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, 2018
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 every Interactive Data File required to be submitted 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 such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 18, 2018, is shown below:
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
504,280,902



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
APC RCF - Anadarko’s $3.0 billion senior unsecured RCF
ASR Agreement - An 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
DJ Basin Complex - The Platte Valley system, Wattenberg system, and Lancaster plant, which were combined into a single complex in Colorado in the first quarter of 2014 to serve production in the DJ basin
FID - Final investment decision
Fitch - Fitch Ratings
FPSO - Floating production, storage, and offloading unit
G&A - General and administrative expenses
IRS - Internal Revenue Service
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
N/A - Not applicable
NGLs - Natural gas liquids
NM - Not meaningful
NTSB - National Transportation Safety Board
NYMEX - New York Mercantile Exchange
Oil - Includes crude oil and condensate
RCF - Revolving credit facility
ROTF - Regional oil treating facility

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S&P - Standard and Poor’s
Share-Repurchase Program - A program authorizing the repurchase of Anadarko’s common stock
Tax Reform Legislation - The U.S. Tax Cuts and Jobs Act signed into law on December 22, 2017
TEN - Tweneboa/Enyenra/Ntomme
TEUs - Tangible equity units
VIE or VIEs - Variable interest entity
WES - Western Gas Partners, LP, a publicly traded limited partnership, which is a consolidated subsidiary of Anadarko
WES RCF - WES’s $1.5 billion senior unsecured RCF
WGP - Western Gas Equity Partners, LP, a publicly traded limited partnership, which is a consolidated subsidiary of Anadarko
WGP RCF - WGP’s $35 million senior secured RCF
WTI - West Texas Intermediate
Zero Coupons - Anadarko’s Zero-Coupon Senior Notes due 2036

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
millions except per-share amounts
 
2018
 
2017
 
2018
 
2017
Revenues and Other
 
 
 
 
 
 
 
 
Oil sales
 
$
2,572

 
$
1,567

 
$
6,964

 
$
4,652

Natural-gas sales
 
232

 
269

 
682

 
1,090

Natural-gas liquids sales
 
382

 
265

 
992

 
768

Gathering, processing, and marketing sales
 
421

 
509

 
1,163

 
1,417

Gains (losses) on divestitures and other, net
 
90

 
(114
)
 
232

 
1,052

Total
 
3,697

 
2,496

 
10,033

 
8,979

Costs and Expenses
 
 
 
 
 
 
 
 
Oil and gas operating
 
294

 
253

 
845

 
738

Oil and gas transportation
 
228

 
220

 
633

 
698

Exploration
 
118

 
750

 
380

 
2,366

Gathering, processing, and marketing
 
256

 
396

 
745

 
1,101

General and administrative
 
248

 
261

 
814

 
768

Depreciation, depletion, and amortization
 
1,130

 
1,083

 
3,123

 
3,235

Production, property, and other taxes
 
246

 
159

 
637

 
449

Impairments
 
172

 

 
319

 
383

Other operating expense
 
26

 
123

 
188

 
157

Total
 
2,718

 
3,245

 
7,684

 
9,895

Operating Income (Loss)
 
979

 
(749
)
 
2,349

 
(916
)
Other (Income) Expense
 
 
 
 
 
 
 
 
Interest expense
 
240

 
230

 
705

 
682

(Gains) losses on derivatives, net
 
32

 
82

 
503

 
(33
)
Other (income) expense, net
 
24

 
5

 
16

 
51

Total
 
296

 
317

 
1,224

 
700

Income (Loss) Before Income Taxes
 
683

 
(1,066
)
 
1,125

 
(1,616
)
Income tax expense (benefit)
 
256

 
(425
)
 
507

 
(366
)
Net Income (Loss)
 
427

 
(641
)
 
618

 
(1,250
)
Net income (loss) attributable to noncontrolling interests
 
64

 
58

 
105

 
182

Net Income (Loss) Attributable to Common Stockholders
 
$
363

 
$
(699
)
 
$
513

 
$
(1,432
)
 
 
 
 
 
 
 
 
 
Per Common Share
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
0.72

 
$
(1.27
)
 
$
0.99

 
$
(2.60
)
Net income (loss) attributable to common stockholders—diluted
 
$
0.72

 
$
(1.27
)
 
$
0.99

 
$
(2.61
)
Average Number of Common Shares Outstanding—Basic
 
499

 
553

 
507

 
552

Average Number of Common Shares Outstanding—Diluted
 
500

 
553

 
508

 
552

Dividends (per common share)
 
