CONOCOPHILLIPS - Quarter Report: 2018 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2018

or

For the transition period from              to             

Commission file number: 001-32395

ConocoPhillips

(Exact name of registrant as specified in its charter)

600 North Dairy Ashford, Houston, TX 77079

(Address of principal executive offices) (Zip Code)

281-293-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The registrant had 1,151,241,888 shares of common stock, $.01 par value, outstanding at September 30, 2018.

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CONOCOPHILLIPS

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PART I. FINANCIAL INFORMATION

*Certain amounts have been reclassified to conform to the current-period presentation resulting from the adoption of ASU No. 2017-07. See Note 2—Changes in Accounting Principles, for additional information.

See Notes to Consolidated Financial Statements.

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*Plans for which ConocoPhillips is not the primary obligor, primarily those administered by equity affiliates.

**See Note 2—Changes in Accounting Principles and Note 16—Accumulated Other Comprehensive Loss for additional information relating to the adoption of ASU No. 2016-01.

See Notes to Consolidated Financial Statements.

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See Notes to Consolidated Financial Statements.

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*Restated to include $211 million of restricted cash at January 1, 2018. See Note 2—Changes in Accounting Principles for additional information relating to the adoption of ASU No. 2016-18. Restricted cash totaling $224 million is included in the “Other assets” line of our Consolidated Balance Sheet as of September 30, 2018.

See Notes to Consolidated Financial Statements.

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Note 1—Basis of Presentation

The interim-period financial information presented in the financial statements included in this report is unaudited and, in the opinion of management, includes all known accruals and adjustments necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature unless otherwise disclosed. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2017 Annual Report on Form 10-K.

Note 2—Changes in Accounting Principles

We adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” and its amendments issued by the provisions of ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers,” collectively Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” (ASC Topic 606) beginning January 1, 2018. ASC Topic 606 outlines a single comprehensive model for an entity to use in accounting for revenue arising from all contracts with customers except where revenues are in scope of another accounting standard. The ASU superseded the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASC Topic 606 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods and services. ASC Topic 606 also requires certain additional revenue-related disclosures. The adoption of ASC Topic 606 did not have a material impact on our consolidated financial statements. See Note 20—Sales and Other Operating Revenues for additional information related to this ASC.

We adopted the provisions of FASB ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Liabilities,” (ASU No. 2016-01) beginning January 1, 2018. The ASU, among other things, requires an entity to record the changes in fair value of equity investments, other than investments accounted for using the equity method, within net income. Under this ASU, an entity is no longer able to recognize unrealized holding gains and losses on available-for-sale securities in other comprehensive income and instead must recognize them in the income statement. See Note 7—Investment in Cenovus Energy and Note 16—Accumulated Other Comprehensive Loss for additional information relating to this ASU.

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The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2018, for the adoption of ASC Topic 606 and ASU No. 2016-01 were as follows:

For discussion of adjustments for ASU No. 2016-01 and ASC Topic 606, see Note 7—Investment in Cenovus Energy and Note 20—Sales and Other Operating Revenues, respectively.

We adopted the provisions of FASB ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” beginning January 1, 2018. We retrospectively applied the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on plan assets, amortization of prior service cost/credit, recognized net actuarial loss/gain, settlement expense, curtailment loss/gain, and special termination benefits have been reclassified from the “Production and operating expenses,” “Selling, general and administrative expenses,” and “Exploration expenses” lines to the “Other expenses” line on our consolidated income statement. We elected to apply the practical expedient which allows us to reclassify amounts disclosed previously in the employee benefit plans footnote as the basis for applying retrospective presentation for prior comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the other components of net periodic benefit costs will not be included in amounts capitalized in inventory or properties, plants, and equipment (PP&E).

The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and other postretirement employee benefits plans on our consolidated income statement was as follows:

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We adopted the provisions of FASB ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” beginning January 1, 2018. This ASU clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. We have made an accounting policy election to classify distributions received from equity method investees using the nature of the distribution approach which classifies distributions received from investees as either cash inflows from operating activities or cash inflows from investing activities in the statement of cash flows based on the nature of the activities of the investee that generated the distribution. The impact of adopting this ASU was not material to prior presented periods.

