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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 March 31, 2018
or
[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from        to        
Commission File No. 1-8968
ANADARKO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
76-0146568
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1201 Lake Robbins Drive, The Woodlands, Texas
 
77380-1046
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (832) 636-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The number of shares outstanding of the Company’s common stock at April 30, 2018, is shown below:
Title of Class
 
Number of Shares Outstanding
Common Stock, par value $0.10 per share
 
515,088,252



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



COMMONLY USED TERMS AND DEFINITIONS
Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. In addition, the following company or industry-specific terms and abbreviations are used throughout this report:

$3.0 Billion Share-Repurchase Program - A program approved by the Anadarko Board of Directors in September 2017 that extends through the end of 2018, authorizing the repurchase of $2.5 billion of Anadarko’s common stock, which was expanded to $3.0 billion in February 2018
364-Day Facility - Anadarko’s $2.0 billion 364-day senior unsecured RCF
APC RCF - Anadarko’s $3.0 billion senior unsecured RCF
ASR Agreement - An accelerated share-repurchase agreement with an investment bank to repurchase the Company’s common stock
ASU - Accounting Standards Update
Bcf - Billion cubic feet
BOE - Barrels of oil equivalent
CBM - Coalbed methane
DBJV - Delaware Basin JV Gathering LLC
DBJV System - A gathering system and related facilities located in the Delaware basin in Loving, Ward, Winkler, and Reeves Counties in West Texas
DBM Complex - The processing plants, gas gathering system, and related facilities and equipment in West Texas that serve production from Reeves, Loving, and Culberson Counties, Texas and Eddy and Lea Counties, New Mexico
DD&A - Depreciation, depletion, and amortization
DJ Basin Complex - The Platte Valley system, Wattenberg system, and Lancaster plant, which were combined into a single complex in Colorado in the first quarter of 2014 to serve production in the DJ basin
FID - Final investment decision
Fitch - Fitch Ratings
FPSO - Floating production, storage, and offloading unit
G&A - General and administrative expenses
GOM Acquisition - The acquisition of oil and natural-gas assets in the Gulf of Mexico that closed on December 15, 2016
IPO - Initial public offering
LIBOR - London Interbank Offered Rate
LNG - Liquefied natural gas
MBbls/d - Thousand barrels per day
MBOE/d - Thousand barrels of oil equivalent per day
Mcf - Thousand cubic feet
MMBbls - Million barrels
MMBOE - Million barrels of oil equivalent
MMBtu - Million British thermal units
MMBtu/d - Million British thermal units per day
MMcf/d - Million cubic feet per day
Moody’s - Moody’s Investors Service
NGLs - Natural gas liquids
NM - Not meaningful
NTSB - National Transportation Safety Board
NYMEX - New York Mercantile Exchange
Oil - Includes crude oil and condensate

2


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

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended 
 March 31,
millions except per-share amounts
 
2018
 
2017
Revenues and Other
 
 
 
 
Oil sales
 
$
2,127

 
$
1,663

Natural-gas sales
 
247

 
502

Natural-gas liquids sales
 
292

 
289

Gathering, processing, and marketing sales
 
360

 
444

Gains (losses) on divestitures and other, net
 
19

 
869

Total
 
3,045

 
3,767

Costs and Expenses
 
 
 
 
Oil and gas operating
 
276

 
256

Oil and gas transportation
 
196

 
249

Exploration
 
168

 
1,084

Gathering, processing, and marketing
 
237

 
350

General and administrative
 
278

 
263

Depreciation, depletion, and amortization
 
990

 
1,115

Production, property, and other taxes
 
190

 
155

Impairments
 
19

 
373

Other operating expense
 
140

 
22

Total
 
2,494

 
3,867

Operating Income (Loss)
 
551

 
(100
)
Other (Income) Expense
 
 
 
 
Interest expense
 
228

 
223

(Gains) losses on derivatives, net
 
35

 
(147
)
Other (income) expense, net
 
(12
)
 
2

Total
 
251

 
78

Income (Loss) Before Income Taxes
 
300

 
(178
)
Income tax expense (benefit)
 
126

 
97

Net Income (Loss)
 
174

 
(275
)
Net income (loss) attributable to noncontrolling interests
 
53

 
43

Net Income (Loss) Attributable to Common Stockholders
 
$
121

 
$
(318
)
 
 
 
 
 
Per Common Share
 
 
 
 
Net income (loss) attributable to common stockholders—basic
 
$
0.23

 
$
(0.58
)
Net income (loss) attributable to common stockholders—diluted
 
$
0.22

 
$
(0.58
)
Average Number of Common Shares Outstanding—Basic
 
518

 
551

Average Number of Common Shares Outstanding—Diluted
 
519

 
551

Dividends (per common share)
 
$
0.25

 
$
0.05


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 March 31,
millions
 
2018
 
2017
Net Income (Loss)
 
$
174

 
$
(275
)
Other Comprehensive Income (Loss)
 
 
 
 
Adjustments for derivative instruments
 
 
 
 
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 
1

 
1

Total adjustments for derivative instruments, net of taxes
 
1

 
1

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

 
(4
)
Income taxes on net gain (loss) incurred during period
 

 
1

Amortization of net actuarial (gain) loss to other (income) expense, net
 
7

 
9

Income taxes on amortization of net actuarial (gain) loss
 
(2
)
 
(3
)
Amortization of net prior service (credit) cost to other (income) expense, net
 
(6
)
 
(6
)
Income taxes on amortization of net prior service (credit) cost
 
1

 
2

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

 
(1
)
Total
 
1

 

Comprehensive Income (Loss)
 
175

 
(275
)
Comprehensive income (loss) attributable to noncontrolling interests
 
53

 
43

Comprehensive Income (Loss) Attributable to Common Stockholders
 
$
122

 
$
(318
)


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
millions except per-share amounts

March 31, 
 2018

December 31, 
 2017
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents ($524 and $80 related to VIEs)
 
$
3,361

 
$
4,553

Accounts receivable (net of allowance of $14 and $14)
 
 
 
 
   Customers ($125 and $106 related to VIEs)
 
1,156

 
1,222

   Others ($13 and $19 related to VIEs)
 
