-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J3+1tH+S5Ubt3nC/wTV/gJZZbkSP++4IU/C3qjV9eKewSMdZBCW7Pif7qSwyOR9y 8nP1KgIHjxPLUjii46YAow== 0000773910-98-000010.txt : 19981116 0000773910-98-000010.hdr.sgml : 19981116 ACCESSION NUMBER: 0000773910-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANADARKO PETROLEUM CORP CENTRAL INDEX KEY: 0000773910 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760146568 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08968 FILM NUMBER: 98749148 BUSINESS ADDRESS: STREET 1: 17001 NORTHCHASE DR CITY: HOUSTON STATE: TX ZIP: 77060-2141 BUSINESS PHONE: 2818751101 MAIL ADDRESS: STREET 1: P O BOX 1330 STREET 2: P O BOX 1330 CITY: HOUSTON STATE: TX ZIP: 77251-1330 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1998 Commission File No. 1-8968 ANADARKO PETROLEUM CORPORATION 17001 Northchase Drive, Houston, Texas 77060-2141 (281) 875-1101 Incorporated in the Employer Identification State of Delaware No. 76-0146568 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 X No _____ The number of shares outstanding of the Company's common stock as of October 30, 1998 is shown below: Number of Shares Title of Class Outstanding Common Stock, $0.10 par value per share 120,325,896 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended Nine Months Ended thousands except September 30 September 30 per share amounts 1998 1997 1998 1997 Revenues Gas sales $ 86,253 $ 94,773 $267,443 $284,971 Oil and condensate sales 35,010 42,036 97,989 124,556 Natural gas liquids and other 18,928 21,908 59,286 59,537 Total 140,191 158,717 424,718 469,064 Cost and Expenses Operating expenses 41,848 39,319 120,754 105,630 Administrative and general 21,950 19,486 64,914 53,673 Depreciation, depletion and amortization 51,562 51,062 151,286 144,323 Other taxes 9,116 10,720 28,432 34,333 Total 124,476 120,587 365,386 337,959 Operating Income 15,715 38,130 59,332 131,105 Interest Expense 14,991 11,452 41,127 28,657 Income before Income Taxes 724 26,678 18,205 102,448 Income Taxes 260 9,586 6,385 37,148 Net Income $ 464 $ 17,092 $ 11,820 $ 65,300 Preferred Stock Dividends 2,730 --- 4,368 --- Net Income (Loss) Available to Common Stockholders $ (2,266) $ 17,092 $ 7,452 $ 65,300 Per Common Share Net income (loss)- basic $ (0.02) $ 0.14 $ 0.06 $ 0.55 Net income (loss)- diluted $ (0.02) $ 0.14 $ 0.06 $ 0.54 Dividends - common $ 0.05 $ 0.0375 $ 0.1375 $ 0.1125 Average Number of Common Shares Outstanding 120,140 119,484 120,008 119,329
See accompanying notes to consolidated financial statements. -2- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, December 31, thousands 1998 1997 ASSETS Current Assets Cash and cash equivalents $ 19,881 $ 8,907 Accounts receivable 157,750 177,157 Inventories, at average cost 20,961 28,564 Prepaid expenses 6,576 4,366 Total 205,168 218,994 Properties and Equipment Original cost 5,314,372 4,669,251 Less accumulated depreciation, depletion and amortization 2,054,097 1,914,472 Net properties and equipment - based on the full cost method of accounting for oil and gas properties 3,260,275 2,754,779 Deferred Charges 31,570 18,692 $3,497,013 $2,992,465
See accompanying notes to consolidated financial statements. -3- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEET (continued) (Unaudited)
September 30, December 31, thousands 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable Trade and other $ 157,870 $ 202,822 Banks 26,797 22,102 Accrued expenses Interest 13,968 13,607 Taxes and other 15,653 13,799 Notes payable, banks 49,631 --- Total 263,919 252,330 Long-term Debt 1,225,000 955,733 Deferred Credits Deferred income taxes 550,046 546,792 Other 140,242 120,830 Total 690,288 667,622 Stockholders' Equity Preferred stock, par value $1.00 (2,000,000 shares authorized, 200,000 and no shares issued as of September 30, 1998 and December 31, 1997, respectively) 200,000 --- Common stock, par value $0.10 (200,000,000 shares authorized, 122,247,367 and 121,771,988 shares issued as of September 30, 1998 and December 31, 1997, respectively) 12,224 6,134 Paid-in capital 375,086 353,125 Retained earnings (as of September 30, 1998, $667,806,000 was not restricted as to the payment of dividends) 819,631 828,787 Deferred compensation (8,510) (11,203) Executives and Directors Benefits Trust, at market value (2,000,000 shares as of September 30, 1998 and December 31, 1997) (80,625) (60,063) _________ _________ Total 1,317,806 1,116,780 $3,497,013 $2,992,465
See accompanying notes to consolidated financial statements. -4- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended September 30 thousands 1998 1997 Cash Flow from Operating Activities Net income $ 11,820 $ 65,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 151,286 144,319 Amortization of restricted stock 829 1,424 Deferred U.S. income taxes 4,818 29,014 168,753 240,057 Decrease in accounts receivable 19,407 52,997 (Increase) decrease in inventories 7,603 (9,033) Decrease in accounts payable - trade and other and accrued expenses (42,737) (35,628) Other items - net (5,600) (342) Net cash provided by operating activities 147,426 248,051 Cash Flow from Investing Activities Additions to properties and equipment (672,368) (496,402) Proceeds from the sale of assets to be leased, net 20,170 87,900 Sales and retirements of properties and equipment 5,454 3,141 Net cash used in investing activities (646,744) (405,361) Cash Flow from Financing Activities Additions to debt 418,898 159,522 Retirements of debt (100,000) --- Issuance of preferred stock 195,675 --- Increase in accounts payable, banks 4,695 1,360 Dividends paid (20,976) (13,433) Issuance of common stock 12,000 9,094 Issuance of treasury stock, net --- 4 Net cash provided by financing activities 510,292 156,547 Net Increase (Decrease) in Cash and Cash Equivalents 10,974 (763) Cash and Cash Equivalents at Beginning of Period 8,907 14,601 Cash and Cash Equivalents at End of Period $ 19,881 $ 13,838
See accompanying notes to consolidated financial statements. -5- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Accounting Policies General Anadarko Petroleum Corporation is engaged in the exploration, development, production and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs). The terms "Anadarko" and "Company" refer to Anadarko Petroleum Corporation and its subsidiaries. The principal subsidiaries of Anadarko are: Anadarko Algeria Corporation (Anadarko Algeria), Anadarko Energy Services Company and Anadarko Gathering Company. Certain amounts have been restated to conform to the current presentation. 2. Inventories Materials and supplies and natural gas inventory are stated at the lower of average cost or market. Natural gas, when sold from inventory, is charged to expense using the average-cost method. The major classes of inventories are as follows:
September 30, December 31, thousands 1998 1997 Materials and supplies $19,925 $27,332 Natural gas 1,036 1,232 $20,961 $28,564
3. Properties and Equipment Oil and gas properties include costs of $379,329,000 and $343,789,000 at September 30, 1998 and December 31, 1997, respectively, which were excluded from capitalized costs being amortized. These amounts represent costs associated with unevaluated properties and major development projects. 4. Long-term Debt A summary of long-term debt follows:
September 30, December 31, thousands 1998 1997 Commercial Paper $ 284,631 $125,733 Notes Payable, Banks 140,369 30,000 8 3/4% Notes due 1998 --- 100,000 8 1/4% Notes due 2001 100,000 100,000 6 3/4% Notes due 2003 100,000 100,000 5 7/8% Notes due 2003 100,000 100,000 7 1/4% Debentures due 2025 100,000 100,000 7% Debentures due 2027 100,000 100,000 6.625% Debentures due 2028 100,000 --- 7.73% Debentures due 2096 100,000 100,000 7 1/4% Debentures due 2096 100,000 100,000 $1,225,000 $955,733
-6- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 4. Long-term Debt (continued) The commercial paper and a portion of the notes payable to banks have been classified as long-term debt in accordance with Statement of Financial Accounting Standards No. 6, "Classification of Short-term Obligations Expected to be Refinanced", under the terms of Anadarko's Bank Credit Agreements. In January 1998, Anadarko issued $100,000,000 principal amount of 6.625% Debentures due 2028. The proceeds were used to fund capital spending projects in core operating areas. In March 1998, Anadarko filed a shelf registration statement with the Securities and Exchange Commission that permits the issuance of up to $500,000,000 in debt and equity securities. Net proceeds, terms and pricing of offerings of securities issued under the shelf registration statement will be determined at the time of the offerings. In May 1998, $200,000,000 in preferred stock was issued under the shelf registration statement. (See Note 5). In April 1998, the Company's Revolving Credit and 364-Day Credit Agreements were amended. The Revolving Credit Agreement was amended to increase the number of commercial banks in the group from eight to nine. The 364-Day Credit Agreement was amended as follows: the principal amount of the Agreement was increased from $125,000,000 to $175,000,000; the number of commercial banks in the group was changed from eight to nine; and the expiration date of the Agreement was extended for 10 months. 5. Preferred Stock On May 7, 1998, Anadarko issued $200,000,000 of 5.46% Series B Cumulative Preferred Stock in the form of two million depositary shares, each depositary share representing 1/10th of a share of the 5.46% Series B Cumulative Preferred Stock. The preferred stock has no stated maturity and is not subject to a sinking fund or mandatory redemption. The shares are not convertible into other securities of the Company. Anadarko has the option to redeem the shares at $100 per depositary share on or after May 15, 2008. Holders of the shares are entitled to receive, when, and as declared by the Board of Directors, cumulative cash dividends at an annual dividend rate of $5.46 per depositary share. The proceeds from the offering were used to reduce commercial paper and bank borrowings and provide capital for Anadarko's 1998 capital expenditures. The preferred stock was issued under the Company's shelf registration statement. -7- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 5. Preferred Stock (continued) For the third quarter of 1998, dividends of $13.65 per share (equivalent to $1.365 per depositary share) were paid to holders of preferred stock. 6. Common Stock In April 1998, the Board of Directors approved a two-for-one stock split, to be effected in the form of a stock dividend. The distribution date was July 1, 1998 to stockholders of record on June 15, 1998. All share and per share information has been restated to reflect the stock split. For the third quarter of 1998, dividends of $0.05 per share were paid to holders of common stock. Under the most restrictive provisions of the Company's credit agreements, which limit the payment of dividends, retained earnings of $667,806,000 and $466,780,000 were not restricted as to the payment of dividends at September 30, 1998 and December 31, 1997, respectively. The Company's basic earnings per share (EPS) amounts have been computed based on the average number of common shares outstanding. Diluted EPS amounts include the effect of the Company's outstanding stock options under the treasury stock method. The reconciliation between basic and diluted EPS is as follows:
Three Months Ended Three Months Ended September 30, 1998 September 30, 1997 thousands except Per Share Per Share per share amounts Loss Shares Amount Income Shares Amount Basic EPS Income (loss) available to common stockholders $(2,266) 120,140 $(0.02) $17,092 119,484 $0.14 Effect of dilutive stock options --- --- --- 974 Diluted EPS Income (loss) available to common stockholders plus assumed conversion $(2,266) 120,140 $(0.02) $17,092 120,458 $0.14
