Devon Energy (DVN)

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Investment in Chevron Corporation common stock — The fair value of this investment is based on a quoted market price.

 

Debt — The fair value of Devon’s variable-rate commercial paper borrowings is the carrying value. Certain of Devon’s fixed-rate debt instruments actively trade in an established market. The fair values of this debt are based on quotes obtained from brokers.

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Gas price swaps and collars — The fair values of the gas price swaps and collars are estimated using internal discounted cash flow calculations based upon forward commodity price curves, quotes obtained from brokers for contracts with similar terms or quotes obtained from counterparties to the agreements.

 

Embedded option in exchangeable debentures — The embedded option was not actively traded in an established market. Therefore, its fair value was estimated using quotes obtained from a broker for trades near the fair value measurement date.

 

Debt — Certain of Devon’s fixed-rate debt instruments do not actively trade in an established market. The fair values of this debt are estimated by discounting the principal and interest payments at rates available for debt with similar terms and maturity.

 

Interest rate swaps — The fair values of the interest rate swaps are estimated using internal discounted cash flow calculations based upon forward interest-rate yield curves or quotes obtained from counterparties to the agreements.

 

 

Gas price swaps and collars — The fair values of the gas price swaps and collars are estimated using internal discounted cash flow calculations based upon forward commodity price curves, quotes obtained from brokers for contracts with similar terms or quotes obtained from counterparties to the agreements.

 

Embedded option in exchangeable debentures — The embedded option was not actively traded in an established market. Therefore, its fair value was estimated using quotes obtained from a broker for trades near the fair value measurement date.

 

Debt — Certain of Devon’s fixed-rate debt instruments do not actively trade in an established market. The fair values of this debt are estimated by discounting the principal and interest payments at rates available for debt with similar terms and maturity.

 

Interest rate swaps — The fair values of the interest rate swaps are estimated using internal discounted cash flow calculations based upon forward interest-rate yield curves or quotes obtained from counterparties to the agreements.

 

 

Asset retirement obligations — The fair values of the asset retirement obligations are estimated using internal discounted cash flow calculations based upon Devon’s estimates of future retirement costs. Reconciliations of the beginning and ending balances of Devon’s asset retirement obligations, including revisions of the estimated fair values in 2008 and 2007, are presented in Note 5.

 

Short-term and long-term investments — Devon’s short-term and long-term investments presented in the tables above as of December 31, 2008 and December 31, 2007 consisted entirely of auction rate securities. As of December 31, 2007, Devon estimated the fair values of its short-term investments using quoted market prices. However, due to the auction failures discussed in Note 1 and the lack of an active market for Devon’s auction rate securities, quoted market prices for these securities were not available as of December 31, 2008. Therefore, Devon used valuation techniques that rely on unobservable, or Level 3, inputs to estimate the fair values of its long-term auction rate securities as of December 31, 2008. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the United States government guarantees of substantially all of the underlying student loans, the collection of all accrued interest to date and continued receipts of principal at par. Devon also has the ability to hold these securities until their scheduled maturity dates. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of December 31, 2008. At this time, Devon does not believe the values of its long-term securities are impaired.

 

Included below is a summary of the changes in Devon’s Level 3 short-term and long-term investments during 2008 (in millions).

 

 

 

On June 8, 2005, Devon’s stockholders adopted the 2005 Long-Term Incentive Plan, which expires on June 8, 2013. Devon’s stockholders adopted certain amendments to this plan on June 7, 2006. This plan, as amended, authorizes the Compensation Committee, which consists of non-management members of Devon’s Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards, Canadian

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

restricted stock units, performance units, performance bonuses, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards and stock appreciation rights to directors. A total of 32 million shares of Devon common stock have been reserved for issuance pursuant to the plan. To calculate shares issued under the plan, options granted represent one share and other awards represent 2.2 shares.

 

Devon also has stock option plans that were adopted in 2003 and 1997 under which stock options and restricted stock awards were issued to key management and professional employees. Options granted under these plans remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under these plans. Devon also has stock options outstanding that were assumed as part of the acquisitions of Ocean, Mitchell Energy & Development Corp., Santa Fe Snyder and PennzEnergy.

 

With the approval of Devon’s Compensation Committee, Devon modified the share-based compensation arrangements for certain of Devon’s executives in the second quarter of 2008. The modified compensation arrangements provide that executives who meet certain years-of-service and age criteria can retire and continue vesting in outstanding share-based grants. As a condition to receiving the benefits of these modifications, the executives must agree not to use or disclose Devon’s confidential information and not to solicit Devon’s employees and customers. The executives are required to agree to these conditions at retirement and again in each subsequent year until all grants have vested.

