22
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


10. Contingencies

Litigation  There are no material developments in previously reported contingencies nor are there 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, 2016.

11. Restructuring Charges

In the first quarter of 2016, the Company initiated a workforce reduction program to align the size and composition of its workforce with its expected future operating and capital plans. Employee notifications related to the workforce reduction program were completed by June 30, 2016. The Company recognized restructuring charges included in G&A in the Company’s Consolidated Statements of Income of $112 million during the three months ended September 30, 2016, and $363 million during the nine months ended September 30, 2016. All material restructuring charges were recognized in 2016, with the exception of settlement expense expected to be recognized during 2017 for lump-sum payments to terminated participants. During the nine months ended September 30, 2017, the Company recognized restructuring charges of $20 million, primarily related to settlement expense. Settlement expenses for the remainder of 2017 are not expected to be material.


23
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


12. 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
2017
 
2016
 
2017
 
2016
Three Months Ended September 30
 
 
 
 
 
 
 
Service cost
$
22

 
$
24

 
$
—

 
$
1

Interest cost
21

 
24

 
3

 
3

Expected (return) loss on plan assets
(21
)
 
(24
)
 
—

 
—

Amortization of net actuarial loss (gain)
7

 
12

 
—

 
—

Amortization of net prior service cost (credit)
(1
)
 
—

 
(6
)
 
(6
)
Settlement expense (1)
22

 
102

 
—

 
—

Net periodic benefit cost
$
50

 
$
138

 
$
(3
)
 
$
(2
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
 
 
 
 
 
 
Service cost
$
64

 
$
73

 
$
1

 
$
2

Interest cost
63

 
73

 
9

 
9

Expected (return) loss on plan assets
(63
)
 
(75
)
 
—

 
—

Amortization of net actuarial loss (gain)
20

 
30

 
—

 
—

Amortization of net prior service cost (credit)
(1
)
 
—

 
(18
)
 
(18
)
Settlement expense (1)
80

 
126

 
—

 
—

Termination benefits expense (1)
4

 
44

 
—

 
—

Curtailment expense (1)
—

 
8

 
—

 
—

Net periodic benefit cost
$
167

 
$
279

 
$
(8
)
 
$
(7
)
__________________________________________________________________
(1) 
Settlement expense, termination benefits expense, and curtailment expense for 2016 relate to the workforce reduction program. See Note 11—Restructuring Charges.

The Company contributed $167 million to funded pension plans and $84 million to unfunded pension plans during the nine months ended September 30, 2017, and expects to contribute an additional $3 million to unfunded pension plans during 2017.


24
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


13. Stockholders’ Equity

Earnings Per Share  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 EPS attributable to common stockholders:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions except per-share amounts
2017
 
2016
 
2017
 
2016
Net income (loss)
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
(699
)
 
$
(830
)
 
$
(1,432
)
 
$
(2,556
)
Income (loss) effect of TEUs
(2
)
 
(2
)
 
(6
)
 
(5
)
Less distributions on participating securities
—

 
1

 
—

 
1

Basic
$
(701
)
 
$
(833
)
 
$
(1,438
)
 
$
(2,562
)
Income (loss) effect of TEUs
—

 
—

 
(1
)
 
(1
)
Diluted
$
(701
)
 
$
(833
)
 
$
(1,439
)
 
$
(2,563
)
Shares
 
 
 
 
 
 
 
Average number of common shares outstanding—basic
553

 
517

 
552

 
512

Average number of common shares outstanding—diluted
553

 
517

 
552

 
512

Excluded due to anti-dilutive effect
11

 
11

 
11

 
11

Net income (loss) per common share
 
 
 
 
 
 
 
Basic
$
(1.27
)
 
$
(1.61
)
 
$
(2.60
)
 
$
(5.00
)
Diluted
$
(1.27
)
 
$
(1.61
)
 
$
(2.61
)
 
$
(5.00
)

Common Stock Repurchase Program In September 2017, the Company announced a $2.5 billion share-repurchase program under which shares of the Company’s common stock may be repurchased either in the open market or through private transactions. The program is authorized to extend through the end of 2018. In October 2017, Anadarko entered into an accelerated share-repurchase agreement (ASR Agreement) with an investment bank (Bank) to repurchase $1.0 billion of the Company’s common stock as part of the share-repurchase program. Under the terms of the ASR Agreement, the Company paid $1.0 billion in cash and received an initial delivery of shares of the Company’s common stock. At the conclusion of the term of the ASR Agreement, the Company and the Bank will enter into a final share settlement with the settlement price determined by applying a percentage discount to the volume-weighted average price of the shares during the term. The ASR Agreement is subject to customary adjustment and termination provisions, and final settlement is expected to occur prior to year end. All of the shares acquired by Anadarko under the ASR Agreement will be classified as treasury stock.


