UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event report): October 2, 2002
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 000-30176 73-1567067
(State or Other Jurisdiction of (Commission File Number) (IRS Employer
Incorporation or Organization) Identification Number)
20 NORTH BROADWAY, OKLAHOMA CITY, OK 73102
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Page 1 of 77 pages
ITEM 5. OTHER EVENTS
On April 18, 2002, Devon Energy Corporation ("Devon"), sold its
Indonesian operations to PetroChina Company Limited for total cash consideration
of $262 million, including working capital. Devon received approximately $250
million upon closing and could receive an additional $12 million upon successful
completion of certain events.
As of December 31, 2001, Devon's Indonesian oil and gas properties had
estimated proved reserves of approximately 80 million equivalent barrels, of
which approximately 20% were classified as proved developed producing.
Effective January 1, 2002, Devon was required to adopt SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under the
provisions of this accounting pronouncement, beginning with the 2002 second
quarter Form 10-Q, Devon has reclassified its Indonesian activities as
discontinued operations. This reclassification affects not only the 2002 second
quarter presentation of financial results, but also the presentation of all
prior periods' results. Included herein are Items 6 and 8 from Devon's December
31, 2001 Form 10-K, reclassified to present the Indonesian operations as a
discontinued operation.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"Bcf" means billion cubic feet
"MMBtu" means million British thermal units, a measure of heating
value "Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"MBoe" means thousand equivalent barrels of oil
"MMBoe" means million equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGLs" means natural gas liquids
"Domestic" means the properties of the Company in the onshore continental
United States and the offshore Gulf of Mexico
"Permian/Mid-Continent, Rocky Mountain and Gulf" means the divisions of the
Company with properties in the onshore continental United States
and the offshore properties in the Gulf of Mexico
"Canada" means the division of the Company encompassing
oil and gas properties located in the Western Canadian
Sedimentary Basin in Alberta and British Columbia
"International" means the division of the Company encompassing oil and gas
properties that lie outside the United States and Canada
2
SELECTED FINANCIAL DATA
The following selected financial information should be read in
conjunction with the consolidated financial statements and the notes thereto
included in "Financial Statements and Supplementary Data." Notes 2 and 19 to the
consolidated financial statements included in this report contain information on
mergers and acquisitions which occurred in 2002, 2001, 2000 and 1999, as well as
unaudited pro forma financial data for the years 2001 and 2000.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
OPERATING RESULTS
Oil sales $ 836 960 468 257 527
Gas sales 1,890 1,485 628 347 375
NGL sales 131 154 68 25 36
Marketing and midstream revenue 71 53 20 8 10
-------- -------- -------- -------- --------
Total revenues 2,928 2,652 1,184 637 948
-------- -------- -------- -------- --------
Lease operating expenses 490 404 264 202 251
Transportation costs 83 53 34 23 20
Production taxes 117 103 45 23 31
Marketing and midstream costs and expenses 47 28 10 3 4
Depreciation, depletion and amortization of property and equipment 855 673 387 225 281
Amortization of goodwill 34 41 16 -- --
General and administrative expenses 114 96 83 48 56
Expenses related to mergers 1 60 17 13 --
Reduction of carrying value of oil and gas properties 1,003 -- 476 423 633
-------- -------- -------- -------- --------
Total production and operating costs and expenses 2,744 1,458 1,332 960 1,276
-------- -------- -------- -------- --------
Earnings (loss) from operations 184 1,194 (148) (323) (328)
Interest expense (220) (155) (109) (43) (41)
Effects of changes in foreign currency exchange rates (13) (3) 13 (16) (6)
Distributions on preferred securities of subsidiary trust -- -- (7) (10) (10)
Change in fair value of financial instruments (2) -- -- -- --
Other income 69 40 10 18 42
-------- -------- -------- -------- --------
Net other expenses (166) (118) (93) (51) (15)
-------- -------- -------- -------- --------
Earnings (loss) from continuing operations before income taxes,
minority interest and cumulative effect of change in
accounting principle 18 1,076 (241) (374) (343)
Income tax expense (benefit):
Current 57 129 22 (5) 34
Deferred (48) 259 (90) (124) (160)
-------- -------- -------- -------- --------
Total 9 388 (68) (129) (126)
-------- -------- -------- -------- --------
Earnings (loss) from continuing operations before minority interest,
extraordinary item and cumulative effect of change in
accounting principle 9 688 (173) (245) (217)
Results of discontinued operations before income taxes 66 66 42 12 3
Income tax expense (benefit) 21 24 19 3 (1)
-------- -------- -------- -------- --------
Net results of discontinued operations 45 42 23 9 4
-------- -------- -------- -------- --------
Earnings (loss) before minority interest, extraordinary item and
cumulative effect of change in accounting principle 54 730 (150) (236) (213)
Minority interest in Monterey Resources, Inc. -- -- -- -- (5)
-------- -------- -------- -------- --------
Earnings (loss) before extraordinary item and cumulative effect
of change in accounting principle 54 730 (150) (236) (218)
Extraordinary loss -- -- (4) -- --
-------- -------- -------- -------- --------
Earnings (loss) before cumulative effect of change in
accounting principle 54 730 (154) (236) (218)
Cumulative effect of change in accounting principle 49 -- -- -- --
-------- -------- -------- -------- --------
Net earnings (loss) $ 103 730 (154) (236) (218)
======== ======== ======== ======== ========
Net earnings (loss) applicable to common stockholders $ 93 720 (158) (236) (230)
======== ======== ======== ======== ========
3
YEAR ENDED DECEMBER 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.06 5.33 (1.88) (3.45) (3.41)
Earnings from discontinued operations $ 0.28 0.33 0.24 0.13 0.06
Extraordinary item $ -- -- (0.04) -- --
Cumulative effect of change in accounting principle $ 0.39 -- -- -- --
-------- -------- -------- -------- --------
Net earnings (loss) $ 0.73 5.66 (1.68) (3.32) (3.35)
======== ======== ======== ======== ========
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.06 5.17 (1.88) (3.45) (3.41)
Earnings from discontinued operations $ 0.28 0.33 0.24 0.13 0.06
Extraordinary item $ -- -- (0.04) -- --
Cumulative effect of change in accounting principle $ 0.38 -- -- -- --
-------- -------- -------- -------- --------
Net earnings (loss) $ 0.72 5.50 (1.68) (3.32) (3.35)
======== ======== ======== ======== ========
Cash dividends per common share (1) $ 0.20 0.17 0.14 0.10 0.09
Weighted average common shares outstanding:
Basic 128 127 94 71 69
Diluted 130 132 99 77 75
Ratio of earnings to combined fixed charges and preferred stock
dividends (2) 1.00 6.91 N/A N/A N/A
DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
(MILLIONS)
BALANCE SHEET DATA
Total assets $ 13,184 6,860 6,096 1,931 1,965
Debentures exchangeable into shares of ChevronTexaco Corporation $ 649 760 760 -- --
common stock
Other long-term debt $ 5,940 1,289 1,656 736 427
Convertible preferred securities of subsidiary trust $ -- -- -- 149 149
Stockholders' equity $ 3,259 3,277 2,521 750 1,006
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
(MILLIONS, EXCEPT PER UNIT DATA)
CASH FLOW DATA
Net cash provided by operating activities $ 1,902 1,596 540 328 530
Net cash used in investing activities $ (5,285) (1,173) (768) (607) (546)
Net cash provided by (used in) financing activities $ 3,370 (390) 377 256 35
Modified EBITDA (3,5) $ 2,232 2,034 802 373 644
Cash margin (4,5) $ 1,941 1,748 663 324 557
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MMBbls) 39 39 27 22 30
Gas (Bcf) 498 426 304 198 186
NGL (MMBbls) 8 7 5 3 3
MMBoe(6) 130 117 83 58 64
Average prices:
Oil (Per Bbl) $ 21.44 25.07 17.72 12.14 17.02
Gas (Per Mcf) $ 3.80 3.49 2.06 1.75 2.02
NGL (Per Bbl) $ 16.38 20.87 13.28 8.08 12.61
Per Boe (6) $ 21.98 22.28 14.15 10.99 14.47
Costs per Boe (6):
Operating costs $ 5.31 4.80 4.16 4.32 4.64
Depreciation, depletion and amortization
of oil and gas properties $ 6.29 5.51 4.51 3.72 4.19
General and administrative expenses $ 0.88 0.83 1.01 0.85 0.87
----------
(1) Cash dividends per share are presented based on the combined amount of
dividends paid by Devon, Santa Fe Snyder and Northstar in each year.
The dividends per share are also based on the number of shares
4
outstanding in each year assuming the Santa Fe Snyder merger and the
Northstar combination had been consummated as of the beginning of the
earliest year presented. Santa Fe Snyder did not pay any dividends in
any of the years presented. Northstar did not pay any dividends in
1997, or in 1998 prior to the closing of the Northstar combination.
Because of these facts, the cash dividends per share presented for 1997
through 2000 are not representative of the actual amounts paid by Devon
on an historical basis. For the years 1997 through 2000, Devon's
historical cash dividends per share were $0.20 in each year.
(2) For purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, (i) earnings consist of earnings
before income taxes, plus fixed charges; (ii) fixed charges consist of
interest expense, distributions on preferred securities of subsidiary
trust, amortization of costs relating to indebtedness and the preferred
securities of subsidiary trust, and one-third of rental expense
estimated to be attributable to interest; and (iii) preferred stock
dividends consist of the amount of pre-tax earnings required to pay
dividends on the outstanding preferred stock. For the years 1999, 1998
and 1997, earnings were insufficient to cover combined fixed charges
and preferred stock dividends by $249 million, $375 million and $350
million, respectively.
(3) Modified EBITDA represents earnings before interest (including effects
of changes in foreign currency exchange rates, change in fair value of
financial instruments, and distributions on preferred securities of
subsidiary trust), taxes, depreciation, depletion and amortization and
reduction of carrying value of oil and gas properties.
(4) "Cash margin" equals total revenues less cash expenses. Cash expenses
are all expenses other than the non-cash expenses of depreciation,
depletion and amortization, effects of changes in foreign currency
exchange rates, change in fair value of financial instruments,
reduction of carrying value of oil and gas properties and deferred
income tax expense (benefit). Cash margin measures the net cash which
is generated by a company's operations during a given period, without
regard to the period such cash is actually physically received or spent
by the company. This margin ignores the non-operational effect on a
company's "net cash provided by operating activities", as measured by
accounting principles generally accepted in the United States of
America, from a company's activities as an operator of oil and gas
wells. Such activities produce net increases or decreases in temporary
cash funds held by the operator which have no effect on net earnings of
the company.
(5) Modified EBITDA is presented because it is commonly accepted in the oil
and gas industry as a financial indicator of a company's ability to
service or incur debt. Cash margin is presented because it is commonly
accepted in the oil and gas industry as a financial indicator of a
company's ability to fund capital expenditures or service debt.
Modified EBITDA and cash margin are also presented because investors
routinely request such information. Management interprets the trends of
modified EBITDA and cash margin in a similar manner as trends in net
earnings.
Modified EBITDA and cash margin should be used as supplements to, and
not as substitutes for, net earnings and net cash provided by operating
activities determined in accordance with accounting principles
generally accepted in the United States of America as measures of
Devon's profitability or liquidity. There may be operational or
financial demands and requirements that reduce management's discretion
over the use of modified EBITDA and cash margin. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." Modified EBITDA and cash margin may not be comparable to
similarly titled measures used by other companies.
(6) Gas volumes are converted to Boe or MMBoe at the rate of six Mcf of gas
per barrel of oil, based upon the approximate relative energy content
of natural gas and oil, which rate is not necessarily indicative of the
relationship of oil and gas prices. The respective prices of oil, gas
and NGLs are affected by market and other factors in addition to
relative energy content.
5
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Reports............................................................................. 7
Consolidated Financial Statements:
Consolidated Balance Sheets
December 31, 2001, 2000, and 1999................................................................... 9
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000, and 1999....................................................... 10
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000, and 1999....................................................... 12
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000, and 1999....................................................... 13
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999................................................................... 14
6
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Devon Energy Corporation:
We have audited the accompanying consolidated balance sheets of Devon Energy
Corporation and subsidiaries (the Company) as of December 31, 2001, 2000 and
1999, and the related statements of operations, stockholders' equity and cash
flows for each of the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the 1999 financial statements of Santa Fe Snyder
Corporation, a wholly owned subsidiary, which statements reflect total assets
constituting 24% in 1999 of the related consolidated totals, and which
statements reflect total revenues constituting 41% in 1999 of the related
consolidated totals. The 1999 financial statements of Santa Fe Snyder
Corporation were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Santa Fe
Snyder Corporation in 1999 is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Devon Energy Corporation and
subsidiaries as of December 31, 2001, 2000 and 1999, and the results of their
operations and their cash flows for each of the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, as of January
1, 2001, the Company changed its method of accounting for derivative instruments
and hedging activities; effective July 1, 2001, adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and certain provisions of SFAS No. 142, Goodwill and Other
Intangible Assets; and, as of January 1, 2002, adopted the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
/s/ KPMG LLP
Oklahoma City, Oklahoma
February 5, 2002, except as to Note 1 - "Discontinued Operations", which is as
of April 18, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Santa Fe Snyder Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Santa Fe Snyder Corporation and its subsidiaries at December 31,
1999 and the results of their operations and their cash flows for the year ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As further described in Note 2, these consolidated financial statements have
been retroactively restated to the full cost method of accounting for the
Company's oil and gas properties in order to conform to the accounting policies
of Devon Energy Corporation.
As discussed in Note 1 - "Discontinued Operations," the Company adopted the
provisions of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Houston, Texas
January 28, 2000, except for Note 2 and the second paragraph
above which are as of October 30, 2000 and Note 1 -
"Discontinued Operations" and the third paragraph above
which are as of September 25, 2002
8
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 185 204 172
Accounts receivable 503 570 300
Inventories 26 31 23
Deferred income taxes -- 9 5
Fair value of financial instruments 195 -- --
Income taxes receivable 68 -- --
Investments and other current assets 45 43 46
--------- --------- ---------
Total current assets 1,022 857 546
--------- --------- ---------
Property and equipment, at cost, based on the full cost method of
accounting for oil and gas properties ($1,938, $314 and $295
excluded from amortization in 2001, 2000 and 1999, respectively) 15,243 9,385 8,328
Less accumulated depreciation, depletion and amortization 6,360 4,611 4,010
--------- --------- ---------
8,883 4,774 4,318
Investment in ChevronTexaco Corporation common stock, at fair 636 599 614
value
Fair value of financial instruments 31 -- --
Goodwill 2,206 289 323
Assets of discontinued operations 212 219 153
Other assets 194 122 142
--------- --------- ---------
Total assets $ 13,184 6,860 6,096
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 440 293 247
Revenues and royalties due to others 170 116 67
Income taxes payable 17 65 12
Accrued interest payable 102 23 28
Merger related expenses payable 7 52 36
Fair value of financial instruments 15 -- --
Deferred income taxes 57 -- --
Accrued expenses 72 51 56
--------- --------- ---------
Total current liabilities 880 600 446
--------- --------- ---------
Other liabilities 172 158 259
Debentures exchangeable into shares of ChevronTexaco Corporation
common stock 649 760 760
Other long-term debt 5,940 1,289 1,656
Deferred revenue 51 114 105
Fair value of financial instruments 45 -- --
Liabilities of discontinued operations 77 60 46
Deferred income taxes 2,111 602 303
Stockholders' equity:
Preferred stock of $1.00 par value ($100 liquidation value) Authorized
4,500,000 shares; issued 1,500,000 in 2001, 2000 and 1999 1 1 1
Common stock of $.10 par value
Authorized 400,000,000 shares; issued 129,886,000 in 2001,
128,638,000 in 2000 and 126,323,000 in 1999 13 13 13
Additional paid-in capital 3,610 3,564 3,492
Accumulated deficit (147) (215) (909)
Accumulated other comprehensive loss (28) (85) (65)
Unamortized restricted stock awards -- (1) --
Treasury stock, at cost: 3,754,000 shares in 2001 and 330,000 shares in 1999 (190) -- (11)
--------- --------- ---------
Total stockholders' equity 3,259 3,277 2,521
--------- --------- ---------
Commitments and contingencies (Notes 12 and 13)
Total liabilities and stockholders' equity $ 13,184 6,860 6,096
========= ========= =========
See accompanying notes to consolidated financial statements.
9
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
REVENUES
Oil sales $ 836 960 468
Gas sales 1,890 1,485 628
NGL sales 131 154 68
Marketing and midstream revenue 71 53 20
-------- -------- --------
Total revenues 2,928 2,652 1,184
-------- -------- --------
COSTS AND EXPENSES
Lease operating expenses 490 404 264
Transportation costs 83 53 34
Production taxes 117 103 45
Marketing and midstream costs and expenses 47 28 10
Depreciation, depletion and amortization of property and equipment 855 673 387
Amortization of goodwill 34 41 16
General and administrative expenses 114 96 83
Expenses related to mergers 1 60 17
Reduction of carrying value of oil and gas properties 1,003 -- 476
-------- -------- --------
Total production and operating costs and expenses 2,744 1,458 1,332
-------- -------- --------
Earnings (loss) from operations 184 1,194 (148)
OTHER INCOME (EXPENSES)
Interest expense (220) (155) (109)
Effects of changes in foreign currency exchange rates (13) (3) 13
Distributions on preferred securities of subsidiary trust -- -- (7)
Change in fair value of financial instruments (2) -- --
Other income 69 40 10
-------- -------- --------
Net other expenses (166) (118) (93)
-------- -------- --------
Earnings (loss) from continuing operations before income taxes, extraordinary
item and cumulative effect of change in accounting principle 18 1,076 (241)
INCOME TAX EXPENSE (BENEFIT):
Current 57 129 22
Deferred (48) 259 (90)
-------- -------- --------
Total income tax expense (benefit) 9 388 (68)
-------- -------- --------
Earnings (loss) from continuing operations before extraordinary item and
cumulative effect of change in accounting principle 9 688 (173)
DISCONTINUED OPERATIONS:
Results of discontinued operations before income taxes 66 66 42
Income tax expense 21 24 19
-------- -------- --------
Net results of discontinued operations 45 42 23
-------- -------- --------
Earnings (loss) before extraordinary item and cumulative effect of change in
accounting principle 54 730 (150)
Extraordinary loss -- -- (4)
-------- -------- --------
Earnings (loss) before cumulative effect of change in accounting principle 54 730 (154)
Cumulative effect of change in accounting principle 49 -- --
-------- -------- --------
Net earnings (loss) $ 103 730 (154)
Preferred stock dividends 10 10 4
-------- -------- --------
Net earnings (loss) applicable to common shareholders $ 93 720 (158)
======== ======== ========
See accompanying notes to consolidated financial statements.
