10-Q 1 apc20162q-10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from        to        
Commission File No. 1-8968
ANADARKO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
76-0146568
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1201 Lake Robbins Drive, The Woodlands, Texas
 
77380-1046
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (832) 636-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☒    Accelerated filer  ☐    Non-accelerated filer  ☐    Smaller reporting company  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
The number of shares outstanding of the Company’s common stock at July 15, 2016, is shown below:
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
510,457,469


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


PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except per-share amounts
 
2016
 
2015
 
2016
 
2015
Revenues and Other
 
 
 
 
 
 
 
 
Oil and condensate sales
 
$
1,125

 
$
1,616

 
$
1,975

 
$
3,035

Natural-gas sales
 
320

 
487

 
686

 
1,128

Natural-gas liquids sales
 
235

 
229

 
413

 
461

Gathering, processing, and marketing sales
 
305

 
305

 
545

 
598

Gains (losses) on divestitures and other, net
 
(70
)
 
(1
)
 
(30
)
 
(265
)
Total
 
1,915

 
2,636

 
3,589

 
4,957

Costs and Expenses
 
 
 
 
 
 
 
 
Oil and gas operating
 
202

 
226

 
410

 
522

Oil and gas transportation
 
246

 
283

 
488

 
588

Exploration
 
76

 
103

 
202

 
1,186

Gathering, processing, and marketing
 
252

 
255

 
467

 
509

General and administrative
 
305

 
278

 
754

 
585

Depreciation, depletion, and amortization
 
984

 
1,214

 
2,133

 
2,470

Other taxes
 
157

 
151

 
274

 
333

Impairments
 
18

 
30

 
34

 
2,813

Other operating expense
 
7

 
6

 
23

 
69

Total
 
2,247

 
2,546

 
4,785

 
9,075

Operating Income (Loss)
 
(332
)
 
90

 
(1,196
)
 
(4,118
)
Other (Income) Expense
 
 
 
 
 
 
 
 
Interest expense
 
217

 
201

 
437

 
417

Loss on early extinguishment of debt
 
124

 
—

 
124

 
—

(Gains) losses on derivatives, net
 
307

 
(311
)
 
604

 
(159
)
Other (income) expense, net
 
(55
)
 
15

 
(55
)
 
62

Tronox-related contingent loss
 
—

 
—

 
—

 
5

Total
 
593

 
(95
)
 
1,110

 
325

Income (Loss) Before Income Taxes
 
(925
)
 
185

 
(2,306
)
 
(4,443
)
Income tax expense (benefit)
 
(314
)
 
77

 
(697
)
 
(1,315
)
Net Income (Loss)
 
(611
)
 
108

 
(1,609
)
 
(3,128
)
Net income (loss) attributable to noncontrolling interests
 
81

 
47

 
117

 
79

Net Income (Loss) Attributable to Common Stockholders
 
$
(692
)
 
$
61

 
$
(1,726
)
 
$
(3,207
)
 
 
 
 
 
 
 
 
 
Per Common Share
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
(1.36
)
 
$
0.12

 
$
(3.39
)
 
$
(6.32
)
Net income (loss) attributable to common stockholders—diluted
 
$
(1.36
)
 
$
0.12

 
$
(3.39
)
 
$
(6.32
)
Average Number of Common Shares Outstanding—Basic
 
510

 
508

 
510

 
507

Average Number of Common Shares Outstanding—Diluted
 
510

 
509

 
510

 
507

Dividends (per common share)
 
$
0.05

 
$
0.27

 
$
0.10

 
$
0.54


See accompanying Notes to Consolidated Financial Statements.

2

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
 
2016
 
2015
Net Income (Loss)
 
$
(611
)
 
$
108

 
$
(1,609
)
 
$
(3,128
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
2

 
3

 
5

 
5

Income taxes on reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
(1
)
 
(1
)
 
(2
)
 
(2
)
Total adjustments for derivative instruments, net of taxes
 
1

 
2

 
3

 
3

Adjustments for pension and other postretirement plans
 
 
 
 
 
 
 
 
Net gain (loss) incurred during period
 
(24
)
 
—

 
(190
)
 
—

Income taxes on net gain (loss) incurred during period
 
9

 
—

 
70

 
—

Prior service credit (cost) incurred during period
 
—

 
—

 
(1
)
 
—

Income taxes on prior service credit (cost) incurred during period
 
—

 
—

 
1

 
—

Amortization of net actuarial (gain) loss to general and administrative expense
 
34

 
13

 
42

 
26

Income taxes on amortization of net actuarial (gain) loss to general and administrative expense
 
(13
)
 
(5
)
 
(16
)
 
(9
)
Amortization of net prior service (credit) cost to general and administrative expense
 
(6
)
 
1

 
(21
)
 
1

Income taxes on amortization of net prior service (credit) cost to general and administrative expense
 
3

 
—

 
8

 
—

Total adjustments for pension and other postretirement plans, net of taxes
 
3

 
9

 
(107
)
 
18

Total
 
4

 
11

 
(104
)
 
21

Comprehensive Income (Loss)
 
(607
)
 
119

 
(1,713
)
 
(3,107
)
Comprehensive income (loss) attributable to noncontrolling interests
 
81

 
47

 
117

 
79

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
(688
)
 
$
72

 
$
(1,830
)
 
$
(3,186
)


See accompanying Notes to Consolidated Financial Statements.

3

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
millions
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents ($160 and $100 related to VIEs)
 
$
1,394

 
$
939

Accounts receivable (net of allowance of $13 and $11)
 
 
 
 
   Customers ($67 and $81 related to VIEs)
 
770

 
652

   Others ($76 and $84 related to VIEs)
 
730

 
1,817

Other current assets
 
318

 
573

Total
 
3,212

 
3,981

Properties and Equipment
 
 
 
 
Cost
 
69,610

 
70,683

Less accumulated depreciation, depletion, and amortization
 
37,265

 
36,932

Net properties and equipment ($5,002 and $4,859 related to VIEs)
 
32,345

 
33,751

Other Assets ($621 and $644 related to VIEs)
 
2,239

 
2,268

Goodwill and Other Intangible Assets ($1,237 and $1,220 related to VIEs)
 
6,237

 
6,331

Total Assets
 
$
44,033

 
$
46,331

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable ($172 and $179 related to VIEs)
 
$
2,200

 
$
2,850

Current asset retirement obligations
 
221

 
309

Interest payable
 
242

 
247

Other taxes payable ($21 and $18 related to VIEs)
 
282

 
318

Accrued expenses
 
267

 
424

Short-term debt
 
32

 
32

Total
 
3,244

 
4,180

Long-term Debt
 
15,641

 
15,636

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
4,686

 
5,400

Asset retirement obligations ($135 and $127 related to VIEs)
 
1,726

 
1,750

Other
 
4,136

 
3,908

Total
 
10,548

 
11,058

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share (1.0 billion shares authorized, 531.2 million and 528.3 million shares issued)
 
53

 
52

Paid-in capital
 
9,638

 
9,265

Retained earnings
 
3,103

 
4,880

Treasury stock (20.7 million and 20.0 million shares)
 
(1,026
)
 
(995
)
Accumulated other comprehensive income (loss)
 
(487
)
 
(383
)
Total Stockholders’ Equity
 
11,281

 
12,819

Noncontrolling interests
 
3,319

 
2,638

Total Equity
 
14,600

 
15,457

Total Liabilities and Equity
 
$
44,033

 
$
46,331

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

See accompanying Notes to Consolidated Financial Statements.

4

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
 
 
Total Stockholders’ Equity
 
 
 
 
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
millions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
$
52

 
$
9,265

 
$
4,880

 
$
(995
)
 
$
(383
)
 
$
2,638

 
$
15,457

Net income (loss)
 
—

 
—

 
(1,726
)
 
—

 
—

 
117

 
(1,609
)
Common stock issued
 
1

 
108

 
—

 
—

 
—

 
—

 
109

Dividends—common stock
 
—

 
—

 
(51
)
 
—

 
—

 
—

 
(51
)
Repurchase of common stock
 
—

 
—

 
—

 
(31
)
 
—

 
—

 
(31
)
Subsidiary equity transactions
 
—

 
265

 
—

 
—

 
—

 
723

 
988

Distributions to noncontrolling interest owners
 
—

 
—

 
—

 
—

 
—

 
(159
)
 
(159
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
—

 
—

 
—

 
—

 
3

 
—

 
3

Adjustments for pension and other postretirement plans
 
—

 
—

 
—

 
—

 
(107
)
 
—

 
(107
)
Balance at June 30, 2016
 
$
53

 
$
9,638

 
$
3,103

 
$
(1,026
)
 
$
(487
)
 
$
3,319

 
$
14,600



See accompanying Notes to Consolidated Financial Statements.

5

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
(1,609
)
 
$
(3,128
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
2,133

 
2,470

Deferred income taxes
 
(820
)
 
(1,187
)
Dry hole expense and impairments of unproved properties
 
45

 
1,040

Impairments
 
34

 
2,813

(Gains) losses on divestitures, net
 
102

 
425

Loss on early extinguishment of debt
 
124

 
—

Total (gains) losses on derivatives, net
 
610

 
(158
)
Operating portion of net cash received (paid) in settlement of derivative instruments
 
165

 
172

Other
 
203

 
74

Changes in assets and liabilities
 
 
 
 
Tronox-related contingent liability
 
—

 
(5,210
)
(Increase) decrease in accounts receivable
 
922

 
(105
)
Increase (decrease) in accounts payable and accrued expenses
 
(717
)
 
(198
)
Other items, net
 
(100
)
 
(269
)
Net cash provided by (used in) operating activities
 
1,092

 
(3,261
)
Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment and dry hole costs
 
(1,879
)
 
(3,501
)
Divestitures of properties and equipment and other assets
 
900

 
700

Other, net
 
14

 
16

Net cash provided by (used in) investing activities
 
(965
)
 
(2,785
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
5,275

 
4,787

Repayments of debt
 
(5,425
)
 
(3,857
)
Financing portion of net cash received (paid) for derivative instruments
 
(727
)
 
(77
)
Increase (decrease) in outstanding checks
 
(159
)
 
(109
)
Dividends paid
 
(51
)
 
(277
)
Repurchase of common stock
 
(31
)
 
(37
)
Issuance of common stock, including tax benefit on share-based compensation awards
 
30

 
19

Sale of subsidiary units
 
1,163

 
187

Issuance of tangible equity units — equity component
 
—

 
348

Distributions to noncontrolling interest owners
 
(159
)
 
(135
)
Proceeds from conveyance of future hard minerals royalty revenues, net of transaction costs
 
413

 
—

Net cash provided by (used in) financing activities
 
329

 
849

Effect of Exchange Rate Changes on Cash
 
(1
)
 
1

Net Increase (Decrease) in Cash and Cash Equivalents
 
455

 
(5,196
)
Cash and Cash Equivalents at Beginning of Period
 
939

 
7,369

Cash and Cash Equivalents at End of Period
 
$
1,394

 
$
2,173



See accompanying Notes to Consolidated Financial Statements.

6

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Summary of Significant Accounting Policies

General  Anadarko Petroleum Corporation is engaged in the exploration, development, production, and marketing of oil, condensate, natural gas, and natural gas liquids (NGLs), and in the marketing of anticipated production of liquefied natural gas (LNG). In addition, the Company engages in the gathering, processing, treating, and transporting of oil, condensate, natural gas, and NGLs. The Company also participates in the hard-minerals business through royalty arrangements. Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries.

Basis of Presentation  The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP). Certain prior-period amounts have been reclassified to conform to the current-year presentation. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Consolidated Financial Statements include the accounts of Anadarko and subsidiaries in which Anadarko holds, directly or indirectly, more than 50% of the voting rights and variable interest entities (VIEs) for which Anadarko is the primary beneficiary. All intercompany transactions have been eliminated. Undivided interests in oil and natural-gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in noncontrolled entities over which Anadarko has the ability to exercise significant influence over operating and financial policies and VIEs for which Anadarko is not the primary beneficiary are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost, and subsequently adjusted for the Company’s proportionate share of earnings, losses, and distributions. Other investments are carried at original cost. Investments accounted for using the equity method and cost method are reported as a component of other assets.

Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30)—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASUs require capitalized debt issuance costs, except for those related to revolving credit facilities, to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than as an asset. The Company adopted these ASUs on January 1, 2016, using a retrospective approach. The adoption resulted in a reclassification that reduced other current assets and short-term debt by $1 million and reduced other assets and long-term debt by $82 million on the Company’s Consolidated Balance Sheet at December 31, 2015.
The FASB issued ASU 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis. The Company adopted this ASU on January 1, 2016. In accordance with the new ASU, Western Gas Equity Partners, LP (WGP) and Western Gas Partners, LP (WES), publicly traded consolidated subsidiaries of the Company, are considered VIEs for which the Company is the primary beneficiary. Prior to adoption of the ASU, WGP and WES were consolidated by the Company under the voting interest model. After adoption, WGP and WES were consolidated by the Company under the variable interest model. While this ASU requires additional financial statement disclosure, it has no impact on the Company’s consolidated results of operations, cash flows, or financial position. See Note 17—Variable Interest Entities.
The FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU will simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. This ASU is effective for annual and interim periods beginning in 2017 with early adoption permitted. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.


7

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet and disclose key information about their leasing transactions. This ASU is effective for annual and interim periods beginning in 2019. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.
The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes current revenue recognition requirements and industry-specific guidance. The codification was amended through additional ASUs and, as amended, requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company is required to adopt the new standard in the first quarter of 2018 using one of two retrospective application methods. The Company is continuing to evaluate the provisions of this ASU and has not determined the impact this standard may have on its consolidated financial statements and related disclosures or decided upon the method of adoption.

2. Inventories

The following summarizes the major classes of inventories included in other current assets:
millions
June 30,
2016
 
December 31,
2015
Oil
$
111

 
$
116

Natural gas
28

 
36

NGLs
77

 
64

Total inventories
$
216

 
$
216


3. Divestitures and Assets Held for Sale

For the six months ended June 30, 2016, the Company received $900 million in net proceeds from divestitures and recognized net losses of $102 million from divestitures and assets held for sale.

Divestitures The following divestitures primarily related to assets that were included in the oil and gas exploration and production reporting segment:
•
The Company sold certain U.S. onshore assets in East Texas/Louisiana with a sales price of $107 million, for net proceeds of $99 million, and recognized a gain of $13 million.
•
The Company sold certain U.S. onshore assets in West Texas for net proceeds of $138 million, with no gain or loss recognized.
•
The Company sold certain U.S. onshore assets in the Rockies for net proceeds of $593 million, and recognized a loss of $53 million.