$
0.25

 
$
0.05

 
$
0.75

 
$
0.15


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
millions
 
2018
 
2017
 
2018
 
2017
Net Income (Loss)
 
$
427

 
$
(641
)
 
$
618

 
$
(1,250
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
1

 
1

 
2

 
3

Income taxes on reclassification of previously deferred derivative losses
 

 

 

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

 
1

 
2

 
2

Adjustments for pension and other postretirement plans
 
 
 
 
 
 
 
 
Net gain (loss) incurred during period
 
25

 
(14
)
 
25

 
1

Income taxes on net gain (loss) incurred during period
 
(6
)
 
5

 
(6
)
 

Amortization of net actuarial (gain) loss to other (income) expense, net
 
15

 
29

 
28

 
100

Income taxes on amortization of net actuarial (gain) loss
 
(4
)
 
(11
)
 
(7
)
 
(37
)
Amortization of net prior service (credit) cost to other (income) expense, net
 
(6
)
 
(7
)
 
(18
)
 
(19
)
Income taxes on amortization of net prior service (credit) cost
 
2

 
3

 
4

 
7

Total adjustments for pension and other postretirement plans, net of taxes
 
26

 
5

 
26

 
52

Total
 
27

 
6

 
28

 
54

Comprehensive Income (Loss)
 
454

 
(635
)
 
646

 
(1,196
)
Comprehensive income (loss) attributable to noncontrolling interests
 
64

 
58

 
105

 
182

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
390

 
$
(693
)
 
$
541

 
$
(1,378
)


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
 
December 31,
millions except per-share amounts

2018
 
2017
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents ($133 and $80 related to VIEs)
 
$
1,883

 
$
4,553

Accounts receivable (net of allowance of $11 and $14)
 
 
 
 
   Customers ($159 and $106 related to VIEs)
 
1,644

 
1,222

   Others ($15 and $19 related to VIEs)
 
547

 
607

Other current assets
 
397

 
380

Total
 
4,471

 
6,762

Net Properties and Equipment (net of accumulated depreciation, depletion, and amortization of $36,375 and $34,107) ($6,419 and $5,731 related to VIEs)
 
28,744

 
27,451

Other Assets ($801 and $579 related to VIEs)
 
2,292

 
2,211

Goodwill and Other Intangible Assets ($1,170 and $1,191 related to VIEs)
 
5,638

 
5,662

Total Assets
 
$
41,145

 
$
42,086

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
 
 
 
Trade ($337 and $305 related to VIEs)
 
$
2,144

 
$
1,894

Other ($16 and $1 related to VIEs)
 
201

 
266

Short-term debt - Anadarko (1)
 
910

 
142

Short-term debt - WGP/WES
 
28

 

Current asset retirement obligations
 
332

 
294

Other current liabilities
 
1,502

 
1,310

Total
 
5,117

 
3,906

Long-term Debt
 
 
 
 
Long-term debt - Anadarko (1)
 
11,189

 
12,054

Long-term debt - WGP/WES
 
4,566

 
3,493

Total
 
15,755

 
15,547

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
2,455

 
2,234

Asset retirement obligations ($158 and $143 related to VIEs)
 
2,538

 
2,500

Other
 
4,043

 
4,109

Total
 
9,036

 
8,843

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share (1.0 billion shares authorized, 576.2 million and 574.2 million shares issued)
 
57

 
57

Paid-in capital
 
12,344

 
12,000

Retained earnings
 
1,291

 
1,109

Treasury stock (82.3 million and 43.4 million shares)
 
(4,608
)
 
(2,132
)
Accumulated other comprehensive income (loss)
 
(383
)
 
(338
)
Total Stockholders’ Equity
 
8,701

 
10,696

Noncontrolling interests
 
2,536

 
3,094

Total Equity
 
11,237

 
13,790

Total Liabilities and Equity
 
$
41,145

 
$
42,086

__________________________________________________________________
Parenthetical references reflect amounts as of September 30, 2018, and December 31, 2017.
VIE amounts relate to WGP and WES. See Note 16—Variable Interest Entities.
(1) 
Excludes WES and WGP.