10
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- -------- --------
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.06 5.33 (1.88)
Earnings from discontinued operations $ 0.28 0.33 0.24
Extraordinary loss $ -- -- (0.04)
Cumulative effect of change in accounting principle $ 0.39 -- --
-------- -------- --------
Net earnings (loss) $ 0.73 5.66 (1.68)
======== ======== ========
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.06 5.17 (1.88)
Earnings from discontinued operations $ 0.28 0.33 0.24
Extraordinary loss $ -- -- (0.04)
Cumulative effect of change in accounting principle $ 0.38 -- --
-------- -------- --------
Net earnings (loss) $ 0.72 5.50 (1.68)
======== ======== ========
Weighted average common shares outstanding:
Basic 128 127 94
======== ======== ========
Diluted 130 132 99
======== ======== ========
See accompanying notes to consolidated financial statements.
11
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
ACCUMU-
LATED
OTHER UNAMORTIZED TOTAL
ADDITIONAL ACCUMU- COMPRE- RESTRICTED STOCK-
PREFERRED COMMON PAID-IN LATED HENSIVE STOCK TREASURY HOLDERS
STOCK STOCK CAPITAL DEFICIT LOSS AWARDS STOCK EQUITY
--------- ------- ---------- ------- --------- ----------- -------- -------
Balance as of December 31, 1998 $ -- 7 1,524 (737) (36) (1) (7) 750
Comprehensive loss:
Net loss -- -- -- (154) -- -- -- (154)
Other comprehensive earnings (loss), net of tax:
Foreign currency translation adjustments -- -- -- -- 7 -- -- 7
Unrealized loss on marketable securities -- -- -- -- (36) -- -- (36)
-------
Other comprehensive loss -- -- -- -- -- -- -- (29)
-------
Comprehensive loss (183)
Stock issued 1 6 1,967 (1) -- -- 8 1,981
Stock repurchased -- -- -- -- -- -- (12) (12)
Tax benefit related to employee stock options -- -- 1 -- -- -- -- 1
Dividends on common stock -- -- -- (13) -- -- -- (13)
Dividends on preferred stock -- -- -- (4) -- -- -- (4)
Amortization of restricted stock awards -- -- -- -- -- 1 -- 1
------- ------- ------- ------- ------- ------- ------- -------
Balance as of December 31, 1999 1 13 3,492 (909) (65) -- (11) 2,521
Comprehensive loss:
Net earnings -- -- -- 730 -- -- -- 730
Other comprehensive earnings (loss), net of tax:
Foreign currency translation adjustments -- -- -- -- (10) -- -- (10)
Minimum pension liability adjustment -- -- -- -- 1 -- -- 1
Unrealized loss on marketable securities -- -- -- -- (11) -- -- (11)
-------
Other comprehensive loss -- -- -- -- -- -- -- (20)
-------
Comprehensive earnings 710
Stock issued -- -- 69 (4) -- -- 21 86
Stock repurchased -- -- -- -- -- -- (10) (10)
Tax benefit related to employee stock options -- -- 3 -- -- -- -- 3
Dividends on common stock -- -- -- (22) -- -- -- (22)
Dividends on preferred stock -- -- -- (10) -- -- -- (10)
Grant of restricted stock awards -- -- -- -- -- (5) -- (5)
Amortization of restricted stock awards -- -- -- -- -- 4 -- 4
------- ------- ------- ------- ------- ------- ------- -------
Balance as of December 31, 2000 1 13 3,564 (215) (85) (1) -- 3,277
Comprehensive earnings:
Net earnings -- -- -- 103 -- -- -- 103
Other comprehensive earnings (loss), net of tax:
Foreign currency translation adjustments -- -- -- -- (107) -- -- (107)
Cumulative effect of change in -- -- -- -- (37) -- -- (37)
Accounting principle
Reclassification adjustment for
Derivative (gains) losses reclassified -- -- -- -- (20) -- -- (20)
Into oil and gas sales
Change in fair value of financial instruments -- -- -- -- 216 -- -- 216
Minimum pension liability adjustment -- -- -- -- (17) -- -- (17)
Unrealized gain on marketable securities -- -- -- -- 22 -- -- 22
-------
Other comprehensive earnings -- -- -- -- -- -- -- 57
-------
Comprehensive earnings 160
Stock issued -- -- 48 -- -- -- -- 48
Stock repurchased -- -- (14) -- -- -- (190) (204)
Tax benefit related to employee stock options -- -- 12 -- -- -- -- 12
Dividends on common stock -- -- -- (25) -- -- -- (25)
Dividends on preferred stock -- -- -- (10) -- -- -- (10)
Amortization of restricted stock awards -- -- -- -- -- 1 -- 1
------- ------- ------- ------- ------- ------- ------- -------
Balance as of December 31, 2001 $ 1 13 3,610 (147) (28) -- (190) 3,259
======= ======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
12
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings (loss) from continuing operations $ 9 688 (173)
Adjustments to reconcile earnings (loss) from continuing operations to net
cash provided by operating activities:
Depreciation, depletion and amortization of property and equipment 855 673 387
Amortization of goodwill 34 41 16
Accretion (amortization) of discounts (premiums) on long-term debt, net 26 3 (1)
Effects of changes in foreign currency exchange rates 13 3 (13)
Change in fair value of financial instruments 2 -- --
Reduction of carrying value of oil and gas properties 1,003 -- 476
Operating cash flows from discontinued operations 102 61 63
Loss (gain) on sale of assets 2 (1) 5
Deferred income tax expense (benefit) (48) 259 (90)
Extraordinary loss -- -- (4)
Other (3) 4 2
Changes in assets and liabilities, net of effects of acquisitions of
businesses:
Decrease (increase) in:
Accounts receivable 197 (272) (87)
Inventories 14 (8) (3)
Income taxes receivable (68) -- --
Investments and other current assets (5) 8 (47)
(Decrease) increase in:
Accounts payable 32 91 (22)
Income taxes payable (129) 61 (19)
Accrued interest and expenses (47) 3 (38)
Deferred revenue (63) 8 91
Long-term other liabilities (24) (26) (3)
-------- -------- --------
Net cash provided by operating activities 1,902 1,596 540
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 41 101 114
Proceeds from sale of investments -- 13 --
Capital expenditures, including acquisitions of businesses (5,289) (1,223) (864)
Discontinued operations (37) (57) (19)
(Increase) decrease in other assets -- (7) 1
-------- -------- --------
Net cash used in investing activities (5,285) (1,173) (768)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings of long-term debt, net of issuance costs 6,199 2,580 1,945
Principal payments on long-term debt (2,638) (2,952) (2,089)
Issuance of common stock, net of issuance costs 48 51 530
Repurchase of common stock (204) (10) (12)
Issuance of treasury stock -- 25 6
Dividends paid on common stock (25) (22) (13)
Dividends paid on preferred stock (10) (10) (4)
(Decrease) increase in long-term other liabilities -- (52) 14
-------- -------- --------
Net cash provided by (used in) financing activities 3,370 (390) 377
-------- -------- --------
Effect of exchange rate changes on cash (6) (1) 1
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (19) 32 150
Cash and cash equivalents at beginning of year 204 172 22
-------- -------- --------
Cash and cash equivalents at end of year $ 185 $ 204 172
======== ======== ========
See accompanying notes to consolidated financial statements.
13
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies used by Devon Energy Corporation and subsidiaries
("Devon") reflect industry practices and conform to accounting principles
generally accepted in the United States of America. The more significant of such
policies are briefly discussed below.
Basis of Presentation and Principles of Consolidation
Devon is engaged primarily in oil and gas exploration, development and
production, and the acquisition of producing properties. Such activities
domestically are managed in three divisions:
- the Gulf Division, which includes properties located primarily
in the onshore South Texas and South Louisiana areas and
offshore in the Gulf of Mexico;
- the Rocky Mountain Division, which includes properties located
in the Rocky Mountains area of the United States stretching
from the Canadian Border into northern New Mexico; and
- the Permian/Mid-Continent Division, which includes all
domestic properties other than those included in the Gulf
Division and the Rocky Mountain Division.
Devon's Canadian activities are located primarily in the Western
Canadian Sedimentary Basin, and Devon's international activities -- outside of
North America -- are located primarily in Argentina, Azerbaijan, China and
Gabon. Devon's share of the assets, liabilities, revenues and expenses of
affiliated partnerships and the accounts of its wholly-owned subsidiaries are
included in the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from those
estimates.
Property and Equipment
Devon follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs incidental to the acquisition, exploration
and development of oil and gas properties, including costs of undeveloped
leasehold, dry holes and leasehold equipment, are capitalized. Internal costs
incurred that are directly identified with acquisition, exploration and
development activities undertaken by Devon for its own account, and which are
not related to production, general corporate overhead or similar activities are
also capitalized. For the years 2001, 2000 and 1999, such internal costs
capitalized totaled $77 million, $62 million and $29 million, respectively.
14
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Unproved properties are excluded from amortized capitalized costs until
it is determined whether or not proved reserves can be assigned to such
properties. Devon assesses its unproved properties for impairment at least
annually.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves plus the lower of cost or fair value of unproved properties.
Such limitations are imposed separately on a country-by-country basis and are
tested quarterly. Capitalized costs are depleted by an equivalent
unit-of-production method, converting gas to oil at the ratio of six thousand
cubic feet of natural gas to one barrel of oil. Depletion is calculated using
the capitalized costs plus the estimated future expenditures (based on current
costs) to be incurred in developing proved reserves, and the estimated
dismantlement and abandonment costs, net of estimated salvage values. No gain or
loss is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves. All costs related to production activities, including workover costs
incurred solely to maintain or increase levels of production from an existing
completion interval, are charged to expense as incurred.
Depreciation and amortization of other property and equipment,
including leasehold improvements, are provided using the straight-line method
based on estimated useful lives from three to 39 years.
Marketable Securities and Other Investments
Devon accounts for certain investments in debt and equity securities by
following the requirements of Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. This standard requires that, except for debt securities classified
as "held-to-maturity," investments in debt and equity securities must be
reported at fair value. As a result, Devon's investment in ChevronTexaco
Corporation common stock, which is classified as "available-for-sale," is
reported at fair value, with the tax effected unrealized gain or loss recognized
in other comprehensive loss and reported as a separate component of
stockholders' equity. Devon's investments in other short-term securities are
also classified as "available-for-sale."
Goodwill
Goodwill, which represents the excess of purchase price over the fair
value of net assets acquired, acquired before June 30, 2001, is amortized by an
equivalent unit-of-production method. Goodwill acquired after June 30, 2001, is
not amortized. Devon assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
properties. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting Devon's average cost of
15
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Accumulated goodwill amortization was $91 million, $57 million and $16
million at December 31, 2001, 2000 and 1999, respectively.
Effective January 1, 2002, Devon adopted the remaining provisions of
SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill
and intangible assets with indefinite useful lives are no longer amortized, but
are instead tested for impairment at least annually. Also, Devon adopted the
provisions of SFAS No. 141, Business Combinations, and certain provisions of
SFAS No. 142 in July 2001. Under the provisions of SFAS No. 142, any goodwill
and any intangible asset determined to have an indefinite useful life that were
acquired in a purchase business combination completed after June 30, 2001 are
not amortized, but are to be evaluated for impairment at December 31, 2001, in
accordance with the appropriate pre- SFAS No. 142 accounting. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 continued to be amortized prior to the adoption of the remaining provisions
of SFAS No. 142.
Devon will perform an assessment of whether there is an indication that
goodwill is impaired as of January 1, 2002. Devon will identify its reporting
units and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill, to those reporting
units as of January 1, 2002. Devon has until June 30, 2002, to determine the
fair value of each reporting unit and compare such value to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and Devon must perform the second step of the transitional impairment
test. In the second step, Devon must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with SFAS No. 141,
to its carrying amount, both of which would be measured as of January 1, 2002.
This second step is required to be completed as soon as possible, but no later
than the end of 2002. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in Devon's 2002 statement
of operations.
As of January 1, 2002, Devon had unamortized goodwill in the amount of
$2.2 billion, which was subject to the transition provisions of SFAS Nos. 141
and 142. Devon has not completed its assessment of the impact on its financial
statements of adopting SFAS Nos. 141 and 142. However, Devon does not believe
that a transitional impairment loss will be required to be recognized.
Revenue Recognition and Gas Balancing
Oil and gas revenues are recognized when sold. During the course of
normal operations, Devon and other joint interest owners of natural gas
reservoirs will take more or less than their respective ownership share of the
natural gas volumes produced. These volumetric imbalances are
16
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
monitored over the lives of the wells' production capability. If an imbalance
exists at the time the wells' reserves are depleted, cash settlements are made
among the joint interest owners under a variety of arrangements.
Devon follows the sales method of accounting for gas imbalances. A
liability is recorded when Devon's excess takes of natural gas volumes exceed
its estimated remaining recoverable reserves. No receivables are recorded for
those wells where Devon has taken less than its ownership share of gas
production.
Hedging Activities
Devon has periodically entered into oil and gas financial instruments
and foreign exchange rate swaps to manage its exposure to oil and gas price
volatility. The foreign exchange rate swaps mitigate the effect of volatility in
the Canadian-to-U.S. dollar exchange rate on Canadian oil and gas revenues that
are predominantly based on U.S. dollar prices. The hedging instruments are
usually placed with counterparties that Devon believes are minimal credit risks.
It is Devon's policy to only enter into derivative contracts with investment
grade rated counterparties deemed by management to be competent and competitive
market makers. The oil and gas reference prices upon which the price hedging
instruments are based reflect various market indices that have a high degree of
historical correlation with actual prices received by Devon.
As of January 1, 2001, Devon adopted the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Certain Hedging Activities and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS No. 133. SFAS Nos. 133 and 138 require that all
derivative instruments be recorded on the balance sheet at their respective fair
values. In accordance with the transition provisions of SFAS No. 133, Devon
recorded a net-of-tax cumulative-effect-type adjustment of $37 million loss in
accumulated other comprehensive loss to recognize the fair value of all
derivatives that were designated as cash-flow hedging instruments. Additionally,
Devon recorded a net-of-tax cumulative-effect-type adjustment to net earnings of
$49 million gain ($0.38 per basic share and $0.37 per diluted share) related to
the fair value of derivative instruments that did not qualify as hedges. This
gain related principally to the option embedded in Devon's debentures that are
exchangeable into shares of ChevronTexaco Corporation common stock.
All derivatives are recognized on the balance sheet at their fair
value. The majority of Devon's derivatives that qualify for hedge accounting
treatment are either "cash flow" hedges or "foreign currency cash flow" hedges
(collectively, "cash flow hedges"). Devon designates its cash flow hedge
derivatives as such on the date the derivative contract is entered into or the
date of a business combination which includes cash flow hedges. Devon formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. Devon also assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged items.
17
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
During 2001, there were no gains or losses reclassified into earnings
as a result of the discontinuance of hedge accounting treatment for any of
Devon's derivatives.
By using derivative instruments to hedge exposures to changes in
commodity prices and exchange rates, Devon exposes itself to credit risk and
market risk. Credit risk is the failure of the counterparty to perform under the
terms of the derivative contract. To mitigate this risk, the hedging instruments
are usually placed with counterparties that Devon believes are minimal credit
risks.
Market risk is the adverse effect on the value of a derivative
instrument that results from a change in interest rates, commodity prices, or
currency exchange rates. The market risk associated with commodity price and
foreign exchange contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken.
Devon does not hold or issue derivative instruments for trading
purposes. The majority of Devon's commodity price swaps and costless price
collars, interest rate swaps, and foreign exchange rate swaps in place at
January 1, 2001 through December 31, 2001 have been designated as cash flow
hedges. Changes in the fair value of these derivatives are reported on the
balance sheet in "Accumulated other comprehensive loss" ("AOCL"). These amounts
are reclassified to oil and gas sales or interest expense when the forecasted
transaction takes place.
During the third quarter of 2001, Devon entered into foreign exchange
forward contracts to mitigate the effect of volatility in the Canadian-to-U.S.
dollar exchange rate on the Anderson acquisition. Under SFAS No. 133, these
derivative instruments were not considered hedges and, as such, the realized
gain of $30 million from settling these contracts is included in the 2001
consolidated statement of operations as other revenues.
During the third quarter of 2001, Devon also entered into interest rate
locks to reduce exposure to the variability in market interest rates,
specifically U.S. Treasury rates, in anticipation of the sale of the debt
securities discussed in Note 7. These derivative instruments were designated as
cash flow hedges. A $28 million loss was incurred on these interest rate locks.
This loss will be amortized into interest expense using the effective interest
method over the life of the debt securities.
