ITEM 1. BUSINESS
GENERAL
Anadarko Petroleum Corporation and its subsidiaries are engaged in the exploration, development, production and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs), both domestically and internationally. Anadarko's U.S. drilling and production operations are focused primarily in Kansas, Oklahoma, Texas and the Gulf of Mexico where about 85 percent of the Company's reserves are located. Approximately 19 percent of Anadarko's reserves are in the Gulf of Mexico, where the Company owns interests in 125 lease blocks. Anadarko also has found and continues to explore for crude oil reserves on a 5.1 million acre area in Algeria. The Company is participating in other joint-venture projects overseas in Indonesia and China. In order to manage production more effectively and improve recovery of natural gas reserves, the Company owns interests in 15 gas gathering systems and eight gas processing plants in the mid-continent area. Anadarko also owns acreage and is pursuing the development of geothermal energy in the western United States. Anadarko is a Delaware corporation which was organized in 1985 as the successor to the oil and gas business of Anadarko Production Company (Production), which was founded in 1959 as a subsidiary of Panhandle Eastern Corporation (Panhandle). Anadarko's common stock was distributed to Panhandle stockholders in 1986. The principal subsidiaries of Anadarko are: Anadarko Gathering Company; Anadarko Trading Company; and, Anadarko Algeria Corporation (Anadarko Algeria). Unless the context otherwise requires, the terms "Anadarko" or "Company" refer to Anadarko and its subsidiaries. The Company's executive offices are located at 17001 Northchase Drive, Houston, Texas 77060, where the telephone number is (713) 875-1101.
EMPLOYEES
On December 31, 1994, the Company employed 1,085 persons. The Company's employees are not represented by any union. Relations between the Company and its employees are considered to be satisfactory and the Company has had no work stoppages or strikes.
PROVED RESERVES AND FUTURE NET CASH FLOWS
Proved oil and gas reserves are the estimated quantities of natural gas, crude oil, condensate and NGLs which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reserves are considered proved if economical producibility is supported by either actual production or conclusive formation tests. Reserves which can be produced economically through application of improved recovery techniques are included in the "proved" classification when successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the project or program was based. Proved developed oil and gas reserves can be expected to be recovered through existing wells, with existing equipment and operating methods. As of December 31, 1994, Anadarko had proved reserves of 1.91 trillion cubic feet (Tcf) of natural gas and 157.4 million barrels (MMBbls) of crude oil, condensate and NGLs. Combined, these proved reserves are equivalent to 476.4 MMBbls of oil or 2.86 Tcf of gas. Crude oil and condensate reserves have grown from 20 percent of total reserves in 1993 to 33 percent of total reserves in 1994. Proved developed reserves comprise 78 percent of the total proved reserves on an energy equivalent barrel (EEB) basis. As of December 31, 1994, Anadarko had proved developed reserves of 1.79 Tcf of natural gas and 74.2 MMBbls of crude oil, condensate and NGLs.
The Company's estimates of proved reserves and proved developed reserves, net of royalty interests, of natural gas, crude oil, condensate and NGLs owned at December 31, 1994, 1993, 1992 and 1991 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities (Supplemental Information) in the Anadarko Petroleum Corporation 1994 Consolidated Financial Statements (Consolidated Financial Statements) under Item 8 of this Form 10-K Annual Report (Form 10-K). The Company files annual estimates of proved oil and gas reserves with the Department of Energy, which are within five percent of these amounts. Also contained in the Supplemental Information in the Consolidated Financial Statements are the Company's estimates of future net cash flows, discounted future net cash flows before income taxes and discounted future net cash flows after income taxes from proved reserves of natural gas, crude oil, condensate and NGLs. The Company emphasizes the volumes of reserves are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data, as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data.
EXPLORATION, DEVELOPMENT, ACQUISITION AND MARKETING ACTIVITIES
See narrative description of "Exploration", "Development", "Acquisitions" and "Marketing" on pages five through eight of the Anadarko Petroleum Corporation 1994 Annual Report to Stockholders (Annual Report), which is incorporated herein by reference, and see "Marketing Strategies" and "Operating Results" in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) under Item 7 of this Form 10-K.
VOLUMES AND PRICES
The following table shows the Company's annual volumes. Volumes for natural gas are in millions of cubic feet (MMcf) at a pressure base of 14.73 pounds per square inch (psi) and volumes for oil, condensate and NGLs are in thousands of barrels (MBbls).
- --------------- * In December 1994, the Company sold its Canadian subsidiary.
The following table shows the Company's annual average sales prices and average production costs. Production costs are per EEB. For this computation, one barrel is the energy equivalent of six thousand cubic feet (Mcf).
- --------------- * In December 1994, the Company sold its Canadian subsidiary.
Additional information on volumes and prices is contained in "Analysis of Volumes and Prices" in the MD&A under Item 7 of this Form 10-K. Additional information on major customers is contained in Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
PROPERTIES AND ACTIVITIES -- UNITED STATES -- ONSHORE
ACREAGE Approximately 53 percent of the Company's 1,838,000 gross (607,000 net) onshore undeveloped acres in the United States at year-end 1994 lie within three producing provinces: the Anadarko Basin of Kansas and Oklahoma, the Gulf Coast region and the Permian Basin of West Texas. In addition, the Company has 25,000 gross (6,000 net) undeveloped acres onshore in Alaska. As of December 31, 1994, approximately 89 percent of the Company's 1,991,000 gross (841,000 net) developed acres onshore in the United States are located within these same provinces. The accompanying map illustrates by state Anadarko's developed and undeveloped net acres, number of producing net wells and other data relevant to its onshore oil and gas operations in the United States.
HUGOTON Anadarko is an industry leader in developing the shallow reserves in the Hugoton Field of Kansas. In 1994, Anadarko drilled 44 infill wells, bringing the total to 325 infill wells since 1987. Currently, Anadarko owns 347,000 net lease acres in the Field with 762 producing natural gas wells. Anadarko's net production from the Field was 53.4 billion cubic feet (Bcf) in 1994. The Company also is developing deeper oil and gas pay zones in southwest Kansas. In 1994, Anadarko drilled 41 "deep" wells. Recovery of reserves from some deeper oil fields is enhanced through secondary recovery techniques (waterflooding). A notable example is the Hitch Unit, located in Seward County, Kansas. After injection began in 1991, oil production increased from 220 barrels of oil per day (BOPD) to a peak of 3,860 BOPD in June 1994. Production is declining, as expected, but remains over 2,200 BOPD. Anadarko owns a 91 percent working interest in this waterflood unit. The Company has been active in waterflood operations for more than 30 years.
ONSHORE MAP (GRAPHIC MATERIAL OMITTED)
- --------------- * Drilling activities were conducted in these areas in 1994.
PERMIAN BASIN About half of the Company's oil production comes from the Permian Basin of West Texas and eastern New Mexico. In addition to waterflood operations, the Company has been acquiring properties to increase production and enhance operations. In the Permian Basin, Anadarko holds 132,200 net lease acres and operates nearly 2,100 active wells. Anadarko's oil production over the past 10 years has increased 63 percent. The Company's oil production from the Permian Basin in 1994 totaled about 4 MMBbls.
GOLDEN TREND Anadarko's most active year in central Oklahoma's Golden Trend was 1994. The Company drilled 44 wells in 1994 and currently holds 13,700 net developed lease acres in the Field. To date, the Company owns interests in 246 Golden Trend wells, of which 169 are Company-operated. Anadarko has an additional 19,800 net undeveloped lease acres in the Golden Trend. Gas production from the Golden Trend averaged 23 million cubic feet per day (MMcf/d) of gas in 1994, an increase of 64 percent over 1993. In 1994, oil production totaled 700 BOPD, an increase of 87 percent over 1993.
COAL-BED METHANE Since 1989, the Company has been exploring coal-bed methane acreage in Colorado, Wyoming and Utah. In August 1994, Anadarko acquired 24 producing coal-bed methane wells, a gas pipeline and 16,300 gross acres in Carbon County, Utah, from Pacific Gas and Electric Resources. Known as the Castlegate Field, the wells are near Price, Utah. The Company operates two other coal-bed methane pilot study programs in Colorado and Utah.
YEGUA During 1994, Anadarko participated in 10 Yegua wells, located along the Texas Gulf Coast. Anadarko holds 91,300 gross lease acres in the Yegua play. Since entering the play in 1991, the Company has drilled or participated in 19 wildcat wells and four development wells. Six wells are planned for 1995. Net production from the Yegua play was 9.2 MMcf/d of gas and 324 barrels of condensate per day in 1994.
ALASKA Anadarko has maintained an active oil exploration effort on the North Slope of Alaska since 1992. ARCO Alaska, the operator, plans to drill two wells in the first quarter of 1995 in the Colville Delta, west of Prudhoe Bay. Anadarko owns a 22 percent working interest in both wells.
GEOTHERMAL The Company has an interest in geothermal energy because of its long-term potential for economic and environmentally clean electric power generation. Geothermal exploratory holdings in California, Nevada and Oregon totaled 160,000 net acres at year-end 1994. The Company is working to develop a commercial geothermal electric power generation project at the site of its Pueblo Valley discovery, in southeastern Oregon. In the first half of 1995, the Company expects to sign a Memorandum of Understanding with Portland General Electric for a power sales agreement. Following the execution of the Memorandum, Anadarko will participate in a Federal Environmental Impact Statement (EIS), designed to assess any significant impact this plant could have on the environment. When the EIS review is completed and following negotiation of a power purchase agreement, the Company may construct a power generating facility near this discovery.
GAS GATHERING SYSTEMS Anadarko owns and operates five gas gathering systems in the nation's mid-continent area: the Antioch Gathering System in the Southwest Antioch Field of Oklahoma; the Hemphill Gathering System, located in Hemphill County, Texas; the Hugoton Gathering System in southwest Kansas; the Cimmaron River System (CRS) in southwest Kansas; and the Sneed System in the West Panhandle Field of Texas. In October 1994, the Company signed agreements to purchase two gathering systems in the Kansas Hugoton Field from Panhandle. The systems include the CRS and a portion of the Panhandle Eastern Pipe Line (PEPL) gathering system serving the Hugoton Field area. The systems serve about 1,000 Anadarko-operated wells and 200 third-party wells and are located primarily in Stevens, Seward and Morton Counties, Kansas, and Texas County, Oklahoma. Anadarko acquired and began operating the CRS in October 1994. The Company expects to acquire and take over operation of the PEPL system in late 1995, pending Federal Energy Regulatory Commission (FERC) approval. This acquisition will triple the Company's gas gathering capability. In addition to these systems, Anadarko owns interests in 10 other smaller systems. Including the acquisition of the PEPL system, these 16 systems have approximately 2,100 miles of pipeline and over 480 MMcf/d of gas gathering capability.