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

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, 2017
 
$
57

 
$
12,000

 
$
1,109

 
$
(2,132
)
 
$
(338
)
 
$
3,094

 
$
13,790

Net income (loss)
 

 

 
513

 

 

 
105

 
618

Common stock issued
 

 
6

 

 

 

 

 
6

Share-based compensation expense
 

 
125

 

 

 

 

 
125

Dividends—common stock
 

 

 
(380
)
 

 

 

 
(380
)
Repurchases of common stock
 

 

 

 
(2,476
)
 

 

 
(2,476
)
Subsidiary equity transactions
 

 
(17
)
 

 

 

 
25

 
8

Settlement of tangible equity units
 

 
230

 

 

 

 
(300
)
 
(70
)
Distributions to noncontrolling interest owners
 

 

 

 

 

 
(365
)
 
(365
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 

 

 

 

 
2

 

 
2

Adjustments for pension and other postretirement plans
 

 

 

 

 
26

 

 
26

Cumulative effect of accounting change (1)
 

 

 
49

 

 
(73
)
 
(23
)
 
(47
)
Balance at September 30, 2018
 
$
57

 
$
12,344

 
$
1,291

 
$
(4,608
)
 
$
(383
)
 
$
2,536

 
$
11,237

 __________________________________________________________________
(1) 
Beginning January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 1—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for further information.



See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
 
 
September 30,
millions
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
618

 
$
(1,250
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
3,123

 
3,235

Deferred income taxes
 
141

 
(1,026
)
Dry hole expense and impairments of unproved properties
 
212

 
2,144

Impairments
 
319

 
383

(Gains) losses on divestitures, net
 
(31
)
 
(815
)
Total (gains) losses on derivatives, net
 
506

 
(33
)
Operating portion of net cash received (paid) in settlement of derivative instruments
 
(433
)
 
21

Other
 
224

 
227

Changes in assets and liabilities
 
 
 
 
(Increase) decrease in accounts receivable
 
(344
)
 
(32
)
Increase (decrease) in accounts payable and other current liabilities
 
230

 
(95
)
Other items, net
 
(263
)
 
(140
)
Net cash provided by (used in) operating activities
 
4,302

 
2,619

Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment
 
(4,891
)
 
(3,538
)
Divestitures of properties and equipment and other assets
 
393

 
3,480

Other, net
 
(161
)
 
30

Net cash provided by (used in) investing activities
 
(4,659
)
 
(28
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
2,131

 
249

Repayments of debt
 
(1,176
)
 
(42
)
Financing portion of net cash received (paid) for derivative instruments
 
19

 
(160
)
Increase (decrease) in outstanding checks
 
(13
)
 
(58
)
Dividends paid
 
(380
)
 
(84
)
Repurchases of common stock
 
(2,476
)
 
(37
)
Issuances of common stock
 
6

 

Distributions to noncontrolling interest owners
 
(365
)
 
(327
)
Payments of future hard-minerals royalty revenues conveyed
 
(50
)
 
(50
)
Other financing activities
 
(2
)
 
(18
)
Net cash provided by (used in) financing activities
 
(2,306
)
 
(527
)
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(18
)
 
4

Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents
 
(2,681
)
 
2,068

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents at Beginning of Period
 
4,674

 
3,308

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents at End of Period
 
$
1,993

 
$
5,376


See accompanying Notes to Consolidated Financial Statements.

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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 sale of oil, natural gas, and NGLs and in advancing its Mozambique LNG project toward FID. In addition, the Company engages in gathering, compressing, treating, processing, and transporting of natural gas; gathering, stabilizing, and transporting of oil and NGLs; and gathering and disposing 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 U.S. Generally Accepted Accounting Principles 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, 2017.
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. Investments are included in other assets.

Recently Adopted Accounting Standards  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 adopted 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 $107 million for 2017, including $94 million for the nine months ended September 30, 2017, were reclassified to other (income) expense, net, from G&A; oil and gas operating; gathering, processing, and marketing; and exploration expense.
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. The Company adopted this ASU using a retrospective approach on January 1, 2018. Adoption did not have a material impact on the Company’s consolidated financial statements. See Consolidated Statements of Cash Flows and Note 17—Supplemental Cash Flow Information for additional information.


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Table of Contents
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 the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 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 adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Under the modified retrospective method, prior-period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included a reduction to total equity of $47 million. While the Company does not expect 2018 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning January 1, 2018. See Note 2—Revenue from Contracts with Customers for additional information. The Company’s revenue recognition accounting policy effective January 1, 2018, is detailed below.
Exploration and Production—The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including spot sales or month-to-month contracts, contracts with a finite term, and life-of-field contracts where all production from a well or group of wells is sold to one or more customers. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs. For natural gas and NGLs sold on our behalf by a processor, revenue is typically measured based on the price the processor receives for the sale, less certain costs withheld by the processor.
Revenues are recognized for the sale of Anadarko’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
The Company enters into buy/sell arrangements related to the transportation of a portion of its oil production. Under these arrangements, barrels are sold to a third party at a location-based contract price and subsequently repurchased by the Company at a downstream location. The difference in value between the sale and purchase price represents the transportation fee to move oil from the lease or certain gathering locations to more liquid markets. These arrangements are often required by private transporters. These buy/sell transactions are recorded net in oil and gas transportation expense in the Company’s Consolidated Statements of Income.



