UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-30176
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 73-1567067
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 NORTH BROADWAY, SUITE 1500
OKLAHOMA CITY, OKLAHOMA 73102 -8260
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Not applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed from last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of Registrant's common stock, par
value $.10, as of April 30, 2001, was 129,420,000.
DEVON ENERGY CORPORATION
Index to Form 10-Q/A Quarterly Report
to the Securities and Exchange Commission
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, March 31, 2001 (Unaudited) 4
and December 31, 2000
Consolidated Statements of Operations (Unaudited), 5
For the Three Months Ended March 31, 2001 and 2000
Consolidated Statements of Comprehensive Operations 6
(Unaudited), For the Three Months Ended March 31,
2001 and 2000
Consolidated Statements of Cash Flows (Unaudited), 7
For the Three Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements. 8
DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"Bcf" means billion cubic feet
"Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"Mboe" means thousand equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGLs" means natural gas liquids
2
DEVON ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
(FORMING A PART OF FORM 10-Q QUARTERLY REPORT
TO THE SECURITIES AND EXCHANGE COMMISSION)
3
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 609,702 228,050
Accounts receivable 555,967 615,463
Inventories 40,256 47,272
Deferred income taxes 8,979 8,979
Investments and other current assets 35,199 34,373
----------- -----------
Total current assets 1,250,103 934,137
----------- -----------
Property and equipment, at cost, based on the full
cost method of accounting for oil and gas properties 9,966,413 9,709,352
Less accumulated depreciation, depletion
and amortization 4,925,204 4,799,816
----------- -----------
5,041,209 4,909,536
Investment in Chevron Corporation common stock,
at fair value 622,715 598,867
Goodwill, net of amortization 286,227 289,489
Other assets 126,498 128,449
----------- -----------
Total assets $ 7,326,752 6,860,478
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 314,325 305,210
Revenues and royalties due to others 117,306 151,951
Income taxes payable 162,546 65,674
Accrued interest payable 31,690 23,191
Merger related expenses payable 23,799 36,981
Accrued expenses and other current liabilities 47,127 45,980
----------- -----------
Total current liabilities 696,793 628,987
----------- -----------
Other liabilities 180,429 164,469
Debentures exchangeable into shares of Chevron
Corporation common stock 639,257 760,313
Other long-term debt 1,229,916 1,288,523
Deferred revenue 97,545 113,756
Fair value of derivative instruments 89,711 --
Deferred income taxes 728,552 626,826
Stockholders' equity:
Preferred stock of $1.00 par value ($100 liquidation value)
Authorized 4,500,000 shares; issued 1,500,000 in 2001 and 2000 1,500 1,500
Common stock of $.10 par value
Authorized 400,000,000 shares; issued 129,414,000 in 2001 and
128,638,000 in 2000 12,941 12,864
Additional paid-in capital 3,582,982 3,563,994
Retained earnings (accumulated deficit) 176,654 (214,708)
Accumulated other comprehensive loss (108,961) (85,397)
Unamortized restricted stock awards (567) (649)
----------- -----------
Total stockholders' equity 3,664,549 3,277,604
----------- -----------
Total liabilities and stockholders' equity $ 7,326,752 6,860,478
=========== ===========
See accompanying notes to consolidated financial statements.