We adopted the provisions of FASB ASU No. 2016-18, “Restricted Cash,” beginning January 1, 2018. This ASU requires amounts deemed restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows, and presentation should permit a reconciliation when cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet. We have amounts deposited in statutory bank accounts in certain countries to satisfy asset retirement obligations (ARO). These amounts are deemed restricted cash and are included in the “Other assets” line of our consolidated balance sheet. This standard is required to be applied retrospectively to all periods presented, but the impact in those periods was not material.

Note 3—Variable Interest Entities (VIEs)

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on our significant VIEs follows:

Australia Pacific LNG Pty Ltd (APLNG)

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary of APLNG because we share with Origin Energy and China Petrochemical Corporation (Sinopec) the power to direct the key activities of APLNG that most significantly impact its economic performance, which involve activities related to the production and commercialization of coalbed methane, as well as liquefied natural gas (LNG) processing and export marketing. As a result, we do not consolidate APLNG, and it is accounted for as an equity method investment.

As of September 30, 2018, we have not provided any financial support to APLNG other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of APLNG. See Note 6—Investments, Loans and Long-Term Receivables, and Note 12—Guarantees, for additional information.

Marine Well Containment Company, LLC (MWCC)

MWCC provides well containment equipment and technology and related services in the deepwater U.S. Gulf of Mexico. Its principal activities involve the development and maintenance of rapid-response hydrocarbon well containment systems that are deployable in the Gulf of Mexico on a call-out basis. We have a 10 percent ownership interest in MWCC, and it is accounted for as an equity method investment because MWCC is a limited liability company in which we are a Founding Member and exercise significant influence through our permanent seat on the ten-member Executive Committee responsible for overseeing the affairs of MWCC. In 2016, MWCC executed a $154 million term loan financing arrangement with an external financial institution whose terms required the financing be secured by letters of credit provided by certain owners of MWCC, including ConocoPhillips. In connection with the financing transaction, we issued a letter of credit of $22 million which can be drawn upon in the event of a default by MWCC on its obligation to repay the proceeds of the term loan. The fair value of this letter of credit is immaterial and not recognized on our consolidated balance sheet. MWCC is considered a VIE, as it has entered into arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary and do not consolidate MWCC because we share the power to govern the business and operation of the company and to undertake certain obligations that most significantly impact its economic performance with nine other unaffiliated owners of MWCC.

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At September 30, 2018, the carrying value of our equity method investment in MWCC was $132 million. We have not provided any financial support to MWCC other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of MWCC.

Note 4—Inventories

Inventories consisted of the following:

Inventories valued on the last-in, first-out (LIFO) basis totaled $283 million and $341 million at September 30, 2018 and December 31, 2017, respectively. The estimated excess of current replacement cost over LIFO cost of inventories was $100 million and $124 million at September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018, crude oil and natural gas inventory includes $139 million of inventory received as part of a settlement agreement reached with Petróleos de Venezuela, S.A. (PDVSA) under an International Chamber of Commerce arbitration award. As of the end of October 2018, substantially all of the inventory recognized during the third quarter related to this settlement has been sold. For information about the settlement, see Note 13—Contingencies and Commitments.

Note 5—Assets Held for Sale, Dispositions, Acquisitions and Other Planned Transactions

Assets Held for Sale and Other Planned Acquisitions

In the second quarter of 2017, we signed a definitive agreement to sell our interests in the Barnett, and the assets met the asset held for sale criteria. As of September 30, 2017, we had recorded before-tax impairments of $568 million to reduce our carrying value of these assets to fair value. The agreement was terminated in the fourth quarter of 2017, and we continued to market the asset in 2018. In the first quarter of 2018, we recorded a before-tax impairment of $44 million to reduce the net carrying value to fair value of $250 million based on information gathered during marketing efforts. Marketing efforts ceased in April 2018, and the assets were reclassified as held for use in the second quarter of 2018. In the third quarter of 2018, we signed a definitive agreement to sell our interest in the Barnett to Lime Rock Resources for approximately $230 million, subject to customary adjustments. The transaction is expected to close by year-end 2018. In the third quarter of 2018, we recorded a before-tax impairment of $43 million to reduce the carrying value to fair value less costs to sell. As of September 30, 2018, our Barnett asset had a net carrying value of $201 million and was considered held for sale resulting in the reclassification of $250 million of PP&E to “Prepaid expenses and other current assets” and $49 million of noncurrent liabilities, primarily ARO, to “Other accruals” on our consolidated balance sheet. The before-tax loss associated with our interests in the Barnett, including the impairments noted above, was $59 million and $575 million for the nine-month periods of 2018 and 2017, respectively. The Barnett results of operations are reported in our Lower 48 segment.