During 1994, Anadarko sold its interests in the Limestone Ridge Gathering System in the Arkoma Basin and a gathering system in the Bridger Lake Field, in Wyoming. Both sales were in connection with sales of non-strategic producing properties.
GAS PROCESSING PLANTS Anadarko owns and operates two gas processing plants and has interests in six other plants. Most of these plants are located within the Company's major areas of gas production. In 1994, the Company sold its interests in six plants and closed four plants. In most cases, the Company was able to arrange to have the gas processed more efficiently in third-party processing facilities, discussed below. The Company-operated plants are integrated with the gas gathering systems described previously. In conjunction with the CRS and PEPL gathering system acquisitions in 1994, Anadarko entered into agreements to commit a majority of its gas connected to the systems for processing at the National Helium Corporation plant in Liberal, Kansas, which is owned by Panhandle. Anadarko and Panhandle also entered into gathering agreements for Anadarko's gas on the facilities remaining with Panhandle. In addition, the Company entered into long-term processing agreements with the Seagull Energy-operated Matagorda Island Plant on the Texas Gulf Coast for processing of Anadarko's gas from the Company's Matagorda Island development project. The following table sets forth the average daily gas throughput and NGLs production for the three years ended December 31, 1994 and capacity as of December 31, 1994.
PROPERTIES AND ACTIVITIES -- UNITED STATES -- OFFSHORE
ACREAGE At year-end 1994, Anadarko owned an average 45 percent interest in 125 lease blocks and held 42,000 net acres in developed properties and 234,000 net acres in undeveloped properties offshore. The accompanying map illustrates the Company's exploratory and development net acres, number of producing net wells and other data relevant to its offshore properties.
OFFSHORE EXPLORATION In March 1994, Anadarko invested $72 million (net) as high bidder on 26 offshore lease blocks at the Minerals Management Service Offshore Lease Sale #147. All but two of the blocks are related to sub-salt exploration projects. In 1994, the Company drilled two exploration wells in the sub-salt play in the Gulf of Mexico. In July, Anadarko and partner, Phillips Petroleum Company (Phillips) announced results from the "Teak" exploratory well, located on South Timbalier South Addition Block 260. The discovery well tested more than 4,400 BOPD and 7.7 MMcf/d of gas from several zones. Further evaluation of the discovery will be conducted in 1995 to determine if the field is commercial. Phillips, the operator, and Anadarko each have a 50 percent working interest in the well. The "Mesquite" exploratory well, located at Vermilion Block 349, was plugged and abandoned in June 1994 after finding no commercial hydrocarbons. Anadarko, the operator of the well, and partner Phillips each have a 50 percent working interest. The Company drilled four conventional exploration wells in the Gulf of Mexico in 1994 that were dry holes.
OFFSHORE DEVELOPMENT Production commenced from Anadarko's Matagorda Island Block 636 discovery, announced in 1993. The Matagorda Island Block 636 discovery was tied back to the Matagorda Island 622 "C" platform through a pipeline and production from the well commenced in the Fall of 1994. Initial production from the well was 4 MMcf/d of gas. Additional drilling operations continue on the four blocks that comprise the Matagorda Island Field. In 1994, Anadarko installed two production platforms in the Gulf of Mexico. A platform was installed in August 1994 at High Island Block A-376, located 150 miles offshore Louisiana. The Field began production, less than two years after discovery, at an initial rate of 1,700 BOPD and 2.8 MMcf/d of gas. Production from the platform is currently suspended, pending final regulatory approval. Anadarko is operator of the Block with a 33 percent working interest. A production platform was also installed at East Cameron Block 157 in October 1994, only 10 months after discovery. Completion operations are underway and initial production is expected in the second quarter of 1995. Confirmation drilling continued at the "Mahogany" project, Ship Shoal Block 349 No. 1, a sub-salt discovery well announced by Anadarko and Phillips in September 1993. A delineation well, Ship Shoal 349 No. 2, tested 4,366 BOPD and 5.3 MMcf/d of gas. This well produced oil from zones not previously tested in the first well. A third development well, Ship Shoal 359 No. 2, is currently drilling. A production platform for the Field is in the design stage. Anadarko owns a 37.5 percent working interest in the project.
PROPERTIES AND ACTIVITIES -- INTERNATIONAL
OVERVIEW In recent years, Anadarko has devoted a portion of its exploration budget to selected international joint-venture exploration projects. The Company's objective is to add high-potential prospects to its balanced portfolio of domestic plays. Foreign investment projects often offer significant economic potential for oil and gas exploration activities. However, to achieve commercial success in foreign exploration, companies must overcome many obstacles, such as: a difficult operating environment, lack of an oil field service company infrastructure, complex regulations and relationships with the host government, and above all the geologic risk of finding commercial hydrocarbons. In some countries, political risk and uncertainty can complicate the situation and may lead to delay or cancellation of a project.
OFFSHORE MAP (GRAPHIC MATERIAL OMITTED)
There is exposure to write-offs in the event foreign exploration projects are unsuccessful. Anadarko recorded pre-tax charges to earnings (provisions for impairments) of $3.1 million in 1994, $6.5 million in 1993 and $21 million in 1992. These charges reflect unsuccessful exploration drilling in China and Yemen, as well as costs associated with extensive reviews of several other potential international opportunities, which the Company elected not to pursue. The Company's primary international ventures underway are discussed below.
ALGERIA Anadarko's largest international venture involves exploration and development of liquid hydrocarbons in Algeria. In 1989, Anadarko Algeria became the first U.S. firm to secure a production sharing agreement (PSA) from Sonatrach, the national oil and gas enterprise of Algeria, under the modern economic terms of Algeria's 1986 Hydrocarbon Law. Since 1989, Sonatrach has entered into more than 20 similar contracts with other international exploration and production companies and many of these companies are currently exploring for crude oil in the Ghadames and Illizi Basins of the eastern Sahara Desert. Sonatrach is the beneficial owner of 10.2 percent of Anadarko's common stock. Anadarko's interest in the PSA is 50 percent. The Company has two partners, each with a 25 percent interest in the Algerian venture; they are LASMO Oil (Algeria) Limited, a wholly-owned subsidiary of LASMO plc, and Maersk Olie Algeriet AS, a wholly-owned subsidiary of Maersk Olie Og Gas AS, a company in the Danish A.P. Moeller group. Under the terms of the PSA, liquid hydrocarbons that are discovered, developed and produced will be shared by Anadarko, its two partners and Sonatrach. In addition, Anadarko and its partners are entitled to recover exploration costs out of production. The PSA requires Anadarko and its two partners to invest over $100 million over a 10-year period. Anadarko believes this obligation will be fully met in 1995. As of December 31, 1994, Anadarko's total net investment in Algeria for exploration and related activities amounted to $105.6 million of which about $33.2 million was spent in 1994. Due to the success of the project thus far, these expenditures are currently being capitalized and no provision for loss or impairment has been made. To date, the Company has elected not to insure its investment in Algeria. See Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. Since 1989, Anadarko as operator has drilled seven exploration wells in Algeria; five wells successfully discovered oil and two wells were dry holes. The Company has also drilled two delineation wells to confirm reservoir quality and areal extent of two discoveries; a delineation well at a third discovery is currently drilling. The Company believes these five discoveries could contain total gross recoverable oil reserves of between 850 MMBbls and 1,250 MMBbls. Additional drilling and production information will be required to determine an accurate estimate of total reserves. During 1994, Anadarko added 44 MMBbls of proved oil reserves, based on preliminary development studies and the contractual rights granted under the Sonatrach agreement. The Company has budgeted $34 million net for further delineation drilling and development work in Algeria during 1995. Full development of the discoveries could take several years to complete. The Company is actively pursuing development on an accelerated basis. The PSA originally specified an exploration area totaling 5.1 million acres. Anadarko and its partners proposed to Sonatrach to relinquish about 25 percent of this area, pursuant to the relinquishment clause in the PSA. This would leave Anadarko and its partners approximately 3.8 million acres of the original exploration area for continued exploration drilling in the future. During 1994, the Company and its two partners also acquired, subject to approval by Algerian authorities, a minority interest in a PSA covering two additional blocks in the same region, which are operated by BHP Petroleum (Algerie) Inc. An exploration program is already underway on these two blocks, which contain about 1.2 million acres. At the end of 1994, the Company's total gross acreage in Algeria was still about 5.1 million acres. The current political unrest in Algeria has been the subject of numerous news media reports. The Company is closely monitoring the situation and has taken reasonable and prudent steps to insure the safety of employees working in the remote regions of the Sahara Desert. Anadarko is presently unable to predict with certainty any effect the current situation may have on activity planned for 1995 and beyond. However, the situation has not had any material effect on the Company's operations.
CANADA Anadarko sold all of its interests in Canada in four separate transactions during 1994. Proved Canadian reserves at the end of 1993 were about 10 million energy equivalent barrels (MMEEBs), which was less than three percent of Anadarko's total proved reserves. Proceeds from the sales were about $58 million. The Company will continue to evaluate potential acquisitions that could reestablish Anadarko's presence in areas with exploration and development potential in Canada's western provinces.
INDONESIA The Company's ongoing commitment to international exploration includes exploration on the Jabung Block in the Jambi Province of Indonesia. Anadarko and its partners, Santa Fe Energy Resources (Jabung), Ltd., a wholly-owned subsidiary of Santa Fe Energy Resources, Inc. (Santa Fe), and Kerr-McGee Sumatra, Ltd., a wholly-owned subsidiary of Kerr-McGee Corporation, have a production sharing contract which includes a $15 million commitment to exploration activities during the first three years. The Jabung Block, which is located on the island of Sumatra in the northernmost part of the South Sumatra Basin, covers an area of two million acres. Two exploration wells are planned for 1995. The first well has reached target depth and was being tested and evaluated at the time this report was released for printing. Santa Fe is the operator.
CHINA In 1994, Anadarko signed a joint study agreement with Chengdu Huachuan Petroleum and Natural Gas Exploration and Development Corporation. The one-year agreement allows for a complete geological, geophysical and engineering evaluation of two areas within the Sichuan Basin in China's Sichuan Province. The areas under study total approximately two million acres. Depending on the results of the study, the Company could negotiate a production sharing agreement in 1995.
DRILLING PROGRAMS
The Company's 1994 drilling program again focused on known oil and gas provinces onshore in North America, as well as offshore in the Gulf of Mexico. Onshore activity was concentrated in the mid-continent regions of Kansas and Oklahoma, the Yegua Trend along the Texas Gulf Coast and the Permian Basin of West Texas. Exploration activity consisted of 16 wells onshore in the United States, six wells offshore United States, four wells in Canada and six wells in Algeria. Development activity included 238 wells onshore United States, five wells offshore United States and six wells in Canada.
