SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: DECEMBER 3, 2001
Date of earliest event reported: OCTOBER 12, 2001
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 000-30176 73-1567067
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 NORTH BROADWAY, SUITE 1500
OKLAHOMA CITY, OKLAHOMA 73102
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
ITEM 2. Acquisition or Disposition of Assets
On October 12, 2001, Devon Energy Corporation ("Devon"), accepted all
of the Anderson Exploration Ltd. ("Anderson") common shares tendered by Anderson
stockholders pursuant to the Offer to Purchase for Cash and Directors' Circular
dated September 6, 2001, (the "Offer to Purchase"). In the Offer to Purchase,
Devon offered to purchase each outstanding common share, including the
associated rights, of Anderson, for C$40.00 per common share. The total common
shares accepted on October 12, 2001 represented approximately 97% of the
outstanding Anderson common shares. On October 17, 2001, Devon completed its
acquisition of Anderson by a compulsory acquisition under the Canada Business
Corporations Act of the remaining 3% of Anderson common shares. The total cost
to Devon of acquiring Anderson's outstanding common shares and paying for the
intrinsic value of Anderson's outstanding options and appreciation rights was
approximately $3.5 billion.
Devon filed a Form 8-K on October 26, 2001, related to the Anderson
acquisition. This Form 8-K/A includes Anderson's historical consolidated
financial statements and unaudited pro forma financial information related to
the Anderson acquisition.
ITEM 7. Financial Statements and Exhibits
(a) Financial Statements of the Business Acquired
See index at page 4.
(b) Pro Forma Financial Information
Unaudited pro forma financial information of Devon-Anderson combined
begins at page 30.
2
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereto duly authorized.
DEVON ENERGY CORPORATION
By: /s/ DANNY J. HEATLY
----------------------------------
Danny J. Heatly
Vice President
Date: December 3, 2001
3
INDEX TO HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
ANDERSON EXPLORATION LTD.
PAGE
-----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL
YEARS ENDED SEPTEMBER 30, 1999, 2000
AND 2001:
Report of KPMG LLP to the Directors of Anderson Exploration
Ltd....................................................... 5
Consolidated Balance Sheets as of September 30, 2000 and
2001...................................................... 6
Consolidated Statements of Earnings for the fiscal years
ended September 30, 1999, 2000
and 2001.................................................. 7
Consolidated Statements of Retained Earnings for the fiscal
years ended September 30, 1999, 2000 and 2001............. 8
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 1999, 2000 and 2001................... 9
Notes to Consolidated Financial Statements for the fiscal
years ended September 30, 1999, 2000 and 2001............. 10
4
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of Anderson Exploration
Ltd. as at September 30, 2000 and 2001 and the consolidated statements of
earnings, retained earnings and cash flows for each of the years in the
three-year period ended September 30, 2001. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at September 30,
2000 and 2001 and the results of its operations and its cash flows for each of
the years in the three-year period ended September 30, 2001 in accordance with
Canadian generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its policy for accounting for income taxes and, in accordance
with Canadian generally accepted accounting principles, this change has been
applied retroactively without restatement of prior years.
Accounting principles generally accepted in Canada vary in certain
significant respects from accounting principles generally accepted in the United
States. Application of accounting principles generally accepted in the United
States would have affected results of operations for each of the years in the
three-year period ended September 30, 2001, and shareholder's equity as at
September 30, 2000 and 2001, to the extent summarized in Note 13 to the
consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Calgary, Canada
November 9, 2001
5
ANDERSON EXPLORATION LTD.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30
---------------------
2000 2001
--------- ---------
(STATED IN MILLIONS
OF CANADIAN DOLLARS)
ASSETS
Current assets
Accounts receivable....................................... $ 227.7 $ 218.3
Inventories............................................... 17.8 11.3
-------- --------
245.5 229.6
Property, plant and equipment based on the full cost method
of accounting for oil and gas properties ($375.0 million
and $693.9 million excluded from amortization in 2000 and
2001, respectively) (note 3).............................. 3,725.4 5,574.8
Other assets................................................ 2.7 29.4
-------- --------
$3,973.6 $5,833.8
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Bank indebtedness......................................... $ 32.4 $ 7.2
Accounts payable and accrued liabilities.................. 272.9 459.8
Taxes payable............................................. 3.2 22.5
Dividend payable.......................................... -- 21.0
-------- --------
308.5 510.5
Long term debt (note 4)..................................... 1,126.9 1,350.1
Other credits (note 5)...................................... 133.6 141.2
Future income taxes (note 6)................................ 841.1 1,823.8
-------- --------
2,410.1 3,825.6
-------- --------
Shareholder's equity
Share capital (note 7).................................... 905.3 889.8
Retained earnings......................................... 658.2 1,118.4
-------- --------
1,563.5 2,008.2
-------- --------
$3,973.6 $5,833.8
======== ========
Subsequent events (note 14)
See accompanying notes to consolidated financial statements.