639

 
607

Other current assets
 
374

 
380

Total
 
5,530

 
6,762

Net Properties and Equipment (net of accumulated depreciation, depletion, and amortization of $34,220 and $34,146) ($6,064 and $5,731 related to VIEs)
 
27,758

 
27,451

Other Assets ($572 and $579 related to VIEs)
 
2,134

 
2,211

Goodwill and Other Intangible Assets ($1,184 and $1,191 related to VIEs)
 
5,654

 
5,662

Total Assets
 
$
41,076

 
$
42,086

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
 
 
 
Trade ($331 and $305 related to VIEs)
 
$
2,059

 
$
1,894

Other
 
191

 
266

Short-term debt - Anadarko (1)
 
733

 
142

Short-term debt - WGP/WES
 
28

 

Current asset retirement obligations
 
286

 
294

Other current liabilities
 
1,437

 
1,310

Total
 
4,734

 
3,906

Long-term Debt
 
 
 
 
Long-term debt - Anadarko (1)
 
11,467

 
12,054

Long-term debt - WGP/WES
 
4,176

 
3,493

Total
 
15,643

 
15,547

Other Long-term Liabilities
 
 
 
 
Deferred income taxes
 
2,267

 
2,234

Asset retirement obligations ($147 and $143 related to VIEs)
 
2,510

 
2,500

Other
 
4,166

 
4,109

Total
 
8,943

 
8,843

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ equity
 
 
 
 
Common stock, par value $0.10 per share
(1.0 billion shares authorized, 575.2 million and 574.2 million shares issued)
 
57

 
57

Paid-in capital
 
11,701

 
12,000

Retained earnings
 
1,152

 
1,109

Treasury stock (71.3 million and 43.4 million shares)
 
(3,759
)
 
(2,132
)
Accumulated other comprehensive income (loss)
 
(410
)
 
(338
)
Total Stockholders’ Equity
 
8,741

 
10,696

Noncontrolling interests
 
3,015

 
3,094

Total Equity
 
11,756

 
13,790

Total Liabilities and Equity
 
$
41,076

 
$
42,086

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

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
 
 
Total Stockholders’ Equity
 
 
 
 
millions
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance at December 31, 2017
 
$
57

 
$
12,000

 
$
1,109

 
$
(2,132
)
 
$
(338
)
 
$
3,094

 
$
13,790

Net income (loss)
 

 

 
121

 

 

 
53

 
174

Share-based compensation expense
 

 
39

 

 

 

 

 
39

Dividends—common stock
 

 

 
(127
)
 

 

 

 
(127
)
Repurchases of common stock
 

 
(332
)
 

 
(1,627
)
 

 

 
(1,959
)
Subsidiary equity transactions
 

 
(6
)
 

 

 

 
9

 
3

Distributions to noncontrolling interest owners
 

 

 

 

 

 
(118
)
 
(118
)
Reclassification of previously deferred derivative losses to (gains) losses on derivatives, net
 

 

 

 

 
1

 

 
1

Cumulative effect of accounting change (1)
 

 

 
49

 

 
(73
)
 
(23
)
 
(47
)
Balance at March 31, 2018
 
$
57

 
$
11,701

 
$
1,152

 
$
(3,759
)
 
$
(410
)
 
$
3,015

 
$
11,756

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



See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended 
 March 31,
millions
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
174

 
$
(275
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
Depreciation, depletion, and amortization
 
990

 
1,115

Deferred income taxes
 
42

 
(660
)
Dry hole expense and impairments of unproved properties
 
106

 
1,012

Impairments
 
19

 
373

(Gains) losses on divestitures, net
 
24

 
(804
)
Total (gains) losses on derivatives, net
 
36

 
(147
)
Operating portion of net cash received (paid) in settlement of derivative instruments
 
(63
)
 
(8
)
Other
 
74

 
83

Changes in assets and liabilities
 
 
 
 
(Increase) decrease in accounts receivable
 
23

 
68

Increase (decrease) in accounts payable and other current liabilities
 
45

 
395

Other items, net
 
(40
)
 
(29
)
Net cash provided by (used in) operating activities
 
1,430

 
1,123

Cash Flows from Investing Activities
 
 
 
 
Additions to properties and equipment
 
(1,547
)
 
(1,194
)
Divestitures of properties and equipment and other assets
 
371

 
2,851

Other, net
 
63

 
66

Net cash provided by (used in) investing activities
 
(1,113
)
 
1,723

Cash Flows from Financing Activities
 
 
 
 
Borrowings, net of issuance costs
 
1,333

 

Repayments of debt
 
(639
)
 
(10
)
Financing portion of net cash received (paid) for derivative instruments
 
54

 
(37
)
Increase (decrease) in outstanding checks
 
(26
)
 
28

Dividends paid
 
(127
)
 
(28
)
Repurchases of common stock
 
(1,959
)
 
(21
)
Distributions to noncontrolling interest owners
 
(118
)
 
(105
)
Payments of future hard-minerals royalty revenues conveyed
 
(25
)
 
(25
)
Net cash provided by (used in) financing activities
 
(1,507
)
 
(198
)
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 

 
3

Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents
 
(1,190
)
 
2,651

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

 
3,308

Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents at End of Period
 
$
3,484

 
$
5,959


See accompanying Notes to Consolidated Financial Statements.

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


1. Summary of Significant Accounting Policies

General  Anadarko Petroleum Corporation is engaged in the exploration, development, production, and sale of oil, natural gas, and NGLs and in advancing its Mozambique LNG project toward FID. In addition, the Company engages in gathering, compressing, treating, processing, and transporting of natural gas; gathering, stabilizing, and transporting of oil and NGLs; and gathering and disposing of produced water. The Company also participates in the hard-minerals business through royalty arrangements.

