Document
Table of Contents

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, 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 October 20, 2016, is shown below:
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
558,900,897



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


Table of Contents

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
 
2016
 
2015
 
2016
 
2015
Revenues and Other
 
 
 
 
 
 
 
 
Oil and condensate sales
 
$
1,239

 
$
1,229

 
$
3,214

 
$
4,264

Natural-gas sales
 
435

 
484

 
1,121

 
1,612

Natural-gas liquids sales
 
227

 
183

 
640

 
644

Gathering, processing, and marketing sales
 
350

 
334

 
895

 
932

Gains (losses) on divestitures and other, net
 
(358
)
 
(542
)
 
(388
)
 
(807
)
Total
 
1,893

 
1,688

 
5,482

 
6,645

Costs and Expenses
 
 
 
 
 
 
 
 
Oil and gas operating
 
198

 
262

 
608

 
784

Oil and gas transportation
 
256

 
265

 
744

 
853

Exploration
 
304

 
1,074

 
506

 
2,260

Gathering, processing, and marketing
 
291

 
289

 
758

 
798

General and administrative
 
362

 
303

 
1,116

 
888

Depreciation, depletion, and amortization
 
1,069

 
1,111

 
3,202

 
3,581

Other taxes
 
148

 
127

 
422

 
460

Impairments
 
27

 
758

 
61

 
3,571

Other operating expense
 
31

 
48

 
54

 
117

Total
 
2,686

 
4,237

 
7,471

 
13,312

Operating Income (Loss)
 
(793
)
 
(2,549
)
 
(1,989
)
 
(6,667
)
Other (Income) Expense
 
 
 
 
 
 
 
 
Interest expense
 
220

 
199

 
657

 
616

Loss on early extinguishment of debt
 

 

 
124

 

(Gains) losses on derivatives, net
 
25

 
282

 
629

 
123

Other (income) expense, net
 
(31
)
 
47

 
(86
)
 
109

Tronox-related contingent loss
 

 

 

 
5

Total
 
214

 
528

 
1,324

 
853

Income (Loss) Before Income Taxes
 
(1,007
)
 
(3,077
)
 
(3,313
)
 
(7,520
)
Income tax expense (benefit)
 
(260
)
 
(917
)
 
(957
)
 
(2,232
)
Net Income (Loss)
 
(747
)
 
(2,160
)
 
(2,356
)
 
(5,288
)
Net income (loss) attributable to noncontrolling interests
 
83

 
75

 
200

 
154

Net Income (Loss) Attributable to Common Stockholders
 
$
(830
)
 
$
(2,235
)
 
$
(2,556
)
 
$
(5,442
)
 
 
 
 
 
 
 
 
 
Per Common Share
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
(1.61
)
 
$
(4.41
)
 
$
(5.00
)
 
$
(10.73
)
Net income (loss) attributable to common stockholders—diluted
 
$
(1.61
)
 
$
(4.41
)
 
$
(5.00
)
 
$
(10.73
)
Average Number of Common Shares Outstanding—Basic
 
517

 
508

 
512

 
508

Average Number of Common Shares Outstanding—Diluted
 
517

 
508

 
512

 
508

Dividends (per common share)
 
$
0.05

 
$
0.27

 
$
0.15

 
$
0.81


See accompanying Notes to Consolidated Financial Statements.

2

Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
 
2016
 
2015
 
2016
 
2015
Net Income (Loss)
 
$
(747
)
 
$
(2,160
)
 
$
(2,356
)
 
$
(5,288
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
2

 
2

 
7

 
7

Income taxes on reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
(1
)
 
(1
)
 
(3
)
 
(3
)
Total adjustments for derivative instruments, net of taxes
 
1

 
1

 
4

 
4

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

 
(347
)
 

Income taxes on net gain (loss) incurred during period
 
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
 
114

 
13

 
156

 
39

Income taxes on amortization of net actuarial (gain) loss to general and administrative expense
 