6
ANDERSON EXPLORATION LTD.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30
-----------------------------------
1999 2000 2001
--------- ---------- ----------
(STATED IN MILLIONS OF CANADIAN
DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues
Oil and gas............................................... $ 770.9 $1,417.1 $2,620.8
Royalties, net of ARTC (1999 -- $1.5 million; 2000 -- $0.7
million; 2001 -- $0.5 million)......................... (125.9) (291.8) (601.0)
------- -------- --------
645.0 1,125.3 2,019.8
------- -------- --------
Expenses
Operating................................................. 153.6 209.4 312.8
Depletion and depreciation................................ 260.7 312.0 503.5
General and administrative................................ 40.7 52.9 73.9
Interest (interest on long term debt; 1999 -- $41.9
million; 2000 -- $58.3 million; 2001 -- $101.5
million)............................................... 42.5 58.3 101.5
Future site restoration................................... 18.5 18.6 22.6
------- -------- --------
516.0 651.2 1,014.3
------- -------- --------
Earnings from continuing operations before taxes............ 129.0 474.1 1,005.5
------- -------- --------
Taxes (note 6)
Current................................................... 20.5 7.8 38.2
Future.................................................... 42.1 218.1 365.0
------- -------- --------
62.6 225.9 403.2
------- -------- --------
Earnings from continuing operations......................... 66.4 248.2 602.3
Earnings from discontinued operations (note 2).............. 4.0 65.3 --
------- -------- --------
Earnings.................................................... $ 70.4 $ 313.5 $ 602.3
======= ======== ========
Basic earnings per common share
From continuing operations................................ $ 0.54 $ 1.95 $ 4.59
From discontinued operations.............................. 0.03 0.51 --
------- -------- --------
$ 0.57 $ 2.46 $ 4.59
======= ======== ========
Diluted earnings per common share (note 8)
From continuing operations................................ $ 0.54 $ 1.92 $ 4.49
From discontinued operations.............................. 0.03 0.51 --
------- -------- --------
$ 0.57 $ 2.43 $ 4.49
======= ======== ========
Weighted average number of common shares outstanding
(millions)
Basic..................................................... 124.1 127.4 131.2
Diluted................................................... 124.5 129.3 134.2
See accompanying notes to consolidated financial statements.
7
ANDERSON EXPLORATION LTD.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
YEARS ENDED SEPTEMBER 30
--------------------------
1999 2000 2001
------ ------ --------
(STATED IN MILLIONS OF
CANADIAN DOLLARS)
Retained earnings, beginning of year........................ $274.3 $344.7 $ 658.2
Retroactive adjustment to opening retained earnings (notes 6
and 10)................................................... -- -- (121.1)
Earnings.................................................... 70.4 313.5 602.3
Dividends................................................... -- -- (21.0)
------ ------ --------
Retained earnings, end of year.............................. $344.7 $658.2 $1,118.4
====== ====== ========
See accompanying notes to consolidated financial statements.
8
ANDERSON EXPLORATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30
----------------------------------------
1999 2000 2001
---------- ------------ ------------
(STATED IN MILLIONS OF CANADIAN DOLLARS)
Cash provided by (used in):
Operations
Earnings from continuing operations....................... $ 66.4 $ 248.2 $ 602.3
Add (deduct) non-cash items:
Depletion and depreciation............................. 260.7 312.0 503.5
Future site restoration................................ 18.5 18.6 22.6
Future taxes........................................... 42.1 218.1 365.0
Other.................................................. (0.1) -- 7.6
Cash flow from discontinued operations (note 2)........... 8.0 4.4 --
Change in deferred revenue................................ (10.6) (10.4) (9.3)
Change in non-cash working capital related to:
-- continuing operations (note 9)...................... 21.1 (17.6) 149.3
-- discontinued operations (notes 2 and 9)............. 1.0 0.9 --
------- --------- ---------
407.1 774.2 1,641.0
------- --------- ---------
Investments
Additions to property, plant and equipment................ (293.4) (679.8) (1,078.7)
Proceeds on disposition of property, plant and
equipment.............................................. 9.6 10.4 156.3
Acquisitions (note 2)..................................... -- (550.1) (782.3)
Proceeds on disposition of Federated Pipe Lines Ltd. (note
2)..................................................... -- 102.5 --
Site restoration expenditures............................. (6.3) (10.1) (11.3)
Change in non-cash working capital related to investments
(note 9)............................................... 4.8 (2.0) 61.9
Discontinued operations (notes 2 and 9)................... (8.0) (0.2) --
------- --------- ---------
(293.3) (1,129.3) (1,654.1)
------- --------- ---------
Financing
Increase (decrease) in long term debt..................... (150.3) 331.7 55.3
Increase (decrease) in bank indebtedness.................. (6.2) 18.5 (26.7)
Issue of common shares.................................... 42.7 49.4 32.4
Repurchase of common shares............................... -- (38.7) (47.9)
Dividends................................................. -- -- (21.0)
Change in non-cash working capital related to financing
(note 9)............................................... -- -- 21.0
Discontinued operations (note 2).......................... -- (5.8) --
------- --------- ---------
(113.8) 355.1 13.1
------- --------- ---------
Increase in cash............................................ -- -- --
Cash position, beginning of year............................ -- -- --
------- --------- ---------
Cash position, end of year.................................. $ -- $ -- $ --
======= ========= =========
See accompanying notes to consolidated financial statements.
Current bank indebtedness includes outstanding cheques.
9
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 2000 AND 2001
(TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE STATED)
Anderson Exploration Ltd. ("Anderson Exploration" or "the Company") is
engaged in the acquisition, exploration, development and production of oil and
gas resources in western and northern Canada. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in Canada.