Basis of Presentation  The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed or omitted. The accompanying interim financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s consolidated financial statements. Certain prior-period amounts have been reclassified to conform to the current-period presentation. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The consolidated financial statements include the accounts of Anadarko and subsidiaries in which Anadarko holds, directly or indirectly, more than 50% of the voting rights and VIEs for which Anadarko is the primary beneficiary. The Company has determined that WGP and WES are VIEs. Anadarko is considered the primary beneficiary and consolidates WGP and WES. WGP and WES function with capital structures that are separate from Anadarko, consisting of their own debt instruments and publicly traded common units. All intercompany transactions have been eliminated. Undivided interests in oil and natural-gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in noncontrolled entities that Anadarko has the ability to exercise significant influence over operating and financial policies and VIEs for which Anadarko is not the primary beneficiary are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost and subsequently adjusted for the Company’s proportionate share of earnings, losses, and distributions. Investments are included in other assets.

Recently Adopted Accounting Standards  ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requires presentation of service cost in the same line item(s) as other compensation costs arising from services rendered by employees during the period and presentation of the remaining components of net benefit cost in a separate line item outside operating items. Additionally, only the service cost component of net benefit cost will be eligible for capitalization. The Company adopted this ASU on January 1, 2018, with retrospective presentation of the service cost component and the other components of net benefit cost in the income statement and prospective presentation for the capitalization of the service cost component of net benefit cost in assets. Upon adoption, non-service cost components of net periodic benefit costs of $107 million for 2017, including $10 million for the three months ended March 31, 2017, were reclassified to other (income) expense, net, from G&A; oil and gas operating; gathering, processing, and marketing; and exploration expense.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, requires an entity to explain the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement of cash flows and to provide a reconciliation of the totals in that statement to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. The Company adopted this ASU using a retrospective approach on January 1, 2018. Adoption did not have a material impact on the Company’s consolidated financial statements. See Consolidated Statements of Cash Flows and Note 17—Supplemental Cash Flow Information for additional information.


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

1. Summary of Significant Accounting Policies (Continued)

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Under the modified retrospective method, prior period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included a reduction to total equity of $47 million. While the Company does not expect 2018 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning January 1, 2018. Refer to Note 2—Revenue from Contracts with Customers for additional information. The Company’s revenue recognition accounting policy effective January 1, 2018, is detailed below.
Exploration and Production—The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including spot sales or month-to-month contracts, contracts with a finite term, and life-of-field contracts where all production from a well or group of wells is sold to one or more customers. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs. For natural gas and NGLs sold on our behalf by a processor, revenue is typically measured based on the price the processor receives for the sale, less certain costs withheld by the processor.
Revenues are recognized for the sale of Anadarko’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
The Company enters into buy/sell arrangements related to the transportation of a portion of its oil production. Under these arrangements, barrels are sold to a third party at a location-based contract price and subsequently repurchased by the Company at a downstream location. The difference in value between the sale and purchase price represents the transportation fee to move oil from the lease or certain gathering locations to more liquid markets. These arrangements are often required by private transporters. These buy/sell transactions are recorded net in oil and gas transportation expense in the Company’s Consolidated Statements of Income.


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

1. Summary of Significant Accounting Policies (Continued)

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

New Accounting Standards Issued But Not Yet Adopted  ASU 2016-02, Leases (Topic 842), requires lessees to recognize a lease liability and a right-of-use (ROU) asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet. This ASU modifies the definition of a lease and outlines the recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. The Company plans to make certain elections allowing the Company not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for land easements, and not to recognize ROU assets or lease liabilities for short-term leases. Anadarko continues to review contracts in its portfolio of leased assets to assess the impact of adopting this ASU. The Company expects the adoption of this ASU to primarily impact other assets and other liabilities and does not expect a material impact on its consolidated results of operations. To facilitate compliance with this ASU, Anadarko is implementing new accounting software and continuing to evaluate its systems, processes, and internal controls during 2018. The Company will adopt this ASU on January 1, 2019, using a modified retrospective approach for all comparative periods presented according to the ASU as it is currently written.


11

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

2. Revenue from Contracts with Customers

Change in Accounting Policy  The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Refer to Note 1—Summary of Significant Accounting Policies for additional information. The primary impacts of the Company’s change in accounting policy for revenue recognition effective January 1, 2018, are detailed below.

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

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

Impacts on Financial Statements The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the three months ended March 31, 2018, as described in the Change in Accounting Policy section above:
CONSOLIDATED STATEMENT OF INCOME
Impact of Change in Accounting Policy
millions
As Reported
 
Without Adoption of Topic 606
 
Effect of Change
Increase/(Decrease)
Three Months Ended March 31, 2018
 
 
 
 
 
Revenues
 
 
 
 
 
Gathering, processing, and marketing sales
$
360

 
$
577

 
$
(217
)
Gains (losses) on divestitures and other, net
19

 
21

 
(2
)
Expenses
 
 
 
 
 
Gathering, processing, and marketing
237

 
451

 
(214
)
Income tax expense (benefit)
126

 
127

 
(1
)
Net income (loss) attributable to noncontrolling interests
53

 
54

 
(1
)
Net Income (Loss) Attributable to Common Stockholders
$
121

 
$
124

 
$
(3
)

CONSOLIDATED BALANCE SHEET
Impact of Change in Accounting Policy
millions
As Reported
 
Without Adoption of Topic 606
 
Effect of Change
Increase/(Decrease)
March 31, 2018
 
 
 
 
 
Assets
 
 
 
 
 
Net properties and equipment
$
27,758

 
$
27,715

 
$
43

Other assets
2,134

 
2,122

 
12

Liabilities
 
 
 
 
 
Other current liabilities
1,437

 
1,434

 
3

Deferred income taxes
2,267

 
2,274

 
(7
)
Other
4,166

 
4,056

 
110

Equity
 
 
 
 
 
Total equity
11,756

 
11,807

 
(51
)

12

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

2. Revenue from Contracts with Customers (Continued)

Disaggregation of Revenue from Contracts with Customers The following table disaggregates revenue by significant product type and segment:
millions
Exploration
& Production
 
WES Midstream
 
Other Midstream
 
Other and
Intersegment
Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Product Type
 
 
 
 
 
 
 
 
 
Oil sales
$
2,127

 
$

 
$

 
$

 
$
2,127

Natural-gas sales
247

 

 

 

 
247

Natural-gas liquids sales
292

 

 

 

 
292

Gathering, processing, and marketing sales (1)

 
438

 
86

 
24

 
548

Other, net
3

 

 