Assets Held for Sale Certain U.S. onshore assets included in the oil and gas exploration and production and midstream reporting segments satisfied criteria to be considered held for sale during the second quarter of 2016, at which time the Company remeasured them to their current fair value using a market approach and Level 2 fair-value measurement and recognized a loss of $50 million. The sale of these assets is expected to close in the third quarter of 2016.
Gains and losses on assets held for sale are included in gains (losses) on divestitures and other, net in the Company’s Consolidated Statements of Income. At June 30, 2016, the balances of assets and liabilities associated with assets held for sale were not material.


8

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Impairments

Impairments of long-lived assets are included in impairment expense in the Company’s Consolidated Statements of Income. The following summarizes impairments of long-lived assets and the related post-impairment fair values by segment:
  
Three Months Ended
 
Six Months Ended
millions
Impairment
 
Fair Value (1)
 
Impairment
 
Fair Value (1)
June 30, 2016
 
 
 
 
 
 
 
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
U.S. onshore properties
$
—

 
$
—

 
$
4

 
$
585

Gulf of Mexico properties
1

 
—

 
2

 
—

Cost-method investment (2)
1

 
32

 
2

 
32

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
11

 
2

 
21

 
5

Other
 
 
 
 
 
 
 
Long-lived assets held for use
5

 
1

 
5

 
1

Total
$
18

 
$
35

 
$
34

 
$
623

 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
Oil and gas exploration and production
 
 
 
 
 
 
 
Long-lived assets held for use
 
 
 
 
 
 
 
U.S. onshore properties
$
4

 
$
12

 
$
2,303

 
$
1,303

Gulf of Mexico properties
17

 
—

 
25

 
—

Cost-method investment (2)
1

 
32

 
1

 
32

Midstream
 
 
 
 
 
 
 
Long-lived assets held for use
8

 
199

 
484

 
202

Total
$
30

 
$
243

 
$
2,813

 
$
1,537

__________________________________________________________________
(1) 
Measured as of the impairment date using the income approach and Level 3 inputs.
(2) 
Represents the after-tax net investment.

Impairments during the six months ended June 30, 2015, were primarily related to the Company’s Greater Natural Buttes oil and gas and midstream properties in the Rockies, which were impaired due to lower forecasted commodity prices.
In addition to the long-lived asset impairments above, the Company recognized a $935 million impairment of unproved Greater Natural Buttes properties during the six months ended June 30, 2015, as a result of lower commodity prices. Impairments of unproved properties are included in exploration expense in the Company’s Consolidated Statements of Income.
It is reasonably possible that prolonged low or further declines in commodity prices, changes to the Company’s drilling plans in response to lower prices, or increases in drilling or operating costs could result in future impairments.


9

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $1.2 billion at June 30, 2016, and $1.1 billion at December 31, 2015. The increase in suspended exploratory well costs during 2016 is primarily related to the capitalization of costs associated with appraisal activities in Côte d’Ivoire. There were no material charges to exploration expense during the six months ended June 30, 2016, related to suspended exploratory well costs previously capitalized for a period greater than one year since the completion of drilling at December 31, 2015. Projects with suspended exploratory well costs are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development and where management is actively pursuing efforts to assess whether reserves can be attributed to these projects. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time.

6. Derivative Instruments

Objective and Strategy  The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks. Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations such as Cushing, Oklahoma or Sullom Voe, Scotland for oil and Henry Hub, Louisiana for natural gas. Basis swaps are periodically used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (Marketing and Trading Derivative Activities).
Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to interest-rate changes. The fair value of the Company’s current interest-rate swap portfolio is subject to changes in interest rates.
The Company does not apply hedge accounting to any of its derivative instruments. As a result, gains and losses associated with derivative instruments are recognized currently in earnings. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. See Note 15—Accumulated Other Comprehensive Income (Loss).


10

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities  The oil prices listed below are a combination of New York Mercantile Exchange (NYMEX) West Texas Intermediate and Intercontinental Exchange, Inc. (ICE) Brent Blend prices. The natural-gas prices listed below are NYMEX Henry Hub prices. The NGLs prices listed below are Oil Price Information Services prices. The following is a summary of the Company’s derivative instruments related to oil and natural-gas production/processing derivative activities at June 30, 2016:
 
2016 Settlement
 
2017 Settlement
 
2018 Settlement
Oil
 
 
 
 
 
Three-Way Collars (MBbls/d)
83

 
—

 
—

Average price per barrel
 
 
 
 
 
Ceiling sold price (call)
$
63.82

 
$
—

 
$
—

Floor purchased price (put)
$
54.46

 
$
—

 
$
—

Floor sold price (put)
$
42.77

 
$
—

 
$
—

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

 
682

 
250

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

 
$
3.60

 
$
3.54

Floor purchased price (put)
$
—

 
$
2.75

 
$
2.75

Floor sold price (put)
$
—

 
$
2.00

 
$
2.00

Fixed-Price Contracts (thousand MMBtu/d)
14

 
32

 
—

Average price per MMBtu
$
2.38

 
$
3.14

 
$
—

NGLs
 
 
 
 
 
Fixed-Price Contracts (MBbls/d)
—

 
2

 
—

Average price per barrel
$
—

 
$
15.84

 
$
—

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

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

Marketing and Trading Derivative Activities  The Company had financial derivative transactions with notional volumes of natural gas totaling 5 billion cubic feet (Bcf) at June 30, 2016, and 8 Bcf at December 31, 2015, that were entered into to mitigate commodity-price risk related to fixed-price purchase and sales contracts and storage activity.


11

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Interest-Rate Derivatives  Anadarko has outstanding interest-rate swap contracts to manage interest-rate risk associated with anticipated debt issuances. The Company has locked in a fixed interest rate in exchange for a floating interest rate indexed to the three-month London Interbank Offered Rate (LIBOR). In February 2016, in exchange for amended terms with certain counterparties, the Company modified the mandatory termination dates from 2021 to 2018 and, in some cases, the related fixed interest rates on interest-rate swaps with an aggregate notional principal amount of $500 million. Additionally, an interest-rate swap agreement was settled in March 2016, resulting in a cash payment of $193 million.
At June 30, 2016, the Company had outstanding interest-rate swaps with a notional amount of $1.7 billion due prior to or at September 2021 that will manage interest-rate risk associated with the potential refinancing of the Company’s $900 million Senior Notes due 2019 and the Zero-Coupon Senior Notes due 2036 (Zero Coupons), should the Zero Coupons be put to the Company prior to the swap termination dates. At the next put date in October 2016, the accreted value of the Zero Coupons will be $839 million. See Note 8—Debt and Interest Expense. Depending on market conditions, liability-management actions, or other factors, the Company may enter into offsetting interest-rate swap positions, or settle or amend, certain or all of the currently outstanding interest-rate swaps. 
Derivative settlements and collateralization are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization are classified as cash flows from financing activities. As a result of prior extensions of reference-period start dates without settlement of the related interest-rate derivative obligations, the interest-rate derivatives in the Company’s portfolio contain an other-than-insignificant financing element, and therefore, any settlements or collateralization related to these extended interest-rate derivatives are classified as cash flows from financing activities.
The Company had the following outstanding interest-rate swaps at June 30, 2016: 
millions except percentages
 
 
 
Mandatory
 
Weighted-Average
Notional Principal Amount
 
Reference Period
 
Termination Date
 
Interest Rate
$
50

 
 
September 2016 – 2026
 
September 2016
 
5.910%
$
50

 
 
September 2016 – 2046
 
September 2016
 
6.290%
$
500

 
 
September 2016 – 2046
 
September 2018
 
6.559%
$
300

 
 
September 2016 – 2046
 
September 2020
 
6.509%
$
450

 
 
September 2017 – 2047
 
September 2018
 
6.445%
$
100

 
 
September 2017 – 2047
 
September 2020
 
6.891%
$
250

 
 
September 2017 – 2047
 
September 2021
 
6.570%


12

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Effect of Derivative Instruments—Balance Sheet  The following summarizes the fair value of the Company’s derivative instruments:
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
millions
 
June 30,
 
December 31,
 
June 30,
 
December 31,
Balance Sheet Classification
 
2016
 
2015
 
2016
 
2015
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
111

 
$
462

 
$
(29
)
 
$
(177
)
Other assets
 
10

 
8

 
—

 
—

Accrued expenses
 
4

 
—

 
(30
)
 
(3
)
Other liabilities
 
2

 
—

 
(15
)
 
—

 
 
127

 
470

 
(74
)
 
(180
)
Interest-rate derivatives
 
 
 
 
 
 
 
 
Other current assets
 
3

 
2

 
—

 
—

Other assets
 
15

 
54

 
—

 
—

Accrued expenses
 
—

 
—

 
(99
)
 
(54
)
Other liabilities
 
—

 
—

 
(1,749
)
 
(1,488
)
 
 
18

 
56

 
(1,848
)
 
(1,542
)
Total derivatives
 
$
145

 
$
526

 
$
(1,922
)
 
$
(1,722
)

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
 
2016
 
2015
 
2016
 
2015
Commodity derivatives
 
 
 
 
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
4

 
$
1

 
$
6

 
$
1

(Gains) losses on derivatives, net
 
94

 
1

 
66

 
(52
)
Interest-rate derivatives
 
 
 
 
 
 
 
 
(Gains) losses on derivatives, net
 
213

 
(312
)
 
538

 
(107
)
Total (gains) losses on derivatives, net
 
$
311

 
$
(310
)
 
$
610

 
$
(158
)
__________________________________________________________________
(1) 
Represents the effect of Marketing and Trading Derivative Activities.


13

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Credit-Risk Considerations  The financial integrity of exchange-traded contracts, which are subject to nominal credit risk, is assured by NYMEX or ICE through systems of financial safeguards and transaction guarantees. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact on the fair value of its counterparties’ creditworthiness. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure.
The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities, and routinely exercises its contractual right to offset gains and losses when settling with derivative counterparties. In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across derivative types. At June 30, 2016, $100 million of the Company’s $1.922 billion gross derivative liability balance, and at December 31, 2015, $347 million of the Company’s $1.722 billion gross derivative liability balance, would have been eligible for setoff against the Company’s gross derivative asset balance in the event of default. Other than in the event of default, the Company does not net settle across derivative types.
The Company’s derivative instruments are subject to individually negotiated credit provisions that may require collateral of cash or letters of credit depending on the derivative’s portfolio valuation versus negotiated credit thresholds. These credit thresholds may also require full or partial collateralization or immediate settlement of the Company’s obligations if certain credit-risk-related provisions are triggered, such as if the Company’s credit rating from major credit rating agencies declines to a level that is below investment grade. In February 2016, Moody’s Investors Service (Moody’s) downgraded the Company’s long-term debt credit rating from “Baa2” to “Ba1,” which is below investment grade. The downgrade triggered credit-risk-related features with certain derivative counterparties and required the Company to post collateral under its derivative instruments. The amount of cash posted as collateral pursuant to the contractual requirements applicable to derivative instruments with financial institutions was $599 million at June 30, 2016, and $58 million at December 31, 2015. No counterparties have requested termination or full settlement of derivative positions. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $1.3 billion (net of collateral) at each of June 30, 2016, and December 31, 2015.


14

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Derivative Instruments (Continued)

Fair Value  Fair value of futures contracts is based on unadjusted quoted prices in active markets for identical assets or liabilities, which represent Level 1 inputs. Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, discount factors and implied market volatility.
The following summarizes the fair value of the Company’s derivative assets and liabilities by input level within the fair-value hierarchy:
millions
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
1

 
$
126

 
$
—

 
$
(35
)
 
$
—

 
$
92

Interest-rate derivatives
—

 
18

 
—

 
—

 
—

 
18

Total derivative assets
$
1

 
$
144

 
$
—

 
$
(35
)
 
$
—

 
$
110

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
(4
)
 
$
(70
)
 
$
—

 
$
35

 
$
5

 
$
(34
)
Interest-rate derivatives
—

 
(1,848
)
 
—

 
—

 
592

 
(1,256
)
Total derivative liabilities
$
(4
)
 
$
(1,918
)
 
$
—

 
$
35

 
$
597

 
$
(1,290
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
10

 
$
460

 
$
—

 
$
(178
)
 
$
(8
)
 
$
284

Interest-rate derivatives
—

 
56

 
—

 
—

 
—

 
56

Total derivative assets
$
10

 
$
516

 
$
—

 
$
(178
)
 
$
(8
)
 
$
340

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
(1
)
 
$
(179
)
 
$
—

 
$
178

 
$
—

 
$
(2
)
Interest-rate derivatives
—

 
(1,542
)
 
—

 
—

 
58

 
(1,484
)
Total derivative liabilities
$
(1
)
 
$
(1,721
)
 
$
—

 
$
178

 
$
58

 
$
(1,486
)
 __________________________________________________________________
(1) 
Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.

15

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Tangible Equity Units

In June 2015, the Company issued 9.2 million 7.50% tangible equity units (TEUs) at a stated amount of $50.00 per TEU for net proceeds of $445 million. Each TEU is comprised of a prepaid equity purchase contract for common units of WGP and a senior amortizing note. Subsequent to issuance, each TEU may be legally separated into the two components. The prepaid equity purchase contract is considered a freestanding financial instrument, indexed to WGP common units, and meets the conditions for equity classification. The prepaid equity purchase contracts are included in noncontrolling interests, net of issuance costs, and the senior amortizing notes are included in short-term debt and long-term debt on the Company’s Consolidated Balance Sheets.

Equity Component Unless settled earlier at the holder’s option, each purchase contract has a mandatory settlement date of June 7, 2018. Anadarko has a right to elect to issue and deliver shares of Anadarko Petroleum Corporation common stock (APC shares) in lieu of delivering WGP common units at settlement. The Company will deliver not more than 0.8591 WGP common units and not less than 0.7159 WGP common units (or a computed number of APC shares) per TEU on the settlement date, subject to adjustment, at the settlement rate based upon the applicable market value of WGP common units (or APC shares).

Debt Component Each senior amortizing note has an initial principal amount of $10.95 and bears interest at 1.50% per year. On September 7, 2015, Anadarko began paying equal quarterly cash installments of $0.9375 per amortizing note (except for the September 7, 2015 installment payment, which was $0.9063 per amortizing note). The payments constitute a payment of interest and partial repayment of principal, with the aggregate per-year payments of principal and interest equating to a 7.50% cash payment with respect to each TEU. The senior amortizing notes have a final installment payment date of June 7, 2018, and are senior unsecured obligations of the Company.