(43
)
 
(5
)
 
(59
)
 
(14
)
Amortization of net prior service (credit) cost to general and administrative expense
 
(6
)
 
1

 
(27
)
 
2

Income taxes on amortization of net prior service (credit) cost to general and administrative expense
 
2

 
(1
)
 
10

 
(1
)
Total adjustments for pension and other postretirement plans, net of taxes
 
(32
)
 
8

 
(139
)
 
26

Total
 
(31
)
 
9

 
(135
)
 
30

Comprehensive Income (Loss)
 
(778
)
 
(2,151
)
 
(2,491
)
 
(5,258
)
Comprehensive income (loss) attributable to noncontrolling interests
 
83

 
75

 
200

 
154

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
(861
)
 
$
(2,226
)
 
$
(2,691
)
 
$
(5,412
)


See accompanying Notes to Consolidated Financial Statements.

3

Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
millions
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents ($146 and $100 related to VIEs)
 
$
3,980

 
$
939

Accounts receivable (net of allowance of $12 and $11)
 
 
 
 
   Customers ($56 and $81 related to VIEs)
 
848

 
652

   Others ($68 and $84 related to VIEs)
 
743

 
1,817

Other current assets
 
347

 
573

Total
 
5,918

 
3,981

Properties and Equipment
 
 
 
 
Cost
 
69,089

 
70,683

Less accumulated depreciation, depletion, and amortization
 
37,990

 
36,932

Net properties and equipment ($5,037 and $4,859 related to VIEs)
 
31,099

 
33,751

Other Assets ($614 and $644 related to VIEs)
 
2,203

 
2,268

Goodwill and Other Intangible Assets ($1,230 and $1,220 related to VIEs)
 
6,197

 
6,331

Total Assets
 
$
45,417

 
$
46,331

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable ($185 and $179 related to VIEs)
 
$
1,983

 
$
2,850

Current asset retirement obligations
 
232

 
309

Interest payable
 
145

 
247

Other taxes payable ($32 and $18 related to VIEs)
 
313

 
318

Accrued expenses
 
301

 
424

Short-term debt
 
788

 
32

Total
 
3,762

 
4,180

Long-term Debt
 
15,090

 
15,636

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
4,343

 
5,400

Asset retirement obligations ($137 and $127 related to VIEs)
 
1,744

 
1,750

Other
 
4,566

 
3,908

Total
 
10,653

 
11,058

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share (1.0 billion shares authorized, 571.7 million and 528.3 million shares issued)
 
57

 
52

Paid-in capital
 
11,842

 
9,265

Retained earnings
 
2,246

 
4,880

Treasury stock (20.7 million and 20.0 million shares)
 
(1,027
)
 
(995
)
Accumulated other comprehensive income (loss)
 
(518
)
 
(383
)
Total Stockholders’ Equity
 
12,600

 
12,819

Noncontrolling interests
 
3,312

 
2,638

Total Equity
 
15,912

 
15,457

Total Liabilities and Equity
 
$
45,417

 
$
46,331

__________________________________________________________________
Parenthetical references reflect amounts as of September 30, 2016, and December 31, 2015.

See accompanying Notes to Consolidated Financial Statements.

4

Table of Contents

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)
 

 

 
(2,556
)
 

 

 
200

 
(2,356
)
Common stock issued
 
5

 
2,307

 

 

 

 

 
2,312

Dividends—common stock
 

 

 
(78
)
 

 

 

 
(78
)
Repurchase of common stock
 

 

 

 
(32
)
 

 

 
(32
)
Subsidiary equity transactions
 

 
270

 

 

 

 
734

 
1,004

Distributions to noncontrolling interest owners
 

 

 

 

 

 
(260
)
 
(260
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 

 

 

 

 
4

 

 
4

Adjustments for pension and other postretirement plans
 

 

 

 

 
(139
)
 

 
(139
)
Balance at September 30, 2016
 
$
57

 
$
11,842

 
$
2,246

 
$
(1,027
)
 
$
(518
)
 
$
3,312

 
$
15,912



See accompanying Notes to Consolidated Financial Statements.

