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Derivative Instruments
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
7. Derivative Instruments

Objective and Strategy  The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks. Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations, such as Henry Hub, Louisiana for natural gas and Cushing, Oklahoma or Sullom Voe, Scotland for oil. Basis swaps are periodically used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (Marketing and Trading Derivative Activities).
Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to interest-rate changes. The fair value of the Company’s current interest-rate swap portfolio increases (decreases) when interest rates increase (decrease).
The Company does not apply hedge accounting to any of its derivative instruments. As a result, gains and losses associated with derivative instruments are recognized currently in earnings. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. See Note 10—Accumulated Other Comprehensive Income (Loss).

7. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities  The natural-gas prices listed below are New York Mercantile Exchange (NYMEX) Henry Hub prices. The crude-oil prices listed below are a combination of NYMEX West Texas Intermediate and IntercontinentalExchange, Inc. (ICE) Brent Blend prices. The following is a summary of the Company’s derivative instruments related to its Oil and Natural-Gas Production/Processing Derivative Activities at June 30, 2014:
 
2014
Settlement
 
2015
Settlement
Natural Gas
 
 
 
Three-Way Collars (thousand MMBtu/d)
600

 
635

Average price per MMBtu
 
 
 
Ceiling sold price (call)
$
5.01

 
$
4.76

Floor purchased price (put)
$
3.75

 
$
3.75

Floor sold price (put)
$
2.75

 
$
2.75

Fixed-Price Contracts (thousand MMBtu/d)
1,000

 
—

Average price per MMBtu
$
4.23

 
$
—

Crude Oil
 
 
 
Three-Way Collars (MBbls/d)
—

 
25

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

 
$
117.55

Floor purchased price (put)
$
—

 
$
100.00

Floor sold price (put)
$
—

 
$
85.00

Fixed-Price Contracts (MBbls/d)
140

 
—

Average price per barrel
$
101.94

 
$
—

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

A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.

Marketing and Trading Derivative Activities  The Company had financial derivative transactions with notional volumes of natural gas totaling 4 billion cubic feet (Bcf) at June 30, 2014, and 16 Bcf at December 31, 2013, that were entered into to mitigate commodity-price risk related to fixed-price purchase and sales contracts and storage activity.

7. Derivative Instruments (Continued)

Interest-Rate Derivatives  Anadarko has outstanding interest-rate swap contracts as a fixed-rate payer to manage interest-rate risk associated with anticipated debt issuances. The Company has locked in a fixed interest rate in exchange for a floating interest rate indexed to the three-month London Interbank Offered Rate (LIBOR). These swap instruments include a provision that requires both the termination of the swaps and cash settlement in full at the start of the reference period.
During the second quarter of 2014, to align the interest-rate swap portfolio with anticipated debt financing, the Company extended the reference-period start dates from June 2014 to September 2016 and adjusted the related fixed interest rates for interest-rate swaps with an aggregate notional principal amount of $1.1 billion. In addition, in anticipation of the July 2014 issuance of an aggregate $1.25 billion of Senior Notes, interest-rate swap agreements with an aggregate notional principal amount of $750 million were settled in June 2014, resulting in a cash payment of $222 million.
Derivative settlements are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements are classified as cash flows from financing activities. In previous years, the Company extended the reference-period start dates for derivatives included in the interest-rate swap portfolio with no settlement of related interest-rate derivative obligations. As a result, current and future settlements related to these extended interest-rate derivatives are classified as cash flows from financing activities.
The Company had the following outstanding interest-rate swaps at June 30, 2014: 
millions except percentages
 
Reference Period
 
Weighted-Average
Notional Principal Amount
 
Start
 
End
 
Interest Rate
$
50

 
 
September 2016
 
September 2026
 
5.91%
$
1,850

 
 
September 2016
 
September 2046
 
6.05%

Effect of Derivative Instruments—Balance Sheet  The following summarizes the fair value of the Company’s derivative instruments:
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
millions
 
June 30,
 
December 31,
 
June 30,
 
December 31,
Balance Sheet Classification
 
2014
 
2013
 
2014
 
2013
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
23

 
$
181

 
$
(8
)
 
$
(102
)
Other assets
 
28

 
89

 
(19
)
 
(66
)
Accrued expenses
 
36

 
106

 
(213
)
 
(149
)
Other liabilities
 
3

 
4

 
(6
)
 
(15
)
 
 
90

 
380

 
(246
)
 
(332
)
Interest-rate and other derivatives
 
 
 
 
 
 
 
 
Accrued expenses
 
—

 
—

 
—

 
(480
)
Other liabilities
 
—

 
—

 
(829
)
 
(174
)
 
 
—

 
—

 
(829
)
 
(654
)
Total derivatives
 
$
90

 
$
380

 
$
(1,075
)
 
$
(986
)


7. Derivative Instruments (Continued)

Effect of Derivative Instruments—Statement of Income  The following summarizes gains and losses related to derivative instruments:
millions
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Classification of (Gain) Loss Recognized
 
2014
 
2013
 
2014
 
2013
Commodity derivatives
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
2

 
$
(3
)
 
$
10

 
$
5

(Gains) losses on derivatives, net
 
164

 
(394
)
 
379

 
(111
)
Interest-rate and other derivatives
 
 
 
 
 
 
 
 
(Gains) losses on derivatives, net
 
159

 
(262
)
 
397

 
(354
)
Total (gains) losses on derivatives, net
 
$
325

 
$
(659
)
 
$
786

 
$
(460
)
__________________________________________________________________
(1) 
Represents the effect of Marketing and Trading Derivative Activities.

Credit-Risk Considerations  The financial integrity of exchange-traded contracts, which are subject to nominal credit risk, is assured by NYMEX or ICE through systems of financial safeguards and transaction guarantees. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact on fair value of its counterparties’ creditworthiness. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure. The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities, and routinely exercises its contractual right to offset gains and losses when settling with derivative counterparties.
In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across derivative types. At June 30, 2014, $53 million of the Company’s $1.1 billion gross derivative liability balance, and at December 31, 2013, $76 million of the Company’s $986 million gross derivative liability balance would have been eligible for setoff against the Company’s gross derivative asset balance in the event of default. Other than in the event of default, the Company does not net settle across derivative types.
Some of the Company’s derivative instruments are subject to provisions that can require full or partial collateralization or immediate settlement of the Company’s obligations if certain credit-risk-related provisions are triggered. However, most of the Company’s derivative counterparties maintain secured positions with respect to the Company’s derivative liabilities under the Company’s $5.0 billion senior secured revolving credit facility maturing in September 2015 ($5.0 billion Facility). For information on the Company’s revolving credit facilities, see Note 8—Debt and Interest Expense—Anadarko Revolving Credit Facilities.
Unsecured derivative obligations may require immediate settlement or full collateralization if certain credit-risk-related provisions are triggered, such as the Company’s credit rating from major credit rating agencies declining to a level below investment grade. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $92 million at June 30, 2014, and $42 million at December 31, 2013. The current portion of these amounts was included in accrued expenses and the long-term portion of these amounts was included in other long-term liabilities—other on the Company’s Consolidated Balance Sheets.

7. Derivative Instruments (Continued)

Fair Value  Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, implied market volatility and discount factors. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments.
The following summarizes the fair value of the Company’s derivative assets and liabilities, by input level within the fair-value hierarchy:
millions
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
—

 
$
73

 
$
—

 
$
(65
)
 
$
—

 
$
8

Other counterparties
—

 
17

 
—

 
(1
)
 
—

 
16

Total derivative assets
$
—

 
$
90

 
$
—

 
$
(66
)
 
$
—

 
$
24

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
—

 
$
(225
)
 
$
—

 
$
65

 
$
14

 
$
(146
)
Other counterparties
—

 
(21
)
 
—

 
1

 
—

 
(20
)
Interest-rate and other derivatives
—

 
(829
)
 
—

 
—

 
—

 
(829
)
Total derivative liabilities
$
—

 
$
(1,075
)
 
$
—

 
$
66

 
$
14

 
$
(995
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
—

 
$
211

 
$
—

 
$
(153
)
 
$
—

 
$
58

Other counterparties
—

 
169

 
—

 
(126
)
 
—

 
43

Total derivative assets
$
—

 
$
380

 
$
—

 
$
(279
)
 
$
—

 
$
101

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
$
—

 
$
(200
)
 
$
—

 
$
153

 
$
7

 
$
(40
)
Other counterparties
—

 
(132
)
 
—

 
126

 
—

 
(6
)
Interest-rate and other derivatives
—

 
(654
)
 
—

 
—

 
—

 
(654
)
Total derivative liabilities
$
—

 
$
(986
)
 
$
—

 
$
279

 
$
7

 
$
(700
)
 __________________________________________________________________
(1) 
Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.