8. Debt and Interest Expense

Debt Activity  The following summarizes the Company’s debt activity, after eliminating the effect of intercompany transactions, during the six months ended June 30, 2016:
 
Carrying Value
 
 
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Anadarko Consolidated
 
Description
Balance at December 31, 2015
$
2,691

 
$
—

 
$
12,957

 
$
15,648

 
 
Issuances
—

 
—

 
794

 
794

 
4.850% Senior Notes due 2021
 
—

 
—

 
1,088

 
1,088

 
5.550% Senior Notes due 2026
 
—

 
—

 
1,088

 
1,088

 
6.600% Senior Notes due 2046
Borrowings
—

 
—

 
1,750

 
1,750

 
364-Day Facility
 
530

 
—

 
—

 
530

 
WES RCF
 
—

 
28

 
—

 
28

 
WGP RCF
Repayments
—

 
—

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

 
—

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

 
—

 
(1,750
)
 
(1,750
)
 
364-Day Facility
 
(290
)
 
—

 
—

 
(290
)
 
WES RCF
 
—

 
—

 
(250
)
 
(250
)
 
Commercial paper notes, net
 
—

 
—

 
(17
)
 
(17
)
 
TEUs - senior amortizing notes
Other, net
1

 
—

 
27

 
28

 
Amortization of discounts, premiums, and debt issuance costs
Balance at June 30, 2016
$
2,932

 
$
28

 
$
12,693

 
$
15,653

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

16

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Debt  The Company’s outstanding debt, excluding the capital lease obligation and any borrowings under the WGP revolving credit facility, is senior unsecured. The following summarizes the Company’s outstanding debt after eliminating the effect of intercompany transactions:
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Anadarko Consolidated
June 30, 2016
 
 
 
 
 
 
 
Total borrowings at face value
$
2,960

 
$
28

 
$
14,325

 
$
17,313

Net unamortized discounts, premiums, and debt issuance costs (3)
(28
)
 
—

 
(1,632
)
 
(1,660
)
Total borrowings
2,932

 
28

 
12,693

 
15,653

Capital lease obligation
—

 
—

 
20

 
20

Less short-term debt
—

 
—

 
32

 
32

Total long-term debt
$
2,932

 
$
28

 
$
12,681

 
$
15,641

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Total borrowings at face value
$
2,720

 
$
—

 
$
14,592

 
$
17,312

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

 
(1,635
)
 
(1,664
)
Total borrowings
2,691

 
—

 
12,957

 
15,648

Capital lease obligation
—

 
—

 
20

 
20

Less short-term debt
—

 
—

 
32

 
32

Total long-term debt
$
2,691

 
$
—

 
$
12,945

 
$
15,636

__________________________________________________________________
(1) 
Excludes WES.
(2) 
Excludes WES and WGP.
(3) 
Unamortized discounts, premiums, and debt issuance costs are amortized over the term of the related debt. Debt issuance costs related to revolving credit facilities are included in other current assets and other assets on the Company’s Consolidated Balance Sheets.

During the second quarter of 2016, the Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.250 billion of its $2.0 billion 6.375% Senior Notes due September 2017 pursuant to a tender offer and to redeem its $1.750 billion 5.950% Senior Notes due September 2016. The Company recognized a loss of $124 million for the early retirement and redemption of these senior notes, which included $114 million of premiums paid.
Anadarko’s Zero Coupons can be put to the Company in October of each year, in whole or in part, for the then-accreted value, which will be $839 million at the next put date in October 2016. Anadarko’s Zero Coupons were classified as long-term debt on the Company’s Consolidated Balance Sheet at June 30, 2016, as the Company has the ability and intent to refinance these obligations using long-term debt, should the put be exercised.

Fair Value  The Company uses a market approach to determine the fair value of its fixed-rate debt using observable market data, which results in a Level 2 fair-value measurement. The carrying amount of floating-rate debt approximates fair value as the interest rates are variable and reflective of market rates. The estimated fair value of the Company’s total borrowings was $17.2 billion at June 30, 2016, and $15.7 billion at December 31, 2015.


17

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Debt and Interest Expense (Continued)

Anadarko Revolving Credit Facilities and Commercial Paper Program  Anadarko has a $3.0 billion five-year senior unsecured revolving credit facility maturing in January 2021 (Five-Year Facility). In addition, in January 2016 the Company replaced its previous $2.0 billion 364-day senior unsecured revolving credit facility with a new $2.0 billion 364-day senior unsecured revolving credit facility (364-Day Facility), on identical terms, that will mature in January 2017. At June 30, 2016, the Company had no outstanding borrowings under the Five-Year Facility or the 364-Day Facility and was in compliance with all related covenants.
In January 2015, the Company initiated a commercial paper program, which allows for a maximum of $3.0 billion of unsecured commercial paper notes and is supported by the Five-Year Facility. The maturities of the commercial paper notes may vary, but may not exceed 397 days. In February 2016, Moody’s downgraded the Company’s commercial paper program credit rating, which essentially eliminated the Company’s access to the commercial paper market. As a result, the Company has not issued commercial paper notes since the downgrade. At June 30, 2016, the Company had no outstanding borrowings under the commercial paper program.

WES and WGP Borrowings  WES has a five-year $1.2 billion senior unsecured revolving credit facility maturing in February 2019 (WES RCF), which is expandable to $1.5 billion. At June 30, 2016, WES had outstanding borrowings under its RCF of $540 million at an interest rate of 1.77%, had outstanding letters of credit of $5 million, and had available borrowing capacity of $655 million. At June 30, 2016, WES was in compliance with all related covenants.
In March 2016, WGP entered into a three-year $250 million senior secured revolving credit facility maturing in March 2019 (WGP RCF), which is expandable to $500 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions. Obligations under the WGP RCF are secured by a first priority lien on all of WGP’s assets (not including the consolidated assets of WES), as well as all equity interests owned by WGP. Borrowings under the WGP RCF bear interest at LIBOR (with a floor of 0%), plus applicable margins ranging from 2.00% to 2.75% depending on WGP’s consolidated leverage ratio, or at a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.00%, in each case plus applicable margins ranging from 1.00% to 1.75% based upon WGP’s consolidated leverage ratio. At June 30, 2016, WGP had outstanding borrowings under its RCF of $28 million at an interest rate of 2.72%, had available borrowing capacity of $222 million, and was in compliance with all related covenants.
In July 2016, WES completed a public offering of $500 million aggregate principal amount of 4.650% Senior Notes due July 2026. Net proceeds were used to repay a portion of the amount outstanding under the WES RCF.

Interest Expense  The following summarizes interest expense:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
2016
 
2015
 
2016
 
2015
Debt and other
$
259

 
$
244

 
$
517

 
$
498

Capitalized interest
(42
)
 
(43
)
 
(80
)
 
(81
)
Total interest expense
$
217

 
$
201

 
$
437

 
$
417



18

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Income Taxes

The following summarizes income tax expense (benefit) and effective tax rates:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
2016
 
2015
 
2016
 
2015
Income tax expense (benefit)
$
(314
)
 
$
77

 
$
(697
)
 
$
(1,315
)
Income (loss) before income taxes
(925
)
 
185

 
(2,306
)
 
(4,443
)
Effective tax rate
34
%
 
42
%
 
30
%
 
30
%

The Company reported a loss before income taxes for the three and six months ended June 30, 2016, and the six months ended June 30, 2015. As a result, items that ordinarily increase or decrease the tax rate will have the opposite effect. The variance from the 35% U.S. federal statutory rate for the three and six months ended June 30, 2016 and 2015, was primarily attributable to the non-deductible Algerian exceptional profits tax for Algerian income tax purposes and the tax impact from foreign operations. In addition, the decrease from the 35% U.S. federal statutory rate for the three and six months ended June 30, 2016, was attributable to non-deductible goodwill related to divestitures and net changes in uncertain tax positions.
At June 30, 2016, the Company’s Consolidated Balance Sheet included a $192 million tax receivable included in accounts receivable—others.

10. Conveyance of Future Hard Minerals Royalty Revenues

During the first quarter of 2016, the Company conveyed a limited-term nonparticipating royalty interest in certain of its coal and trona leases to a third party for $413 million, net of transaction costs. Such conveyance entitles the third party to receive up to $553 million in future royalty revenue over a period of not less than 10 years and not greater than 15 years. Additionally, such third party is entitled to receive 3% of the aggregate royalties earned during the first 10 years between $800 million and $900 million and 4% of the aggregate royalties earned during the first 10 years that exceed $900 million. Generally, such third party relies solely on the royalty payments to recover its investment and, as such, has the risk of the royalties not being sufficient to recover its investment over the term of the conveyance.
Proceeds from this transaction have been accounted for as deferred revenues and are included in accrued expenses and other long-term liabilities on the Company’s Consolidated Balance Sheet. The deferred revenues will be amortized to other revenues, included in gains (losses) on divestitures and other, net on a unit-of-revenue basis over the term of the agreement. During the six months ended June 30, 2016, the Company amortized $19 million of deferred revenues as a result of this agreement. Proceeds from the transaction and payments to the third party are reported in financing activities in the Company’s Consolidated Statement of Cash Flows.
The Company will make the first payment for royalties in September 2016. The specified future amounts that the Company expects to pay and the payment timing are subject to change based upon the actual royalties received by the Company during the term of the conveyance. The following summarizes the future amounts, prior to the 3% to 4% of any excess described above, that the Company expects to pay:
millions
 
2016
$
25

2017
50

2018
50

2019
52

2020
56

Later years
320

Total
$
553



19

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Contingencies

Litigation  The following is a discussion of any material developments in previously reported contingencies and any other material matters that have arisen since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Deepwater Horizon Events  In April 2010, the Macondo well in the Gulf of Mexico blew out and an explosion occurred on the Deepwater Horizon drilling rig, resulting in an oil spill. The well was operated by BP Exploration and Production Inc. (BP) and Anadarko held a 25% nonoperated interest. In October 2011, the Company and BP entered into a settlement agreement relating to the Deepwater Horizon events (Settlement Agreement). Pursuant to the Settlement Agreement, the Company is fully indemnified by BP against all claims and damages arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and assessment costs, and any claims arising under the Operating Agreement with BP.
Numerous Deepwater Horizon event-related civil lawsuits were filed against BP and other parties, including the Company. Generally, the plaintiffs sought actual damages, punitive damages, declaratory judgment, and/or injunctive relief. This litigation was consolidated into a federal Multidistrict Litigation (MDL) action pending before Judge Carl Barbier in the U.S. District Court for the Eastern District of Louisiana in New Orleans, Louisiana (Louisiana District Court).

BP Consent Decree In July 2015, BP announced a settlement agreement in principle with the U.S. Department of Justice (DOJ) and certain states and local government entities regarding essentially all of the outstanding claims against BP related to the Deepwater Horizon event (BP Settlement) and, in October 2015, lodged a proposed consent decree with the Louisiana District Court. In April 2016, the Louisiana District Court approved the consent decree. As a result of the BP Settlement and approval of the consent decree, all liability relating to OPA-related environmental costs was resolved and all NRD claims and claims by the United States and the Gulf states impacted by the event relating to the MDL action were dismissed. For any remaining claims relating to the MDL action, the Company is fully indemnified by BP against any losses pursuant to the Settlement Agreement. For additional disclosure related to the Deepwater Horizon events, see Note 15—Contingencies—Deepwater Horizon Events in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Penalties and Fines  In December 2010, the DOJ, on behalf of the United States, filed a civil lawsuit in the Louisiana District Court against several parties, including the Company, seeking an assessment of civil penalties under the Clean Water Act (CWA) in an amount to be determined by the Louisiana District Court. After previously finding that Anadarko, as a nonoperating investor in the Macondo well, was not culpable with respect to the Deepwater Horizon events, the Louisiana District Court found Anadarko liable for civil penalties under Section 311 of the CWA as a working-interest owner in the Macondo well and entered a judgment of $159.5 million in December 2015. Neither party appealed the decision and the Company paid the penalty in the first quarter of 2016.


20

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. Restructuring Charges

In the first quarter of 2016, the Company initiated a workforce reduction program to align the size and composition of Anadarko’s workforce with the Company’s expected future operating and capital plans. Employee notifications related to the workforce reduction program were completed by June 30, 2016. All restructuring charges will be recognized in 2016, with the exception of approximately $10 million of expense for retirement benefits expected to be recognized in the first quarter of 2017. The following summarizes the total expected restructuring charges and the amounts expensed during the three and six months ended June 30, 2016, which are included in general and administrative expenses in the Company’s Consolidated Statements of Income:
millions
Total Expected Costs
 
Three Months Ended 
 June 30, 2016
 
Six Months Ended 
 June 30, 2016
Costs by category
 
 
 
 
 
Cash severance
$
153

 
$
15

 
$
146

Retirement benefits (1)
220

 
27

 
76

Share-based compensation
34

 
6

 
29

Total
$
407

 
$
48

 
$
251

__________________________________________________________________
(1) 
Includes termination benefits, curtailments, and settlements. See Note 13—Pension Plans and Other Postretirement Benefits.

The following summarizes the changes in the cash severance-related liability included in accounts payable on the Company’s Consolidated Balance Sheet:
millions
2016
Balance at January 1
$
—

Accruals
146

Payments
(126
)
Balance at June 30
$
20



21

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

13. Pension Plans and Other Postretirement Benefits

The Company has contributory and non-contributory defined-benefit pension plans, which include both qualified and supplemental plans. The Company also provides certain health care and life insurance benefits for certain retired employees. Retiree health care benefits are funded by contributions from the retiree and, in certain circumstances, contributions from the Company. The Company’s retiree life insurance plan is noncontributory. The following summarizes the Company’s pension and other postretirement benefit cost:
 
Pension Benefits
 
Other Benefits
millions
2016
 
2015
 
2016
 
2015
Three Months Ended June 30
 
 
 
 
 
 
 
Service cost
$
23

 
$
29

 
$
—

 
$
2

Interest cost
23

 
26

 
3

 
4

Expected return on plan assets
(24
)
 
(28
)
 
—

 
—

Amortization of net actuarial loss (gain)
10

 
13

 
—

 
—

Amortization of net prior service cost (credit)
—

 
—

 
(6
)
 
1

Settlement expense
24

 
—

 
—

 
—

Curtailment expense
—

 
—

 
3

 
—

Net periodic benefit cost
$
56

 
$
40

 
$
—

 
$
7

 
 
 
 
 
 
 
 
Six Months Ended June 30
 
 
 
 
 
 
 
Service cost
$
49

 
$
59

 
$
1

 
$
5

Interest cost
49

 
51

 
6

 
8

Expected return on plan assets
(51
)
 
(55
)
 
—

 
—

Amortization of net actuarial loss (gain)
18

 
26

 
—

 
—

Amortization of net prior service cost (credit)
—

 
—

 
(12
)
 
1

Settlement expense
24

 
—

 
—

 
—

Termination benefits expense
44

 
—

 
—

 
—

Curtailment expense
8

 
—

 
—

 
—

Net periodic benefit cost
$
141

 
$
81

 
$
(5
)
 
$
14


The Company’s workforce reduction program resulted in remeasurements of its pension and other postretirement benefit obligations during 2016. The remeasurements resulted in increases in the benefit obligation of $171 million for the pension benefit plans and $23 million for the other postretirement benefit plans, with a corresponding decrease in other comprehensive income.
At December 31, 2015, total expected contributions related to unfunded pension plans were $25 million for 2016. The Company expects to contribute an additional $82 million in 2016 and $23 million in 2017 to unfunded pension plans primarily related to the workforce reduction program. See Note 12—Restructuring Charges.