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
The consolidated financial statements include the accounts of Anderson
Exploration Ltd. and subsidiary companies and partnerships, all of which are
wholly-owned. All significant intercompany accounts and transactions have been
eliminated.
A significant portion of the Company's oil and gas exploration, development
and production activities are conducted with others. Accordingly, the accounts
reflect only the Company's proportionate interest in such activities.
(b) Inventories
Inventories are stated at the lower of cost and net realizable value. Cost
is determined using the specific item or average cost method.
(c) Property, plant and equipment
The Company follows the full cost method of accounting for oil and gas
properties. Under this method, all costs relative to the exploration for and
development of oil and gas reserves are capitalized into cost centres on a
country by country basis. Capitalized costs include lease acquisitions,
geological and geophysical costs, lease rentals on non-producing properties,
costs of drilling productive and non-productive wells and plant and production
equipment costs. General and administrative costs are not capitalized, except to
the extent of the Company's working interest in operated capital expenditure
programs to which overhead fees have been charged under standard industry
operating agreements. Proceeds received from disposals of oil and gas properties
and equipment are credited against capitalized costs unless the disposal would
alter the rate of depletion and depreciation by more than 20 percent, in which
case a gain or loss on disposal is recorded.
Depletion of oil and gas properties and depreciation of plant and
production equipment, including estimated future costs to develop proved
reserves, are provided on the unit of production method based on total proven
reserves before royalties as estimated by Company engineers. Natural gas sales
and reserves are converted to equivalent units of crude oil using their relative
energy content. Buildings and other equipment are depreciated over their useful
lives using the declining balance and straight line methods at rates varying
from five percent to 40 percent per annum.
The Company applies a ceiling test to capitalized oil and gas property
costs to ensure that such costs do not exceed the estimated future net revenues
from production of proven reserves, at prices and operating costs in effect at
the balance sheet date, plus the cost of unevaluated properties less
management's estimate of impairment. The test also provides for estimated future
administrative overhead, financing costs and taxes.
10
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Future site restoration costs
Provisions for future site restoration costs are made using the unit of
production method based on established reserves. Costs are based on engineering
estimates considering current regulations, costs and industry standards. Actual
expenditures incurred are applied against deferred future site restoration
costs.
(e) Stock based compensation plans
Consideration received from employees or directors on the exercise of stock
options under the employee stock option plan and the purchase of stock under the
employee stock savings plan is recorded as share capital. The Company matches
employee contributions to the stock savings plan and these cash payments are
recorded as compensation expense.
Obligations for cash payments under the share appreciation rights plan are
accrued as compensation expense over the vesting period of the rights. Changes
in the share price, up or down, will change the compensation expense and are
recognized prospectively when they occur.
(f) Taxes
Effective October 1, 2000, the Company adopted the liability method of
accounting for income taxes (see note 6). Under this method, income tax assets
and income tax liabilities are recognized, at current rates, for differences
between amounts reported for financial statement purposes and their respective
tax bases. The effect of a change in income tax rates on future income tax
assets and future income tax liabilities is recognized in income in the period
that the change occurs.
(g) Revenue recognition
Oil and natural gas revenues are recognized when title passes to the
purchaser. Settlement payments received for restructuring or terminating long
term natural gas sales contracts are deferred and recognized as revenue over the
remaining period of the contracts, or over the life of the reserves associated
with the contracts.
(h) Foreign currency translation
Monetary assets and liabilities denominated in a foreign currency are
translated at the rate of exchange in effect at the balance sheet date while
non-monetary assets and liabilities are translated at historical rates of
exchange. Revenues and expenses are translated at monthly average rates of
exchange. Translation gains and losses are included in earnings except for
unrealized gains and losses on long term monetary items which are deferred and
amortized to earnings over their remaining term.
(i) Hedging
The Company utilizes derivative instruments in its management of exposures
to fluctuations in commodity prices, interest rates and foreign currency
exchange rates. Hedge accounting is used when there is a high degree of
correlation between price movements in the derivative instrument and the item
designated as being hedged. Gains and losses on derivative instruments used for
hedging purposes are recognized in the same period as the hedged item and are
recorded in the consolidated statements of earnings in the same manner as the
hedged item. The fair values of derivative instruments are not recorded in the
balance sheet. If correlation ceases, hedge accounting is terminated and future
changes in the market value of the derivative instruments are recognized as
gains or losses in the period of change.
11
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Per share amounts
Basic earnings per common share are computed by dividing earnings from
operations by the weighted average number of common shares outstanding for the
period. Diluted per share amounts reflect the potential dilution that could
occur if securities or other contracts to issue common shares were exercised or
converted to common shares. The treasury stock method is used to determine the
dilutive effect of stock options and other dilutive instruments.
(k) Use of estimates
Management is required 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 reported period. Actual results could differ
from these estimates.
2. CORPORATE ACQUISITIONS AND DISPOSITION
(a) Acquisition of Numac Energy Inc.