5

Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended 
 September 30,
millions
 
2016
 
2015
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
(2,356
)
 
$
(5,288
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
3,202

 
3,581

Deferred income taxes
 
(1,121
)
 
(2,627
)
Dry hole expense and impairments of unproved properties
 
300

 
1,993

Impairments
 
61

 
3,571

(Gains) losses on divestitures, net
 
516

 
1,003

Loss on early extinguishment of debt
 
124

 

Total (gains) losses on derivatives, net
 
634

 
123

Operating portion of net cash received (paid) in settlement of derivative instruments
 
229

 
251

Other
 
256

 
219

Changes in assets and liabilities
 
 
 
 
Tronox-related contingent liability
 

 
(5,210
)
(Increase) decrease in accounts receivable
 
810

 
23

Increase (decrease) in accounts payable and accrued expenses
 
(833
)
 
(573
)
Other items, net
 
55

 
800

Net cash provided by (used in) operating activities
 
1,877

 
(2,134
)
Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment
 
(2,618
)
 
(4,861
)
Divestitures of properties and equipment and other assets
 
1,281

 
1,248

Other, net
 
81

 
(83
)
Net cash provided by (used in) investing activities
 
(1,256
)
 
(3,696
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
5,840

 
4,810

Repayments of debt
 
(6,023
)
 
(4,024
)
Financing portion of net cash received (paid) for derivative instruments
 
(639
)
 
(44
)
Increase (decrease) in outstanding checks
 
(126
)
 
(103
)
Dividends paid
 
(78
)
 
(415
)
Repurchase of common stock
 
(32
)
 
(38
)
Issuance of common stock, including tax benefit on share-based compensation awards
 
2,188

 
21

Sale of subsidiary units
 
1,163

 
187

Issuance of tangible equity units — equity component
 

 
348

Distributions to noncontrolling interest owners
 
(260
)
 
(208
)
Proceeds from conveyance of future hard minerals royalty revenues, net of transaction costs
 
413

 

Payments of future hard minerals royalty revenues conveyed
 
(25
)
 

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

 
534

Effect of Exchange Rate Changes on Cash
 
(1
)
 
(1
)
Net Increase (Decrease) in Cash and Cash Equivalents
 
3,041

 
(5,297
)
Cash and Cash Equivalents at Beginning of Period
 
939

 
7,369

Cash and Cash Equivalents at End of Period
 
$
3,980

 
$
2,072



See accompanying Notes to Consolidated Financial Statements.

6

Table of Contents

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. Certain prior-period amounts have been reclassified to conform to the current-year presentation. These Consolidated 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, 2015.
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 noncontrolled 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.

Recently Adopted 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. After adoption, WGP and WES were consolidated by the Company 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.

New Accounting Standards Issued But Not Yet Adopted The FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU 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. This ASU is effective for annual and interim periods beginning in 2018 and is required to be adopted using a modified retrospective approach, with early adoption permitted. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.


7

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

The FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU 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 in 2018 and is required to be adopted using a retrospective approach if practicable, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its Consolidated Statement of Cash Flows.
The FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. This ASU is effective for annual and interim periods beginning in 2017 with early adoption permitted. The Company will adopt this ASU beginning on January 1, 2017, and does not expect the adoption to have a material impact 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 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes current revenue recognition requirements and industry-specific guidance. The codification was amended through additional ASUs and, as amended, 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. The Company is required to adopt the new standard in the first quarter of 2018 using one of two retrospective application methods. The Company is continuing to evaluate the provisions of this ASU and has not determined the impact this standard 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
September 30,
2016
 
December 31,
2015
Oil
$
136

 
$
116

Natural gas
35

 
36

NGLs
83

 
64

Total inventories
$
254

 
$
216



8

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Acquisitions, Divestitures, and Assets Held for Sale

Acquisition In September 2016, the Company entered into an agreement to acquire certain oil and gas assets in the Gulf of Mexico for $2.0 billion using a portion of the net proceeds from the September 2016 issuance of 40.5 million shares of its common stock. The acquisition is expected to close in the fourth quarter of 2016 and is subject to customary closing conditions. See Note 14—Stockholders’ Equity.

