Anadarko settles legacy claims against Kerr-McGee for $5.15 billion

Anadarko Petroleum Corp. and subsidiaries it acquired when it bought Kerr-McGee Corp. in 2006 agreed to pay $5.15 billion to settle fraudulent conveyance allegations brought by the US government and co-plaintiff Anadarko Litigation Trust in the bankruptcy of Tronox Inc.

A federal bankruptcy court found in December 2013 that Kerr-McGee conveyed its oil and gas assets to a new entity with the same name and renamed the remaining holdings Tronox in an attempt to evade debts, including its environmental liability to clean up contaminated sites around the country, US Department of Justice and Environmental Protection Agency officials jointly announced on Apr. 3.

They reported that of the settlement amount Anadarko has agreed to pay, $4.4 billion will be used for environmental cleanups and to settle environmental claims. It is the largest environmental enforcement recovery in DOJ history, the federal department said.

“This settlement agreement with the Litigation Trust and the US government eliminates the uncertainty this dispute has created, and the proceeds will fund the remediation and cleanup of the legacy environmental liabilities and tort claims,” Anadarko Chief Executive Al Walker separately said.

Evasive move

In his Dec. 12, 2013, opinion, Judge Allan J. Gropper of US Bankruptcy Court for New York’s Southern District agreed with the government and litigation trust’s charges that Kerr-McGee transferred out and spun off its oil and gas assets in 2005 to a newly formed entity with the same name to evade creditors and environmental liabilities.

Although it had been founded in 1929 as an oil and gas exploration and production operation, Kerr-McGee diversified into refining and marketing, uranium mining and processing, wood treatment, and manufacturing and use of chemicals including creosote and ammonium perchlorate. By the early 2000s, the Oklahoma City-based independent had discontinued all but its chemical and E&P operations but still was responsible for environmental, tort, workers’ compensation, and retiree and employee benefit liabilities related to the other businesses.

In 2001, Kerr-McGee began an internal reorganization, Project Focus, to separate its oil and gas business from its chemical business and legacy liabilities, according to Cropper. When it was unable to sell the chemical operations, the company decided to move it into a new entity, Tronox, which also assumed the legacy liabilities, in 2005. It was spun off a year later from Kerr-McGee, which Anadarko bought for $18 billion soon after.

Burdened by environmental and other legacy liabilities, Tronox sought Chapter 11 bankruptcy protection in New York’s Southern District in January 2009 and sued the defendants. It emerged from bankruptcy on Feb. 14, 2011, when the court confirmed its reorganization plan that included a settlement with various environmental regulators for $270 million and 88% of any net proceeds from the fraudulent conveyance litigation.

At the same time, Tronox established a litigation trust to pursue the action after its emergence from bankruptcy and to distribute any recoveries from the litigation to the trust’s environmental and tort beneficiaries. The US government intervened in the case under the Federal Debt Collection Procedures Act to recover response costs for environmental cleanups at numerous sites around the country.

Settlement’s terms

Under the Apr. 3 settlement, which must go through a 30-day public comment and judicial review period before it becomes final, Anadarko and the subsidiaries will pay the settlement amount to the trust, DOJ said.

It said that under a 2011 agreement between the US government; certain state, local, and tribal governments; and the bankruptcy estate, the trust will distribute 88% of the litigation’s net proceeds to the US, certain state governments, the Navajo Nation, and environmental trusts created to clean up the contaminated sites. The 2011 agreement specifies percentages of the funding that will be made available to each site.

DOJ said as a result of these agreements, some of the key recoveries for environmental claims and for waste site cleanups will include an estimated:

• $1.1 billion to be paid to a trust charged with cleaning up two dozen contaminated sites around the country, including the Kerr-McGee Superfund Site in Columbus, Miss.

• $1.1 billion to be paid to a trust responsible for cleaning up a former chemical manufacturing site in Nevada that has led to contamination of Lake Mead.

• $985 million to be paid to EPA for clean-up of 50 abandoned uranium mines in and around the Navajo Nation, where radioactive waste remains from Kerr-McGee mining operations. The Navajo tribe also will receive more than $43 million to address radioactive waste left at the former Kerr-McGee uranium mill in Shiprock, NM, DOJ said.

• $224 million to be paid to EPA for clean-up of thorium contamination at the Welsbach Superfund Site in Gloucester, NJ.

• $217 million to be paid to the federal Superfund in repayment of costs previously incurred by EPA’s clean-up of the Federal Creosote Superfund Site in Manville, NJ.

Additional amounts will be paid to the US government, state governments, Navajo Nation, and environmental trusts for other environmental claims and contaminated sites, DOJ said.

Anadarko said in exchange for the payment, the litigation trust and Kerr-McGee have agreed to mutually release claims against each other, and the US government and Kerr-McGee have provided mutual covenants not to sue. The federal government also will provide contribution protection from third-party claims seeking reimbursement from Kerr-McGee at more than 4,000 sites covered by the covenants, it added.

The claims asserted in the Tronox adversary proceeding will be dismissed with prejudice after the settlement payment is made, Anadarko said. It expects the process to be completed before the end of 2014’s third quarter, and believes its significant cash position and available $5 billion credit facility provide flexibility in funding the settlement payment.

Anadarko said it expects the settlement agreement’s impact to be reflected in its financial results for 2014’s first quarter. It estimated it would record a gross tax benefit of $1.65 billion associated with the settlement, offset by $1.10 billion in uncertain tax positions, which would result in an $550 million net tax benefit.

Contact Nick Snow at nicks@pennwell.com.

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