Effective February 12, 2001, the Company acquired all of the outstanding
shares of Numac Energy Inc. ("Numac"), an oil and gas production company, for
cash consideration of $8.00 per share. The transaction has been accounted for
using the purchase method with the results of operations included in these
financial statements from the date of acquisition. Details of the acquisition
are as follows:
Net assets acquired, at assigned values:
Property, plant and equipment............................. $ 933.5
Deferred financing costs.................................. 3.5
Working capital deficiency (including bank indebtedness
assumed of $1.5 million)............................... (12.4)
Long term debt assumed.................................... (135.7)
Pension and lease obligations assumed..................... (6.6)
Future income tax adjustment to property, plant and
equipment.............................................. 419.8
Future income tax liability............................... (419.8)
-------
$ 782.3
=======
Purchase price:
Cash...................................................... $ 773.3
Transaction costs......................................... 9.0
-------
$ 782.3
=======
(b) Acquisition of Ulster Petroleums Ltd.
On May 17, 2000, the Company acquired all the outstanding shares of Ulster
Petroleums Ltd. ("Ulster"), an oil and gas production company. The consideration
given for each Ulster share was $13.10, made up of $11.00 cash and 0.09655 of an
Anderson Exploration common share based on Anderson Exploration's closing price
of $21.75 per share on the offer date. The transaction has been accounted for
12
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
using the purchase method with the results of operations included in these
financial statements from the date of acquisition. Details of the acquisition
are as follows:
Net assets acquired, at assigned values:
Property, plant and equipment............................. $1,000.7
Working capital deficiency (including a cash balance of
$2.8 million).......................................... (32.1)
Long term debt assumed.................................... (312.2)
--------
$ 656.4
========
Purchase price:
Cash...................................................... $ 542.2
Common shares (4,758,727 shares).......................... 103.5
Transaction costs......................................... 10.7
--------
$ 656.4
========
(c) Disposition of Federated Pipe Lines Ltd.
On June 28, 2000, the Company entered into an agreement to sell its 50
percent interest in Federated Pipe Lines Ltd. ("Federated"), a pipeline
transportation company. The Company received net proceeds on the sale of $102.5
million and disposed of $0.8 million of bank indebtedness. Net proceeds from
this transaction were used to reduce debt related to the acquisition of Ulster.
The Company's proportionate interest in the results of operations of
Federated are shown as discontinued operations in the consolidated statements of
earnings and cash flows.
For the six months ended March 31, 2000, revenues from discontinued
operations were $16.7 million, earnings were $1.8 million (net of taxes of $1.5
million) and net capital expenditures were $0.1 million. Results of discontinued
operations subsequent to this date were included in the gain on sale of $63.5
million (net of taxes of $1.6 million), as a plan of arrangement to dispose of
the assets existed at March 31, 2000.
3. PROPERTY, PLANT AND EQUIPMENT
2000 2001
------------------------ ------------------------
ACCUMULATED ACCUMULATED
DEPLETION AND DEPLETION AND
COST DEPRECIATION COST DEPRECIATION
-------- ------------- -------- -------------
Oil and gas properties,
Subject to depletion and depreciation......... $6,065.0 $(2,743.1) $8,088.0 $(3,240.0)
Not subject to depletion and depreciation..... 375.0 -- 693.9 --
Buildings, land and other....................... 81.2 (52.7) 91.8 (58.9)
-------- --------- -------- ---------
$6,521.2 $(2,795.8) $8,873.7 $(3,298.9)
======== ========= ======== =========
Net book value.................................. $ 3,725.4 $ 5,574.8
========= =========
13
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Oil and gas property costs not subject to depletion and depreciation at
September 30, 2001 are as follows:
LAND GEOLOGICAL AND
ACQUISITION GEOPHYSICAL FRONTIER DRILLING AND
COSTS COSTS COMPLETION COSTS TOTAL
----------- --------------- --------------------- ------
Acquired in 2001................... $203.1 $125.7 $29.2 $358.0
Acquired in 2000................... 172.5 32.9 -- 205.4
Acquired in 1999................... 28.8 -- -- 28.8
Acquired prior to 1999............. 101.7 -- -- 101.7
------ ------ ----- ------
$506.1 $158.6 $29.2 $693.9
====== ====== ===== ======
Future development costs of proven undeveloped reserves of $340.3 million
and $858.7 million are included in depletion and depreciation calculations at
September 30, 2000 and 2001, respectively.
Depletion and depreciation per equivalent barrel of production for the
years ended September 30, 1999, 2000 and 2001 was $5.57, $5.89 and $7.32,
respectively.
At the balance sheet dates, the Company had surpluses in its ceiling tests
using balance sheet date prices.
4. LONG TERM DEBT
2000 2001
---------------------- ----------------------
BALANCE INTEREST BALANCE INTEREST
OUTSTANDING RATE* OUTSTANDING RATE*
----------- -------- ----------- --------
Bank loans............................................ $ 385.9 6.68% $ 4.8 5.26%
Bank loans subject to swaps........................... 253.0 6.94% 244.0 7.01%
Senior unsecured U.S. notes, maturing March 2011 (U.S
$400.0 million)....................................... -- 631.6 6.75%
Medium term notes, maturing August 2006............... -- 200.0 6.55%
Medium term notes, maturing July 2005................. 175.0 7.25% 175.0 7.25%
Senior U.S. dollar notes, maturing October 2005 to
October 2006 (U.S.$60.0 million).................... 113.0 7.44% 94.7 7.50%
Oil indexed debentures, maturing October 2000......... 200.0 8.26% --
-------- --------
$1,126.9 $1,350.1
======== ========
---------------
* As at September 30.