Divestitures and Assets Held for Sale For the nine months ended September 30, 2016, the Company received $1.3 billion in net proceeds from divestitures and recognized net losses of $516 million from divestitures and assets held for sale.

Divestitures During the nine months ended September 30, 2016, the Company divested the following U.S. onshore assets:
certain West Texas assets in the oil and gas exploration and production and midstream reporting segments for net proceeds of $223 million and a loss of $50 million
certain East Texas/Louisiana assets in the oil and gas exploration and production reporting segment for net proceeds of $199 million and a net loss of $41 million
certain Wyoming assets in the oil and gas exploration and production reporting segment for net proceeds of $588 million and a loss of $59 million

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. Certain U.S. onshore assets located primarily in East Texas included in the oil and gas 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 is expected to close in the fourth quarter of 2016. At September 30, 2016, the Company’s Consolidated Balance Sheet included long-term assets of $1.1 billion, which includes $184 million of goodwill, and long-term liabilities of $44 million associated with assets held for sale.


9

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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:
  
Three Months Ended
 
Nine Months Ended
millions
Impairment
 
Fair Value (1)
 
Impairment
 
Fair Value (1)
September 30, 2016
 
 
 
 
 
 
 
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
U.S. onshore properties
$
23

 
$
32

 
$
27

 
$
617

Gulf of Mexico properties

 

 
2

 

Cost-method investment (2)

 

 
2

 
32

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
3

 

 
24

 
5

Other
 
 
 
 
 
 
 
Long-lived assets held for use
1

 

 
6

 

Total
$
27

 
$
32

 
$
61

 
$
654

 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
U.S. onshore properties
$
641

 
$
634

 
$
2,944

 
$
1,904

Gulf of Mexico properties
101

 
94

 
126

 
94

Cost-method investment (2)
1

 
32

 
2

 
32

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
15

 
7

 
499

 
209

Total
$
758

 
$
767

 
$
3,571

 
$
2,239

__________________________________________________________________
(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 three and nine months ended September 30, 2016, were primarily related to U.S. onshore oil and gas and midstream properties due to changes in development plans. Impairments during the three months ended September 30, 2015, were primarily related to U.S. onshore oil and gas properties and an oil and gas property in the Gulf of Mexico, all of which were impaired due to lower forecasted commodity prices. Impairments during the nine months ended September 30, 2015, were primarily related to the Company’s Greater Natural Buttes oil and gas and midstream properties, certain other U.S. onshore oil and gas and midstream properties, and oil and gas properties in the Gulf of Mexico, all of which were impaired due to lower forecasted commodity prices.

Impairments of Unproved Properties Impairments of unproved properties are included in exploration expense in the Company’s Consolidated Statements of Income. During the third quarter of 2015, the Company recognized a $109 million impairment of unproved Utica properties resulting from an assignment of mineral interests in settlement of a legal matter. The Company also recognized a $935 million impairment of unproved Greater Natural Buttes properties during the nine months ended September 30, 2015, as a result of lower commodity prices.


