DEVON ENERGY CORP/DE, 10-K filed on 2/21/2013
Annual Report
Document And Entity Information (USD $)
In Billions, except Share data in Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Feb. 6, 2013
Jun. 29, 2012
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Amendment Flag
false 
 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
 
Entity Central Index Key
0001090012 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2012 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Common Stock, Shares Outstanding
 
406.0 
 
Entity Public Float
 
 
$ 23.3 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenues:
 
 
 
Oil, gas and NGL sales
$ 7,153 
$ 8,315 
$ 7,262 
Oil, gas and NGL derivatives
693 
881 
811 
Marketing and midstream revenues
1,656 
2,258 
1,867 
Total revenues
9,502 
11,454 
9,940 
Expenses and other, net:
 
 
 
Lease operating expenses
2,074 
1,851 
1,689 
Marketing and midstream operating costs and expenses
1,246 
1,716 
1,357 
Depreciation, depletion and amortization
2,811 
2,248 
1,930 
General and administrative expenses
692 
585 
563 
Taxes other than income taxes
414 
424 
380 
Interest expense
406 
352 
363 
Restructuring costs
74 
(2)
57 
Asset impairments
2,024 
 
 
Other, net
78 
(10)
33 
Total expenses and other, net
9,819 
7,164 
6,372 
Earnings (loss) from continuing operations before income taxes
(317)
4,290 
3,568 
Current income tax expense (benefit)
52 
(143)
516 
Deferred income tax expense (benefit)
(184)
2,299 
719 
Earnings (loss) from continuing operations
(185)
2,134 
2,333 
Earnings (loss) from discontinued operations, net of tax
(21)
2,570 
2,217 
Net earnings (loss)
(206)
4,704 
4,550 
Basic net earnings (loss) per share:
 
 
 
Basic earnings (loss) from continuing operations per share
$ (0.47)
$ 5.12 
$ 5.31 
Basic earnings (loss) from discontinued operations per share
$ (0.05)
$ 6.17 
$ 5.04 
Basic net earnings (loss) per share
$ (0.52)
$ 11.29 
$ 10.35 
Diluted net earnings (loss) per share:
 
 
 
Diluted earnings (loss) from continuing operations per share
$ (0.47)
$ 5.10 
$ 5.29 
Diluted earnings (loss) from discontinued operations per share
$ (0.05)
$ 6.15 
$ 5.02 
Diluted net earnings (loss) per share
$ (0.52)
$ 11.25 
$ 10.31 
Comprehensive earnings (loss):
 
 
 
Net earnings (loss)
(206)
4,704 
4,550 
Other comprehensive earnings (loss), net of tax:
 
 
 
Foreign currency translation
194 
(191)
377 
Pension and postretirement plans
(2)
Other comprehensive earnings (loss), net of tax
196 
(185)
375 
Comprehensive earnings (loss)
$ (10)
$ 4,519 
$ 4,925 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ (206)
$ 4,704 
$ 4,550 
(Earnings) loss from discontinued operations, net of tax
21 
(2,570)
(2,217)
Adjustments to reconcile earnings from continuing operations to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
2,811 
2,248 
1,930 
Asset impairments
2,024 
 
 
Deferred income tax expense (benefit)
(184)
2,299 
719 
Unrealized change in fair value of financial instruments
205 
(401)
107 
Other noncash charges
240 
241 
215 
Net decrease (increase) in working capital
(50)
185 
(273)
Decrease (increase) in long-term other assets
(36)
33 
32 
Increase (decrease) in long-term other liabilities
105 
(493)
(41)
Cash from operating activities - continuing operations
4,930 
6,246 
5,022 
Cash from operating activities - discontinued operations
26 
(22)
456 
Net cash from operating activities
4,956 
6,224 
5,478 
Cash flows from investing activities:
 
 
 
Capital expenditures
(8,225)
(7,534)
(6,476)
Proceeds from property and equipment divestitures
1,468 
129 
4,310 
Purchases of short-term investments
(4,106)
(6,691)
(145)
Redemptions of short-term investments
3,266 
5,333 
 
Other
14 
(29)
Cash from investing activities - continuing operations
(7,583)
(8,792)
(2,309)
Cash from investing activities - discontinued operations
57 
3,146 
2,197 
Net cash from investing activities
(7,526)
(5,646)
(112)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings of long-term debt, net of issuance costs
2,458 
2,221 
 
Net short-term borrowings (repayments)
(537)
3,726 
(1,432)
Debt repayments
 
(1,760)
(350)
Credit facility borrowings
750 
 
 
Credit facility repayments
(750)
 
 
Proceeds from stock option exercises
27 
101 
111 
Repurchases of common stock
 
(2,332)
(1,168)
Dividends paid on common stock
(324)
(278)
(281)
Excess tax benefits related to share-based compensation
13 
16 
Net cash from financing activities
1,629 
1,691 
(3,104)
Effect of exchange rate changes on cash
23 
(4)
17 
Net change in cash and cash equivalents
(918)
2,265 
2,279 
Cash and cash equivalents at beginning of period
5,555 
3,290 
1,011 
Cash and cash equivalents at end of period
$ 4,637 
$ 5,555 
$ 3,290 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 4,637 
$ 5,555 
Short-term investments
2,343 
1,503 
Accounts receivable
1,245 
1,379 
Other current assets
746 
868 
Total current assets
8,971 
9,305 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
69,410 
61,696 
Not subject to amortization
3,308 
3,982 
Total oil and gas
72,718 
65,678 
Other
5,630 
5,098 
Total property and equipment, at cost
78,348 
70,776 
Less accumulated depreciation, depletion and amortization
(51,032)
(46,002)
Property and equipment, net
27,316 
24,774 
Goodwill
6,079 
6,013 
Other long-term assets
960 
1,025 
Total assets
43,326 
41,117 
Current liabilities:
 
 
Accounts payable
1,451 
1,471 
Revenues and royalties payable
750 
678 
Short-term debt
3,189 
3,811 
Other current liabilities
613 
778 
Total current liabilities
6,003 
6,738 
Long-term debt
8,455 
5,969 
Asset retirement obligations
1,996 
1,496 
Other long-term liabilities
901 
721 
Deferred income taxes
4,693 
4,763 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 406 million and 404 million shares in 2012 and 2011, respectively
41 
40 
Additional paid-in capital
3,688 
3,507 
Retained earnings
15,778 
16,308 
Accumulated other comprehensive earnings
1,771 
1,575 
Total stockholders' equity
21,278 
21,430 
Commitments and contingencies (Note 18)
   
   
Total liabilities and stockholders' equity
$ 43,326 
$ 41,117 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.10 
$ 0.10 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
406,000,000 
404,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions, except Share data
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Total
Balance, at Dec. 31, 2009
$ 45 
$ 6,527 
$ 7,613 
$ 1,385 
 
$ 15,570 
Balance, shares, at Dec. 31, 2009
447,000,000 
 
 
 
 
 
Net earnings (loss)
 
 
4,550 
 
 
4,550 
Other comprehensive earnings (loss), net of tax
 
 
 
375 
 
375 
Stock option exercises
 
117 
 
 
(6)
111 
Stock option exercises, shares
2,000,000 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
2,000,000 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(1,246)
(1,246)
Common stock retired
(2)
(1,217)
 
 
1,219 
 
Common stock retired, shares
(19,000,000)
 
 
 
 
 
Common stock dividends
 
 
(281)
 
 
(281)
Share-based compensation
 
158 
 
 
 
158 
Share-based compensation tax benefits
 
16 
 
 
 
16 
Balance, at Dec. 31, 2010
43 
5,601 
11,882 
1,760 
(33)
19,253 
Balance, shares, at Dec. 31, 2010
432,000,000 
 
 
 
 
 
Net earnings (loss)
 
 
4,704 
 
 
4,704 
Other comprehensive earnings (loss), net of tax
 
 
 
(185)
 
(185)
Stock option exercises
 
112 
 
 
(11)
101 
Stock option exercises, shares
2,000,000 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
1,000,000 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(2,337)
(2,337)
Common stock retired
(3)
(2,378)
 
 
2,381 
 
Common stock retired, shares
(31,000,000)
 
 
 
 
 
Common stock dividends
 
 
(278)
 
 
(278)
Share-based compensation
 
159 
 
 
 
159 
Share-based compensation tax benefits
 
13 
 
 
 
13 
Balance, at Dec. 31, 2011
40 
3,507 
16,308 
1,575 
 
21,430 
Balance, shares, at Dec. 31, 2011
404,000,000 
 
 
 
 
 
Net earnings (loss)
 
 
(206)
 
 
(206)
Other comprehensive earnings (loss), net of tax
 
 
 
196 
 
196 
Stock option exercises
49 
 
 
(23)
27 
Stock option exercises, shares
1,000,000 
 
 
 
 
1,390,000 
Restricted stock grants, net of cancellations, shares
1,000,000 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(29)
(29)
Common stock retired
 
(52)
 
 
52 
 
Common stock dividends
 
 
(324)
 
 
(324)
Share-based compensation
 
179 
 
 
 
179 
Share-based compensation tax benefits
 
 
 
 
Balance, at Dec. 31, 2012
$ 41 
$ 3,688 
$ 15,778 
$ 1,771 
 
$ 21,278 
Balance, shares, at Dec. 31, 2012
406,000,000 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.Summary of Significant Accounting Policies

 

Devon Energy Corporation (“Devon”) is a leading independent energy company engaged primarily in the exploration, development and production of oil, natural gas and NGLs. Devon’s operations are concentrated in various North American onshore areas in the U.S. and Canada. Devon also owns natural gas pipelines, plants and treatment facilities in many of its producing areas, making it one of North America's larger processors of natural gas.

 

Accounting policies used by Devon and its subsidiaries conform to accounting principles generally accepted in the United States of America and reflect industry practices. The more significant of such policies are discussed below.

 

Principles of Consolidation

 

The accounts of Devon and its wholly owned and controlled subsidiaries are included in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements 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 these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the following:

 

• proved reserves and related present value of future net revenues;

• the carrying value of oil and gas properties;

• derivative financial instruments;

• the fair value of reporting units and related assessment of goodwill for impairment;

• income taxes;

• asset retirement obligations;

• obligations related to employee pension and postretirement benefits; and

• legal and environmental risks and exposures.

 

Revenue Recognition and Gas Balancing

 

Oil, gas and NGL sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline, railcar or truck. Cash received relating to future production is deferred and recognized when all revenue recognition criteria are met. Taxes assessed by governmental authorities on oil, gas and NGL sales are presented separately from such revenues in the accompanying comprehensive statements of earnings.

 

Devon follows the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which Devon is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the underproduced owner to recoup its entitled share through production. The liability is priced based on current market prices. No receivables are recorded for those wells where Devon has taken less than its share of production unless all revenue recognition criteria are met. If an imbalance exists at the time the wells' reserves are depleted, settlements are made among the joint interest owners under a variety of arrangements.

 

Marketing and midstream revenues are recorded at the time products are sold or services are provided to third parties at a fixed or determinable price, delivery or performance has occurred, title has transferred and collectability of the revenue is probable. Revenues and expenses attributable to oil, gas and NGL purchases, transportation and processing contracts are reported on a gross basis when Devon takes title to the products and has risks and rewards of ownership.   

 

 

During 2012, 2011 and 2010, no purchaser accounted for more than 10 percent of Devon’s revenues from continuing operations.

 

Derivative Financial Instruments

 

Devon is exposed to certain risks relating to its ongoing business operations, including risks related to commodity prices, interest rates and Canadian to U.S. dollar exchange rates. As discussed more fully below, Devon uses derivative instruments primarily to manage commodity price risk and interest rate risk. Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes.

 

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility. Devon's derivative financial instruments typically include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars 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 will cash-settle the difference with the counterparty to the collars. The call options give counterparties the right to purchase production at a predetermined price.

 

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon's interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates.

 

All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheet. Changes in the fair value of these derivative financial instruments are recorded in earnings unless specific hedge accounting criteria are met. For derivative financial instruments held during the three-year period ended December 31, 2012, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. Cash settlements with counterparties on Devon's derivative financial instruments are also recorded in earnings.

 

By using derivative financial instruments to hedge exposures to changes in commodity prices, interest rates and foreign currency rates, Devon is exposed to credit 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 placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon's policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon's derivative contracts generally require cash collateral to be posted if either its or the counterparty's credit rating falls below certain credit rating levels. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below such credit levels. As of December 31, 2012, Devon held $63 million of cash collateral, which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying balance sheet.

 

General and Administrative Expenses

 

General and administrative expenses are reported net of amounts reimbursed by 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.

 

Share Based Compensation

 

Devon grants stock options, restricted stock awards and other types of share-based awards to members of its Board of Directors and selected employees. All such awards are measured at fair value on the date of grant and are generally recognized as a component of general and administrative expenses in the accompanying comprehensive statements of earnings over the applicable requisite service periods. As a result of Devon’s strategic repositioning announced in 2009 and the consolidation of its U.S. operations announced in October 2012, certain share based awards were accelerated and recognized as a component of restructuring expense in the accompanying comprehensive statements of earnings.

 

Generally, Devon uses new shares from approved incentive programs to grant share-based awards and to issue shares upon stock option exercises. Shares repurchased under approved programs are available to be issued as part of Devon’s share based awards. However, Devon has historically cancelled these shares upon repurchase.

 

Income Taxes

 

Devon is subject to current income taxes assessed by the federal and various state jurisdictions in the U.S. and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, 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. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of carryforwards is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. 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.

 

Devon does not recognize U.S. deferred income taxes on the unremitted earnings of its foreign subsidiaries that are deemed to be indefinitely reinvested. When such earnings are no longer deemed permanently reinvested, Devon recognizes the appropriate deferred, or even current, income tax liabilities.

 

Devon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in other current liabilities. Interest and penalties related to unrecognized tax benefits are included in current income tax expense.

 

Net Earnings (Loss) Per Common Share    

 

Devon’s basic earnings per share amounts have been computed based on the average number of shares of common stock outstanding for the period. Basic earnings per share includes the effect of participating securities, which primarily consist of Devon's outstanding restricted stock awards. Diluted earnings per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities. Such securities primarily consist of outstanding stock options.  

 

Cash and Cash Equivalents  

 

Devon considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.

 

Investments

 

Devon periodically invests excess cash in U.S. and Canadian treasury securities and other marketable securities. During 2012 and 2011, Devon invested a portion of its joint venture proceeds and a portion of the International offshore divestiture proceeds into such securities, causing short-term investments to increase.

 

Devon considers securities with original contractual maturities in excess of three months, but less than one year to be short-term investments. Investments with contractual maturities in excess of one year are classified as long-term, unless such investments are classified as trading or available-for-sale.

 

Devon reports its investments and other marketable securities at fair value, except for debt securities in which management has the ability and intent to hold until maturity. Such debt securities totaled $64 million and $84 million at December 31, 2012 and 2011, respectively and are included in other long-term assets in the accompanying balance sheet. Devon has the ability to hold the securities until maturity and does not believe the values of its long-term securities are impaired.

 

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 that are not related to production, general corporate overhead or similar activities, are also capitalized. Interest costs incurred and attributable to unproved oil and gas properties under current evaluation and major development projects of oil and gas properties are also capitalized. 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.

 

Under the full-cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling” at the end of each quarter. The ceiling is calculated separately for each country and is based on the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum, net of related tax effects. The estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties.

 

Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts in place that qualify for hedge accounting treatment. None of Devon's derivative contracts held during the three-year period ended December 31, 2012, qualified for hedge accounting treatment.

 

Any excess of the net book value, less related deferred taxes, over the ceiling is written off as an expense. An expense recorded in one period may not be reversed in a subsequent period even though higher commodity prices may have increased the ceiling applicable to the subsequent period.

 

Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six thousand cubic feet of gas to one barrel of oil. Depletion is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

 

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Devon assesses its unproved properties for impairment quarterly. Significant unproved properties are assessed individually. Costs of insignificant unproved properties are transferred into the depletion calculation over holding periods ranging from three to four years.

 

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 in a particular country.

 

Depreciation of midstream pipelines are provided on a unit-of-production basis. Depreciation and amortization of other property and equipment, including corporate and other midstream assets and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to 60 years. Interest costs incurred and attributable to major midstream and corporate construction projects are also capitalized.

 

Devon recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites and midstream pipelines and processing plants when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. Devon’s asset retirement obligations include estimated environmental remediation costs which arise from normal operations and are associated with the retirement of such long-lived assets. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.

 

 

Goodwill 

 

Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. Such test includes an assessment of qualitative and quantitative factors. The impairment test requires allocating goodwill and all other assets and liabilities to assigned reporting units. The fair value of each reporting unit is estimated and compared to the net book value of the reporting unit. If the estimated fair value of the reporting unit is less than the net book value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense. Because quoted market prices are not available for Devon's reporting units, the fair values of the reporting units are estimated based upon several valuation analyses, including comparable companies, comparable transactions and premiums paid.

 

Devon performed annual impairment tests of goodwill in the fourth quarters of 2012, 2011 and 2010. Based on these assessments, no impairment of goodwill was required.

 

The table below provides a summary of Devon's goodwill, by assigned reporting unit. The increase in Devon’s goodwill from 2011 to 2012 was due to changes in the exchange rate between the U.S. dollar and the Canadian dollar.

 

 

December 31,

 

2012

2011

 

(In millions)

U.S.

$
3,046 
$
3,046 

Canada

3,033 
2,967 

Total

$
6,079 
$
6,013 

 

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. Liabilities for environmental remediation or restoration claims resulting from improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with Devon's accounting policy for property and equipment.

 

Fair Value Measurements

 

Certain of Devon's assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.” Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels:

 

·

Level 1 – Inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

·

Level 2 – Inputs consist of quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active.

·

Level 3 – Inputs are not observable from objective sources and have the lowest priority. The most common Level 3 fair value measurement is an internally developed cash flow model.

 

Discontinued Operations

 

As a result of the November 2009 plan to divest Devon’s offshore assets, all amounts related to Devon's International operations are classified as discontinued operations. The Gulf of Mexico properties that were divested in 2010 do not qualify as discontinued operations under accounting rules. As such, amounts in these notes and the accompanying financial statements that pertain to continuing operations include amounts related to Devon’s offshore Gulf of Mexico operations.

 

 

Foreign Currency Translation Adjustments

 

The U.S. dollar is the functional currency for Devon's consolidated operations except its Canadian subsidiaries, which use the Canadian dollar as the functional currency. Assets and liabilities of the Canadian subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period.  Revenues, expenses and cash flow are translated using an average exchange rate during the reporting period. Translation adjustments have no effect on net income and are included in accumulated other comprehensive earnings in stockholders' equity. 

Derivative Financial Instruments
Derivative Financial Instruments

2.Derivative Financial Instruments

 

Commodity Derivatives

 

As of December 31, 2012, Devon had the following open oil derivative positions. Devon’s oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.

 

 

Price Swaps

Price Collars

Call Options Sold

Period

Volume (Bbls/d)

Weighted Average Price ($/Bbl)

Volume (Bbls/d)

Weighted Average Floor Price ($/Bbl)

Weighted Average Ceiling Price ($/Bbl)

Volume (Bbls/d)

Weighted  Average Price ($/Bbl)

Q1-Q4 2013

31,000

$104.13

45,753

$91.19

$115.97

10,000

$120.00

Q1-Q4 2014

4,000

$100.49

2,000

$90.00

$111.13

10,000

$120.00

 

Basis Swaps

Period

Index

Volume (Bbls/d)

Weighted Average Differential to WTI ($/Bbl)

Q1-Q2 2013

Western Canadian Select

3,000

$(19.58)

 

As of December 31, 2012, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas swaps and collars that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas swaps and collars that settle against the AECO index. 

 

 

 

 

 

 

 

 

 

 

Price Swaps

Price Collars

Call Options Sold

Period

Volume (MMBtu/d)

Weighted Average Price ($/MMBtu)

Volume (MMBtu/d)

Weighted Average Floor Price ($/MMBtu)

Weighted Average Ceiling Price ($/MMBtu)

Volume (MMBtu/d)

Weighted Average Price ($/MMBtu)

Q1-Q4 2013

560,000

$4.18

461,370

$3.53

$4.33

Q1-Q4 2014

250,000

$4.09

250,000

$5.00

 

 

Price Swaps

Period

Volume (MMBtu/d)

Weighted Average Price ($/MMBtu)

Q1-Q4 2013

28,435

$3.64

 

Basis Swaps

Period

Index

Volume (MMBtu/d)

Weighted Average Differential to Henry Hub ($/MMBtu)

Q1-Q4 2013

El Paso Natural Gas

20,000

$(0.12)

Q1-Q4 2013

Panhandle Eastern Pipeline

20,000

$(0.17)

 

 

As of December 31, 2012, Devon had the following open NGL derivative positions. Devon’s NGL swaps settle against the average of the prompt month OPIS Mont Belvieu, Texas hub. 

 

 

 

 

 

 

Price Swaps

Period

Product

Volume (Bbls/d)

Weighted Average Floor Price ($/Bbl)

Q1-Q4 2013

Propane

822 

$41.12

Q1-Q4 2013

Ethane

1,973 

$15.36

 

Basis Swaps

Period

Pay

Volume (Bbls/d)

Weighted Average Differential to WTI ($/Bbl)

Q1-Q4 2013

Natural Gasoline

500

$(6.80)

 

Interest Rate Derivatives

 

As of December 31, 2012, Devon had the following open interest rate derivative positions:

 

Notional

Weighted Average Fixed Rate Received

Variable Rate Paid

Expiration

(In millions)

 

 

 

$
750 

3.88%

Federal funds rate

July 2013

 

Foreign Currency Derivatives

 

As of December 31, 2012, Devon had the following open foreign currency derivative positions:

 

 

Forward Contract

Currency

Contract Type

CAD Notional

Weighted Average Fixed Rate Received

Expiration

 

 

(In millions)

(CAD-USD)

 

Canadian Dollar

Sell

$
755 

1.005

March 2013

 

Financial Statement Presentation

 

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying comprehensive statements of earnings associated with derivative financial instruments.

 

 

Comprehensive Statement of Earnings Caption

2012

2011

2010

 

 

(In millions)

Cash settlements:

 

 

 

 

Commodity derivatives

Oil, gas and NGL derivatives

$
870 
$
392 
$
888 

Interest rate derivatives

Other, net

14 
77 
44 

Foreign currency derivatives

Other, net

(19)
16 

Total cash settlements

865 
485 
932 

 

 

 

 

 

Unrealized gains (losses):

 

 

 

 

Commodity derivatives

Oil, gas and NGL derivatives

(177)
489 
(77)

Interest rate derivatives

Other, net

(29)
(88)
(30)

Foreign currency derivatives

Other, net

Total unrealized gains (losses)

(205)
401 
(107)

Net gain recognized on comprehensive statements of earnings

$
660 
$
886 
$
825 

 

 

The following table presents the derivative fair values included in the accompanying balance sheets.

 

 

 

December 31,

 

Balance Sheet Caption

2012

2011

 

 

(In millions)

Asset derivatives:

 

 

 

Commodity derivatives

Other current assets

$
379 
$
611 

Commodity derivatives

Other long-term assets

22 
17 

Interest rate derivatives

Other current assets

23 
30 

Interest rate derivatives

Other long-term assets

22 

Foreign currency derivatives

Other current assets

Total asset derivatives

$
425 
$
680 

 

 

 

 

Liability derivatives:

 

 

 

Commodity derivatives

Other current liabilities

$
$
82 

Commodity derivatives

Other long-term liabilities

29 

Total liability derivatives

$
32 
$
82 

 

Share-Based Compensation
Share-Based Compensation

3.Share-Based Compensation 

 

On June 3, 2009, Devon's stockholders adopted the 2009 Long-Term Incentive Plan, which expires on June 2, 2019. This plan authorizes the Compensation Committee, which consists of independent non-management members of Devon's Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards, performance restricted stock awards, Canadian restricted stock units, performance share units, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors.

 

In the second quarter of 2012, Devon’s stockholders adopted an amendment to the 2009 Long-Term Incentive Plan, which also expires June 2, 2019. This amendment increases the number of shares authorized for issuance from 21.5 million shares to 47.0 million shares. To calculate shares issued under the 2009 Long-Term Incentive Plan subsequent to this amendment, options and stock appreciation rights represent one share and other awards represent 2.38 shares.

 

Devon also has a  stock option plan that was adopted in 2005 under which stock options were issued to certain employees. Options granted under this plan remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under this plan. Devon also has stock options outstanding that were assumed as part of its 2003 acquisition of Ocean Energy.  

 

The following table presents the effects of share-based compensation included in Devon's accompanying comprehensive statements of earnings. The vesting for certain share-based awards was accelerated as part of Devon’s strategic repositioning announced in 2009 and the consolidation of its U.S. operations announced in October 2012. The associated expense for these accelerated awards is included in restructuring costs in the accompanying comprehensive statements of earnings. See Note 4 for further details.

 

 

2012

2011

2010

 

(In millions)

Gross general and administrative expense

$
179 
$
181 
$
188 

Share-based compensation expense capitalized pursuant to the

 full cost method of accounting for oil and gas properties

$
56 
$
56 
$
58 

Related income tax benefit

$
31 
$
33 
$
40 

 

 

 

 

Stock Options

 

In accordance with Devon’s incentive plans, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Generally, the service requirement for vesting ranges from zero to four years.

 

The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions. The volatility of Devon's common stock is based on the historical volatility of the market price of Devon's common stock over a period of time equal to the expected term of the option and ending on the grant date. The dividend yield is based on Devon’s historical and current yield in effect at the date of grant. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for the expected term of the option at the date of grant. The expected term of the options is based on historical exercise and termination experience for various groups of employees and directors. Each group is determined based on the similarity of their historical exercise and termination behavior. The following table presents a summary of the grant-date fair values of stock options granted and the related assumptions. All such amounts represent the weighted-average amounts for each year.

 

2012

2011

2010

Grant-date fair value

$
22.20 
$
23.11 
$
25.41 

Volatility factor

42.5% 
46.0% 
45.3% 

Dividend yield

1.2% 
1.0% 
1.0% 

Risk-free interest rate

1.1% 
0.8% 
1.1% 

Expected term (in years)

6.0 
4.2 
4.5 

 

The following table presents a summary of Devon's outstanding stock options.

 

 

 

Weighted Average

 

   

Options

Exercise Price

Remaining Term

Intrinsic Value

 

(In thousands)

 

(In years)

(In millions)

Outstanding at December 31, 2011

10,543 
$
66.35 

Granted

18 
$
60.09 

Exercised

(1,390)
$
35.16 

Expired

(1,058)
$
85.98 

 

 

Forfeited

(285)
$
68.90 

Outstanding at December 31, 2012

7,828 
$
69.12 
4.24 
$

Vested and expected to vest at December 31, 2012

7,742 
$
69.14 
4.22 
$

Exercisable at December 31, 2012

5,695 
$
69.35 
3.47 
$

 

The aggregate intrinsic value of stock options that were exercised during 2012, 2011 and 2010 was $34 million, $81 million and $47 million, respectively. As of December 31, 2012, Devon's unrecognized compensation cost related to unvested stock options was $39 million. Such cost is expected to be recognized over a weighted-average period of 2.4 years.

 

Restricted Stock Awards and Units

 

These awards and units are subject to the terms, conditions, restrictions and limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, the service requirement for vesting ranges from zero to four years. During the vesting period, recipients of restricted stock awards receive dividends that are not subject to restrictions or other limitations. Devon estimates the fair values of restricted stock awards and units as the closing price of Devon's common stock on the grant date of the award or unit, which is expensed over the applicable vesting period. The following table presents a summary of Devon's unvested restricted stock awards and units.

 

 

 

 

Restricted Stock Awards & Units

Weighted Average Grant-Date Fair Value

 

(In thousands)

 

Unvested at December 31, 2011

5,224 
$
67.85 

Granted

2,870 
$
53.22 

Vested

(2,101)
$
68.34 

Forfeited

(253)
$
67.32 

Unvested at December 31, 2012

5,740 
$
61.75 

 

The aggregate fair value of restricted stock awards and units that vested during 2012, 2011 and 2010 was $112 million, $145 million and $184 million, respectively. As of December 31, 2012, Devon's unrecognized compensation cost related to unvested restricted stock awards and units was $314 million. Such cost is expected to be recognized over a weighted-average period of 2.9 years.

 

Performance Based Restricted Stock Awards

 

In December 2012 and 2011, certain members of Devon’s senior management were granted performance based share awards. Vesting of the awards is dependent on Devon meeting certain internal performance targets and the recipient meeting certain service requirements. Generally, the service requirement for vesting ranges from zero to four years. If Devon meets or exceeds the performance target, the awards vest after the recipient meets the related requisite service period. If the performance target and service period requirement are not met, the award does not vest. Once vested, recipients are entitled to dividends on the awards. Devon estimates the fair values of the awards as the closing price of Devon's common stock on the grant date of the award, which is expensed over the applicable vesting period. The following table presents a summary of Devon's performance based restricted stock awards.

 

 

 

 

Performance Restricted Stock Awards

Weighted Average Grant-Date Fair Value

 

(In thousands)

 

Unvested at December 31, 2011

184 
$
65.10 

Granted

224 
$
52.60 

Unvested at December 31, 2012

408 
$
58.25 

 

As of December 31, 2012, Devon's unrecognized compensation cost related to these awards was $8 million. Such cost is expected to be recognized over a weighted-average period of 2.3 years.

 

Performance Share Units  

 

In December 2012 and 2011, certain members of Devon’s management were granted performance share units. Each unit that vests entitles the recipient to one share of Devon common stock. The vesting of these units is based on comparing Devon’s total shareholder return (“TSR”) to the TSR of a predetermined group of fourteen peer companies over the specified two- or three-year performance period. The vesting of units may be between zero and 200 percent of the units granted depending on Devon’s TSR as compared to the peer group on the vesting date.

 

At the end of the vesting period, recipients receive dividend equivalents with respect to the number of units vested. The fair value of each performance share unit is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a risk-free interest rate based on U.S. Treasury rates as of the grant date; (ii) a volatility assumption based on the historical realized price volatility of Devon and the designated peer group; and (iii) an estimated ranking of Devon among the designated peer group. The fair value of the unit on the date of grant is expensed over the applicable vesting period. The following table presents a summary of the grant-date fair values of performance share units granted and the related assumptions.

 

 

2012

2011

Grant-date fair value

 $61.27 - $63.48

 $80.24 - $83.15

Risk-free interest rate

   0.26% - 0.36%

  0.28% - 0.43%

Volatility factor

30.3% 
41.8% 

Contractual term (in years)

3.0 
3.0 

 

 

The following table presents a summary of Devon's performance share units.

 

 

 

 

Performance Share Units

Weighted  Average Grant-Date Fair Value

 

(In thousands)

 

Unvested at December 31, 2011

171 
$
81.70 

Granted

707 
$
63.37 

Unvested at December 31, 2012 (1)

878 
$
66.93 

____________________________

(1)

A maximum of 1.8 million common shares could be awarded based upon Devon’s final TSR ranking.

 

As of December 31, 2012, Devon's unrecognized compensation cost related to unvested units was $40 million. Such cost is expected to be recognized over a weighted-average period of 2.5 years.

Restructuring Costs
Restructuring Costs

4.Restructuring Costs    

 

Office Consolidation

 

In October 2012, Devon announced plans to consolidate its U.S. personnel into a single operations group centrally located at the company’s corporate headquarters in Oklahoma City. As a result, Devon is in the process of closing its office in Houston and transferring operational responsibilities for assets in South Texas, East Texas and Louisiana to Oklahoma City. This initiative is expected to be substantially complete by the end of the first quarter 2013.

 

Including the $80 million recognized in December of 2012, Devon estimates that it will incur approximately $135 million in restructuring costs in connection with this plan. This estimate includes approximately $85 million of employee severance and relocation costs, $35 million of contract termination and other costs and $15 million of employee retention costs. Approximately $25 million of employee costs relates to accelerated vesting of stock awards, which are non-cash charges. Devon expects to recognize the remainder of the restructuring costs during 2013.

 

Divestiture of Offshore Assets

 

In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of December 31, 2012, Devon had divested all of its U.S. Offshore and International assets and incurred $196 million of restructuring costs associated with the divestitures.

 

Financial Statement Presentation

 

The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings. Restructuring costs relating to Devon’s discontinued operations totaled $(2) million and $(4) million in 2011 and 2010, respectively. These costs primarily related to cash severance and share-based awards and are not included in the schedule below. There were no costs related to discontinued operations in 2012.

 

 

Year Ended December 31,

   

2012

2011

2010

 

(In millions)

Office consolidation:

 

 

 

Employee severance

$
77 

$

$

Lease obligations

Total

80 

Offshore divestitures:

 

 

Employee severance

(3)
(27)

Lease obligations and other

(3)
(10)
84 

Total

(6)
(2)
57 

Restructuring costs

$
74 
$
(2)
$
57 

 

Office Consolidation

 

Employee  severance and retention - In the fourth quarter of 2012, Devon recognized $77 million of estimated employee severance costs associated with the office consolidation. This amount was based on estimates of the number employees that would ultimately be impacted by office consolidation and included amounts related to cash severance costs and accelerated vesting of share-based grants.

 

Lease obligations and other - As of December 31, 2012, Devon incurred $3 million of restructuring costs related to certain office space that is subject to non-cancellable operating lease agreements and that it ceased using as a part of the office consolidation. In 2013 Devon expects to incur approximately $25 million of additional restructuring costs that represent the present value of its future obligations under the leases, net of anticipated sublease income. Devon’s estimate of lease obligations was based upon certain key estimates that could change over the term of the leases. These estimates include the estimated sublease income that it may receive over the term of the leases, as well as the amount of variable operating costs that it will be required to pay under the leases.

 

Divestiture of Offshore Assets

 

Lease obligations and other - As a result of the divestitures, Devon ceased using certain office space that was subject to non-cancellable operating lease arrangements. Consequently, in 2010 Devon recognized $70 million of restructuring costs that represented the present value of its future obligations under the leases, net of anticipated sublease income. Devon's estimate of lease obligations was based upon certain key estimates that could change over the term of the leases. These estimates include the estimated sublease income that Devon may receive over the term of the leases, as well as the amount of variable operating costs that Devon will be required to pay under the leases. In addition, Devon recognized $13 million of asset impairment charges for leasehold improvements and furniture associated with the office space that it ceased using.

 

The schedule below summarizes Devon’s restructuring liabilities. Devon’s restructuring liabilities for cash severance related to its discontinued operations totaled $16 million at December 31, 2010 and are not included in the schedule below. There was no liability related to discontinued operations at the end of 2012 or 2011.

 

 

 

 

 

   

Other Current Liabilities

Other  Long-Term Liabilities

Total

 

(In millions)

Balance as of December 31, 2010

$
31 
$
51 
$
82 

Lease obligations - Offshore

(35)
(33)

Employee severance - Offshore

(4)

(4)

Balance as of December 31, 2011

29 
16 
45 

Employee severance – Office consolidation

49 

49 

Lease obligations - Offshore

(17)
(7)
(24)

Employee severance - Offshore

(9)

(9)

Balance as of December 31, 2012

$
52 
$
$
61 

 

Other, Net
Other, Net

 

 

5.Other, net

 

The components of other, net in the accompanying comprehensive statement of earnings include the following:  

 

 

 

 

 

 

Year Ended December 31,

   

2012

2011

2010

 

(In millions)

Accretion of asset retirement obligations

$
110 
$
92 
$
92 

Interest rate derivatives

15 
11 
(14)

Foreign currency derivatives

18 
(16)

Foreign exchange loss (gain)

(15)
25 
(7)

Interest income

(36)
(21)
(13)

Other

(14)
(101)
(25)

Other, net

$
78 
$
(10)
$
33 

 

 During 2011, Devon received $88 million of excess insurance recoveries related to certain weather and operational claims. 

Income Taxes
Income Taxes

6.Income Taxes

Income Tax Expense (Benefit)

 

Devon’s income tax components are presented in the following table.

 

 

 

 

 

 

Year Ended December 31,

   

2012

2011

2010

 

(In millions)

Current income tax expense (benefit):

U.S. federal

$
60 
$
(143)
$
244 

Various states

(3)
20 
16 

Canada and various provinces

(5)
(20)
256 

Total current tax expense (benefit)

52 
(143)
516 

Deferred income tax expense (benefit):

U.S. federal

(188)
1,986 
781 

Various states

34 
95 
21 

Canada and various provinces

(30)
218 
(83)

Total deferred tax expense (benefit)

(184)
2,299 
719 

Total income tax expense (benefit)

$
(132)
$
2,156 
$
1,235 

 

Total income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate to earnings from continuing operations before income taxes as a result of the following:

 

 

 

 

 

 

Year Ended December 31,

   

2012

2011

2010

 

(In millions)

Expected income tax expense (benefit) based on U.S. statutory tax

 rate of 35%

$
(111)
$
1,502 
$
1,249 

Assumed repatriations

725 
144 

State income taxes 

20 
70 
31 

Taxation on Canadian operations 

(19)
(91)
(60)

Other

(22)
(50)
(129)

Total income tax expense (benefit)

$
(132)
$
2,156 
$
1,235 

 

During 2011 and 2010, pursuant to the completed and planned divestitures of Devon’s International assets located outside North America, a portion of Devon’s foreign earnings were no longer deemed to be indefinitely reinvested. Accordingly, Devon recognized deferred income tax expense of $725 million and $144 million during 2011 and 2010 respectively, related to assumed repatriations of earnings from its foreign subsidiaries.

 

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities are presented below:

 

 

 

 

 

December 31,

 

2012

2011

Deferred tax assets:

(In millions)

Net operating loss carryforwards

$
427 
$
222 

Asset retirement obligations

618 
447 

Pension benefit obligations

129 
130 

Alternative minimum tax credits

198 

Other

134 
117 

Total deferred tax assets

1,506 
916 

Deferred tax liabilities:

Property and equipment

(4,970)
(4,475)

Fair value of financial instruments

(141)
(218)

Long-term debt

(198)
(185)

Taxes on unremitted foreign earnings

(936)
(936)

Other

(76)
(27)

Total deferred tax liabilities

(6,321)
(5,841)

Net deferred tax liability

$
(4,815)
$
(4,925)

 

Devon has recognized $427 million of deferred tax assets related to various carryforwards available to offset future income taxes. The carryforwards consist of $711 million of U.S. federal net operating loss carryforwards, which expire in 2031, $662 million of Canadian net operating loss carryforwards, which expire between 2029 and 2031, and $153 million of state net operating loss carryforwards, which expire primarily between 2013 and 2031. Devon expects the tax benefits from the U.S. federal net operating loss carryforwards to be utilized between 2013 and 2015. Devon expects the tax benefits from the Canadian and state net operating loss carryforwards to be utilized between 2013 and 2017. Such expectations are based upon current estimates of taxable income during these periods, considering limitations on the annual utilization of these benefits as set forth by tax regulations. Significant changes in such estimates caused by variables such as future oil, gas and NGL 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 its tax carryforwards prior to their expiration.

Devon has also recognized a $198 million deferred tax asset related to alternative minimum tax credits which have no expiration date and will be available for use against tax on future taxable income.

 

As of December 31, 2012, Devon’s unremitted foreign earnings totaled approximately $8.0 billion. Of this amount, approximately $5.5 billion was deemed to be indefinitely reinvested into the development and growth of our Canadian business. Therefore, Devon has not recognized a deferred tax liability for U.S. income taxes associated with such earnings. If such earnings were to be repatriated to the U.S., Devon may be subject to U.S. income taxes and foreign withholding taxes. However, it is not practical to estimate the amount of such additional taxes that may be payable due to the inter-relationship of the various factors involved in making such an estimate.

 

Devon has deemed the remaining $2.5 billion of unremitted earnings not to be indefinitely reinvested. Consequently, Devon has recognized a $936 million deferred tax liability associated with such unremitted earnings as of December 31, 2012. Although Devon has recognized this deferred tax liability, Devon does not currently expect to repatriate its foreign earnings. This expectation is based on Devon’s current forecasts for both its U.S. and Canadian operations, currently favorable borrowing conditions in the U.S., and existing U.S. income tax laws pertaining to repatriations of foreign earnings.

 

 

Unrecognized Tax Benefits

 

The following table presents changes in Devon's unrecognized tax benefits.

 

 

 

 

 

December 31,

 

2012

2011

 

(In millions)

Balance at beginning of year

$
165 
$
194 

Tax positions taken in prior periods

(46)
(3)

Tax positions taken in current year

92 
27 

Accrual of interest related to tax positions taken

(7)

Lapse of statute of limitations

(3)
(41)

Settlements

(5)

Foreign currency translation

Balance at end of year

$
216 
$
165 

 

Devon’s unrecognized tax benefit balance at December 31, 2012 and 2011, included $27 million and $20 million of interest and penalties, respectively. If recognized, $176 million of Devon's unrecognized tax benefits as of December 31, 2012 would affect Devon's effective income tax rate. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

 

 

 

Jurisdiction

Tax Years Open

U.S. federal

2008-2012

Various U.S. states

2008-2012

Canada federal

2004-2012

Various Canadian provinces

2004-2012

 

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process. As a result, Devon cannot reasonably anticipate the extent that the liabilities for unrecognized tax benefits will increase or decrease within the next twelve months.

Earnings Per Share
Earnings Per Share

7.Earnings Per Share  

 

The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share.

 

 

 

 

 

   

Earnings

Common Shares

Earnings per Share

 

(In millions, except per share amounts)

Year Ended December 31, 2012:

 

Loss from continuing operations

$
(185)
404 

 

Attributable to participating securities

(3)
(4)

 

Basic and diluted loss per share

$
(188)
400 
$
(0.47)

Year Ended December 31, 2011:

 

Earnings from continuing operations

$
2,134 
417 

 

Attributable to participating securities

(23)
(5)

 

Basic earnings per share

2,111 
412 
$
5.12 

Dilutive effect of potential common shares issuable

Diluted earnings per share

$
2,111 
414 
$
5.10 

Year Ended December 31, 2010:

Earnings from continuing operations

$
2,333 
440 

 

Attributable to participating securities

(26)
(5)

 

Basic earnings per share

2,307 
435 
$
5.31 

Dilutive effect of potential common shares issuable

Diluted earnings per share

$
2,307 
436 
$
5.29 

 

Certain options to purchase shares of Devon's common stock were excluded from the dilution calculations because the options were antidilutive. These excluded options totaled 9 million, 3 million and 6 million in 2012, 2011 and 2010, respectively.

Other Comprehensive Earnings
Other Comprehensive Earnings

8.Other Comprehensive Earnings

 

Components of other comprehensive earnings consist of the following:

 

 

 

 

 

Year Ended December 31,

   

2012

2011

2010

 

(In millions)

Foreign currency translation:

 

Beginning accumulated foreign currency translation

$
1,802 
$
1,993 
$
1,616 

Change in cumulative translation adjustment

203 
(200)
397 

Income tax benefit (expense)

(9)
(20)

Ending accumulated foreign currency translation

1,996 
1,802 
1,993 

Pension and postretirement benefit plans:

 

 

 

Beginning accumulated pension and postretirement benefits

(227)
(233)
(231)

Net actuarial loss and prior service cost arising in current year

(47)
(21)
(33)

Income tax benefit

16 
11 

Recognition of net actuarial loss and prior service cost in net earnings

51 
30 
31 

Income tax expense

(18)
(11)
(11)

Ending accumulated pension and postretirement benefits

(225)
(227)
(233)

Accumulated other comprehensive earnings, net of tax

$
1,771 
$
1,575 
$
1,760 

 

Supplemental Information To Statements Of Cash Flows
Supplemental Information To Statements Of Cash Flows

9.Supplemental Information to Statements of Cash Flows

 

 

 

 

 

 

Year Ended December 31,

   

2012

2011

2010

 

(In millions)

Net decrease (increase) in working capital:

 

Change in accounts receivable

$
140 
$
(185)
$
23 

Change in other current assets

(128)
125 
21 

Change in accounts payable

(8)
64 
37 

Change in revenues and royalties payable

19 
144 
48 

Change in other current liabilities

(73)
37 
(402)

Net decrease (increase) in working capital

$
(50)
$
185 
$
(273)

 

 

 

 

Supplementary cash flow data – total operations:

 

 

 

Interest paid (net of capitalized interest)

$
334 
$
325 
$
359 

Income taxes paid (received)

$
100 
$
(383)
$
955 

 

Short-Term Investments
Short-Term Investments

10.Short-Term Investments

 

The components of short-term investments include the following:

 

 

December 31,

 

2012

2011

 

(In millions)

Canadian treasury, agency and provincial securities

$
1,865 
$
1,155 

U.S. treasuries

429 
201 

Other

49 
147 

Short-term investments

$
2,343 
$
1,503 

 

Accounts Receivable
Accounts Receivable

 

 

11.  Accounts Receivable

The components of accounts receivable include the following:

 

 

 

 

 

December 31,

 

2012

2011

 

(In millions)

Oil, gas and NGL sales

$
752 
$
928 

Joint interest billings

270 
247 

Marketing and midstream revenues

161 
174 

Other

72 
39 

Gross accounts receivable

1,255 
1,388 

Allowance for doubtful accounts

(10)
(9)

Net accounts receivable

$
1,245 
$
1,379 

 

Other Current Assets
Other Current Assets

12.Other Current Assets  

 

The components of other current assets include the following:

 

 

 

 

 

December 31,

 

2012

2011

 

(In millions)

Derivative financial instruments

$
403 
$
641 

Inventories

110 
102 

Income tax receivable

119 
35 

Current assets held for sale

21 

Other

111 
69 

Other current assets

$
746 
$
868 

 

Property And Equipment
Property And Equipment

13.Property and Equipment 

 

See Note 22 for disclosure of Devon’s capitalized costs related to its oil and gas exploration and development activities.

 

Sinopec Transaction 

 

In April 2012, Devon closed its joint venture transaction with Sinopec International Petroleum Exploration & Production Corporation. Pursuant to the agreement, Sinopec paid approximately $900 million in cash and received a 33.3 percent interest in five of Devon’s new ventures exploration plays in the U.S. at closing of the transaction. Additionally, Sinopec is required to fund approximately $1.6 billion of Devon’s share of future exploration, development and drilling costs associated with these plays. Devon recognized the cash proceeds received at closing as a reduction to U.S. oil and gas property and equipment. No gain or loss was recognized.  

 

Sumitomo Transaction

 

In September 2012, Devon closed its joint venture transaction with Sumitomo Corporation. At closing, Sumitomo paid approximately $400 million in cash and received a 30 percent interest in the Cline and Midland-Wolfcamp Shale plays in Texas. Additionally, Sumitomo is required to fund approximately $1.0 billion of Devon’s share of future exploration, development and drilling costs associated with these plays. Devon recognized the cash proceeds received at closing as a reduction to U.S. oil and gas property and equipment. No gain or loss was recognized.

 

 

Asset Impairments

 

In the third and fourth quarters of 2012, Devon recognized asset impairments related to its oil and gas property and equipment and its U.S. midstream assets as presented below.

 

 

 

 

 

 

 

 

 

Q3 2012

Q4 2012

Year Ended December 31, 2012

 

Gross

Net of Taxes

Gross

Net of Taxes

Gross

Net of Taxes

 

(In millions)

U.S. oil and gas assets

$
1,106 
$
705 
$
687 
$
437 
$
1,793 
$
1,142 

Canada oil and gas assets

163 
122 
163 
122 

Midstream assets

22 
14 
46 
30 
68 
44 

Total asset impairments

$
1,128 
$
719 
$
896 
$
589 
$
2,024 
$
1,308 

 

Oil and Gas Impairments 

 

Under the full-cost method of accounting, capitalized costs of oil and gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 1.

 

The oil and gas impairments resulted primarily from declines in the U.S. and Canada full cost ceilings. The lower ceiling values resulted primarily from decreases in the 12-month average trailing prices for oil, natural gas and NGLs, which have reduced proved reserve values.

 

If pricing conditions do not improve, Devon may incur full cost ceiling impairments related to its oil and gas property and equipment in 2013.

 

Midstream Impairments

 

Due to declining natural gas production resulting from low natural gas and NGL prices, Devon determined that the carrying amounts of certain of its midstream facilities were not recoverable from estimated future cash flows. Consequently, the assets were written down to their estimated fair values, which were determined using discounted cash flow models. The fair value of Devon’s midstream assets is considered a Level 3 fair value measurement.

 

Offshore Divestitures

 

In November 2009, Devon announced plans to divest its offshore assets. In 2012, Devon completed its planned divestiture program. In aggregate, Devon’s U.S. and International sales generated total proceeds of $10 billion. Assuming repatriation of a portion of the foreign proceeds under current U.S. tax law, the after-tax proceeds from these transactions were approximately $8 billion.

Asset Retirement Obligations
Asset Retirement Obligations

15.Asset Retirement Obligations

 

The schedule below summarizes changes in Devon’s asset retirement obligations.

 

 

 

 

 

 

Year Ended December 31,

 

2012

2011

 

(In millions)

Asset retirement obligations as of beginning of period

$
1,563 
$
1,497 

Liabilities incurred

90 
53 

Liabilities settled

(86)
(82)

Revision of estimated obligation

420 
25 

Liabilities assumed by others

(23)

Accretion expense on discounted obligation

110 
92 

Foreign currency translation adjustment

21 
(22)

Asset retirement obligations as of end of period

2,095 
1,563 

Less current portion

99 
67 

Asset retirement obligations, long-term

$
1,996 
$
1,496 

During 2012, Devon recognized revisions to its asset retirement obligations totaling $420 million. The primary factor contributing to this revision was an overall increase in abandonment cost estimates for certain of its production operations facilities. 

Retirement Plans
Retirement Plans

16.Retirement Plans 

 

Devon has various non-contributory defined benefit pension plans, including qualified plans and nonqualified plans. The qualified plans provide retirement benefits for certain U.S. and Canadian employees meeting certain age and service requirements. Benefits for the qualified plans are based on the employees' years of service and compensation and are funded from assets held in the plans' trusts. 

 

The nonqualified plans provide retirement benefits for certain employees whose benefits under the qualified plans are limited by income tax regulations. The nonqualified plans' benefits are based on the employees' years of service and compensation. For certain nonqualified plans, Devon has established trusts to fund these plans' benefit obligations. The total value of these trusts was $31 million and $32 million at December 31, 2012 and 2011, respectively, and is included in other long-term assets in the accompanying balance sheets. For the remaining nonqualified plans for which trusts have not been established, benefits are funded from Devon's available cash and cash equivalents.

 

Devon also has defined benefit postretirement plans that provide benefits for substantially all U.S. employees. The plans provide medical and, in some cases, life insurance benefits and are either contributory or non-contributory, depending on the type of plan. Benefit obligations for such plans are estimated based on Devon's future cost-sharing intentions. Devon's funding policy for the plans is to fund the benefits as they become payable with available cash and cash equivalents. 

 

 

Benefit Obligations and Funded Status

 

The following table presents the funded status of Devon's qualified and nonqualified pension and postretirement benefit plans. The benefit obligation for pension plans represents the projected benefit obligation, while the benefit obligation for the postretirement benefit plans represents the accumulated benefit obligation. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. The accumulated benefit obligation for pension plans was $1.2 billion at December 31, 2012 and 2011. Devon’s benefit obligations and plan assets are measured each year as of December 31. Devon’s 2012 plan settlements relate to a plan amendment which removed a dollar cap on lump sum payments and revised optional forms of payment to include a lump sum distribution feature.  Devon’s 2011 pension plan contributions of $454 million presented in the table were primarily discretionary. After these contributions, the projected benefit obligation for Devon’s qualified plans was fully funded as of December 31, 2012 and 2011.

 

 

 

 

 

 

 

Pension Benefits

Postretirement Benefits

 

2012 
2011 
2012 
2011 

 

(In millions)

Change in benefit obligation:

Benefit obligation at beginning of year

$
1,303 
$
1,124 
$
37 
$
43 

Service cost

43 
37 

Interest cost

60 
60 

Actuarial loss (gain)

95 
123 
(4)
(8)

Plan amendments

14 

Plan curtailments

(20)

Plan settlements

(93)

(4)

Foreign exchange rate changes

(1)

Participant contributions

Benefits paid

(43)
(40)
(5)
(5)

Benefit obligation at end of year

1,360 
1,303 
34 
37 

Change in plan assets:

Fair value of plan assets at beginning of year

1,187 
632 

Actual return on plan assets

102 
141 

Employer contributions

11 
454 

Participant contributions

Plan settlements 

(93)

(5)

Benefits paid

(43)
(40)
(5)
(5)

Foreign exchange rate changes

Fair value of plan assets at end of year

1,165 
1,187 

Funded status at end of year

$
(195)
$
(116)
$
(34)
$
(37)

 

 

 

 

 

Amounts recognized in balance sheet:

 

 

 

 

Noncurrent assets

$
62 
$
116 

$

$

Current liabilities

(12)
(10)
(3)
(3)

Noncurrent liabilities

(245)
(222)
(31)
(34)

Net amount

$
(195)
$
(116)
$
(34)
$
(37)

 

 

 

 

 

Amounts recognized in accumulated other

 comprehensive earnings:

 

 

 

 

Net actuarial loss (gain)

$
340 
$
348 
$
(11)
$
(9)

Prior service cost (credit)

25 
18 
(4)
(5)

Total

$
365 
$
366 
$
(15)
$
(14)

 

The plan assets for pension benefits in the table above exclude the assets held in trusts for the nonqualified plans. However, employer contributions for pension benefits in the table above include $10 million and $8 million for 2012 and 2011, respectively, which were transferred from the trusts established for the nonqualified plans.

 

 

Certain of Devon's pension plans have a projected benefit obligation and accumulated benefit obligation in excess of plan assets at December 31, 2012 and 2011 as presented in the table below.

 

 

 

 

 

December 31,

 

2012

2011

 

(In millions)

Projected benefit obligation

$
257 
$
232 

Accumulated benefit obligation

$
216 
$
189 

Fair value of plan assets

$

$

 

Net Periodic Benefit Cost and Other Comprehensive Earnings

 

The following table presents the components of net periodic benefit cost and other comprehensive earnings.

 

 

 

 

 

 

 

 

 

Pension Benefits

Postretirement Benefits

 

2012

2011

2010

2012

2011

2010

 

(In millions)

Net periodic benefit cost:

Service cost

$
43 
$
37 
$
33 
$
$
$

Interest cost

60 
60 
58 

Expected return on plan assets

(64)
(42)
(36)

Curtailment and settlement expense

26 

(3)

Recognition of net actuarial loss (gain)

24 
32 
27 
(1)

Recognition of prior service cost

(1)
(2)

Total net periodic benefit cost

92 
90 
85 
(2)

Other comprehensive loss (earnings):

 

 

 

 

 

 

Actuarial loss (gain) arising in current year

37 
23 
50 
(4)
(7)

Prior service cost (credit) arising in current year

14 

(22)

Recognition of net actuarial loss, including

settlement expense, in net periodic benefit cost

(45)
(32)
(27)

 

Recognition of prior service cost, including

curtailment, in net periodic benefit cost

(8)
(3)
(3)
(1)

Total other comprehensive loss (earnings)

(2)
(12)
24 
(2)
(22)

Total recognized

$
90 
$
78 
$
109 
$
(1)
$
$
(17)

 

The following table presents the estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive earnings into net periodic benefit cost during 2013.

 

 

 

 

 

Pension Benefits

Postretirement Benefits

 

(In millions)

Net actuarial loss (gain)

$
22 
$
(1)

Prior service cost (credit)

 —

Total

$
26 
$
(1)

 

Assumptions

 

The following table presents the weighted average actuarial assumptions used to determine obligations and periodic costs.

 

 

 

 

 

 

 

 

 

Pension Benefits

Postretirement Benefits

 

2012

2011

2010

2012

2011

2010

Assumptions to determine benefit obligations:

Discount rate

3.85% 
4.65% 
5.50% 
3.30% 
4.25% 
4.90% 

Rate of compensation increase

4.48% 
4.97% 
6.94% 

N/A

N/A

N/A

Assumptions to determine net periodic benefit cost:

 

 

 

 

 

 

Discount rate

4.65% 
5.50% 
6.00% 
4.25% 
4.90% 
5.70% 

Expected return on plan assets

5.48% 
6.48% 
6.94% 

N/A

N/A

N/A

Rate of compensation increase

4.97% 
6.94% 
6.95% 

N/A

N/A

N/A

 

Discount rate – Future pension and postretirement obligations are discounted at the end of each year based on the rate at which obligations could be effectively settled, considering the timing of estimated future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk.

 

Rate of compensation increase – For measurement of the 2012 benefit obligation for the pension plans, a 4.48 percent compensation increase was assumed.

 

Expected return on plan assets – The expected rate of return on plan assets was determined by evaluating input from external consultants and economists, as well as long-term inflation assumptions. Devon expects the long-term asset allocation to approximate the targeted allocation. Therefore, the expected long-term rate of return on plan assets is based on the target allocation of investment types. See the pension plan assets section below for more information on Devon's target allocations.

 

Other assumptions – For measurement of the 2012 benefit obligation for the other postretirement medical plans, an 8.2 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2013. The rate was assumed to decrease annually to an ultimate rate of 5 percent in the year 2029 and remain at that level thereafter. Assumed health care cost-trend rates affect the amounts reported for retiree health care costs. A one-percentage-point change in the assumed health care cost-trend rates would have changed the postretirement benefits obligation as of December 31, 2012, by $2 million and would change the 2013 service and interest cost components of net periodic benefit cost by less than $1 million.

 

Pension Plan Assets

 

Devon's overall investment objective for its pension plans' assets is to achieve stability of the plans’ funded status while providing long-term growth of invested capital and income to ensure benefit payments can be funded when required. To assist in achieving this objective, Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing. Derivatives or other speculative investments considered high risk are generally prohibited. The following table presents Devon’s target allocation for its pension plan assets.

 

 

 

 

 

December 31,

 

2012

2011

Fixed income

70% 
70% 

Equity

20% 
20% 

Other

10% 
10% 

 

The fair values of Devon's pension assets are presented by asset class in the following tables.

 

 

 

 

 

 

 

As of December 31, 2012

 

 

 

Fair Value Measurements Using:

 

Actual Allocation

Total

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

 

($ in millions)

Fixed-income securities:

 

 

 

 

 

U.S. Treasury obligations

39.4% 
$
459 
$
65 
$
394 

$

Corporate bonds

26.5% 
308 
256 
52 

Other bonds

2.4% 
28 
28 

Total fixed-income securities

68.3% 
795 
349 
446 

Equity securities: 

 

 

 

 

 

Global (large, mid, small cap)

20.5% 
239 

239 

Other securities:

 

 

 

 

 

Hedge fund & alternative investments

10.3% 
120 
17 

103 

Short-term investment funds

0.9% 
11 

11 

Total other securities

11.2% 
131 
17 
11 
103 

Total investments

100.0% 
$
1,165 
$
366 
$
696 
$
103 

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

Fair Value Measurements Using:

 

Actual Allocation

Total

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

 

($ in millions)

Fixed-income securities:

 

 

 

 

 

U.S. Treasury obligations

43.9% 
$
522 
$
27 
$
495 

$

Corporate bonds

24.8% 
294 
265 
29 

Other bonds

3.1% 
36 
36 

Total fixed-income securities

71.8% 
852 
328 
524 

Equity securities: 

 

 

 

 

 

Global (large, mid, small cap)

18.0% 
214 

214 

Other securities:

 

 

 

 

 

Hedge fund & alternative investments

8.9% 
106 
16 

90 

Short-term investment funds

1.3% 
15 

15 

Total other securities

10.2% 
121 
16 
15 
90 

Total investments

100.0% 
$
1,187 
$
344 
$
753 
$
90 

 

 

The following methods and assumptions were used to estimate the fair values in the tables above.

 

Fixed-income securities – Devon's fixed-income securities consist of U.S. Treasury obligations, bonds issued by investment-grade companies from diverse industries, and asset-backed securities. These fixed-income securities are actively traded securities that can be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices.

 

Devon’s fixed income securities also include commingled funds that primarily invest in long-term bonds and U.S. Treasury securities. These fixed income securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by the investment managers.

 

 Equity securities – Devon’s equity securities include a commingled global equity fund that invests in large, mid and small capitalization stocks across the world’s developed and emerging markets. These equity securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by the investment managers.

 

Other securities – Devon's other securities include commingled, short-term investment funds. These securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by investment managers.

 

Devon’s hedge fund and alternative investments include an investment in an actively traded global mutual fund that focuses on alternative investment strategies and a hedge fund of funds that invests both long and short using a variety of investment strategies. Devon's hedge fund of funds is not actively traded and Devon is subject to redemption restrictions with regards to this investment. The fair value of this Level 3 investment represents the fair value as determined by the hedge fund manager.

 

Included below is a summary of the changes in Devon's Level 3 plan assets (in millions).

 

 

 

December 31, 2010

$
58 

Purchases

33 

Investment returns

(1)

December 31, 2011

90 

Purchases

Investment returns

December 31, 2012

$
103 

 

Expected Cash Flows

 

The following table presents expected cash flow information for Devon's pension and postretirement benefit plans.

 

 

 

 

 

Pension Benefits

Postretirement Benefits

 

(In millions)

Devon's 2013 contributions

$
11 
$

Benefit payments:

 

 

 2013

$
60 
$

 2014

$
61 
$

 2015

$
63 
$

 2016

$
65 
$

 2017

$
67 
$

 2018 to 2022

$
386 
$
14 

 

Expected contributions included in the table above include amounts related to Devon's qualified plans, nonqualified plans and postretirement plans. Of the benefits expected to be paid in 2013, the $11 million of pension benefits is expected to be funded from the trusts established for the nonqualified plans and the $3 million of postretirement benefits is expected to be funded from Devon's available cash and cash equivalents. Expected employer contributions and benefit payments for other postretirement benefits are presented net of employee contributions.

 

Defined Contribution Plans

Devon maintains several defined contribution plans covering its employees in the U.S. and Canada. Such plans include Devon’s 401(k) plan, enhanced contribution plan and Canadian pension and savings plan. Contributions are primarily based upon percentages of annual compensation and years of service. In addition, each plan is subject to regulatory limitations by each respective government. The following table presents Devon's expense related to these defined contribution plans.

 

 

 

 

 

 

Year Ended December 31,

 

2012

2011

2010

 

(In millions)

401(k) and enhanced contribution plans

$
36 
$
33 
$
32 

Canadian pension and savings plans

23 
21 
17 

Total

$
59 
$
54 
$
49 

 

 

Stockholders' Equity
Stockholders' Equity

17.Stockholders' Equity

 

The authorized capital stock of Devon consists of 1 billion shares of common stock, par value $0.10 per share, 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.   

 

Devon's Board of Directors has designated 2.9 million shares of the preferred stock as Series A Junior Participating Preferred Stock (the “Series A Junior Preferred Stock”). At December 31, 2012, 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 $1.00 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 on all matters submitted to a vote of the stockholders. Devon, at its option, may redeem shares of the Series A Junior Participating Preferred Stock in whole at any time and in part from time to time, at a redemption price equal to 100 times the current per share market price of Devon’s common stock on the date of the mailing of the notice of redemption. The Series A Junior Preferred Stock ranks prior to the common stock but junior to all other classes of Preferred Stock.

 

 

Stock Repurchases

 

In fourth quarter of 2011, Devon completed its 2010 repurchase program. In total, Devon repurchased 49.2 million shares for $3.5 billion, or $71.18 per share.

 

Dividends

 

Devon paid common stock dividends of $324 million, $278 million and $281 million in 2012, 2011 and 2010 respectively. The quarterly cash dividend was $0.16 per share in 2010 and the first quarter of 2011. Devon increased the dividend rate to $0.17 per share in the second quarter of 2011 and further increased the dividend rate to $0.20 per share in the first quarter of 2012. 

Commitments And Contingencies
Commitments And Contingencies

18.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. Actual amounts could differ materially from management's estimates.

 

Royalty Matters

 

Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. The suits allege that the producers and related parties used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold. Devon’s largest exposure for such matters relates to royalties in New Mexico. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

 

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 and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured remediation costs. Devon's monetary exposure for environmental matters is not expected to be material.

 

Chief Redemption Matters

 

In 2006, Devon acquired Chief Holdings LLC (“Chief”) from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief’s successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones’ fiduciary responsibility to the former owner in connection with Chief’s 2004 redemption of the owner’s minority ownership stake in Chief.

 

On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Devon does not have a legal right of set off with respect to the judgment. Therefore, it has recorded a $133 million long-term liability relating to the judgment with an offsetting $133 million long-term receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement. Both Rees-Jones and Devon appealed the judgment.

 

In December 2012, the plaintiffs and Rees-Jones reached an agreement in principle to settle all claims related to the 2004 redemption. Under the terms of the agreement, Rees-Jones and Devon will receive full releases for all of the plaintiffs’ claims related to the Chief redemption. All settlement payments will be funded entirely by Rees-Jones. The settlement is contingent upon the execution of a formal settlement agreement and release, which is currently being negotiated by the parties. Devon does not expect to have any net exposure as a result of this matter

 

Other Matters

 

Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon's knowledge, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.

 

Commitments

 

The following is a schedule by year of Devon’s commitments that have initial or remaining noncancelable terms in excess of one year as of December 31, 2012.

 

 

 

 

 

Year Ending December 31,

Purchase Obligations

Drilling and Facility Obligations

Operational Agreements

Office and Equipment Leases

 

(In millions)

2013

$
826 
$
777 
$
391 
$
50 

2014

862 
173 
406 
34 

2015

861 

391 
31 

2016

861 

340 
29 

2017

844 

342 
27 

Thereafter

2,741 

1,626 
141 

Total

$
6,995 
$
950 
$
3,496 
$
312 

 

Purchase obligation amounts represent contractual commitments primarily to purchase condensate at market prices for use at Devon’s heavy oil projects in Canada. Devon has entered into these agreements because condensate is an integral part of the heavy oil production and transportation processes. Any disruption in Devon’s ability to obtain condensate could negatively affect its ability to produce and transport heavy oil at these locations. Devon’s total obligation related to condensate purchases expires in 2021.  The value of the obligation in the table above is based on the contractual volumes and Devon’s internal estimate of future condensate market prices.

 

Devon has certain drilling and facility obligations under contractual agreements with third-party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction.

 

Devon has certain operational agreements whereby Devon has committed to transport or process certain volumes of oil, gas and NGLs for a fixed fee. Devon has entered into these agreements to aid the movement of its production to downstream markets.  

 

Devon leases certain office space and equipment under operating lease arrangements.  Total rental expense included in general and administrative expenses under operating leases, net of sub-lease income, was $42 million, $42 million and $57 million in 2012, 2011 and 2010, respectively.    

Fair Value Measurements
Fair Value Measurements

 

 

19.Fair Value Measurements  

 

The following tables provide carrying value and fair value measurement information for certain of Devon's financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other payables and accrued expenses included in the accompanying balance sheets approximated fair value at December 31, 2012 and December 31, 2011. Therefore, such financial assets and liabilities are not presented in the following tables. Additionally, information regarding the fair values of Devon's midstream and pension plan assets is provided in Note 13 and Note 16, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

Carrying Amount

Total Fair Value

Level 1
 Inputs

Level 2
 Inputs

Level 3
 Inputs

 

(In millions)

December 31, 2012 assets (liabilities):

 

 

 

 

 

Cash equivalents

$
4,149 
$
4,149 
$
200 
$
3,949 

$

Short-term investments

$
2,343 
$
2,343 
$
429 
$
1,914 

$

Long-term investments

$
64 
$
64 

$

$

$
64 

Commodity derivatives

$
401 
$
401 

$

$
401 

$

Commodity derivatives

$
(32)
$
(32)

$

$
(32)

$

Interest rate derivatives

$
23 
$
23 

$

$
23 

$

Foreign currency derivatives

$
$

$

$

$