4
MARCH 2001 10-Q
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
----------- -----------
(UNAUDITED)
REVENUES
Oil sales $ 253,982 270,157
Gas sales 725,164 240,817
Natural gas liquids sales 32,337 37,377
Other 12,104 12,065
----------- -----------
Total revenues 1,023,587 560,416
----------- -----------
COSTS AND EXPENSES
Lease operating expenses 122,648 106,707
Transportation costs 17,404 11,813
Production taxes 44,509 19,398
Depreciation, depletion and amortization of property and equipment 182,892 165,252
Amortization of goodwill 8,462 10,332
General and administrative expenses 22,262 24,850
Interest expense 34,538 40,076
Deferred effect of changes in foreign currency exchange rate on
subsidiary's long-term debt -- 2,408
Change in fair value of derivative instruments 14,042 --
----------- -----------
Total costs and expenses 446,757 380,836
----------- -----------
Earnings before income tax expense and cumulative effect of change in
accounting principle 576,830 179,580
INCOME TAX EXPENSE
Current 144,096 36,147
Deferred 81,919 38,246
----------- -----------
Total income tax expense 226,015 74,393
----------- -----------
Earnings before cumulative effect of change in accounting principle 350,815 105,187
Cumulative effect of change in accounting principle, net of income tax
expense of $31,617 49,452 --
----------- -----------
Net earnings 400,267 105,187
Preferred stock dividends 2,434 2,434
----------- -----------
Net earnings applicable to common shareholders $ 397,833 102,753
=========== ===========
Net earnings before cumulative effect of change in accounting principle per
average common share outstanding:
Basic $ 2.70 0.81
=========== ===========
Diluted $ 2.59 0.80
=========== ===========
Net earnings per average common share outstanding:
Basic $ 3.08 0.81
=========== ===========
Diluted $ 2.96 0.80
=========== ===========
Weighted average common shares outstanding - basic 129,030 126,336
=========== ===========
Weighted average common shares outstanding - diluted 135,361 127,667
=========== ===========
See accompanying notes to consolidated financial statements.
5
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
--------- ---------
(UNAUDITED)
Net earnings $ 400,267 105,187
Other comprehensive (loss) earnings, net of tax:
Foreign currency translation adjustments (19,634) (355)
Cumulative effect of change in accounting principle (36,579) --
Reclassification adjustment for derivative losses reclassified into
oil and gas sales 4,643 --
Change in fair value of outstanding hedging positions 13,459 --
Unrealized gains on marketable securities 14,547 25,447
--------- ---------
Comprehensive earnings $ 376,703 130,279
========= =========
See accompanying notes to consolidated financial statements.
6
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
--------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 400,267 105,187
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation, depletion and amortization of property
and equipment 182,892 165,252
Amortization of goodwill 8,462 10,332
Accretion of interest on zero-coupon convertible senior debentures 3,483 --
Amortization of discounts (premiums) on other long-term debt 1,985 (923)
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- 2,408
Gain on sale of assets (49) (22)
Change in fair value of derivative instruments 14,042 --
Cumulative effect of change in accounting principle (49,452) --
Deferred income taxes 81,919 38,246
Other 302 1,900
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 79,130 (29,370)
Inventories 7,044 (247)
Prepaid expenses (24,416) (9,807)
Other assets (12,600) (10,551)
Increase (decrease) in:
Accounts payable 2,319 (1,678)
Income taxes payable 96,977 26,141
Accrued expenses and other current liabilities (20,910) (3,611)
Deferred revenue (16,014) 61,700
Long-term other liabilities 1,349 (8,887)
--------- ---------
Net cash provided by operating activities 756,730 345,970
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 22,215 3,448
Capital expenditures (345,926) (436,055)
Decrease in other assets -- 96
--------- ---------
Net cash used in investing activities (323,711) (432,511)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings of long-term debt, net of issuance costs 62,406 487,386
Principal payments on long-term debt (117,763) (505,670)
Issuance of common stock, net of issuance costs 32,403 11,186
Repurchase of common stock (13,337) (8,800)
Issuance of treasury stock -- 1,900
Dividends paid on common stock (6,471) (4,317)
Dividends paid on preferred stock (2,434) (2,434)
Decrease in long-term other liabilities (5,163) (4,522)
--------- ---------
Net cash used in financing activities (50,359) (25,271)
--------- ---------
Effect of exchange rate changes on cash (1,008) (467)
--------- ---------
Net increase (decrease) in cash and cash equivalents 381,652 (112,279)
Cash and cash equivalents at beginning of period 228,050 173,167
--------- ---------
Cash and cash equivalents at end of period $ 609,702 60,888
========= =========
See accompanying notes to consolidated financial statements.
7
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On August 29, 2000, Devon Energy Corporation ("Devon") and Santa Fe
Snyder Corporation ("Santa Fe Snyder") completed a merger of the two companies
(the "Santa Fe Snyder merger"). At that date, Santa Fe Snyder became a
wholly-owned subsidiary of Devon. The Santa Fe Snyder merger was accounted for
under the pooling-of-interests method of accounting for business combinations.
All operational and financial information contained herein includes the combined
amounts of Devon and Santa Fe Snyder for all periods presented.