-8- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 6. Common Stock (continued)
Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 thousands except Per Share Per Share per share amounts Income Shares Amount Income Shares Amount Basic EPS Income available to common stockholders $7,452 120,008 $0.06 $65,300 119,329 $0.55 Effect of dilutive stock options --- 923 --- 751 Diluted EPS Income available to common stockholders plus assumed conversion $7,452 120,931 $0.06 $65,300 120,080 $0.54
For the third quarter of 1998, there were 979,000 common stock equivalents related to outstanding stock options that were not included in the computation of diluted EPS since they had an anti- dilutive effect. 7. Statement of Cash Flows Supplemental Information The amounts of cash paid (received) for interest (net of amounts capitalized) and income taxes are as follows:
Nine Months Ended September 30 thousands 1998 1997 Interest $41,078 $28,903 Income taxes $(6,516) $10,930
8. Operating Expenses Operating expenses by category are as follows:
Three Months Ended Nine Months Ended September 30 September 30 Thousands 1998 1997 1998 1997 Oil and gas $25,031 $21,011 $ 67,751 $ 59,427 Plant, gathering and marketing 16,817 18,308 53,003 46,203 $41,848 $39,319 $120,754 $105,630
-9- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 9. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 (NGPA) allowed a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for natural gas. Based on the Federal Energy Regulatory Commission (FERC) ruling that the Kansas ad valorem tax was such a tax, the Company collected the Kansas ad valorem tax. Background of Present Litigation FERC's ruling regarding the ability of producers to collect the Kansas ad valorem tax was appealed to the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit). The Court held in June 1988 that FERC failed to provide a reasoned basis for its findings and remanded the case to FERC. On December 1, 1993, FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. Based on Anadarko's interpretation of FERC's orders, $700,000 (pre-tax) was charged against income in 1994, in addition to $130,000 (pre-tax) charged against income in 1993. Anadarko, together with other natural gas producers, challenged FERC's orders. The D.C. Circuit issued its decision on August 2, 1996 ruling that producers must refund all Kansas ad valorem taxes collected relating to production since October 1983. The Company, along with other producing companies, filed a petition for writ of certiorari with the Supreme Court. That petition was denied on May 12, 1997. Anadarko estimates that the maximum amount of principal and interest at issue which has not been paid to date, assuming that the October 1983 effective date remains in effect, is about $41,800,000 (pre-tax) as of September 30, 1998. FERC Proceedings The Company, along with other producing companies, filed a petition for adjustment with FERC on May 12, 1997 seeking a waiver of all interest which might otherwise be due. The total interest at issue is about $27,300,000 (pre-tax) as of September 30, 1998. On September 10, 1997, FERC denied the petition for adjustment. By order dated February 26, 1998, in response to Anadarko's request, FERC granted first sellers the right to secure a surety bond instead of placing cash in escrow. The Company and other producers filed petitions for review of FERC's January 28, 1998 order denying adjustment relief with the United States Court of Appeals for the Fifth Circuit (Fifth Circuit). -10- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 9. Kansas Ad Valorem Tax (continued) The Public Service Company of Colorado and an affiliate filed a motion in the Fifth Circuit to dismiss the pending appeals or to transfer them to the D.C. Circuit. On April 27, 1998, the Fifth Circuit denied the motion to dismiss but granted the motion to transfer the appeals to the D.C. Circuit. Several parties, including Anadarko, sought rehearing of the Order Clarifying Procedures issued by FERC on January 28, 1998. On June 3, 1998, FERC denied the relief sought in the motion for rehearing. FERC generally held that it was permissible for producers to adjust pipeline statements of refunds due to reflect refund amounts attributable to other working interest owners, amounts associated with uncollectible royalty interest, and amounts associated with sales made below applicable FERC set maximum lawful prices. In addition, claims for a generic waiver of interest on refunds due were denied. Depending on future FERC orders, the Company could be required to pay all or part of the amounts claimed by all pipelines (which might include PanEnergy) pending further potential review by FERC or courts. However, a FERC order issued February 26, 1998 involving refunds paid by another producer to Northern Natural Gas Company indicates that, if a producer prevails in subsequent legal challenges, the producer may recoup amounts paid directly from the pipeline itself, even if the pipeline already distributed refunds to the pipeline's customers. Requests for rehearing of this order are pending. The Company intends to comply fully with all lawful orders issued by FERC, without waiver of any claim of right or any defense or the right to seek judicial review or intervention. On March 9, 1998 and March 10, 1998, the Company filed several compliance filings with FERC paying undisputed amounts billed by pipelines and bonding amounts in dispute. The entire refund claim by Panhandle Eastern Pipe Line Company, a PanEnergy affiliate, was disputed, and the Company posted a surety bond for the amount in controversy of $25,125,000, covering refund claims made against the Company and all affiliates. -11- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 9. Kansas Ad Valorem Tax (continued) PanEnergy Litigation On May 13, 1997, the Company filed a lawsuit in the Federal District Court for the Southern District of Texas against PanEnergy seeking declaration that pursuant to prior agreements Anadarko is not required to issue refunds to PanEnergy for the principal amount of $14,000,000 (pre-tax) and, if the petition for adjustment is denied in its entirety by FERC with respect to PanEnergy refunds, interest in an amount of $26,200,000 (pre-tax) as of September 30, 1998. The Company also seeks from PanEnergy the return of $816,000 of the $830,000 (pre-tax) charged against income in 1993 and 1994. In response to a motion filed by PanEnergy, the United States District Court issued an order on March 19, 1998 staying the litigation, pending the exercise by FERC of its regulatory jurisdiction. FERC Order of October 13, 1998 On October 13, 1998, FERC issued a final order on Anadarko's complaint. The order declares that Anadarko Production Company (now an affiliate of Duke Energy) is responsible as first seller for making refunds of Kansas ad valorem tax reimbursements collected from 1983 through August 1, 1985. The Company estimates this amount to be as much as $26,000,000. The Company is responsible to make refunds for reimbursements it collected as first seller from August 1, 1985 through 1988. The Company estimates this amount to be as much as $16,000,000. The FERC order states that whether Anadarko Production Company or the Company is entitled to reimbursement from another party for the refunds ordered is a matter to be pursued in an appropriate judicial forum. Requests for rehearing of the October 13, 1998 order may be filed. FERC may, in the near future, issue an order based upon the above allocation regarding when the refunds must be paid. -12- Item 1. Financial Statements (continued) ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 9. Kansas Ad Valorem Tax (continued) Kansas Corporation Commission (KCC) Proceeding On April 30, 1998, the Company's subsidiary, Anadarko Gathering Company (AGC), filed a petition with the KCC to clarify AGC's rights and obligations, if any, related to the payment by first sellers of Kansas ad valorem tax refunds. The refunds at issue relate to sales made by Anadarko Production Company, a PanEnergy affiliate, through facilities known as the Cimmaron River System during the time period from 1983 to 1988. AGC purchased the Cimmaron River System from Centana, the successor of Anadarko Production Company, in 1995. The petition, among other things, asks the KCC to determine whether AGC or Anadarko Production Company is responsible for the payment or distribution of refunds received from first sellers to Anadarko Production Company's former customers and requests guidance concerning the disposition of refunds received that are attributable to sales made to Anadarko Production Company customers that did not reimburse Anadarko Production Company for Kansas ad valorem taxes during the relevant time periods. This matter is presently being pursued before KCC. Anadarko's net income for 1997 included a $1,800,000 charge (before income taxes) related to the Kansas ad valorem tax refunds. This charge reflects all principal and interest which may be due at the conclusion of all regulatory proceedings and litigation to parties other than PanEnergy. The Company is unable at this time to predict the final outcome of this matter and no provision for liability (excluding the amounts recorded in 1993, 1994 and 1997) has been made in the accompanying financial statements. 10. The information, as furnished, reflects all normal recurring adjustments that are, in the opinion of management, necessary to a fair statement of financial position as of September 30, 1998 and December 31, 1997, the results of operations for the three and nine months ended September 30, 1998 and 1997, and cash flows for the nine months ended September 30, 1998 and 1997. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company has made in this report forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company's operations, economic performance and financial condition. These forward looking statements include information concerning future production and reserves, contributions from Algerian properties, and those statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "estimates", "projects", "target", "goal", "plans", "objective", "should" or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Such statements are subject to various risks and uncertainties, and actual results could differ materially from those expressed or implied by such statements due to a number of factors in addition to those discussed elsewhere in this Form 10-Q and in the Company's other public filings, press releases and discussions with Company management. See Additional Factors Affecting Business in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 1997 Annual Report on Form 10-K. Overview of Operating Results For 1998's third quarter, Anadarko had a net loss available to common stockholders of $2.3 million or two cents per share. Revenues for the third quarter of 1998 totaled $140.2 million. For the same period in 1997, Anadarko had net income of $17.1 million or 14 cents per share on revenues of $158.7 million. The decline in Anadarko's 1998 third quarter results from the same period in 1997 was primarily due to substantially lower commodity prices for crude oil, natural gas and natural gas liquids (NGLs), partially offset by increased production volumes. Higher costs and expenses, increased interest expense and preferred stock dividends also affected the 1998 third quarter performance. For the first nine months of 1998, Anadarko's net income available to common stockholders was $7.5 million (six cents per share). Revenues for the first nine months of 1998 totaled $424.7 million. For the corresponding period in 1997, Anadarko had $65.3 million in net income (54 cents per share) on revenues of $469.1 million. The decline in the first nine months of 1998 net income and revenues compared to the same period in 1997 was due to substantially lower commodity prices, which were partially offset by higher production volumes. Net income for the first nine months of 1998 also reflects higher costs and expenses, higher interest expense and preferred stock dividends. -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table shows the Company's volumes and average prices for the three and nine months ended September 30, 1998 and 1997:
Three Months Ended September 30 % Increase 1998 1997 (Decrease) Natural gas, Bcf 45.7 45.4 1 Average daily volumes, MMcf/d 497 494 1 Price per Mcf $1.82 $2.02 (10) Crude oil and condensate, MBbls 2,940 2,392 23 Average daily volumes, MBOPD 32 26 23 Price per barrel $11.46 $17.06 (33) Natural gas liquids, MBbls 1,788 1,430 25 Average daily volumes, MBOPD 19 16 25 Price per barrel $9.44 $14.65 (36) Nine Months Ended September 30 % Increase 1998 1997 (Decrease) Natural gas, Bcf 131.9 131.5 - Average daily volumes, MMcf/d 483 482 - Price per Mcf $1.94 $2.17 (11) Crude oil and condensate, MBbls 7,871 6,643 18 Average daily volumes, MBOPD 29 24 18 Price per barrel $11.93 $18.26 (35) Natural gas liquids, MBbls 5,062 3,693 37 Average daily volumes, MBOPD 19 14 37 Price per barrel $10.65 $14.65 (27)
__________________ See "Natural Gas Volumes and Prices" and "Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices". Costs and expenses during the third quarter of 1998 were $124.5 million, an increase of 3% compared to $120.6 million for the third quarter of 1997. The increase is primarily due to higher operating expenses related to acquisition of domestic producing properties and first production from Algeria, and higher administrative and general expenses associated with the Company's growing workforce, offset slightly by lower other taxes. -15- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) For the first nine months of 1998, costs and expenses totaled $365.4 million, an increase of 8% compared to $338.0 million for the first nine months of 1997. Operating expense increased due to higher total production volumes, acquisition of domestic producing properties and initial production from Algeria. Administrative and general expenses are up due to higher costs associated with the Company's growing workforce. Expenses for depreciation, depletion and amortization (DD&A) increased due to higher production volumes, partially offset by a lower DD&A rate. Interest expense for the third quarter of 1998 increased 31% to $15.0 million compared to $11.5 million for the third quarter of 1997. For the first nine months of 1998, interest expense was $41.1 million, an increase of 44% compared to $28.7 million for the same period of 1997. The increases in interest expense are primarily due to higher levels of long-term debt in 1998 compared to 1997. Natural Gas Volumes and Prices In 1998's third quarter, Anadarko's natural gas production was 45.7 billion cubic feet (Bcf) of gas or 497 million cubic feet per day (MMcf/d), essentially level with 45.4 Bcf or 494 MMcf/d during 1997's same period. 1998 third quarter gas volumes remained strong despite temporary storm-related production shut-ins in the Gulf of Mexico in August and September. Anadarko's wellhead price for natural gas averaged $1.82 per thousand cubic feet (Mcf) for the third quarter of 1998, down 10% from $2.02 per Mcf for the third quarter of 1997. During the first nine months of 1998, Anadarko's natural gas production was level with the corresponding period in 1997. The Company produced 131.9 Bcf of gas or 483 MMcf/d in the first nine months of 1998. Anadarko's wellhead natural gas price averaged $1.94 per Mcf, an 11% decline from $2.17 per Mcf in 1997's same period. Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices During the third quarter of 1998, Anadarko's oil volumes grew 23% to 2.9 million barrels (MMBbls) or 32 thousand barrels (MBOPD) from 2.4 MMBbls or 26 MBOPD in 1997's corresponding period. The increase in oil volumes reflected higher production in 1998 from start up of production from the Company's Hassi Berkine South Field in Algeria, which came onstream in May 1998, and the acquisition of properties in the Golden Trend area of central Oklahoma earlier this year. For the third quarter of 1998, oil production from Algeria was 466 thousand barrels net to Anadarko. The higher oil production volumes were offset by a 33% decline in 1998's third quarter oil prices. Anadarko's average oil price for the third quarter of 1998 was $11.46 per barrel, versus $17.06 per barrel for the third quarter of 1997. -16- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Anadarko's worldwide oil production for the first nine months of 1998 rose by 18% compared to the same period in 1997. For the first nine months of 1998, oil volumes totaled 7.9 MMBbls or 29 MBbls per day, versus 6.6 MMBbls or 24 MBOPD for the same period in 1997. First production from Algeria and the Golden Trend property acquisition contributed to the significant increase in oil volumes for 1998. Anadarko's average oil price declined 35% for 1998's first nine months compared to the same period in 1997. Oil prices averaged $11.93 per barrel in 1998's first nine months, compared to $18.26 per barrel for the same period in 1997. Anadarko's NGLs sales volumes for the third quarter of 1998 rose 25% to 1.8 MMBbls or 19 MBOPD, up from 1.4 MMBbls or 16 MBOPD during 1997's corresponding period. Increased NGLs volumes were offset by lower NGLs prices, which fell 36% to $9.44 per barrel in the third quarter of 1998 from $14.65 per barrel in 1997's same period. NGLs volumes for the first nine months of 1998 increased 37% to 5.1 MMBbls or 19 MBOPD, up from 3.7 MMBbls or 14 MBOPD in 1997's same period. The substantial rise in volumes was offset by a 27% decline in the Company's average NGLs price for the first nine months of 1998. Anadarko's NGLs price averaged $10.65 per barrel for the first nine months of 1998, versus $14.65 per barrel for the same period in 1997. Use of Derivatives Anadarko produces, purchases and sells natural gas, crude oil, and NGLs. As a result, Anadarko's financial results can be significantly affected by changes in these commodity prices. Anadarko uses derivative financial instruments to hedge the Company's exposure to changes in the market price of natural gas and crude oil, to provide methods to fix the price for natural gas independently of the physical purchase or sale and to manage interest rates. Commodity financial instruments also provide methods to meet customer pricing requirements while achieving a price structure consistent with the Company's overall pricing strategy. While commodity financial instruments are intended to reduce the Company's exposure to declines in the market price of natural gas and crude oil, the commodity financial instruments may also limit Anadarko's gain from increases in the market price of natural gas and crude oil. As a result, gains and losses on commodity financial instruments are generally offset by similar changes in the realized price of natural gas and crude oil. Gains and losses are recognized in revenues for the periods to which the commodity financial instruments relate. Anadarko's commodity financial instruments currently are comprised of futures, swaps and options contracts. -17- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) While the volume of derivative commodity instruments utilized by the Company to hedge its market price risk can vary during the year within the boundaries of its established policy guidelines, the fair value of those instruments at September 30, 1998 and December 31, 1997 was, in the judgment of the Company, immaterial. Additionally, through the use of sensitivity analysis, the Company evaluates the potential effect that reasonably possible near term changes in the market prices of natural gas and crude oil may have on the fair value of the Company's derivative commodity instruments. Based upon an analysis utilizing the actual derivative contractual volumes and assuming a 10% adverse movement in commodity prices, the potential decrease in the fair value of the derivative commodity instruments at September 30, 1998 and December 31, 1997 does not have a material adverse effect on the financial position or results of operations of the Company. The Company also evaluated the potential effect that reasonably possible near term changes in interest rates may have on the fair value of the Company's interest rate swap agreement. Based upon an analysis utilizing the actual interest rates in effect as of September 1998 and December 1997 and assuming a 10% increase in interest rates, the potential decrease in the fair value of the derivative interest swap instrument at September 30, 1998 and December 31, 1997 does not have a material effect on the financial position or results of operations of the Company. Capital Expenditures, Liquidity and Dividends During the first nine months of 1998, Anadarko's capital spending (including capitalized interest and overhead) was $672.4 million compared to $496.4 million in the same period of 1997. The Company believes cash flows, including proceeds from divestitures, issuances of additional debt or securities, and existing credit facilities will be sufficient to meet capital and operating requirements, including any contingencies, during 1998. In January 1998, Anadarko issued $100 million principal amount of 6.625% Debentures due 2028. The proceeds were used to fund capital spending projects in core operating areas. In March 1998, Anadarko filed a shelf registration statement with the Securities and Exchange Commission (SEC) that permits the issuance of up to $500 million in debt and equity securities. Net proceeds, terms and pricing of offerings of securities issued under the shelf registration statement will be determined at the time of the offerings. -18- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In April 1998, the Company's Revolving Credit and 364-Day Credit Agreements were amended. The Revolving Credit Agreement was amended to increase the number of commercial banks in the group from eight to nine. The 364-Day Credit Agreement was amended as follows: the principal amount of the Agreement was increased from $125 million to $175 million; the number of commercial banks in the group was changed from eight to nine; and the expiration date of the Agreement was extended for 10 months. In April 1998, the Board of Directors approved a two-for-one stock split. The stock split was effected by way of a stock dividend. The distribution date was July 1, 1998 to stockholders of record on June 15, 1998. In May 1998, Anadarko issued $200 million of 5.46% Series B Cumulative Preferred Stock in the form of two million depositary shares, each depositary share representing 1/10th of a share of the 5.46% Series B Cumulative Preferred Stock. The preferred stock has no stated maturity and is not subject to a sinking fund or mandatory redemption. The shares are not convertible into other securities of the Company. Anadarko has the option to redeem the shares at $100 per depositary share on or after May 15, 2008. Holders of the shares are entitled to receive, when, and as declared by the Board of Directors, cumulative cash dividends at an annual dividend rate of $5.46 per depositary share. The proceeds from the offering were used to reduce commercial paper and bank borrowings and provide capital for Anadarko's 