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Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

WES Midstream and Other Midstream—Anadarko provides gathering, compressing, treating, processing, stabilizing, transporting, and disposal services pursuant to a variety of contracts. Under these arrangements, the Company receives fees and/or retains a percentage of products or a percentage of the proceeds from the sale of the customer’s products. These revenues are included in gathering, processing, and marketing sales in the Company’s Consolidated Statements of Income. Payment is generally received from the customer in the month of service or the month following the service. Contracts with customers generally have initial terms ranging from 5 to 10 years.
Revenue is recognized for fee-based gathering and processing services in the month of service based on the volumes delivered by the customer. Revenues are valued based on the rate in effect for the month of service when the fee is either the same rate per unit over the contract term or when the fee escalates and the escalation factor approximates inflation. The Company may charge additional service fees to customers for a portion of the contract term (i.e., for the first year of a contract or until reaching a volume threshold) due to the significant upfront capital investment. These fees are recognized as revenue over the expected period of customer benefit, generally the life of the related properties. Deficiency fees, which are charged to the customer if they do not meet minimum delivery requirements, are recognized over the performance period based on an estimate of the deficiency fees that will be billed upon completion of the performance period.
The Company’s midstream business also purchases natural-gas volumes from producers at the wellhead or production facility, typically at an index price, and charges the producer fees associated with the downstream gathering and processing services. These fees are treated as a reduction of the purchase cost when the fees relate to services performed after control of the product has transferred to Anadarko. Revenue is recognized, along with cost of product expense related to the sale, when the purchased product is sold to a third party.
Revenue from percentage of proceeds gathering and processing contracts is recognized net of the cost of product for purchases from service customers when the Company is acting as their agent in the product sale, and any fees charged on these percentage of proceeds contracts are recognized in service revenues.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, provides entities the option to reclassify stranded tax effects resulting from the Tax Reform Legislation from accumulated other comprehensive income (AOCI) to retained earnings. In accordance with its accounting policy, the Company releases stranded income tax effects from AOCI in the period the underlying portfolio is liquidated. This ASU allows for the reclassification of stranded tax effects as a result of the change in tax rates from Tax Reform Legislation to be recorded upon adoption of the ASU, rather than at the actual portfolio liquidation date. The Company adopted this ASU on January 1, 2018, electing to reclassify $73 million from AOCI to retained earnings, including a $2 million federal benefit of state tax impact related to the Tax Reform Legislation.

New Accounting Standards Issued But Not Yet Adopted  ASU 2016-02, Leases (Topic 842), requires lessees to recognize a lease liability and a right-of-use (ROU) asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet. This ASU modifies the definition of a lease and outlines the recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. The Company plans to make certain elections allowing the Company not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for existing or expired land easements, and not to recognize ROU assets or lease liabilities for short-term leases. Anadarko continues to review contracts in its portfolio of leased assets to assess the impact of adopting this ASU. The Company expects the adoption of this ASU to primarily impact other assets and other long-term liabilities and does not expect a material impact on its consolidated results of operations. To facilitate compliance with this ASU, Anadarko expects to implement new accounting software and complete the evaluation of its systems, processes, and internal controls by the end of 2018. Anadarko will adopt this ASU on January 1, 2019, using a modified retrospective approach. As permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements, the Company does not expect to adjust comparative-period financial statements and will recognize a cumulative effect adjustment in the opening balance of retained earnings in the period of adoption.

11

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Revenue from Contracts with Customers

Change in Accounting Policy  The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. See Note 1—Summary of Significant Accounting Policies for additional information.

Impacts on Financial Statements

Exploration and Production There were no significant changes to the timing or valuation of revenue recognized for sales of production by the Exploration and Production segment.

WES Midstream and Other Midstream Gathering and processing revenues decreased for contracts where the Company is acting as an agent for its processing customer in the sale of processed volumes and increased for contracts with noncash consideration, with an offset to gathering and processing expense upon product sale. The magnitude of these presentation changes in subsequent periods is dependent on future customer volumes subject to the impacted contracts and commodity prices for those volumes. These presentation changes do not impact net earnings.