 
19

 
22

Total Revenue from Customers
$
2,669

 
$
438

 
$
86

 
$
43

 
$
3,236

Gathering, processing, and marketing sales (2)

 
(1
)
 
2

 
(189
)
 
(188
)
Gains (losses) on divestitures, net
(33
)
 

 
9

 

 
(24
)
Other, net
(12
)
 
29

 
10

 
(6
)
 
21

Total Revenue from Other than Customers
$
(45
)
 
$
28

 
$
21

 
$
(195
)
 
$
(191
)
Total Revenue and Other
$
2,624

 
$
466

 
$
107

 
$
(152
)
 
$
3,045

 __________________________________________________________________
(1) 
The amount in Other and Intersegment Eliminations primarily represents sales of third-party natural gas and NGLs of $224 million and intercompany eliminations of $(196) million.
(2) 
The amount in Other and Intersegment Eliminations represents purchases of third-party natural gas and NGLs. Although these purchases are reported net in gathering, processing, and marketing sales in the Company’s Consolidated Statements of Income, they are shown separately on this table, as the purchases are not considered revenue from customers.

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

Increase due to cumulative effect of adopting Topic 606
98

Increase due to cash received, excluding revenues recognized in the period
40

Decrease due to revenue recognized
(12
)
Balance at March 31, 2018
$
163

 
 
Contract liabilities at March 31, 2018
 
Other current liabilities
$
39

Other long-term liabilities - other
124

Total contract liabilities from contracts with customers
$
163



13

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

2. Revenue from Contracts with Customers (Continued)

Transaction Price Allocated to Remaining Performance Obligations Revenue expected to be recognized from certain performance obligations that are unsatisfied as of March 31, 2018, is reflected in the table below. The Company applies the optional exemptions in Topic 606 and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied performance obligations. Therefore, the following table represents only a small portion of Anadarko’s expected future consolidated revenues as future revenue from the sale of most products and services is dependent on future production or variable customer volumes and variable commodity prices for those volumes.
millions
Exploration
& Production
 
WES Midstream
 
Other Midstream
 
Other and
Intersegment
Eliminations
 
Total
Remainder of 2018
$
74

 
$
268

 
$
38

 
$
(167
)
 
$
213

2019
102

 
440

 
74

 
(327
)
 
289

2020
103

 
496

 
87

 
(394
)
 
292

2021
103

 
470

 
94

 
(395
)
 
272

2022
7

 
461

 
98

 
(394
)
 
172

Thereafter
62

 
1,698

 
194

 
(1,321
)
 
633

Total
$
451

 
$
3,833

 
$
585

 
$
(2,998
)
 
$
1,871


3. Inventories

The following summarizes the major classes of inventories included in other current assets:
millions
March 31, 
 2018
 
December 31, 
 2017
Oil
$
184

 
$
165

Natural gas
8

 
29

NGLs
117

 
122

Total inventories
$
309

 
$
316



14

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

4. Divestitures

Divestitures  The following summarizes the proceeds received and gains (losses) recognized on divestitures for the three months ended March 31:
millions
2018
 
2017
Proceeds received, net of closing adjustments
$
371

 
$
2,851

Gains (losses) on divestitures, net (1)
(24
)
 
804

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

2018 During the three months ended March 31, 2018, the Company divested of the following assets:
Alaska nonoperated assets, included in the Exploration and Production and Other Midstream reporting segments, for net proceeds of $383 million and net losses of $30 million in 2018 and $154 million in the fourth quarter of 2017. As this transaction is subject to regulatory approval, the Company recognized a contingent liability, which is presented net with the related assets, equal to the net proceeds received from the buyer.

2017 During the three months ended March 31, 2017, the Company divested of the following assets:
Eagleford assets in South Texas, included in the Exploration and Production reporting segment, for net proceeds of $2.1 billion and a net gain of $726 million.
Marcellus assets in Pennsylvania, included in the Exploration and Production and Other Midstream reporting segments, for net proceeds of $763 million and net losses of $44 million in 2017 and $129 million in the fourth quarter of 2016.

Property Exchange On March 17, 2017, WES acquired a third party’s 50% nonoperated interest in the DBJV System in exchange for WES’s 33.75% interest in nonoperated Marcellus midstream assets and $155 million in cash. WES recognized a gain of $126 million as a result of this transaction. After the acquisition, the DBJV System is 100% owned by WES and consolidated by Anadarko.


15

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

5. Impairments

Impairments of Long-Lived Assets Impairments of long-lived assets are included in impairment expense in the Company’s Consolidated Statements of Income. The following summarizes impairments of long-lived assets and the related post-impairment fair values by segment:
  
Three Months Ended
millions
Impairment
 
Fair Value (1)
March 31, 2018
 
 
 
Exploration and Production
 
 
 
Gulf of Mexico properties
$
19

 
$

Total
$
19

 
$

 
 
 
 
March 31, 2017
 
 
 
Exploration and Production
 
 
 
Gulf of Mexico properties
$
204

 
$
231

WES Midstream
168

 
49

Other Midstream
1

 

Total
$
373

 
$
280

__________________________________________________________________
(1) 
Measured as of the impairment date using the income approach and Level 3 inputs. The primary assumptions used to estimate undiscounted future net cash flows include anticipated future production, commodity prices, and capital and operating costs.

Impairments during the three months ended March 31, 2017, were primarily related to oil and gas properties in the Gulf of Mexico due to lower forecasted commodity prices and a U.S. onshore midstream property due to a reduced throughput fee as a result of a producer’s bankruptcy.

Impairments of Unproved Properties Impairments of unproved properties are included in exploration expense in the Company’s Consolidated Statements of Income. The Company recognized $532 million of impairments of unproved Gulf of Mexico properties during the three months ended March 31, 2017, of which $467 million related to the Shenandoah project. The unproved property balance related to the Shenandoah project originated from the purchase price allocated to the Gulf of Mexico exploration projects from the acquisition of Kerr-McGee Corporation in 2006.

It is reasonably possible that significant declines in commodity prices, further changes to the Company’s drilling plans in response to lower prices, reduction of proved and probable reserve estimates, or increases in drilling or operating costs could result in other additional impairments.