10

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Impairments (Continued)

Potential for Future Impairments  At September 30, 2016, the Company’s estimates of undiscounted future cash flows attributable to a certain international asset group with a net book value of approximately $1.4 billion, and certain U.S. onshore asset groups with a combined net book value of approximately $1.1 billion, indicated that the carrying amounts were expected to be recovered; however, these asset groups may be at risk for impairment if the estimates of future cash flows decline. The Company estimates that a 10% decline in oil prices (with all other assumptions unchanged) could result in a non-cash impairment in excess of $600 million for the international asset group, and a 10% decline in natural-gas prices (with all other assumptions unchanged) could result in non-cash impairments in excess of $400 million for the U.S. onshore asset groups. It is also reasonably possible that prolonged low or further declines in commodity prices, further changes to the Company’s drilling plans in response to lower prices, or increases in drilling or operating costs could result in other additional impairments.

5. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $1.2 billion at September 30, 2016, and $1.1 billion at December 31, 2015. The increase in suspended exploratory well costs during 2016 is primarily related to the capitalization of costs associated with appraisal activities in Côte d’Ivoire. Projects with suspended exploratory well costs are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development or where it is reasonably possible that the well can be utilized in the development of the project and when management is actively pursuing efforts to assess whether reserves can be attributed to these projects. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time.
During the nine months ended September 30, 2016, $142 million of suspended exploratory well costs previously capitalized for greater than one year at December 31, 2015, were charged to exploration expense and primarily related to the following:
$64 million related to a Shenandoah well in the Gulf of Mexico was expensed as it was no longer reasonably possible that the wellbore would be used in the development of the project if a final investment decision is reached
$38 million related to the Orca-4 well in Mozambique was expensed after additional reservoir analysis and the determination that the well was not associated with the first three Orca wells
$33 million related to the Tubarão Tigre discovery was expensed based on the outlook for development viability, given current commodity market conditions and the complexity introduced by the depth and characteristics of the reservoir

Costs of $21 million previously capitalized for less than one year at December 31, 2015, related to the Tubarão Tigre discovery discussed above, were also charged to exploration expense.


11

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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. See Note 15—Accumulated Other Comprehensive Income (Loss).


12

Table of Contents

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 September 30, 2016:
 
2016 Settlement
 
2017 Settlement
 
2018 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
 
 
 
 
 
Three-Way Collars (thousand MMBtu/d)

 
682

 
250

Average price per MMBtu
 
 
 
 
 
Ceiling sold price (call)
$

 
$
3.60

 
$
3.54

Floor purchased price (put)
$

 
$
2.75

 
$
2.75

Floor sold price (put)
$

 
$
2.00

 
$
2.00

Fixed-Price Contracts (thousand MMBtu/d)

 
37

 

Average price per MMBtu
$

 
$
3.14

 
$

NGLs
 
 
 
 
 
Fixed-Price Contracts (MBbls/d)

 
2

 

Average price per barrel
$

 
$
15.84

 
$

__________________________________________________________________
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 5 billion cubic feet (Bcf) at September 30, 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.


13

Table of Contents

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). 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 for a cash payment of $193 million in March 2016, and interest-rate swap agreements were settled for total cash payments of $73 million in September 2016. Anadarko does not expect additional net cash outlays in 2016 related to interest-rate derivative settlements.
At September 30, 2016, the Company had outstanding interest-rate swaps with a notional amount of $1.6 billion due prior to or at September 2021 that 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. None of the Zero Coupons (accreted value of $839 million) were put to the Company in October 2016. 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. 
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 September 30, 2016: 
millions except percentages
 
 
 
Mandatory
 
Weighted-Average
Notional Principal Amount
 
Reference Period
 
Termination Date
 
Interest Rate
$
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%


14

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Effect of Derivative InstrumentsBalance 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
 
2016
 
2015
 
2016
 
2015
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
65

 
$
462

 
$
(8
)
 
$
(177
)
Other assets
 
29

 
8

 
(2
)
 

Accrued expenses
 
2

 

 
(18
)
 
(3
)
Other liabilities
 
3

 

 
(22
)
 

 
 
99

 
470

 
(50
)
 
(180
)
Interest-rate derivatives
 
 
 
 
 
 
 
 
Other current assets
 
4

 
2

 

 