In July 2018, we entered into an agreement to sell a ConocoPhillips subsidiary to BP. The subsidiary will hold a 16.5 percent interest in the BP-operated Clair Field in the United Kingdom and we will retain a 7.5 percent interest in the field. At the same time, we entered into an agreement with BP to acquire their 39.2 percent nonoperated interest in the Greater Kuparuk Area in Alaska, including their 38 percent interest in the Kuparuk Transportation Company (Kuparuk Assets). Both transactions are subject to regulatory approvals and are expected to close simultaneously in late 2018. Excluding customary adjustments, the transactions are expected

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to be cash neutral. Depending on the timing of regulatory approvals, we anticipate recognizing a noncash gain between $0.5 billion to $1.0 billion on completion of the sale of the ConocoPhillips subsidiary holding 16.5 percent of the Clair Field, after customary adjustments and foreign exchange impacts. As of September 30, 2018, our 16.5 percent interest in the Clair Field had a net carrying value of approximately $945 million consisting primarily of $1.552 billion of PP&E, $544 million of deferred tax liabilities, and $63 million of ARO. As of September 30, 2018, our 16.5 percent interest in the Clair Field was considered held for sale resulting in the reclassification of the $1.552 billion of PP&E to “Prepaid expenses and other current assets” and $63 million of ARO to “Other accruals” on our consolidated balance sheet. The before-tax earnings associated with our 16.5 percent interest in the Clair Field was $13 million and $1 million for the nine months ended September 30, 2018 and 2017, respectively. Results of operations for our interest in the Clair Field are reported within our Europe and North Africa segment and the Kuparuk Assets are included in our Alaska segment.

Asset Dispositions

In the first quarter of 2018, we completed the sale of certain properties in the Lower 48 segment for net proceeds of $112 million. No gain or loss was recognized on the sale. In the second quarter of 2018, we completed the sale of a package of largely undeveloped acreage in the Lower 48 segment for net proceeds of $105 million. No gain or loss was recognized on the sale. In September 2018, we completed a noncash exchange of undeveloped acreage in the Lower 48 segment. The transaction was recorded at fair value resulting in the recognition of a $56 million before-tax gain which is reflected as “Gain on dispositions” in our consolidated income statement. In the first nine months of 2018, we completed several other dispositions.

In the second quarter of 2017, we completed the sale of our 50 percent nonoperated interest in the Foster Creek Christina Lake (FCCL) Partnership, as well as the majority of our western Canada gas assets to Cenovus Energy. Consideration for the transaction included a five-year uncapped contingent payment. The contingent payment, calculated on a quarterly basis, is $6 million Canadian dollars (CAD) for every $1 CAD by which the Western Canada Select quarterly average crude price exceeds $52 CAD per barrel. Contingent payments received during the five-year period will be reflected as “Gain on dispositions” in our consolidated income statement. In 2018, we recorded gains on dispositions for these contingent payments of $50 million in the second quarter and $45 million in the third quarter.

In the third quarter of 2017, we completed the sale of our interests in the San Juan Basin to an affiliate of Hilcorp Energy Company for $2.5 billion in cash after customary adjustments and recognized a loss on disposition of $22 million. The transaction includes a contingent payment of up to $300 million. The six-year contingent payment is effective beginning January 1, 2018, and is due annually for the periods in which the monthly U.S. Henry Hub price is at or above $3.20 per million British thermal units. The San Juan Basin results of operations were reported within our Lower 48 segment.

Acquisition

In the second quarter of 2018, we obtained regulatory approvals for the agreement with Anadarko Petroleum Corporation to acquire its 22 percent nonoperated interest in the Western North Slope of Alaska, as well as its interest in the Alpine Pipeline.    The transaction was completed in May 2018 for $386 million, after customary adjustments. These assets are included in our Alaska segment.

Other Planned Disposition

On October 1, 2018, we entered into an agreement to sell our 30 percent interest in Greater Sunrise Fields to the government of Timor-Leste for $350 million, subject to customary adjustments. The transaction is conditional on the funding approval from the Timor-Leste Council of Ministers and National Parliament, as well as regulatory approvals and partner pre-emption rights. We expect it to close in early 2019. These assets are included in our Asia Pacific and Middle East segment.