 

Although this modification does not accelerate the vesting of the executives’ grants, it does accelerate the expense recognition as executives approach the years-of-service and age criteria. When the modification was made in the second quarter of 2008, certain executives had already met the years-of-service and age criteria. As a result, Devon recognized an additional $27 million of share-based compensation expense in the second quarter of 2008 related to this modification. This additional expense would have been recognized in future reporting periods if the modification had not been made and the executives continued their employment at Devon.

 

The following table presents the effects of share-based compensation included in Devon’s accompanying statement of operations for the years ended December 31, 2008, 2007 and 2006.

 

 

 

Asset retirement obligations — The fair values of the asset retirement obligations are estimated using internal discounted cash flow calculations based upon Devon’s estimates of future retirement costs. Reconciliations of the beginning and ending balances of Devon’s asset retirement obligations, including revisions of the estimated fair values in 2008 and 2007, are presented in Note 5.

 

Short-term and long-term investments — Devon’s short-term and long-term investments presented in the tables above as of December 31, 2008 and December 31, 2007 consisted entirely of auction rate securities. As of December 31, 2007, Devon estimated the fair values of its short-term investments using quoted market prices. However, due to the auction failures discussed in Note 1 and the lack of an active market for Devon’s auction rate securities, quoted market prices for these securities were not available as of December 31, 2008. Therefore, Devon used valuation techniques that rely on unobservable, or Level 3, inputs to estimate the fair values of its long-term auction rate securities as of December 31, 2008. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the United States government guarantees of substantially all of the underlying student loans, the collection of all accrued interest to date and continued receipts of principal at par. Devon also has the ability to hold these securities until their scheduled maturity dates. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of December 31, 2008. At this time, Devon does not believe the values of its long-term securities are impaired.

 

Included below is a summary of the changes in Devon’s Level 3 short-term and long-term investments during 2008 (in millions).

 

 

 

On June 8, 2005, Devon’s stockholders adopted the 2005 Long-Term Incentive Plan, which expires on June 8, 2013. Devon’s stockholders adopted certain amendments to this plan on June 7, 2006. This plan, as amended, authorizes the Compensation Committee, which consists of non-management members of Devon’s Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards, Canadian

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

restricted stock units, performance units, performance bonuses, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards and stock appreciation rights to directors. A total of 32 million shares of Devon common stock have been reserved for issuance pursuant to the plan. To calculate shares issued under the plan, options granted represent one share and other awards represent 2.2 shares.

 

Devon also has stock option plans that were adopted in 2003 and 1997 under which stock options and restricted stock awards were issued to key management and professional employees. Options granted under these plans remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under these plans. Devon also has stock options outstanding that were assumed as part of the acquisitions of Ocean, Mitchell Energy & Development Corp., Santa Fe Snyder and PennzEnergy.

 

With the approval of Devon’s Compensation Committee, Devon modified the share-based compensation arrangements for certain of Devon’s executives in the second quarter of 2008. The modified compensation arrangements provide that executives who meet certain years-of-service and age criteria can retire and continue vesting in outstanding share-based grants. As a condition to receiving the benefits of these modifications, the executives must agree not to use or disclose Devon’s confidential information and not to solicit Devon’s employees and customers. The executives are required to agree to these conditions at retirement and again in each subsequent year until all grants have vested.

 

Although this modification does not accelerate the vesting of the executives’ grants, it does accelerate the expense recognition as executives approach the years-of-service and age criteria. When the modification was made in the second quarter of 2008, certain executives had already met the years-of-service and age criteria. As a result, Devon recognized an additional $27 million of share-based compensation expense in the second quarter of 2008 related to this modification. This additional expense would have been recognized in future reporting periods if the modification had not been made and the executives continued their employment at Devon.

 

The following table presents the effects of share-based compensation included in Devon’s accompanying statement of operations for the years ended December 31, 2008, 2007 and 2006.

 

 

 

Investment in Chevron Corporation common
stock — The fair value of this investment is based
on a quoted market price.

 

Debt — The fair value of Devon’s
variable-rate commercial paper borrowings is the carrying value.
Certain of Devon’s fixed-rate debt instruments actively
trade in an established market. The fair values of this debt are
based on quotes obtained from brokers.

 

DEVON
ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)

 

 

Investment in Chevron Corporation common
stock — The fair value of this investment is based
on a quoted market price.