The Company had a $500 million syndicated revolving credit facility with an
extendible 364 day revolving period and a six year term period. Advances under
the facility could be drawn in either Canadian or U.S. funds. The facility bears
interest at the banks' prime lending rate, bankers' acceptance rates plus
applicable margins or U.S. LIBOR rates plus applicable margins. On October 15,
2001, all amounts outstanding under this facility were repaid following the
acquisition of the Company by Devon Energy Corporation ("Devon") (note 14). The
facility was cancelled on October 19, 2001.
The Company had a syndicated revolving credit facility that was arranged in
May 2000 to finance the acquisition of Ulster (note 2). The facility was made up
of three separate components. Tranche A was a committed 364 day $100 million
bridge facility available by way of a single draw. Tranche B was a committed 18
month $300 million bridge facility available by way of a single draw. Tranche C
is a committed $500 million 364 day revolving credit facility, followed by a
committed two year term period. In July 2000, the full amount of Tranche A and
$75 million of Tranche B were repaid with proceeds from
14
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the issue of medium term notes. In February 2001, the remaining $225 million
under Tranche B was transferred to Tranche C. Tranche A and Tranche B are no
longer available. Advances under the facility can be drawn in either Canadian or
U.S. funds. The facility bears interest at the banks' prime lending rate,
bankers' acceptance rates plus applicable margins or U.S. Libor rates plus
applicable margins. All amounts outstanding under Tranche C were repaid during
2001 and the facility was cancelled on October 19, 2001.
The Company has fixed the rate of interest on $244.0 million of its bank
loans through swap agreements at an average rate of 7.01 percent. The swap
agreements mature at various dates as shown below:
AMOUNT INTEREST RATE* MATURITY DATE
------ -------------- -------------
$ 32.5 6.66% October 2001
7.5 6.80% October 2002
79.0 6.76% May 2003
40.0 7.32% February 2007
30.0 7.53% March 2007
30.0 7.32% June 2007
25.0 6.85% July 2007
------ -----
$244.0 7.01%
====== =====
---------------
* Includes margin.
The Company arranged a new $1 billion non-revolving bridge credit facility
through a group of Canadian chartered banks to finance the acquisition of Numac
(note 2). The unsecured facility had a maturity date of October 1, 2002. On
March 14, 2001, Anderson Exploration sold U.S. $400 million principal amount of
6.75 percent senior unsecured notes due 2011 to purchasers in the United States.
Net proceeds from the issue were used to repay a portion of the bridge facility.
In March 2001, existing credit facilities were used to repay the remainder of
the outstanding amount under the bridge facility, and the facility was
cancelled. At September 30, 2001, the senior unsecured notes were rated "Baaa"
by Moody's Investors Service, Inc. and "BBB+" by Standard & Poor's Rating
Services.
On June 29, 2000, the Company filed a short form shelf prospectus in
connection with a two year medium term note program in an aggregate principal
amount of up to $500 million that are offered at prices and contain such other
terms as may be determined at the time of issue. On July 18, 2000, the Company
issued $175 million of 7.25 percent unsecured, non-redeemable notes maturing
July 2005 pursuant to the program. On August 2, 2001, the Company issued $200
million of 6.55 percent unsecured, non-redeemable notes maturing August 2006
pursuant to the program. At September 30, 2001, the medium term notes were rated
"BBB+" by Standard & Poor's Rating Services and "BBB (high)" by Dominion Bond
Rating Service Limited. Subsequent to September 30, 2001, Dominion Bond Rating
Service Limited lowered its rating of the medium term notes to "BBB (low)".
The senior U.S. dollar notes were assumed on the acquisition of Ulster
(note 2). The senior notes are denominated in U.S. dollars and were issued in
October 1995 in three series as follows:
Series A 7.23%, repaid in October 2000............................... U.S.$15.0
Series B 7.42%, due in October 2005; annual principal repayments of
U.S.$5.8 million begin in October 2001...................... U.S.$29.0
Series C 7.57%, due in October 2006; annual principal repayments of
U.S.$10.3 million begin in October 2004..................... U.S.$31.0
15
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During October 2000, the Series A notes totalling U.S. $15.0 million were
repaid. At September 30, 2001, U.S. $60.0 million, representing Series B and
Series C of the notes, was outstanding. The Company drew upon existing long-term
credit facilities to finance the principal payment made in October 2001.
Accordingly, the amount has not been included in current liabilities at
September 30, 2001.
The bank loans, medium term notes and senior U.S. dollar notes are
unsecured and rank equally with one another and are subject to the maintenance
of certain financial ratios.
The oil indexed debentures had a fixed interest rate of 5.0 percent per
annum plus a variable interest rate of up to 16.8 percent per annum based upon
the average price of crude oil. The effective rate of interest on the debentures
was fixed to maturity at 8.26 percent by an unsecured interest rate swap
agreement. These debentures were repaid in October 2000.
The Company has a $125 million operating line of credit, of which $35.9
million was unused at September 30, 2001. The operating line is being used to
support outstanding letters of credit associated with the Company's work
proposals in northern Canada (note 12).
The Company's revolving credit facilities of $248.8 million were repaid and
cancelled in October 2001. The aggregate amount of payments estimated to be
required in each of the next five years on the Company's other debt facilities
are $9.2 million in 2002, $9.2 million in 2003, $9.2 million in 2004, $200.5
million in 2005 and $225.5 million in 2006.