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Note 6—Investments, Loans and Long-Term Receivables

APLNG

APLNG’s $8.5 billion project finance facility consists of financing agreements executed by APLNG with the Export-Import Bank of the United States for approximately $2.9 billion, the Export-Import Bank of China for approximately $2.7 billion, and a syndicate of Australian and international commercial banks for approximately $2.9 billion. All amounts have been drawn from the facility. APLNG made its first principal and interest payment in March 2017 and will continue to make bi-annual payments until March 2029. APLNG made a voluntary repayment of $1.4 billion to the Export-Import Bank of China in September 2018. At the same time, APLNG was successful in obtaining a United States Private Placement (USPP) bond facility of $1.4 billion. Interest payments will commence in March 2019 and principal payments in September 2023, with bi-annual payments due on the facility until September 2030. At September 30, 2018, a balance of $7.2 billion was outstanding on the facilities. See Note 12—Guarantees, for additional information.

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. See Note 3—Variable Interest Entities (VIEs), for additional information.

During the first half of 2017, the outlook for crude oil prices deteriorated, and as a result of significantly reduced price outlooks, the estimated fair value of our investment in APLNG declined to an amount below carrying value. Based on a review of the facts and circumstances surrounding this decline in fair value, we concluded in the second quarter of 2017 the impairment was other than temporary under the guidance of FASB ASC Topic 323, “Investments—Equity Method and Joint Ventures,” and the recognition of an impairment of our investment to fair value was necessary. Accordingly, we recorded a noncash $2,384 million before- and after-tax impairment in our second-quarter 2017 results. Fair value was estimated based on an internal discounted cash flow model using estimated future production, an outlook of future prices from a combination of exchanges (short-term) and pricing service companies (long-term), costs, a market outlook of foreign exchange rates provided by a third party, and a discount rate believed to be consistent with those used by principal market participants. The impairment was included in the “Impairments” line on our consolidated income statement.

At September 30, 2018, the carrying value of our equity method investment in APLNG was $7,676 million. The balance is included in the “Investments and long-term receivables” line on our consolidated balance sheet.

Distributions from APLNG commenced in April 2018.

FCCL

On May 17, 2017, we completed the sale of our 50 percent nonoperated interest in the FCCL Partnership, as well as the majority of our western Canada gas assets, to Cenovus Energy. For additional information on the Canada disposition and our investment in Cenovus Energy, see Note 5—Assets Held for Sale, Dispositions, Acquisitions and Other Planned Transactions and Note 7—Investment in Cenovus Energy.

Loans and Long-Term Receivables

As part of our normal ongoing business operations, and consistent with industry practice, we enter into numerous agreements with other parties to pursue business opportunities. Included in such activity are loans made to certain affiliated and non-affiliated companies. At September 30, 2018, significant loans to affiliated companies included $461 million in project financing to Qatar Liquefied Gas Company Limited (3) (QG3).

On our consolidated balance sheet, the long-term portion of these loans is included in the “Loans and advances—related parties” line, while the short-term portion is in the “Accounts and notes receivable—related parties” line.

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Note 7-–Investment in Cenovus Energy

On May 17, 2017, we completed the sale of our 50 percent nonoperated interest in the FCCL Partnership, as well as the majority of our western Canada gas assets, to Cenovus Energy. Consideration for the transaction included 208 million Cenovus Energy common shares, which approximated 16.9 percent of issued and outstanding Cenovus Energy common stock at closing. See Note 5—Assets Held for Sale, Dispositions, Acquisitions and Other Planned Transactions for additional information on the Canada disposition. At closing of the sale, the fair value and cost basis of our investment in 208 million Cenovus Energy common shares was $1.96 billion based on a price of $9.41 per share on the New York Stock Exchange.

We adopted the provisions of ASU No. 2016-01, beginning January 1, 2018, using the cumulative-effect approach. Results for reporting periods beginning January 1, 2018, are presented under ASU No. 2016-01 with all changes in the fair value of our equity securities reflected within the “Other income” line of our consolidated income statement and within the “Other” line in the “Cash Flows From Operating Activities” section of our consolidated statement of cash flows. Prior period amounts are not adjusted under the cumulative-effect method of adopting ASU No. 2016-01. See Note 2—Changes in Accounting Principles and Note 16—Accumulated Other Comprehensive Loss for the effect on our consolidated balance sheet and the line items that have been impacted by the adoption of this standard.