 

Debt — The fair value of Devon’s
variable-rate commercial paper borrowings is the carrying value.
Certain of Devon’s fixed-rate debt instruments actively
trade in an established market. The fair values of this debt are
based on quotes obtained from brokers.

 

DEVON
ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)

 

 

Gas price swaps and collars — The fair values
of the gas price swaps and collars are estimated using internal
discounted cash flow calculations based upon forward commodity
price curves, quotes obtained from brokers for contracts with
similar terms or quotes obtained from counterparties to the
agreements.

 

Embedded option in exchangeable debentures —
The embedded option was not actively traded in an established
market. Therefore, its fair value was estimated using quotes
obtained from a broker for trades near the fair value
measurement date.

 

Debt — Certain of Devon’s fixed-rate debt
instruments do not actively trade in an established market. The
fair values of this debt are estimated by discounting the
principal and interest payments at rates available for debt with
similar terms and maturity.

 

Interest rate swaps — The fair values of the
interest rate swaps are estimated using internal discounted cash
flow calculations based upon forward interest-rate yield curves
or quotes obtained from counterparties to the agreements.

 

 

Gas price swaps and collars — The fair values
of the gas price swaps and collars are estimated using internal
discounted cash flow calculations based upon forward commodity
price curves, quotes obtained from brokers for contracts with
similar terms or quotes obtained from counterparties to the
agreements.

 

Embedded option in exchangeable debentures —
The embedded option was not actively traded in an established
market. Therefore, its fair value was estimated using quotes
obtained from a broker for trades near the fair value
measurement date.

 

Debt — Certain of Devon’s fixed-rate debt
instruments do not actively trade in an established market. The
fair values of this debt are estimated by discounting the
principal and interest payments at rates available for debt with
similar terms and maturity.

 

Interest rate swaps — The fair values of the
interest rate swaps are estimated using internal discounted cash
flow calculations based upon forward interest-rate yield curves
or quotes obtained from counterparties to the agreements.

 

 

Asset retirement obligations — The fair values
of the asset retirement obligations are estimated using internal
discounted cash flow calculations based upon Devon’s
estimates of future retirement costs. Reconciliations of the
beginning and ending balances of Devon’s asset retirement
obligations, including revisions of the estimated fair values in
2008 and 2007, are presented in Note 5.

 

Short-term and long-term investments —
Devon’s short-term and long-term investments presented in
the tables above as of December 31, 2008 and
December 31, 2007 consisted entirely of auction rate
securities. As of December 31, 2007, Devon estimated the
fair values of its short-term investments using quoted market
prices. However, due to the auction failures discussed in
Note 1 and the lack of an active market for Devon’s
auction rate securities, quoted market prices for these
securities were not available as of December 31, 2008.
Therefore, Devon used valuation techniques that rely on
unobservable, or Level 3, inputs to estimate the fair
values of its long-term auction rate securities as of
December 31, 2008. These inputs were based on the AAA
credit rating of the securities, the probability of full
repayment of the securities considering the United States
government guarantees of substantially all of the underlying
student loans, the collection of all accrued interest to date
and continued receipts of principal at par. Devon also has the
ability to hold these securities until their scheduled maturity
dates. As a result of using these inputs, Devon concluded the
estimated fair values of its long-term auction rate securities
approximated the par values as of December 31, 2008. At
this time, Devon does not believe the values of its long-term
securities are impaired.

 

Included below is a summary of the changes in Devon’s
Level 3 short-term and long-term investments during 2008
(in millions).

 

 

 

On June 8, 2005, Devon’s stockholders adopted the 2005
Long-Term Incentive Plan, which expires on June 8, 2013.
Devon’s stockholders adopted certain amendments to this
plan on June 7, 2006. This plan, as amended, authorizes the
Compensation Committee, which consists of non-management members
of Devon’s Board of Directors, to grant nonqualified and
incentive stock options, restricted stock awards, Canadian

 

DEVON
ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)

 

restricted stock units, performance units, performance bonuses,
stock appreciation rights and cash-out rights to eligible
employees. The plan also authorizes the grant of nonqualified
stock options, restricted stock awards and stock appreciation
rights to directors. A total of 32 million shares of Devon
common stock have been reserved for issuance pursuant to the
plan. To calculate shares issued under the plan, options granted
represent one share and other awards represent 2.2 shares.