DRILLING STATISTICS
The following table shows the results of the oil and gas wells drilled and tested:
The following table shows the number of wells in the process of drilling or in active completion stages and the number of wells suspended or waiting on completion as of December 31, 1994:
PRODUCTIVE WELLS
As of December 31, 1994, the Company owned productive wells in the United States and Algeria as follows:
REGULATORY AND LEGISLATIVE DEVELOPMENTS
NATURAL GAS PRORATION State agencies in many of the states where Anadarko operates are empowered by laws unique to each state to prevent waste in the production of natural gas and protect the correlative rights of each mineral interest owner to produce its fair share of gas in a field. To prevent waste and protect correlative rights, state agencies have developed proration systems for limiting production by assigning each unit in a prorated field an allowable production volume which the producer is legally permitted to produce. These allowables are based on market demand and other factors as determined by the state agency. In Kansas, where Anadarko has significant gas reserves and production capacity, the Kansas Corporation Commission (KCC) voted in December 1993 to modify its basic proration order for the Hugoton Field, the largest gas field in the United States. A written order was issued in February 1994. This order changed the formula used by the KCC to calculate Field and unit allowables and increased the portion of overall production allowables assigned to Anadarko's wells in the Hugoton Field. As a result of the order, Anadarko's share of the total Field allowable increased from about 12 percent in 1993 to about 15 percent in 1994. Anadarko's 1994 net production from the Field increased 18 percent, from 45,000 MMcf in 1993 to 53,000 MMcf in 1994. In 1995, the Company expects gas production from the Field to be flat compared to 1994.
KANSAS AD VALOREM TAX The Natural Gas Policy Act of 1978 (NGPA) allows a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for natural gas. Based on a FERC ruling that the Kansas ad valorem tax was such a tax, the Company collected the Kansas ad valorem tax in addition to the maximum lawful price. FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia, which held in June 1988 that FERC failed to provide a reasoned basis for its findings and remanded the case to FERC for further consideration. On December 1, 1993, FERC issued an order reversing its prior ruling and concluded the effective date for refunds should be June 28, 1988. FERC clarified the effective date of its December 1, 1993 order by an order dated May 19, 1994. Based on Anadarko's interpretation of FERC's orders, $700,000 (pre-tax) has been charged to income in 1994, in addition to the $130,000 (pre-tax) charged to income in 1993. Numerous parties have filed appeals of FERC's action in the D.C. Circuit and, accordingly, the Company is unable to predict the final outcome of this matter.
ENVIRONMENTAL The Company's oil and gas operations and properties are subject to numerous federal, state and local laws and regulations relating to the environmental protection. These laws and regulations govern, among other things, the amounts and types of substances and materials that may be released into the environment, the issuance of permits in connection with drilling and production activities, the discharge and disposition of waste materials, offshore oil and gas operations, the reclamation and abandonment of wells and facility sites and the remediation of contaminated sites. In addition, these laws and regulations may impose substantial liabilities for the Company's failure to comply with them or for any contamination resulting from the Company's operations. Anadarko takes the issue of environmental stewardship very seriously and has worked diligently to insure that all areas of the Company's operations are in compliance with applicable environmental rules and regulations. In 1994, the Company was recognized by the Department of Interior's Minerals Management Service for exemplary operating performance in the Gulf of Mexico. Compliance with such laws and regulations has not had a material adverse effect on the Company's operations or financial condition in the past. However, because environmental laws and regulations are becoming increasingly more stringent, there can be no assurances that such laws and regulations or any environmental law or regulation enacted in the future will not have a material adverse effect on the Company's operations or financial condition. For a description of certain environmental proceedings in which the Company is involved, see Note 15 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
OTHER Regulatory agencies in certain states have authority to issue permits for the drilling of wells, regulate the spacing of wells, prevent the waste of oil and gas resources through proration and regulate environmental matters. Operations conducted by the Company on federal oil and gas leases must comply with numerous regulatory restrictions, including various nondiscrimination statutes. Additionally, certain operations must be conducted pursuant to appropriate permits issued by the Bureau of Land Management and the Minerals Management Service of the Department of Interior and, in regard to certain federal leases, with prior approval of drill site locations by the Environmental Protection Agency.
ADDITIONAL FACTORS AFFECTING BUSINESS
The oil and gas business is highly competitive in the search for and acquisition of reserves, as well as, in the gathering and marketing of oil and gas production. The Company's competitors include the major oil companies, independent oil and gas concerns, individual producers, gas marketers and major pipeline companies, as well as participants in other industries supplying energy and fuel to industrial, commercial and individual consumers. Crude oil prices continue to be affected by political developments worldwide, pricing decisions of the Organization of Petroleum Exporting Countries (OPEC) and the volatile trading patterns in the oil and gas futures markets. Natural gas prices also continue to be highly volatile. The domestic and international operations of the Company have been, and at times in the future may be, affected by political developments and by federal, state and local laws and regulations such as restrictions on production, changes in taxes, royalties and other amounts payable to governments or governmental agencies, price or gathering rate controls and environmental protection regulations. The Company's business is subject to all of the operating risks normally associated with the exploration for and production of oil and gas, including blowouts, cratering and fire, each of which could result in damage to or destruction of oil and gas wells or formations or production facilities and other property and injury to persons. As protection against financial loss resulting from these operating hazards, the Company maintains insurance coverage, including certain physical damage, employer's liability, comprehensive general liability and workmen's compensation insurance. Although the Company is not fully insured against all risks in its business, the Company believes that the coverage it maintains is adequate and customary for companies engaged in similar operations. The occurrence of a significant event against which the Company is not fully insured could have a material adverse effect on the Company's financial position.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a preliminary title examination is conducted at the time properties believed to be suitable for drilling operations are acquired by the Company. Prior to the commencement of drilling operations, a thorough title examination of the drill site tract is conducted and curative work is performed with respect to significant defects, if any, before proceeding with operations. A thorough title examination has been performed with respect to substantially all leasehold producing properties owned by the Company. The Company believes the title to its leasehold properties is good and defensible in accordance with standards generally acceptable in the oil and gas industry subject to such exceptions which, in the opinion of counsel employed in the various areas in which the Company has conducted exploration activities, are not so material as to detract substantially from the use of such properties. The leasehold properties owned by the Company are subject to royalty, overriding royalty and other outstanding interests customary in the industry. The properties may be subject to burdens such as liens incident to operating agreements and current taxes, development obligations under oil and gas leases and other encumbrances, easements and restrictions. The Company does not believe any of these burdens will materially interfere with its use of these properties.
CAPITAL SPENDING
See "Capital Expenditures, Liquidity and Long-Term Debt" of the MD&A under Item 7 of this Form 10-K.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratios of earnings to fixed charges for the years ended December 31, 1994, 1993 and 1992 were 2.23, 2.68 and 1.81, respectively. These ratios were computed by dividing earnings by fixed charges. For this purpose, earnings include income before income taxes and fixed charges. Fixed charges include interest and amortization of debt expenses and the estimated interest component of rentals. During the three years ended December 31, 1994, there were no shares of preferred stock outstanding. Accordingly, the ratio of earnings to combined fixed charges and preferred stock dividends for each of the three years is the same as the ratio of earnings to fixed charges.
ITEM 2.
ITEM 2. PROPERTIES
See information appearing under Item 1 of this Form 10-K.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
HERITAGE RESOURCES, INC. LITIGATION Pursuant to an order of the 162nd Judicial District Court for Dallas County, Texas, dated January 29, 1988, requiring all owners of interests in certain properties in Winkler County, Texas, to be joined as parties Plaintiff or parties Defendant, Anadarko has entered, as a party Plaintiff, a suit filed against Heritage Resources, Inc. (Heritage) by Tribal Drilling Company. The Plaintiffs, among other things, seek to have Heritage removed as operator of a well in which Plaintiffs own interests. The Defendants have asserted counterclaims against Anadarko and the 19 other Plaintiffs alleging that, among other things, the assertions of the Plaintiffs are frivolous and were made in bad faith and the Plaintiffs breached the joint operating agreements. The trial previously scheduled for April 1993 has been continued indefinitely until such time as the appeal of a companion case, a case in which Anadarko is not a party, has been concluded. While the outcome of the litigation cannot be predicted, Anadarko's management believes that any recovery on the counterclaims in a material amount is remote.
See "Regulatory and Legislative Developments -- Kansas Ad Valorem Tax" under Item 1 and Note 15 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. Allison joined Production in 1973 as Vice President-Operations, was named President in 1976 and was President and Chief Executive Officer from 1979 until 1985 when he assumed the position of President and Chief Executive Officer of Anadarko. Mr. Allison was named Chairman and Chief Executive Officer effective October 1986. In January 1993, he was elected the additional position of President. Mr. Manley was employed by Production in 1976 and was Vice President, Administration and Employee Relations, from 1977 until August 1985. He held that position with Anadarko until January 1993 when he was named Senior Vice President, Administration. Mr. Rose joined Production as Chief Accountant in January 1978 and became Vice President and Controller in May 1981. He held that position at Anadarko from August 1985 until he was named Vice President, Finance, in October 1986. In January 1993, he was named Senior Vice President, Finance and Chief Financial Officer.