5. OTHER CREDITS
2000 2001
------ ------
Deferred future site restoration costs...................... $ 68.4 $ 79.7
Deferred revenue............................................ 59.7 50.3
Pension obligation (note 10)................................ 5.5 7.9
Deferred lease obligations.................................. -- 3.3
------ ------
$133.6 $141.2
====== ======
Site restoration involves the surface clean-up and reclamation of well
sites and field production facilities to ensure they can be safely returned to
appropriate land uses. In addition, certain plant facilities will require
decommissioning, which involves dismantlement of facilities as well as the
decontamination and reclamation of these lands. Total estimated future costs,
given the current inventory of wells and facilities, are approximately $369.6
million, of which $79.7 million has been accrued to date.
6. TAXES
Effective October 1, 2000, the Company adopted the Canadian Institute of
Chartered Accountants accounting recommendations with respect to income taxes.
The new recommendations were applied retroactively without restatement of prior
year financial statements. The change in policy resulted in an increase in
property, plant and equipment of $77.2 million, an increase in future income tax
liabilities of $198.0 million and a charge to retained earnings of $120.8
million. The adjustment to retained earnings was primarily a result of the
future income tax cost of the Ulster acquisition in which the tax basis acquired
was less than the purchase price.
16
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The temporary differences that gave rise to the Company's future income tax
assets and liabilities are as follows:
OCTOBER 1, SEPTEMBER 30,
2000 2001
---------- -------------
Future income tax assets
Alberta royalty tax rebate................................ $ 44.7 $ 25.4
Deferred future site restoration costs.................... 29.9 28.1
Deferred revenue.......................................... 26.0 21.2
-------- --------
100.6 74.7
-------- --------
Future income tax liabilities
Property, plant & equipment in excess of tax basis........ 1,136.8 1,894.3
Other..................................................... 2.9 4.2
-------- --------
1,139.7 1,898.5
-------- --------
Net future income tax liability............................. $1,039.1 $1,823.8
======== ========
The provision for taxes differs from the result which would have been
obtained by applying the combined federal and provincial tax rate to earnings
before taxes. The difference results from the following items:
1999 2000 2001
------ ------ --------
Earnings from continuing operations before taxes.......... $129.0 $474.1 $1,005.5
====== ====== ========
Combined federal and provincial tax rate.................. 44.8% 44.8% 44.0%
------ ------ --------
Computed "expected" tax................................... 57.8 $212.4 $ 442.4
Increase (decrease) in taxes resulting from:
Royalties and other payments to provincial
governments........................................ 49.5 116.4 237.6
Non-deductible depletion............................. 1.2 6.4 --
Resource allowance................................... (49.7) (111.9) (221.8)
Income tax rebates and credits....................... (2.1) (7.6) (17.6)
Capital taxes........................................ 7.0 10.3 16.2
Reduction in provincial tax rate..................... -- -- (55.8)
Other................................................ (1.1) (0.1) 2.2
------ ------ --------
Provision for taxes....................................... $ 62.6 $225.9 $ 403.2
====== ====== ========
17
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHARE CAPITAL
Authorized:
Common shares: unlimited
Preferred shares: unlimited
Junior preferred shares, redeemable, participating: unlimited
Issued:
1999 2000 2001
------------------------ ------------------------ ------------------------
NUMBER OF AMOUNT NUMBER OF AMOUNT NUMBER OF AMOUNT
SHARES (MILLIONS) SHARES (MILLIONS) SHARES (MILLIONS)
----------- ---------- ----------- ---------- ----------- ----------
Common shares Balance,
beginning of year......... 123,260,352 $594.9 126,030,334 $637.6 131,526,926 $778.8
Issued for cash on
exercise of stock
options................ 2,553,155 39.2 2,857,210 45.3 1,741,105 28.1
Issued for cash under
employee stock savings
plan................... 216,827 3.5 183,793 4.1 141,856 4.3
Issued on acquisition of
Ulster................. -- -- 4,758,727 103.5 -- --
Repurchase of shares under
Normal Course Issuer
Bid.................... -- -- (2,303,138) (11.7) (1,716,800) (10.2)
----------- ------ ----------- ------ ----------- ------
Balance, end of year...... 126,030,334 637.6 131,526,926 778.8 131,693,087 801.0
----------- ------ ----------- ------ ----------- ------
Contributed surplus Balance,
beginning of year......... 153.5 153.5 126.5
Repurchase of shares under
Normal Course Issuer
Bid.................... -- (27.0) (37.7)
----------- ------ ----------- ------ ----------- ------
Balance, end of year...... 153.5 126.5 88.8
----------- ------ ----------- ------ ----------- ------
126,030,334 $791.1 131,526,926 $905.3 131,693,087 $889.8
=========== ====== =========== ====== =========== ======
The Company has an employee stock option plan under which both employees
and directors are eligible to receive grants. At September 30, 2001, 11,328,215
common shares were reserved for issuance under the plan. Options granted under
the plan generally have a term of five years to expiry and vest equally over a
three year period starting on the first anniversary date of the grant. The
exercise price of each option equals the market price of the Company's common
shares on the date of the grant. At
18
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 2001, 7,062,365 options with exercise prices between $13.15 and
$34.05 were outstanding and exercisable at various dates to the year 2006.