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements:
CONSOLIDATED BALANCE SHEET
Impact of Change in Accounting Policy
millions
As Reported
 
Without Adoption of Topic 606
 
Effect of Change
Increase/(Decrease)
September 30, 2018
 
 
 
 
 
Assets
 
 
 
 
 
Other current assets
$
397

 
$
395

 
$
2

Net properties and equipment
28,744

 
28,697

 
47

Other assets
2,292

 
2,282

 
10

Liabilities
 
 
 
 
 
Other current liabilities
1,502

 
1,494

 
8

Deferred income taxes
2,455

 
2,461

 
(6
)
Other
4,043

 
3,932

 
111

Equity
 
 
 
 
 
Total equity
11,237

 
11,291

 
(54
)








12

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Revenue from Contracts with Customers (Continued)

CONSOLIDATED STATEMENT OF INCOME
Impact of Change in Accounting Policy
millions
As Reported
 
Without Adoption of Topic 606
 
Effect of Change
Increase/(Decrease)
Three Months Ended September 30, 2018
 
 
 
 
 
Revenues
 
 
 
 
 
Gathering, processing, and marketing sales
$
421

 
$
717

 
$
(296
)
Gains (losses) on divestitures and other, net
90

 
89

 
1

Expenses
 
 
 
 
 
Gathering, processing, and marketing
256

 
551

 
(295
)
Income tax expense (benefit)
256

 
254

 
2

Net income (loss) attributable to noncontrolling interests
64

 
71

 
(7
)
Net Income (Loss) Attributable to Common Stockholders
$
363

 
$
358

 
$
5

 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
Revenues
 
 
 
 
 
Gathering, processing, and marketing sales
$
1,163

 
$
1,944

 
$
(781
)
Gains (losses) on divestitures and other, net
232

 
233

 
(1
)
Expenses
 
 
 
 
 
Gathering, processing, and marketing
745

 
1,520

 
(775
)
Income tax expense (benefit)
507

 
507

 

Net income (loss) attributable to noncontrolling interests
105

 
111

 
(6
)
Net Income (Loss) Attributable to Common Stockholders
$
513

 
$
514

 
$
(1
)


13

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Revenue from Contracts with Customers (Continued)

Disaggregation of Revenue from Contracts with Customers The following table disaggregates revenue by significant product type and segment:
millions
Exploration
& Production
 
WES Midstream
 
Other Midstream
 
Other and
Intersegment
Eliminations
 
Total
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Oil sales
$
2,572

 
$

 
$

 
$

 
$
2,572

Natural-gas sales
232

 

 

 

 
232

Natural-gas liquids sales
382

 

 

 

 
382

Gathering, processing, and marketing sales (1)

 
511

 
113

 
1

 
625

Other, net
9

 

 

 
31

 
40

Total Revenue from Customers
$
3,195

 
$
511

 
$
113

 
$
32

 
$
3,851

Gathering, processing, and marketing sales (2)

 
(3
)
 
3

 
(204
)
 
(204
)
Gains (losses) on divestitures, net
5

 

 
1

 
(3
)
 
3

Other, net
(8
)
 
52

 
12

 
(9
)
 
47

Total Revenue from Other than Customers
$
(3
)
 
$
49

 
$
16

 
$
(216
)
 
$
(154
)
Total Revenue and Other
$
3,192

 
$
560

 
$
129

 
$
(184
)
 
$
3,697

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Oil sales
$
6,964

 
$

 
$

 
$

 
$
6,964

Natural-gas sales
682

 

 

 

 
682

Natural-gas liquids sales
992

 

 

 

 
992

Gathering, processing, and marketing sales (1)

 
1,438

 
255

 
83

 
1,776

Other, net
16

 

 

 
71

 
87

Total Revenue from Customers
$
8,654

 
$
1,438

 
$
255

 
$
154

 
$
10,501

Gathering, processing, and marketing sales (2)

 
(6
)
 
6

 
(613
)
 
(613
)
Gains (losses) on divestitures, net
24

 

 
10

 
(3
)
 
31

Other, net
(21
)
 
113

 
30

 
(8
)
 
114

Total Revenue from Other than Customers
$
3

 
$
107

 
$
46

 
$
(624
)
 
$
(468
)
Total Revenue and Other
$
8,657

 
$
1,545

 
$
301

 
$
(470
)
 
$
10,033

 __________________________________________________________________
(1) 
The amount in Other and Intersegment Eliminations primarily represents sales of third-party natural gas and NGLs of $328 million and intercompany eliminations of $(312) million for the three months ended September 30, 2018, and sales of third-party natural gas and NGLs of $813 million and intercompany eliminations of $(715) million for the nine months ended September 30, 2018.
(2) 
The amount in Other and Intersegment Eliminations represents purchases of third-party natural gas and NGLs. Although these purchases are reported net in gathering, processing, and marketing sales in the Company’s Consolidated Statements of Income, they are shown separately on this table, as the purchases are not considered revenue from customers.