1998 capital expenditures. The preferred stock was issued under the Company's shelf registration statement. In October 1998, the Company filed a registration statement with the SEC that permits the issuance of Anadarko common stock under the Anadarko Dividend Reinvestment and Stock Purchase Plan (DRIP). The DRIP offers the opportunity to reinvest dividends and provides an alternative to traditional methods of buying, holding and selling Anadarko common stock. The DRIP will provide the Company with a means of raising additional capital for general corporate purposes through the sale of common stock under the DRIP. In October 1998, the Board of Directors adopted a Stockholders Rights Plan, which replaced the Rights Plan that expired on October 20, 1998. Under the Rights Plan, the Rights will be distributed as a dividend at a rate of one Preferred Stock Purchase Right for each share of the Company's common stock held of record on November 10, 1998. Each Right will entitle stockholders to purchase from the Company one one- thousandth of a share of a new series of junior participating preferred stock at an exercise price of $175. The Right will be exercisable only if a person or group acquires 15% or more of common stock or announces a tender offer or exchange offer the consummation of which would result in ownership by a person or group of 15% or more of the common stock. The Rights distribution is not taxable to stockholders. The Rights will expire on November 10, 2008. -19- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Anadarko's Board of Directors declared quarterly dividends on two classes of the Company's stock. A dividend of $13.65 per share (equivalent to $1.365 per depositary share) was declared on the Company's 5.46% Series B Cumulative Preferred Stock, payable on December 31, 1998, to stockholders of record at the close of business on December 15, 1998. A dividend of $0.05 cents per share was declared on the Company's common stock outstanding, payable on December 23, 1998, to stockholders of record at the close of business on December 9, 1998. Under the most restrictive provisions of the Company's credit agreements, which limit the payment of dividends, retained earnings of $667,806,000 were not restricted as to the payment of dividends at September 30, 1998. The amount of future dividend payments for Anadarko common stock will depend on the Company's earnings, financial condition, capital requirements and other factors and will be determined by the Board on a quarterly basis. Exploration and Development Activities In October 1998, Anadarko updated its production growth targets for the next five years. The Company expects production to grow at an average rate of 18% a year over the five-year period. Production in 1998 is expected to be 48 million energy equivalent barrels (EEBs), increasing to 92 million EEBs in 2002. The increases in production volumes are primarily from discoveries in Alaska, development of Algeria fields and recent sub-salt discoveries in the Gulf of Mexico, Tanzanite and Hickory. The production forecast assumes capital spending of about $700 million a year and no new exploration success. During the third quarter of 1998, Anadarko participated in a total of 116 wells, including 58 oil wells, 47 gas wells and 11 dry holes. This compares to a total of 172 wells, including 110 oil wells, 43 gas wells and 19 dry holes during the third quarter of 1997. For the first nine months of 1998, Anadarko participated in a total of 320 wells, including 173 oil wells, 113 gas wells and 34 dry holes. This compares to a total of 447 wells, including 276 oil wells, 125 gas wells and 46 dry holes during the first nine months of 1997. Following is a description of activity during the first nine months of 1998. Gulf of Mexico Third quarter highlights included the release of test results from the Tanzanite sub-salt discovery. The well tested 21,917 barrels of oil per day (BOPD) of 21.9-degree API gravity oil and 29.7 MMcf/d of gas with flowing tubing pressure of 2,679 psi. The flow rate is the highest ever for an Anadarko-operated well and one of the highest rates ever recorded in the shallow waters of the Gulf of Mexico. The discovery well encountered 450 feet of continuous -20- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) hydrocarbon pay. Design work is now underway on a production platform for Tanzanite and the Company is negotiating a construction contract. The project is expected to be completed in about 22 months with first production scheduled for the third quarter of 2000. The first offset development well at Tanzanite is currently drilling. Anadarko owns a 100-percent working interest in the discovery which is located on Eugene Island 346 about 75 miles offshore Louisiana in 314 feet of water. On October 20, the Company announced its second major sub-salt discovery. The Hickory well, located at Grand Isle 116 about 75 miles offshore Louisiana, encountered 300 feet of hydrocarbon pay after being drilled to a total depth of 21,600 feet. The well penetrated a salt section approximately 8,000 feet thick, which the Company believes to be the thickest section of salt ever drilled in the Gulf of Mexico. The Global Baltic I jack-up rig has been contracted by Anadarko and partners to immediately begin drilling a field delineation well from the same surface location to develop proved reserves and explore for other pay horizons. First production is expected in the year 2000. Anadarko (operator) owns a 50-percent working interest in Grand Isle Blocks 110, 111 and 116 along with partners Shell Oil Company (37.5 percent) and Ocean Energy (12.5 percent). Production from another sub-salt discovery - Agate - began during 1998's third quarter. During testing, the well, located on Ship Shoal Block 361, flowed 13.0 MMcf/d of gas and 1,788 barrels of condensate per day (BCPD) from a 17/64-inch choke with flowing tubing pressure of 7,195 psi. Production through a sub-sea completion increased during the third quarter to 2,500 BCPD and 19.5 MMcf/d of gas. The Company has a 50-percent working interest in the Phillips-operated Block. Additional highlights from Anadarko's offshore activities during the first three quarters of 1998 include the completion of two wells at East Cameron 157. The A-7 well tested 25.4 MMcf/d of gas and 557 BCPD and the A-3 well produced 4.9 MMcf/d of gas and 245 BCPD. Anadarko is operator of the platform with a 100-percent working interest. During the third quarter, construction of a pipeline from the Matagorda Island 623 platform to the El Paso Energy-operated Tomcat system was completed. The seven-mile tie-in reduces pressures at the platform, increasing production to approximately 310 MMcf/d of gas. Anadarko owns a 37.5-percent working interest in the Amoco-operated field. -21- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The B-5 well at the High Island Block A-376, an extended reach well, was placed on production earlier in the year averaging 2.0 MMcf/d of gas. The construction of a compressor package is nearing completion, which is expected to double the Company's output from the B-5 well and another well on the platform. Anadarko owns a 100-percent working interest in the B-5 well and a 33.8-percent working interest in the remaining wells in the Field. Hugoton Embayment Activity in Anadarko's deep drilling program continued strong in the third quarter, with successes in two fields where 3-D seismic has played an important role in identifying prospects. In the Lorena East Field of Beaver County, Oklahoma, three wells were completed, resulting in combined production of 36 MMcf/d of gas and confirmation of the discovery of a new reservoir in the Chester formation. The first confirmed oil well in the Basal Chester sand, the Smith AE-1, flowed 501 BOPD and 500 thousand cubic feet per day (Mcf/d) of gas. Drilling targets were identified using information obtained from the 32 square-mile Turpin seismic survey shot in late 1997. Anadarko owns a 100-percent working interest in these Lorena Field wells. In the Archer Field of Seward County, Kansas, Anadarko has completed 14 successful wells in 1998 as part of its delineation program in the St. Louis formation. The Headrick A-2 well was recompleted during the third quarter and flowed 323 BOPD and 276 Mcf/d of gas. The St. Louis formation, while prolific, has traditionally been difficult to image. Again, the use of 3-D seismic technology has been a very valuable tool. Through the first nine months of 1998, production from the Archer Field has averaged 719 BOPD and 1.1 MMcf/d of gas. Other significant completions in the Hugoton Embayment during the third quarter include: Charity A-2, Panoma Council Grove Field (590 Mcf/d of gas) KU Endowment G-1, Wildcat Field (1.4 MMcf/d of gas). Noteworthy completions in the Hugoton Embayment during the first nine months of 1998 include: Lemon Trust B-2, Condit Field (2.0 MMcf/d of gas) Box A-1, Condit Field (1.5 MMcf/d of gas) Schneider Alley A-1, Liberal SE Field (1.0 MMcf/d of gas) Malin B-1, Fedder Southwest Field (1.0 MMcf/d of gas) Milhon B-1, Fedder Southwest Field (1.6 MMcf/d of gas) USA Barker A-3, Berryman Richfield Field (2.5 MMcf/d of gas) Trader A-1, Light Field (2.2 MMcf/d of gas) Smith AD-3, Price Field (4.0 MMcf/d of gas, 231 BOPD). -22- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Central Oklahoma Golden Trend activity during the third quarter included test results from four significant completions in the SW Antioch Field of Garvin County, Oklahoma: Paul "A" 2-34 (980 Mcf/d of gas, 147 BOPD) Sanford D-2 (340 Mcf/d of gas, 68 BOPD) Layton State No. 2 (710 Mcf/d of gas, 152 BOPD) Annie Cole No. 5-36 (362 Mcf/d of gas, 44 BOPD). Another Golden Trend completion during the third quarter was the Mowdy "A" No. 1-32 well, located in the Laflin Creek West Field of Grady County, Oklahoma. The well was completed in four separate intervals with comingled production of 507 Mcf/d of gas and 80 BOPD. Anadarko has a 69-percent working interest in the well. Additional completions during the first three quarters of 1998 include: Lance "A" No. 3-33, Bradley Field (1.7 MMcf/d of gas, 339 BOPD) Jack Hammer No. 2-31, Bradley Field (1.2 MMcf/d of gas, 110 BOPD) Manatt A-2, SW Antioch Field (1.1 MMcf/d of gas, 160 BOPD) EXPH 2-31, SW Antioch Field (736 Mcf/d of gas, 83 BOPD) Tomlinson "A" No. 4-26, SW Antioch Field (1.2 MMcf/d of gas, 109 BOPD). East Texas' Bossier Sand Play The brisk pace that has marked activity in the Dew Field of Freestone County this year continued in the third quarter with six rigs in operation. The Company has completed 20 wells during the first nine months of 1998, bringing Field production to over 50 MMcf/d of gas. Production volumes from the Field have increased five-fold since the beginning of the year. The Bossier Sand Play is now the Company's third largest onshore gas field. Significant completions in the third quarter include: Henderson No. 2 (4.8 MMcf/d of gas) Henderson No. 3 (2.5 MMcf/d of gas) Henderson No. 4 (3.5 MMcf/d of gas) B.K. Johnson "A" No. 1 (3.3 MMcf/d of gas) J.H. Moore No. 2 (3.0 MMcf/d of gas) Eubanks Trust No. 2 (2.7 MMcf/d of gas) Lancaster A-1 (1.2 MMcf/d of gas) H.E.White No. 2 (3.1 MMcf/d of gas) J.H. Moore No. 3 (1.2 MMcf/d of gas) English No. 4 (1.3 MMcf/d of gas). -23- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Permian Basin In response to lower oil prices, Anadarko has deferred some Permian Basin drilling projects until oil prices recover. Activity throughout 1998 has been focused on infill drilling and waterflood projects at the Company's TXL North and TXL South Units where 45 wells have been drilled during the first nine months. Combined gross production from both units