 

Devon also has stock option plans that were adopted in 2003 and
1997 under which stock options and restricted stock awards were
issued to key management and professional employees. Options
granted under these plans remain exercisable by the employees
owning such options, but no new options or restricted stock
awards will be granted under these plans. Devon also has stock
options outstanding that were assumed as part of the
acquisitions of Ocean, Mitchell Energy & Development
Corp., Santa Fe Snyder and PennzEnergy.

 

With the approval of Devon’s Compensation Committee, Devon
modified the share-based compensation arrangements for certain
of Devon’s executives in the second quarter of 2008. The
modified compensation arrangements provide that executives who
meet certain
years-of-service
and age criteria can retire and continue vesting in outstanding
share-based grants. As a condition to receiving the benefits of
these modifications, the executives must agree not to use or
disclose Devon’s confidential information and not to
solicit Devon’s employees and customers. The executives are
required to agree to these conditions at retirement and again in
each subsequent year until all grants have vested.

 

Although this modification does not accelerate the vesting of
the executives’ grants, it does accelerate the expense
recognition as executives approach the
years-of-service
and age criteria. When the modification was made in the second
quarter of 2008, certain executives had already met the
years-of-service
and age criteria. As a result, Devon recognized an additional
$27 million of share-based compensation expense in the
second quarter of 2008 related to this modification. This
additional expense would have been recognized in future
reporting periods if the modification had not been made and the
executives continued their employment at Devon.

 

The following table presents the effects of share-based
compensation included in Devon’s accompanying statement of
operations for the years ended December 31, 2008, 2007 and
2006.

 

 

 

Asset retirement obligations — The fair values
of the asset retirement obligations are estimated using internal
discounted cash flow calculations based upon Devon’s
estimates of future retirement costs. Reconciliations of the
beginning and ending balances of Devon’s asset retirement
obligations, including revisions of the estimated fair values in
2008 and 2007, are presented in Note 5.

 

Short-term and long-term investments —
Devon’s short-term and long-term investments presented in
the tables above as of December 31, 2008 and
December 31, 2007 consisted entirely of auction rate
securities. As of December 31, 2007, Devon estimated the
fair values of its short-term investments using quoted market
prices. However, due to the auction failures discussed in
Note 1 and the lack of an active market for Devon’s
auction rate securities, quoted market prices for these
securities were not available as of December 31, 2008.
Therefore, Devon used valuation techniques that rely on
unobservable, or Level 3, inputs to estimate the fair
values of its long-term auction rate securities as of
December 31, 2008. These inputs were based on the AAA
credit rating of the securities, the probability of full
repayment of the securities considering the United States
government guarantees of substantially all of the underlying
student loans, the collection of all accrued interest to date
and continued receipts of principal at par. Devon also has the
ability to hold these securities until their scheduled maturity
dates. As a result of using these inputs, Devon concluded the
estimated fair values of its long-term auction rate securities
approximated the par values as of December 31, 2008. At
this time, Devon does not believe the values of its long-term
securities are impaired.

 

Included below is a summary of the changes in Devon’s
Level 3 short-term and long-term investments during 2008
(in millions).

 

 

 

On June 8, 2005, Devon’s stockholders adopted the 2005
Long-Term Incentive Plan, which expires on June 8, 2013.
Devon’s stockholders adopted certain amendments to this
plan on June 7, 2006. This plan, as amended, authorizes the
Compensation Committee, which consists of non-management members
of Devon’s Board of Directors, to grant nonqualified and
incentive stock options, restricted stock awards, Canadian

 

DEVON
ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)

 

restricted stock units, performance units, performance bonuses,
stock appreciation rights and cash-out rights to eligible
employees. The plan also authorizes the grant of nonqualified
stock options, restricted stock awards and stock appreciation
rights to directors. A total of 32 million shares of Devon
common stock have been reserved for issuance pursuant to the
plan. To calculate shares issued under the plan, options granted
represent one share and other awards represent 2.2 shares.

 

Devon also has stock option plans that were adopted in 2003 and
1997 under which stock options and restricted stock awards were
issued to key management and professional employees. Options
granted under these plans remain exercisable by the employees
owning such options, but no new options or restricted stock
awards will be granted under these plans. Devon also has stock
options outstanding that were assumed as part of the
acquisitions of Ocean, Mitchell Energy & Development
Corp., Santa Fe Snyder and PennzEnergy.

 

With the approval of Devon’s Compensation Committee, Devon
modified the share-based compensation arrangements for certain
of Devon’s executives in the second quarter of 2008. The
modified compensation arrangements provide that executives who
meet certain
years-of-service
and age criteria can retire and continue vesting in outstanding
share-based grants. As a condition to receiving the benefits of
these modifications, the executives must agree not to use or
disclose Devon’s confidential information and not to
solicit Devon’s employees and customers. The executives are
required to agree to these conditions at retirement and again in
each subsequent year until all grants have vested.