14

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Revenue from Contracts with Customers (Continued)

Contract Liabilities Contract liabilities primarily relate to midstream fees and capital reimbursements that are charged to customers for only a portion of the contract term and must be recognized as revenues over the expected period of benefit, fixed and variable fees that are received from customers but revenue recognition is deferred under midstream cost of service contracts, and hard-minerals bonus payments received from customers that must be recognized as revenue over the expected period of benefit. The following table summarizes the current period activity related to contract liabilities from contracts with customers:
millions
 
Balance at December 31, 2017
$
37

Increase due to cumulative effect of adopting Topic 606
98

Increase due to cash received, excluding revenues recognized in the period (1)
46

Decrease due to revenue recognized (2)
(30
)
Balance at September 30, 2018
$
151

 
 
Contract liabilities at September 30, 2018
 
Other current liabilities
$
23

Other long-term liabilities - other
128

Total contract liabilities from contracts with customers
$
151

 __________________________________________________________________
(1) 
Includes $(6) million for the three months ended September 30, 2018.
(2) 
Includes $(9) million for the three months ended September 30, 2018.

Transaction Price Allocated to Remaining Performance Obligations Revenue expected to be recognized from certain performance obligations that are unsatisfied as of September 30, 2018, is reflected in the table below. The Company applies the optional exemptions in Topic 606 and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied performance obligations. Therefore, the following table represents only a small portion of Anadarko’s expected future consolidated revenues as future revenue from the sale of most products and services is dependent on future production or variable customer volumes and variable commodity prices for those volumes.
millions
Exploration
& Production
 
WES Midstream
 
Other Midstream
 
Other and
Intersegment
Eliminations
 
Total
Remainder of 2018
$
27

 
$
124

 
$
31

 
$
(96
)
 
$
86

2019
104

 
480

 
204

 
(441
)
 
347

2020
103

 
545

 
293

 
(606
)
 
335

2021
103

 
525

 
361

 
(672
)
 
317

2022
7

 
529

 
417

 
(739
)
 
214

Thereafter
65

 
2,192

 
3,107

 
(4,662
)
 
702

Total
$
409

 
$
4,395

 
$
4,413

 
$
(7,216
)
 
$
2,001



15

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Commodity Inventories

The following summarizes the major classes of commodity inventories included in other current assets:
 
September 30,
 
December 31,
millions
2018
 
2017
Oil
$
168

 
$
165

Natural gas
19

 
29

NGLs
131

 
122

Total commodity inventories
$
318

 
$
316


4. Divestitures

Divestitures  The following summarizes the proceeds received and gains (losses) recognized on divestitures:
 
Nine Months Ended
 
September 30,
millions
2018
 
2017
Proceeds received, net of closing adjustments
$
393

 
$
3,480

Gains (losses) on divestitures, net (1)
31

 
815

__________________________________________________________________
(1) 
Includes the $126 million gain related to the 2017 property exchange discussed below.

2018 During the nine months ended September 30, 2018, the Company divested of the following U.S. onshore and Gulf of Mexico assets:
Alaska nonoperated assets, included in the Exploration and Production and Other Midstream reporting segments, for net proceeds of $370 million and net losses of $33 million in 2018 and $154 million in the fourth quarter of 2017.
Ram Powell nonoperated assets in the Gulf of Mexico, included in the Exploration and Production reporting segment, resulting in a net gain of $67 million.

2017 During the nine months ended September 30, 2017, the Company divested of the following U.S. onshore 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
Marcellus assets in Pennsylvania, included in the Exploration and Production and Other Midstream reporting segments, for net proceeds of $758 million and net losses of $56 million in 2017 and $129 million in the fourth quarter of 2016
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 WES Midstream reporting segments, for net proceeds of $69 million and a net loss of $52 million

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. Following the acquisition, the DBJV System is 100% owned by WES and consolidated by Anadarko.


16

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Impairments

Impairments of Long-Lived Assets

2018 During the nine months ended September 30, 2018, the Company expensed $319 million primarily related to the following:
$145 million in the third quarter of 2018 related to hard-minerals properties due to the Company’s primary consumer of coal stating its intent to retire its existing coal-fired power generation plant earlier than expected, coupled with the outlook for limited new markets for the Company’s coal in the Rockies region. These coal assets had a post-impairment fair value of $15 million.
$126 million related to a gathering system in the DJ basin, included in the WES Midstream reporting segment that was permanently taken out of service in the second quarter of 2018.