at the end of the third quarter was 5,270 BOPD and 14.4 MMcf/d of gas. This year, efforts have also been concentrated on continuing development of the Ketchum Mountain (Clearfork) Field, located in Irion County, Texas. Anadarko has drilled 94 wells in the Permian Basin through the first nine months of 1998. Alaska During the third quarter, Anadarko completed its first Company-operated well in the Cook Inlet. The Lone Creek No. 1 on the Moquawkie Prospect flowed 10.6 MMcf/d of gas through a 33/64-inch choke with 925 psi flowing tubing pressure from 53 feet of perforations at about 2,400 feet. This represents one of the best shallow gas tests in the vicinity for a reservoir of this age and type. The well, which is located about 40 miles west of Anchorage on lands leased from Cook Inlet Region, Inc., also encountered several other possibly productive gas zones totaling about 180 feet that were not flow tested. Anadarko and ARCO Alaska each hold a 50-percent working interest in the discovery. Additionally, the partners hold approximately 56,000 leasehold acres in the Moquawkie area and 178,000 acres in the Cook Inlet area of south central Alaska. The partners are preparing plans to develop this new discovery, which may lead to additional drilling and installation of facilities necessary to produce this and subsequent wells. Work on development facilities in the Alpine Field continues to progress. North Slope activity has been suspended waiting on winter weather to allow completion of the gravel drilling pads and airstrip. Once completed, drilling and development operations will be able to continue year-round. Elsewhere (primarily Anchorage and Kenai), significant construction activity on the production facility modules is underway. These prefabricated modules are scheduled to be transported to the North Slope for installation at the Alpine Field site during the 1999-2000 winter season. The project is about 20 percent complete. -24- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In August 1998, the Company announced a major exploration agreement with Alaska's Arctic Slope Regional Corporation (ASRC) that gives Anadarko exclusive access to more lands for exploration than any other oil company operating in the state. The agreement provides Anadarko with exploration rights to 2.3 million acres that ASRC has under title currently. The Company also has exploration rights to an additional one million acres now held by the Bureau of Land Management. ASRC will eventually claim title to about 240,000 acres in this area as part of its land selection rights under the Alaska Native Claims Settlement Act. In Alaska's State Lease Sale 87, Anadarko was the third most active bidder, investing $8.1 million (net) to acquire 26 tracts. Of those, 20 tracts are held by the Company alone, with the other six held in partnership with Fina, Inc. The area covered by the lease sale, called the Foothills, is located in the North Slope area and is intermingled with and adjacent to some of the state lands acquired by Anadarko as part of an agreement with ASRC. Algeria In the third quarter, Anadarko lifted its first cargo of Algerian crude oil. The 663,000-barrel shipment came from the HBNS Field via the Central Production Facility and was bound for a customer with operations along the Mediterranean. Gross production at the end of the third quarter was 30,000 BOPD. At the end of the third quarter, Anadarko was drilling the HBNS-13 development well on Block 404 and the EKT-4 delineation well on Block 208. A third rig was being moved to the QB-1 development well. Eritrea Drilling has been completed at the Bulissar prospect on the Zula Block in the Red Sea. While declared a dry hole, the joint venture is encouraged by the results of its drilling program. The well encountered source rocks at multiple levels, good seals, and reservoir quality sands. In addition, traces of oil were recovered from sidewall cores. These results add to the understanding of this largely unexplored portion of the Red Sea. Anadarko and its partners plan to drill two additional wells offshore Eritrea. Drilling activity now moves to the Du Rig-Rig Prospect, 90 miles northwest of Bulissar, with a well that was spud in early November 1998. Anadarko is operator for its Eritrean program and has a 50 percent interest with 30 percent owned by Agip Eritrea B.V. and 20 percent owned by Burlington Resources. -25- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Year 2000 Overview The Year 2000 issue relates to the inability of certain computers and software applications to correctly recognize and process date sensitive information for the Year 2000 and beyond. Without correction, the computers and software applications could fail or create erroneous information. The Company has established a Year 2000 Compliance Program focused on minimizing disruptions of the Company's operations as a result of the millennium change. Since this problem could affect the Company's systems, as well as the systems of its business partners, the Program focuses on the internal systems and external services considered most critical to Anadarko's continuing operations. Since 1993, the Company has enhanced its scientific processing capabilities, implemented new business systems and upgraded its network infrastructure. These information systems were purchased from leading suppliers of technology, most of whom are representing their products to be Year 2000 compliant. The Company is in the process of testing third-party hardware and software for compliance, which should be completed by mid-year 1999. Any necessary replacements of non-compliant computer equipment and software are underway and should also be completed by mid-year 1999. Inventories of process control and field automation equipment (embedded systems) are anticipated to be completed by year-end 1998. External field instrumentation specialists will help assess equipment for Year 2000 compliance and develop test plans. This activity is scheduled to begin in December 1998. All embedded systems are expected to be in compliance by the end of the third quarter of 1999. The Company is assessing the readiness of its business partners, including joint-venture operators and outside-operated pipeline and processing facilities as well as suppliers of goods and services. Interruptions in these services could disrupt Anadarko's production and delivery of oil, gas and NGLs. Meetings are planned with key business partners to discuss their Year 2000 programs and assess their ability to supply services through 1999 and 2000. These efforts should be completed by the end of the third quarter of 1999. Contingency Planning The Company will develop contingency plans to provide business continuity and to address operations, safety and environmental concerns. This effort is expected to begin in January 1999 and should be completed by the end of the third quarter of 1999. -26- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Estimated Cost The total cost of testing, remediation and contingency planning is expected to be approximately $5 million, which will be funded by operating cash flows. This estimate does not include the Company's share of potential Year 2000 costs as a result of participation in partnerships in which Anadarko is not the operator. As of September 30, 1998, the Company had spent less than $500,000 for planning, systems inventories and business partner and supplier notification. The Company expects to spend $3 million to test internal systems, replace and upgrade equipment, and complete field automation testing. The remaining $1.5 million is for replacement of any non- compliant field automation equipment discovered during testing, instrumentation consulting services and contingency planning. Anadarko's Year 2000 Program is an on-going process that may result in changes to cost estimates and schedules as testing and business partner assessment progress. Risks The Company expects to have all internal systems and computer equipment Year 2000 compliant prior to the millennium change. The Company is relying on its business partners and suppliers to be Year 2000 ready as well. Failure of significant third parties to complete their Year 2000 compliance projects could interrupt the supply of materials and contract services needed for oil and gas operations. Disruptions to oil and gas transportation networks controlled by third- party carriers could result in reduced production volumes delivered to market. Risk associated with foreign operations may increase with the uncertainty of Year 2000 compliance by foreign governments and their supporting infrastructures. Such occurrences could have a material adverse effect on the Company's business, results of operations and financial condition. However, the Year 2000 Program is expected to significantly reduce the Company's level of uncertainty about the Year 2000 issue. Forward looking statements contained in the Year 2000 discussion above should be read in conjunction with Additional Factors Affecting Business in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1997 Annual Report on Form 10-K. -27- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Changes in Accounting Principles Pensions and Other Postretirement Benefits Reporting Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", amends the disclosure requirements with respect to pensions and other post- retirement benefits in annual financial statements. SFAS No. 132 does not change any of the current guidance on expense measurement or recognition related to these areas. The Company will adopt SFAS No. 132 for the year ended December 31, 1998. Accounting for Derivatives SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities", provides guidance for account- ing for derivative instruments and hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet completed an evaluation of the impact of the provisions of SFAS No. 133. -28- Part II. OTHER INFORMATION Item 1. Legal Proceedings Kansas Ad Valorem Tax See Note 9 of the Notes to Consolidated Financial Statements under Part I, Financial Information, of this Form 10-Q. -29- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
Exhibit Original Filed File Number Description Exhibit Number 3(a) Restated Certificate of Incorporation of Anadarko 19(a)(i) to Form 10-Q 1-8968 Petroleum Corporation, for quarter ended Dated August 28, 1986 September 30, 1986 (b) By-laws of Anadarko 3(b) to Form 10-Q 1-8968 Petroleum Corporation, for quarter ended as amended June 30, 1996 *10(a)(i) Agreement Concerning the Method of Application of the Contract signed on 23 October 1989 between Sonatrach and Anadarko Algeria Corporation *(ii) Amendment No. 1 to the Agreement for the Exploration and Exploitation of Liquid Hydrocarbons between Sonatrach and Anadarko Algeria Corporation signed October 23, 1989 *12 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends *27 Financial Data Schedule