16

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

6. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $539 million at March 31, 2018, and $525 million at December 31, 2017. For exploratory wells, drilling costs are capitalized, or “suspended,” on the balance sheet when the well has found a sufficient quantity of reserves to justify its completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time. During the three months ended March 31, 2018, no charges were booked to exploration expense for suspended exploratory well costs previously capitalized for greater than one year at December 31, 2017.

7. Current Liabilities

Accounts Payable Accounts payable, trade included liabilities of $193 million at March 31, 2018, and $219 million at December 31, 2017, representing the amount by which checks issued but not presented to the Company’s banks for collection exceeded balances in applicable bank accounts. Changes in these liabilities are classified as cash flows from financing activities.

Other Current Liabilities The following summarizes the Company’s other current liabilities:
millions
March 31, 
 2018
 
December 31, 
 2017
Accrued income taxes
$
54

 
$
71

Interest payable
167

 
246

Production, property, and other taxes payable
276

 
216

Accrued employee benefits
140

 
210

Derivatives
460

 
384

Other
340

 
183

Total other current liabilities
$
1,437

 
$
1,310


8. Derivative Instruments

Objective and Strategy  The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks. Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations, such as Cushing, Oklahoma or Sullom Voe, Scotland for oil and Henry Hub, Louisiana for natural gas. Basis swaps are periodically used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (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.


17

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

8. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities  The oil prices listed below are a combination of NYMEX WTI and Intercontinental Exchange, Inc. (ICE) Brent Blend prices. The natural-gas prices listed below are NYMEX Henry Hub prices. The following is a summary of the Company’s derivative instruments related to oil and natural-gas production/processing derivative activities at March 31, 2018:
 
2018 Settlement
Oil
 
Two-Way Collars (MBbls/d)
108

Average price per barrel (WTI)

Ceiling sold price (call)
$
60.48

Floor purchased price (put)
$
50.00

Fixed-Price Contracts (MBbls/d)
84

Average price per barrel (Brent)
$
61.45

Natural Gas
 
Three-Way Collars (thousand MMBtu/d)
250

Average price per MMBtu (Henry Hub)
 
Ceiling sold price (call)
$
3.54

Floor purchased price (put)
$
2.75

Floor sold price (put)
$
2.00

Fixed-Price Contracts (thousand MMBtu/d)
256

Average price per MMBtu (Henry Hub)
$
3.02


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


18

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

8. Derivative Instruments (Continued)

Interest-Rate Derivatives  Anadarko has outstanding interest-rate swap contracts to manage interest-rate risk associated with anticipated debt issuances. The Company has locked in a fixed interest rate in exchange for a floating interest rate indexed to the three-month LIBOR.
At March 31, 2018, the Company had outstanding interest-rate swaps with a notional amount of $1.6 billion due prior to or in September 2023 that manage interest-rate risk associated with the potential refinancing of the Company’s future debt maturities. Depending on market conditions, liability-management actions, or other factors, the Company may enter into offsetting interest-rate swap positions or settle or amend certain or all of the currently outstanding interest-rate swaps. The Company had the following outstanding interest-rate swaps at March 31, 2018
millions except percentages
 
 
 
Mandatory
 
Weighted-Average
Notional Principal Amount
 
Reference Period
 
Termination Date
 
Interest Rate
$
550

 
 
September 2016 - 2046

September 2020
 
6.418%
$
250

 
 
September 2016 - 2046
 
September 2022
 
6.809%
$
200

 
 
September 2017 - 2047
 
September 2018
 
6.049%
$
100

 
 
September 2017 - 2047
 
September 2020
 
6.891%
$
250

 
 
September 2017 - 2047
 
September 2021
 
6.570%
$
250

 
 
September 2017 - 2047
 
September 2023
 
6.761%

Derivative settlements and collateralization are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization are classified as cash flows from financing activities. As a result of prior extensions of reference-period start dates without settlement of the related interest-rate derivative obligations, the interest-rate derivatives in the Company’s portfolio contain an other-than-insignificant financing element, and therefore, any settlements, collateralization, or cash payments for amendments related to these extended interest-rate derivatives are classified as cash flows from financing activities. Net cash payments related to settlements and amendments of interest-rate swap agreements were $46 million during the three months ended March 31, 2018, and $24 million during the three months ended March 31, 2017.


19

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

8. Derivative Instruments (Continued)

Effect of Derivative InstrumentsBalance Sheet  The following summarizes the fair value of the Company’s derivative instruments:
 
 
Gross Derivative Assets
 
Gross Derivative Liabilities
millions
 
March 31,
 
December 31,
 
March 31,
 
December 31,
Balance Sheet Classification
 
2018
 
2017
 
2018
 
2017
Commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
6

 
$
7

 
$

 
$
(1
)
Other assets
 
1

 
2

 

 

Other current liabilities
 
31

 
45

 
(292
)
 
(206
)
Other liabilities
 

 

 
(1
)
 
(2
)
 
 
38

 
54

 
(293
)
 
(209
)
Interest-rate derivatives
 

 
 
 
 
 
 
Other current assets
 
17

 
14

 

 

Other assets
 
47

 
40

 

 

Other current liabilities
 

 

 
(211
)
 
(236
)
Other liabilities
 

 

 
(1,045
)
 
(1,183
)
 
 
64

 
54

 
(1,256
)
 
(1,419
)
Total derivatives
 
$
102

 
$
108

 
$
(1,549
)
 
$
(1,628
)

Effect of Derivative InstrumentsStatement of Income  The following summarizes gains and losses related to derivative instruments:
millions
 
Three Months Ended 
 March 31,
Classification of (Gain) Loss Recognized
 
2018
 
2017
Commodity derivatives
 
 
 
 
Gathering, processing, and marketing sales (1)
 
$
1

 
$

(Gains) losses on derivatives, net
 
162

 
(135
)
Interest-rate derivatives
 
 
 

(Gains) losses on derivatives, net
 
(127
)
 
(12
)
Total (gains) losses on derivatives, net
 
$
36

 
$
(147
)
__________________________________________________________________
(1) 
Represents the effect of Marketing and Trading Derivative Activities.