Devon assesses the effectiveness of its hedges based on changes in the
derivative's intrinsic value. The change in the time value of the derivative is
excluded from the assessment of hedge effectiveness and, along with any
ineffectiveness, is recorded on the statement of operations in "Change in fair
value of derivative instruments." For the year ended December 31, 2001, Devon
recorded a net charge of approximately $10 million which represented (i) the
ineffectiveness of the various cash flow hedges and (ii) the component of the
derivative instrument gain or loss excluded from the assessment of hedge
effectiveness.
As of December 31, 2001, $180 million of net deferred gains on
derivative instruments accumulated in AOCL are expected to be reclassified to
earnings during the next 12 months. Transactions and events expected to occur
over the next 12 months that will necessitate reclassifying
18
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
these derivatives' gains to earnings are primarily the production and sale of
oil and gas which includes the production hedged under the various derivative
instruments. The maximum term over which Devon is hedging exposures to the
variability of cash flows for commodity price risk is 34 months.
Devon recorded in its statements of operations a loss of $2 million for
the year ended December 31, 2001 for the change in fair value of derivative
instruments that do not qualify for hedge accounting treatment.
Stock Options
Devon applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for its fixed plan stock
options. As such, compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, Devon has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123 which are included in Note 10.
Major Purchasers
In 2001 and 2000, Enron Capital and Trade Resource Corporation
accounted for 16% and 21%, respectively, of Devon's combined oil, gas and
natural gas liquids sales. No purchaser accounted for over 10% of such revenues
in 1999.
On December 2, 2001, Enron Corp. and certain of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code. Prior to this date, Devon had terminated substantially all of
its agreements to sell oil or gas to Enron related entities. Devon incurred $3
million of losses for sales to Enron related subsidiaries which were not
collected prior to the bankruptcy filing.
Income Taxes
Devon accounts for income taxes using the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases, as
well as the future tax consequences attributable to the future utilization of
existing tax net operating loss and other types of carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences and
carryforwards are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. U.S. deferred income taxes have not
been provided on Canadian earnings which are being permanently reinvested.
19
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
General and Administrative Expenses
General and administrative expenses are reported net of amounts
allocated to working interest owners of the oil and gas properties operated by
Devon and net of amounts capitalized pursuant to the full cost method of
accounting.
Discontinued Operations
Effective January 1, 2002, Devon was required to adopt SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business (as previously defined in that Opinion).
On April 18, 2002, Devon, sold its Indonesian operations to PetroChina
Company Limited for total cash consideration of $262 million. Devon received
approximately $250 million upon closing. An additional $12 million could be
received upon successful completion of certain events. In accordance with SFAS
No. 144, Devon has reclassified the assets, liabilities and results of its
Indonesian operations, which were included in Devon's International segment, as
discontinued operations for each of the periods presented. The following tables
include the major classes of assets and liabilities and the revenues that were
reclassified.
20
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
AS OF DECEMBER 31,
--------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
MAJOR CLASSES OF ASSETS AND LIABILITIES
Cash $ 8 $ 24 $ 1
Accounts receivable 34 28 16
Inventories 15 16 16
Other current assets 2 9 11
Property and equipment, net of accumulated
depreciation, depletion and amortization 145 136 106
Other assets 8 6 3
------ ------ ------
Total assets 212 219 153
====== ====== ======
Accounts payable - trade 25 28 20
Income taxes payable 13 1 1
Accrued expense 1 -- --
Other liabilities 7 6 4
Deferred income taxes 31 25 21
------ ------ ------
Total liabilities 77 60 46
====== ====== ======
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
REVENUES
Oil sales $ 122 119 93
NGL sales 1 -- --
------ ------ ------
Total revenues $ 123 119 93
====== ====== ======
Net Earnings Per Common Share
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if Devon's dilutive outstanding stock options were exercised
(calculated using the treasury stock method) and if Devon's zero coupon
convertible senior debentures were converted to common stock.
The following table reconciles the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
2001 and 2000. The diluted loss per share calculations for 1999 produce results
that are anti-dilutive. (The diluted calculation for 1999 reduced the net loss
by $4.3 million and increased the common shares outstanding by 5.7 million
shares.) Therefore, the diluted loss per share amounts for 1999 reported in the
accompanying consolidated statements of operations are the same as the basic
loss per share amounts.
21
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Net Earnings Weighted
Applicable Average Net
To Common Common Shares Earnings
Stockholders Outstanding Per Share
------------ ------------- ---------
(In Millions)
YEAR ENDED DECEMBER 31, 2001:
Basic earnings per share $ 93 128 $ 0.73
Dilutive effect of potential common shares issuable
upon the exercise of outstanding stock options -- 2
------- -------
Diluted earnings per share $ 93 130 $ 0.72
======= ======= =======
YEAR ENDED DECEMBER 31, 2000:
Basic earnings per share $ 720 127 $ 5.66
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $3) 5 3
Potential common shares issuable upon the exercise
of outstanding stock options -- 2
------- -------
Diluted earnings per share $ 725 132 $ 5.50
======= ======= =======
The senior convertible debentures were not included in the 2001
dilution calculation because the inclusion was anti-dilutive.
Options to purchase approximately three million shares of Devon's
common stock with exercise prices ranging from $48.13 per share to $89.66 per
share (with a weighted average price of $56.11 per share) were outstanding at
December 31, 2001, but were not included in the computation of diluted earnings
per share for 2001 because the options' exercise price exceeded the average
market price of Devon's common stock during the year. The excluded options for
2001 expire between February 18, 2002 and December 4, 2011. Options to purchase
approximately one million shares of Devon's common stock with exercise prices
ranging from $55.54 per share to $89.66 per share (with a weighted average price
of $66.64 per share) were outstanding at December 31, 2000, but were not
included in the computation of diluted earnings per share for 2000 because the
options' exercise price exceeded the average market price of Devon's common
stock during the year. All options were excluded from the diluted earnings per
share calculations for 1999.
Comprehensive Earnings or Loss
Devon's comprehensive earnings or loss information is included in the
accompanying consolidated statements of stockholders' equity. A summary of
accumulated other comprehensive earnings or loss as of December 31, 2001, 2000
and 1999, and changes during each of the years then ended, is presented in the
following table.
22
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CHANGE IN FAIR MINIMUM UNREALIZED
FOREIGN VALUE OF PENSION GAIN (LOSS)
CURRENCY FINANCIAL LIABILITY ON MARKET-
TRANSLATION INSTRU- ADJUST- ABLE
ADJUSTMENTS MENTS MENTS SECURITIES TOTAL
----------- ------------- --------- ---------- --------
(IN MILLIONS)
Balance as of December 31, 1998 $ (35) $ -- $ (1) $ -- $ (36)
1999 activity 7 -- -- (60) (53)
Deferred taxes -- -- -- 24 24
-------- -------- -------- -------- --------
1999 activity, net of deferred taxes 7 -- -- (36) (29)
-------- -------- -------- -------- --------
Balance as of December 31, 1999 (28) -- (1) (36) (65)
2000 activity (10) -- 1 (18) (27)
Deferred taxes -- -- -- 7 7
-------- -------- -------- -------- --------
2000 activity, net of deferred taxes (10) -- 1 (11) (20)
-------- -------- -------- -------- --------
Balance as of December 31, 2000 (38) -- -- (47) (85)
2001 activity (107) 243 (28) 36 144
Deferred taxes -- (84) 11 (14) (87)
-------- -------- -------- -------- --------
2001 activity, net of deferred taxes (107) 159 (17) 22 57
-------- -------- -------- -------- --------
Balance as of December 31, 2001 $ (145) $ 159 $ (17) $ (25) $ (28)
======== ======== ======== ======== ========
Foreign Currency Translation Adjustments
The assets and liabilities of certain foreign subsidiaries are prepared
in their respective local currencies and translated into U.S. dollars based on
the current exchange rate in effect at the balance sheet dates, while income and
expenses are translated at average rates for the periods presented. Translation
adjustments have no effect on net income and are included in accumulated other
comprehensive loss.
Dividends
Dividends on Devon's common stock were paid in 2001, 2000 and 1999 at a
per share rate of $0.05 per quarter. As adjusted for the pooling-of-interests
method of accounting followed for the Santa Fe Snyder merger, annual dividends
per share for 2001, 2000 and 1999 were $0.20, $0.17 and $0.14, respectively.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, Devon
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
23
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
Environmental expenditures are expensed or capitalized in accordance
with accounting principles generally accepted in the United States of America.
Liabilities for these expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
Reference is made to Note 13 for a discussion of amounts recorded for these
liabilities.
Reclassification
Certain of the 2000 and 1999 amounts in the accompanying consolidated
financial statements have been reclassified to conform to the 2001 presentation.
2. BUSINESS COMBINATIONS AND PRO FORMA INFORMATION
Mitchell Energy & Development Corp. Merger
On January 24, 2002, Devon completed its acquisition of Mitchell Energy
& Development Corp. ("Mitchell") for cash and stock. For each Mitchell common
share outstanding, Mitchell stockholders received $31 cash and 0.585 of a share
of Devon common stock. The purchase price was approximately $3.2 billion. The
$1.6 billion cash portion of the purchase price was funded from the $3.0 billion
senior unsecured term loan credit facility (see Note 7).
Because the Mitchell merger was not closed until 2002, it had no effect
on Devon's 2001 financial condition or results of operations. See Note 19 for
unaudited pro forma information concerning the Mitchell merger and the October
2001 acquisition of Anderson Exploration Ltd. ("Anderson").
Anderson Exploration Ltd. Acquisition
On October 15, 2001, Devon accepted all of the Anderson common shares
tendered by Anderson stockholders in the tender offer, which represented
approximately 97% of the outstanding Anderson common shares. On October 17,
2001, Devon completed its acquisition of Anderson by a compulsory acquisition
under the Canada Business Corporations Act of the remaining 3% of Anderson
common shares. The cost to Devon of acquiring Anderson's outstanding common
shares and paying for the intrinsic value of Anderson's outstanding options and
appreciation rights was approximately $3.5 billion, which was funded from the
sale of $3.0 billion of debt securities and borrowings under the $3.0 billion
senior unsecured term loan credit facility (see Note 7).
24
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Devon acquired Anderson to increase the scope of its Canadian
operations, for the exposure to north Canada's exploratory areas and to increase
exposure to the North American natural gas market.
The calculation of the purchase price and the preliminary allocation to
assets and liabilities as of October 15, 2001, are shown below. The purchase
price allocation is preliminary because certain items such as the tax basis of
the assets and liabilities acquired and the allocation of fair value to
undeveloped properties have not been completed.
(IN MILLIONS,
EXCEPT SHARE PRICE)
-------------------
Calculation and preliminary allocation of purchase price:
Number of Anderson common shares outstanding 132
Acquisition price per share $ 25.68
--------
Cash paid to Anderson stockholders $ 3,386
Cash paid to settle Anderson employees' stock options and
appreciation rights 92
--------
3,478
Plus estimated acquisition costs incurred 35
--------
Total purchase price 3,513
Plus fair value of liabilities assumed by Devon:
Current liabilities 249
Long-term debt 1,017
Other long-term liabilities 7
Fair value of financial instruments 30
Deferred income taxes 1,427
--------
Total purchase price plus liabilities assumed $ 6,243
========
Fair value of assets acquired by Devon:
Current assets 214
Proved oil and gas properties 2,605
Unproved oil and gas properties 1,432
Other property and equipment 21
Goodwill (none deductible for income tax purposes) 1,971
--------
Total fair value of assets acquired $ 6,243
========
See Note 19 for unaudited pro forma information concerning the Anderson
acquisition and the Mitchell merger.
Santa Fe Snyder Merger
Devon closed its merger with Santa Fe Snyder Corporation ("Santa Fe
Snyder") on August 29, 2000. The merger was accounted for using the
pooling-of-interests method of accounting for business combinations.
Accordingly, all operational and financial information contained herein includes
the combined amounts for Devon and Santa Fe Snyder for all periods presented.
25
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Devon issued approximately 41 million shares of its common stock to the
former stockholders of Santa Fe Snyder based on an exchange ratio of 0.22 shares
of Devon common stock for each share of Santa Fe Snyder common stock. Because
the merger was accounted for using the pooling-of-interests method, all combined
share information has been retroactively restated to reflect the exchange ratio.
During 2000, Devon recorded a pre-tax charge of $60 million ($37
million net of tax) for direct costs related to the Santa Fe Snyder merger.
PennzEnergy Merger
Devon closed its merger with PennzEnergy Company ("PennzEnergy") on
August 17, 1999. The merger was accounted for using the purchase method of
accounting for business combinations. Accordingly, the accompanying statement of
operations for 1999 includes the effects of PennzEnergy operations since August
17, 1999.
Devon issued approximately 22 million shares of its common stock to the
former stockholders of PennzEnergy. In addition, Devon assumed long-term debt
and other obligations totaling approximately $2.3 billion on August 17, 1999.
Additionally, $347 million of deferred taxes were created as a result
of the merger. Due to the tax-free nature of the merger, Devon's tax basis in
the assets acquired and liabilities assumed are the same as PennzEnergy's tax
basis. The $347 million of deferred taxes recorded represent the deferred tax
effect of the differences between the fair values assigned by Devon for
financial reporting purposes to the former PennzEnergy assets and liabilities
and their bases for income tax purposes.
Snyder Merger
Santa Fe Snyder was formed on May 5, 1999, when the former Santa Fe
Energy Resources, Inc. ("Santa Fe") closed its merger with Snyder Oil
Corporation ("Snyder"). Because Devon's merger with Santa Fe Snyder was
accounted for using the pooling-of-interests method, the accompanying
consolidated financial statements are presented as though Devon merged with
Snyder in May 1999.
The Snyder merger was accounted for using the purchase method of
accounting for business combinations. Accordingly, the accompanying statement of
operations for 1999 includes the effects of Snyder's operations since May 5,
1999.
26
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
As restated for the Devon-Santa Fe Snyder pooling, each share of Snyder
common stock was exchanged for 0.451 shares of Devon common stock. This resulted
in the issuance of approximately 15 million shares of Devon stock in the Snyder
merger. In addition, the Snyder merger also included the assumption of
approximately $219 million of Snyder's long-term debt as of May 5, 1999.
Additionally, $135 million was added to oil and gas properties for
deferred taxes created as a result of the Snyder merger. Due to the tax-free
nature of the merger, Santa Fe's tax basis in the assets acquired and
liabilities assumed were the same as Snyder's tax basis. The $135 million of
deferred taxes recorded represent the deferred tax effect of the differences
between the fair values assigned by Santa Fe for financial reporting purposes to
the former Snyder assets and liabilities and their bases for income tax
purposes.
3. SAN JUAN BASIN TRANSACTION
At the beginning of 1995, Devon entered into a transaction (the "San
Juan Basin Transaction") involving a volumetric production payment and a
repurchase option. The San Juan Basin Transaction allowed Devon to monetize tax
credits earned from certain of its coal seam gas production in the San Juan
Basin. During 2000 and 1999, the San Juan Basin Transaction added approximately
$12 million and $8 million, respectively, to Devon's gas revenues.
Under the terms of the San Juan Basin Transaction, Devon had a
repurchase option which it could exercise at anytime. Devon exercised the
repurchase option effective September 30, 2000. Devon had previously recorded a
portion of the quarterly cash payments received pursuant to the San Juan Basin
Transaction as a repurchase liability based upon the estimated eventual
repurchase price. Devon also received cash payments in exchange for agreeing not
to exercise its repurchase option for specific periods of time prior to 2000.
These payments were also added to the repurchase liability. As a result, in
addition to the cash flow recorded as revenues described in the previous
paragraph, Devon also received $17 million in 1999 which was added to the
repurchase liability. The actual repurchase price as of September 30, 2000, was
approximately $36 million.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in 2001, 2000 and 1999 were approximately
$118 million, $155 million and $116 million, respectively. Cash payments for
federal, state and foreign income taxes in 2001, 2000 and 1999 were
approximately $192 million, $82 million and $16 million, respectively.
27
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The 2001 Anderson acquisition and the 1999 PennzEnergy merger and
Snyder merger involved non-cash consideration as presented below:
2001 1999
-------- --------
(IN MILLIONS)
Value of common stock issued $ -- 1,130
Value of preferred stock issued -- 150
Employee stock options assumed -- 18
Liabilities assumed 1,303 2,259
Deferred tax liability created 1,427 475
-------- --------
Fair value of assets acquired with non-cash consideration $ 2,730 4,032
======== ========
During the fourth quarter of 1999, substantially all of the 6.5% Trust
Convertible Preferred Securities were converted to Devon common stock (see Note
9).
5. ACCOUNTS RECEIVABLE
The components of accounts receivable included the following:
DECEMBER 31,
---------------------------------
2001 2000 1999
------- ------- -------
(IN MILLIONS)
Oil, gas and natural gas liquids revenue accruals $ 289 410 202
Joint interest billings 108 123 67
Other 110 41 35
------- ------- -------
507 574 304
Allowance for doubtful accounts (4) (4) (4)
------- ------- -------
Net accounts receivable $ 503 570 300
======= ======= =======
28
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
6. PROPERTY AND EQUIPMENT
Property and equipment included the following:
DECEMBER 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
(IN MILLIONS)
Oil and gas properties:
Subject to amortization $ 12,912 8,847 7,868
Not subject to amortization:
Acquired in 2001 1,638 -- --
Acquired in 2000 74 74 --
Acquired in 1999 116 122 135
Acquired prior to 1999 110 118 160
Accumulated depreciation, depletion
and amortization (6,271) (4,564) (3,971)
--------- --------- ---------
Net oil and gas properties 8,579 4,597 4,192
--------- --------- ---------
Other property and equipment 393 224 165
Accumulated depreciation and amortization (89) (47) (39)
--------- --------- ---------
Net other property and equipment 304 177 126
--------- --------- ---------
Property and equipment, net of accumulated
depreciation, depletion and amortization $ 8,883 4,774 4,318
========= ========= =========
The costs not subject to amortization relate to unproved properties,
none of which are individually significant. Subject to industry conditions,
evaluation of these properties is expected to be completed within five years.