(b) Reports on Form 8-K There were no reports filed on Form 8-K for the three months ended September 30, 1998. -30- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized officer and principal financial officer. ANADARKO PETROLEUM CORPORATION (Registrant) November 13, 1998 [Michael E. Rose] Michael E. Rose - Senior Vice President, Finance and Chief Financial Officer EX-10.A.I 2 AGREEMENT CONCERNING THE METHOD OF APPLICATION OF THE CONTRACT SIGNED ON 23 OCTOBER 1989 BETWEEN SONATRACH AND ANADARKO ALGERIA CORPORATION [Executed 6th March 1997 in Algiers] AGREEMENT CONCERNING THE METHOD OF APPLICATION OF THE CONTRACT SIGNED ON 23 OCTOBER 1989 BETWEEN SONATRACH AND ANADARKO ALGERIA CORPORATION Between, The National Enterprise SONATRACH (hereinafter referred to as "changes SONATRACH"), whose head office is in Algiers, 10, Rue du Sahara, Hydra, represented by Mr. Nazim Cherif- Eddine Zouioueche, General Manager, acting by virtue of the powers entrusted to him for the purpose of this Agreement, and, Anadarko Algeria Corporation, a company incorporated and existing under the laws of Delaware, USA, and whose corporate business office is 16855 Northchase Drive, Houston, Texas 77060, United States, represented by Mr. Robert J. Allison, Jr., Chairman of the Board of Directors and Chief Executive Officer, acting for ANADARKO ALGERIA CORPORATION, LASMO Oil (Algeria) LTD and MAERSK OLIE ALGERIET A/S. Whereas the Contract for the Exploration and Exploitation of Liquid Hydrocarbons between the National Enterprise SONATRACH and ANADARKO Algeria Corporation was signed on October 23, 1989. Whereas it is necessary to further clarify certain provisions of the Contract in order to avoid differing interpretations. Whereas the parties wish to make certain changes in an amendment to the afore mentioned Contract. Whereas the parties agree that they shall apply such in accordance with the provisions of this Agreement. The parties hereinafter agree: SECTION I: PAYMENT OF A TRANSPORTATION CHARGE ARTICLE 1 Each Party to this Agreement agrees to pay a charge for the transportation of the share of Liquid Hydrocarbons allocated to it under Article 4.3.A of the Contract signed October 23, 1989. It is understood that SONATRACH shall finish, as soon as possible, the construction of a pipeline for the transportation of Liquid Hydrocarbons to Haoud-El-Hamra, and shall ensure the transportation of such Liquid Hydrocarbons to the Port of Loading. The Delivery Point of the said Liquid Hydrocarbons shall be the connection flange with SONATRACH's transportation system. ARTICLE 2 For each Calendar Year ANADARKO agrees to pay, for its share of Liquid Hydrocarbon production mentioned in Article 1 above, a transportation charge expressed in US dollars per barrel, according to the following formula: Cn-1 TCn = 1.35 _______ Co TCn is the transportation charge for year n. Cn-1 is the index of year n-1, Co is the index for 1996. The index is the arithmetic average of the monthly values of the "Consumer Price Index for Urban Consumers" (CPIUC) and "the Machinery and Equipment Index" (MEI) published by the Minister of Labor of the United States of America, or, if one of these indices ceases to be published, any other price index from the United States of America which the Parties agree to use instead. The totality of production volumes to be transported shall be measured at the connecting flange to SONATRACH's transportation system, after deduction of the water and sediments and metering at the Main Gathering Facilities (CPC). The Main Gathering Facilities is the location where the Liquid Hydrocarbons produced from all Pools are measured and metered in accordance with the article 1, item 3 of Decree No.88-35, dated February 16, 1988. The quantities of water and sediment to be deducted shall be determined with the standard test method for water and sediment in crude oils, according to the ASTM D96 standard or any other standard applied by SONATRACH in accordance with the practice of the international oil industry. Any transportation loss due to the pipeline transportation shall be fully deducted and borne by SONATRACH and ANADARKO in proportion with their share of Liquid Hydrocarbons. Such transportation loss is set out at zero point fifty per cent (0.50%) of the quantities of Liquid Hydrocarbons delivered, measured after deducting the water and sediments. The said transportation losses shall be determined on a non- discriminatory basis. Since the 30" transportation pipeline built by SONATRACH is a transportation pipeline, the initial filling of this pipeline with Liquid Hydrocarbons shall be done out of SONATRACH's share of Liquid Hydrocarbons. SECTION II: CONSOLIDATION AND CALCULATION OF PRODUCTION AND COSTS ARTICLE 3 In accordance with Article 4.3 of the Contract signed October 23, 1989, the share of production between the parties as well as the recovery of fifty-one (51) per cent of exploration costs will be calculated on the basis of the total amount of Liquid Hydrocarbons produced from all Pools without differentiating between the origin of such production (consolidation). Consequently, and in accordance with Article 4.3.B of the Contract, the reimbursement of 51% of Exploration Costs incurred by ANADARKO shall be made within the limits of the share, equal to forty nine percent (49%) of the total productions from all Pools less that share of production due to ANADARKO under Article 4.3.A of the Contract signed on October 23, 1989. It is understood that for unitized Pools, the calculation of the total amount of the said Liquid Hydrocarbon production shall take into account only the production shares from the said unitized Pools and allocated to the SONATRACH - ANADARKO association, created pursuant to the Contract dated October 23, 1989. ARTICLE 4 The calculation of that share of production allocated to each of the Parties will be the weighted average, by tranches, of the fixed percentages set out in Article 4.3A of the Contract dated October 23, 1989. SECTION III: ROYALTY AND TAX ON REMUNERATION ARTICLE 5 SONATRACH agrees to pay Royalties for the totality of the production as well as the tax on remuneration. ARTICLE 6 The conditions and methods of payment by SONATRACH of the tax referred to in Article 5 above shall be detailed in the amendment referred to in Article 7 below. It is understood that SONATRACH shall not deduct the amounts paid for the Royalties and the tax on remuneration from ANADARKO's share of Liquid Hydrocarbons. SECTION IV: AMENDMENTS TO THE CONTRACT SIGNED 10/23/89 ARTICLE 7 The Parties agree to conclude and sign an amendment to the Contract signed October 23, 1989, containing the following modifications: (i) Introduction of a clause for International Arbitration for the settlement of differences. (ii) The conversion to US dollars of the amounts set out in Dinars in Articles 5.8.C, 15.5.C, 20.3 and 20.6 of the contract signed on October 23, 1989, as well as Articles 5.5.4 and 5.5.12 of Annex B "Accounting Procedure" to the said Contract. (iii) Granting to LASMO Oil (Algeria) LTD and MAERSK OLIE ALGERIET AS the status of Parties to the Contract signed October 23, 1989 and of SONATRACH's partners, in accordance with the regulation in effect and the provisions of Article 24 of the Contract signed October 23, 1989. ARTICLE 8 The amendment referred to in the above Articles 6 and 7 shall only come into force after approval by the Competent Authorities in the same form as the Contract signed October 23, 1989. SECTION V: SERVICES PROVIDED BY THE PARTIES ARTICLE 9 The Petroleum Operations shall be carried out in Algeria. Therefore, the Operator's main office will be located in Hassi Messaoud or any other location in Algeria agreed by the Parties, and all studies and actions regarding the Petroleum Operations will be put into effect in Algeria. ARTICLE 10 Subject to the Management Committee's approval, the Operator shall however be entitled to use ANADARKO's and/or SONATRACH's specialized services, located in Algeria or abroad, through service contracts or sub-contracting. In this event, the Party approached by the Operator shall charge its services to the Total Costs. SECTION VI: DELAY ARTICLE 11 In the event that the completion of the 1997 Work Program for the drilling of Exploration wells requires an extension, SONATRACH agrees to grant such extension up to a maximum of nine (9) months . ARTICLE 12 The above extension will be granted subject to the Parties complying with Algerian laws and regulations. ARTICLE 13 SONATRACH and ANADARKO could also agree to end the Exploration Phase provided for by the Contract signed October 23, 1989, and to conclude a new Exploration Agreement providing a minimum exploration work commitment to be performed in the Contractual Area covered by the Contract dated October 23, 1989, less the areas covering the Pools discovered under the Contract dated October 23, 1989. This new Exploration Agreement shall only come into force after approval by the Competent Authorities in the required forms. ARTICLE 14 If the above Article 13 is applied, the provisions of Article 11 of this Agreement shall not apply. SECTION 7 : GENERAL PROVISIONS ARTICLE 15 The parties agree to make every endeavor to obtain optimum valorization (commercial value), in accordance with the Algerian laws and regulations, of the Liquid Hydrocarbons reserves discovered within the framework and the performance of the Contract signed October 23, 1989. ARTICLE 16 The Parties agree to use their best efforts to quickly and fairly resolve the outstanding questions regarding the Budgets and the exploitation projects within the framework of the Contract dated October 23, 1989. SONATRACH agrees to audit, as soon as possible, the Exploration Costs incurred by ANADARKO within the framework of the execution of the Contract signed October 23, 1989, in order to determine the recoverability of those costs. ARTICLE 17 The Parties agree to commence as soon as reasonably possible the negotiation of contractual provisions allowing for the integration of a new gas clause in the Contract signed October 23, 1989. For this, SONATRACH shall provide ANADARKO with its typical gas clause, provided that the Parties shall not be obliged to reach an agreement regarding the integration of a gas clause in the Contract dated October 23, 1989. In case of an agreement between the Parties, such agreement will comprise an amendment which will take effect after approval by the Competent Authorities. ARTICLE 18 The Parties shall agree, as soon as possible, on the method of application of the Lifting Procedure attached to the Contract dated October 23, 1989, as Annex E. ARTICLE 19 SONATRACH and ANADARKO agree that any future question regarding the application of the Contract signed October 23, 1989, shall be promptly dealt with within the same spirit of cooperation and good will as the one which prevailed during the drafting of this Agreement ARTICLE 20 The terms and expressions in this Agreement and whose first letter is capitalized have the same meaning as those of the Contract dated October 23, 1989. ARTICLE 21 This Agreement shall come into effect and shall be enforceable by the Parties from the effective date of the amendment mentioned in Article 7 and 8 hereinabove. Made in Algiers on _____________________ in eight (8) originals For SONATRACH For ANADARKO The General Manager The Chairman of the Board __________________________ _____________________ N.C. Zouioueche R. J. Allison Jr. EX-10.A.II 3 AMENDMENT NO. 1 TO THE AGREEMENT FOR THE EXPLORATION AND EXPLOITATION OF LIQUID HYDROCARBONS BETWEEN SONATRACH AND ANADARKO SIGNED OCTOBER 23, 1989 (Executed 6th March 1997 in Algiers) Between, The National Enterprise SONATRACH, whose head office is in Algiers, 10 Rue du Sahara, Hydra (hereinafter referred to as "SONATRACH") represented by Mr. Nazim Cherif-Eddine Zouioueche, General Manager, acting by virtue of the powers entrusted to him for the purpose of this Amendment, and, Anadarko Algeria Corporation, whose head office is 17001 Northchase Drive, Houston, Texas 77060, United Stated (hereinafter referred to as "Anadarko") represented by Mr. Robert J. Allison, Jr., Chairman of the Board of Directors and Chief Executive Officer. and, LASMO OIL (Algeria) Limited, whose head office is 100 Liverpool Street, London, EC2M 2BB, United Kingdom (hereinafter referred to as "LASMO") represented by Mr. Ian D. Brown, Director, acting by virtue of the powers entrusted to him for the purpose of this Amendment, And, MAERSK OLIE