Other assets
 
18

 
54

 

 

Accrued expenses
 

 

 
(48
)
 
(54
)
Other liabilities
 

 

 
(1,806
)
 
(1,488
)
 
 
22

 
56

 
(1,854
)
 
(1,542
)
Total derivatives
 
$
121

 
$
526

 
$
(1,904
)
 
$
(1,722
)

Effect of Derivative InstrumentsStatement 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
 
2016
 
2015
 
2016
 
2015
Commodity derivatives
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
(1
)
 
$
(1
)
 
$
5

 
$

(Gains) losses on derivatives, net
 
(59
)
 
(125
)
 
7

 
(177
)
Interest-rate derivatives
 
 
 
 
 
 
 
 
(Gains) losses on derivatives, net
 
84

 
407

 
622

 
300

Total (gains) losses on derivatives, net
 
$
24

 
$
281

 
$
634

 
$
123

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


15

Table of Contents

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 September 30, 2016, $52 million of the Company’s $1.904 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. During the third quarter of 2016, Anadarko paid a fee in connection with the negotiated increase of a credit threshold for an interest-rate derivative with an other-than-insignificant financing element. As a result of the increased credit threshold, $200 million of collateral was returned to the Company. 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 $1.4 billion (net of $422 million of collateral) at September 30, 2016, and $1.3 billion (net of $58 million of collateral) at December 31, 2015.


16

Table of Contents

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
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
99

 
$

 
$
(14
)
 
$

 
$
85

Interest-rate derivatives

 
22

 

 

 

 
22

Total derivative assets
$

 
$
121

 
$

 
$
(14
)
 
$

 
$
107

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
(1
)
 
$
(49
)
 
$

 
$
14

 
$
2

 
$
(34
)
Interest-rate derivatives

 
(1,854
)
 

 

 
422

 
(1,432
)
Total derivative liabilities
$
(1
)
 
$
(1,903
)
 
$

 
$
14

 
$
424

 
$
(1,466
)
 
 
 
 
 
 
 
 
 
 
 
 
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.

17

Table of Contents

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 for 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 are included in noncontrolling interests, net of issuance costs, and the senior amortizing notes are included 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.


18

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense

Debt Activity  The following summarizes the Company’s borrowing activity, after eliminating the effect of intercompany transactions, during the nine months ended September 30, 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
 
495

 

 

 
495

 
WES 4.650% Senior Notes due 2026
Borrowings

 

 
1,750

 
1,750

 
364-Day Facility
 
600

 

 

 
600

 
WES RCF
 

 
28

 

 
28

 
WGP RCF
Repayments

 

 
(1,749
)
 
(1,749
)
 
5.950% Senior Notes due 2016
 

 

 
(1,245
)
 
(1,245
)
 
6.375% Senior Notes due 2017
 

 

 
(1,750
)
 
(1,750
)
 
364-Day Facility
 
(880
)
 

 

 
(880
)
 
WES RCF
 

 

 
(250
)
 
(250
)
 
Commercial paper notes, net
 

 

 
(25
)
 
(25
)
 
TEUs - senior amortizing notes
Other, net
1

 

 
40

 
41

 
Amortization of discounts, premiums, and debt issuance costs
Balance at September 30, 2016
$
2,907

 
$
28

 
$
12,698

 
$
15,633

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

During the second quarter of 2016, the Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.250 billion of its $2.0 billion 6.375% Senior Notes due September 2017 pursuant to a tender offer and to redeem its $1.750 billion 5.950% Senior Notes due September 2016. The Company recognized a loss of $124 million for the early retirement and redemption of these senior notes, which included $114 million of premiums paid.