22

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14. Stockholders’ Equity

The Company’s basic earnings per share (EPS) is computed based on the average number of shares of common stock outstanding for the period and includes the effect of any participating securities and TEUs as appropriate. Diluted EPS includes the effect of the Company’s outstanding stock options, restricted stock awards, restricted stock units, TEUs, and WES Series A Preferred units, if the inclusion of these items is dilutive.
The following provides a reconciliation between basic and diluted earnings per share attributable to common stockholders:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except per-share amounts
2016
 
2015
 
2016
 
2015
Net income (loss)
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
(692
)
 
$
61

 
$
(1,726
)
 
$
(3,207
)
Income (loss) effect of TEUs
(2
)
 
—

 
(3
)
 
—

Less distributions on participating securities
—

 
1

 
—

 
2

Basic
$
(694
)
 
$
60

 
$
(1,729
)
 
$
(3,209
)
Income (loss) effect of TEUs
(1
)
 
—

 
(1
)
 
—

Diluted
$
(695
)
 
$
60

 
$
(1,730
)
 
$
(3,209
)
Shares
 
 
 
 
 
 
 
Average number of common shares outstanding—basic
510

 
508

 
510

 
507

Dilutive effect of stock options
—

 
1

 
—

 
—

Average number of common shares outstanding—diluted
510

 
509

 
510

 
507

Excluded due to anti-dilutive effect
11

 
6

 
10

 
11

Net income (loss) per common share
 
 
 
 
 
 
 
Basic
$
(1.36
)
 
$
0.12

 
$
(3.39
)
 
$
(6.32
)
Diluted
$
(1.36
)
 
$
0.12

 
$
(3.39
)
 
$
(6.32
)

15. Accumulated Other Comprehensive Income (Loss)

The following summarizes the after-tax changes in the balances of accumulated other comprehensive income (loss):
millions
Interest-rate
Derivatives
Previously
Subject to Hedge
Accounting
 
Pension and Other Postretirement
Plans
 
Total
Balance at December 31, 2015
$
(42
)
 
$
(341
)
 
$
(383
)
Other comprehensive income (loss), before reclassifications
—

 
(120
)
 
(120
)
Reclassifications to Consolidated Statement of Income
3

 
13

 
16

Balance at June 30, 2016
$
(39
)
 
$
(448
)
 
$
(487
)


23

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

16. Noncontrolling Interests

WES, a publicly traded consolidated subsidiary, is a limited partnership formed by Anadarko to acquire, own, develop, and operate midstream assets. During the first quarter of 2016, WES issued 14 million Series A Preferred units to private investors for net proceeds of $440 million, and issued 1.3 million common units to the Company. Proceeds from these issuances were used to acquire interests in Springfield Pipeline LLC from the Company. During the second quarter of 2016, WES issued an additional eight million Series A Preferred units to private investors, pursuant to the full exercise of an option granted in connection with the initial issuance, and raised net proceeds of $247 million.
Class C units issued to Anadarko will receive quarterly distributions in the form of additional Class C units until the end of 2017, unless WES elects to convert the units to common units earlier or Anadarko elects to extend the conversion date. WES distributed 534 thousand Class C units to Anadarko during the six months ended June 30, 2016, and 498 thousand Class C units to Anadarko during 2015. During 2015, WES issued approximately 874 thousand common units to the public for net proceeds of $57 million.
WGP, a publicly traded consolidated subsidiary, is a limited partnership formed by Anadarko to own partnership interests in WES. During the three months ended June 30, 2016, Anadarko sold 12.5 million of its WGP common units to the public for net proceeds of $476 million. At June 30, 2016, Anadarko’s ownership interest in WGP consisted of an 81.6% limited partner interest and the entire non-economic general partner interest. The remaining 18.4% limited partner interest in WGP was owned by the public.
At June 30, 2016, WGP’s ownership interest in WES consisted of a 30.0% limited partner interest, the entire 1.5% general partner interest, and all of the WES incentive distribution rights. At June 30, 2016, Anadarko also owned an 8.4% limited partner interest in WES through other subsidiaries’ ownership of common and Class C units. The remaining 60.1% limited partner interest in WES was owned by the public.

17. Variable Interest Entities

Consolidated VIEs The Company determined that the partners in WGP and WES with equity at risk lack the power, through voting rights or similar rights, to direct the activities that most significantly impact WGP’s and WES’s economic performance; therefore, WGP and WES are considered VIEs. Anadarko, through its ownership of the general partner interest in WGP, has the power to direct the activities that most significantly affect economic performance and the obligation to absorb losses or the right to receive benefits that could be potentially significant to WGP and WES, therefore Anadarko is considered the primary beneficiary and consolidates WGP and WES. See Note 16—Noncontrolling Interests for additional information on WGP and WES.

Assets and Liabilities of VIEs The assets of WGP and WES cannot be used by Anadarko for general corporate purposes and are both included in and disclosed parenthetically on the Company’s Consolidated Balance Sheets. The carrying amounts of liabilities related to WGP and WES for which the creditors do not have recourse to other assets of the Company are both included in and disclosed parenthetically on the Company’s Consolidated Balance Sheets.
All outstanding debt for WES at June 30, 2016, and December 31, 2015, including any borrowings under the WES RCF, is recourse to WES’s general partner, which in turn has been indemnified in certain circumstances by certain wholly owned subsidiaries of the Company for such liabilities. All outstanding debt for WGP at June 30, 2016, and December 31, 2015, including any borrowings under the WGP RCF, is recourse to WGP’s general partner, which is a wholly owned subsidiary of the Company. See Note 8—Debt and Interest Expense for additional information on WGP and WES long-term debt balances.

VIE Financing WGP’s sources of liquidity include borrowings under its RCF and distributions from WES. WES’s sources of liquidity include cash and cash equivalents, cash flows generated from operations, interest income from a note receivable from Anadarko as discussed below, borrowings under its RCF, the issuance of additional partnership units, or debt offerings. See Note 8—Debt and Interest Expense and Note 16—Noncontrolling Interests for additional information on WGP and WES financing activity.


24

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

17. Variable Interest Entities (Continued)

Financial Support Provided to VIEs Concurrent with the closing of its May 2008 initial public offering, WES loaned the Company $260 million in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly. The related interest income for WES was $4 million for each of the three months ended June 30, 2016 and 2015, and $8 million for each of the six months ended June 30, 2016 and 2015. The note receivable and related interest income are eliminated in consolidation.
In March 2015, WES acquired the Company’s interest in Delaware Basin JV Gathering LLC. The acquisition was financed using a deferred purchase price obligation which requires a cash payment from WES to the Company due on March 31, 2020. The net present value of this obligation was $29 million at June 30, 2016, and $189 million at December 31, 2015.
In order to reduce WES’s exposure to a majority of the commodity-price risk inherent in certain of their contracts, Anadarko has commodity price swap agreements in place with WES expiring in 2016. WES has recorded a capital contribution from Anadarko in its Consolidated Statement of Equity and Partners’ Capital for the amount by which the swap price exceeds the applicable market price. WES recorded a $16 million capital contribution from Anadarko for the six months ended June 30, 2016, and a capital contribution of zero for the six months ended June 30, 2015.

18. Supplemental Cash Flow Information

The following summarizes cash paid (received) for interest and income taxes, as well as non-cash investing and financing activities:
 
Six Months Ended 
 June 30,
millions
2016
 
2015
Cash paid (received)
 
 
 
Interest, net of amounts capitalized (1)
$
427

 
$
1,621

Income taxes, net of refunds (2)
(883
)
 
6

Non-cash investing activities
 
 
 
Fair value of properties and equipment from non-cash transactions
$
3

 
$
126

Asset retirement cost additions
49

 
90

Accruals of property, plant, and equipment
505

 
901

Net liabilities assumed (divested) in acquisitions and divestitures
(36
)
 
(29
)
Non-cash investing and financing activities
 
 
 
Floating production, storage, and offloading vessel construction period obligation
$
11

 
$
43

__________________________________________________________________
(1) 
Includes $1.2 billion of interest related to the Tronox settlement payment in 2015.
(2) 
Includes $881 million from a tax refund related to the income tax benefit associated with the Company’s 2015 tax net operating loss carryback.

19. Segment Information

Anadarko’s business segments are separately managed due to distinct operational differences and unique technology, distribution, and marketing requirements. The Company’s three reporting segments are oil and gas exploration and production, midstream, and marketing. The oil and gas exploration and production segment explores for and produces oil, condensate, natural gas, and NGLs and plans for the development and operation of the Company’s LNG project in Mozambique. The midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, condensate, natural-gas, and NGLs production. The midstream reporting segment consists of two operating segments, WES and other midstream, which are aggregated into one reporting segment due to similar financial and operating characteristics. The marketing segment sells much of Anadarko’s oil, condensate, natural-gas, and NGLs production as well as third-party purchased volumes.

25

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

19. Segment Information (Continued)

To assess the performance of Anadarko’s operating segments, the chief operating decision maker analyzes Adjusted EBITDAX. The Company defines Adjusted EBITDAX as income (loss) before income taxes; gains (losses) on divestitures, net; exploration expense; depreciation, depletion, and amortization (DD&A); impairments; interest expense; total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives; and certain items not related to the Company’s normal operations, less net income (loss) attributable to noncontrolling interests. During the periods presented, items not related to the Company’s normal operations included restructuring charges related to the workforce reduction program included in general and administrative expenses, Deepwater Horizon settlement and related costs included in other operating expenses, loss on early extinguishment of debt, Tronox-related contingent loss, and certain other nonoperating items included in other (income) expense, net. The Company’s definition of Adjusted EBITDAX excludes gains (losses) on divestitures, net and exploration expense as they are not indicators of operating efficiency for a given reporting period. However, exploration expense is monitored by management as part of costs incurred in exploration and development activities. Similarly, DD&A and impairments are excluded from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Anadarko’s financing methods or capital structure. Total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives are excluded from Adjusted EBITDAX because these (gains) losses are not considered a measure of asset operating performance. Finally, net income (loss) attributable to noncontrolling interests is excluded from the Company’s measure of Adjusted EBITDAX because it represents earnings that are not attributable to the Company’s common stockholders.
Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures, and make distributions to stockholders. Adjusted EBITDAX as defined by Anadarko may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income (loss) attributable to common stockholders and other performance measures, such as operating income or cash flows from operating activities. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) before income taxes:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
2016
 
2015
 
2016
 
2015
Income (loss) before income taxes
$
(925
)
 
$
185

 
$
(2,306
)
 
$
(4,443
)
(Gains) losses on divestitures, net
104

 
91

 
102

 
425

Exploration expense
76

 
103

 
202

 
1,186

DD&A
984

 
1,214

 
2,133

 
2,470

Impairments
18

 
30

 
34

 
2,813

Interest expense
217

 
201

 
437

 
417

Total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives
371

 
(229
)
 
775

 
14

Restructuring charges
48

 
—

 
251

 
—

Other operating expense
—

 
—

 
1

 
4

Loss on early extinguishment of debt
124

 
—

 
124

 
—

Tronox-related contingent loss
—

 
—

 
—

 
5

Certain other nonoperating items
(56
)
 
—

 
(56
)
 
22

Less net income (loss) attributable to noncontrolling interests
81

 
47

 
117

 
79

Consolidated Adjusted EBITDAX
$
880

 
$
1,548

 
$
1,580

 
$
2,834


26

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

19. Segment Information (Continued)

Information presented below as “Other and Intersegment Eliminations” includes corporate costs, results from hard-minerals royalties, and net cash from settlement of commodity derivatives. The following summarizes selected financial information for Anadarko’s reporting segments:
millions
Oil and Gas
Exploration
& Production
 
Midstream
 
Marketing
 
Other and
Intersegment
Eliminations
 
Total
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Sales revenues
$
1,033

 
$
141

 
$
811

 
$
—

 
$
1,985

Intersegment revenues
567

 
340

 
(676
)
 
(231
)
 
—

Other
—

 
—

 
—

 
34

 
34

Total revenues and other (1)
1,600

 
481

 
135

 
(197
)
 
2,019

Operating costs and expenses (2)
790

 
219

 
177

 
(65
)
 
1,121

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(60
)
 
(60
)
Other (income) expense, net (3)
—

 
—

 
—

 
1

 
1

Net income (loss) attributable to noncontrolling interests
—

 
81

 
—

 
—

 
81

Total expenses and other
790

 
300

 
177

 
(124
)
 
1,143

Total (gains) losses on derivatives, net included in marketing revenue, less net cash from settlement
—

 
—

 
4

 
—

 
4

Adjusted EBITDAX
$
810

 
$
181

 
$
(38
)
 
$
(73
)
 
$
880

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Sales revenues
$
1,356

 
$
191

 
$
1,090

 
$
—

 
$
2,637

Intersegment revenues
885

 
303

 
(954
)
 
(234
)
 
—

Other
—

 
—

 
—

 
90

 
90

Total revenues and other (1)
2,241

 
494

 
136

 
(144
)
 
2,727

Operating costs and expenses (2)
832

 
234

 
192

 
(59
)
 
1,199

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(82
)
 
(82
)
Other (income) expense, net
—

 
—

 
—

 
15

 
15

Net income (loss) attributable to noncontrolling interests
—

 
47

 
—

 
—

 
47

Total expenses and other
832

 
281

 
192

 
(126
)
 
1,179

Adjusted EBITDAX
$
1,409

 
$
213

 
$
(56
)
 
$
(18
)
 
$
1,548

 __________________________________________________________________
(1) 
Total revenues and other excludes gains (losses) on divestitures, net since these gains and losses are excluded from Adjusted EBITDAX.
(2) 
Operating costs and expenses excludes exploration expense, DD&A, impairments, restructuring charges, and other operating expense since these expenses are excluded from Adjusted EBITDAX.
(3) 
Other (income) expense, net excludes certain other nonoperating items since these items are excluded from Adjusted EBITDAX.

27

ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

19. Segment Information (Continued)

millions
Oil and Gas
Exploration
& Production
 
Midstream
 
Marketing
 
Other and
Intersegment
Eliminations
 
Total
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Sales revenues
$
1,744

 
$
266

 
$
1,609

 
$
—

 
$
3,619

Intersegment revenues
1,168

 
642

 
(1,339
)
 
(471
)
 
—

Other
—

 
—

 
—

 
72

 
72

Total revenues and other (1)
2,912

 
908

 
270

 
(399
)
 
3,691

Operating costs and expenses (2)
1,563

 
402

 
353

 
(154
)
 
2,164

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(163
)
 
(163
)
Other (income) expense, net (3)
—

 
—

 
—

 
1

 
1

Net income (loss) attributable to noncontrolling interests
—

 
117

 
—

 
—

 
117

Total expenses and other
1,563

 
519

 
353

 
(316
)
 
2,119

Total (gains) losses on derivatives, net included in marketing revenue, less net cash from settlement
—

 
—

 
8

 
—

 
8

Adjusted EBITDAX
$
1,349

 
$
389

 
$
(75
)
 
$
(83
)
 
$
1,580

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Sales revenues
$
2,426

 
$
365

 
$
2,431

 
$
—

 
$
5,222

Intersegment revenues
2,002

 
605

 
(2,145
)
 
(462
)
 
—

Other
—

 
—

 
—

 
160

 
160

Total revenues and other (1)
4,428

 
970

 
286

 
(302
)
 
5,382

Operating costs and expenses (2)
1,834

 
474

 
390

 
(96
)
 
2,602

Net cash from settlement of commodity derivatives
—

 
—

 
—

 
(172
)
 
(172
)
Other (income) expense, net (3)
—

 
—

 
—

 
40

 
40

Net income (loss) attributable to noncontrolling interests
—

 
79

 
—

 
—

 
79

Total expenses and other
1,834

 
553

 
390

 
(228
)
 
2,549

Total (gains) losses on derivatives, net included in marketing revenue, less net cash from settlement
—

 
—

 
1

 
—

 
1

Adjusted EBITDAX
$
2,594

 
$
417

 
$
(103
)
 
$
(74
)
 
$
2,834

 __________________________________________________________________
(1) 
Total revenues and other excludes gains (losses) on divestitures, net since these gains and losses are excluded from Adjusted EBITDAX.
(2) 
Operating costs and expenses excludes exploration expense, DD&A, impairments, restructuring charges, and other operating expense since these expenses are excluded from Adjusted EBITDAX.
(3) 
Other (income) expense, net excludes certain other nonoperating items since these items are excluded from Adjusted EBITDAX.




28

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. The Company has made in this Form 10-Q, and may from time to time make in other public filings, press releases, and management discussions, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning the Company’s operations, economic performance, and financial condition. These forward-looking statements include, among other things, information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, marketing and midstream activities, and also include those statements preceded by, followed by, or that otherwise include the words “may,” “could,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should,” “would,” “will,” “potential,” “continue,” “forecast,” “future,” “likely,” “outlook,” 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. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will be realized. Anadarko undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

These forward-looking statements involve risk and uncertainties. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the following risks and uncertainties:

•
the Company’s assumptions about energy markets
•
production and sales volume levels
•
levels of oil, natural-gas, and natural-gas liquids (NGLs) reserves
•
operating results
•
competitive conditions
•
technology
•
availability of capital resources, levels of capital expenditures, and other contractual obligations
•
supply and demand for, the price of, and the commercialization and transporting of oil, natural gas, NGLs, and other products or services
•
volatility in the commodity-futures market
•
weather
•
inflation
•
availability of goods and services, including unexpected changes in costs
•
drilling risks
•
processing volumes and pipeline throughput
•
general economic conditions, nationally, internationally, or in the jurisdictions in which the Company is, or in the future may be, doing business
•
the Company’s inability to timely obtain or maintain permits or other governmental approvals, including those necessary for drilling and/or development projects
•
legislative or regulatory changes, including changes relating to hydraulic fracturing; retroactive royalty or production tax regimes; deepwater drilling and permitting regulations; derivatives reform; changes in state, federal, and foreign income taxes; environmental regulation; environmental risks; and liability under federal, state, foreign, and local environmental laws and regulations
•
civil or political unrest or acts of terrorism in a region or country
•
the creditworthiness and performance of the Company’s counterparties, including financial institutions, operating partners, and other parties

29

•
volatility in the securities, capital, or credit markets and related risks such as general credit, liquidity, and interest-rate risk
•
the Company’s ability to successfully monetize select assets, repay or refinance its debt, and the impact of changes in the Company’s credit ratings
•
disruptions in international oil, NGLs, and condensate cargo shipping activities
•
physical, digital, internal, and external security breaches
•
supply and demand, technological, political, governmental, and commercial conditions associated with long-term development and production projects in domestic and international locations
•
other factors discussed below and elsewhere in “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, this Form 10-Q, and in the Company’s other public filings, press releases, and discussions with Company management
The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this Form 10-Q in Part I, Item 1; the information set forth in the Risk Factors under Part II, Item 1A; the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015; and the information set forth in the Risk Factors under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

OUTLOOK

During 2015, the oil and natural-gas industry experienced a significant decrease in commodity prices driven by a global supply/demand imbalance for oil and an oversupply of natural gas in the United States. Low commodity prices have continued into 2016 and may exist for an extended period. The Company’s revenues, operating results, cash flows from operations, capital spending, and future growth rates are highly dependent on the global commodity-price markets, which affect the value the Company receives from its sales of oil, natural gas, and NGLs.
The Company has continued its disciplined and focused approach in 2016 by emphasizing value over growth, preserving and building value through capital allocation, enhancing operational efficiencies, and continuing an active monetization program. In the first quarter of 2016, the Company initiated a workforce reduction program to align the size and composition of Anadarko’s workforce with the Company’s expected future operating and capital plans. Employee notifications related to the workforce reduction program were completed by June 30, 2016. All of the $407 million of expected restructuring charges will be recognized in 2016, with the exception of approximately $10 million of expense for retirement benefits expected to be recognized in the first quarter of 2017.
The Company estimates a 2016 capital spending range of $3.1 billion to $3.3 billion, including approximately $450 million to $490 million for Western Gas Partners, LP (WES), a publicly traded consolidated subsidiary, excluding any acquisitions made by WES. The Company has currently allocated approximately 65% of its 2016 capital spending budget to development activities, 15% to exploration activities, and 20% to gathering and processing activities and other business activities. The Company currently expects its 2016 capital spending by area to be approximately 40% for the U.S. onshore region and Alaska, 20% for the Gulf of Mexico, 20% for Midstream and other (including WES), and 20% for International.
The Company will continue to evaluate the oil and natural-gas price environments and may adjust its capital spending plans to maintain the appropriate liquidity and financial flexibility. Anadarko expects that its 2016 capital expenditures will be within its cash flows from operations and asset monetizations. As of June 30, 2016, the Company closed monetizations totaling $2.5 billion in 2016, including asset divestitures, the sale of Anadarko’s interest in Springfield Pipeline LLC to WES, the sale of 12.5 million of the Company’s common units in Western Gas Equity Partners, LP (WGP) to the public, and the Company’s conveyance of a limited-term nonparticipating royalty interest in certain of its coal and trona leases to a third party. These monetizations continue Anadarko’s track record of actively managing its portfolio and reaffirm the Company’s commitment toward strengthening its balance sheet.


30

Liquidity  As of June 30, 2016, Anadarko had $1.4 billion of cash on hand plus $5.0 billion of borrowing capacity under its revolving credit facilities.
Anadarko believes that its cash on hand, anticipated operating cash flows, and proceeds from expected future asset monetizations will be sufficient to fund the Company’s projected 2016 operational and capital programs. In response to the current commodity price environment, the Board of Directors (Board) decreased the quarterly dividend from $0.27 per share to $0.05 per share in February 2016. On an annualized basis, the dividend decrease and the workforce reduction program (without consideration for restructuring charges) are expected to have the effect of providing approximately $800 million of available cash to enhance the Company’s operations and financial flexibility. During the second quarter of 2016, the Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.250 billion of its $2.0 billion 6.375% Senior Notes due September 2017 pursuant to a tender offer and to redeem its $1.750 billion 5.950% Senior Notes due September 2016. Also during the second quarter of 2016, Anadarko received cash of $881 million from a tax refund related to the income tax benefit associated with the Company’s 2015 tax net operating loss carryback and sold 12.5 million of its common units in WGP to the public for net proceeds of $476 million. Further, Anadarko enters into strategic derivative positions to reduce commodity-price risk and increase the predictability of cash flows. At June 30, 2016, derivative positions covered 26% of Anadarko’s anticipated oil sales volumes and 1% of its anticipated natural-gas sales volumes for 2016, 41% of its anticipated natural-gas sales volumes and 2% of its anticipated NGLs sales volumes for 2017, and 14% of anticipated natural-gas sales volumes for 2018. These instruments had a fair value of $45 million as of June 30, 2016. See Note 6—Derivative Instruments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. Anadarko believes that the actions taken to enhance the Company’s liquidity position coupled with its asset portfolio and operating and financial performance provide the necessary financial flexibility to fund the Company’s current and long-term operations.

Potential for Future Impairments  The Company did not recognize any material impairments during the six months ended June 30, 2016, although it is reasonably possible that prolonged low or further declines in commodity prices, changes to the Company’s drilling plans in response to lower prices, or increases in drilling or operating costs could result in future property impairments.

OVERVIEW

Anadarko is among the world’s largest independent exploration and production companies. Anadarko is engaged in the exploration, development, production, and marketing of oil, condensate, natural gas, and NGLs, and in the marketing of anticipated production of liquefied natural gas. The Company also engages in the gathering, processing, treating, and transporting of oil, condensate, natural gas, and NGLs. The Company has exploration and production activities in various countries around the world, including activities in the United States, Algeria, Ghana, Mozambique, Colombia, Côte d’Ivoire, New Zealand, Kenya, and other countries.


31

Significant operating and financial activities for the second quarter of 2016 include the following:

Overall
•
Anadarko’s second-quarter sales volumes averaged 792 thousand barrels of oil equivalent per day (MBOE/d), representing a 6% decrease from the second quarter of 2015, primarily due to a decrease in natural-gas and oil and condensate sales volumes.
•
The Company recognized workforce reduction program expenses of $48 million in the second quarter for a total of $251 million for the six months ended June 30, 2016. Total program expenses are expected to be $407 million. 
•
The Company closed $2.5 billion of monetizations year to date, including proceeds received during the quarter from asset divestitures and the sale of a portion of the Company’s WGP common units to the public.
U.S. Onshore
•
Second-quarter liquids sales volumes averaged 291 thousand barrels per day (MBbls/d), representing a 5% decrease from the second quarter of 2015, primarily due to a natural production decline in the Eagleford shale and reduced capital activity in the Wattenberg field.
•
Second-quarter natural-gas sales volumes averaged 353 MBOE/d, representing a 6% decrease from the second quarter of 2015, primarily due to the September 2015 sale of certain coalbed methane properties in the Rockies, the July 2015 sale of certain U.S. onshore properties in East Texas, and natural production declines at Greater Natural Buttes. These decreases were partially offset by improved well performance in the Wattenberg field and the injection of volumes into storage in 2015.
Gulf of Mexico
•
Second-quarter sales volumes averaged 74 MBOE/d, representing an 11% decrease from the second quarter of 2015, primarily due to a decrease in natural-gas sales volumes as a result of the last producing well going off line at Independence Hub (IHUB) in December 2015.
•
The Shenandoah-5 appraisal well (33% working interest) encountered more than 1,040 net feet of oil pay, extending the eastern limits of the field.
International
•
Second-quarter sales volumes averaged 74 MBbls/d, representing an 11% decrease from the second quarter of 2015, primarily in Ghana due to downtime related to a maintenance issue with the floating, production, storage, and offloading unit (FPSO) turret bearing.
Financial
•
Anadarko’s net loss attributable to common stockholders for the second quarter of 2016 totaled $692 million.
•
The Company generated $1.2 billion of cash flow from operations and ended the quarter with $1.4 billion of cash on hand.
•
In April 2016, WES issued an additional eight million Series A Preferred units to private investors, pursuant to the full exercise of an option granted in connection with the initial March 2016 issuance, for net proceeds of $247 million.
•
The Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.250 billion of its $2.0 billion 6.375% Senior Notes due September 2017 pursuant to a tender offer and to redeem its $1.750 billion 5.950% Senior Notes due September 2016. The Company recognized a loss of $124 million for the early retirement and redemption of these senior notes, which included $114 million of premiums paid.
•
In July 2016, WES completed a public offering of $500 million aggregate principal amount of 4.650% Senior Notes due July 2026.


32

FINANCIAL RESULTS
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except per-share amounts
 
2016
 
2015
 
2016
 
2015
Oil and condensate, natural-gas, and NGLs sales
 
$
1,680

 
$
2,332

 
$
3,074

 
$
4,624

Gathering, processing, and marketing sales
 
305

 
305

 
545

 
598

Gains (losses) on divestitures and other, net
 
(70
)
 
(1
)
 
(30
)
 
(265
)
Revenues and other
 
1,915

 
2,636

 
3,589

 
4,957

Costs and expenses
 
2,247

 
2,546

 
4,785

 
9,075

Other (income) expense
 
593

 
(95
)
 
1,110

 
325

Income tax expense (benefit)
 
(314
)
 
77

 
(697
)
 
(1,315
)
Net income (loss) attributable to common stockholders
 
$
(692
)
 
$
61

 
$
(1,726
)
 
$
(3,207
)
Net income (loss) per common share attributable to common stockholders—diluted
 
$
(1.36
)
 
$
0.12

 
$
(3.39
)
 
$
(6.32
)
Average number of common shares outstanding—diluted
 
510

 
509

 
510

 
507


The following discussion pertains to Anadarko’s results of operations, financial condition, and changes in financial condition. Any increases or decreases “for the three months ended June 30, 2016,” refer to the comparison of the three months ended June 30, 2016, to the three months ended June 30, 2015, and any increases or decreases “for the six months ended June 30, 2016,” refer to the comparison of the six months ended June 30, 2016, to the six months ended June 30, 2015. The primary factors that affect the Company’s results of operations include commodity prices for oil, natural gas, and NGLs; sales volumes; the cost of finding such reserves; and operating costs.

Revenues and Sales Volumes
 
 
Three Months Ended June 30,
millions except percentages
 
Oil and
Condensate
 
Natural
Gas
 
NGLs
 
Total
2015 sales revenues
 
$
1,616

 
$
487

 
$
229

 
$
2,332

Changes associated with sales volumes
 
(114
)
 
(34
)
 
(7
)
 
(155
)
Changes associated with prices
 
(377
)
 
(133
)
 
13

 
(497
)
2016 sales revenues
 
$
1,125

 
$
320

 
$
235

 
$
1,680

Increase (decrease) vs. 2015
 
(30
)%
 
(34
)%

3
 %

(28
)%
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
millions except percentages
 
Oil and
Condensate
 
Natural
Gas
 
NGLs
 
Total
2015 sales revenues
 
$
3,035

 
$
1,128

 
$
461

 
$
4,624

Changes associated with sales volumes
 
(178
)
 
(127
)
 
(30
)
 
(335
)
Changes associated with prices
 
(882
)
 
(315
)
 
(18
)
 
(1,215
)
2016 sales revenues
 
$
1,975

 
$
686

 
$
413

 
$
3,074

Increase (decrease) vs. 2015
 
(35
)%
 
(39
)%
 
(10
)%
 
(34
)%

Changes associated with sales volumes for the three and six months ended June 30, 2016, include decreases associated with asset divestitures.

33

The following provides Anadarko’s sales volumes for the three and six months ended June 30:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
Barrels of Oil Equivalent
 
 
 
 
 
 
 
 
 
 
 
 
 
(MMBOE except percentages)
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
 
65

 
(6
)%
 
69

 
132

 
(8
)%
 
144

International
 
 
7

 
(11
)
 
8

 
15

 
(13
)
 
17

Total barrels of oil equivalent
 
 
72

 
(6
)
 
77

 
147

 
(9
)
 
161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barrels of Oil Equivalent per Day
 
 
 
 
 
 
 
 
 
 
 
 
 
(MBOE/d except percentages)
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
 
718

 
(6
)%
 
762

 
728

 
(8
)%
 
796

International
 
 
74

 
(11
)
 
84

 
81

 
(13
)
 
94

Total barrels of oil equivalent per day
 
 
792

 
(6
)
 
846

 
809

 
(9
)
 
890

 _______________________________________________________________________________
MMBOE—million barrels of oil equivalent

Sales volumes represent actual production volumes adjusted for changes in commodity inventories and natural-gas production volumes provided to satisfy a commitment established in conjunction with the Jubilee development plan in Ghana. Anadarko employs marketing strategies to minimize market-related shut-ins, maximize realized prices, and manage credit-risk exposure. For additional information, see Note 6—Derivative Instruments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q and Other (Income) Expense—(Gains) Losses on Derivatives, net. Production of oil, natural gas, and NGLs is usually not affected by seasonal swings in demand.

34

Oil and Condensate Sales Volumes, Average Prices, and Revenues
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
United States
 
 
 
 
 
 
 
 
 
 
 
 
Sales volumes—MMBbls
 
20

 
(5
)%
 
21

 
41

 
(3
)%
 
43

MBbls/d
 
227

 
(5
)
 
240

 
229

 
(3
)
 
238

Price per barrel
 
$
40.25

 
(26
)
 
$
54.14

 
$
34.07

 
(31
)
 
$
49.23

International
 
 
 
 
 
 
 
 
 
 
 
 
Sales volumes—MMBbls
 
6

 
(12
)%
 
8

 
14

 
(13
)%
 
16

MBbls/d
 
69

 
(12
)
 
78

 
76

 
(13
)
 
88

Price per barrel
 
$
46.75

 
(23
)
 
$
60.81

 
$
39.84

 
(30
)
 
$
57.12

Total
 
 
 
 
 
 
 
 
 
 
 
 
Sales volumes—MMBbls
 
26

 
(7
)%
 
29

 
55

 
(6
)%
 
59

MBbls/d
 
296

 
(7
)
 
318

 
305

 
(6
)
 
326

Price per barrel
 
$
41.77

 
(25
)
 
$
55.78

 
$
35.51

 
(31
)
 
$
51.37

Oil and condensate sales revenues (millions)
 
$
1,125

 
(30
)
 
$
1,616

 
$
1,975

 
(35
)
 
$
3,035

 _______________________________________________________________________________
MMBbls—million barrels

Anadarko’s oil and condensate sales volumes decreased by 22 MBbls/d for the three months ended June 30, 2016, and 21 MBbls/d for the six months ended June 30, 2016.

•
Sales volumes in the Rockies decreased by 9 MBbls/d for the three months ended June 30, 2016, and 13 MBbls/d for the six months ended June 30, 2016, primarily due to reduced capital activity in the Wattenberg field. Sales volumes for the six months ended June 30, 2016, also decreased as a result of the April 2015 sale of certain enhanced oil recovery (EOR) assets.
•
International sales volumes decreased by 9 MBbls/d for the three months ended June 30, 2016, and 12 MBbls/d for the six months ended June 30, 2016, primarily in Ghana due to downtime to address new production and offtake procedures resulting from a maintenance issue with the FPSO turret bearing. The partnership has determined a long-term solution to convert the FPSO to a permanently moored facility and is expecting the work program to be complete in the first half of 2017. In the meantime, shuttle tankers continue to successfully conduct offtakes. Sales volumes for the six months ended June 30, 2016, also decreased as a result of the timing of liftings in Ghana.
•
Sales volumes in the Southern and Appalachia Region decreased by 6 MBbls/d for the three months ended June 30, 2016, and 4 MBbls/d for the six months ended June 30, 2016, primarily due to a natural production decline in the Eagleford shale, partially offset by higher sales volumes due to continued development in the Delaware basin.
•
Sales volumes in the Gulf of Mexico were relatively flat for the three months ended June 30, 2016, and increased by 5 MBbls/d for the six months ended June 30, 2016, primarily from the Lucius development, which achieved first oil in the first quarter of 2015.

Anadarko’s average oil price received decreased for the three and six months ended June 30, 2016, primarily due to continued global oversupply and concerns of slowing oil demand growth.

35

Natural-Gas Sales Volumes, Average Prices, and Revenues
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
United States
 
 
 
 
 
 
 
 
 
 
 
 
Sales volumes—Bcf
 
199

 
(7
)%
 
215

 
409

 
(11
)%
 
461

MMcf/d
 
2,188

 
(7
)
 
2,354

 
2,245

 
(11
)
 
2,545

Price per Mcf
 
$
1.61

 
(29
)
 
$
2.28

 
$
1.68

 
(31
)
 
$
2.45

Natural-gas sales revenues (millions)
 
$
320

 
(34
)
 
$
487

 
$
686

 
(39
)
 
$
1,128

 _______________________________________________________________________________
Bcf—billion cubic feet
MMcf/d—million cubic feet per day
Mcf—thousand cubic feet

The Company’s natural-gas sales volumes decreased by 166 MMcf/d for the three months ended June 30, 2016, and 300 MMcf/d for the six months ended June 30, 2016.
•
Sales volumes in the Rockies decreased by 150 MMcf/d for the three months ended June 30, 2016, and 161 MMcf/d for the six months ended June 30, 2016, primarily due to the September 2015 sale of certain coalbed methane properties and a natural production decline at Greater Natural Buttes, partially offset by higher 2016 sales volumes in the Wattenberg field as a result of improved well performance.
•
Sales volumes in the Gulf of Mexico decreased by 40 MMcf/d for the three months ended June 30, 2016, and 89 MMcf/d for the six months ended June 30, 2016, primarily as a result of the last producing well going off line at IHUB in December 2015.
•
Sales volumes in the Southern and Appalachia Region increased by 24 MMcf/d for the three months ended June 30, 2016, primarily due to the injection of volumes into storage in 2015, third-party infrastructure downtime in the Marcellus shale in 2015, and continued development in the Delaware basin. The increase for the three months ended June 30, 2016, was partially offset by decreased sales volumes in 2016 as a result of the July 2015 sale of certain U.S. onshore properties in East Texas and a natural production decline in the Eagleford shale. Sales volumes for the six months ended June 30, 2016, decreased by 50 MMcf/d, primarily due to the decreases discussed above, partially offset by higher 2016 sales volumes in the Delaware basin due to continued development.

The average natural-gas price Anadarko received decreased for the three and six months ended June 30, 2016, primarily due to lower weather-driven residential and commercial demand, which have contributed to sustained high gas storage levels.

Natural-Gas Liquids Sales Volumes, Average Prices, and Revenues
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
Total
 
 
 
 
 
 
 
 
 
 
 
 
Sales volumes—MMBbls
 
13

 
(3
)%
 
12

 
24

 
(7
)%
 
25

MBbls/d
 
131

 
(3
)
 
136

 
130

 
(7
)
 
140

Price per barrel
 
$
19.60

 
6

 
$
18.50

 
$
17.49

 
(4
)
 
$
18.24

Natural-gas liquids sales revenues (millions)
 
$
235

 
3

 
$
229

 
$
413

 
(10
)
 
$
461


NGLs sales represent revenues from the sale of product derived from the processing of Anadarko’s natural-gas production. The Company’s NGLs sales volumes decreased by 5 MBbls/d for the three months ended June 30, 2016, and by 10 MBbls/d for the six months ended June 30, 2016, primarily due to increased ethane rejection in the United States in 2016.

36

Gathering, Processing, and Marketing
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
Gathering, processing, and marketing sales
 
$
305

 
—
 %
 
$
305

 
$
545

 
(9
)%
 
$
598

Gathering, processing, and marketing expense
 
252

 
(1
)
 
255

 
467

 
(8
)
 
509

Total gathering, processing, and marketing, net
 
$
53

 
6

 
$
50

 
$
78

 
(12
)
 
$
89


Gathering and processing sales includes revenue from the sale of NGLs and remaining residue gas extracted from natural gas purchased from third parties and processed by Anadarko as well as fee revenue earned by providing gathering, processing, compression, and treating services to third parties. Marketing sales include the margin earned from purchasing and selling third-party oil and natural gas. Gathering, processing, and marketing expense includes the cost of third-party natural gas purchased and processed by Anadarko as well as other operating and transportation expenses related to the Company’s costs to perform gathering, processing, and marketing activities.
Gathering, processing, and marketing, net was relatively flat for the three months ended June 30, 2016, and decreased by $11 million for the six months ended June 30, 2016, primarily due to plant downtime in 2016 and the 2015 divestitures of certain midstream assets, partially offset by higher marketing margins.

Gains (Losses) on Divestitures and Other, net
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
Gains (losses) on divestitures
 
$
(104
)
 
(14
)%
 
$
(91
)
 
$
(102
)
 
76
 %
 
$
(425
)
Other
 
34

 
(62
)
 
90

 
72

 
(55
)
 
160

Total gains (losses) on divestitures and other, net
 
$
(70
)
 
NM

 
$
(1
)
 
$
(30
)
 
89

 
$
(265
)
 _______________________________________________________________________________
NM—not meaningful

Gains (losses) on divestitures and other, net includes gains (losses) on divestitures and other operating revenues, including hard-minerals royalties, earnings from equity investments, and other revenues.

2016
•
The Company recognized a loss of $53 million associated with the June divestiture of certain U.S. onshore assets in the Rockies for net proceeds of $593 million.
•
The Company recognized a loss of $50 million on assets held for sale associated with the divestiture of certain U.S. onshore assets that is expected to close in the third quarter of 2016.
2015
•
The Company recognized losses of $340 million associated with the April divestiture of certain EOR assets in the Rockies, with a sales price of $703 million, for net proceeds of $675 million.
•
The Company recognized a loss of $97 million associated with the July divestiture of certain oil and gas properties and related midstream assets in East Texas, with a sales price of $440 million, for net proceeds of $425 million.
•
The Company recognized income of $63 million during the three months ended June 30, 2015, and $117 million during the six months ended June 30, 2015, related to the settlement of a royalty lawsuit associated with a property in the Gulf of Mexico.

37

Costs and Expenses
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
Oil and gas operating (millions)
 
$
202

 
(11
)%
 
$
226

 
$
410

 
(21
)%
 
$
522

Oil and gas operating—per BOE
 
2.80

 
(4
)
 
2.93

 
2.78

 
(14
)
 
3.24

Oil and gas transportation (millions)
 
246

 
(13
)
 
283

 
488

 
(17
)
 
588

Oil and gas transportation—per BOE
 
3.41

 
(7
)
 
3.67

 
3.32

 
(9
)
 
3.65

_________________________________________________________________________
BOE—barrel of oil equivalent

Oil and gas operating expense decreased by $24 million for the three months ended June 30, 2016, primarily as a result of divestitures in 2015. Oil and gas operating expense decreased by $112 million for the six months ended June 30, 2016, due to lower expenses of $56 million as a result of divestitures in 2015; lower workover costs of $31 million in Ghana, the Gulf of Mexico, and the Rockies; and lower nonoperated costs of $18 million across all areas. The related costs per BOE decreased by $0.13 for the three months ended June 30, 2016, and by $0.46 for the six months ended June 30, 2016.
Oil and gas transportation expense decreased by $37 million for the three months ended June 30, 2016, and $100 million for the six months ended June 30, 2016, due to lower sales volumes across all areas. The related costs per BOE decreased by $0.26 for the three months ended June 30, 2016, and by $0.33 for the six months ended June 30, 2016, due to lower costs as a result of decreased sales volumes.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
 
2016
 
2015
Exploration Expense
 
 
 
 
 
 
 
 
Dry hole expense
 
$
(5
)
 
$
13

 
$
6

 
$
42

Impairments of unproved properties
 
15

 
18

 
39

 
998

Geological and geophysical expense
 
32

 
16

 
69

 
38

Exploration overhead and other
 
34

 
56

 
88

 
108

Total exploration expense
 
$
76

 
$
103

 
$
202

 
$
1,186


For the three months ended June 30, 2016, total exploration expense decreased by $27 million.
•
Dry hole expense decreased by $18 million. The Company recognized $13 million in the second quarter of 2015 primarily associated with wells in the Rockies.
•
Geological and geophysical expense increased by $16 million primarily due to seismic activities in Colombia in 2016.
•
Exploration overhead and other decreased by $22 million primarily due to lower employee-related expenses in 2016.
For the six months ended June 30, 2016, total exploration expense decreased by $984 million.
•
Dry hole expense decreased by $36 million. The Company recognized $42 million in 2015 primarily associated with wells in Mozambique.
•
Impairments of unproved properties decreased by $959 million. The Company recognized a $935 million impairment in the first quarter of 2015 related to the Company’s unproved Greater Natural Buttes properties as a result of lower commodity prices.
•
Geological and geophysical expense increased by $31 million primarily due to seismic activities in Colombia in 2016.
•
Exploration overhead and other decreased by $20 million primarily due to lower employee-related expenses in 2016.

38

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
 
2016
 
Inc (Dec) vs. 2015
 
2015
 
2016
 
Inc (Dec) vs. 2015
 
2015
General and administrative
 
$
305

 
10
 %
 
$
278

 
$
754

 
29
 %
 
$
585

Depreciation, depletion, and amortization
 
984

 
(19
)
 
1,214

 
2,133

 
(14
)
 
2,470

Other taxes
 
157

 
4

 
151

 
274

 
(18
)
 
333

Impairments
 
18

 
(40
)
 
30

 
34

 
(99
)
 
2,813

Other operating expense
 
7

 
17

 
6

 
23

 
(67
)
 
69


General and administrative expense (G&A) included $48 million of charges associated with the workforce reduction program for the three months ended June 30, 2016, and $251 million for the six months ended June 30, 2016. Excluding the workforce reduction expenses, G&A decreased by $21 million for the three months ended June 30, 2016, and by $82 million for the six months ended June 30, 2016, primarily due to lower employee-related expenses primarily associated with decreased benefit, bonus plan, and salary expenses. See Note 12—Restructuring Charges in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Depreciation, depletion, and amortization expense decreased by $230 million for the three months ended June 30, 2016, and by $337 million for the six months ended June 30, 2016, primarily due to the following:
•
lower costs for U.S. onshore and midstream properties as a result of 2015 asset impairments
•
lower 2016 sales volumes associated with U.S. onshore properties
•
lower costs and sales volumes as a result of 2015 divestitures of certain gathering and processing facilities
•
cost revisions related to certain asset retirement obligations associated with fully depreciated assets

Other taxes decreased by $59 million for the six months ended June 30, 2016, primarily due to lower ad valorem taxes of $36 million and lower Algerian exceptional profits taxes of $23 million. These decreases were primarily due to lower commodity prices and lower sales volumes.

Impairment expense for the six months ended June 30, 2015, included $2.3 billion related to the Company’s Greater Natural Buttes oil and gas properties and $449 million for related midstream properties in the Rockies, which were impaired due to lower forecasted commodity prices.

Other operating expense decreased by $46 million for the six months ended June 30, 2016, primarily due to expenses in 2015 for the early termination of a drilling rig.

Other (Income) Expense
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
 
2016
 
2015
Interest Expense
 
 
 
 
 
 
 
 
Debt and other
 
$
259

 
$
244

 
$
517

 
$
498

Capitalized interest
 
(42
)
 
(43
)
 
(80
)
 
(81
)
Total interest expense
 
$
217

 
$
201

 
$
437

 
$
417


Interest expense increased by $16 million for the three months ended June 30, 2016, and by $20 million for the six months ended June 30, 2016, primarily due to the $3.0 billion March 2016 Senior Notes issuances.

39

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
 
2016
 
2015
Loss on early extinguishment of debt
 
$
124

 
$
—

 
$
124

 
$
—


During the second quarter of 2016, the Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.250 billion of its $2.0 billion 6.375% Senior Notes due September 2017 pursuant to a tender offer and to redeem its $1.750 billion 5.950% Senior Notes due September 2016. The Company recognized a loss of $124 million for the early retirement and redemption of these senior notes, which included $114 million of premiums paid.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
 
2016
 
2015
(Gains) Losses on Derivatives, net
 
 
 
 
 
 
 
 
(Gains) losses on commodity derivatives, net
 
$
94

 
$
1

 
$
66

 
$
(52
)
(Gains) losses on interest-rate derivatives, net
 
213

 
(312
)
 
538

 
(107
)
Total (gains) losses on derivatives, net
 
$
307

 
$
(311
)
 
$
604

 
$
(159
)

(Gains) losses on derivatives, net represents the changes in fair value of the Company’s derivative instruments as a result of changes in commodity prices and interest rates, contract modifications, and settlements. An interest-rate swap agreement was settled in March 2016, resulting in a cash payment of $193 million. The Company settled commodity derivatives resulting in cash receipts of $60 million for the three months ended June 30, 2016, $81 million for the three months ended June 30, 2015, $165 million for the six months ended June 30, 2016, and $172 million for the six months ended June 30, 2015.
For additional information, see Note 6—Derivative Instruments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
 
2016
 
2015
Other (Income) Expense, net
 
 
 
 
 
 
 
 
Interest income
 
$
(4
)
 
$
(2
)
 
$
(7
)
 
$
(7
)
Other
 
(51
)
 
17

 
(48
)
 
69

Total other (income) expense, net
 
$
(55
)
 
$
15

 
$
(55
)
 
$
62


For the three months ended June 30, 2016, other income, net increased by $70 million.
•
As a result of a Chapter 11 bankruptcy declaration by a third party, the U.S. Department of the Interior ordered Anadarko to perform the decommissioning of a production facility and related wells, previously sold to the third party. The Company accrued the costs to decommission the facility and wells in prior years. During the second quarter of 2016, the Company substantially completed the decommissioning of the wells. Final costs were lower than expected and the Company recognized income of $56 million as a result of the reduced obligation.

For the six months ended June 30, 2016, other income, net increased by $117 million.
•
Other income, net increased by $78 million related to the decommissioning obligation mentioned above.
•
Favorable changes in foreign currency gains/losses of $34 million were primarily associated with foreign currency held in escrow pending final determination of the Company’s Brazilian tax liability attributable to the 2008 divestiture of the Peregrino field offshore Brazil.



40

Income Tax Expense
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
 
2016
 
2015
 
2016
 
2015
Income tax expense (benefit)
 
$
(314
)
 
$
77

 
$
(697
)
 
$
(1,315
)
Income (loss) before income taxes
 
(925
)
 
185

 
(2,306
)
 
(4,443
)
Effective tax rate
 
34
%
 
42
%
 
30
%
 
30
%

The Company reported a loss before income taxes for the three and six months ended June 30, 2016, and the six months ended June 30, 2015. As a result, items that ordinarily increase or decrease the tax rate will have the opposite effect. The variance from the 35% U.S. federal statutory rate for the three and six months ended June 30, 2016 and 2015, was primarily attributable to the non-deductible Algerian exceptional profits tax for Algerian income tax purposes and the tax impact from foreign operations. In addition, the decrease from the 35% U.S. federal statutory rate for the three and six months ended June 30, 2016, was attributable to non-deductible goodwill related to divestitures and net changes in uncertain tax positions.

Net Income (Loss) Attributable to Noncontrolling Interests
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
millions except percentages
 
2016
 
2015
 
2016
 
2015
Net income (loss) attributable to noncontrolling interests
 
$
81

 
$
47

 
$
117

 
$
79

Public ownership in WES, limited partnership interest
 
60.1
%
 
55.2
%
 
60.1
%
 
55.2
%
Public ownership in WGP, limited partnership interest
 
18.4
%
 
12.7
%
 
18.4
%
 
12.7
%

See Note 16—Noncontrolling Interests in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.


41

LIQUIDITY AND CAPITAL RESOURCES
 
 
Six Months Ended 
 June 30,
millions
 
2016
 
2015
Net cash provided by (used in) operating activities
 
$
1,092

 
$
(3,261
)
Net cash provided by (used in) investing activities
 
(965
)
 
(2,785
)
Net cash provided by (used in) financing activities
 
329

 
849


Overview  Anadarko believes that its cash on hand, anticipated operating cash flows, and proceeds from expected future asset monetizations will be sufficient to fund the Company’s projected 2016 operational and capital programs. In addition, the Company has available borrowing capacity to supplement its working capital needs. The Company continuously monitors its liquidity needs and evaluates available funding alternatives in light of current and expected conditions. Anadarko has a variety of funding sources available, including cash on hand, an asset portfolio that provides ongoing cash-flow-generating capacity, opportunities for liquidity enhancement through divestitures and joint-venture arrangements that reduce future capital expenditures, and the Company’s credit facilities. In addition, an effective registration statement is available to Anadarko covering the sale of WGP common units owned by the Company.

Effects of Moody’s Credit Rating Downgrade  In February 2016, Standard and Poor’s affirmed Anadarko’s “BBB” long-term debt credit rating and changed the outlook from stable to negative. Later in February 2016, Moody’s Investors Service (Moody’s) lowered the Company’s long-term debt credit rating from “Baa2” to “Ba1,” which is below investment grade. In March 2016, Fitch Ratings affirmed Anadarko’s “BBB” long-term debt credit rating and changed the outlook from stable to negative.
As a result of Moody’s downgrade of Anadarko’s credit rating to a level that is below investment grade, the Company’s credit thresholds with certain derivative counterparties were reduced and in some cases eliminated, which required the Company to increase the amount of collateral posted with derivative counterparties when the Company’s net trading position is a liability in excess of the contractual threshold. No counterparties have requested termination or full settlement of derivative positions. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $1.3 billion (net of collateral) at each of June 30, 2016, and December 31, 2015. The amount of cash posted as collateral pursuant to the contractual requirements applicable to derivative instruments with financial institutions was $599 million at June 30, 2016, and $58 million at December 31, 2015.
The Moody’s credit rating downgrade required Anadarko to post collateral in the form of letters of credit or cash as financial assurance of its performance under certain contractual arrangements such as pipeline transportation contracts and oil and gas sales contracts. The amount of letters of credit or cash provided as assurance of the Company’s performance under these types of contractual arrangements with respect to credit-risk-related contingent features was $274 million at June 30, 2016, and zero at December 31, 2015.
Also in February 2016, Moody’s downgraded Anadarko’s commercial paper program credit rating, which essentially eliminated the Company’s access to the commercial paper market. As a result, the Company has not issued commercial paper notes since the downgrade, but instead has used its 364-day senior unsecured revolving credit facility (364-Day Facility) for short-term working capital requirements, as needed.


42

Operating Activities

One of the primary sources of variability in the Company’s cash flows from operating activities is the fluctuation in commodity prices, the impact of which Anadarko partially mitigates by entering into commodity derivatives. Sales volume changes also impact cash flow, but historically have not been as volatile as commodity prices. Anadarko’s cash flows from operating activities are also impacted by the costs related to operations and interest payments related to the Company’s outstanding debt.
Anadarko generated $1.1 billion of cash from operating activities during the six months ended June 30, 2016, which included the $881 million tax refund related to the income tax benefit associated with the Company’s 2015 tax net operating loss carryback, the $159.5 million payment of the Clean Water Act (CWA) penalty, and the payment of $182 million related to severance costs and retirement benefits in connection with the workforce reduction program. Cash used in operating activities for the same period of 2015 was $3.3 billion, which included the $5.2 billion Tronox settlement payment. Excluding the impact of the tax refund and payments for the CWA penalty, severance costs and retirement benefits, and the Tronox settlement, operating cash flows for the six months ended June 30, 2016, decreased by $1.4 billion primarily due to decreased sales revenues as a result of lower commodity prices.

Investing Activities

Capital Expenditures  The following presents the Company’s capital expenditures for the six months ended June 30:
millions
 
2016
 
2015
Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment and dry hole costs
 
$
1,879

 
$
3,501

Adjustments for capital expenditures
 
 
 
 
Changes in capital accruals
 
(249
)
 
(310
)
Other
 
(6
)
 
32

Total capital expenditures (1)
 
$
1,624

 
$
3,223

 ________________________________________________________________________________________
(1) 
Includes WES capital expenditures of $260 million for the six months ended June 30, 2016, and $278 million for the six months ended June 30, 2015.

The Company’s capital expenditures decreased by $1.6 billion for the six months ended June 30, 2016, as reduced development and exploration activity resulted in the following:
•
decreased development costs of $1.2 billion primarily in the Rockies and the Southern and Appalachia Region
•
decreased exploration costs of $214 million primarily in Colombia and Mozambique
•
decreased gathering, processing, and other costs of $154 million primarily due to lower expenditures for plants and gathering in the Rockies

Carried-Interest Arrangements  In the third quarter of 2014, the Company entered into a carried-interest arrangement that requires a third party to fund $442 million of Anadarko’s capital costs in exchange for a 34% working interest in the Eaglebine development, located in Southeast Texas. The third-party funding is expected to cover Anadarko’s future capital costs in the development through 2020. At June 30, 2016, $141 million of the $442 million carry obligation had been funded.
In the second quarter of 2013, the Company entered into a carried-interest arrangement that requires a third party to fund $860 million of Anadarko’s capital costs in exchange for a 12.75% working interest in the Heidelberg development, located in the Gulf of Mexico. At June 30, 2016, $853 million of the $860 million carry obligation had been funded.

Divestitures  During the six months ended June 30, 2016, Anadarko received pretax sales proceeds related to property divestiture transactions of $900 million primarily related to the divestitures of certain U.S. onshore assets in the Rockies, East Texas/Louisiana, and West Texas. See Note 3—Divestitures and Assets Held for Sale in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

43

Investments  During the six months ended June 30, 2016, the Company made capital contributions of $46 million for equity investments, which are included in other, net under Investing Activities in the Consolidated Statements of Cash Flows. These contributions were primarily associated with joint ventures for pipelines.

Financing Activities
millions except percentages
June 30, 
 2016
 
December 31, 2015
Total debt
$
15,673

 
$
15,668

Total equity
14,600

 
15,457

Debt to total capitalization ratio
51.8
%
 
50.3
%

Senior Notes  The following summarizes the Company’s debt activity related to senior notes for the six months ended June 30, 2016:
millions
Face Value
 
Description
Issuances
$
800

 
4.850% Senior Notes due 2021
 
1,100

 
5.550% Senior Notes due 2026
 
1,100

 
6.600% Senior Notes due 2046
Repayments
(1,250
)
 
6.375% Senior Notes due 2017
 
(1,750
)
 
5.950% Senior Notes due 2016
 
(17
)
 
Tangible equity units (TEUs) - senior amortizing notes

During the second quarter of 2016, the Company used proceeds from its $3.0 billion March 2016 Senior Notes issuances to purchase and retire $1.250 billion of its $2.0 billion 6.375% Senior Notes due September 2017 pursuant to a tender offer and to redeem its $1.750 billion 5.950% Senior Notes due September 2016. The Company recognized a loss of $124 million for the early retirement and redemption of these senior notes, which included $114 million of premiums paid.
In July 2016, WES completed a public offering of $500 million aggregate principal amount of 4.650% Senior Notes due July 2026. Net proceeds were used to repay a portion of the amount outstanding under its five-year $1.2 billion senior unsecured revolving credit facility maturing in February 2019 (WES RCF).