1999 2000 2001
--------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------
Stock options
outstanding,
beginning of
year............... 7,647,502 $15.95 7,423,564 $15.71 6,466,771 $16.81
Granted.............. 2,595,800 14.68 2,109,600 19.35 2,563,300 32.44
Exercised............ (2,553,155) 15.35 (2,857,210) 15.87 (1,741,105) 16.13
Cancelled............ (266,583) 15.93 (209,183) 16.16 (226,601) 22.11
---------- ------ ---------- ------ ---------- ------
Stock options
outstanding, end of
year............... 7,423,564 $15.71 6,466,771 $16.81 7,062,365 $22.48
========== ====== ========== ====== ========== ======
Exercisable at year
end................ 2,560,734 $15.95 2,000,936 $16.05 2,489,232 $16.59
========== ====== ========== ====== ========== ======
The range of exercise prices of the Company's outstanding stock options at
September 30, 2001 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING TERM (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
Under $15.00.............. 1,443,665 2.5 $14.44 751,665 $14.44
$15.00 to 18.99........... 1,270,500 1.4 $16.57 1,182,500 $16.54
$19.00 to 26.99........... 1,850,600 2.6 $19.36 545,067 $19.38
Over $27.00............... 2,497,600 4.5 $32.43 10,000 $32.72
--------- --- ------ --------- ------
7,062,365 3.3 $22.48 2,489,232 $16.59
========= === ====== ========= ======
In 1999, the employee stock option plan was amended to give the Board of
Directors the discretion to attach share appreciation rights to stock options
granted after February 10, 1999. Share appreciation rights give the holder of
the options the right to surrender his or her options for cancellation and
receive a cash payment from the Company equal to the excess of the then current
market price of the common shares over the exercise price of the options. To
date, share appreciation rights have not been attached to stock options granted.
A separate share appreciation rights plan, where employees are granted the
right to receive cash payments from the Company, but not common shares, was
established in 2000. Under this plan, employees
19
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are entitled to cash payments equal to the excess of the then current market
price of the common shares over the exercise price of the right. Other terms of
the plan are similar to the employee stock option plan.
2000 2001
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE
RIGHTS EXERCISE PRICE RIGHTS EXERCISE PRICE
--------- -------------- --------- --------------
Share appreciation rights outstanding,
beginning of year........................... -- $ -- 1,643,061 $21.95
Granted....................................... 1,738,101 22.09 133,200 33.36
Exercised..................................... -- -- (259,830) 19.85
Cancelled..................................... (95,040) 24.55 (152,221) 28.22
--------- ------ --------- ------
Share appreciation rights outstanding, end of
year........................................ 1,643,061 $21.95 1,364,210 $22.76
========= ====== ========= ======
Exercisable at year end....................... -- $ -- 261,830 $23.38
========= ====== ========= ======
At September 30, 2000 and 2001, the weighted average remaining contractual
life of the rights was 4.5 years and 3.6 years, respectively. Compensation
expense of $ nil, $4.1 million and $11.4 million has been recorded in respect of
this plan for the years ended September 30, 1999, 2000 and 2001, respectively.
On October 17, 2001, Devon completed its acquisition of the issued and
outstanding shares of the Company. Immediately prior to the acquisition, all
stock options and share appreciation rights outstanding vested and were
subsequently exercised or paid out by the Company (note 14).
Under the employee stock savings plan, the Company is authorized to issue
shares of common stock to all of its permanent employees. Under the terms of the
plan, qualifying employees may contribute from four percent to eight percent of
basic annual earnings. Employee contributions are invested in the Company's
common shares purchased from treasury at market prices. The Company matches the
employees' contributions, investing in qualified money market instruments or
additional common shares of the Company purchased on the open market. The
Company's share of contributions is recorded as compensation expense and
amounted to $3.5 million, $4.1 million and $4.3 million in 1999, 2000 and 2001,
respectively. At September 30, 2001, 717,709 common shares were reserved for
issuance under the plan. As a result of the acquisition of the Company by Devon,
the issuance of shares under this plan ceased September 30, 2001.
On November 14, 2000, the Board of Directors approved a new Notice of
Intention to make a Normal Course Issuer Bid, under which the Company could
acquire up to five percent of its outstanding common shares through the
facilities of The Toronto Stock Exchange. During the year, the Company
repurchased 0.7 million shares at an average price of $29.03 per share. Under
the program that expired on November 30, 2000, the Company repurchased 1.0
million shares at an average price of $27.16. The repurchased shares under both
programs were cancelled and returned to treasury.
On August 18, 1999, the Board of Directors adopted a Shareholder Rights
Plan to replace the Company's previous plan which expired in 1999. The Plan was
approved by shareholders on February 16, 2000. If a bid to acquire control of
the Company is made, the Plan is designed to give the Board of Directors of the
Company time to consider alternatives to allow shareholders to receive full and
fair value for their shares. In the event that a bid, other than a permitted
bid, is made, shareholders become entitled to exercise rights to acquire common
shares of the Company at 50 percent of market value. This would significantly
dilute the value of the bidder's holdings. This Plan was not utilized in
connection with Devon's acquisition of the Company.