Depreciation, depletion and amortization of property and equipment
consisted of the following components:
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
Depreciation, depletion and amortization
of oil and gas properties $ 817 643 371
Depreciation and amortization of other
property and equipment 30 23 14
Amortization of other assets 8 7 2
------ ------ ------
Total $ 855 673 387
====== ====== ======
29
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
7. LONG-TERM DEBT AND RELATED EXPENSES
A summary of Devon's long-term debt is as follows:
DECEMBER 31,
--------------------------------------
2001 2000 1999
------- ------- -------
(IN MILLIONS)
Borrowings under credit facilities with banks $ 50 147 645
Commercial paper borrowings 75 -- --
$3 billion term loan credit facility 1,046 -- --
Debentures exchangeable into shares of
ChevronTexaco Corporation common stock:
4.90% due August 15, 2008 444 444 444
4.95% due August 15, 2008 316 316 316
Discount on exchangeable debentures (111) -- --
Zero coupon convertible senior debentures exchangeable into shares of
Devon common stock, 3.875% due June 27, 2020 374 360 --
Other debentures:
10.25% due November 1, 2005 236 250 250
10.125% due November 15, 2009 177 200 200
7.875% due September 30, 2031 1,250 -- --
Net premium on debentures 6 33 37
Senior notes:
8.05% due June 15, 2004 125 125 125
7.25 % due July 18, 2005 110 -- --
6.76% due July 19, 2005 -- -- 75
7.42% due October 1, 2005 23 -- --
7.57% due October 4, 2005 31 -- --
6.55% due August 2, 2006 126 -- --
8.75% due June 15, 2007 175 175 175
6.79% due March 2, 2009 -- -- 150
6.75% due March 15, 2011 400 -- --
6.875% due September 30, 2011 1,750 -- --
Net discount on notes (14) (1) (1)
-------- -------- --------
6,589 2,049 2,416
Less amount classified as current -- -- --
-------- -------- --------
Long-term debt $ 6,589 2,049 2,416
======== ======== ========
Maturities of long-term debt as of December 31, 2001, excluding the
$119 million of discounts net of premiums, are as follows (in millions):
2002 $ --
2003 --
2004 358
2005 775
2006 689
2007 and thereafter 4,886
----------
Total $ 6,708
==========
30
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Credit Facilities With Banks
On August 13, 2001, Devon renewed its unsecured long-term credit
facilities aggregating $1 billion (the "Credit Facilities"). The Credit
Facilities include a U.S. facility of $725 million (the "U.S. Facility") and a
Canadian facility of $275 million (the "Canadian Facility").
The $725 million U.S. Facility consists of a Tranche A facility of $200
million and a Tranche B facility of $525 million. The Tranche B facility can be
increased to as high as $625 million and reduced to as low as $425 million by
reallocating the amount available between the Tranche B facility and the
Canadian Facility. The Tranche A facility matures on October 15, 2004. Devon may
borrow funds under the Tranche B facility until August 12, 2002 (the "Tranche B
Revolving Period"). Devon may request that the Tranche B Revolving Period be
extended an additional 364 days by notifying the agent bank of such request
between 30 and 60 days prior to the end of the Tranche B Revolving Period. Debt
borrowed under the Tranche B facility matures two years and one day following
the end of the Tranche B Revolving Period.
Devon may borrow funds under the $275 million Canadian Facility until
August 12, 2002 (the "Canadian Facility Revolving Period"). As disclosed in the
prior paragraph, the Canadian Facility can be increased to as high as $375
million and reduced to as low as $175 million by reallocating the amount
available between the Tranche B facility and the Canadian Facility. Devon may
request that the Canadian Facility Revolving Period be extended an additional
364 days by notifying the agent bank of such request between 45 and 90 days
prior to the end of the Canadian Facility Revolving Period. Debt outstanding as
of the end of the Canadian Facility Revolving Period is payable in semi-annual
installments of 2.5% each for the following five years, with the final
installment due five years and one day following the end of the Canadian
Facility Revolving Period.
Amounts borrowed under the Credit Facilities bear interest at various
fixed rate options that Devon may elect for periods up to six months. Such rates
are generally less than the prime rate, and are tied to margins determined by
Devon's corporate credit ratings. Devon may also elect to borrow at the prime
rate. The Credit Facilities provide for an annual facility fee of $0.9 million
that is payable quarterly. The weighted average interest rate on the $50 million
and $147 million outstanding under the Credit Facilities at December 31, 2001
and 2000, was 4.8% and 6.1%, respectively. The average interest rate on bank
debt outstanding under the previous facilities at December 31, 1999 was 6.8%.
The agreements governing the Credit Facilities contain certain
covenants and restrictions, including a maximum debt-to-capitalization ratio. At
December 31, 2001, Devon was in compliance with such covenants and restrictions.
31
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Commercial Paper
On August 29, 2000, Devon entered into a commercial paper program.
Devon may borrow up to $725 million under the commercial paper program. Total
borrowings under the U.S. Facility and the commercial paper program may not
exceed $725 million. The commercial paper borrowings may have terms of up to 365
days and bear interest at rates agreed to at the time of the borrowing. The
interest rate is based on a standard index such as the Federal Funds Rate,
London Interbank Offered Rate (LIBOR), or the money market rate as found on the
commercial paper market. As of December 31, 2001, Devon had $75 million of
borrowings under its commercial paper program at an average rate of 3.5%.
Because Devon had the intent and ability to refinance the balance due with
borrowings under its U.S. Facility, the $75 million outstanding under the
commercial paper program was classified as long-term debt on the December 31,
2001 consolidated balance sheet.
$3 Billion Term Loan Credit Facility
On October 12, 2001, Devon and its wholly-owned financing subsidiary
Devon Financing Corporation, U.L.C. ("Devon Financing") entered into a new $3
billion senior unsecured term loan credit facility. The facility has a term of
five years. Devon and Devon Financing may borrow funds under this facility
subject to conditions usual in commercial transactions of this nature, including
the absence of any default under this facility. Interest on borrowings under
this facility may be based, at the borrower's option, on LIBOR or on UBS Warburg
LLC's base rate (which is the higher of UBS Warburg's prime commercial lending
rate and the weighted average of rates on overnight Federal funds transactions
with members of the Federal Reserve System plus 0.50%).
The interest rates will include a margin determined by Devon's
long-term senior unsecured debt rating for borrowings made subsequent to June
17, 2002. Prior to that time, the margin for borrowings based on LIBOR will be
an additional 100 basis points. Based on LIBOR rates as of December 31, 2001,
Devon's average interest rate was 2.9%. In addition, Devon incurred an
availability fee on the daily average unused lending commitments through the
date of the Mitchell closing on January 24, 2002, equal to a percentage
determined by Devon's long-term senior unsecured debt rating.
Prior to December 31, 2001, Devon used proceeds of $1 billion from
borrowings on this facility to partially fund the Anderson acquisition. The
remaining $2 billion of availability was utilized upon the closing of the
Mitchell acquisition on January 24, 2002.
32
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The terms of this facility require repayment of the debt during the
following years:
(In Millions)
-------------
2002 $ --
2003 --
2004 232
2005 1,200
2006 1,600
-------
Total $ 3,032
=======
The terms of this facility also provide that voluntary prepayments of
the debt may be applied, at Devon's option, to the earliest scheduled maturities
first. For example, if Devon were to prepay a portion of the $3 billion of debt
with proceeds from property sales or other cash sources, the amount of the
prepayment would reduce, if so elected by Devon, the amounts otherwise due first
in 2004, then 2005 and finally 2006.
This credit facility contains certain covenants and restrictions,
including a maximum allowed debt-to-capitalization ratio as defined in the
credit facility. At December 31, 2001, Devon was in compliance with such
covenants and restrictions.
Exchangeable Debentures
The exchangeable debentures consist of $444 million of 4.90% debentures
and $316 million of 4.95% debentures. The exchangeable debentures were issued on
August 3, 1998 and mature August 15, 2008. The exchangeable debentures are
callable beginning August 15, 2000, initially at 104.0% of principal and at
prices declining to 100.5% of principal on or after August 15, 2007. The
exchangeable debentures are exchangeable at the option of the holders at any
time prior to maturity, unless previously redeemed, for shares of ChevronTexaco
Corporation common stock. In lieu of delivering ChevronTexaco Corporation common
stock, Devon may, at its option, pay to any holder an amount of cash equal to
the market value of the ChevronTexaco Corporation common stock to satisfy the
exchange request. However, at maturity, the holders will receive an amount at
least equal to the face value of the debt outstanding. Such amount will either
be in cash or in a combination of cash and ChevronTexaco Corporation common
stock.
As of December 31, 2001, Devon beneficially owned approximately seven
million shares of ChevronTexaco Corporation common stock. These shares have been
deposited with an exchange agent for possible exchange for the exchangeable
debentures. Each $1,000 principal amount of the exchangeable debentures is
exchangeable into 9.3283 shares of ChevronTexaco Corporation common stock, an
exchange rate equivalent to $107-7/32 per share of ChevronTexaco stock.
The exchangeable debentures were assumed as part of the PennzEnergy
merger. The fair values of the exchangeable debentures were determined as of
August 17, 1999, based on market quotations. The fair value approximated the
face value of the exchangeable debentures. As a result, no premium or discount
was recorded on these exchangeable debentures. However,
33
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
pursuant to the adoption of SFAS No. 133 effective January 1, 2001, these
debentures were revalued as of August 17, 1999. Under SFAS No. 133, the total
fair value of the debentures was allocated between the interest-bearing debt and
the option to exchange ChevronTexaco Corporation common stock that is embedded
in the debentures. Accordingly, the debt portion of the debentures was reduced
by $140 million as of August 17, 1999. This discount is being accreted using the
effective interest method, and has raised the effective interest rate on the
debentures to 7.76% in 2001 compared to 4.92% prior to 2001.
Zero Coupon Convertible Debentures
In June 2000, Devon privately sold zero coupon convertible senior
debentures. The debentures were sold at a price of $464.13 per debenture with a
yield to maturity of 3.875% per annum. Each of the 760,000 debentures is
convertible into 5.7593 shares of Devon common stock. Devon may call the
debentures at any time after five years, and a debenture holder has the right to
require Devon to repurchase the debentures after five, 10 and 15 years, at the
issue price plus accrued original issue discount and interest. Devon's proceeds
were approximately $346 million, net of debt issuance costs of approximately $7
million. Devon used the proceeds from the sale of these debentures to pay down
other domestic long-term debt.
Debt Securities
On October 3, 2001, Devon, through Devon Financing, sold $1.75 billion
of 6.875% notes due September 30, 2011 and $1.25 billion of 7.875% debentures
due September 30, 2031. The debt securities are unsecured and unsubordinated
obligations of Devon Financing. Devon has fully and unconditionally guaranteed
on an unsecured and unsubordinated basis the obligations of Devon Financing
under the debt securities. The proceeds from the issuance of these debt
securities were used to fund a portion of the Anderson acquisition.
The $3 billion of debt securities were structured in a manner that
results in an expected weighted average after-tax borrowing rate of
approximately 1.76%.
Interest on the debt securities will be payable by Devon Financing
semiannually on March 30 and September 30 of each year, beginning on March 30,
2002. The indenture governing the debt securities limits both Devon Financing's
and Devon's ability to incur liens or enter into mergers or consolidations, or
transfer all or substantially all of their respective assets, unless the
successor company assumes Devon Financing's or Devon's obligations under the
indenture.
Other Debentures
The 10.25% and 10.125% debentures were assumed as part of the
PennzEnergy merger. The fair values of the respective debentures were determined
using August 17, 1999, market interest rates. As a result, premiums were
recorded on these debentures which lowered their effective interest rates to
8.3% and 8.9% on the $236 million of 10.25% debentures and $177
34
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
million of 10.125% debentures, respectively. The premiums are being amortized
using the effective interest method.
During October 2001, Devon repurchased $14 million and $23 million of
its 10.25% debentures and 10.125% debentures, respectively. Devon recorded a
loss on the early retirement of debt of $5 million related to this repurchase.
Senior Notes
In connection with the Anderson acquisition, Devon assumed $702 million
of senior notes. The table below summarizes the debt assumed, the fair value of
the debt at October 15, 2001, and the effective interest rate of the debt
assumed after determining the fair values of the respective notes using October
15, 2001, market interest rates. The premiums and discounts are being amortized
or accreted using the effective interest method. All of the notes are general
unsecured obligations of Devon.
Fair value of Effective rate of
Debt assumed debt assumed debt assumed
--------------------------- ------------- -----------------
(In Millions)
6.75% senior notes due 2011 $ 400 6.8%
6.55% senior notes due 2006 129 6.5%
7.25% senior notes due 2005 116 6.3%
7.57% senior notes due 2005 33 5.7%
7.42% senior notes due 2005 24 5.7%
Devon recorded a $2 million loss in 2001 related to the early
retirement of the above 7.57% and 7.42% senior notes.
In connection with the Snyder merger, Devon assumed Snyder's $175
million of 8.75% notes due in 2007. The notes are redeemable by Devon on or
after June 15, 2002, initially at 104.375% of principal and at prices declining
to 100% of principal on or after June 15, 2005. The notes are general unsecured
obligations of Devon. In June 1999, Devon issued $125 million of 8.05% notes due
2004. The notes were issued for 98.758% of face value and Devon received total
proceeds of $122 million after deducting related costs and expenses of $2
million. The notes, which mature June 15, 2004, are redeemable, upon not less
than thirty nor more than sixty days notice, as a whole or in part, at the
option of Devon at a redemption price equal to the sum of (i) 100% of the
principal amount thereof, (ii) the applicable make-whole premium as determined
by an independent investment banker and (iii) accrued and unpaid interest. The
notes are general unsecured obligations of Devon. The indentures for these notes
include covenants that restrict the ability of Devon SFS Operating, Inc., a
wholly-owned subsidiary of Devon, to take certain actions, including the ability
to incur additional indebtedness and to pay dividends or repurchase capital
stock.
35
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Interest Expense
Following are the components of interest expense for the years 2001,
2000 and 1999:
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS)
Interest based on debt outstanding $ 200 157 108
Accretion (amortization) of debt discount
(premium), net 10 (4) (1)
Facility and agency fees 1 3 2
Amortization of capitalized loan costs 3 2 2
Capitalized interest (3) (3) (2)
Loss on debt retirement 7 -- --
Other 2 -- --
-------- -------- --------
Total interest expense $ 220 155 109
======== ======== ========
Effects of Changes in Foreign Currency Exchange Rates
The 6.75% fixed-rate senior notes referred to in the first table of
this note are payable by Devon Canada, a wholly-owned subsidiary of Devon.
However, the notes are denominated in U.S. dollars. Until their retirement in
mid-January 2000, the 6.76 % and 6.79% fixed-rate senior notes payable by Devon
Canada were also denominated in U.S. dollars. Changes in the exchange rate
between the U.S. dollar and the Canadian dollar from the dates the notes were
issued to the dates of repayment increase or decrease the expected amount of
Canadian dollars eventually required to repay the notes. Such changes in the
Canadian dollar equivalent of the debt are required to be included in
determining net earnings for the period in which the exchange rate changed. The
rate of conversion of Canadian dollars to U.S. dollars declined in 2001 and 2000
and increased in 1999. Therefore, $11 million and $3 million of increased
expense was recorded in 2001 and 2000, respectively, and $13 million of reduced
expense was recorded in 1999.
8. INCOME TAXES
At December 31, 2001, Devon had the following carryforwards available
to reduce future income taxes:
YEARS OF CARRYFORWARD
TYPES OF CARRYFORWARD EXPIRATION AMOUNTS
---------- ------------
(IN MILLIONS)
Net operating loss - U.S. federal 2008 - 2021 $ 22
Net operating loss - various states 2002 - 2014 $ 60
Net operating loss - Canada 2002 - 2008 $ 3
Net operating loss - International Indefinite $ 86
Minimum tax credits Indefinite $ 118
All of the carryforward amounts shown above have been utilized for
financial purposes to reduce the deferred tax liability.
36
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The earnings (loss) from continuing operations before income taxes and
the components of income tax expense (benefit) for the years 2001, 2000 and 1999
were as follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
------- ------- -------
(IN MILLIONS)
Earnings (loss) from continuing operations before income taxes:
U.S $ 458 872 (313)
Canada (357) 156 58
International (83) 48 14
------- ------- -------
Total $ 18 1,076 (241)
======= ======= =======
Current income tax expense:
U.S. federal $ 23 107 12
Various states 6 6 3
Canada 8 2 3
Other 20 14 4
------- ------- -------
Total current tax expense 57 129 22
------- ------- -------
Deferred income tax expense (benefit):
U.S. federal 124 152 (119)
Various states (32) 33 --
Canada (145) 67 27
Other 5 7 2
------- ------- -------
Total deferred tax expense (benefit) (48) 259 (90)
------- ------- -------
Total income tax expense (benefit) $ 9 388 (68)
======= ======= =======
The taxes on the results of discontinued operations as presented in the
accompanying consolidated statements of operations were all related to foreign
operations.