Algeriet A/S, whose head office is 50 Esplanaden DK- 1263, Copenhagen K, Denmark (hereinafter referred to as "MAERSK Oil") represented by Mr. Kjeld Fjeldgaard, Administrator, acting by virtue of the powers entrusted to him for the purpose of this Amendment - - Considering the Agreement for the Exploration and Exploitation of Liquid Hydrocarbons entered into between SONATRACH and Anadarko on October 23, 1989, ratified by Executive Decree No. 90-08, dated January 1, 1990. - - Considering law No. 91-12, dated September 7, 1991, relative to the supplementary Finance Law for 1991, particularly its Article 23 which modifies and completes Article 39 of the above-mentioned law No. 86-14, dated august 19, 1986. - - Considering law no. 91-21, dated December 4, 1991, modifying and completing law No. 86-14, dated August 19, 1986. - - Considering Anadarko's request to modify certain contractual provisions in order to adapt them to the amendments to the above-mentioned Law no. 86-14. - - Considering Anadarko's request to state in U.S. Dollars the amounts set in the Agreement and in the Accounting Procedure in Algerian Dinars, by applying the value in exchange for Algerian Dinars/U.S. Dollars in effect at the time of the signing of the Agreement. The following has been agreed upon by the parties: SECTION I: STATEMENT IN U.S. DOLLARS OF THE AMOUNTS SET IN ALGERIAN DINARS IN THE AGREEMENT AND THE ACCOUNTING PROCEDURE (ANNEX B) ARTICLE 1 Article 5.8.C of the Agreement relative to the function of the Operating Committee, is modified to read as follows: "Review, discuss and approve draft contracts in respect of Petroleum Operations which contemplate an expenditure for the Joint Account in excess of one million (1,000,000) U.S. Dollars." ARTICLE 2 Article 15.5C of the Agreement relative to the function of the Operator is modified as follows: "Operator shall have no authority to use budgeted funds for a particular item which will cost in excess of one million (1,000,000) U.S. Dollars, without first having obtained from the Operating Committee approval of an authorization for expenditure covering that item." ARTICLE 3 Articles 20.3 and 20.6 of the Agreement relative to the Goods- Equipment-Fixed Assets and Services are modified as follows: "20.3 All agreements for the purchase or rental of any single item of Moveable Property or Immovable Property for use in Joint Operations chargeable to the Joint Account and whose anticipated costs exceed one (1) million (1,000,000) U.S. Dollars, shall be previously submitted to the Operating Committee for approval. 20.6 All agreements to be entered into by the Operator and its contractors which contemplate an expenditure chargeable to the Joint Account greater than (1) million (1,000,000) U.S. Dollars, shall be previously submitted to the Operating Committee for approval." ARTICLE 4 Article 5.5.4, subparagraph 2 - Damages and Losses of Annex B - - Accounting Procedure is modified as follows: "The Operator shall give Notice to the Parties as soon as possible of damages or losses exceeding ten thousand (10,000) U.S. Dollars in each case." ARTICLE 5 Article 5.5.12(a) Overhead of Annex B - Accounting Procedure is replaced as follows: (a) Exploration Phase Overhead incurred by the parent company of the Operator under the Agreement, shall be charged to the Joint Account in proportion to the sum of costs incurred annually for direct charges, and based on the following percentages: - - Five percent (5%) of charges less than or equal to one (1) million U.S. Dollars. - - Three percent (3%) of charges exceeding one (1) million U.S. Dollars and less than or equal to two (2) million U.S. Dollars. - - One percent (1%) of charges exceeding two (2) million U.S. Dollars. The overhead charges represent all charges directly associated with the whole general organization of the Operator covering the following functions: - - Management - - Administrative, Financing and Accounting Services - - Budget, Personnel - - General and continual assistance and technical supervision by the parent company - - Internal audit - - Tax and legal services, research and development, public relations - - Etc. SECTION II: SETTLEMENT OF DISPUTES ARTICLE 6 Article 26 of the Agreement relative to the settlement of disputes is amended and completed as follows: "26.1 If any dispute arising out of the performance and/or interpretation of this Agreement cannot be settled by the Parties themselves within sixty (60) Days of its inception, it shall be subject to a mandatory conciliation, according to the following terms and conditions: A. The Party wishing to have recourse to conciliation (hereinafter referred to as "Claimant") shall give notice to the other Party (hereinafter referred to as "Respondent") of its request, by registered letter with return receipt requested, which will state explicitly the subject matter of the request, the claims and justifications which support them, and which will explicitly state the last and first names, qualifications and address of its appointed conciliator. B. Within thirty (30) Days from the receipt of the request, the Respondent shall: (1) Appoint a conciliator, give notice to the other Party and the conciliator appointed by the Claimant, of the last and first names, qualifications and address of the conciliator thus appointed, and (2) Notify the Claimant of its observations upon the request for conciliation and the claims which are contained therein. C. The conciliators appointed by the Parties shall, within thirty (30) Days from the notification of the appointment of the second one, take steps to appoint a third conciliator who shall act as Chairman of the conciliation board (hereinafter referred to as "the Chairman"). D. If, upon expiration of the thirty (30) Days stated in Article 26.1B hereinabove, the Respondent has not proceeded with the appointment and notice provided for in Article 26.1.B.1 hereinabove, the Claimant shall submit the matter to the Secretary General of the United Nations Commission on International Trade (UNCITRAL) so that he may appoint, or cause to be appointed, within forty-five (45) Days, the conciliator of the Respondent, who may not, on any account, decline. E. If, upon expiration of the thirty (30) Days stated in Article 26.1.C hereinabove, the two (2) conciliators have not reached an agreement on the appointment of the Chairman, the Parties shall have thirty (30) Days to agree, with the assistance of both conciliators, upon the appointment of the Chairman. If they fail to agree, the most diligent Party shall submit the matter to the Secretary General of the UNCITRAL so that he may appoint, or cause to be appointed, the Chairman, according to the following terms and conditions: 1. in any case and regardless of the appointment procedure, the Chairman shall: (a) have no present or past interest in, nor be dependant upon or subordinate to, either of the Parties or their Affiliates, (b) be of a nationality other than the nationalities of the Parties, (c) be of a nationality of a country which has diplomatic relations with the countries of the Parties, (d) be internationally recognized as being competent in the petroleum industry, (e) have a good understanding of the language of this Agreement. 2. The Chairman shall be appointed within forty- five (45) Days, from a list of two (2) candidates remaining on a common list prepared from the lists submitted by the two (2) Parties according to the following procedure: (a) Each Party shall submit to the other Party a list of five (5) names, stating their qualifications and addresses, (b) the Parties shall meet at the latest forty- eight (48) hours after the exchange of lists in order to prepare a single list of two (2) names, in order to establish this list, each Party will have the right to challenge all candidates proposed by the other Party, with the exception of one only. (c) the single list to be submitted to the Secretary General of the UNCITRAL shall be composed of two (2) remaining names, in alphabetical order and without stating the Party who proposed the names, (d) if one of the Parties does not comply with the obligations of the subparagraphs (a) and/or (b) hereinabove, the most diligent Party shall have the right to submit to the Secretary General of the UNCITRAL a list of three (3) persons meeting the criteria listed in Article 26.1.E.1, for the purposes of appointing the Chairman, and (e) the Chairman thus appointed cannot be challenged. F. If, in the course of the conciliation, one of the conciliators does not accept his appointment, is not able to participate, resigns or dies, the Party who appointed that conciliator shall be entitled to appoint his successor within fifteen (15) Days. Failing that, his successor shall be appointed according to the procedure specified in Article 26.1.D hereinabove. G. If, in the course of the conciliation, the Chairman does not accept his appointment, is not able to participate, resigns or dies, his successor shall be appointed according to the procedure specified in Article 26.1.C and 26.1.E hereinabove. 26.2 The conciliation board sits in Algiers (Algeria), but may hold hearings in any other place which might appear to be more appropriate. The conciliation board shall decide upon the procedure to follow for the requirements of its proceedings. It especially sees to it that each Party be given full opportunity of pressing its claims, rights and justifications and that all memoranda or information be provided simultaneously to the other Party. The conciliation board is specially empowered to: A. Visit any location it deems necessary for the purpose of its proceedings. B. Require the Parties to produce all relevant documents, records and account books related to the performance of this Agreement. C. Proceed to the hearing of the Parties, witnesses and any other Third Party involved. D. Take measures of preliminary investigation it deems appropriate and, especially appoint one or several experts, give them their assignments, and determine a time limit for the delivery of their report(s). 26.3 The Parties agree, during the conciliation proceedings to: A. Furnish to the conciliation board, upon its request and within the time limit it specifies, all memoranda and data necessary to its proceedings, and, in general, to participate in the conciliation proceedings, B. Keep confidential the proceeding and all documents produced in the framework of the conciliation. C. Pay in equal parts the expenses and fees of the members of the conciliation board as set and justified by the board and notified by the Chairman who will be able to make a call for funds. D. Not cause any interruption in the performance of obligations under this Agreement by reason of the conciliation being in progress. 26.4 In order to carry out the assignment with which it has been entrusted, the conciliation board must take into account: A. Algerian laws and regulations in force at the date of signing this Agreement. B. Provisions of this Agreement and its Annexes. C. Practices, customs and rules of the international petroleum industry. 26.5 Within six (6) months from the appointment of its Chairman, and except when there is an agreement between the Parties or an extension by the conciliation board, made necessary by a measure of investigation, the conciliation board must complete its proceedings and address a recommendation to the Parties. 26.6 The recommendation given to the Parties shall include the reasons explaining and justifying the recommendation. A. If both Parties accept the recommendation, they will implement the means which will enable them to comply with it. The dispute is then deemed settled. B. If one of the Parties rejects the recommendation, that Party shall notify the Chairman so that the conciliation board may give official notice to the Parties that the attempt of conciliation has failed. C. The dispute may be submitted to arbitration if, at the expiration of sixty (60) Days from the recommendation, the recommendation has not been expressly accepted by the Parties. 