 

Although this modification does not accelerate the vesting of
the executives’ grants, it does accelerate the expense
recognition as executives approach the
years-of-service
and age criteria. When the modification was made in the second
quarter of 2008, certain executives had already met the
years-of-service
and age criteria. As a result, Devon recognized an additional
$27 million of share-based compensation expense in the
second quarter of 2008 related to this modification. This
additional expense would have been recognized in future
reporting periods if the modification had not been made and the
executives continued their employment at Devon.

 

The following table presents the effects of share-based
compensation included in Devon’s accompanying statement of
operations for the years ended December 31, 2008, 2007 and
2006.

 

 

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Devon has various non-contributory defined benefit pension plans, including qualified plans (“Qualified Plans”) and nonqualified plans (“Supplemental Plans”). The Qualified Plans provide retirement benefits for 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.

 

Devon’s funding policy regarding the Qualified Plans is to contribute the amount of funds necessary so that the Qualified Plans’ assets will be approximately equal to the related accumulated benefit obligation. As of December 31, 2007 and 2006, the fair values of the Qualified Plans’ assets were $619 million and $590 million, respectively, which were $62 million and $59 million more, respectively, than the related accumulated benefit obligation. The actual amount of contributions required during future periods will depend on investment returns from the plan assets during the same period as well as changes in long-term interest rates.

 

The Supplemental Plans provide retirement benefits for certain employees whose benefits under the Qualified Plans are limited by income tax regulations. The Supplemental Plans’ benefits are based on the employees’ years of service and compensation. For certain Supplemental Plans, Devon has established trusts to fund these plans’ benefit obligations. The total value of these trusts was $59 million at both December 31, 2007 and 2006, and is included in noncurrent other assets in the consolidated balance sheets. For the remaining Supplemental 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 (“Postretirement Plans”) that provide benefits for substantially all U.S. employees. The Postretirement Plans provide medical and, in some cases, life insurance benefits and are, depending on the type of plan, either contributory or non-contributory. Benefit obligations for the Postretirement Plans are estimated based on Devon’s future cost-sharing intentions. Devon’s funding policy for the Postretirement Plans is to fund the benefits as they become payable with available cash and cash equivalents.

 

 

Asset retirement obligation — The fair values
of the asset retirement obligations are estimated using internal
discounted cash flow calculations based upon Devon’s
estimates of future retirement costs. A reconciliation of the
beginning and ending balances of Devon’s asset retirement
obligation, including a revision of the estimated fair value in
2007 and 2006, is presented in Note 3.

 

DEVON
ENERGY CORPORATION AND SUBSIDIARIES

 

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)

 

 

Devon has various non-contributory defined benefit pension
plans, including qualified plans (“Qualified Plans”)
and nonqualified plans (“Supplemental Plans”). The
Qualified Plans provide retirement benefits for 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.

 

Devon’s funding policy regarding the Qualified Plans is to
contribute the amount of funds necessary so that the Qualified
Plans’ assets will be approximately equal to the related
accumulated benefit obligation. As of December 31, 2007 and
2006, the fair values of the Qualified Plans’ assets were
$619 million and $590 million, respectively, which
were $62 million and $59 million more, respectively,
than the related accumulated benefit obligation. The actual
amount of contributions required during future periods will
depend on investment returns from the plan assets during the
same period as well as changes in long-term interest rates.

 

The Supplemental Plans provide retirement benefits for certain
employees whose benefits under the Qualified Plans are limited
by income tax regulations. The Supplemental Plans’ benefits
are based on the employees’ years of service and
compensation. For certain Supplemental Plans, Devon has
established trusts to fund these plans’ benefit
obligations. The total value of these trusts was
$59 million at both December 31, 2007 and 2006, and is
included in noncurrent other assets in the consolidated balance
sheets. For the remaining Supplemental 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
(“Postretirement Plans”) that provide benefits for
substantially all U.S. employees. The Postretirement Plans
provide medical and, in some cases, life insurance benefits and
are, depending on the type of plan, either contributory or
non-contributory. Benefit obligations for the Postretirement
Plans are estimated based on Devon’s future cost-sharing
intentions. Devon’s funding policy for the Postretirement
Plans is to fund the benefits as they become payable with
available cash and cash equivalents.