Total income tax expense (benefit) differed from the amounts computed
by applying the U.S. federal income tax rate to earnings (loss) from continuing
operations before income taxes as a result of the following:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------ ------ ------
Expected income tax (benefit) based
on U.S. statutory tax rate of 35% $ 6 376 (85)
Benefit from disposition of certain
foreign assets -- (46) --
Financial expenses not deductible for
income tax purposes 12 15 16
Dividends received deduction (5) (5) (1)
Nonconventional fuel source credits (19) (8) (6)
State income taxes 4 15 1
Taxation on foreign operations 13 20 11
Other (2) 21 (4)
------ ------ ------
Total income tax expense (benefit) $ 9 388 (68)
====== ====== ======
37
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at December 31, 2001, 2000
and 1999 are presented below:
DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS)
Deferred tax assets:
Net operating loss carryforwards $ 39 123 207
Minimum tax credit carryforwards 118 85 88
Production payments -- -- 21
Long-term debt 6 17 18
Fair value of financial instruments 7 -- --
Other 37 95 51
-------- -------- --------
Total deferred tax assets 207 320 385
-------- -------- --------
Deferred tax liabilities:
Property and equipment, principally due
to nontaxable business combinations,
differences in depreciation, and
the expensing of intangible drilling
costs for tax purposes (2,151) (662) (479)
ChevronTexaco Corporation common stock (213) (167) (172)
Other (11) (84) (32)
-------- -------- --------
Total deferred tax liabilities (2,375) (913) (683)
-------- -------- --------
Net deferred tax liability $ (2,168) (593) (298)
======== ======== ========
As shown in the above table, Devon has recognized $207 million of
deferred tax assets as of December 31, 2001. Such amount consists primarily of
$157 million of various carryforwards available to offset future income taxes.
The carryforwards include federal net operating loss carryforwards, the majority
of which do not begin to expire until 2008, state net operating loss
carryforwards which expire primarily between 2002 and 2014, Canadian
carryforwards which expire primarily between 2002 and 2008, International
carryforwards which have no expiration and minimum tax credit carryforwards
which have no expiration. The tax benefits of carryforwards are recorded as an
asset to the extent that management assesses the utilization of such
carryforwards to be "more likely than not." When the future utilization of some
portion of the carryforwards is determined not to be "more likely than not," a
valuation allowance is provided to reduce the recorded tax benefits from such
assets.
Devon expects the tax benefits from the net operating loss
carryforwards to be utilized between 2002 and 2010. Such expectation is based
upon current estimates of taxable income during this period, considering
limitations on the annual utilization of these benefits as set forth by federal
tax regulations. Significant changes in such estimates caused by variables such
as future oil and gas prices or capital expenditures could alter the timing of
the eventual utilization of such carryforwards. There can be no assurance that
Devon will generate any specific level of continuing taxable earnings. However,
management believes that Devon's future taxable income will more likely than not
be sufficient to utilize substantially all its tax carryforwards prior to their
expiration.
38
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
9. TRUST CONVERTIBLE PREFERRED SECURITIES
On July 10, 1996, Devon, through its affiliate Devon Financing Trust,
completed the issuance of $149 million of 6.5% trust convertible preferred
securities (the "TCP Securities"). Devon Financing Trust issued 2,990,000 shares
of the TCP Securities at $50 per share with a maturity date of June 15, 2026.
Each TCP Security was convertible at the holder's option into 1.6393 shares of
Devon common stock, which equated to a conversion price of $30.50 per share of
Devon common stock.
Devon Financing Trust invested the $149 million of proceeds in 6.5%
convertible junior subordinated debentures issued by Devon (the "Convertible
Debentures"). In turn, Devon used the net proceeds from the issuance of the
Convertible Debentures to retire debt outstanding under its credit lines.
On October 27, 1999, Devon issued notice to the holders of the TCP
Securities that it was exercising its right to redeem such securities on
November 30, 1999. Substantially all of the holders of the TCP Securities
elected to exercise their conversion rights instead of receiving the redemption
cash value. As a result, all but 950 shares of the TCP Securities were converted
into approximately 4.9 million shares of Devon common stock. The redemption
price for the 950 shares not converted was $52.275 per share which included a
4.55% premium as required under the terms of the TCP Securities.
Devon owned all the common securities of Devon Financing Trust. As
such, the accounts of Devon Financing Trust were included in Devon's
consolidated financial statements after appropriate eliminations of intercompany
balances and transactions. The distributions on the TCP Securities were recorded
as a charge to pre-tax earnings on Devon's consolidated statements of
operations, and such distributions were deductible by Devon for income tax
purposes.
10. STOCKHOLDERS' EQUITY
The authorized capital stock of Devon consists of 400 million shares of
common stock, par value $.10 per share (the "Common Stock"), and 4.5 million
shares of preferred stock, par value $1.00 per share. The preferred stock may be
issued in one or more series, and the terms and rights of such stock will be
determined by the Board of Directors.
Effective August 17, 1999, Devon issued 1.5 million shares of 6.49%
cumulative preferred stock, Series A, to holders of PennzEnergy 6.49% cumulative
preferred stock, Series A. Dividends on the preferred stock are cumulative from
the date of original issue and are payable quarterly, in cash, when declared by
the Board of Directors. The preferred stock is redeemable at the option of Devon
at any time on or after June 2, 2008, in whole or in part, at a redemption price
of $100 per share, plus accrued and unpaid dividends to the redemption date.
39
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
In late September and early October 1999, Devon received $403 million
from the sale of approximately 10 million shares of its common stock in a public
offering. The price to the public for these shares was $40.50 per share. Net of
underwriters' discount and commissions, Devon received $38.98 per share. Devon
paid approximately $1 million of expenses related to the equity offering, and
these costs were recorded as reductions of additional paid-in capital.
As discussed in Note 2, there were approximately 22 million shares of
Devon common stock issued on August 17, 1999, in connection with the PennzEnergy
merger. Also, there were 16 million Exchangeable Shares issued on December 10,
1998, in connection with the Northstar Energy Corporation combination. As of
year-end 2001, 14 million of the Exchangeable Shares had been exchanged for
shares of Devon's common stock. The Exchangeable Shares have rights identical to
those of Devon's common stock and are exchangeable at any time into Devon's
common stock on a one-for-one basis.
Devon's Board of Directors has designated a certain number of shares of
the preferred stock as Series A Junior Participating Preferred Stock (the
"Series A Junior Preferred Stock") in connection with the adoption of the
shareholder rights plan described later in this note. Effective January 22,
2002, the Board voted to increase the designated shares from one million to two
million. At December 31, 2001, there were no shares of Series A Junior Preferred
Stock issued or outstanding. The Series A Junior Preferred Stock is entitled to
receive cumulative quarterly dividends per share equal to the greater of $10 or
100 times the aggregate per share amount of all dividends (other than stock
dividends) declared on Common Stock since the immediately preceding quarterly
dividend payment date or, with respect to the first payment date, since the
first issuance of Series A Junior Preferred Stock. Holders of the Series A
Junior Preferred Stock are entitled to 100 votes per share (subject to
adjustment to prevent dilution) on all matters submitted to a vote of the
stockholders. The Series A Junior Preferred Stock is neither redeemable nor
convertible. The Series A Junior Preferred Stock ranks prior to the Common Stock
but junior to all other classes of Preferred Stock.
Stock Option Plans
Devon has outstanding stock options issued to key management and
professional employees under three stock option plans adopted in 1988, 1993 and
1997 (the "1988 Plan," the "1993 Plan" and the "1997 Plan"). Options granted
under the 1988 Plan and 1993 Plan remain exercisable by the employees owning
such options, but no new options will be granted under these plans. At December
31, 2001, there were 63,000 and 320,860 options outstanding under the 1988 Plan
and the 1993 Plan, respectively.
On May 21, 1997, Devon's stockholders adopted the 1997 Plan and
reserved two million shares of Common Stock for issuance thereunder. On December
9, 1998, Devon's stockholders voted to increase the reserved number of shares to
three million. On August 17, 1999, Devon's stockholders voted to increase the
reserved number of shares to six million. On August 29, 2000, Devon's
stockholders voted to increase the reserved number of shares to 10 million.
40
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The exercise price of stock options granted under the 1997 Plan may not
be less than the estimated fair market value of the stock at the date of grant,
plus 10% if the grantee owns or controls more than 10% of the total voting stock
of Devon prior to the grant. Options granted are exercisable during a period
established for each grant, which period may not exceed 10 years from the date
of grant. Under the 1997 Plan, the grantee must pay the exercise price in cash
or in Common Stock, or a combination thereof, at the time that the option is
exercised. The 1997 Plan is administered by a committee comprised of
non-management members of the Board of Directors. The 1997 Plan expires on April
25, 2007. As of December 31, 2001, there were 5,274,235 options outstanding
under the 1997 Plan. There were 3,745,334 options available for future grants as
of December 31, 2001.
In addition to the stock options outstanding under the 1988 Plan, 1993
Plan and 1997 Plan, there were approximately 1,053,807, 1,410,158 and 62,270
stock options outstanding at the end of 2001 that were assumed as part of the
Santa Fe Snyder merger, the PennzEnergy merger and the Northstar combination,
respectively. Santa Fe Snyder, PennzEnergy and Northstar had granted these
options prior to the Santa Fe Snyder merger, the PennzEnergy merger and the
Northstar combination. As part of the Santa Fe Snyder merger, the PennzEnergy
merger and the Northstar combination, the options were assumed by Devon and
converted to Devon options at the exchange rate of 0.22, 0.4475 and 0.235 Devon
options for each Santa Fe Snyder, PennzEnergy and Northstar option,
respectively.
A summary of the status of Devon's stock option plans as of December
31, 1999, 2000 and 2001, and changes during each of the years then ended, is
presented below.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OUTSTANDING PRICE EXERCISABLE PRICE
----------------- ----------------- ----------------- ------------
Balance at December 31, 1998 5,520,656 $ 31.768 4,079,125 $ 30.479
========= ========
Options granted 1,564,108 $ 31.736
Options assumed in the
PennzEnergy merger 2,081,894 $ 55.643
Options assumed in the Snyder merger 979,220 $ 35.182
Options exercised (1,139,231) $ 28.509
Options forfeited (452,746) $ 36.369
-----------
Balance at December 31, 1999 8,553,901 $ 38.202 7,063,983 $ 39.547
========= ========
Options granted 1,624,800 $ 51.430
Options exercised (2,488,756) $ 33.106
Options forfeited (333,991) $ 60.354
-----------
Balance at December 31, 2000 7,355,954 $ 41.843 6,024,796 $ 40.718
========= ========
Options granted 2,600,650 $ 35.427
Options exercised (1,504,691) $ 31.133
Options forfeited (267,583) $ 62.774
-----------
Balance at December 31, 2001 8,184,330 $ 41.089 5,515,958 $ 41.934
============ ========= ========
41
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The weighted average fair values of options granted during 2001, 2000
and 1999 were $13.17, $28.73 and $12.80, respectively. The fair value of each
option grant was estimated for disclosure purposes on the date of grant using
the Black-Scholes Option Pricing Model with the following assumptions for 2001,
2000 and 1999, respectively: risk-free interest rates of 3.8%, 5.5% and 6%;
dividend yields of 0.6%, 0.4% and 0.5%; expected lives of five, five and five
years; and volatility of the price of the underlying common stock of 42.2%,
40.0% and 35.2%.
The following table summarizes information about Devon's stock options
which were outstanding, and those which were exercisable, as of December 31,
2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ---------------- --------------- --------------- --------------- -----------
$8.375-$26.501 442,204 2.38 Years $ 23.014 442,204 $ 23.014
$28.830-$33.381 1,314,346 5.29 Years $ 30.726 1,239,114 $ 30.713
$34.375-$39.773 3,445,957 7.04 Years $ 35.308 1,569,779 $ 35.818
$40.190-$49.950 454,980 4.01 Years $ 45.941 444,996 $ 45.916
$50.142-$59.813 2,028,308 6.66 Years $ 53.177 1,329,064 $ 53.865
$60.150-$89.660 498,535 5.36 Years $ 70.788 490,801 $ 70.954
------------ ------------
8,184,330 6.15 Years $ 41.089 5,515,958 $ 41.934
============ ============
Had Devon elected the fair value provisions of SFAS No. 123 and
recognized compensation expense over the vesting period based on the fair value
of the stock options granted as of their grant date, Devon's 2001, 2000 and 1999
pro forma net earnings (loss) and pro forma net earnings (loss) per share would
have differed from the amounts actually reported as shown in the following
table. The pro forma amounts shown below do not include the effects of stock
options granted prior to January 1, 1995.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net earnings (loss) available to
common shareholders:
As reported $ 93 720 (158)
Pro forma $ 79 702 (173)
Net earnings (loss) per share available to
common shareholders:
As reported:
Basic $ 0.73 5.66 (1.68)
Diluted $ 0.72 5.50 (1.68)
Pro forma:
Basic $ 0.62 5.51 (1.85)
Diluted $ 0.61 5.36 (1.85)
42
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Shareholder Rights Plan
Under Devon's shareholder rights plan, stockholders have one right for
each share of Common Stock held. The rights become exercisable and separately
transferable ten business days after a) an announcement that a person has
acquired, or obtained the right to acquire, 15% or more of the voting shares
outstanding, or b) commencement of a tender or exchange offer that could result
in a person owning 15% or more of the voting shares outstanding.
Each right entitles its holder (except a holder who is the acquiring
person) to purchase either (a) 1/100 of a share of Series A Preferred Stock for
$75.00, subject to adjustment or, (b) Devon Common Stock with a value equal to
twice the exercise price of the right, subject to adjustment to prevent
dilution. In the event of certain merger or asset sale transactions with another
party or transactions which would increase the equity ownership of a shareholder
who then owned 15% or more of Devon, each Devon right will entitle its holder to
purchase securities of the merging or acquiring party with a value equal to
twice the exercise price of the right.
The rights, which have no voting power, expire on April 16, 2005. The
rights may be redeemed by Devon for $.01 per right until the rights become
exercisable.
11. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of Devon's financial instruments at December 31, 2001, 2000 and 1999.
2001 2000 1999
------------------------ ------------------------ ------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS)
Investments $ 644 644 606 606 634 634
Oil and gas price hedge agreements $ 225 225 -- (58) -- (10)
Interest rate swap agreements $ (9) (9) -- -- -- --
Electricity hedge agreements $ (12) (12) -- -- -- --
Foreign exchange hedge agreements $ (4) (4) -- (1) -- (3)
Embedded option in exchangeable $ (34) (34) -- -- -- --
debentures
Long-term debt (including current $ (6,589) (6,699) (2,049) (2,050) (2,416) (2,400)
portion)
43
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The following methods and assumptions were used to estimate the fair
values of the financial instruments in the above table. None of Devon's
financial instruments are held for trading purposes. The carrying values of cash
and cash equivalents, accounts receivable and accounts payable (including income
taxes payable and accrued expenses) included in the accompanying consolidated
balance sheets approximated fair value at December 31, 2001, 2000 and 1999.
Investments - The fair values of investments are primarily based on
quoted market prices.
Oil and Gas Price Hedge Agreements - The fair values of the oil and gas
price hedges are based on either (a) an internal discounted cash flow
calculation, (b) quotes obtained from the counterparty to the hedge agreement or
(c) quotes provided by brokers.
Interest Rate Swap Agreements - The fair values of the interest rate
swaps are based on quotes obtained from the counterparty to the swap agreement.
Electricity Hedge Agreements - The fair values of the electricity
hedges are based on an internal discounted cash flow calculation.
Foreign Exchange Hedge Agreements - The fair values of the foreign
exchange agreements are based on either (a) an internal discounted cash flow
calculation or (b) quotes obtained from brokers.
Embedded Option in Exchangeable Debentures - The fair values of the
embedded options are based on quotes obtained from brokers.
Long-term Debt - The fair values of the fixed-rate long-term debt have
been estimated based on quotes obtained from brokers or by discounting the
principal and interest payments at rates available for debt of similar terms and
maturity. The fair values of the floating-rate long-term debt are estimated to
approximate the carrying amounts due to the fact that the interest rates paid on
such debt are generally set for periods of three months or less.
Devon's total hedged positions as of January 31, 2002 are set forth in
the following tables.
PRICE SWAPS Through various price swaps, Devon has fixed the price it
will receive on a portion of its oil and natural gas production in 2002, 2003
and 2004. The following tables include information on this production. Where
necessary, the prices have been adjusted for certain transportation costs that
are netted against the price recorded by Devon, and the price has also been
adjusted for the Btu content of the gas production that has been hedged.
44
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
OIL PRODUCTION
--------------------------------------------
YEAR Bbls/DAY PRICE/Bbl
----------- ---------- ---------
2002 26,350 $ 23.27
GAS PRODUCTION
--------------------------------------------
YEAR Mcf/DAY PRICE/Mcf
----------- ---------- ---------
2002 242,128 $ 2.99
2003 99,905 $ 3.35
2004 4,164 $ 2.36
COSTLESS PRICE COLLARS Devon has also entered into costless price
collars that set a floor and ceiling price for a portion of its 2002 and 2003
oil and natural gas production. The following tables include information on
these collars. The floor and ceiling prices related to domestic oil production
are based on NYMEX. The NYMEX price is the monthly average of settled prices on
each trading day for West Texas Intermediate Crude oil delivered at Cushing,
Oklahoma. The gas prices shown in the following table have been adjusted to a
NYMEX-based price, using Devon's estimates of differentials between NYMEX and
the specific regional indices upon which the collars are based. The floor and
ceiling prices related to the domestic collars are based on various regional
first-of-the-month price indices as published monthly by Inside FERC. The floor
and ceiling prices related to the Canadian collars are based on the AECO index
as published by the Canadian Gas Price Reporter.
If the applicable monthly price indices are outside of the ranges set
by the floor and ceiling prices in the various collars, Devon and the
counterparty to the collars will settle the difference. Any such settlements
will either increase or decrease Devon's gas revenues for the period. Because
Devon's gas volumes are often sold at prices that differ from the related
regional indices, and due to differing Btu content of gas production, the floor
and ceiling prices of the various collars do not reflect actual limits of
Devon's realized prices for the production volumes related to the collars.