The accompanying consolidated financial statements and notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in Devon's 2000 Annual Report on Form 10-K.
In the opinion of Devon's management, all adjustments (all of which are
normal and recurring) have been made which are necessary to fairly state the
consolidated financial position of Devon and its subsidiaries as of March 31,
2001, and the results of their operations and their cash flows for the three
month periods ended March 31, 2001 and 2000. Certain of the 2000 amounts in the
accompanying consolidated financial statements have been reclassified to conform
to the 2001 presentation.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, Devon adopted the provisions of Statement of
Financial Accounting Standards (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 No. 133 and SFAS No. 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 a $36.6 million loss in
accumulated other comprehensive loss to recognize at fair value all derivatives
that are designated as cash-flow hedging instruments. Additionally, Devon
recorded a net-of-tax cumulative-effect-type adjustment to net earnings for a
$49.5 million gain ($0.38 per basic share and $0.37 per diluted share) related
to the fair value of derivative instruments that do not qualify as hedges. This
gain related principally to the option embedded in Devon's debentures that are
exchangeable into shares of Chevron Corporation common stock.
8
All derivatives are recognized on the balance sheet at their fair
value. All 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. 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.
During the first quarter of 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 periodically enters into financial hedging activities with
respect to a portion of its projected oil and natural gas production through
various financial transactions to manage its exposure to oil and gas price
volatility. These transactions include financial price swaps whereby Devon will
receive a fixed price for its production and pay a variable market price to the
contract counterparty. These transactions also include costless price collars
that set a floor and ceiling price for the hedged production. 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. These financial hedging activities are intended to
support oil and natural gas prices at targeted levels and to manage Devon's
exposure to oil and gas price fluctuations. The oil and gas reference prices
upon which these price hedging instruments are based reflect various market
indices that have a high degree of historical correlation with actual prices
received by Devon.
Devon also periodically enters into 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 revenues that are predominantly based on U.S. dollar
prices.
Devon does not hold or issue derivative instruments for trading
purposes. All of Devon's commodity price financial swaps and costless price
collars and foreign exchange rate swaps in place at January 1, 2001 and March
31, 2001 have been designated as cash flow hedges. Changes in the
9
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 when the forecasted transaction takes place.
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 quarter ended March 31, 2001, Devon
recorded a net charge of less than $0.1 million which represented the
ineffectiveness of the various cash flow hedges.
As of January 1, 2001, $31.9 million of net deferred losses on
derivative instruments accumulated in AOCL as a result of the $36.6 million
transition adjustment are expected to be reclassified to earnings during the
next 12 months.
As of March 31, 2001, $16.1 million of net deferred losses 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 these derivatives'
losses to earnings are the production and sale of oil and gas which includes the
production hedged under the various derivative instruments. The maximum term
over which the Company is hedging exposures to the variability of cash flows for
commodity price risk is 21 months.
Devon recorded an expense of $14.0 million in the first quarter of 2001
for the change in fair value of derivative instruments. Substantially all of
this expense related to the fair value change in the option that is embedded in
Devon's debentures which are exchangeable into shares of Chevron Corporation
common stock.
3. EARNINGS PER SHARE
The following tables reconcile the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three-month periods ended March 31, 2001 and 2000.
Options to purchase approximately 0.8 million shares of Devon's common
stock with exercise prices ranging from $58.84 per share to $89.66 per share
(with a weighted average price of $66.49 per share) were outstanding at March
31, 2001, but were not included in the computation of diluted earnings per share
for the first quarter of 2001 because the options' exercise price exceeded the
average market price of Devon's common stock during the first quarter.
Similarly, options to purchase approximately 2.6 million shares of Devon's
common stock with exercise prices ranging from $39.44 per share to $92.78 per
share (with a weighted average price of $59.96 per share) were excluded from the
diluted earnings per share calculation for the first quarter of 2000. The
excluded options for the 2001 period expire between May 22, 2001 and February
22, 2011.
10
3. EARNINGS PER SHARE (CONTINUED)
NET EARNINGS NET
APPLICABLE COMMON EARNINGS
TO COMMON SHARES PER
STOCKHOLDERS OUTSTANDING SHARE
------------ ----------- --------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2001:
Basic earnings per share $397,833 129,030 $3.08
=====
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 $1,380,000) 2,159 4,377
Potential common shares issuable upon the exercise
of outstanding stock options -- 1,954
-------- --------
Diluted earnings per share $399,992 135,361 $2.96
======== ======== =====
THREE MONTHS ENDED MARCH 31, 2000:
Basic earnings per share $102,753 126,336 $0.81
=====
Dilutive effect of potential common shares issuable
upon the exercise of outstanding stock options -- 1,331
-------- --------
Diluted earnings per share $102,753 127,667 $0.80
======== ======== =====
11
4. SEGMENT INFORMATION
Devon manages its business by country. As such, Devon identifies its
segments based on geographic areas. Devon has three 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. Following is certain financial information regarding
Devon's segments for the first quarters of 2001 and 2000. The revenues reported
are all from external customers.
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
AS OF MARCH 31, 2001:
Current assets $ 928,456 83,797 237,850 1,250,103
Property and equipment, net of accumulated depreciation,
depletion and amortization 3,679,823 597,381 764,005 5,041,209
Investment in Chevron Corporation common stock 622,715 -- -- 622,715
Goodwill, net of amortization 238,880 -- 47,347 286,227
Other assets 123,152 82 3,264 126,498
---------- ---------- ---------- ----------
Total assets $5,593,026 681,260 1,052,466 7,326,752
========== ========== ========== ==========
Current liabilities 460,627 105,336 130,830 696,793
Other liabilities 144,423 796 35,210 180,429
Debentures exchangeable into shares of Chevron
Corporation common stock 639,257 -- -- 639,257
Other long-term debt 1,144,326 85,590 -- 1,229,916
Deferred revenue 96,325 729 491 97,545
Fair value of derivative instruments 63,822 25,889 -- 89,711
Deferred income taxes 616,451 83,327 28,774 728,552
Stockholders' equity 2,427,795 379,593 857,161 3,664,549
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $5,593,026 681,260 1,052,466 7,326,752
========== ========== ========== ==========
12
4. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2001:
REVENUES
Oil sales $ 166,548 27,787 59,647 253,982
Gas sales 643,181 79,465 2,518 725,164
Natural gas liquids sales 27,163 5,124 50 32,337
Other 13,581 1,053 (2,530) 12,104
---------- ---------- ---------- ----------
Total revenues 850,473 113,429 59,685 1,023,587
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 88,463 15,337 18,848 122,648
Transportation costs 14,636 2,768 -- 17,404
Production taxes 43,916 418 175 44,509
Depreciation, depletion and amortization of property
and equipment 149,134 19,285 14,473 182,892
Amortization of goodwill 8,451 -- 11 8,462
General and administrative expenses 20,443 1,910 (91) 22,262
Interest expense 32,168 2,115 255 34,538
Change in fair value of derivative instruments 14,042 -- -- 14,042
---------- ---------- ---------- ----------
Total costs and expenses 371,253 41,833 33,671 446,757
---------- ---------- ---------- ----------
Earnings before income tax expense and cumulative effect
of change in accounting principle 479,220 71,596 26,014 576,830
INCOME TAX EXPENSE
Current 139,877 936 3,283 144,096
Deferred 43,634 30,712 7,573 81,919
---------- ---------- ---------- ----------
Total income tax expense 183,511 31,648 10,856 226,015
---------- ---------- ---------- ----------
Earnings before cumulative effect of change in accounting
principle 295,709 39,948 15,158 350,815
Cumulative effect of change in accounting principle 49,452 -- -- 49,452
---------- ---------- ---------- ----------
Net earnings 345,161 39,948 15,158 400,267
Preferred stock dividends 2,434 -- -- 2,434
---------- ---------- ---------- ----------
Net earnings applicable to common shareholders $ 342,727 39,948 15,158 397,833
========== ========== ========== ==========
Capital expenditures $ 230,754 61,364 53,808 345,926
========== ========== ========== ==========
13
4. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2000:
REVENUES
Oil sales $189,834 29,473 50,850 270,157
Gas sales 206,869 31,348 2,600 240,817
Natural gas liquids sales 33,001 4,376 -- 37,377
Other 11,450 1,091 (476) 12,065
-------- -------- -------- --------
Total revenues 441,154 66,288 52,974 560,416
-------- -------- -------- --------
COSTS AND EXPENSES
Lease operating expenses 77,418 12,304 16,985 106,707
Transportation costs 9,025 2,788 -- 11,813
Production taxes 19,071 227 100 19,398
Depreciation, depletion and amortization of property
and equipment 139,976 15,994 9,282 165,252
Amortization of goodwill 10,326 -- 6 10,332
General and administrative expenses 22,027 2,254 569 24,850
Interest expense 37,348 2,428 300 40,076
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- 2,408 -- 2,408
-------- -------- -------- --------
Total costs and expenses 315,191 38,403 27,242 380,836
-------- -------- -------- --------
Earnings before income tax expense 125,963 27,885 25,732 179,580
INCOME TAX EXPENSE
Current 31,947 700 3,500 36,147
Deferred 16,496 12,910 8,840 38,246
-------- -------- -------- --------
Total income tax expense 48,443 13,610 12,340 74,393
-------- -------- -------- --------
Net earnings 77,520 14,275 13,392 105,187
Preferred stock dividends 2,434 -- -- 2,434
-------- -------- -------- --------
Net earnings applicable to common shareholders $ 75,086 14,275 13,392 102,753
======== ======== ======== ========
Capital expenditures $339,727 36,026 60,302 436,055
======== ======== ======== ========
14
5. 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.
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 March 31, 2001, Devon's consolidated balance sheet included
$7.8 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
More than 30 oil companies, including Devon, are involved in disputes
in which it is alleged that such companies and related parties underpaid
royalty, overriding royalty and working interests owners in connection with the
production of crude oil. The proceedings include suits in federal court in
Texas, Louisiana, Mississippi and Wyoming that have been consolidated into one
proceeding in Texas. To avoid expensive and protracted litigation, certain
parties, including Devon, have entered into a global settlement agreement which
provides for a settlement of all claims of all members of the settlement class.
The court held a fairness hearing and issued an Amended Final Judgment approving
15
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the settlement on September 10, 1999. However, certain entities have appealed
their objections to the settlement. Devon's share of the proposed settlement,
which was accrued at March 31, 2001, is not material to its financial position,
results of operations or liquidity.
Also, pending in federal court in Texas is a similar suit alleging
underpaid royalties to the United States in connection with natural gas and
natural gas liquids produced and sold from United States owned and/or controlled
lands. The claims were filed by private litigants against Devon and numerous
other producers, under the federal False Claims Act. The United States served
notice of its intent to intervene as to certain defendants, but not Devon. Devon
and certain other defendants are challenging the constitutionality of whether a
claim under the federal False Claims Act can be maintained absent government
intervention. Devon believes that it has acted reasonably and paid royalties in
good faith. Devon does not currently believe that it is subject to material
exposure in association with this litigation. As a result, Devon's monetary
exposure in this suit is not expected to be material.
Maersk Rig Contract
In December 1997, the working interest owner partner of Pennzoil
Venezuela Corporation, S.A. ("PVC"), a subsidiary of Devon as a result of the
PennzEnergy merger, entered into a contract with Maersk Jupiter Drilling, S.A.
("Maersk") for the provision of a rig for drilling services relative to the
anticipated drilling program associated with Devon's Block 70/80 in Lake
Maracaibo, Venezuela. The rig was assembled and delivered by Maersk to Lake
Maracaibo where it performed an abbreviated drilling program for both Blocks
68/79 and 70/80. It is currently stacked in Lake Maracaibo. The contract, which
expires October 1, 2001, provides for early termination, with a charge for such
termination which is currently estimated at $42,000 per day with certain
escalation factors for the balance of the term. As of March 31, 2001, Devon's
consolidated balance sheet included accrued liabilities, reflected in "Other
liabilities," for the expected cost to terminate/settle the contract. Devon does
not currently believe there is a reasonable possibility of incurring additional
material costs in excess of the liability recognized for such
termination/settlement of the contract.
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SIGNATURES
Pursuant to the requirements 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
Date: December 18, 2001 /s/ Danny J. Heatly
-----------------------------------------
Danny J. Heatly
Vice President - Accounting
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