19

Table of Contents

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

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)
 
Anadarko Consolidated
September 30, 2016
 
 
 
 
 
 
 
Total borrowings at face value
$
2,940

 
$
28

 
$
14,317

 
$
17,285

Net unamortized discounts, premiums, and debt issuance costs (3)
(33
)
 

 
(1,619
)
 
(1,652
)
Total borrowings (4)
2,907

 
28

 
12,698

 
15,633

Capital lease obligations

 

 
245

 
245

Less short-term debt (5)

 

 
788

 
788

Total long-term debt
$
2,907

 
$
28

 
$
12,155

 
$
15,090

 
 
 
 
 
 
 
 
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 (4)
2,691

 

 
12,957

 
15,648

Capital lease obligations

 

 
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.
(4) 
The Company’s outstanding borrowings, except for borrowings under the WGP revolving credit facility, are senior unsecured.
(5) 
Short-term debt includes $750 million of 6.375% Senior Notes due September 2017. In October 2016, the Company provided notice of its intent to redeem the notes prior to year end.

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 (accreted value of $839 million) were put to the Company in October 2016.

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 $17.6 billion at September 30, 2016, and $15.7 billion at December 31, 2015.


20

Table of Contents

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, the Company has a $2.0 billion 364-day senior unsecured revolving credit facility (364-Day Facility) that will mature in January 2017. At September 30, 2016, the Company had no outstanding borrowings under the Five-Year Facility or the 364-Day Facility and was in compliance with all related covenants.
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 eliminated the Company’s access to the commercial paper market. The Company has not issued commercial paper notes since the downgrade and had no outstanding borrowings under the commercial paper program at September 30, 2016.

WES and WGP Borrowings  In July 2016, WES completed a public offering of $500 million aggregate principal amount of 4.650% Senior Notes due July 2026. Net proceeds were used to repay a portion of the amount outstanding under WES’s $1.2 billion five-year senior unsecured revolving credit facility maturing in February 2019 (WES RCF), which is expandable to $1.5 billion.
At September 30, 2016, WES had outstanding borrowings under its RCF of $20 million at an interest rate of 1.82%, had outstanding letters of credit of $5 million, and had available borrowing capacity of $1.18 billion. At September 30, 2016, WES was in compliance with all related covenants.
In March 2016, WGP entered into a $250 million three-year 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 September 30, 2016, WGP had outstanding borrowings under its RCF of $28 million at an interest rate of 2.53%, had available borrowing capacity of $222 million, and was in compliance with all related covenants.
In October 2016, WES completed a public offering of $200 million aggregate principal amount of 5.450% Senior Notes due April 2044. Net proceeds were used to repay amounts outstanding under the WES RCF and the remaining proceeds will be used for general partnership purposes, including capital expenditures.


21

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ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Capital Lease Obligations  Construction of a floating production, storage and offloading unit (FPSO) for the Company’s Tweneboa/Enyenra/Ntomme (TEN) field operations in Ghana commenced in 2013. The Company recognized an asset and related obligation for its approximate 19% nonoperated working interest share during the construction period. Upon completion of the construction during the third quarter of 2016, the Company reported the asset and related obligation as a capital lease of $225 million for the Company’s share of the fair value of the FPSO. The FPSO lease provides for an initial term of 10 years with annual renewal periods for an additional 10 years, annual purchase options that decrease over time, and no residual value guarantees. The capital lease asset will be depreciated over the estimated proved reserves of the TEN field using the unit-of-production method, with the associated depreciation included in depreciation, depletion, and amortization (DD&A) in the Company’s Consolidated Statement of Income. The capital lease obligation will be accreted to the present value of the minimum lease payments using the effective interest method. The Company will make the first payment under the FPSO capital lease in the fourth quarter of 2016.
At September 30, 2016, future minimum lease payments due under capital leases were:
millions
 
2016
$
16

2017
42

2018
42

2019
42

2020
42

Remaining years
433

Total future minimum lease payments
$
617

Less portion representing imputed interest
372

Capital lease obligations
$
245


Interest Expense  The following summarizes interest expense:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
millions
2016
 
2015
 
2016
 
2015
Debt and other
$
251

 
$
245

 
$
768

 
$
743

Capitalized interest
(31
)
 