25
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


14. Noncontrolling Interests

WES is a limited partnership formed by Anadarko to acquire, own, develop, and operate midstream assets. During 2016, WES issued 22 million Series A Preferred units to private investors for net proceeds of $687 million and issued 1.3 million common units to the Company. Proceeds from these issuances were primarily used to acquire interests in Springfield Pipeline LLC from the Company. Pursuant to an agreement between WES and the holders of the Series A Preferred units, 50% of the Series A Preferred units converted into WES common units on a one-for-one basis on March 1, 2017, and the remaining Series A Preferred units converted on May 2, 2017.
WES Class C units issued to Anadarko will convert into WES common units on a one-for-one basis on the conversion date, which was extended in February 2017 from December 31, 2017, to March 1, 2020. The Class C units receive quarterly distributions in the form of additional Class C units until the March 1, 2020 conversion date unless WES elects to convert the units to common units earlier or Anadarko elects to extend the conversion date. WES distributed 620 thousand Class C units to Anadarko during the nine months ended September 30, 2017, and 946 thousand Class C units to Anadarko during 2016.
WGP is a limited partnership formed by Anadarko to own interests in WES. During 2016, Anadarko sold 12.5 million WGP common units to the public for net proceeds of $476 million. At September 30, 2017, Anadarko’s ownership interest in WGP consisted of an 81.6% limited partner interest and the entire non-economic general partner interest. The remaining 18.4% limited partner interest in WGP was owned by the public.
At September 30, 2017, WGP’s ownership interest in WES consisted of a 29.8% limited partner interest, the entire 1.5% general partner interest, and all of the WES incentive distribution rights. At September 30, 2017, Anadarko also owned a 9.0% limited partner interest in WES through other subsidiaries’ ownership of common and Class C units. The remaining 59.7% limited partner interest in WES was owned by the public.


26
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


15. 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, WES, and all of their consolidated subsidiaries. See Note 14—Noncontrolling Interests for additional information on WGP and WES.

Assets and Liabilities of VIEs The assets of WGP, WES, and their subsidiaries cannot be used by Anadarko for general corporate purposes and are included in and disclosed parenthetically on the Company’s Consolidated Balance Sheets. The carrying amounts of liabilities related to WGP, WES, and their subsidiaries for which the creditors do not have recourse to other assets of the Company are included in and disclosed parenthetically on the Company’s Consolidated Balance Sheets.
All outstanding debt for WES at September 30, 2017, and December 31, 2016, 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 September 30, 2017, and December 31, 2016, 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 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 Note 14—Noncontrolling Interests for additional information on WGP and WES financing activity.

Financial Support Provided to VIEs Concurrent with the closing of its May 2008 IPO, 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 $5 million for each of the three months ended September 30, 2017 and 2016, and $13 million for each of the nine months ended September 30, 2017 and 2016. The note receivable and related interest income are eliminated in consolidation.
In March 2015, WES acquired the Company’s interest in DBJV. The acquisition was financed using a deferred purchase price obligation that required a cash payment from WES to the Company due on March 31, 2020. In May 2017, WES reached an agreement with the Company to settle this obligation whereby WES made a cash payment to the Company of $37 million, equal to the estimated net present value of the obligation at March 31, 2017.
In order to reduce WES’s exposure to a majority of the commodity-price risk inherent in certain of its contracts, Anadarko has commodity price swap agreements in place with WES expiring on December 31, 2017. 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 capital contribution from Anadarko of $47 million for the nine months ended September 30, 2017, and $35 million for the nine months ended September 30, 2016.


27
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


16. Supplemental Cash Flow Information

Additions to properties and equipment as presented within Anadarko’s cash flows from investing activities include cash payments for cost of properties, equipment, and facilities. The cost of properties includes the initial capitalization of drilling costs associated with all exploratory wells whether or not they were deemed to have a commercially sufficient quantity of proved reserves.
The following summarizes cash paid (received) for interest and income taxes as well as non-cash investing and financing activities:
 
Nine Months Ended 
 September 30,
millions
2017
 
2016
Cash paid (received)
 
 
 
Interest, net of amounts capitalized
$
764

 
$
735

Income taxes, net of refunds (1)
169

 
(878
)
Non-cash investing activities
 
 
 
Fair value of properties and equipment from non-cash transactions
$
619

 
$
2

Asset retirement cost additions
228

 
85

Accruals of property, plant, and equipment
786

 
454

Net liabilities assumed (divested) in acquisitions and divestitures
(115
)
 
(39
)
Non-cash investing and financing activities
 
 
 
Capital lease obligation (2)
$
—

 
$
10

FPSO construction period obligation (2)
—

 
11

Deferred drilling lease liability
14

 
3

__________________________________________________________________
(1) 
Includes $881 million from a tax refund in 2016 related to the income tax benefit associated with the Company’s 2015 tax net operating loss carryback.
(2) 
Upon completion of the FPSO in the third quarter of 2016, the Company reported the construction period obligation as a capital lease obligation based on the fair value of the FPSO.
 
17. Segment Information

Anadarko’s business segments are separately managed due to distinct operational differences. Anadarko has previously presented three reporting segments in its quarterly and annual filings: Oil and Gas Exploration and Production, Midstream, and Marketing. In the first half of 2017, Anadarko substantially completed a repositioning of its asset portfolio to focus on higher margin liquids production. This shift resulted in a substantial decrease in the number of U.S. operating areas. Following the portfolio repositioning, the chief operating decision maker reviews operating results for Exploration and Production and Midstream when making operating and capital allocation decisions. Accordingly, Anadarko no longer identifies marketing activities as a separate reporting segment and has two reporting segments, Exploration and Production and Midstream, which include their respective marketing results. The Company has reclassified prior period amounts to conform to the current period’s presentation.
The Exploration and Production reporting segment explores for, produces, and sells oil, natural gas, and NGLs and plans for the development and operation of the Company’s LNG project in Mozambique. The Midstream reporting segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production as well as gathering and disposal of produced water. 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.


28
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


17. Segment Information (Continued)

To assess the performance of Anadarko’s operating segments, the chief operating decision maker analyzes Adjusted EBITDAX. The Company defines Adjusted EBITDAX as income (loss) before income taxes; interest expense; DD&A; exploration expense; gains (losses) on divestitures, net; impairments; total (gains) losses on derivatives, net, less net cash from settlement of commo