The cumulative effect of applying the standard was the reclassification of accumulated unrealized holding losses of $58 million, recognized in 2017, related to our investment in Cenovus Energy from accumulated other comprehensive loss to retained earnings.

Our investment is carried at fair value of $2.09 billion as of September 30, 2018, reflecting the closing price of Cenovus Energy shares on the New York Stock Exchange of $10.03 per share, an increase from its fair value of $1.90 billion at year-end 2017. For the three- and nine-month periods ended September 30, 2018, we recorded a before-tax unrealized loss of $73 million and a before-tax unrealized gain of $187 million, respectively, related to the shares held at the reporting date. See Note 15—Fair Value Measurement, for additional information. Subject to market conditions, we intend to decrease our investment over time through market transactions, private agreements or otherwise.

Note 8—Suspended Wells

The capitalized cost of suspended wells at September 30, 2018, was $986 million, an increase of $133 million from $853 million at year-end 2017. Three suspended wells totaling $7 million were charged to dry hole expense during the first nine months of 2018 relating to exploratory well costs capitalized for a period greater than one year as of December 31, 2017.

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Note 9—Impairments

During the three- and nine-month periods ended September 30, 2018 and 2017, we recognized before-tax impairment charges within the following segments:

In the three-month period ended September 30, 2018, impairments in our Lower 48 segment were primarily related to developed properties in our Barnett asset which were written down to fair value less costs to sell.

In the nine-month period ended September 30, 2018, our Lower 48 segment included before-tax impairments of $55 million, primarily related to developed properties in our Barnett asset which were written down to fair value less costs to sell, partly offset by a revision to reflect finalized proceeds on a separate transaction. In our Europe and North Africa segment, we recorded a credit to impairment of $49 million, primarily due to decreased ARO estimates on a certain field in the United Kingdom that has ceased production and was impaired in a prior year.

For additional information related to the status of our Barnett asset, see Note 5—Assets Held for Sale, Dispositions, Acquisitions and Other Planned Transactions.

In the nine-month period ended September 30, 2017, our Lower 48 segment included before-tax impairments of $3.3 billion for our interests in the San Juan Basin and $0.6 billion for our interests in the Barnett asset, which were written down to fair value less costs to sell. See the “APLNG” section of Note 6—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment included within the Asia Pacific and Middle East segment. Additionally, our Alaska segment included an impairment of $174 million for the associated carrying value of our small interest in the Point Thomson Unit.

The charge discussed below is included in the “Exploration expenses” line on our consolidated income statement and is not reflected in the table above.

In the nine-month period ended September 30, 2017, we recorded a before-tax impairment of $51 million in our Lower 48 segment for the associated carrying value of capitalized undeveloped leasehold costs of Shenandoah in deepwater Gulf of Mexico following the suspension of appraisal activity by the operator.

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Note 10—Debt

In May 2018, we refinanced our revolving credit facility from a total aggregate principal amount of $6.75 billion to $6.0 billion with a new expiration date of May 2023. Our revolving credit facility may be used for direct bank borrowings, the issuance of letters of credit totaling up to $500 million, or as support for our commercial paper program. The revolving credit facility is broadly syndicated among financial institutions and does not contain any material adverse change provisions or any covenants requiring maintenance of specified financial ratios or credit ratings. The facility agreement contains a cross-default provision relating to the failure to pay principal or interest on other debt obligations of $200 million or more by ConocoPhillips, or any of its consolidated subsidiaries.

Credit facility borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at a margin above the overnight federal funds rate or prime rates offered by certain designated banks in the United States. The agreement calls for commitment fees on available, but unused, amounts. The agreement also contains early termination rights if our current directors or their approved successors cease to be a majority of our Board of Directors.

The revolving credit facility supports the ConocoPhillips Company $6.0 billion commercial paper program which is primarily a funding source for short-term working capital needs. Commercial paper maturities are generally limited to 90 days. We had no commercial paper outstanding in programs in place at September 30, 2018 or December 31, 2017. We had no direct outstanding borrowings or letters of credit under the revolving credit facility at September 30, 2018 and December 31, 2017. Since we had no commercial paper outstanding and had issued no letters of credit, we had access to $6.0 billion in borrowing capacity under our revolving credit facility at September 30, 2018.