2017 During the nine months ended September 30, 2017, the Company expensed $383 million primarily related to the following:
$211 million related to oil and gas properties in the Gulf of Mexico, included in the Exploration and Production reporting segment, due to lower forecasted commodity prices at that time. The assets had a post-impairment fair value of $231 million.
$168 million related to U.S. onshore midstream properties, included in the WES Midstream reporting segment, primarily due to a reduced throughput fee as a result of a producer’s bankruptcy. The assets had a post-impairment fair value of $58 million.
Fair values were 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 of Unproved Properties Impairments of unproved properties are included in exploration expense in the Company’s Consolidated Statements of Income. During the nine months ended September 30, 2018, the Company recognized $158 million of impairments of unproved Gulf of Mexico properties primarily related to blocks where the Company determined it would no longer pursue activities. The Company recognized $586 million of impairments of unproved Gulf of Mexico properties during the nine months ended September 30, 2017, of which $463 million related to the Shenandoah project. The unproved property balance related to the Shenandoah project originated from the purchase price allocated to the Gulf of Mexico exploration projects from the acquisition of Kerr-McGee Corporation in 2006.

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.

6. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $510 million at September 30, 2018, and $525 million at December 31, 2017. 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, 2018, there was no exploration expense recorded for suspended exploratory well costs previously capitalized for greater than one year at December 31, 2017.


17

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Current Liabilities

Accounts Payable Accounts payable, trade included liabilities of $205 million at September 30, 2018, and $219 million at December 31, 2017, 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:
 
September 30,
 
December 31,
millions
2018
 
2017
Accrued income taxes
$
79

 
$
71

Interest payable
169

 
246

Production, property, and other taxes payable
344

 
216

Accrued employee benefits
270

 
210

Derivatives
491

 
384

Other
149

 
183

Total other current liabilities
$
1,502

 
$
1,310


8. 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.
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.


18

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities  The oil prices listed below are a combination of NYMEX WTI and Intercontinental Exchange, Inc. (ICE) Brent Blend prices. The natural-gas prices listed below are NYMEX Henry Hub 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, 2018:
 
2018 Settlement
 
2019 Settlement
Oil
 
 
 
Two-Way Collars (MBbls/d)
108

 

Average price per barrel (WTI)

 

Ceiling sold price (call)
$
60.48

 
$

Floor purchased price (put)
$
50.00

 
$

Three-Way Collars (MBbls/d)

 
87

Average price per barrel (WTI and Brent)

 


Ceiling sold price (call)
$

 
$
72.98

Floor purchased price (put)
$

 
$
56.72

Floor sold price (put)
$

 
$
46.72

Fixed-Price Contracts (MBbls/d)
84

 

Average price per barrel (Brent)
$
61.45

 
$

Natural Gas

 

Three-Way Collars (thousand MMBtu/d)
250

 

Average price per MMBtu (Henry Hub)

 

Ceiling sold price (call)
$
3.54

 
$

Floor purchased price (put)
$
2.75

 
$

Floor sold price (put)
$
2.00

 
$

Fixed-Price Contracts (thousand MMBtu/d)
280

 

Average price per MMBtu (Henry Hub)
$
3.02

 
$


A two-way collar is a combination of two options: a sold call and a purchased 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.
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.


19

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. 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 August 2018, the Company amended an interest-rate swap with a notional principal amount of $200 million, extending the mandatory termination date from 2018 to 2023 in exchange for a cash payment of approximately $10 million.
At September 30, 2018, 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 potential future debt issuances. 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, 2018
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%
$
100

 
 
September 2017 - 2047
 
September 2020
 
6.891%
$
250

 
 
September 2017 - 2047
 
September 2021
 
6.570%
$
450

 
 
September 2017 - 2047
 
September 2023
 
6.445%

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 $101 million during the nine months ended September 30, 2018, and $118 million during the nine months ended September 30, 2017.


20

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. 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
 
2018
 
2017
 
2018
 
2017
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
2

 
$
7

 
$

 
$
(1
)
Other assets
 

 
2

 

 

Other current liabilities
 
20

 
45

 
(440
)
 
(206
)
Other liabilities
 
15

 

 
(56
)
 
(2
)
 
 
37

 
54

 
(496
)
 
(209
)
Interest-rate derivatives
 

 
 
 
 
 
 
Other current assets
 
21

 
14

 

 

Other assets
 
54

 
40

 

 

Other current liabilities
 

 

 
(80
)
 
(236
)
Other liabilities
 

 

 
(1,028
)
 
(1,183
)
 
 
75

 
54

 
(1,108
)
 
(1,419
)
Total derivatives
 
$
112

 
$
108

 
$
(1,604
)
 
$
(1,628
)