The floor and ceiling prices in the following table are weighted
averages of all the various collars.
OIL PRODUCTION
--------------------------------------------------
FLOOR CEILING
PRICE PRICE
PER PER
YEAR Bbls/DAY Bbl Bbl
----------- ---------- ---------- ----------
2002 20,000 $ 23.00 $ 28.19
45
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
GAS PRODUCTION
-------------------------------------------------
FLOOR CEILING
PRICE PRICE
PER PER
YEAR Mcf/DAY Mcf Mcf
---------- ---------- ---------- ----------
2002 442,574 $ 3.34 $ 6.37
2003 345,000 $ 3.20 $ 4.19
INTEREST RATE SWAPS Devon assumed certain interest rate swaps as a
result of the Anderson acquisition. Under these interest rate swaps, Devon has
swapped a floating rate for a fixed rate. Under such swaps, Devon will record a
fixed rate of 6.2% on $132 million of debt in 2002, 6.3% on $97 million of debt
in 2003, 6.4% on $79 million of debt in 2004 through 2006 and 6.3% on $24
million of debt in 2007.
FOREIGN CURRENCY EXCHANGE RATE SWAPS Devon assumed certain foreign
currency exchange rate swaps in the Anderson acquisition. These swaps require
Devon to sell $30 million and $12 million at average Canadian-to-U.S. exchange
rates of $0.680 and $0.676, and buy the same amount of dollars at the floating
exchange rate, in 2002 and 2003, respectively.
12. RETIREMENT PLANS
Devon has non-contributory defined benefit retirement plans (the "Basic
Plans") which include U.S. and Canadian employees meeting certain age and
service requirements. The benefits are based on the employee's years of service
and compensation. Devon's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Rights to amend or
terminate the Basic Plans are retained by Devon.
Devon also has separate defined benefit retirement plans (the
"Supplementary Plans") which are non-contributory and include only certain
employees whose benefits under the Basic Plans are limited by income tax
regulations. The Supplementary Plans' benefits are based on the employee's years
of service and compensation. Devon's funding policy for the Supplementary Plans
is to fund the benefits as they become payable. Rights to amend or terminate the
Supplementary Plans are retained by Devon.
In 2000, Devon established a defined benefit postretirement plan, which
is unfunded, and covers substantially all current employees including former
Santa Fe Snyder and PennzEnergy employees who remained with Devon. Additionally,
Devon assumed responsibility for the PennzEnergy sponsored defined benefit
postretirement plans, which are unfunded. The plans provide medical and life
insurance benefits and are, depending on the type of plan, either contributory
or non-contributory. The accounting for the health care plan anticipates future
cost-sharing changes that are consistent with Devon's expressed intent to
increase, where possible, contributions for future retirees.
46
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The following table sets forth the plans' benefit obligations, plan
assets, reconciliation of funded status, amounts recognized in the consolidated
balance sheets and the actuarial assumptions used as of December 31, 2001, 2000
and 1999.
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------------- ----------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
Change in benefit obligation:
Benefit obligation at beginning of
year $ 165 156 64 $ 32 38 8
Service cost 5 7 5 -- 1 1
Interest cost 13 11 6 2 2 1
Participant contributions -- -- -- 1 -- --
Amendments 5 4 -- (1) (2) --
Mergers and acquisitions 16 -- 88 -- -- 29
Special termination benefits 3 -- -- -- -- --
Settlement payments (4) -- -- -- -- --
Curtailment gain (1) (3) -- -- -- --
Actuarial (gain) loss 17 (3) (3) 4 (3) 1
Benefits paid (9) (7) (4) (5) (4) (2)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year 210 165 156 33 32 38
-------- -------- -------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at
beginning of year 155 158 42 -- -- --
Actual return on plan assets (9) 3 15 -- -- --
Mergers and acquisitions 17 -- 104 -- -- --
Employer contributions 6 1 1 4 4 2
Participant contributions -- -- -- 1 -- --
Settlement payments (4) -- -- -- -- --
Administrative expenses -- -- -- -- -- --
Benefits paid (9) (7) (4) (5) (4) (2)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end
of year 156 155 158 -- -- --
-------- -------- -------- -------- -------- --------
Funded status (54) (10) 2 (33) (32) (38)
Unrecognized net actuarial (gain) loss 35 10 (3) 2 (2) 1
Unrecognized prior service cost 6 1 2 (1) (1) --
Unrecognized net transition (asset) -- (6) -- -- 1 2
obligation
-------- -------- -------- -------- -------- --------
Net amount recognized $ (13) (5) 1 $ (32) (34) (35)
======== ======== ======== ======== ======== ========
The net amounts recognized in the
consolidated balance sheets consist of:
(Accrued) prepaid benefit cost $ (13) (5) 1 $ (32) (34) (35)
Additional minimum liability (33) (1) (3) -- -- --
Intangible asset 5 1 1 -- -- --
Accumulated other comprehensive
loss 28 -- 2 -- -- --
-------- -------- -------- -------- -------- --------
Net amount recognized $ (13) (5) 1 $ (32) (34) (35)
======== ======== ======== ======== ======== ========
Assumptions:
Discount rate 7.10% 7.65% 7.34% 7.15% 7.65% 7.32%
Expected return on plan assets 8.27% 8.50% 8.37% N/A N/A N/A
Rate of compensation increase 4.88% 5.00% 4.88% 5.00% 5.00% 4.75%
The benefit obligation for the defined benefit pension plans with
benefit obligations in excess of assets was $201 million as of December 31,
2001. The plan assets for these plans at December 31, 2001 totaled $138 million.
47
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Net periodic benefit cost included the following components:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------------------ --------------------------------------
2001 2000 1999 2001 2000 1999
----------- ----------- ----------- -------------- ------------- ---------
(IN MILLIONS)
Service cost $ 5 7 5 $ -- 1 1
Interest cost 13 11 6 2 2 1
Expected return on plan assets (13) (13) (7) -- -- --
Amortization of prior service cost 1 -- -- -- -- --
Recognized net actuarial (gain) loss 1 -- -- -- -- --
------- ----- ----- ------- ----- -----
Net periodic benefit cost $ 7 5 4 $ 2 3 2
======= ===== ===== ======= ===== =====
For measurement purposes, a 9% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 2001. The rate was
assumed to decrease on a pro-rata basis annually to 5% in the year 2005 and
remain at that level thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan. A one
percentage-point change in assumed health care cost trend rates would have the
following effects:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
----------------- -----------------
(IN MILLIONS)
Effect on total of service and interest cost components for 2001 $ -- $ --
Effect on year-end 2001 postretirement benefit obligation $ 1 $ (1)
Devon has incurred certain postemployment benefits to former or
inactive employees who are not retirees. These benefits include salary
continuance, severance and disability health care and life insurance which are
accounted for under SFAS No. 112, Employer's Accounting for Postemployment
Benefits. The accrued postemployment benefit liability was approximately $7
million, $13 million and $3 million at the end of 2001, 2000 and 1999,
respectively.
Devon has a 401(k) Incentive Savings Plan which covers all domestic
employees. At its discretion, Devon may match a certain percentage of the
employees' contributions to the plan. The matching percentage is determined
annually by the Board of Directors. Devon's matching contributions to the plan
were $5 million, $5 million and $4 million for the years ended December 31,
2001, 2000 and 1999, respectively.
Devon has defined contribution plans for its Canadian employees. Devon
contributes between 6% and 10% of the employee's base compensation, depending
upon the employee's classification. Such contributions are subject to maximum
amounts allowed under the Income Tax Act (Canada).
Devon also has a savings plan for its Canadian employees. Under the
savings plan, Devon contributes an amount equal to 2% of the base salary of each
employee. The employees may elect to contribute up to 4% of their salary. If
such employee contributions are made, they are matched by additional Devon
contributions.
48
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
During the years 2001, 2000 and 1999, Devon's combined contributions to
the Canadian defined contribution plan and the Canadian savings plan were $3
million, $2 million and $2 million, respectively.
13. COMMITMENTS AND CONTINGENCIES
Devon is party to various legal actions arising in the normal course of
business. Matters that are probable of unfavorable outcome to Devon and which
can be reasonably estimated are accrued. Such accruals are based on information
known about the matters, Devon's estimates of the outcomes of such matters and
its experience in contesting, litigating and settling similar matters. None of
the actions are believed by management to involve future amounts that would be
material to Devon's financial position or results of operations after
consideration of recorded accruals although actual amounts could differ from
management's estimate.
Environmental Matters
Devon is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and similar state statutes. In response to liabilities associated
with these activities, accruals have been established when reasonable estimates
are possible. Such accruals primarily include estimated costs associated with
remediation. Devon has not used discounting in determining its accrued
liabilities for environmental remediation, and no claims for possible recovery
from third party insurers or other parties related to environmental costs have
been recognized in Devon's consolidated financial statements. Devon adjusts the
accruals when new remediation responsibilities are discovered and probable costs
become estimable, or when current remediation estimates must be adjusted to
reflect new information.
Certain of Devon's subsidiaries acquired in the PennzEnergy merger are
involved in matters in which it has been alleged that such subsidiaries are
potentially responsible parties ("PRPs") under CERCLA or similar state
legislation with respect to various waste disposal areas owned or operated by
third parties. As of December 31, 2001, Devon's consolidated balance sheet
included $8 million of accrued liabilities, reflected in "Other liabilities,"
for environmental remediation. Devon does not currently believe there is a
reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which Devon subsidiaries are PRPs, Devon's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Devon's current belief that its share of wastes at a
particular site is or will be viewed by the Environmental Protection Agency or
other PRPs as being de minimis. As a result, Devon's monetary exposure is not
expected to be material.
Royalty Matters
Numerous gas producers and related parties, including Devon, have been
named in various lawsuits filed by private litigants alleging violation of the
federal False Claims Act. The suits allege
49
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
that the producers and related parties used below-market prices, improper
deductions, improper measurement techniques and transactions with affiliates
which resulted in underpayment of royalties in connection with natural gas and
natural gas liquids produced and sold from federal and Indian owned or
controlled lands. The various suits have been consolidated by the United States
Judicial Panel on Multidistrict Litigation for pre-trial proceedings in the
matter of In re Natural Gas Royalties Qui Tam Litigation, MDL-1293, United
States District Court for the District of Wyoming. Devon believes that it has
acted reasonably, has legitimate and strong defenses to all allegations in the
suits, and has paid royalties in good faith. Devon does not currently believe
that it is subject to material exposure in association with these lawsuits and
no liability has been recorded in connection therewith.
Operating Leases
The following is a schedule by year of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 2001:
YEAR ENDING DECEMBER 31, (IN MILLIONS)
------------------------ -------------
2002 $ 21
2003 20
2004 16
2005 14
2006 11
Thereafter 14
--------
Total minimum lease payments required $ 96
========
Total rental expense for all operating leases is as follows for the
years ended December 31:
(IN MILLIONS)
-------------
2001 $ 17
2000 $ 19
1999 $ 24
Santa Fe Energy Trust
The Santa Fe Energy Trust (the "Trust") was formed in 1992 to hold 6.3
million Depository Units, each consisting of beneficial ownership of one unit of
undivided interest in the Trust and a $20 face amount beneficial ownership
interest in a $1,000 face amount zero coupon U.S. Treasury obligation maturing
on or about February 15, 2008, when the Trust will be liquidated. The assets of
the Trust consist of certain oil and gas properties conveyed to it by Santa Fe
Snyder.
For any calendar quarter ending on or prior to December 31, 2002, the
Trust will receive additional support payments from Devon to the extent that the
Trust needs such payments to distribute $0.38 per Depository Unit per quarter.
The source of such support payments is limited
50
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
to Devon's remaining royalty interest in certain of the properties conveyed to
the Trust. The aggregate amount of the additional royalty payments (net of any
amounts recouped) is limited to $19 million on a revolving basis. If such
support payments are made, certain proceeds otherwise payable to the Trust in
subsequent quarters may be reduced to recoup the amount of such support
payments. Through the end of 2001, the Trust had received support payments
totaling $4 million and Devon had recouped all such payments.
Depending on various factors, such as sales volumes and prices and the
level of operating costs and capital expenditures incurred, proceeds payable to
the Trust with respect to operations in subsequent quarters may not be
sufficient to make the required quarterly distributions. In such instances,
Devon would be required to make support payments.
At December 31, 2001, 2000 and 1999, accounts payable as shown on the
accompanying consolidated balance sheets included $3 million, $4 million and $3
million, respectively, due to the Trust.
14. REDUCTION OF CARRYING VALUE OF OIL AND GAS PROPERTIES
Under the full cost method of accounting, the net book value of oil and
gas properties, less related deferred income taxes, may not exceed a calculated
"ceiling." The ceiling limitation is the discounted estimated after-tax future
net revenues from proved oil and gas properties plus the lower of cost or fair
value of unproved properties. The ceiling is imposed separately by country. In
calculating future net revenues, current prices and costs are generally held
constant indefinitely. The net book value, less deferred tax liabilities, is
compared to the ceiling on a quarterly and annual basis. Any excess of the net
book value, less related deferred taxes, is written off as an expense. An
expense recorded in one period may not be reversed in a subsequent period even
though higher oil and gas prices may have increased the ceiling applicable to
the subsequent period.
During 2001 and 1999, Devon reduced the carrying value of its oil and
gas properties by $916 and $476 million, respectively, due to the full cost
ceiling limitations. The after-tax effect of these reductions in 2001 and 1999
were $556 million and $310 million, respectively. The following table summarizes
these reductions by country.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001 1999
----------------------- -----------------------
Net of Net of
Gross Taxes Gross Taxes
---------- ---------- ---------- ----------
(IN MILLIONS)
United States $ 449 281 464 302
Canada 434 252 -- --
Egypt 33 23 -- --
China -- -- 12 8
---------- ---------- ---------- ----------
Total $ 916 556 476 310
========== ========== ========== ==========
51
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The 2001 domestic and Canadian reductions were primarily the result of
lower prices. Under the purchase method of accounting for business combinations,
acquired oil and gas properties are recorded at fair value as of the date of
purchase. Devon estimates such fair value using its estimates of future oil and
gas prices. In contrast, the ceiling calculation dictates that prices in effect
as of the last day of the applicable quarter are held constant indefinitely.
Accordingly, the resulting value is not indicative of the true fair value of the
reserves. The oil and gas properties added from the Anderson acquisition and
other smaller acquisitions in 2001 were recorded at fair values that were based
on expected future oil and gas prices higher than the year-end 2001 prices used
to calculate the ceiling. The reduction in Egypt was the result of high finding
and development costs and negative revisions to proved reserves.
The 1999 domestic reduction was primarily the result of lower prices.
The oil and gas properties added from the Snyder acquisition were recorded at
fair values that were based on expected future oil and gas prices higher than
the quarterly prices used to calculate the ceiling. The reduction in China was
the result of high finding and development costs.
Additionally, during 2001, Devon elected to discontinue operations in
Thailand, Malaysia, Qatar and on certain properties in Brazil. After meeting the
drilling and capital commitments on these properties, Devon determined that
these properties did not meet Devon's internal criteria to justify further
investment. Accordingly, Devon recorded an $87 million charge associated with
the impairment of these properties. The after-tax effect of this reduction was
$69 million.
15. OIL AND GAS OPERATIONS
Costs Incurred
The following tables reflect the costs incurred in oil and gas property
acquisition, exploration, and development activities:
TOTAL
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN MILLIONS)
Property acquisition costs:
Proved, excluding deferred income taxes $ 2,975 273 3,002
Deferred income taxes 84 -- 132
----------- ----------- -----------
Total proved, including deferred income taxes $ 3,059 273 3,134
=========== =========== ===========
Unproved, excluding deferred income taxes:
Business combinations 1,433 -- 84
Other acquisitions 183 55 40
Deferred income taxes 27 -- --
----------- ----------- -----------
Total unproved, including deferred income taxes $ 1,643 55 124
=========== =========== ===========
Exploration costs $ 348 210 158
Development costs $ 956 597 313
52
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
DOMESTIC
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN MILLIONS)
Property acquisition costs:
Proved, excluding deferred income taxes $ 292 177 2,670
Deferred income taxes 79 -- 132
----------- ----------- -----------
Total proved, including deferred income taxes $ 371 177 2,802
=========== =========== ===========
Unproved, excluding deferred income taxes:
Business combinations -- -- 82
Other acquisitions 158 35 28
Deferred income taxes 27 -- --
----------- ----------- -----------
Total unproved, including deferred income taxes $ 185 35 110
=========== =========== ===========
Exploration costs $ 166 117 88
Development costs $ 726 466 228
CANADA
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN MILLIONS)
Property acquisition costs:
Proved, excluding deferred income taxes $ 2,621 70 29
Deferred income taxes 5 -- --
----------- ----------- -----------
Total proved, including deferred income taxes $ 2,626 70 29
=========== =========== ===========
Unproved, excluding deferred income taxes:
Business combinations 1,433 -- --
Other acquisitions 24 17 9
Deferred income taxes -- -- --
----------- ----------- -----------
Total unproved, including deferred income taxes $ 1,457 17 9
=========== =========== ===========
Exploration costs $ 126 55 37
Development costs $ 168 57 30
INTERNATIONAL
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN MILLIONS)
Property acquisition costs:
Proved, excluding deferred income taxes $ 62 26 303
Deferred income taxes -- -- --
----------- ----------- -----------
Total proved, including deferred income taxes $ 62 26 303
=========== =========== ===========
Unproved, excluding deferred income taxes:
Business combinations -- -- 2
Other acquisitions 1 3 3
Deferred income taxes -- -- --
----------- ----------- -----------
Total unproved, including deferred income taxes $ 1 3 5
=========== =========== ===========
Exploration costs $ 56 38 33
Development costs $ 62 74 55
The preceding Total and International cost incurred tables exclude $30
million, $60 million and $23 million in 2001, 2000 and 1999, respectively,
related to discontinued operations.