In the first quarter of 2018, we redeemed or repurchased a total of $2,650 million of debt as described below:

In the second quarter of 2018, we repurchased a total of $1,800 million of debt as described below:

During the first six months of 2018, we incurred net premiums above book value to redeem or repurchase these debt instruments of $208 million.

In the second quarter of 2018, we also repaid the $250 million floating rate note due in 2018 at its natural maturity.

At September 30, 2018, we had $283 million of certain variable rate demand bonds (VRDBs) outstanding with maturities ranging through 2035. The VRDBs are redeemable at the option of the bondholders on any business day. The VRDBs are included in the “Long-term debt” line on our consolidated balance sheet.

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Note 11—Noncontrolling Interests

Activity attributable to common stockholders’ equity and noncontrolling interests for the first nine months of 2018 and 2017 was as follows:

*See Note 2—Changes in Accounting Principles for additional information related to ASC Topic 606.

**Includes components of other comprehensive income, which are disclosed separately in our Consolidated Statement of Comprehensive Income.

Note 12—Guarantees

At September 30, 2018, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

APLNG Guarantees

At September 30, 2018, we had outstanding multiple guarantees in connection with our 37.5 percent ownership interest in APLNG. The following is a description of the guarantees with values calculated utilizing September 2018 exchange rates:

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Other Guarantees

We have other guarantees with maximum future potential payment amounts totaling approximately $780 million, which consist primarily of guarantees of the residual value of leased office buildings, guarantees of the residual value of leased corporate aircraft, and a guarantee for our portion of a joint venture’s project finance reserve accounts. These guarantees have remaining terms of up to four years and would become payable if, upon sale, certain asset values are lower than guaranteed amounts, business conditions decline at guaranteed entities, or as a result of nonperformance of contractual terms by guaranteed parties.

Indemnifications

Over the years, we have entered into agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. These agreements include indemnifications for taxes, environmental liabilities, employee claims and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at September 30, 2018, was approximately $100 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount at September 30, 2018, were approximately $40 million of environmental accruals for known contamination that are included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.

In 2012, we completed the separation of our downstream business, creating two independent energy companies: ConocoPhillips and Phillips 66. On March 1, 2015, a supplier to one of the refineries included in Phillips 66 as part of the separation of our downstream businesses formally registered Phillips 66 as a party to the supply agreement, thereby triggering a guarantee we provided at the time of separation. As of December 31, 2017, the carrying value of this guarantee was $98 million. Because Phillips 66 has indemnified us for losses incurred under this guarantee, we also recorded an indemnification asset from Phillips 66 of $98 million. During the third quarter of 2018, a termination agreement between the supplier and Phillips 66 was executed, releasing all parties from their respective obligations under the supply agreement. Since all obligations under the supply agreement were satisfied and discharged, the guarantee was terminated. As of September 30, 2018, the carrying value of this guarantee and the associated indemnification asset were removed.

Note 13—Contingencies and Commitments

A number of lawsuits involving a variety of claims arising in the ordinary course of business have been filed against ConocoPhillips. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these

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contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. With respect to income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental

We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for other sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the agency concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, and some of the indemnifications are subject to dollar limits and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state and international sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated.

At September 30, 2018, our balance sheet included a total environmental accrual of $170 million, compared with $180 million at December 31, 2017, for remediation activities in the United States and Canada. We expect to incur a substantial amount of these expenditures within the next 30 years. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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Legal Proceedings

We are subject to various lawsuits and claims including but not limited to matters involving oil and gas royalty and severance tax payments, gas measurement and valuation methods, contract disputes, environmental damages, personal injury, and property damage. Our primary exposures for such matters relate to alleged royalty and tax underpayments on certain federal, state and privately owned properties and claims of alleged environmental contamination from historic operations. We will continue to defend ourselves vigorously in these matters.

Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.

Other Contingencies

We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at September 30, 2018, we had performance obligations secured by letters of credit of $275 million (issued as direct bank letters of credit) related to various purchase commitments for materials, supplies, commercial activities and services incident to the ordinary conduct of business.