20

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

8. Derivative Instruments (Continued)

Credit-Risk Considerations  The financial integrity of exchange-traded contracts, which are subject to nominal credit risk, is assured by NYMEX or ICE through systems of financial safeguards and transaction guarantees. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact on the fair value of its counterparties’ creditworthiness. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure.
The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities and routinely exercises its contractual right to offset gains and losses when settling with derivative counterparties. In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across derivative types.
The Company’s derivative instruments are subject to individually negotiated credit provisions that may require collateral of cash or letters of credit depending on the derivative’s portfolio valuation versus negotiated credit thresholds. These credit thresholds generally require full or partial collateralization of the Company’s obligations depending on certain credit-risk-related provisions, such as the Company’s credit rating from S&P and Moody’s. As of March 31, 2018, the Company’s long-term debt was rated investment grade (BBB) by both S&P and Fitch and below investment grade (Ba1) by Moody’s. The Company may be required to post additional collateral with respect to its derivative instruments if its credit ratings decline below current levels. For example, based on the derivative positions as of March 31, 2018, if Anadarko’s credit rating were to be downgraded one level by either S&P or Moody’s, the Company would be required to post additional collateral of up to approximately $60 million. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed was $1.4 billion (net of $69 million of collateral) at March 31, 2018, and $1.4 billion (net of $170 million of collateral) at December 31, 2017.


21

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

8. Derivative Instruments (Continued)

Fair Value  Fair value of futures contracts is based on unadjusted quoted prices in active markets for identical assets or liabilities, which represent Level 1 inputs. Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, discount factors and implied market volatility.
The following summarizes the fair value of the Company’s derivative assets and liabilities by input level within the fair-value hierarchy:
millions
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Collateral
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
38

 
$

 
$
(31
)
 
$

 
$
7

Interest-rate derivatives

 
64

 

 

 

 
64

Total derivative assets
$

 
$
102

 
$

 
$
(31
)
 
$

 
$
71

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
(293
)
 
$

 
$
31

 
$
7

 
$
(255
)
Interest-rate derivatives

 
(1,256
)
 

 

 
69

 
(1,187
)
Total derivative liabilities
$

 
$
(1,549
)
 
$

 
$
31

 
$
76

 
$
(1,442
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
1

 
$
53

 
$

 
$
(46
)
 
$
(1
)
 
$
7

Interest-rate derivatives

 
54

 

 

 

 
54

Total derivative assets
$
1

 
$
107

 
$

 
$
(46
)
 
$
(1
)
 
$
61

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

 
$
46

 
$
3

 
$
(160
)
Interest-rate derivatives

 
(1,419
)
 

 

 
170

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

 
$
46

 
$
173

 
$
(1,409
)
 __________________________________________________________________
(1) 
Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.


22

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

9. Tangible Equity Units

In June 2015, the Company issued 9.2 million 7.50% TEUs at a stated amount of $50.00 per TEU and raised net proceeds of $445 million. Each TEU 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.

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 0.8862 WGP common units and not less than 0.7383 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. The senior amortizing notes have a final installment payment date of June 7, 2018, and are senior unsecured obligations of the Company. For activity related to the senior amortizing notes, see Note 10—Debt.

10. Debt

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

 
$
28

 
$
11,965

 
$
15,458

 
 
Issuances
394

 

 

 
394

 
WES 4.500% Senior Notes due 2028
 
687

 

 

 
687

 
WES 5.300% Senior Notes due 2048
Borrowings
260

 

 

 
260

 
WES RCF
Repayments
(630
)
 

 

 
(630
)
 
WES RCF
 

 

 
(8
)
 
(8
)
 
TEUs - senior amortizing notes
Other, net

 

 
13

 
13

 
Amortization of discounts, premiums, and debt issuance costs
Balance at March 31, 2018
$
4,176

 
$
28

 
$
11,970

 
$
16,174

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


23

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

10. Debt (Continued)

Debt  The following summarizes the Company’s outstanding debt, including capital lease obligations, after eliminating the effect of intercompany transactions:
millions
WES
 
WGP (1)
 
Anadarko (2)
 
Consolidated
March 31, 2018
 
 
 
 
 
 
 
Total borrowings at face value
$
4,220

 
$
28

 
$
13,506

 
$
17,754

Net unamortized discounts, premiums, and debt issuance costs (3)
(44
)
 

 
(1,536
)
 
(1,580
)
Total borrowings (4)
4,176

 
28

 
11,970

 
16,174

Capital lease obligations

 

 
230

 
230

Less short-term debt

 
28

 
733

 
761

Total long-term debt
$
4,176

 
$

 
$
11,467

 
$
15,643

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Total borrowings at face value
$
3,490

 
$
28

 
$
13,514

 
$
17,032

Net unamortized discounts, premiums, and debt issuance costs (3)
(25
)
 

 
(1,549
)
 
(1,574
)
Total borrowings (4)
3,465

 
28

 
11,965

 
15,458

Capital lease obligations

 

 
231

 
231

Less short-term debt

 

 
142

 
142

Total long-term debt
$
3,465

 
$
28

 
$
12,054

 
$
15,547

__________________________________________________________________
(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 RCFs are included in other current assets and other assets on the Company’s Consolidated Balance Sheets.
(4) 
The Company’s outstanding borrowings, except for borrowings under the WGP RCF, are senior unsecured.

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 $18.1 billion at March 31, 2018, and $17.7 billion at December 31, 2017.


24

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

10. Debt (Continued)

Anadarko Borrowings  In January 2018, the Company amended its $3.0 billion senior unsecured RCF to extend the maturity date to January 2022 (APC RCF) and amended its $2.0 billion 364-day senior unsecured RCF to extend the maturity date to January 2019 (364-Day Facility). At March 31, 2018, Anadarko had no outstanding borrowings under the APC RCF or the 364-Day Facility and was in compliance with all covenants.
At March 31, 2018, Anadarko had outstanding borrowings of $9 million of senior amortizing notes associated with the TEUs, $114 million of 7.05% Debentures due May 2018, and $600 million of 8.70% Debentures due March 2019 classified as short-term debt on the Company’s Consolidated Balance Sheet. Short-term debt also included the current portion of the Company’s capital lease obligations.
Anadarko’s Zero Coupons can be put to the Company in October of each year, in whole or in part, for the then-accreted value of the outstanding Zero Coupons, which, if put in whole, will be $930 million at the next put date in October 2018. Anadarko’s Zero Coupons were classified as long-term debt on the Company’s Consolidated Balance Sheet at March 31, 2018, as the Company has the ability and intent to refinance these obligations using long-term debt, should the put be exercised.
The Company also has notes payable related to its ownership of certain noncontrolling mandatorily redeemable interests that are not included in the Company’s reported debt balance and do not affect consolidated interest expense. See Note 8—Equity-Method Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

WES and WGP Borrowings  In February 2018, WES amended its RCF to extend the maturity date from February 2020 to February 2023 and expanded the borrowing capacity to $1.5 billion (WES RCF). As part of the amendment, the WES RCF is expandable to a maximum of $2.0 billion. During the three months ended March 31, 2018, WES borrowed $260 million under its RCF, which was used for general partnership purposes, and made repayments of $630 million. At March 31, 2018, WES had no outstanding borrowings under its RCF, had outstanding letters of credit of $5 million, had available borrowing capacity of $1.495 billion, and was in compliance with all covenants. WES’s $350 million 2.600% Senior Notes due August 2018 were classified as long-term debt on the Company’s Consolidated Balance Sheet at March 31, 2018, as WES has the ability and intent to refinance these obligations using long-term debt.
In March 2018, WES completed a public offering of $400 million aggregate principal amount of 4.500% Senior Notes due March 2028 and a public offering of $700 million aggregate principal amount of 5.300% Senior Notes due March 2048. Net proceeds from the public offerings were used to repay amounts outstanding under the WES RCF, and the remaining net proceeds were used for general partnership purposes, including to fund capital expenditures.
In February 2018, WGP voluntarily reduced the aggregate commitments of the lenders under its senior secured RCF maturing in March 2019 from $250 million to $35 million (WGP RCF). 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. At March 31, 2018, WGP had outstanding borrowings of $28 million at an interest rate of 3.88%, classified as short-term debt on the Company’s Consolidated Balance Sheet, and had available borrowing capacity of $7 million. At March 31, 2018, WGP was in compliance with all covenants.


25

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

11. Income Taxes

Upon enactment of the Tax Reform Legislation on December 22, 2017, the Company remeasured its U.S. deferred tax assets and liabilities based on the reduction of the U.S. corporate tax rate from 35% to 21%. The Company expects to complete the accounting for the income tax effects related to the adoption of the Tax Reform Legislation and record any necessary adjustments to provisional tax amounts before the end of the measurement period on December 21, 2018. See Note 13—Income Taxes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The following summarizes income tax expense (benefit) and effective tax rates:
 
 
Three Months Ended 
 March 31,
millions except percentages
 
2018
 
2017
Current income tax expense (benefit)
 
$
90

 
$
762

Deferred income tax expense (benefit)
 
36

 
(665
)
Total income tax expense (benefit)
 
$
126

 
$
97

Income (loss) before income taxes
 
300

 
(178
)
Effective tax rate
 
42
%
 
(54
)%

The Company’s tax provision for interim periods is determined using an estimate of its annual current and deferred effective tax rates, adjusted for discrete items. Each quarter, the Company updates these rates and records a cumulative adjustment to current and deferred tax expense by applying the rates to the year-to-date pre-tax income excluding discrete items. The Company’s quarterly estimate of its annual current and deferred effective tax rates can vary significantly based on various forecasted items, including future commodity prices, capital expenditures, expenses for which tax benefits are not recognized, and the geographic mix of pre-tax income and losses.
The increase from the U.S. federal statutory rate of 21% for the three months ended March 31, 2018, was primarily attributable to the following:
state taxes, net of federal benefits
tax impact from foreign operations
non-deductible Algerian exceptional profits tax for Algerian income tax purposes
net changes in uncertain tax positions
These increases were partially offset by income attributable to noncontrolling interests.

The Company reported a loss before income taxes for the three months ended March 31, 2017. As a result, items that ordinarily increase or decrease tax rate will have the opposite effect. The decrease from the U.S. federal statutory rate of 35% for the three months ended March 31, 2017, was primarily attributable to the following decreases:
state taxes, net of federal benefit
non-deductible Algerian exceptional profits tax for Algerian income tax purposes
tax impact from foreign operations
net changes in uncertain tax positions
tax deficiency related to share-based compensation due to the adoption of ASU 2016-09
These decreases were partially offset by the following increases:
income attributable to noncontrolling interests
federal manufacturing deduction


26

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

11. Income Taxes (Continued)

The Company recognized a net tax benefit of $346 million as of March 31, 2018 and December 31, 2017, related to the deduction of its 2015 settlement payment for the Tronox Adversary Proceeding. This benefit is net of uncertain tax positions of $1.2 billion as of March 31, 2018 and December 31, 2017, due to uncertainty related to the deductibility of the settlement payment. Due to the deduction of the settlement payment, the Company had a net operating loss carryback for 2015, which resulted in a tentative tax refund of $881 million in 2016. The IRS has audited this position and, in April 2018, issued a final notice of proposed adjustment denying the deductibility of the settlement payment. The Company disagrees and plans to defend its tax position. Accordingly, the Company has not revised its estimate of the benefit that will ultimately be realized. It is reasonably possible the amount of uncertain tax position and/or tax benefit could materially change as the Company defends its tax position through the appeals process and other available avenues. The Company could be required to repay all or a portion of the tentative refund received with interest prior to determining the final outcome of its position either upon IRS request or litigation of the matter in District or Federal Claims Court. If the payment is ultimately determined not to be deductible, the Company would be required to repay the tentative refund received plus interest and reverse the net benefit of $346 million previously recognized in its consolidated financial statements.

12. Contingencies

Litigation  There are no material developments in previously reported contingencies nor are there 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, 2017.