53
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Pursuant to the full cost method of accounting, Devon capitalizes
certain of its general and administrative expenses which are related to property
acquisition, exploration and development activities. Such capitalized expenses,
which are included in the costs shown in the preceding tables, were $77 million,
$62 million and $29 million in the years 2001, 2000 and 1999, respectively.
Results of Operations for Oil and Gas Producing Activities
The following tables include revenues and expenses associated directly
with Devon's oil and gas producing activities. They do not include any
allocation of Devon's interest costs or general corporate overhead and,
therefore, are not necessarily indicative of the contribution to net earnings of
Devon's oil and gas operations. Income tax expense has been calculated by
applying statutory income tax rates to oil and gas sales after deducting costs,
including depreciation, depletion and amortization and after giving effect to
permanent differences.
TOTAL
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER EQUIVALENT BARREL AMOUNTS)
Oil, gas and natural gas liquids sales $ 2,857 2,599 1,164
Production and operating expenses (690) (560) (343)
Depreciation, depletion and amortization (817) (643) (371)
Amortization of goodwill (34) (41) (16)
Reduction of carrying value of oil and gas properties (1,003) -- (476)
Income tax expense (138) (548) (6)
--------------- --------------- ---------------
Results of operations for oil and gas producing
activities $ 175 807 (48)
=============== =============== ===============
Depreciation, depletion and amortization per equivalent
barrel of production $ 6.29 5.51 4.51
=============== =============== ===============
54
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
DOMESTIC
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER EQUIVALENT BARREL AMOUNTS)
Oil, gas and natural gas liquids sales $ 2,260 2,168 892
Production and operating expenses (512) (463) (254)
Depreciation, depletion and amortization (615) (541) (294)
Amortization of goodwill (34) (41) (16)
Reduction of carrying value of oil and gas properties (449) -- (464)
Income tax (expense) benefit (267) (446) 38
--------------- --------------- ---------------
Results of operations for oil and gas producing
activities $ 383 677 (98)
=============== =============== ===============
Depreciation, depletion and amortization per equivalent
barrel of production $ 6.47 5.73 4.98
=============== =============== ===============
CANADA
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER EQUIVALENT BARREL AMOUNTS)
Oil, gas and natural gas liquids sales $ 481 303 204
Production and operating expenses (137) (64) (63)
Depreciation, depletion and amortization (164) (64) (64)
Reduction of carrying value of oil and gas (434) -- --
properties
Income tax benefit (expense) 99 (80) (38)
--------------- --------------- ---------------
Results of operations for oil and gas producing
activities $ (155) 95 39
=============== =============== ===============
Depreciation, depletion and amortization per equivalent
barrel of production $ 5.74 4.05 3.56
=============== =============== ===============
INTERNATIONAL
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER EQUIVALENT BARREL AMOUNTS)
Oil, gas and natural gas liquids sales $ 116 128 68
Production and operating expenses (41) (33) (26)
Depreciation, depletion and amortization (38) (38) (13)
Amortization of goodwill -- -- --
Reduction of carrying value of oil and gas properties (120) -- (12)
Income tax benefit (expense) 30 (22) (6)
--------------- --------------- ---------------
Results of operations for oil and gas producing
activities $ (53) 35 11
=============== =============== ===============
Depreciation, depletion and amortization per equivalent
barrel of production $ 6.00 5.94 2.49
=============== =============== ===============
The preceding Total and International results of oil and gas producing
activities tables exclude $40 million, $38 million and $20 million in 2001, 2000
and 1999, respectively, related to discontinued operations.
16. SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
The following supplemental unaudited information regarding the oil and
gas activities of Devon is presented pursuant to the disclosure requirements
promulgated by the Securities and Exchange Commission and SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities."
55
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of
crude oil, natural gas and natural gas liquids reserves for each of the three
years ended December 31, 2001. Approximately 67%, 80% and 98%, of the respective
year-end 2001, 2000 and 1999 domestic proved reserves were calculated by the
independent petroleum consultants of LaRoche Petroleum Consultants, Ltd. and
Ryder Scott Company Petroleum Consultants. The remaining percentages of domestic
reserves are based on Devon's own estimates. Approximately 43% of the year-end
2001 Canadian proved reserves were calculated by the independent petroleum
consultants of Paddock Lindstrom & Associates and Gilbert Laustsen Jung
Associates, Ltd. The remaining percentage of Canadian reserves are based on
Devon's own estimates. All of the year-end 2000 and 1999 Canadian proved
reserves were calculated by the independent petroleum consultants Paddock
Lindstrom & Associates. All of the international proved reserves other than
Canada as of December 31, 2001, 2000 and 1999 were calculated by the independent
petroleum consultants of Ryder Scott Company Petroleum Consultants.
TOTAL
-----------------------------------------
NATURAL
GAS
OIL GAS LIQUIDS
(MMBBLS) (BCF) (MMBBLS)
----------- ----------- -----------
Proved reserves as of December 31, 1998 186 1,477 21
Revisions of estimates 23 7 3
Extensions and discoveries 13 307 3
Purchase of reserves 273 1,418 33
Production (27) (304) (5)
Sale of reserves (5) (54) --
----------- ----------- -----------
Proved reserves as of December 31, 1999 463 2,851 55
Revisions of estimates (3) 99 4
Extensions and discoveries 33 571 6
Purchase of reserves 24 225 --
Production (39) (426) (7)
Sale of reserves (48) (67) (8)
----------- ----------- -----------
Proved reserves as of December 31, 2000 430 3,253 50
Revisions of estimates (14) (294) 7
Extensions and discoveries 19 577 7
Purchase of reserves 166 2,267 52
Production (39) (498) (8)
Sale of reserves (12) (14) --
----------- ----------- -----------
Proved reserves as of December 31, 2001 550 5,291 108
=========== =========== ===========
Proved developed reserves as of:
December 31, 1998 140 1,282 19
December 31, 1999 277 2,501 52
December 31, 2000 243 2,631 46
December 31, 2001 308 3,948 88
56
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
DOMESTIC
-----------------------------------------
NATURAL
GAS
OIL GAS LIQUIDS
(MMBBLS) (BCF) (MMBBLS)
----------- ----------- -----------
Proved reserves as of December 31, 1998 101 838 16
Revisions of estimates 24 36 3
Extensions and discoveries 2 230 3
Purchase of reserves 143 1,400 33
Production (18) (221) (4)
Sale of reserves (3) (8) --
----------- ----------- -----------
Proved reserves as of December 31, 1999 249 2,275 51
Revisions of estimates (3) 101 4
Extensions and discoveries 21 504 5
Purchase of reserves 21 53 --
Production (29) (355) (6)
Sale of reserves (33) (57) (8)
----------- ----------- -----------
Proved reserves as of December 31, 2000 226 2,521 46
Revisions of estimates (25) (262) 7
Extensions and discoveries 12 360 5
Purchase of reserves 15 170 --
Production (26) (376) (6)
Sale of reserves (11) (14) --
----------- ----------- -----------
Proved reserves as of December 31, 2001 191 2,399 52
=========== =========== ===========
Proved developed reserves as of:
December 31, 1998 93 664 15
December 31, 1999 214 1,960 48
December 31, 2000 192 2,087 42
December 31, 2001 167 1,988 48
57
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CANADA
-----------------------------------------
NATURAL
GAS
OIL GAS LIQUIDS
(MMBBLS) (BCF) (MMBBLS)
----------- ----------- -----------
Proved reserves as of December 31, 1998 39 602 5
Revisions of estimates (3) (41) --
Extensions and discoveries -- 53 --
Purchase of reserves 3 12 --
Production (5) (74) (1)
Sale of reserves (2) (46) --
----------- ----------- -----------
Proved reserves as of December 31, 1999 32 506 4
Revisions of estimates 3 (6) --
Extensions and discoveries 3 65 1
Purchase of reserves 3 27 --
Production (5) (62) (1)
Sale of reserves -- (6) --
----------- ----------- -----------
Proved reserves as of December 31, 2000 36 524 4
Revisions of estimates -- (22) --
Extensions and discoveries 5 139 2
Purchase of reserves 133 2,097 52
Production (8) (113) (2)
Sale of reserves -- -- --
----------- ----------- -----------
Proved reserves as of December 31, 2001 166 2,625 56
=========== =========== ===========
Proved developed reserves as of:
December 31, 1998 33 583 4
December 31, 1999 29 501 4
December 31, 2000 30 508 4
December 31, 2001 124 1,923 40
INTERNATIONAL
-----------------------------------------
NATURAL
GAS
OIL GAS LIQUIDS
(MMBBLS) (BCF) (MMBBLS)
----------- ----------- -----------
Proved reserves as of December 31, 1998 46 37 --
Revisions of estimates 2 12 --
Extensions and discoveries 11 24 --
Purchase of reserves 127 6 --
Production (4) (9) --
Sale of reserves -- -- --
----------- ----------- -----------
Proved reserves as of December 31, 1999 182 70 --
Revisions of estimates (3) 4 --
Extensions and discoveries 9 2 --
Purchase of reserves -- 145 --
Production (5) (9) --
Sale of reserves (15) (4) --
----------- ----------- -----------
Proved reserves as of December 31, 2000 168 208 --
Revisions of estimates 11 (10) --
Extensions and discoveries 2 78 --
Purchase of reserves 18 -- --
Production (5) (9) --
Sale of reserves (1) -- --
----------- ----------- -----------
Proved reserves as of December 31, 2001 193 267
=========== =========== ===========
Proved developed reserves as of:
December 31, 1998 14 35 --
December 31, 1999 34 40 --
December 31, 2000 21 36 --
December 31, 2001 17 37 --
58
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The preceding Total and International quantities of oil and gas
reserves tables exclude the following proved reserves and proved developed
reserves related to discontinued operations.
NATURAL
GAS
OIL GAS LIQUIDS
(MMBBLS) (BCF) (MMBBLS)
----------- ----------- -----------
Proved reserves as of:
December 31, 1998 49 -- 12
December 31, 1999 33 99 13
December 31, 2000 29 205 12
December 31, 2001 36 186 13
Proved developed reserves as of:
December 31, 1998 40 -- --
December 31, 1999 24 -- --
December 31, 2000 18 -- --
December 31, 2001 16 -- --
Standardized Measure of Discounted Future Net Cash Flows
The accompanying tables reflect the standardized measure of discounted
future net cash flows relating to Devon's interest in proved reserves:
TOTAL
DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(IN MILLIONS)
Future cash inflows $ 22,439 38,785 17,079
Future costs:
Development (2,050) (1,432) (1,309)
Production (7,932) (7,599) (5,587)
Future income tax expense (3,131) (8,684) (1,714)
--------------- --------------- ---------------
Future net cash flows 9,326 21,070 8,469
10% discount to reflect timing of
cash flows (4,228) (8,874) (3,869)
--------------- --------------- ---------------
Standardized measure of
discounted future net cash flows $ 5,098 12,196 4,600
=============== =============== ===============
DOMESTIC
DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(IN MILLIONS)
Future cash inflows $ 9,861 29,144 11,363
Future costs:
Development (793) (916) (751)
Production (3,774) (5,661) (3,894)
Future income tax expense (759) (6,346) (1,072)
--------------- --------------- ---------------
Future net cash flows 4,535 16,221 5,646
10% discount to reflect timing of
cash flows (1,734) (6,592) (2,335)
--------------- --------------- ---------------
Standardized measure of
discounted future net cash flows $ 2,801 9,629 3,311
=============== =============== ===============
59
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CANADA
------------------------------------------------
DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(IN MILLIONS)
Future cash inflows $ 9,011 5,686 1,666
Future costs:
Development (922) (85) (66)
Production (3,292) (616) (515)
Future income tax expense (2,006) (1,967) (204)
------------ ------------ ------------
Future net cash flows 2,791 3,018 881
10% discount to reflect timing of
cash flows (1,195) (1,241) (321)
------------ ------------ ------------
Standardized measure of
discounted future net cash flows $ 1,596 1,777 560
============ ============ ============
INTERNATIONAL
------------------------------------------------
DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(IN MILLIONS)
Future cash inflows $ 3,567 3,955 4,050
Future costs:
Development (335) (431) (492)
Production (866) (1,322) (1,178)
Future income tax expense (366) (371) (438)
------------ ------------ ------------
Future net cash flows 2,000 1,831 1,942
10% discount to reflect timing of
cash flows (1,299) (1,041) (1,213)
------------ ------------ ------------
Standardized measure of
discounted future net cash flows $ 701 790 729
============ ============ ============
Future cash inflows are computed by applying year-end prices (averaging
$16.44 per barrel of oil, adjusted for transportation and other charges, $2.26
per Mcf of gas and $13.05 per barrel of natural gas liquids at December 31,
2001) to the year-end quantities of proved reserves, except in those instances
where fixed and determinable price changes are provided by contractual
arrangements in existence at year-end.
Future development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Of the $2.1 billion of future
development costs, $485 million, $222 million and $167 million are estimated to
be spent in 2002, 2003 and 2004, respectively.
Future development costs include not only development costs, but also
future dismantlement, abandonment and rehabilitation costs. Included as part of
the $2.1 billion of future development costs are $276 million of future
dismantlement, abandonment and rehabilitation costs.
60
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Future income tax expenses are computed by applying the appropriate
statutory tax rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future income tax
expenses give effect to permanent differences and tax credits, but do not
reflect the impact of future operations.
The preceding Total and International standardized measure of
discounted future net cash flows tables exclude $216 million, $276 million and
$168 million in 2001, 2000 and 1999, respectively, related to discontinued
operations.
Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
Principal changes in the standardized measure of discounted future net
cash flows attributable to Devon's proved reserves are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(IN MILLIONS)
Beginning balance $ 12,196 4,600 1,340
Sales of oil, gas and natural gas liquids, net of production (2,167) (2,039) (821)
costs
Net changes in prices and production costs (11,953) 9,594 1,569
Extensions, discoveries, and improved recovery, net of future
development costs 613 2,704 273
Purchase of reserves, net of future development costs 2,483 553 2,882
Development costs incurred during the period which reduced
future development costs 327 126 215
Revisions of quantity estimates (337) 434 (110)
Sales of reserves in place (86) (818) (78)
Accretion of discount 1,728 553 135
Net change in income taxes 3,366 (4,149) (866)
Other, primarily changes in timing (1,072) 638 61
------------ ------------ ------------
Ending balance $ 5,098 12,196 4,600
============ ============ ============
The preceding table excludes $216 million, $276 million and $168
million in 2001, 2000 and 1999, respectively, related to discontinued
operations.
17. SEGMENT INFORMATION
Devon manages its business by country. As such, Devon identifies its
segments based on geographic areas. Devon has three reportable segments: its
operations in the U.S., its operations in Canada, and its international
operations outside of North America. Substantially all of these segments'
operations involve oil and gas producing activities. Certain information
regarding such activities for each segment is included in Notes 15 and 16.
Following is certain financial information regarding Devon's segments
for 2001, 2000 and 1999. The revenues reported are all from external customers.