Effect of Derivative InstrumentsStatement of Income  The following summarizes gains and losses related to derivative instruments:
 
 
Three Months Ended
 
Nine Months Ended
millions
 
September 30,
 
September 30,
Classification of (Gain) Loss Recognized
 
2018
 
2017
 
2018
 
2017
Commodity derivatives
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales
 
$
1

 
$

 
$
3

 
$

(Gains) losses on derivatives, net
 
104

 
43

 
734

 
(164
)
Interest-rate derivatives
 

 

 
 
 

(Gains) losses on derivatives, net
 
(72
)
 
39

 
(231
)
 
131

Total (gains) losses on derivatives, net
 
$
33

 
$
82

 
$
506

 
$
(33
)


21

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. 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 generally require full or partial collateralization of the Company’s obligations depending on certain credit-risk-related provisions, such as the Company’s credit rating from S&P and Moody’s. As of September 30, 2018, the Company’s long-term debt was rated investment grade (BBB) by both S&P and Fitch and below investment grade (Ba1) by Moody’s. The Company may be required to post additional collateral with respect to its derivative instruments if its credit ratings decline below current levels or if the liability associated with any such derivative instrument increases substantially. For example, based on the derivative positions as of September 30, 2018, if Anadarko’s credit rating were to be downgraded one level by either S&P or Moody’s, the Company could be required to post additional collateral of up to approximately $124 million. 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 $49 million of collateral) at September 30, 2018, and $1.4 billion (net of $170 million of collateral) at December 31, 2017.


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Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. 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, 2018
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
37

 
$

 
$
(35
)
 
$

 
$
2

Interest-rate derivatives

 
75

 

 

 

 
75

Total derivative assets
$

 
$
112

 
$

 
$
(35
)
 
$

 
$
77

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
(496
)
 
$

 
$
35

 
$
6

 
$
(455
)
Interest-rate derivatives

 
(1,108
)
 

 

 
49

 
(1,059
)
Total derivative liabilities
$

 
$
(1,604
)
 
$

 
$
35

 
$
55

 
$
(1,514
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
1

 
$
53

 
$

 
$
(46
)
 
$
(1
)
 
$
7

Interest-rate derivatives

 
54

 

 

 

 
54

Total derivative assets
$
1

 
$
107

 
$

 
$
(46
)
 
$
(1
)
 
$
61

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
(1
)
 
$
(208
)
 
$

 
$
46

 
$
3

 
$
(160
)
Interest-rate derivatives

 
(1,419
)
 

 

 
170

 
(1,249
)
Total derivative liabilities
$
(1
)
 
$
(1,627
)
 
$

 
$
46

 
$
173

 
$
(1,409
)
 __________________________________________________________________
(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.


23

Table of Contents
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Tangible Equity Units

In June 2015, the Company issued 9.2 million 7.50% TEUs at a stated amount of $50.00 per TEU and raised net proceeds of $445 million. Each TEU was comprised of a prepaid equity purchase contract for common units of WGP and a senior amortizing note. The prepaid equity purchase contract was considered a freestanding financial instrument, indexed to WGP common units, and met the conditions for equity classification.

Equity Component On June 7, 2018, the mandatory settlement date, Anadarko settled 9.2 million outstanding TEUs in exchange for approximately 8.2 million WGP common units based on the determined final settlement rate of 0.8921 WGP common units per outstanding TEU. See settlement of tangible equity units in the Company’s Consolidated Statement of Equity.

Debt Component Each senior amortizing note had an initial principal amount of $10.95 and bore interest at 1.50% per year. The final installment payment of $9 million was made on June 7, 2018. For activity related to the senior amortizing notes, see Note 10—Debt.

10. Debt

Debt Activity  The following summarizes the Company’s borrowing activity, after eliminating the effect of intercompany transactions, during the nine months ended September 30, 2018:
 
Carrying Value
 
 
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Anadarko Consolidated
 
Description
Balance at December 31, 2017
$
3,465

 
$
28

 
$
11,965

 
$
15,458

 
 
Issuances


 

 


 


 
 
 
394

 

 

 
394

 
WES 4.500% Senior Notes due 2028
 
687

 

 

 
687

 
WES 5.300% Senior Notes due 2048
 
396

 

 

 
396

 
WES 4.750% Senior Notes due 2028
 
342

 

 

 
342

 
WES 5.500% Senior Notes due 2048
Borrowings


 


 

 


 
 
 
320

 

 

 
320

 
WES RCF
Repayments


 

 

 


 
 
 
(690
)
 

 

 
(690
)
 
WES RCF
 

 

 
(114
)
 
(114
)
 
7.050% Debentures due 2018
 
(350
)