Mr. Abernathy joined Production in January 1975 as a Senior Petroleum Engineer. He served as the Southern Region's Operations Manager before becoming Manager, Exploration and Production Operations, of Anadarko in June 1987. He was named Vice President, Exploration and Production Operations, in July 1987 and Vice President and General Manager, International, in October 1989. He was named Vice President Operations, International/Offshore, in January 1992. Algeria Exploration was added to his responsibilities in December 1994 Mr. Alman joined Production in 1976 as an Evaluation Engineer. He served as Manager, Production and Planning, prior to being named Manager, Exploration and Production Operations, in February 1990. He was named Vice President, Exploration and Production Operations, in April 1990 and was named Vice President, Operations, U. S. Onshore, in January 1992. In January 1993, he was named Vice President, Engineering. Mr. Seitz joined Production in 1977 as a Petroleum Geologist. He served as Manager of Exploration and Chief Geologist before becoming General Manager, Exploration, of Anadarko in June 1987. He was named Vice President, Exploration and Production Operations, in October 1989 and Vice President and General Manager, Houston Region, in February 1990. He was named Vice President, Exploration, International/Gulf of Mexico, in January 1992 and Vice President, Exploration in January 1993. Mr. Sharples was employed by Anadarko and named Vice President, Marketing, in March 1993. Prior to coming to Anadarko, he held a vice president's position in marketing with Maxus Energy Corporation from October 1984 until March 1993. Mr. Stover joined Anadarko in 1980 as Chief Engineer and was named General Manager -- Special Projects, International in 1987. He assumed the position of President and General Manager, Anadarko Algeria Corporation, in 1989. In January 1993, he was named Vice President, Acquisitions. Mr. Sullivan joined the Company in 1981 as Senior Reservoir Engineer. He held several positions in engineering and operations before being named Manager, Acquisitions in 1987. In 1991, he was named Vice President and General Manager, Anadarko China Company. In January 1993, he was named Vice President Operations, U. S. Onshore. Mr. Taylor was employed by Anadarko in October 1986 as Director, Corporate Communications, and became Vice President, Corporate Communications, in January 1987. Mr. Williams was employed by Anadarko in March 1988 as Regional Counsel and was named Vice President and General Counsel in January 1989. Mr. Williams retired effective January 1, 1995. J. Stephen Martin was named General Counsel, effective January 1, 1995. Mr. Martin was employed by Anadarko in June 1987 and was promoted to Senior Attorney in 1989 and to General Attorney in 1994. All officers of Anadarko are elected in April of each year at an organizational meeting of the Board of Directors to hold office until their successors are duly elected and shall have qualified. There are no family relationships between any directors or executive officers of Anadarko.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information on the market price and cash dividends declared per share of common stock is included in the Stockholders' Information in the Annual Report, which is incorporated herein by reference. As of December 31, 1994, there were approximately 7,800 direct holders of Anadarko common stock. The following table sets forth the amount of dividends paid on Anadarko common stock during the two years ended December 31, 1994.
The amount of future dividends will depend on earnings, financial condition, capital requirements and other factors, and will be determined by the Directors on a quarterly basis. For additional information, see "Dividends" of the MD&A under Item 7 and Note 6 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See Selected Summary Financial Data in the Annual Report, which is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL RESULTS
NET INCOME AND REVENUES Anadarko's net income for 1994 (after a special charge) was $41.1 million (70 cents per share). This compares to Anadarko's 1993 net income before the cumulative effect of changes in accounting principles of $40.0 million (70 cents per share) and 1992 net income of $27.3 million (49 cents per share). Including the cumulative effect of two accounting changes, Anadarko's net income for 1993 was $117.4 million ($2.05 per share). The Company's 1994 income was impacted by the sale for $58 million of a wholly-owned subsidiary, Anadarko Petroleum of Canada Ltd. Stated without the effect of a special charge of $6.6 million (after taxes) related to this sale, 1994 net income was $47.7 million (81 cents per share). The charge is primarily due to foreign currency translation losses that had been incurred over the life of the investment and previously accounted for on the Company's balance sheet. Revenues for 1994 were $482.5 million, slightly above 1993 revenues of $482.0 million and 27 percent higher than 1992 revenues of $379.7 million. Revenues in 1994 reflect record production and sales volumes for natural gas, crude oil, condensate and natural gas liquids (NGLs), offset by lower prices. The increase in 1993 revenues compared to 1992 revenues is due to significantly stronger gas markets in 1993 and increased crude oil production. During 1993, Anadarko's net income was affected by the items discussed below. (1) Implementation in the first quarter of Statement of Financial Accounting Standards (SFAS) No. 106 which required a change in accounting for postretirement benefits other than pensions. The Company recognized the cumulative transition obligation as of January 1, 1993, which resulted in a decrease to net income of $9.7 million (17 cents per share). (2) Implementation in the first quarter of SFAS No. 109 which changed the accounting method for deferred income taxes and increased Anadarko's net income by $87.1 million ($1.52 per share). (3) SFAS No. 109 also requires that the effect on existing deferred tax liabilities of any change in income tax rates must be recognized in income during the period in which the change in tax rates is enacted. In August 1993, Congress enacted the Omnibus Budget Reconciliation Act of 1993, which raised the top corporate income tax rate from 34 to 35 percent. As a result, Anadarko recorded a decrease in net income of $11.2 million (20 cents per share) in the third quarter of 1993.
SELECTED FINANCIAL DATA
- --------------- *Excludes the cumulative effect of changes in accounting principles.
COSTS AND EXPENSES For 1994, Anadarko's costs and expenses were $388.2 million, an increase of three percent from the $377.9 million in 1993. The increase was a result of several factors: (1) Operating expenses increased $5.8 million (six percent) due primarily to higher oil and gas operating expenses and gas purchased expense; (2) Depreciation, depletion and amortization (DD&A) expense was up $5.1 million (three percent) due to a nine percent increase in gas production volumes and a five percent increase in crude oil and condensate production volumes; the increase was partially offset by a four-percent decline in the DD&A rate due to additional reserves booked during the year; and, (3) Administrative and general expenses were up $3.8 million (seven percent) primarily due to costs associated with salaries and benefits, as well as related administrative costs.
These factors were partly offset by lower provisions for impairments of international and geothermal properties in 1994 of $3.1 million compared to $7.0 million in 1993. These impairments primarily reflect costs associated with review and study of potential exploration projects in several foreign countries, which the Company has elected not to pursue. In 1992, impairments totaled $21 million and were primarily due to unsuccessful exploration projects in China and Yemen. Anadarko's costs and expenses in 1993 were up 21 percent compared to 1992. There were four reasons for the increase: (1) Increased DD&A expense due to higher production volumes; (2) Increased operating expenses due primarily to higher production volumes as a result of secondary recovery oil properties acquired in West Texas in 1992; (3) Increased taxes because of higher production related (severance) and ad valorem taxes; and, (4) Higher administrative and general expenses, including postretirement benefits other than pensions and increased salary and benefits for the Company's growing workforce.
COSTS AND EXPENSES
INTEREST EXPENSE Anadarko's interest expense for 1994 was $26.1 million, down 11 percent compared to $29.4 million in 1993 and down seven percent compared to $28.2 million in 1992. Interest expense benefitted in 1994 from an option sold for an interest rate swap agreement that was not exercised by the purchaser; and, as a result the Company reduced interest expense in the fourth quarter of 1994 by $2.6 million. After this reduction, gross interest expense was $41.6 million in 1994 compared to $38.0 million in 1993 and $36.6 million in 1992. The increase in gross interest expense in 1994 compared to 1993 is primarily due to higher average borrowings and interest rates. The increase in gross interest expense for 1993 compared to 1992 is primarily related to higher average borrowings during that year. During the period 1992-94, increased interest expense has been partly offset by higher capitalized interest due to increases in costs excluded offshore in the Gulf of Mexico and in Algeria. See Liquidity and Long-term Debt.
ANALYSIS OF VOLUMES AND PRICES
NATURAL GAS In 1994, Anadarko achieved record natural gas production of 175.8 billion cubic feet (Bcf) or 482 million cubic feet per day (MMcf/d). The 1994 production was up nine percent over natural gas production of 161.9 Bcf or 444 MMcf/d in 1993 and 20 percent over natural gas production of 146.4 Bcf in 1992. The increases in gas production stem primarily from higher production allowables in the Hugoton Field of Kansas and the West Panhandle Field of Texas. However, in the fourth quarter of 1994, the Company began curtailing some natural gas production in response to lower gas prices. Anadarko's average U.S. gas price in 1994 was $1.72 per thousand cubic feet (Mcf), down 10 percent compared to 1993 and nearly equal to prices in 1992. Historically, natural gas sales markets have been highly seasonal because of the increase in residential heating demand during the winter. Due to this seasonality, Anadarko's natural gas prices and production volumes and, therefore, financial results have traditionally been stronger in the first and fourth quarters. However, this market trend abruptly changed in 1992 -- prices were lowest in the winter and highest in late summer. The pattern of highest and lowest monthly prices changed again in 1993, but the trend toward higher average annual prices gave rise to great optimism in the industry that gas prices had finally turned the corner following years of persistent price weakness. However, the anticipated price improvement did not materialize in 1994.
Gas prices weakened through most of 1994; prices declined from peak winter levels in February to extremely low levels during December. These low gas prices have continued in January and February 1995. There were several reasons cited by industry experts: increased domestic deliverability; mild summer and winter temperatures which limited demand; increased volumes in inventory or natural gas storage fields; increased volumes imported from Canada; and, improved efficiency of the national supply network. In stark contrast to the price optimism that prevailed in 1993, most observers now expect 1995 gas prices will be well below 1994 levels. If this occurs, Anadarko's earnings and cash flow are likely to fall below 1994 levels. Recent experience clearly demonstrates that no one can predict the precise movement of U.S. natural gas prices. Anadarko has developed marketing strategies to help manage production and sales volumes, despite the price volatility that is likely to continue. See Marketing Strategies.
QUARTERLY NATURAL GAS VOLUMES AND U.S. AVERAGE PRICES
- --------------- Mcf -- thousand cubic feet MMcf/d -- million cubic feet per day Bcf -- billion cubic feet
CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS Anadarko achieved record crude oil and condensate production of 8.3 million barrels (MMBbls) in 1994, a five percent increase over 1993 oil and condensate production and a 78 percent increase over 1992 oil and condensate production. The continuing increase in oil production is primarily related to aggressive drilling and development of secondary recovery (waterflood) oil fields in West Texas and the mid-continent, some of which were purchased by the Company in a large acquisition in December 1992. These activities have generally offset the production decline normally associated with oil fields. However, oil production is expected to be down in 1995 due to normal depletion and sales of some producing properties during 1994.
Anadarko's average U.S. crude oil price for 1994 was $15.06 per barrel, down eight percent compared to 1993 and down 18 percent compared to 1992. Since the Gulf War in 1991, oil prices have been consistently lower due to sluggish demand growth worldwide, weak winter demand in the U.S. and ample supplies. Anadarko believes the continuing demand growth, albeit modest, and stable world supplies could lead to some price improvement in 1995 and beyond. The Company's crude oil price averaged about $16.00 per barrel in January 1995. Generally, the Company's oil production is sold on a monthly basis as it is produced. Production of oil is usually not affected by seasonal swings in demand or in market prices. The Company's NGLs sales volumes in 1994 were 3.5 MMBbls, up six percent over 1993 and up 20 percent over 1992. The 1994 average price of 28 cents per gallon was seven percent lower than the average price in 1993 and 13 percent lower than the average price in 1992. The increase in NGL volumes is due primarily to the Company's increased gas production. Anadarko's NGLs volumes in 1995 should benefit from new processing contracts that provide better economic terms for gas processed in southwest Kansas and offshore Texas. However, total NGLs sales are expected to be down in 1995 due to the closing of several plants, weak markets and the sale of some producing properties.