61
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
U.S. CANADA INTERNATIONAL TOTAL
------------ ------------ ------------- ------------
(IN MILLIONS)
AS OF DECEMBER 31, 2001:
Current assets $ 661 192 169 1,022
Property and equipment, net of accumulated
depreciation, depletion and amortization 4,051 4,248 584 8,883
Goodwill, net of amortization 209 1,928 69 2,206
Assets of discontinued operations -- -- 212 212
Other assets 826 33 2 861
------------ ------------ ------------ ------------
Total assets $ 5,747 6,401 1,036 13,184
============ ============ ============ ============
Current liabilities 407 367 106 880
Long-term debt 1,987 4,602 -- 6,589
Deferred tax liabilities 775 1,316 20 2,111
Liabilities of discontinued operations -- -- 77 77
Other liabilities 224 20 24 268
Stockholders' equity 2,354 96 809 3,259
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 5,747 6,401 1,036 13,184
============ ============ ============ ============
62
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
U.S. CANADA INTERNATIONAL TOTAL
------------ ------------ ------------- ------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2001:
REVENUES
Oil sales $ 586 146 104 836
Gas sales 1,571 307 12 1,890
Natural gas liquids sales 103 28 -- 131
Marketing and midstream revenue 64 7 -- 71
------------ ------------ ------------ ------------
Total revenues 2,324 488 116 2,928
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Lease operating expenses 340 110 40 490
Transportation costs 59 24 -- 83
Production taxes 113 3 1 117
Marketing and midstream costs and expenses 43 4 -- 47
Depreciation, depletion and amortization of
property and equipment 647 166 42 855
Amortization of goodwill 34 -- -- 34
General and administrative expenses 98 15 1 114
Expenses related to mergers -- 1 -- 1
Reduction in carrying value of oil and gas properties 449 434 120 1,003
------------ ------------ ------------ ------------
Total production and operating costs and expenses 1,783 757 204 2,744
------------ ------------ ------------ ------------
Earnings (loss) from operations 541 (269) (88) 184
OTHER INCOME (EXPENSES)
Interest expense (139) (81) -- (220)
Effects of changes in foreign currency exchange rates -- (11) (2) (13)
Change in fair value of financial instruments (1) (1) -- (2)
Other income 57 5 7 69
------------ ------------ ------------ ------------
Net other income (expenses) (83) (88) 5 (166)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle 458 (357) (83) 18
INCOME TAX EXPENSE (BENEFIT)
Current 29 8 20 57
Deferred 92 (145) 5 (48)
------------ ------------ ------------ ------------
Total income tax expense (benefit) 121 (137) 25 9
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations before
cumulative effect of change in accounting principle 337 (220) (108) 9
DISCONTINUED OPERATIONS:
Results of discontinued operations before income taxes -- -- 66 66
Income tax expense -- -- 21 21
------------ ------------ ------------ ------------
Net results of discontinued operations -- -- 45 45
------------ ------------ ------------ ------------
Earnings (loss) before cumulative effect of change
in accounting principle 337 (220) (63) 54
Cumulative effect of change in accounting principle 49 -- -- 49
------------ ------------ ------------ ------------
Net earnings (loss) $ 386 (220) (63) 103
============ ============ ============ ============
Capital expenditures $ 1,356 3,774 159 5,289
============ ============ ============ ============
63
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
U.S. CANADA INTERNATIONAL TOTAL
------------ ------------ ------------- ------------
(IN MILLIONS)
AS OF DECEMBER 31, 2000:
Current assets $ 645 79 133 857
Property and equipment, net of accumulated
depreciation, depletion and amortization 3,640 586 548 4,774
Assets of discontinued operations -- -- 219 219
Other assets 964 -- 46 1,010
------------ ------------ ------------ ------------
Total assets $ 5,249 665 946 6,860
============ ============ ============ ============
Current liabilities 449 74 77 600
Long-term debt 1,902 147 -- 2,049
Deferred tax liabilities (assets) 537 69 (4) 602
Liabilities of discontinued operations -- -- 60 60
Other liabilities 259 1 12 272
Stockholders' equity 2,102 374 801 3,277
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 5,249 665 946 6,860
============ ============ ============ ============
64
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
U.S. CANADA INTERNATIONAL TOTAL
------------ ------------ ------------- ------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2000:
REVENUES
Oil sales $ 727 116 117 960
Gas sales 1,305 169 11 1,485
Natural gas liquids sales 136 18 -- 154
Marketing and midstream revenue 47 6 -- 53
------------ ------------ ------------ ------------
Total revenues 2,215 309 128 2,652
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Lease operating expenses 319 52 33 404
Transportation costs 42 11 -- 53
Production taxes 102 1 -- 103
Marketing and midstream costs and expenses 25 3 -- 28
Depreciation, depletion and amortization of
property and equipment 565 65 43 673
Amortization of goodwill 41 -- -- 41
General and administrative expenses 81 10 5 96
Expenses related to mergers 60 -- -- 60
------------ ------------ ------------ ------------
Total production and operating costs and expenses 1,235 142 81 1,458
------------ ------------ ------------ ------------
Earnings from operations 980 167 47 1,194
OTHER INCOME (EXPENSES)
Interest expense (144) (10) (1) (155)
Effects of changes in foreign currency exchange rates -- (3) -- (3)
Other income 36 2 2 40
------------ ------------ ------------ ------------
Net other income (expenses) (108) (11) 1 (118)
------------ ------------ ------------ ------------
Earnings from continuing operations before income taxes 872 156 48 1,076
INCOME TAX EXPENSE
Current 113 2 14 129
Deferred 185 67 7 259
------------ ------------ ------------ ------------
Total income tax expense 298 69 21 388
------------ ------------ ------------ ------------
Earnings from continuing operations 574 87 27 688
DISCONTINUED OPERATIONS:
Results of discontinued operations before income taxes -- -- 66 66
Income tax expense -- -- 24 24
------------ ------------ ------------ ------------
Net results of discontinued operations -- -- 42 42
------------ ------------ ------------ ------------
Net earnings $ 574 87 69 730
============ ============ ============ ============
Capital expenditures $ 893 203 127 1,223
============ ============ ============ ============
65
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
U.S. CANADA INTERNATIONAL TOTAL
------------ ------------ ------------- ------------
(IN MILLIONS)
AS OF DECEMBER 31, 1999:
Current assets $ 391 69 86 546
Property and equipment, net of accumulated
depreciation, depletion and amortization 3,425 468 425 4,318
Assets of discontinued operations -- -- 153 153
Other assets 944 -- 135 1,079
------------ ------------ ------------ ------------
Total assets $ 4,760 537 799 6,096
============ ============ ============ ============
Current liabilities 357 45 44 446
Long-term debt 2,077 339 -- 2,416
Deferred tax liabilities (assets) 340 2 (39) 303
Liabilities of discontinued operations -- -- 46 46
Other liabilities 318 3 43 364
Stockholders' equity 1,668 148 705 2,521
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 4,760 537 799 6,096
============ ============ ============ ============
66
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
U.S. CANADA INTERNATIONAL TOTAL
------------ ------------ ------------- ------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 1999:
REVENUES
Oil sales $ 332 80 56 468
Gas sales 502 114 12 628
Natural gas liquids sales 58 10 -- 68
Marketing and midstream revenue 14 6 -- 20
------------ ------------ ------------ ------------
Total revenues 906 210 68 1,184
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Lease operating expenses 189 50 25 264
Transportation costs 22 12 -- 34
Production taxes 43 1 1 45
Marketing and midstream costs and expenses 7 3 -- 10
Depreciation, depletion and amortization of property
and equipment 309 65 13 387
Amortization of goodwill 16 -- -- 16
General and administrative expenses 69 12 2 83
Expenses related to mergers 17 -- -- 17
Reduction in carrying value of oil and gas properties 464 -- 12 476
------------ ------------ ------------ ------------
Total production and operating costs and expenses 1,136 143 53 1,332
------------ ------------ ------------ ------------
Earnings (loss) from operations (230) 67 15 (148)
OTHER INCOME (EXPENSES)
Interest expense (84) (24) (1) (109)
Effects of changes in foreign currency exchange rates -- 13 -- 13
Distributions on preferred securities of subsidiary trust (7) -- -- (7)
Other income 8 2 -- 10
------------ ------------ ------------ ------------
Net other expenses (83) (9) (1) (93)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations before
income taxes and extraordinary item (313) 58 14 (241)
INCOME TAX EXPENSE (BENEFIT)
Current 15 3 4 22
Deferred (119) 27 2 (90)
------------ ------------ ------------ ------------
Total income tax expense (benefit) (104) 30 6 (68)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations before
extraordinary item (209) 28 8 (173)
DISCONTINUED OPERATIONS:
Results of discontinued operations before income -- -- 42 42
taxes
Income tax expense -- -- 19 19
------------ ------------ ------------ ------------
Net results of discontinued operations -- -- 23 23
------------ ------------ ------------ ------------
Earnings (loss) before extraordinary item (209) 28 31 (150)
Extraordinary loss (4) -- -- (4)
------------ ------------ ------------ ------------
Net earnings (loss) $ (213) 28 31 (154)
============ ============ ============ ============
Capital expenditures $ 686 92 86 864
============ ============ ============ ============
67
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
18. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of the unaudited interim results of operations
for the years ended December 31, 2001 and 2000.
2001
---------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------------ ------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Oil, gas and natural gas liquids sales $ 975 684 541 657 2,857
Total revenues $ 995 699 553 681 2,928
Net earnings (loss) $ 400 136 85 (518) 103
Net earnings (loss) per common share:
Basic $ 3.08 1.03 0.65 (4.13) 0.73
Diluted $ 2.96 1.01 0.64 (4.13) 0.72
2000
---------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------------ ------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Oil, gas and natural gas liquids sales $ 523 607 662 807 2,599
Total revenues $ 534 619 676 823 2,652
Net earnings $ 105 153 165 307 730
Net earnings per common share:
Basic $ 0.81 1.19 1.27 2.37 5.66
Diluted $ 0.80 1.17 1.22 2.27 5.50
The second, third and fourth quarters of 2001 include $77 million, $10
million and $916 million, respectively, of reductions of carrying value of oil
and gas properties. The after-tax effect of these expenses was $62 million, $7
million and $556 million, respectively. The per share effect of these quarterly
reductions was $0.48, $0.05 and $4.42, respectively.
The third and fourth quarters of 2000 include $57 million and $3
million, respectively, of expenses incurred in connection with the Santa Fe
Snyder merger. The after-tax effect of these expenses was $35 million and $2
million, respectively. The per share effect of these quarterly reductions was
$0.28 and $0.01, respectively.
Oil, gas and natural gas liquids sales for the first, second, third and
fourth quarters of 2001 exclude $36 million, $26 million, $30 million and $31
million, respectively, related to discontinued operations. Oil, gas and natural
gas liquids sales for the first, second, third and fourth quarters of 2000
exclude $25 million, $29 million, $33 million and $32 million, respectively,
related to discontinued operations.
68
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
19. SUBSEQUENT EVENT AND PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Mitchell Energy & Development Corp. Merger
On January 24, 2002, Devon completed its acquisition of Mitchell. Devon
acquired Mitchell for the significant development and exploitation projects in
each of Mitchell's core areas, increased gas services operations and increased
exposure to the North American natural gas market. Assuming the Mitchell merger
had closed on December 31, 2001, the calculation of the purchase price and the
preliminary allocation to assets and liabilities are shown below.
(IN MILLIONS,
EXCEPT SHARE PRICE)
-------------------
Calculation and preliminary allocation of purchase price:
Shares of Devon common stock issued to Mitchell stockholders 30
Average Devon stock price $ 50.95
------------
Fair value of common stock issued $ 1,507
Cash paid to Mitchell stockholders, calculated at $31 per
outstanding common share of Mitchell 1,567
------------
Fair value of Devon common stock and cash to be issued to Mitchell
Stockholders 3,074
Plus estimated acquisition costs incurred 90
Plus fair value of Mitchell employee stock options assumed by Devon 25
------------
Total purchase price 3,189
Plus fair value of liabilities assumed by Devon:
Current liabilities 305
Long-term debt 363
Other long-term liabilities 76
Deferred income taxes 802
------------
Total purchase price plus liabilities assumed $ 4,735
============
Fair value of assets acquired by Devon:
Current assets 193
Proved oil and gas properties 1,456
Unproved oil and gas properties 696
Gas services facilities and equipment 840
Other property and equipment 3
Other assets 57
Goodwill (none deductible for income tax purposes) 1,490
------------
Total fair value of assets acquired $ 4,735
============
Pro Forma Information
Set forth in the following tables are certain unaudited pro forma
financial information as of December 31, 2001, and for the years ended December
31, 2001 and 2000. The information as of December 31, 2001, assumes the Mitchell
merger had closed on such date. The information for
69
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
the years ended December 31, 2001 and 2000, has been prepared assuming the
Anderson acquisition and the Mitchell merger were consummated on January 1,
2000. All pro forma information is based on estimates and assumptions deemed
appropriate by Devon. The pro forma information is presented for illustrative
purposes only. If the transactions had occurred in the past, Devon's operating
results might have been different from those presented in the following table.
The pro forma information should not be relied upon as an indication of the
operating results that Devon would have achieved if the transactions had
occurred on January 1, 2000. The pro forma information also should not be used
as an indication of the future results that Devon will achieve after the
transactions.
The following should be considered in connection with the pro forma
financial information presented:
- In 2000, Devon recognized $60 million of expenses related to its
merger with Santa Fe Snyder Corporation. Devon accounted for the Santa Fe Snyder
merger using the pooling-of-interests method of accounting and, therefore, the
expenses incurred related to the merger were expensed. The after-tax effect of
these expenses in 2000 was $37 million.
- In 2000, Mitchell realized income tax savings of $13 million related
to prior years' Section 29 tax credits and $6 million related to the reversal of
prior years' deferred income taxes.
- In 2000, Mitchell recognized a $5 million gain from the exchange of
certain gas services assets. Also in 2000, Mitchell recognized an $11 million
impairment expense related to other gas services assets. Net of tax, these two
events reduced Mitchell's 2000 net earnings by $4 million.
- On May 17, 2000, Anderson acquired all the outstanding shares of
Ulster Petroleums Ltd. The summary unaudited pro forma combined statements of
operations do not include any results from Ulster's operations prior to May 17,
2000.
- On February 12, 2001, Anderson acquired all of the outstanding shares
of Numac Energy Inc. The summary unaudited pro forma combined statements of
operations do not include any results from Numac's operations prior to February
12, 2001.
- In 2001, Devon elected to discontinue operations in Malaysia, Qatar,
Thailand and on certain properties in Brazil. Accordingly, in 2001, Devon
recorded an $87 million charge associated with the impairment of those
properties. The after-tax effect of this reduction was $69 million.
- In 2001, Devon reduced the carrying value of its oil and gas
properties by $916 million due to the full cost ceiling limitations. The
after-tax effect of this reduction was $556 million.
- Anderson had a compensation plan pursuant to which it periodically
issued awards referred to as share appreciation rights under which employees
could earn compensation based on increases in the market price of Anderson's
stock. Anderson awarded these rights in lieu of stock
70
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
option grants. Pro forma general and administrative expenses reported in the
accompanying unaudited pro forma statements of operations for the years ended
December 31, 2001 and 2000 include $6 million and $5 million, respectively, of
expenses related to these plans. After taxes, these plans had the effect of
decreasing unaudited pro forma net earnings in the 2001 and 2000 periods by $3
million and $3 million, respectively. Devon acquired all outstanding rights as
part of the Anderson acquisition. Accordingly, these rights will not affect
Devon's net earnings subsequent to the closing of the Anderson acquisition.
- Mitchell has incentive compensation plans pursuant to which it has
periodically issued awards referred to as bonus units under which employees can
earn compensation based on increases in the market price of Mitchell common
stock. Mitchell generally awards these bonus units in lieu of stock option
grants. Pro forma general and administrative expenses reported in the
accompanying unaudited pro forma statements of operations for the year 2000
include $21 million of expense related to these plans. After taxes, these plans
had the effect of decreasing unaudited pro forma net earnings in the 2000 period
by $14 million. Devon will not issue such bonus units after the merger.
- Devon's historical results of operations for the years 2001 and 2000
include $34 million and $41 million, respectively, of amortization expense for
goodwill related to previous mergers. As of January 1, 2002, in accordance with
new accounting pronouncements recently issued, such goodwill will cease to be
amortized and, instead, will be tested for impairment at least annually. No
goodwill amortization expense has been recognized in the pro forma statements of
operations for the goodwill related to the Anderson acquisition and the Mitchell
merger.
PRO FORMA INFORMATION
AS OF
DECEMBER 31, 2001
----------------------
(DOLLARS IN MILLIONS)
Balance sheet data:
Property and equipment, net $ 11,727
Investment in common stock of ChevronTexaco Corporation 636
Goodwill 3,698
Total assets 17,784
Debentures exchangeable into shares of ChevronTexaco
Corporation common stock 649
Other long-term debt 7,882
Stockholders' equity 4,694
Proved reserves:
Oil (MMBbls) 566
Gas (Bcf) 7,000
NGLs (MMBbls) 198
MMBoe 1,931
Standardized measure of discounted future net cash flows $ 5,969
71
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
PRO FORMA INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000
---------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND
PRODUCTION VOLUMES)
REVENUES
Oil sales $ 1,110 1,265
Gas sales 3,145 2,522
Natural gas liquids sales 307 342
Gas services revenue 1,169 1,202
---------- --------
Total revenues 5,731 5,331
---------- --------
COSTS AND EXPENSES
Lease operating expenses 728 603
Transportation costs 155 119
Production taxes 149 129
Gas services costs and expenses 1,038 984
Depreciation, depletion and amortization of property and equipment 1,372 1,172
Amortization of goodwill 34 41
General and administrative expenses 205 208
Expenses related to mergers 1 60
Reduction of carrying value of oil and gas properties 1,155 --
---------- --------
Total production and operating costs and expenses 4,837 3,316
---------- --------
Earnings from operations 894 2,015
OTHER INCOME (EXPENSES)
Interest expense (508) (495)
Effects of changes in foreign currency exchange rates (21) (3)
Change in fair value of financial instruments (16) --
Other income 90 46
---------- --------
Net other expenses (455) (452)
---------- --------
Earnings from continuing operations before income tax expense and
cumulative effect of change in accounting principle 439 1,563
INCOME TAX EXPENSE
Current 94 171
Deferred 61 390
---------- --------
Total income tax expense 155 561
---------- --------
Earnings from continuing operations before cumulative effect of change in
accounting principle 284 1,002
DISCONTINUED OPERATIONS:
Results of discontinued operations before income taxes 66 66
Income tax expense 21 24
---------- --------
Net results of discontinued operations 45 42
---------- --------
Earnings before cumulative effect of change in accounting principle 329 1,044
Cumulative effect of change in accounting principle 49 --
---------- --------
Net earnings 378 1,044
Preferred stock dividends 10 10
---------- --------
Net earnings applicable to common stockholders $ 368 1,034
========== ========
72
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
PRO FORMA INFORMATION
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000
------------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND
PRODUCTION VOLUMES)
Basic net earnings per share:
Earnings from continuing operations $ 1.74 6.41
Earnings from discontinued operations $ 0.29 0.21
Cumulative effect of change in accounting principle $ 0.32 --
------------- -------------
Net earnings $ 2.35 6.62
============= =============
Diluted net earnings per share:
Earnings from continuing operations $ 1.71 6.24
Earnings from discontinued operations $ 0.29 0.21
Cumulative effect of change in accounting principle $ 0.30 --
------------- -------------
Net earnings $ 2.30 6.45
============= =============
Weighted average common shares outstanding - basic 157 156
============= =============
Weighted average common shares outstanding - diluted 164 161
============= =============
Production volumes:
Oil (MMBbls) 53 50
Gas (Bcf) 810 708
NGLs (MMBbls) 17 16
MMBoe 205 184
73
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.
DEVON ENERGY CORPORATION
October 2, 2002 By /s/ Danny J. Heatly
---------------------------------
Danny J. Heatly
Vice President - Accounting
74
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
75