(46
)
 
(111
)
 
(127
)
Total interest expense
$
220

 
$
199

 
$
657

 
$
616



22

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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
2016
 
2015
 
2016
 
2015
Income tax expense (benefit)
$
(260
)
 
$
(917
)
 
$
(957
)
 
$
(2,232
)
Income (loss) before income taxes
(1,007
)
 
(3,077
)
 
(3,313
)
 
(7,520
)
Effective tax rate
26
%
 
30
%
 
29
%
 
30
%

The Company reported a loss before income taxes for the three and nine months ended September 30, 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 and nine months ended September 30, 2016, was primarily attributable to the following decreases:
non-deductible Algerian exceptional profits tax for Algerian income tax purposes
tax impact from foreign operations
non-deductible goodwill related to divestitures
adjustments to deferred tax balances
net changes in uncertain tax positions
These decreases were partially offset by the following increases:
state taxes, net of federal benefit
income attributable to noncontrolling interest

The decrease from the 35% U.S. federal statutory rate for the three and nine months ended September 30, 2015, was primarily attributable to non-deductible Algerian exceptional profits tax for Algerian income tax purposes and the tax impact from foreign operations.



23

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ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 were 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. Net proceeds received from the third party were reported in financing activities on the Company’s Consolidated Statement of Cash Flows. Semi-annual payments to the third party are scheduled on March 1 and September 1 of each year through March 1, 2026. The specified future amounts that the Company expects to pay and the payment timing are subject to change based upon the actual royalties received by the Company during the term of the conveyance. Royalties received by Anadarko under this agreement are reported in operating activities on the Company’s Consolidated Statement of Cash Flows. The semi-annual payments to the third party, up to the aggregate amount of the $413 million net proceeds the Company received for the conveyance in the first quarter of 2016, are reported in financing activities on the Company’s Consolidated Statement of Cash Flows. Any additional payments to the third party are reported in operating activities on the Company’s Consolidated Statement of Cash Flows to offset the royalties received.
During the nine months ended September 30, 2016, the Company amortized $27 million of deferred revenues as a result of this agreement. The Company made the first semi-annual payment of $25 million for royalties in September 2016. The following summarizes the remaining amounts that the Company expects to pay, prior to the potential 3% to 4% of any excess described above:
millions
 
2017
$
50

2018
50

2019
52

2020
56

2021
57

Later years
263

Total
$
528


24

Table of Contents

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 15ContingenciesDeepwater 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.


25

Table of Contents

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 its workforce with its expected future operating and capital plans. Employee notifications related to the workforce reduction program were completed by June 30, 2016. All restructuring charges will be recognized in 2016, with the exception of approximately $17 million of expense for retirement benefits expected to be recognized in 2017. The following summarizes the total expected restructuring charges and the amounts expensed during the three and nine months ended September 30, 2016, which are included in general and administrative expenses in the Company’s Consolidated Statements of Income:
millions
Total Expected Costs
 
Three Months Ended 
 September 30, 2016
 
Nine Months Ended September 30, 2016
Costs by category
 
 
 
 
 
Cash severance
$
154

 
$
5

 
$
151

Retirement benefits (1)
219

 
102

 
178

Share-based compensation
37

 
5

 
34

Total
$
410

 
$
112

 
$
363

__________________________________________________________________
(1) 
Includes termination benefits, curtailments, and settlements. 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
151

Payments
(141
)
Balance at September 30
$
10



26

Table of Contents

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 September 30
 
 
 
 
 
 
 
Service cost
$
24

 
$
30

 
$
1

 
$
3

Interest cost
24

 
25

 
3

 
3

Expected return on plan assets
(24
)
 
(27
)
 

 

Amortization of net actuarial loss (gain)
12

 
13

 

 

Amortization of net prior service cost (credit)

 

 
(6
)
 
1

Settlement expense