ANNUAL VOLUMES AND U.S. AVERAGE PRICES
MARKETING STRATEGIES
NATURAL GAS The domestic natural gas market has grown significantly throughout the last 10 years and continued growth appears likely. The Company's excellent portfolio of exploration and development prospects will position Anadarko to continue to participate in this growth. Over the past three years, Anadarko's wholly-owned marketing subsidiary -- Anadarko Trading Company (ATC) -- has evolved into a full-service marketing company offering supply assurance, competitive pricing and tailored services to its customers. ATC purchases and resells most of the Company's production. ATC sells natural gas under a variety of contracts and may also receive a service fee related to the level of reliability and service required by the customer. ATC has also expanded its marketing capabilities to move larger volumes of gas into and out of the "daily" gas market to take advantage of any price volatility. Included in this strategy is expanded use of leased natural gas storage facilities. In addition, various hedging strategies are sometimes utilized to better manage price risk associated with natural gas sales. See Hedging Strategies. ATC has increased its purchase of third-party gas for sale into the Company's market areas. Sales of third-party gas totaled 84 Bcf in 1994 compared to 82 Bcf in 1993 and 58 Bcf in 1992. ATC's sales have increased 45 percent since 1992.
CRUDE OIL AND CONDENSATE Currently, all of the Company's crude oil production is domestic and the majority is sold on 30-day "evergreen" contracts with prices based on postings plus a premium. The Company's exploration success in Algeria, and the ongoing development of five discoveries there since 1993, could significantly impact Anadarko's production volumes of crude oil and condensate in 1996 and beyond. As these discoveries are brought on-line, Anadarko will begin marketing oil worldwide. See "Properties and Activities -- International -- Algeria" under Item 1 of this Form 10-K.
GAS GATHERING SYSTEMS AND PROCESSING PLANTS Anadarko's investment in gas gathering operations allows the Company to better manage its gas production, improve ultimate recovery of reserves, enhance the value of reserves and expand marketing opportunities. Since 1988, the Company has invested approximately $67 million to build or acquire gas gathering pipeline systems and gas processing plants. Anadarko owns interests in 15 gas gathering systems and eight gas processing plants in core producing areas. In October 1994, Anadarko signed agreements to acquire two natural gas gathering systems in the Kansas Hugoton Field from Panhandle for a purchase price of $36 million. The purchase of the intrastate Cimmaron River System (CRS) was completed that month for $2 million and Anadarko took over operation of the system. Purchase of the second system is currently pending approval from the Federal Energy Regulatory Commission (FERC). Anadarko expects that the purchase will close in late 1995 for about $34 million and the Company will take over operations at that time. Purchase of these two gathering systems will triple the Company's overall gas gathering capability -- from 155 MMcf/d to 480 MMcf/d -- and the new systems serve approximately 1,000 Anadarko-operated wells and 200 third-party wells. During 1994, Anadarko sold the Limestone Ridge Gathering System in the Arkoma Basin and a gathering system in the Bridger Lake Field in Wyoming. Both sales were in connection with sales of non-strategic producing properties In 1994, Anadarko completed a $2.5 million expansion of its Hugoton Gathering System (HUGS) in southwest Kansas, which was built in 1990. The expansion added 46 shallow, low pressure wells to HUGS and increased connected well capacity by 20 MMcf/d of gas. With completion of this expansion, the HUGS system has 120 MMcf/d of gas capacity to serve Anadarko's markets in the midwest through two interstate and one intrastate pipeline connections. The expansion was completed without the installation of new compression, maximizing the use of existing compressors at HUGS. In 1995, in addition to the purchase of the PEPL system, Anadarko will pursue further expansion of its gas gathering operations. The Company expects to spend approximately $9 million in 1995 for construction of new gathering facilities, installation of additional compressors, expansion of existing gathering systems and improving access to multiple pipeline "market hubs." Anadarko remains active in the NGLs business, primarily as a result of its gas gathering and processing operations. The Company sells NGLs on a monthly basis. Anadarko generally markets NGLs under short-term contracts. Anadarko had 89,000 barrels of NGLs in inventory at the end of 1994 compared to 175,000 barrels at the end of 1993.
HEDGING STRATEGIES Anadarko uses financial instruments to limit exposure to changes in the market price of natural gas and crude oil for both the Company and its customers. While financial instruments are intended to reduce the Company's exposure to declines in the market price of natural gas and crude oil, the financial instruments may also limit Anadarko's gain from increases in the market price of natural gas and crude oil. As a result, gains and losses on financial instruments are generally offset by similar changes in the realized price of natural gas and crude oil. Gains and losses are recognized in revenues for the periods to which the financial instruments relate. Anadarko's financial instruments currently are comprised of futures, swaps and options. See Note 5 of the Notes to Consolidated Financial Statements under Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANADARKO PETROLEUM CORPORATION
INDEX
CONSOLIDATED FINANCIAL STATEMENTS
ANADARKO PETROLEUM CORPORATION
REPORT OF MANAGEMENT
The management of Anadarko Petroleum Corporation is responsible for the preparation and integrity of all information contained in the accompanying consolidated financial statements. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management makes informed judgements and estimates. Management maintains and relies on the Company's system of internal accounting controls. Although no system can ensure elimination of all errors and irregularities, this system is designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and accounting records are reliable as a basis for the preparation of financial statements. This system includes the selection and training of qualified personnel, an organizational structure providing appropriate delegation of authority and division of responsibility, the establishment of accounting and business policies for the Company and the conduct of internal audits. The Board of Directors pursues its responsibility for the consolidated financial information through its Audit Committee, which is composed solely of directors who are not officers or employees of Anadarko. The Audit Committee recommends to the Board of Directors the selection of independent auditors and reviews their fee arrangements. The Audit Committee meets periodically with management, the internal auditors and the independent auditors to review that each is carrying out its responsibilities. The internal and independent auditors have full and free access to the Audit Committee to discuss auditing and financial reporting matters. We believe that Anadarko's policies and procedures, including its system of internal accounting controls, provide reasonable assurance that the financial statements are prepared in accordance with the applicable securities laws.
[ROBERT J. ALLISON, JR.] - ----------------------------- Robert J. Allison, Jr. Chairman, President and Chief Executive Officer
[MICHAEL E. ROSE] - ----------------------------- Michael E. Rose Senior Vice President and Chief Financial Officer
ANADARKO PETROLEUM CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Anadarko Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of Anadarko Petroleum Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 Form 10-K Annual Report. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Anadarko Petroleum Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in notes 12 and 14 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board Statements of Financial Accounting Standards No. 109, Accounting For Income Taxes, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, respectively, in 1993.
[KPMG PEAT MARWICK LLP]
Houston, Texas January 26, 1995
ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF INCOME
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEET
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. SUMMARY OF ACCOUNTING POLICIES
GENERAL Anadarko Petroleum Corporation is engaged in the exploration, development, production and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs). The terms "Anadarko" and "Company" refer to Anadarko Petroleum Corporation and its subsidiaries. The principal subsidiaries of Anadarko are: Anadarko Gathering Company; Anadarko Trading Company; and Anadarko Algeria Corporation (Anadarko Algeria). In December 1994, the Company sold its wholly-owned subsidiary, Anadarko Petroleum of Canada Ltd. (Anadarko Canada). See Note 2.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Anadarko and its subsidiaries. All significant intercompany transactions have been eliminated. Certain amounts for prior years have been restated to conform to the current presentation.
CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1993, Anadarko adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." See Notes 12 and 14.
REVENUES Natural gas revenues generally are recorded using the sales method, whereby the Company recognizes natural gas revenues based on the amount of gas sold to purchasers on its behalf. All other revenues also are recorded using the sales method.
PRICE RISK MANAGEMENT Anadarko uses financial instruments to minimize the impact of price fluctuations for the Company and its customers. Anadarko's financial instruments currently are comprised of futures, swaps and options. Gains and losses on these activities are recognized in revenues for the periods to which they relate. Unrealized gains and losses are recorded as assets and liabilities on the balance sheet. See Note 5.
PROPERTIES AND EQUIPMENT The Company uses the full cost method of accounting for exploration and development activities as defined by the United States Securities and Exchange Commission (SEC). Under this method of accounting, the costs for unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that can be directly identified with acquisition, exploration and development activities, but does not include any costs related to production, general corporate overhead or similar activities. The sum of net capitalized costs and estimated future development and dismantlement costs is amortized using the unit-of-production method. Excluded from amounts subject to amortization are costs associated with unevaluated properties and major development projects. On a country-by-country basis, should the net capitalized costs exceed the estimated present value of future net cash flows from proved oil and gas reserves, such excess costs would be charged to current expense. Gain or loss on the sale or other disposition of oil and gas properties is not recognized unless significant amounts of oil and gas reserves are involved. Unsuccessful geothermal exploration costs are charged to expense. All other properties and equipment are stated at original cost, which does not purport to represent replacement or market values.
ENVIRONMENTAL CONTINGENCIES The Company accrues for environmental contingencies when liabilities are likely to occur and reasonable estimates can be made. In accordance with full cost accounting rules, the Company provides for environmental clean up costs associated with oil and gas activities as a component of its depreciation, depletion and amortization expense. Recoveries from third parties for environmental liabilities are not recognized unless collection is probable.
INTEREST CAPITALIZED The Company capitalizes interest on borrowed funds related to oil and gas expenditures that are not subject to amortization until completion of evaluation or development activities.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) INCOME TAXES The Company, excluding Anadarko Canada, files a U.S. consolidated federal income tax return. Deferred federal and state income taxes are provided on all significant temporary differences, except for those essentially permanent in duration, between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS The financial statements of Anadarko Canada have been translated to U.S. dollars. All balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the year; resulting translation adjustments are made directly to a separate component of stockholders' equity. Transaction adjustments are reported in net income. In prior years, deferred federal income taxes were not provided on translation adjustments because the earnings of Anadarko Canada were considered to be permanently invested. Due to the sale of Anadarko Canada in 1994, the cumulative foreign currency translation losses were transferred from stockholders' equity and included in disposition of foreign subsidiary on the income statement. See Note 2.
CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
ACCOUNTS PAYABLE, BANKS This account represents credit balances to the extent that checks issued have not been presented to the Company's banks for payment.
2. DISPOSITION OF FOREIGN SUBSIDIARY
In December 1994, Anadarko sold Anadarko Canada for $57,937,000. The sale price included $17,600,000 for the remaining Canadian properties, as well as Anadarko Canada's cash and other working capital, which included $34,055,000 of proceeds from property dispositions earlier in 1994. In connection with the sale, Anadarko recorded a charge of $5,567,000 before taxes ($6,635,000 after taxes) primarily due to a non-cash charge of $6,065,000 for cumulative foreign currency translation losses previously recorded as a reduction in stockholders' equity. The gain relating to the sale was taxable in the U.S. As a result, the Company recorded U.S. income tax expense of $17,454,000 on the taxable gain. The Company also reversed previously provided deferred Canadian taxes in the amount of $16,386,000 for a net income tax expense associated with the sale of $1,068,000. At the end of 1993, proved reserves of oil and gas for the Canadian properties were less than three percent of the Company's total proved reserves.
3. INVENTORIES
Inventories are stated at the lower of average cost or market. NGLs and natural gas, when sold from inventory, are charged to expense using the average-cost method. The major classes of inventories are as follows:
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4. PROPERTIES AND EQUIPMENT
A summary of the original cost of properties and equipment by classification follows:
Oil and gas properties are amortized using the unit-of-production method. All other properties are depreciated on the straight-line basis over the useful lives of the assets, which range from three to 25 years. Oil and gas properties include costs of $270,956,000 and $180,933,000 at December 31, 1994 and 1993, respectively, which were excluded from capitalized costs being amortized. These amounts represent costs associated with unevaluated properties and major development projects. Anadarko excludes all costs on a country-by-country basis until proved reserves are found or until it is determined that the costs are impaired. All excluded costs are reviewed quarterly to determine if impairment has occurred. During 1994, 1993 and 1992, the Company made provisions for impairments of international properties of $3,100,000, $6,500,000 and $21,000,000, respectively, which were related to oil and gas properties. These impairments related to unsuccessful drilling or related activities in China, Yemen and various other international locations. During 1993, the Company made a provision for impairment of geothermal properties of $500,000. Total interest costs incurred during 1994, 1993 and 1992 were $41,635,000, $38,000,000 and $36,620,000, respectively. Of these amounts, the Company capitalized $15,507,000, $8,577,000 and $8,374,000 during 1994, 1993 and 1992, respectively. Capitalized interest is included as part of the cost of oil and gas properties. The capitalization rates are based on the Company's weighted average cost of borrowings used to finance the expenditures. In addition to capitalized interest, the Company also capitalized internal costs of $37,898,000, $34,637,000 and $34,177,000 during 1994, 1993 and 1992, respectively. These internal costs were directly related to acquisition, exploration and development activities and are included as part of the cost of oil and gas properties.
5. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
- --------------- *The average rates in effect at December 31, 1994.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
5. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED) Anadarko has noncommitted lines of credit from several banks. The general provisions of these lines of credit provide for Anadarko to borrow funds for terms and rates offered from time to time by the banks. There are no fees associated with these lines of credit. The Company has a commercial paper program that allows Anadarko to borrow funds by issuing notes to investors for terms of up to 270 days, at rates as offered. The notes payable to banks and commercial paper in 1994 and 1993 have been classified as long-term debt in accordance with SFAS No. 6, "Classification of Short-term Obligations Expected to be Refinanced," under the terms of Anadarko's Bank Credit Agreements. In May 1994, the Company entered into a $250,000,000 Revolving Credit Agreement and a $150,000,000 364-Day Credit Agreement with a group of 11 commercial banks. Interest rates are based on either the reference rate, the rate of certificate of deposit, the Eurodollar rate or a combination thereof. The Agreements provide for commitment fees on the unused balances at a rate of 18.5/100 of one percent and 12.5/100 of one percent for the Revolving Credit Agreement and 364-Day Credit Agreement, respectively. The Revolving Credit Agreement will expire in 1999. The Agreements replaced the Revolving Credit Agreement entered into in February 1992. During 1994 and 1993, there were no outstanding borrowings under these Agreements. During 1994 and 1993, the Company had available $20,000,000 in a bank line of credit which was not used. The maximum interest rate for loans against the line was the reference rate of the bank. The line of credit is renewable annually, but may be withdrawn at any time by the bank. In 1994 and 1993, Anadarko maintained an average daily compensating balance of $1,000,000 for this line of credit. In March 1993, Anadarko issued $100,000,000 principal amount of 6 3/4% Notes due 2003, which are noncallable. Net proceeds from the offering were used to refinance a portion of the debt related to the acquisition of producing properties in December 1992, which was funded using noncommitted lines of credit and commercial paper. In June 1993, Anadarko called for redemption of its outstanding $100,000,000 principal amount of 6 1/4% Convertible Subordinated Debentures due 2014. Debentures in the principal amount of $99,778,000 were converted at a price of $34.20 per share into 2,917,276 shares of Anadarko common stock. The principal amount of $99,778,000 includes unamortized debt issuance costs, cash paid for fractional shares and forfeited interest expense for a net of $701,000. Debentures in the principal amount of $222,000 were redeemed for a total payment to debenture holders by the Company of $232,000 for principal, premium and interest. The cash portion of the redemption was funded through existing credit facilities. In October 1993, Anadarko issued $100,000,000 principal amount of 5 7/8% Notes due 2003, which are noncallable. Net proceeds from the offering were used to refinance outstanding borrowings incurred for general corporate purposes using noncommitted lines of credit and commercial paper. In October 1993, Anadarko filed a shelf registration with the SEC that permits the issuance of up to $300,000,000 in senior and subordinated debt securities and equity securities. Net proceeds, terms and pricing of offerings of securities issued under the shelf registration will be determined at the time of the offering. Anadarko has used similar shelf registrations since 1989 to provide added flexibility in financing strategies. As of December 31, 1994 and 1993, there had been no securities issued under the shelf registration.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
5. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED) Total sinking fund and installment payments related to long-term debt for the five years ending December 31, 1999 are shown below. The payments related to the redemption of the notes payable to banks and commercial paper are included in the amounts shown in a manner consistent with the terms for repayment of the Revolving Credit Agreement.
The following information discloses the fair value of the Company's financial instruments:
CASH AND CASH EQUIVALENTS The carrying amount reported on the balance sheet approximates fair value.
LONG-TERM DEBT The fair value of long-term debt at December 31, 1994 and 1993 is the value the Company would have to pay to retire the debt, including any premium or discount to the debt holder for the differential between stated interest rate and year-end market rate. The fair values are based on quoted market prices from Standards & Poor's Year-end Bond Guides and, where such quotes were not available, on the average rate in effect at year-end.
DERIVATIVE FINANCIAL INSTRUMENTS Anadarko uses financial instruments -- futures, swaps and options -- to fix a price on the Company's production volumes or to convert a customer's requested price structure to a price structure that is consistent with the Company's overall pricing strategy. Gains and losses are recorded when the related gas or oil production had been produced or delivered or the financial instrument expires. As a result, gains and losses are generally offset by similar changes in the price of natural gas and crude oil. Unrealized gains and losses are recorded as assets and liabilities on the balance sheet at fair market value as of the balance sheet date. While financial instruments are intended to reduce the Company's exposure to declines in the market price of natural gas and crude oil, the financial instruments may limit Anadarko's gain from increases in the market price of natural gas and crude oil.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
5. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED)
FUTURES Anadarko uses futures contracts to hedge the Company's production volume exposure to price risk and to minimize the Company's customers' exposure to price risk. Futures contracts are guaranteed settlement by the New York Mercantile Exchange (NYMEX) and have nominal credit risk. At year-end 1994, Anadarko had open futures contracts totaling 35 million cubic feet per day (MMcf/d) of the Company's natural gas production for February through April 1995 and August through September 1995. Anadarko also had open futures contracts for the Company's natural gas customers of 3 MMcf/d for February through September 1995. At year-end 1993, Anadarko had open futures contracts totaling 32 MMcf/d of the Company's natural gas production for February through August 1994.
SWAPS Anadarko uses swap agreements with third-parties to hedge against potential adverse effects of fluctuations in future prices for the Company's production and for the Company's customers. In addition, Anadarko uses basis swap agreements to hedge against potential adverse effects of fluctuations in the price differential between the NYMEX price at Henry Hub and the price at the market location of Anadarko's production or a customer's market location requirements. These energy swap agreements expose the Company to third-party credit risk to the extent the third-parties are unable to meet their monthly settlement commitment to the Company. The Company monitors the credit standing of the third-parties and anticipates the third-parties will be able to fully satisfy their obligations under the contracts. At year-end 1994, Anadarko had open basis swap agreements for the Company's production averaging 119 MMcf/d for the entire year of 1995 and averaging 30 MMcf/d for the years 1996 through 1999. In addition, the Company had open swap agreements for its customers of 20 MMcf/d for the year 1995 and open basis swap agreements for its customers of 28 MMcf/d for January through August 1995. At year-end 1993, Anadarko had open swap agreements for its customers of 46 MMcf/d for January 1994 through March 1995. The swap agreements discussed above include a swap agreement entered into in December 1993 for which Anadarko received a prepayment of $27,254,000. This swap is in conjunction with a fixed price gas purchase agreement that required Anadarko to make a $27,254,000 prepayment for gas, which will be delivered over the term of the swap agreement. Under the swap agreement, the Company will make payments to a third-party, based on an index price equal to the market value of the gas purchased under the related gas purchase agreement. The settlement period is the first of each month effective April 1994 through March 1995. The carrying amounts reported on the balance sheet represent fair value at year-end. The effect of the swap agreement is to convert the fixed price obligation to purchase gas into a market price obligation.
OPTIONS The Company generally uses options to fix a floor and a ceiling for prices on its production volumes. The Company also has used options to "straddle" a price, effectively setting a price above the then present market price at which the Company is willing to sell production volumes and a price below the then present market price at which the Company is willing to buy to supply third-party markets. Like futures, NYMEX options are guaranteed settlement and have nominal credit risk. Over-the-counter (OTC) options with third-parties have credit risks similar to swaps. At year-end 1994, Anadarko had open NYMEX options on 57 MMcf/d for puts and for calls in order to fix a range of prices (a "collar") for the Company's natural gas production during February through April 1995. At year-end 1993, Anadarko had open OTC options on 25 MMcf/d for puts and for calls as a straddle of the Company's natural gas production and third-party purchase requirements during February through March 1994.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
5. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED)
INTEREST RATE SWAP OPTION AGREEMENT In October 1993, Anadarko accepted a payment of $2,600,000 granting the purchaser the option to enter into a nine-year interest rate swap agreement with the Company. The option was exercisable in October 1994. This agreement, if exercised, would have effectively fixed the rate the Company would have paid on a notional $100,000,000 of its floating interest rate debt at six percent for nine years. The $2,600,000 payment and the related agreement hedged the Company's floating interest rate debt, which was 3.44 percent at December 31, 1993. The option was not exercised and, as a result, the Company recorded a reduction to interest expense of $2,600,000 during the fourth quarter of 1994.
6. STOCK AND STOCK OPTIONS Following is a schedule of the changes in the Company's shares of common stock:
In each quarter of 1994, 1993 and 1992, dividends of 7.5 cents per share were paid to holders of common stock. Under the most restrictive provisions of the various credit agreements, which limit the payment of dividends by the Company, retained earnings of $249,599,000, $464,166,000 and $256,895,000 were not restricted as to the payment of dividends at December 31, 1994, 1993 and 1992, respectively. During 1994, 1993 and 1992, the Company acquired treasury stock only as a result of stock option exercises or restricted stock transactions. Anadarko has four stock option plans -- the 1993 Stock Incentive Plan, the 1988 Stock Option Plan for Non-employee Directors, the 1987 Stock Option Plan and the 1986 Stock Option Plan -- under which key employees and directors of the Company may be granted options to purchase shares of Anadarko common stock. Incentive stock options and non-qualified stock options have a maximum term of ten years from the date of grant and are issued at the market value of Anadarko stock on the date of grant. The options vest over time and may be exercised no earlier than one year from the date of grant. In addition, the 1993 Stock Incentive Plan and the 1987 Stock Option Plan provide that up to 800,000 and 400,000 shares of common stock, respectively, which may be granted under the Plans, may be granted as restricted stock. Generally, restricted stock is subject to forfeiture restrictions and cannot be sold, transferred or disposed of during the restriction period. The holders of the restricted stock have all the rights of a stockholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to such shares. During 1994 and 1993, the Company issued 31,950 and 110,700 shares, respectively, of restricted stock at a market value of $1,669,000 and $4,429,000, respectively.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
6. STOCK AND STOCK OPTIONS -- (CONTINUED) Unexercised stock options do not have a dilutive effect on earnings per common share. Information regarding the Company's stock option plans is summarized below:
The Company had a Restricted Stock Plan which covered 400,000 shares of common stock, all of which were granted in 1987 to certain key officers of the Company. Shares were subject to forfeiture restrictions and could not be sold, transferred or disposed of during the restriction period. The employees had all the rights of a stockholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to such shares. The forfeiture restrictions lapsed as to ten percent of the shares granted on the date of stockholders' approval and lapsed as to an additional ten percent on each anniversary of the date of grant. In November 1992, all of the remaining forfeiture restrictions lapsed, due to an acceleration of vesting of benefits.
7. FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The following is an analysis of currency translation adjustments reflected in stockholders' equity:
8. STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
The amounts of cash paid for interest (net of amounts capitalized) and income taxes are as follows:
In July 1993, $99,778,000 principal amount of the 6 1/4% Convertible Subordinated Debentures due 2014 were converted into 2,917,276 shares of Anadarko common stock.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
9. TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS
During 1989, Anadarko Algeria entered into a production sharing agreement (PSA) with Sonatrach, the national oil and gas enterprise of Algeria. Sonatrach is the beneficial owner of 10.2 percent of the Company's common stock. The PSA gives Anadarko Algeria the right to explore for and produce liquid hydrocarbons in Algeria, subject to the sharing of production with Sonatrach. The PSA provides for a commitment from Anadarko Algeria of over $100,000,000 of exploration costs (including the cost of certain assets) over a ten-year period, subject to certain provisions. Anadarko Algeria has obtained two partners to participate in the PSA and share in the exploration cost commitment. Anadarko believes this obligation will be fully met in 1995. During 1994, the Company and its two partners also acquired, subject to approval by Algerian authorities, a minority interest in a PSA covering two additional blocks in the same region, which are operated by BHP Petroleum (Algerie) Inc., where an exploration program is already underway. The Company believes anticipated operating cash flows and existing credit facilities will be sufficient to meet its share of these costs. As of December 31, 1994, Anadarko Algeria's total net investment in Algeria for exploration and related activities was $105,597,000, of which approximately $33,189,000 was incurred in 1994. The current political unrest in Algeria has been the subject of numerous news media reports. The Company is closely monitoring the situation and has taken reasonable and prudent steps to insure the safety of employees working in the remote regions of the Sahara Desert. Anadarko is presently unable to predict with certainty any effect the current situation may have on activity planned for 1995 and beyond. However, the situation has not had any material effect on the Company's operations. The Company's activities in Algeria also are subject to the general risks associated with all foreign operations. The Company purchases oil field services from a number of companies including Dresser Industries, Inc. and its affiliates and subsidiaries. The aggregate amount paid to Dresser Industries, Inc. and its affiliates and subsidiaries was approximately $671,000 in 1994, $641,000 in 1993 and $3,256,000 in 1992. James L. Bryan, a director of the Company, is Senior Vice President Operations of Dresser Industries, Inc. Approximately $155,000 and $81,000 was paid to L. G. Barcus and Sons, Inc. during 1993 and 1992, respectively, for consulting fees concerning the construction of facilities for the Company in 1993. There were no amounts paid by the Company to L.G. Barcus and Sons, Inc. during 1994. Larry Barcus, a director of the Company, is the Chairman of L. G. Barcus and Sons, Inc., a general contractor with operations nationwide. The Company's natural gas is sold to interstate and intrastate gas pipelines, direct end-users, industrial users, local distribution companies and gas marketers. Crude oil and condensate are sold to marketers, gatherers and refiners. NGLs are sold to direct end-users, refiners and marketers. These purchasers are located in the United States, Canada and Mexico. The majority of the Company's receivables are paid within two months following the month of purchase. The Company generally performs a credit analysis of customers prior to making any sales to new customers. Based upon this credit analysis, the Company may require a standby letter of credit or a financial guarantee. In 1994, sales to Indiana Gas Company Incorporated were $67,348,000, which was more than ten percent of the Company's total revenues. In 1993, sales to CNG Transmission Corporation and its subsidiaries were $75,378,000 (of which $60,191,000 were to East Ohio Gas Company, a wholly-owned subsidiary of CNG) and sales to Indiana Gas Company Incorporated were $65,754,000, each of which accounted for more than ten percent of the Company's total revenues. In 1992, sales to CNG Transmission Corporation and its subsidiaries were $42,570,000 (of which $36,715,000 were to East Ohio Gas Company) and sales to Indiana Gas Company Incorporated were $39,869,000, each of which accounted for more than ten percent of the Company's total revenues.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
10. OPERATING EXPENSES
Operating expenses by category are as follows:
11. OTHER TAXES
Significant taxes other than income taxes are as follows:
12. INCOME TAXES
Income tax expense, including deferred amounts, is summarized as follows:
The Company's current federal income tax expense has been determined under the alternative minimum tax system.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
12. INCOME TAXES -- (CONTINUED) Total income taxes were different than the amounts computed by applying the statutory income tax rate to Income before Income Taxes and Cumulative Effect of Changes in Accounting Principles. The sources of these differences are as follows:
The tax benefit of compensation expense for tax purposes in excess of amounts recognized for financial accounting purposes has been credited directly to stockholders' equity. For 1994 and 1993, the tax benefit amounted to $968,000 and $2,743,000, respectively. SFAS No. 109 was adopted by the Company in the first quarter of 1993 and increased net income by $87,071,000. SFAS No. 109 requires a change from the deferred method of accounting for income taxes to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable to those years in which the temporary differences between financial statement carrying amounts and tax bases are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period when the change is enacted. The Omnibus Budget Reconciliation Act of 1993, which was enacted in August 1993, raised the top corporate income tax rate from 34 to 35 percent retroactive to January 1, 1993. As a result, Anadarko recorded a charge to earnings of $11,249,000 in the third quarter of 1993.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
12. INCOME TAXES -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities (assets) at December 31, 1994 and 1993 are as follows:
The Company has determined that the deferred tax assets will be realized and a valuation allowance for such assets is not required. Under the deferred method of accounting for income taxes which was applied in 1992 and prior years, deferred income taxes applicable to each year's net timing differences were provided based on the tax rates in effect during that year and no adjustments were made to the deferred income tax liability amounts for subsequent changes in tax rates. Deferred income tax expense for the year ended December 31, 1992 resulted from timing differences in the recognition of revenue and expense for tax and financial accounting purposes. The source of these differences is as follows:
In December 1994, the Company sold Anadarko Canada. Under current accounting rules, Anadarko had not previously provided deferred U.S. income taxes on the amount by which its investment in Anadarko Canada exceeded the tax basis or on the cumulative foreign currency translation losses because these temporary differences were previously considered permanent in duration. See Note 2. Alternative minimum tax can be carried forward indefinitely as a credit against regular tax liability. The alternative minimum tax credit generated in 1994 has reduced deferred federal income tax expense. To the extent the cumulative remaining carryforward is utilized against future income taxes, accumulated deferred income taxes will be restored at the then current rate. Net operating loss and alternative minimum tax credit carryforwards at December 31, 1994, which are available for future utilization on federal income tax returns, are as follows:
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
13. LEASE COMMITMENTS
The Company has various commitments under non-cancelable operating lease agreements for buildings, facilities and equipment, the majority of which expire at various dates through 2002. The leases are expected to be renewed or replaced as they expire. At December 31, 1994, future minimum rental payments due under operating leases are as follows:
Total rental expense amounted to $8,441,000, $9,207,000 and $8,212,000 in 1994, 1993 and 1992, respectively.
14. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLANS The Company has a non-contributory defined benefit pension plan covering all permanent employees, except certain employees in foreign countries. The benefits for this plan are based primarily on years of service and pay near retirement. Plan assets consist principally of fixed income investments and equity securities. The Company funds the plan with annual contributions as determined in accordance with the Employee Retirement Income Security Act of 1974 and Internal Revenue Code limitations. In 1994, the Plan was amended, effective January 1, 1992, to bring the definition of compensation in compliance with Section 414(s) of the Internal Revenue Code of 1986, as amended (Code). Effective January 1, 1993, a rollover provision was added to the Plan allowing a member's retirement benefit to be rolled over to another qualified pension plan or Individual Retirement Account. Effective January 1, 1994, a section was added preserving benefits of those members whose accrued benefit under the Plan was determined based on compensation received prior to January 1, 1994, which exceeded the limit on compensation which may be considered for Plan purposes commencing January 1, 1994. Also effective January 1, 1994, provisions were added to clarify the treatment of employees of Anadarko Canada who transfer their employment to Anadarko. Finally, effective July 1, 1994, a section was added to the Plan to allow members who had attained age 50 by July 1, 1994, to retire from Anadarko with a pension benefit as if they had attained age 55, if they were working at one of two specific locations and whose employment was terminated in conjunction with the closing of these specific locations. During 1992, the plan was amended to increase the percent of average compensation returned in benefit payments, which increased the actuarial liability by $3,920,000. In addition, the plan was automatically updated in 1992 to reflect cost-of-living increases to the Code Section 415 limit on benefits and the Code Section 401(a)(17) limit on considered compensation, which increased the actuarial liability by $100,000. The Company has an equalization plan to ensure payments to certain employees of amounts to which they are already entitled under the provisions of the pension plan, but which are subject to limitations imposed by federal tax laws. This plan is unfunded and payable solely from the general assets of the Company. In addition, the Company has a pension plan for non-employee directors, which is unfunded.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
14. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The 1994, 1993 and 1992 pension cost related to these plans includes the following components:
The special termination benefits incurred in 1994 relate to the closing of several plant locations. The Company had an additional minimum liability of $1,591,000 and $947,000 at December 31, 1994 and 1993, respectively, which represents the difference between the unfunded accumulated benefit obligation and the accrued pension cost related to the equalization plan. This liability was offset by an intangible asset of an equal amount. The funded status of the plans at December 31, 1994 and 1993 is as follows:
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
14. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The Company's assumptions used as of December 31 in determining the pension cost and pension liability were as follows:
EMPLOYEE SAVINGS PLAN The Company has an employee savings plan (ESP) that is a defined contribution plan. The Company matches a portion of employees' contributions with shares of the Company's common stock. Participation in the ESP is voluntary and all regular employees of the Company are eligible to participate. The Company charged to expense plan contributions of $3,579,000, $3,426,000 and $2,842,000 during 1994, 1993 and 1992, respectively.
OTHER POSTRETIREMENT BENEFITS As of January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Company recognized the cumulative transition obligation of $19,767,000 as the effect of an accounting change in the first quarter of 1993, resulting in a decrease to net income of $9,668,000 (net of $5,416,000 deferred income tax benefit). For the year ended December 31, 1992, the Company recognized postretirement benefit costs other than pensions as incurred. As a result, the amounts recognized as expense in 1992 are not comparable to 1993 and 1994. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees, including employees in foreign countries, may become eligible for these benefits if they reach retirement age while working for the Company. These benefits and similar benefits for active employees are provided through contributory and non-contributory benefit plans. Health care benefits are funded by contributions from the Company and its employees, with retiree contributions adjusted per the provisions of the Company's health care plans. The Company's current policy is to fund the cost of postretirement health care benefits on a pay-as-you-go basis. The Company's retiree life insurance plan is noncontributory and is currently fully funded through insurance premiums paid by the Company. The following table sets forth the Company's postretirement benefits other than pension combined liability as of December 31, 1994 and 1993:
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
14. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The Company charges postretirement benefits other than pensions as accrued, based on actuarial calculations for each plan. The net annual costs for postretirement benefits other than pensions for 1994 and 1993 included the following components:
The Company's assumptions used as of December 31 in determining postretirement benefits other than pension cost and the accumulated benefit obligation shown above were as follows:
The health care trend rate for the health care plans starts at the maximum rate for the current year and is gradually reduced to an ultimate rate for 2001 and later years. A change in the health care trend rate of one percent would change the annual cost in 1994 by approximately $742,000 and would change the accumulated postretirement benefit obligation in 1994 by approximately $2,775,000. Retiree life insurance expense was $78,000 for 1992 and the cost of providing health care benefits for 129 retirees in 1992 was $375,000.
15. CONTINGENCIES
ENVIRONMENTAL In January 1994, the Company received a Special Notice for Remedial Design/Remedial Action from the Environmental Protection Agency (EPA) in connection with the disposal of oil and gas exploration and production wastes at the PAB Oil Superfund site (the "Site") at Abbeville, Louisiana. The Company had previously received a Notice of Potential Liability from the EPA as one of the potentially responsible parties (PRP) in connection with this Site. In the Notice of Potential Liability, the EPA attributed 40 barrels of waste to the Company which was disposed of by a third-party contractor on behalf of the Company. In October 1994, Anadarko signed an Administrative Order on Consent with the EPA for $8,040 in settlement of the Company's potential liability. On December 17, 1993, the Company received a notice from the Department of Justice in the State of California indicating the Company may be a PRP for the study, cleanup and closure of the waste facility owned by Geothermal, Inc. in Middletown, California (the "GI site"). Anadarko's records indicate the disposal of a limited number of barrels of drilling mud at the GI site in 1982. During the first quarter of 1994, the Company, along with other PRPs, became a party to a Cost Sharing, Joint Defense and Confidentiality Agreement, effective October 20, 1993. The Company believes its share of costs in connection with the cleanup of the GI site will not have a material effect on its financial position or results of operations and will be approximately $35,000 to $70,000.
ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
15. CONTINGENCIES -- (CONTINUED)
As part of the 1992 acquisition of properties from Atlantic Richfield Company (ARCO), the Company conducted an extensive environmental audit of the acquired properties. To the extent that significant environmental problems were found to exist during the audit, ARCO had contractually agreed, with certain limitations, to correct such problems or take back the affected properties and refund the pro rata share of the purchase price attributable to the properties pursuant to the terms of the underlying asset purchase and sale agreement. Negotiations with ARCO continue to determine compensation due the Company from ARCO for certain environmental conditions which have been found on the properties. The Company believes any liability in connection with any environmental conditions existing as of the date of purchase on the properties rest with ARCO and, as such, the Company believes it will not have any material potential liability related thereto.
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
OIL AND GAS PRODUCTION
The following is historical revenue and cost information relating to the Company's oil and gas operations. Excluded from amounts subject to amortization as of December 31, 1994 and 1993 are $270,956,000 and $180,933,000, respectively, of costs associated with unevaluated properties and major development projects. The majority of the evaluation activities are expected to be completed in five years.
COSTS EXCLUDED FROM AMORTIZATION
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following schedule includes only the results of operations from the production and sale of natural gas, crude oil, condensate and NGLs. Results of operations from gas marketing and gas gathering are excluded. The income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include depreciation, depletion and amortization allowances, after giving effect to permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas production.
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
OIL AND GAS RESERVES
The following table shows estimates prepared by the Company's engineers of proved reserves and proved developed reserves, net of royalty interests, of natural gas, crude oil, condensate and NGLs owned at year-end and changes in proved reserves during the last three years. Volumes for natural gas are in billions of cubic feet (Bcf) at a pressure base of 14.73 pounds per square inch and volumes for oil, condensate and NGLs are in millions of barrels (MMBbls). Total volumes are in millions of energy equivalent barrels (MMEEBs). For this computation, one barrel is the equivalent of six thousand cubic feet. The Company's reserves increased in 1994 due to exploration and development drilling and improved recovery. During 1994, the Company added 44 MMBbls of oil reserves, based on preliminary development studies and the contractual rights granted under the Sonatrach agreement. The Company's reserve additions in 1993 came primarily from exploration and development drilling and improved recovery. Reserve revisions for 1993 included an increase of about 60 Bcf to reflect a portion of the effect of the Kansas Corporation Commission order which increased production allowables in the Hugoton Field. This was offset by a modest downward revision to prior estimates of oil and condensate reserves due to weak oil prices at year-end 1993. The Company's reserve additions in 1992 included the purchase of oil and gas properties from Atlantic Richfield Company. This acquisition added 26.4 MMBbls of crude oil, condensate and NGLs and 53.4 Bcf of natural gas, or about 35 MMEEBs. NGLs are included with oil and condensate reserves and the associated shrinkage has been deducted from the gas reserves. The Company emphasizes that the volumes of reserves shown below are estimates which, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data.
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
OIL AND GAS RESERVES -- (CONTINUED)
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
DISCOUNTED FUTURE NET CASH FLOWS
Estimates of future net cash flows from proved reserves of gas, oil, condensate and NGLs were made in accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing Activities". The amounts were prepared by the Company's engineers and are shown in the following table. The estimates are based on prices at year-end. Gas prices are escalated only for fixed and determinable amounts under provisions in some contracts. Estimated future cash inflows are reduced by estimated future development and production costs based on year-end cost levels, assuming continuation of existing economic conditions, and by estimated future income tax expense. Tax expense is calculated by applying the existing statutory tax rates, including any known future changes, to the pretax net cash flows, less depreciation of the tax basis of the properties and depletion allowances applicable to the gas, oil, condensate and NGLs production. At December 31, 1994, the present value (discounted at ten percent) of future net revenues from Anadarko's proved reserves, before income taxes, was $2.01 billion (stated in accordance with the regulations of the Securities Exchange Commission and the Financial Accounting Standards Board). The increase of 11 percent compared to 1993 primarily is due to the additions of proved reserves related to successful drilling in Algeria and offshore in the Gulf of Mexico, offset partially by a decrease in natural gas prices. The present value of future net revenues does not purport to be an estimate of the fair market value of Anadarko's proved reserves. An estimate of fair value would also take into account, among other things, anticipated changes in future prices and costs, the expected recovery of reserves in excess of proved reserves and a discount factor more representative of the time value of money and the risks inherent in producing oil and gas.
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
The following table shows summary quarterly financial data for 1994 and 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" in the Anadarko Petroleum Corporation Proxy Statement, dated March 20, 1995 ("Proxy Statement"), which is incorporated herein by reference. See list of "Executive Officers of the Registrant" appearing under Item 4 of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Directors" and "Compensation and Benefits Committee Report on Executive Compensation" in the Proxy Statement, which are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principle Holders -- Security Ownership of Management and Security Ownership of Certain Beneficial Owners" in the Proxy Statement, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Voting Securities and Principle Holders -- Transactions with Management and Others" in the Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report or incorporated by reference:
(1) The consolidated financial statements of Anadarko Petroleum Corporation are listed on the Index to this report, page 30.
(2) Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
- --------------- The total amount of securities of the registrant authorized under any instrument with respect to long-term debt not filed as an Exhibit does not exceed ten percent of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees, upon request of the Securities and Exchange Commission, to furnish copies of any or all of such instruments to the Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended December 31, 1994.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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
March 7, 1995 By [MICHAEL E. ROSE] ------------------------------------ (Michael E. Rose, Senior Vice President, Finance and Chief Financial Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 7, 1995.
- --------------- * Signed on behalf of each of these persons and on his own behalf:
By [MICHAEL E. ROSE] ------------------------------------------------- (Michael E. Rose, Attorney-in-Fact)
GRAPHICS APPENDIX LIST
EXHIBIT INDEX
- --------------- The total amount of securities of the registrant authorized under any instrument with respect to long-term debt not filed as an Exhibit does not exceed ten percent of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees, upon request of the Securities and Exchange Commission, to furnish copies of any or all of such instruments to the Securities and Exchange Commission.