Anadarko Petroleum Corp. (APC:US) and its Kerr-McGee unit acted improperly in the 2005 spinoff of Tronox Inc. and may have to pay as much as $14 billion related to environmental cleanup and health claims, a judge ruled.
Anadarko plunged 9.3 percent (APC:US) in after-hours trading, cutting its market value to $38 billion. The judge's ruling yesterday weighed how much money can be recovered from a successor to a polluting company, even after bankruptcy has ostensibly cleaned the slate of obligations. The company said it expects to appeal the ruling.
The case stems from Kerr-McGee’s spinoff of its chemicals business and old environmental liabilities as Tronox beginning in 2005. About three months after that transaction was completed, Anadarko offered to buy Kerr-McGee’s oil and natural gas assets (APC:US) for $18 billion.
Burdened by environmental debts, Tronox filed for bankruptcy in 2009 and sued Anadarko and Kerr-McGee the same year. A nonjury trial was held before U.S. Bankruptcy Judge Allan Gropper in Manhattan in 2012.
“The transaction, which left the debtors insolvent and undercapitalized, was not made for reasonably equivalent value,” Gropper said in his decision yesterday. He found that the companies may need to pay $5 billion to $14 billion in damages. He said he will fix an exact amount after giving both sides a chance to file arguments about how the number should be calculated.
Shares in The Woodlands, Texas-based Anadarko traded as low $71.90 yesterday after the close on the New York Stock Exchange. Before the ruling was released, the stock had risen 13 percent this year.
``Given the significant factual evidence supporting our position, we vehemently disagree with the judge’s memorandum of opinion, and we fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered,” Al Walker, Anadarko chairman, president and chief executive officer, said in a statement on the company’s website.
According to the complaint in the lawsuit, Anadarko’s Kerr-McGee unit took part of a two-step transaction that defrauded the Environmental Protection Agency of money to clean polluted sites. The U.S., as Tronox’s largest creditor, intervened on behalf of the EPA.
The U.S. had sought $25 billion to clean 2,772 polluted sites and compensate about 8,100 tort claimants. A trust set up to pay plaintiffs calls for 88 percent of a judgment to go to trusts for cleanup, according to court papers. The remainder is to go to toxin claimants.
“The issue is limited but the difference in damages is large -– whether defendants should be liable for damages in the amount of $14,166,148,000 or $5,150,490,000, plus attorneys’ fees and costs to the extent appropriate,” Gropper wrote.
To set the final number, Gropper will give Anadarko a chance to propose the size of its offsetting claim in Tronox’s bankruptcy. That claim would reduce the total that Anadarko must pay.
“Kerr-McGee’s attempted avoidance of its massive environmental liabilities threatened communities across the nation which have waited years for Kerr-McGee and Anadarko to be held accountable,” attorney John Hueston, the Tronox bankruptcy trustee who oversaw the lawsuit, said in a statement.
The potential damages in Gropper’s ruling are greater than what most analysts had foreseen, and Anadarko hasn’t been holding reserves in anticipation of something this big, Andrew Coleman, an analyst at Raymond James & Associates Inc. in Houston, said in a telephone interview yesterday.
“The range is certainly bigger than people were talking about yesterday,” said Coleman, who had estimated payouts totaling less than $5 billion.
The U.S. sought $15 billion in assets allegedly transferred in 2005, plus $10 billion in interest and appreciation.
While awaiting the judge’s decision, Anadarko repeatedly assured investors it was “confident in the merits of its position.” The company had estimated its costs connected to the lawsuit to be $1.4 billion at most, according to a Nov. 4 quarterly filing.
Initial market reaction to the ruling may be overheated as Anadarko has cash holdings of more than $7 billion and “substantial” liquidity through debt and other holdings, ISI Group Inc., an investment research company, said yesterday.
The case went to trial in May 2012, with testimony from more than 50 witnesses, including bankers, scientists and a mayor who said Kerr-McGee toxins destroyed his town. Luke Corbett, Kerr-McGee’s chief executive officer from 1997 to 2006 and now a director at Anadarko, also testified.
When a notice was filed on July 12, 2012, saying the trial was being halted a week for settlement talks, Anadarko shares (APC:US) rose as much as 4.3 percent. The talks proved fruitless and the trial resumed.
Kerr-McGee, founded in 1929 near Oklahoma City, left a toxic legacy that stretches from uranium mines in Navajo territories in the West to wood-treatment plants in Mississippi and Pennsylvania, the EPA said in court papers.
Labor activist Karen Silkwood died in a car accident in 1974 after claiming that Kerr-McGee was contaminating her and others at its nuclear materials plant near Crescent, Oklahoma. That plant, the Cimarron facility, is one of the sites for which the U.S. has been seeking cleanup costs, according to court papers.
According to the U.S., Kerr-McGee began to separate its liabilities from its assets as early as 2001, through an effort known as “Project Focus,” and never revealed the extent of its polluting properties. Some of the properties were referred to by employees as “secret sites,” the U.S. said.
“The secret sites weren’t secret,” Thomas Lotterman, a lawyer for Anadarko, told Gropper during a court hearing. “The company’s own auditor said they weren’t an issue.”
Anadarko said Kerr-McGee was reorganizing to separate the chemical business from the oil-and-gas business and maximize shareholder value.
“All relevant parties believed that both businesses were healthy,” Anadarko said in court papers.
David Zott, the attorney for the litigation trust, said at trial that Kerr-McGee executives tried to obscure the reason for the Tronox spinoff. He cited evidence that in May 2001, Kerr-McGee’s chief financial officer deleted a reference to the company’s environmental issues from a presentation to the board on why it should authorize a spinoff.
“All the way back in May 2001, they were thinking about the ultimate endgame,” Zott told Gropper. He said nine lawyers spent 86 days researching the subject of fraudulent conveyance, the legal theory being used in the lawsuit to seek recovery of environmental costs.
Lotterman said the U.S. was trying to make everyday business activities sound like a scheme to defraud the government by weaving together select facts with the benefit of hindsight.
“A tall tale well told is still a tall tale,” Lotterman said at the trial.
The lawsuit is Tronox Inc. v. Anadarko Petroleum Corp., 09-ap-01198; the bankruptcy is Tronox Inc., 09-bk-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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