In 2007, ConocoPhillips was unable to reach agreement with respect to the empresa mixta structure mandated by the Venezuelan government’s Nationalization Decree. As a result, Venezuela’s national oil company, PDVSA, or its affiliates, directly assumed control over ConocoPhillips’ interests in the Petrozuata and Hamaca heavy oil ventures and the offshore Corocoro development project. In response to this expropriation, ConocoPhillips initiated international arbitration on November 2, 2007, with the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). On September 3, 2013, an ICSID arbitration tribunal held that Venezuela unlawfully expropriated ConocoPhillips’ significant oil investments in June 2007. On January 17, 2017, the Tribunal reconfirmed the decision that the expropriation was unlawful. A separate arbitration phase is currently proceeding to determine the damages owed to ConocoPhillips for Venezuela’s actions.

In 2014, ConocoPhillips filed a separate and independent arbitration under the rules of the International Chamber of Commerce (ICC) against PDVSA under the contracts that had established the Petrozuata and Hamaca projects. The ICC Tribunal issued an award in April 2018, finding that PDVSA owed ConocoPhillips approximately $2 billion under their agreements in connection with the expropriation of the projects and other pre-expropriation fiscal measures. In August 2018, ConocoPhillips entered into a settlement with PDVSA to recover the full amount of this ICC award, plus interest through the payment period, including initial payments totaling approximately $500 million within a period of 90 days from the time of signing of the settlement agreement. The balance of the settlement is to be paid quarterly over a period of four and a half years. PDVSA also recognized the ICC award as a judgment in various jurisdictions. During the third quarter of 2018, we collected from PDVSA under the settlement and recognized in other income $345 million consisting of $242 million in commodity inventory and $103 million in cash. The remainder of the initial payments is due in the fourth quarter of 2018. As of the end of October 2018, substantially all of the inventory recognized during the quarter has been sold. Per the settlement, ConocoPhillips agreed to suspend its legal enforcement actions of the ICC award, including in the Dutch Caribbean. ConocoPhillips has ensured that the settlement meets all appropriate U.S. regulatory requirements, including any applicable sanctions imposed by the U.S. against Venezuela.

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In 2016, ConocoPhillips filed a separate and independent arbitration under the rules of the ICC against PDVSA under the contracts that had established the Corocoro project. This ICC arbitration is currently in progress.

In February 2017, an ICSID tribunal unanimously awarded Burlington Resources, Inc., a wholly owned subsidiary of ConocoPhillips, $380 million for Ecuador’s unlawful expropriation of Burlington’s investment in Blocks 7 and 21, in breach of the U.S.-Ecuador Bilateral Investment Treaty. The tribunal also issued a separate decision finding Ecuador to be entitled to $42 million for environmental and infrastructure counterclaims. In December 2017, Burlington and Ecuador entered into a settlement agreement by which Ecuador paid Burlington $337 million in two installments. The first installment of $75 million was paid in December 2017, and the second installment of $262 million was paid in April 2018. The settlement included an offset for the counterclaims decision, of which Burlington is entitled to a $24 million contribution from Perenco Ecuador Limited, its co-venturer and consortium operator, pursuant to a joint and several liability provision in the joint operating agreement (JOA). Ecuador’s environmental and infrastructure counterclaims against Perenco remain pending in a separate ICSID arbitration between Perenco and Ecuador, and Burlington may owe Perenco contribution under the JOA for damages found by this tribunal.

In December 2016, ConocoPhillips Angola filed a notice of arbitration against Sonangol E.P. under the Block 36 Production Sharing Contract relating to disputes arising thereunder. Earlier this year, the parties reached a confidential settlement.

In June 2017, FAR Ltd. initiated arbitration before the ICC against ConocoPhillips Senegal B.V. in connection with the sale of ConocoPhillips Senegal B.V. to Woodside Energy Holdings (Senegal) Limited in 2016. This arbitration is ongoing.

In 2017 and 2018, cities, counties, and/or state governments in California, New York, Washington, Rhode Island and Maryland have filed lawsuits against oil and gas companies, including ConocoPhillips, seeking compensatory damages and equitable relief to abate alleged climate change impacts. ConocoPhillips is vigorously defending against these lawsuits. The lawsuits brought by the Cities of San Francisco, Oakland and New York have been dismissed by the district courts and appeals are pending.

Note 14—Derivative and Financial Instruments

Derivative Instruments

We use futures, forwards, swaps and options in various markets to meet our customer needs and capture market opportunities. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and natural gas liquids.

Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented on a net basis. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the normal purchase normal sale (NPNS) exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.

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The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts: