2.  Accounts Receivable

The components of accounts receivable include the following:

3.  Derivative Financial Instruments

Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility and to manage Devon's exposure to interest rate volatility. Devon has elected not to designate any of its derivative instruments for hedge accounting treatment.

The following table presents the fair values of derivative assets and liabilities included in the accompanying consolidated balance sheets.

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

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4.     Other Current Assets

  The components of other current assets include the following:

5.       Property and Equipment

Offshore Divestitures

        In November 2009, Devon announced plans to reposition itself strategically as a high-growth, North America onshore exploration and production company. As part of this strategic repositioning, Devon is bringing forward the value of its offshore assets by divesting them. 

Closed Transactions

The following table presents Devon's offshore divestiture transactions that closed in the first six months of 2010. Gross proceeds represent contract prices based upon a January 1, 2010 effective date for the Gulf of Mexico divestitures and a May 1, 2010 effective date for the China – Panyu divestiture. After-tax proceeds represent gross proceeds adjusted for customary purchase price adjustments, selling costs and income taxes. The purchase price adjustments consist primarily of net cash flow subsequent to the effective date of the divestitures. Proved reserves in the following table are based upon estimated proved reserves as of the divestiture dates.

        Proceeds from these divestitures are being used to retire debt and repurchase Devon common shares. Additionally, Devon is  using divestiture proceeds to fund North America Onshore exploration and development opportunities, including a joint-venture investment in the Pike oil sands discussed below.

Under full cost accounting rules, sales or other dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of gain or loss. However, if not recognizing a gain or loss on the disposition would otherwise significantly alter the relationship between a cost center's capitalized costs and proved reserves, then a gain or loss must be recognized.

The Gulf of Mexico divestitures presented above did not significantly alter such relationship for Devon's United States cost center. Therefore, Devon did not recognize a gain in connection with the Gulf of Mexico divestitures. Panyu was Devon's only producing property in its China cost center. As a result, Devon recognized a $308 million ($235 million after-tax) gain in connection with the Panyu divestiture. This gain is included in "earnings from discontinued operations" in the accompanying 2010 consolidated statements of operations.

Pending Transactions

Devon has entered into agreements to sell its Azerbaijan and Brazil assets for $5.2 billion. Devon has received the necessary government approvals for the Azerbaijan transaction, which is now scheduled to close on August 16, 2010. The Brazil transaction continues to progress through the approval process of the Brazilian government and is on track to close around the end of 2010. Devon expects to record gains when such transactions close. Devon has also entered into an agreement to sell its remaining assets in China for $0.1 billion.

Deepwater Drilling Rigs

As part of its offshore operations, Devon was leasing three deepwater drilling rigs. The Seadrill West Sirius and Ocean Endeavor deepwater drilling rigs were used in Devon's Gulf of Mexico operations. The Transocean Deepwater Discovery is being used in Devon's operations in Brazil.

In conjunction with the deepwater Gulf of Mexico divestiture that closed in the second quarter of 2010, the buyer assumed Devon's lease and remaining commitments for the Seadrill West Sirius rig. Subsequent to closing all its Gulf of Mexico divestitures, Devon agreed to pay $31 million to the owner of the Ocean Endeavor rig to terminate the lease. The $31 million lease termination cost is included in oil and gas property and equipment in the accompanying June 30, 2010, consolidated balance sheet. The buyer of Devon's assets in Brazil will assume Devon's lease and remaining commitments for the Transocean Deepwater Discovery rig when the divestiture transaction closes.

Oil Sands Joint Venture

In conjunction with certain offshore divestitures in the second quarter of 2010, Devon formed a heavy oil joint venture to operate and develop the Pike oil sands leases in Alberta, Canada. As a result, Devon acquired a 50 percent interest in the Pike oil sands leases for $500 million. Devon will also fund $155 million of Canadian dollar capital costs on behalf of its joint-venture partner in the form of a non-interest bearing promissory note. The majority of the capital costs are expected to be paid during 2011 and 2012. See Note 8 for more information regarding the promissory note.

6.     Goodwill

During the first six months of 2010, Devon's Canadian goodwill decreased $38 million. This decrease was entirely due to foreign currency translation.

7.     Other Current Liabilities   

  The components of other current liabilities include the following: 

8.     Debt    

Commercial Paper

During the first six months of 2010, Devon repaid $1.4 billion of commercial paper borrowings primarily with proceeds received from its Gulf of Mexico property divestitures.

In May 2010, Devon reduced the maximum allowed borrowings under its commercial paper program from $2.85 billion to approximately $2.2 billion. At June 30, 2010, Devon had no outstanding commercial paper borrowings.

$350 Million 7.25% Senior Notes Due October 1, 2011

On June 25, 2010, Devon redeemed $350 million of 7.25% senior notes prior to their scheduled maturity of October 1, 2011, primarily with proceeds received from its Gulf of Mexico divestitures. The notes were redeemed for $384 million, which represented 100 percent of the principal amount, a make-whole premium of $28 million and $6 million of accrued and unpaid interest. On the date of redemption, these notes also had an unamortized premium of $9 million. The $28 million make-whole premium and $9 million amortization of the remaining premium are included in interest expense in the accompanying 2010 consolidated statements of operations. 

Non-Interest Bearing Promissory Note

On June 29, 2010, Devon issued a four-year $155 million Canadian dollar non-interest bearing promissory note in connection with the formation of the Pike oil sands joint venture described in Note 5. The present value of the note was $139 million on the issue date based upon an effective interest rate of 3.125%. Of the $139 million, $53 million is presented as short-term debt and the remainder is presented as long-term debt in the accompanying June 30, 2010, consolidated balance sheet.

Credit Lines

In the second quarter of 2010, Devon cancelled its $700 million Short-Term Facility prior to its November 2, 2010  maturity date. Devon incurred no cost to cancel the facility and will avoid paying the facility fee that pertains to the cancellation period.

Devon has a syndicated, unsecured revolving line of credit that can be accessed to provide liquidity as needed. The following schedule summarizes the capacity of Devon's Senior Credit Facility by maturity date, as well as its available capacity as of June 30, 2010 (in millions).

The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon's ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of June 30, 2010, Devon was in compliance with this covenant. Devon's debt-to-capitalization ratio at June 30, 2010, as calculated pursuant to the terms of the agreement, was 16.1%.

Interest Expense

The following schedule includes the components of interest expense.

9.     Asset Retirement Obligations  

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

During the first six months of 2010 and 2009, Devon recognized revisions to its asset retirement obligations totaling $194 million and $22 million, respectively. The primary factors causing the 2010 and 2009 increases were an overall increase in abandonment cost estimates and a decrease in the discount rate used to present value the obligations.

During the first six months of 2010, Devon reduced its asset retirement obligations by $256 million for those obligations that were assumed by purchasers of Devon's Gulf of Mexico oil and gas properties.

10.  Retirement Plans

The following table presents the components of net periodic benefit cost for Devon's pension and other post retirement benefit plans.

11.  Stockholders' Equity  

Stock Repurchases

During the second quarter of 2010, Devon repurchased 7.6 million common shares under its $3.5 billion stock repurchase program for $495 million, or $65.07 per share. This program expires December 31, 2011.

Dividends

Devon paid common stock dividends of $142 million (quarterly rates of $0.16 per share) in the first six months of 2010 and 2009, respectively.

12.    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 that 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. However, actual amounts could differ materially from management's estimate.

Environmental Matters

Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured costs associated with remediation. Devon's monetary exposure for environmental matters is not expected to be material.

Royalty Matters

Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold from federal and Indian-owned or controlled lands. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

Other Matters

Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon's knowledge as of the date of this report, neither Devon nor its property is subject to any material pending legal proceedings.

Commitments

At the end of 2009, Devon's commitments included $0.9 billion that related to long-term lease contracts for two deepwater drilling rigs being used in the Gulf of Mexico. As discussed in Note 5, Devon no longer has lease commitments for these two rigs.

At the end of 2009, Devon's commitments also included $0.5 billion that related to a long-term lease contract for a deepwater drilling rig being used in Brazil. Devon's lease and remaining commitments for this rig will be assumed by the buyer of Devon's assets in Brazil when the associated divestiture transaction closes.

At the end of 2009, Devon's commitments also included $0.4 billion that related to leases of floating, production, storage and offloading facilities being used in the Gulf of Mexico, Brazil and China. Devon's commitments for the Gulf of Mexico and China leases were assumed by the purchasers in the first half of 2010. The Brazil lease will be assumed by the buyer when the associated divestiture transaction closes.

13.  Fair Value Measurements    

The following tables provide carrying value and fair value measurement information for Devon's financial assets and liabilities.

Devon's Level 3 fair value measurements included in the table above relate to a non-interest bearing promissory note and certain long-term investments. As discussed in Note 8, Devon issued a non-interest bearing promissory note that was recorded at its estimated present value of $139 million on the June 29, 2010 issue date. As a result, Devon's Level 3 measurements for debt increased $139 million during the first six months of 2010. The changes in the Level 3 measurements for long-term investments during the first six months of 2010 and 2009 resulted entirely of redemptions of principal.

14. Restructuring Costs 

In the fourth quarter of 2009, Devon recognized $153 million of estimated employee severance costs associated with the planned divestiture of its offshore assets that was announced in November 2009. This amount was based on estimates of the number of employees that will ultimately be impacted by the divestitures and included amounts related to cash severance costs and accelerated vesting of share-based grants. Of the $153 million total, $105 million related to Devon's U.S. Offshore operations and the remainder related to its International discontinued operations.

As discussed in Note 5, Devon had divested all its U.S. Offshore assets by the end of the second quarter of 2010. As a result of these divestitures and associated employee terminations, Devon decreased its estimate of employee severance costs in the second quarter of 2010 by $14 million. As a result, Devon now estimates it will incur approximately $139 million of employee severance costs. The lower estimate results primarily from more offshore employees than previously estimated receiving comparable positions with the purchaser of the properties or in Devon's U.S. Onshore operations. Of the $139 million total, $95 million relates to Devon's U.S. Offshore operations and the remainder relates to its International discontinued operations. Of the $14 million reduction recognized in the second quarter of 2010, $9 million relates to Devon's U.S. Offshore operations and the remainder relates to its International discontinued operations.

All cash severance and accelerated vesting of share-based grants are included in restructuring costs in the accompanying 2010 consolidated statements of operations. Amounts related to cash severance costs are accrued for in other current liabilities in the accompanying consolidated balance sheets while amounts related to accelerated share-based awards are recorded as a reduction to Devon's additional paid-in capital in the accompanying consolidated balance sheets.

The schedule below summarizes activity and liability balances associated with Devon's restructuring liability included in other current liabilities.

The schedule below summarizes the components of restructuring costs in the accompanying consolidated statements of operations for the second quarter and first six months of 2010.

15.  Reduction of Carrying Value of Oil and Gas Properties

In the first quarter of 2009, Devon reduced the carrying value of its United States oil and gas properties $6,408 million, or $4,085 million after taxes, due to a full cost ceiling limitation. The reduction resulted from a significant decrease in the full cost ceiling compared to the immediately preceding quarter due to the effects of declining natural gas prices subsequent to December 31, 2008.

16.  Discontinued Operations

Revenues related to Devon's discontinued operations totaled $222 million and $434 million in the second quarter and first six months of 2010, respectively, and $268 million and $396 million in the second quarter and first six months of 2009, respectively.

The following table presents the main classes of assets and liabilities associated with Devon's discontinued operations.

Reductions of Carrying Value of Oil and Gas Properties

In the first quarter of 2009, Devon reduced the carrying values of its Brazilian and other International oil and gas properties, which are now held for sale, $109 million due to full cost ceiling limitations. The Brazilian reduction of $103 million, which had no related tax benefit, resulted largely from an exploratory well drilled at the BM-BAR-3 block in the offshore Barreirinhas Basin. After drilling this well in the first quarter of 2009, Devon concluded that the well did not have adequate reserves for commercial viability. As a result, the seismic, leasehold and drilling costs associated with this well contributed to the reduction recognized in the first quarter of 2009.

Divestiture

See Note 5 for more information on the divestiture of Devon's Panyu operations in China.

17.  Earnings (Loss) Per Share  

The following table reconciles earnings (loss) from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2010 and 2009. Because a net loss from continuing operations was generated during the six-month period ended June 30, 2009, the dilutive shares produce an antidilutive net loss per share result. Therefore, the diluted loss per share from continuing operations in the six months ended June 30, 2009 reported in the accompanying 2009 consolidated statement of operations is the same as the basic loss per share amount.

Certain options to purchase shares of Devon's common stock are excluded from the dilution calculations because the options are antidilutive. During the three-month and six-month periods ended June 30, 2010, 7.9 million shares and 6.4 million shares, respectively, were excluded from the diluted earnings per share calculations. During the three-month and six-month periods ended June 30, 2009, 7.1 million shares and 8.9 million shares, respectively, were excluded from the diluted earnings per share calculations.

18.   Segment Information

Devon manages its operations through distinct operating segments, or divisions, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its United States divisions into one reporting segment due to the similar nature of the business. However, Devon's Canadian and International divisions are reported as separate reporting segments primarily due to significant differences in the respective regulatory environments.

Following is certain financial information regarding Devon's reporting segments. The revenues reported are all from external customers.