Revolving Credit Facilities  Anadarko has a $3.0 billion five-year senior unsecured revolving credit facility maturing in January 2021 (Five-Year Facility) and the 364-Day Facility that matures in January 2017.
WES has a $1.2 billion RCF, which is expandable to $1.5 billion. In March 2016, WGP entered into a three-year $250 million senior secured revolving credit facility maturing in March 2019 (WGP RCF), which is expandable to $500 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions.
The following summarizes the Company’s debt activity related to revolving credit facilities for the six months ended June 30, 2016:
millions
2016
 
Description
Borrowings
$
1,750

 
364-Day Facility
 
530

 
WES RCF
 
28

 
WGP RCF
Repayments
(1,750
)
 
364-Day Facility
 
(290
)
 
WES RCF

Anadarko Credit Facilities  During the six months ended June 30, 2016, borrowings under the 364-Day Facility were primarily used for general short-term working capital needs. At June 30, 2016, the Company had no outstanding borrowings under the Five-Year Facility or the 364-Day Facility.


44

WES and WGP Credit Facilities  During the six months ended June 30, 2016, WES borrowings were primarily used for general corporate purposes, including the funding of a portion of its acquisition of Springfield Pipeline LLC and capital expenditures. At June 30, 2016, WES had outstanding borrowings under its RCF of $540 million at an interest rate of 1.77%, had outstanding letters of credit of $5 million, and had available borrowing capacity of $655 million.
During the six months ended June 30, 2016, WGP borrowings were used to fund the purchase of WES common units. At June 30, 2016, WGP had outstanding borrowings under its RCF of $28 million at an interest rate of 2.72% and had available borrowing capacity of $222 million.
For additional information on the revolving credit facilities, such as years of maturity, interest rates, and covenants, see Note 8—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Commercial Paper Program  The Company has a commercial paper program, which allows for a maximum of $3.0 billion of unsecured commercial paper notes and is supported by the Company’s Five-Year Facility. As a result of Moody’s downgrade of Anadarko’s commercial paper program credit rating, the Company’s access to the commercial paper market was essentially eliminated. The Company repaid $250 million of commercial paper notes during the first quarter of 2016, and at June 30, 2016, there were no outstanding borrowings under the commercial paper program. See Note 8—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for additional information.

Debt Maturities  Anadarko may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for other debt or equity securities in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.
At June 30, 2016, Anadarko’s scheduled debt maturities during 2016 consisted of $17 million of senior amortizing notes associated with the TEUs. Anadarko’s Zero-Coupon Senior Notes due 2036 (Zero Coupons) can be put to the Company in October of each year, in whole or in part, for the then-accreted value, which will be $839 million at the next put date in October 2016. The Company classified the Zero Coupons as long-term debt on the Company’s Consolidated Balance Sheet at June 30, 2016, as Anadarko has the ability and intent to refinance these obligations using long-term debt, should the put be exercised. At June 30, 2016, Anadarko’s scheduled debt maturities during 2017 consisted of $750 million of 6.375% Senior Notes due September 2017 and $34 million of senior amortizing notes associated with the TEUs.
For additional information on the Company’s debt instruments, such as transactions during the period, years of maturity, and interest rates, see Note 8—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Derivative Instruments  The Company’s derivative instruments are subject to individually negotiated credit provisions that may require collateral of cash or letters of credit depending on the derivatives portfolio valuation versus negotiated credit thresholds. These credit thresholds may also require full or partial collateralization or immediate settlement of the Company’s obligations if certain credit-risk-related provisions are triggered, such as if the Company’s credit rating from major credit rating agencies declines to a level that is below investment grade. Derivative settlements and collateralization are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization are classified as cash flows from financing activities. The amount of cash collateral provided by the Company on its interest-rate derivatives with an other-than-insignificant financing element pursuant to the contractual requirements applicable to derivative instruments with financial institutions was $592 million at June 30, 2016, and $58 million at December 31, 2015. Additionally, an interest-rate swap agreement was settled in March 2016, resulting in a cash payment of $193 million. At June 30, 2016, Anadarko expects additional net cash outlays of $52 million in 2016 related to interest-rate derivative settlements.
For additional information, see Note 6—Derivative Instruments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q and Effects of Moody’s Credit Rating Downgrade above.


45

Conveyance of Future Hard Minerals Royalty Revenues During the first quarter of 2016, the Company conveyed a limited-term nonparticipating royalty interest in certain of its coal and trona leases to a third party for $413 million, net of transaction costs. For additional information, see Note 10—Conveyance of Future Hard Minerals Royalty Revenues in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Common Stock Dividends  Anadarko paid dividends of $51 million to its common stockholders during the six months ended June 30, 2016, and $277 million during the six months ended June 30, 2015. In response to the current commodity-price environment, the Board decreased the Company’s quarterly dividend from $0.27 per share to $0.05 per share in February 2016. Anadarko has paid a dividend to its common stockholders on a quarterly basis since becoming a public company in 1986.
The amount of future dividends paid to Anadarko common stockholders will be determined by the Board on a quarterly basis and is based on earnings, financial conditions, capital requirements, the effect a dividend payment would have on the Company’s compliance with relevant financial covenants, and other factors deemed relevant by the Board.

Equity Transactions  Anadarko sold 12.5 million of its WGP common units to the public for net proceeds of $476 million, which were used for general corporate purposes. WES has a continuous offering program, which allows the issuance of up to an aggregate of $500 million of WES common units. The remaining amount available to be issued under this program was $442 million at June 30, 2016. During the first quarter of 2016, WES issued 14 million Series A Preferred units to private investors for net proceeds of $440 million. During the second quarter of 2016, WES issued an additional eight million Series A Preferred units to private investors, pursuant to the full exercise of an option granted in connection with the initial issuance, for net proceeds of $247 million.

Distributions to Noncontrolling Interest Owners  WES distributed to its unitholders other than Anadarko and WGP an aggregate of $127 million during the six months ended June 30, 2016, and $111 million during the six months ended June 30, 2015. WES has made quarterly distributions to its unitholders since its initial public offering (IPO) in the second quarter of 2008, and has increased its distribution from $0.30 per common unit for the third quarter of 2008 to $0.830 per common unit for the second quarter of 2016 (to be paid in August 2016).
For the three months ended June 30, 2016, the WES Series A Preferred unitholders will receive a quarterly distribution of $0.68 per unit for the Series A Preferred units issued in March 2016, and a quarterly distribution of $0.68 per unit for the Series A Preferred units issued in April 2016, prorated for the 77-day period the units were outstanding during the second quarter of 2016, or an aggregate $14 million (to be paid in August 2016). For the three months ended March 31, 2016, the WES Series A Preferred unitholders received a quarterly distribution of $0.68 per unit, prorated for the 18-day period the units were outstanding during the first quarter, or an aggregate $2 million (paid in May 2016).
WGP distributed to its unitholders other than Anadarko an aggregate of $23 million during the six months ended June 30, 2016, and $17 million during the six months ended June 30, 2015. WGP has made quarterly distributions to its unitholders since its IPO in December 2012, and has increased its distribution from $0.17875 per common unit for the first quarter of 2013 to $0.43375 per unit for the second quarter of 2016 (to be paid in August 2016).

RECENT ACCOUNTING DEVELOPMENTS 

See Note 1—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for discussion of recent accounting developments affecting the Company.


46

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risks are attributable to fluctuations in energy prices and interest rates. These risks can affect revenues and cash flows, and the Company’s risk-management policies provide for the use of derivative instruments to manage these risks. The types of commodity derivative instruments used by the Company include futures, swaps, options, and fixed-price physical-delivery contracts. The volume of commodity derivatives entered into by the Company is governed by risk-management policies and may vary from year to year. Both exchange and over-the-counter traded derivative instruments may be subject to margin-deposit requirements, and the Company may be required from time to time to deposit cash or provide letters of credit with exchange brokers or counterparties to satisfy these margin requirements. For additional information relating to the Company’s derivative and financial instruments, see Note 6—Derivative Instruments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

COMMODITY-PRICE RISK  The Company’s most significant market risk relates to prices for oil, natural gas, and NGLs. Management expects energy prices to remain unpredictable and potentially volatile. As energy prices decline or rise significantly, revenues and cash flows are likewise affected. In addition, a non-cash write-down of the Company’s oil and gas properties or goodwill may be required if commodity prices experience a significant decline. Below is a sensitivity analysis for the Company’s commodity-price-related derivative instruments.

Derivative Instruments Held for Non-Trading Purposes  The Company had derivative instruments in place to reduce the price risk associated with future production of 15 MMBbls of oil, 349 Bcf of natural gas, and 1 MMBbls of NGLs at June 30, 2016, with a net derivative asset position of $45 million. Based on actual derivative contractual volumes, a 10% increase in underlying commodity prices would reduce the fair value of these derivatives by $116 million, while a 10% decrease in underlying commodity prices would increase the fair value of these derivatives by $109 million. However, any cash received or paid to settle these derivatives would be substantially offset by the sales value of production covered by the derivative instruments.

Derivative Instruments Held for Trading Purposes  At June 30, 2016, the Company had a net derivative asset position of $7 million on outstanding derivative instruments entered into for trading purposes. Based on actual derivative contractual volumes, a 10% increase or decrease in underlying commodity prices would not materially impact the Company’s gains or losses on these derivative instruments.

INTEREST-RATE RISK  Borrowings, if any, under each of the 364-Day Facility, the Five-Year Facility, the WES RCF, and the WGP RCF are subject to variable interest rates. The balance of Anadarko’s long-term debt on the Company’s Consolidated Balance Sheets has fixed interest rates. The Company has $2.9 billion of obligations based on the London Interbank Offered Rate (LIBOR) that are presented on the Company’s Consolidated Balance Sheets net of preferred investments in two noncontrolled entities. These obligations give rise to minimal net interest-rate risk because coupons on the related preferred investments are also LIBOR-based. While a 10% change in LIBOR would not materially impact the Company’s interest cost, it would affect the fair value of outstanding fixed-rate debt.
At June 30, 2016, the Company had a net derivative liability position of $1.8 billion related to interest-rate swaps. A 10% increase (decrease) in the three-month LIBOR interest-rate curve would decrease (increase) the aggregate fair value of outstanding interest-rate swap agreements by $75 million. However, any change in the interest-rate derivative gain or loss could be substantially offset by changes in actual borrowing costs associated with future debt issuances. For a summary of the Company’s outstanding interest-rate derivative positions, see Note 6—Derivative Instruments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.


47

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Anadarko’s Chief Executive Officer and Chief Financial Officer performed an evaluation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2016.

Changes in Internal Control over Financial Reporting

There were no changes in Anadarko’s internal control over financial reporting during the second quarter of 2016 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

48

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

GENERAL  The Company is a defendant in a number of lawsuits and is involved in governmental proceedings and regulatory controls arising in the ordinary course of business, including personal injury and death claims; title disputes; tax disputes; royalty claims; contract claims; contamination claims relating to oil and gas exploration, development, production, transportation, and processing; and environmental claims, including claims involving assets owned by acquired companies and claims involving assets previously sold to third parties and no longer a part of the Company’s current operations. Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state, tribal, and local laws and regulations. While the ultimate outcome and impact on the Company cannot be predicted with certainty, after consideration of recorded expense and liability accruals, management believes that the resolution of pending proceedings will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
WGR Operating, LP, a wholly owned subsidiary of the Company, is currently in negotiations with the U.S. Environmental Protection Agency and the state of Wyoming with respect to alleged noncompliance with the leak detection and repair requirements of the Clean Air Act at its Granger, Wyoming facilities. Although management cannot predict the outcome of settlement discussions, it is likely a resolution of this matter will result in a fine or penalty in excess of $100,000.
See Note 11—Contingencies in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q, which is incorporated herein by reference, for material developments with respect to matters previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and material matters that have arisen since the filing of such report.

Item 1A.  Risk Factors

There have been no material changes from the risk factors included under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following sets forth information with respect to repurchases by the Company of its shares of common stock during the second quarter of 2016:
Period
 
Total number of shares purchased (1)
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value of shares that may yet be purchased under the plans or programs
April 1 - 30, 2016
 
7,745

 
$
49.91

 
—

 
$
—

May 1 - 31, 2016
 
4,346

 
$
49.42

 
—

 
$
—

June 1 - 30, 2016
 
6,354

 
$
53.44

 
—

 
$
—

Total
 
18,445

 
$
51.01

 
—

 
$
—

 ____________________________________________________________
(1) 
During the second quarter of 2016, all purchased shares related to stock received by the Company for the payment of withholding taxes due on employee share issuances under share-based compensation plans.

49

Item 6.  Exhibits

Exhibits designated by an asterisk (*) are filed herewith or double asterisk (**) are furnished herewith; all exhibits not so designated are incorporated herein by reference to a prior filing under File Number 1-8968 as indicated.
Exhibit Number
 
Description
 
3
(i)
 
Restated Certificate of Incorporation of Anadarko Petroleum Corporation, dated May 21, 2009, filed as Exhibit 3.3 to Form 8-K filed on May 22, 2009
 
 
(ii)
 
By-Laws of Anadarko Petroleum Corporation, amended and restated as of September 15, 2015, filed as Exhibit 3.1 to Form 8-K filed on September 21, 2015
 
10
(i)
 
Form of Award Letter for Anadarko Petroleum Corporation 2008 Director Compensation Plan Annual Deferred Shares (2016), filed as Exhibit 10 (iii) to Form 10-Q filed on May 2, 2016
 
 
(ii)
 
Anadarko Petroleum Corporation 2012 Omnibus Incentive Compensation Plan, as Amended and Restated Effective as of May 10, 2016, filed as Exhibit 10.1 to Form 8-K filed on May 16, 2016
*
31
(i)
 
Rule 13a-14(a)/15d-14(a) Certification—Chief Executive Officer
*
31
(ii)
 
Rule 13a-14(a)/15d-14(a) Certification—Chief Financial Officer
**
32
 
 
Section 1350 Certifications
*
101
.INS
 
XBRL Instance Document
*
101
.SCH
 
XBRL Schema Document
*
101
.CAL
 
XBRL Calculation Linkbase Document
*
101
.DEF
 
XBRL Definition Linkbase Document
*
101
.LAB
 
XBRL Label Linkbase Document
*
101
.PRE
 
XBRL Presentation Linkbase Document

50

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, thereunto duly authorized.
 
 
ANADARKO PETROLEUM CORPORATION
 
 
                             (Registrant)
 
 
 
 
July 26, 2016
By:
/s/ ROBERT G. GWIN
 
 
Robert G. Gwin
Executive Vice President, Finance and Chief Financial Officer

51