26.7 Regardless of its outcome, the recommendation is of a confidential nature and cannot be released, produced or published by one of the Parties without the specific consent of the other Party, or by a Third Party without the specific consent of all Parties to this Agreement. 26.8 If the conciliation process fails to resolve the dispute, the dispute shall be submitted to an arbitration proceeding, pursuant to the regulations of CNUDCI (UNCITRAL). The applicable law shall be the Algerian law, notably Law 86-14 of August 19, 1986, as amended and modified, and the regulations for its implementation. Arbitration shall take place in Geneva, Switzerland. The language of arbitration shall be French. SECTION III: TAX ON REMUNERATION ARTICLE 7 Annex B - Accounting Procedure is completed by the following provisions: "ARTICLE 7 - TAX ON REMUNERATION 7.1 In accordance with the provisions of Article 34 of law No. 86-14 of August 19, 1986, and Article 23 of law No. 91-12 of September 7, 1991, amended and completing Article 39 of law No. 86-14 of August 19, 1986, ANADARKO ALGERIA CORPORATION and each of its transferees ("ANADARKO ") are separately subject to the tax on remuneration. 7.2 ANADARKO shall calculate for each fiscal year the amount of the tax on its remuneration, at the standard rate in force for corporate income tax as set out in the Direct Tax and Similar Taxes Code. 7.3 The calculation of ANADARKO'S taxable remuneration is as follows: R = (Pa+Pb) Pv x Tch + Ii-(Ee + Aei + Aeii + C1) 1-Tn For any fiscal year for which the sum of expenses and amortization exceeds the value of ANADARKO'S production share, the excess shall be carried forward as a deduction from the taxable remuneration for the following fiscal years, in accordance with the legislation in force. To apply the above-mentioned formula: R = ANADARKO'S remuneration; Pa = ANADARKO'S production share as defined in Article 4.3.A of the Agreement; Pb = ANADARKO'S production share as defined in Articles 4.3.B and 18.3 of the Agreement; Pv = Base price as defined in Article 44.1 of law No. 86- 14; Tch = Exchange rate in Algerian dinars as defined in by Article 44.2 of law No. 86-14; Ii = Additional tax on the remuneration, if any, paid by SONATRACH on behalf of ANADARKO, in accordance with Article 7.12 hereafter; Ee = Share of the exploitation expenses borne by Anadarko, being 49% of the total amount of the operating costs, transportation costs, overhead costs, etc. Aei = Amortization of 100% of the Exploration Costs, determined by taking into consideration the maximum legal amortization rates specified in Article 54 of law No. 86-14, dated August 19, 1986; C1 = Excess of expenses and amortization over the value of production in previous fiscal years; Tn = The Rate in force for the tax on remuneration (i.e. the corporate income tax rate as set out in the Direct Tax and Similar Taxes Code). 7.4 ANADARKO shall submit to the taxation authorities tax returns accompanied by all required documents, no later than the deadline set for the filing of the annual return. 7.5 ANADARKO shall submit to SONATRACH a copy of the tax returns as well as all the documents necessary for the payment of the tax, at least fifteen (15) Days prior to the deadline set for the filing of the annual return. 7.6 SONATRACH shall pay, in ANADARKO's name and on behalf of ANADARKO, the amount stated on the tax returns submitted to the taxation authorities by ANADARKO, after deducting the amount of provisional instalments already paid for the said fiscal year, no later than the deadline set for the filing of the annual return. 7.7 For any fiscal year, the tax on remuneration is due and payable in twelve (12) provisional monthly instalments. These instalments shall be paid by SONATRACH and deducted from the tax on remuneration due for the said fiscal year. 7.8 Consequently, ANADARKO shall notify SONATRACH ten (10) Days before the 25th of the month following the month for which the instalment payment is due, of the amount of the instalment which must be paid for the said month. 7.9 SONATRACH shall submit to ANADARKO, within thirty (30) Days following the date of payment, the original receipts issued by the taxation authorities in the name of ANADARKO, attesting to the payment of the tax on remuneration. 7.10 ANADARKO shall be responsible for any delay in filing or failure to produce the tax returns. ANADARKO shall also be responsible for any delay in payment or failure to make payment of the tax on remuneration by SONATRACH on its behalf. 7.11 It is understood that any penalty established by the taxation authorities, as a result of any delay in filing, non-production of the tax returns, mistakes or omissions in tax returns, will be charged to ANADARKO and paid by ANADARKO. In the event that, as a result of SONATRACH's late payment or failure to make payment, for reasons attributable to SONATRACH, of all or part of the tax on remuneration, penalties would be imposed on ANADARKO by the taxation authorities, SONATRACH shall pay any such penalties. However, if such penalties are paid by ANADARKO, SONATRACH will reimburse ANADARKO within thirty (30) Days following receipt of a demand for payment issued by ANADARKO. 7.12 In the event that the taxation authorities would reject the amount of tax on remuneration submitted by ANADARKO, SONATRACH shall pay immediately, on behalf of ANADARKO, the total amount of required tax included the requested additional tax, as well as any penalty or fine relating thereto. The required additional tax on remuneration paid by SONATRACH shall be considered as the amount Ii for the calculation of the remuneration as provided for by Article 7.3 hereinabove, only if the additional tax on remuneration is due on ANADARKO's remuneration. It is understood that any penalty or fine related thereto paid by SONATRACH shall be charged to ANADARKO, and reimbursed by ANADARKO to SONATRACH. SONATRACH shall also have the right to request from ANADARKO reimbursement of penalties paid to Algerian tax authorities and ANADARKO shall reimburse these amounts within thirty (30) days of the receipt of the request by SONATRACH. 7.13 SONATRACH shall submit to ANADARKO the original of the receipts issued by the taxation authorities for these additional amounts of tax on remuneration, within fifteen (15) Days from the date of payment. Within the same period of time, SONATRACH shall submit to ANADARKO the documents issued by the taxation authorities for all reimbursements or tax exemptions granted in its name. 7.14 SONATRACH's payment of the tax on remuneration, on behalf of ANADARKO, within the framework of the legal provisions in effect, including, if any, the payment of possible penalties mentioned in Article 7.11 hereinabove, due to the delay or failure to pay this tax for reasons strictly attributable to SONATRACH, shall not be deducted from the share of Liquid Hydrocarbons going to ANADARKO under the Agreement. In the event that, or if in breach of its obligations, SONATRACH does not pay, within the time limit allowed, for reasons attributable to SONATRACH, all sums due as tax on remuneration and penalties, if any, as mentioned in paragraph 2 of Article 7.11 and ANADARKO pays these sums pursuant to the taxation authorities' demand, ANADARKO shall have the right to demand from SONATRACH the reimbursement of all sums paid to the Algerian taxation authorities in the currency of origin, and SONATRACH shall reimburse ANADARKO within 30 Days after receipt of the request of ANADARKO. 7.15 The Party who suffers a loss because of the failure of the other Party to reimburse any sums due within the time periods specified in this Article will be entitled to go before the Operating Committee, in accordance with Article 5 of the Agreement." SECTION IV: LASMO AND MARSK OIL STATUS AS SONATRACH'S PARTNERS ARTICLE 8 Upon the effective date of this Amendment LASMO is given the status of Party to the Agreement dated October 23, 1989 and partner of SONATRACH, with a participation interest of twenty- five per cent (25%) of ANADARKO's rights, interests and obligations under this Agreement. LASMO shall, in proportion with its participation interest, succeed to ANADARKO in all ANADARKO's rights and obligations under the Agreement of October 23, 1989. LASMO agrees to respect all provisions of that Agreement. ARTICLE 9 Upon the effective date of this Amendment MAERSK Oil is given the status of Party to the Agreement dated October 23, 1989 and partner of SONATRACH, with a participation interest of twenty-five per cent (25%) of ANADARKO's rights, interests and obligations under this Agreement. MAERSK Oil shall, in proportion with its participation interest, succeed to ANADARKO in all ANADARKO's rights and obligations under the Agreement of October 23, 1989. MAERSK Oil agrees to respect all provisions of that Agreement. ARTICLE 10 ANADARKO, LASMO and MAERSK Oil shall be jointly and severally responsible to SONATRACH for all obligations arising from the Agreement dated October 23, 1989. SECTION V: GENERAL PROVISIONS ARTICLE 11 All the provisions of the Agreement dated October 23, 1989 which have not been expressly modified for this Amendment remain applicable. ARTICLE 12 This Amendment shall become effective upon being approved by the Competent Authority, according to the procedures required pursuant to the legislation and regulation in effect. Made in Algiers on ________________ in eight (8) originals. For Sonatrach For Anadarko Le Directeur General Chairman of the Board of Directors and Chief Executive Officer ______________________________ Nazim Cherif-Eddine Zouioueche- ______________________________ ___ Robert J. Allison Jr. For Lasmo For Maersk Oil Director President ______________________________ ______________________________ Ian D. Brown ___ Kjeld Fjeldgaard EX-12 4 EXHIBIT 12 ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Nine Months Ended September 30, 1998 and Five Years Ended December 31, 1997
Nine Months Ended September 30 Years Ended December 31 thousands 1998 1997 1996 1995 1994 1993 Gross Income $59,332 $205,318 $196,763 $65,624 $90,794 $106,824 Rentals 8,904 8,266 4,234 2,457 2,814 3,069 Earnings 68,236 213,584 200,997 68,081 93,608 109,893 Gross Interest Expense 59,514 62,095 55,986 52,557 41,635 38,000 Rentals 8,904 8,266 4,234 2,457 2,814 3,069 Preferred Stock Dividends 6,728 --- --- --- --- --- Fixed Charges $75,146 $70,361 $60,220 $55,014 $44,449 $41,069 Ratio of Earnings to Fixed Charges 0.91 3.04 3.34 1.24 2.11 2.68
The ratios of earnings to fixed charges and preferred stock dividends were computed by dividing earnings by fixed charges. For this purpose, earnings include income before income taxes and fixed charges. Fixed charges include interest and amortization of debt expenses, the estimated interest component of rentals and preferred stock dividends. During the nine months ended September 30, 1998 and five years ended December 31, 1997, there were two million shares and no shares of preferred stock outstanding, respectively. A pro forma ratio for prior periods is not presented due to immateriality. EX-27 5
5 0000773910 ANADARKO PETROLEUM CORPORATION 1000 9-MOS DEC-31-1998 SEP-30-1998 19,881 0 157,750 0 20,961 205,168 5,314,372 2,054,097 3,497,013 263,919 1,225,000 0 200,000 12,224 1,105,582 3,497,013 424,718 424,718 300,472 300,472 0 0 41,127 18,205 6,385 11,820 0 0 0 11,820 0.06 0.06
-----END PRIVACY-ENHANCED MESSAGE-----