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
2018
 
2017
 
2018
 
2017
Three Months Ended March 31
 
 
 
 
 
 
 
Service cost
$
23

 
$
21

 
$

 
$

Interest cost
19

 
21

 
3

 
3

Expected (return) loss on plan assets
(21
)
 
(21
)
 

 

Amortization of net actuarial loss (gain)
7

 
6

 

 

Amortization of net prior service cost (credit)

 

 
(6
)
 
(6
)
Settlement expense

 
3

 

 

Termination benefits expense

 
4

 

 

Net periodic benefit cost (1)
$
28

 
$
34

 
$
(3
)
 
$
(3
)
__________________________________________________________________
(1) 
The service cost component of net periodic benefit cost is included in G&A; oil and gas operating expense; gathering, processing, and marketing expense; and exploration expense, and all other components of net periodic benefit cost are included in other (income) expense on the Company’s Consolidated Statements of Income.

The Company contributed $46 million to funded pension plans and $16 million to unfunded pension plans during the three months ended March 31, 2018. The Company expects to contribute an additional $116 million to funded pension plans and $14 million to unfunded pension plans during 2018.


27

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

14. Stockholders’ Equity

Earnings Per Share  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, and TEUs, if the inclusion of these items is dilutive.
The following provides a reconciliation between basic and diluted EPS attributable to common stockholders:
 
 
Three Months Ended 
 March 31,
millions except per-share amounts
 
2018
 
2017
Net income (loss)
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
121

 
$
(318
)
Income (loss) effect of TEUs
 
(3
)
 
(2
)
Less distributions on participating securities
 
1

 

Basic
 
$
117

 
$
(320
)
Income (loss) effect of TEUs
 
(1
)
 

Diluted
 
$
116

 
$
(320
)
Shares
 
 
 
 
Average number of common shares outstanding—basic
 
518

 
551

Dilutive effect of stock options
 
1

 

Average number of common shares outstanding—diluted
 
519

 
551

Excluded due to anti-dilutive effect
 
10

 
11

Net income (loss) per common share
 
 
 
 
Basic
 
$
0.23

 
$
(0.58
)
Diluted
 
$
0.22

 
$
(0.58
)

Common Stock  The Company announced a $2.5 billion share-repurchase program in September 2017, which was expanded to $3.0 billion in February 2018 ($3.0 Billion Share-Repurchase Program). The program authorizes the repurchase of the Company’s common stock in the open market or through private transactions through the end of 2018. In February 2018, Anadarko completed the repurchase of 8.5 million shares of its common stock for $500 million (average price of $58.82 per share) under an ASR Agreement. All of the repurchased shares were classified as treasury stock.
In March 2018, Anadarko entered into an additional ASR Agreement to repurchase the remaining $1.4 billion of the Company’s common stock under the $3.0 Billion Share-Repurchase Program. Under the terms of the agreement, the Company paid $1.4 billion in cash and received an initial delivery of 19.1 million shares of the Company’s common stock. The initial delivery of shares represented the minimum number of shares to be repurchased under the agreement. The value of the initial 19.1 million shares delivered on the date of purchase was $1.1 billion (average price of $58.16 per share) and was recorded in treasury stock, with the remaining $332 million recorded in paid-in capital on the Company’s Consolidated Balance Sheet at March 31, 2018. The final number of shares to be delivered upon settlement of this ASR Agreement will be determined in the second quarter of 2018 with reference to the volume-weighted average price of the shares during the term of the agreement less a negotiated settlement price adjustment. The value recorded in paid-in capital at March 31, 2018, will be transferred to treasury stock upon final settlement. The $3.0 Billion Share-Repurchase Program is expected to be completed in the second quarter of 2018.
These transactions were accounted for as equity transactions. For shares received and recorded as treasury stock, these shares reduced the average number of shares of common stock outstanding used to compute both basic and diluted EPS.


28

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

15. Noncontrolling Interests

WES is a limited partnership formed by Anadarko to acquire, own, develop, and operate midstream assets. During 2016, WES issued 22 million Series A Preferred units to private investors. Pursuant to an agreement between WES and the holders of the Series A Preferred units, 50% of the Series A Preferred units converted into WES common units on a one-for-one basis on March 1, 2017, and all remaining Series A Preferred units were converted on May 2, 2017.
WES Class C units issued to Anadarko will convert into WES common units on a one-for-one basis on the conversion date, which was extended in February 2017 from December 31, 2017, to March 1, 2020. The Class C units receive quarterly distributions in the form of additional Class C units until the March 1, 2020 conversion date unless WES elects to convert the units to common units earlier or Anadarko elects to extend the conversion date. WES distributed 261 thousand Class C units to Anadarko during the three months ended March 31, 2018, and 886 thousand Class C units to Anadarko during 2017.
WGP is a limited partnership formed by Anadarko to own interests in WES. At March 31, 2018, 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 March 31, 2018, WGP’s ownership interest in WES consisted of a 29.7% limited partner interest, the entire 1.5% general partner interest, and all of the WES incentive distribution rights. At March 31, 2018, Anadarko also owned a 9.2% limited partner interest in WES through other subsidiaries’ ownership of common and Class C units. The remaining 59.6% limited partner interest in WES was owned by the public.


29

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

16. 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, WES, and all of their consolidated subsidiaries. For additional information on WGP and WES, see Note 15—Noncontrolling Interests.
The following tables present selected financial data from the consolidated financial statements of WGP:
 
Three Months Ended 
 March 31,
millions
2018
 
2017
Statement of Operations Data
 
 
 
Total revenues and other
$
437

 
$
516

Operating income (loss)
187

 
138

Net income (loss)
150

 
103

Statement of Cash Flows Data
 
 
 
Net cash provided by (used in) operating activities
$
241

 
$
192

Net cash provided by (used in) investing activities
(294
)
 
(252
)
Net cash provided by (used in) financing activities
497

 
(176
)

millions
March 31, 
 2018
 
December 31, 
 2017
Balance Sheet Data
 
 
 
Cash and cash equivalents
$
524

 
$
80

Net property, plant, and equipment
6,064

 
5,731

Total assets
8,816

 
8,016

Long-term debt
4,176

 
3,493

Total liabilities
4,967

 
4,071

Total equity and partners’ capital
3,849

 
3,945


Assets and Liabilities of VIEs The assets of WGP, WES, and their subsidiaries cannot be used by Anadar