20
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PER SHARE AMOUNTS
In computing diluted earnings per share, 0.4 million, 1.9 million and 3.0
million shares were added to the weighted average number of common shares
outstanding during the years ended September 30, 1999, 2000 and 2001,
respectively, for the dilutive effect of employee stock options. No adjustments
were required to reported earnings in computing diluted per share amounts.
9. CHANGE IN NON-CASH WORKING CAPITAL
1999 2000 2001
------ ------- ------
Accounts receivable....................................... $(23.6) $(102.7) $ 9.4
Inventories............................................... (1.4) (6.7) 6.5
Accounts payable and accrued liabilities.................. 35.9 136.7 186.9
Taxes payable............................................. 13.4 (11.1) 19.3
Dividend payable.......................................... -- -- 21.0
Acquisition of non-cash working capital deficiency........ -- (34.9) (10.9)
Disposition of non-cash working capital deficiency........ -- (0.2) --
------ ------- ------
$ 24.3 $ (18.9) $232.2
====== ======= ======
The following cash receipts (payments) have been included in the
determination of earnings from continuing operations:
1999 2000 2001
------ ------ -------
Dividends received........................................ $ 1.1 $ 1.0 $ --
Interest paid............................................. (42.2) (54.1) (103.4)
Taxes paid................................................ (7.3) (19.0) (19.0)
10. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
Effective October 1, 2000, the Company adopted the Canadian Institute of
Chartered Accountants accounting recommendations with respect to pension plans
and other post-retirement benefits. Upon adoption of these recommendations, a
charge of $0.3 million was recorded against retained earnings, with a
corresponding increase in the pension accrual.
The Company maintains two pension plans, which were acquired in the
business combination with Home Oil and in the Numac acquisition, respectively.
Home Oil Plan
The Home Oil Plan is a non-contributory registered defined benefit pension
plan. In June 1995, the plan was amended to give active employees an opportunity
to opt out of the plan in favour of a defined contribution alternative. Most
employees opted out of the plan. These employees and all new employees accrue
future benefits based on defined contributions. Employees remaining in the plan
continue to accrue benefits under the defined benefit plan. The plan is funded
based on independent actuarial valuations. Plan assets are invested primarily in
treasury bills and/or publicly traded equity and fixed income securities.
Retirement benefits are based on the employees' years of credited service and
salaries during the last years of employment.
The retirement benefit under the Home Oil Plan is subject to a maximum
pension as determined under the Income Tax Act (Canada). To the extent this
limitation applied, supplemental retirement allowances were provided to
qualifying employees at the time so that the total retirement benefits were
sufficient to provide the annuity that those employees would have been entitled
to without the limitation.
21
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To support the Company's obligations under the supplemental plan, the Company
has issued a letter of credit to the custodian of the supplemental plan.
In August 1997, the Company purchased annuity contracts in respect of all
the then retired and deferred vested members of the Home Oil Plan. Pension
assets were used to purchase the annuities. Projected benefit obligations were
reduced to reflect this purchase of annuities. On October 6, 2000, a benefit
enhancement of approximately $8.3 million was granted to those retired and
deferred vested members of the registered plan as of December 31, 2000 for whom
annuities were purchased in 1997. Pension plan assets were reduced by this
amount.
The Numac Plan
The Numac Plan is a registered defined contribution pension plan. Prior to
January 1, 1994, the plan existed as a registered defined benefit plan. On that
date, employees of Numac were given the option to convert to the defined
contribution plan or remain in the defined benefit plan. Most employees opted
out of the plan. These employees and all new employees accrue future benefits
based on defined contributions. Pension plan assets under the Numac Plan are in
excess of future plan obligations. As a result, funding of ongoing contributions
to the defined contribution plan are being made from plan assets.
The retirement benefit under the Numac Plan is subject to a maximum pension
as determined under the Income Tax Act (Canada). To the extent this limitation
applied, supplemental retirement allowances were provided to qualifying
employees at the time so that the total retirement benefits were sufficient to
provide the annuity that those employees would have been entitled to without the
limitation.
22
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth, for the registered defined benefit pension
plans, reconciliations of the beginning and ending balances of the benefit
obligation, the fair value of the plan assets, the funded status, and the
assumptions used in the determination of the projected benefit obligation and
net pension expense:
AS AT SEPTEMBER 30,
-------------------
2000 2001
------- ------
Change in benefit obligation
Benefit obligation -- beginning of year................... $ 2.8 $ 3.0
Obligation assumed on Numac acquisition................... -- 11.9
Interest cost............................................. 0.2 0.7
Actuarial gain............................................ -- (1.0)
Benefits paid............................................. -- (0.8)
------ -----
Benefit obligation -- end of year.................... $ 3.0 $13.8
====== =====
Change in fair value of plan assets
Fair value of plan assets -- beginning of year............ $ 20.3 $21.0
Assets acquired in Numac acquisition...................... -- 16.7
Benefit enhancement....................................... -- (8.3)
Actual return on plan assets.............................. 1.1 (0.9)
Benefits paid............................................. (0.1) (0.8)
Other disbursements....................................... (0.3) (0.3)
------ -----
Fair value plan assets -- end of year................ $ 21.0 $27.4
====== =====
Reconciliation of funded status
Funded status............................................. $ 18.0 $13.6
Unamortized net actuarial gain............................ (18.0) (8.6)
------ -----
Pension asset recognized on balance sheet............ $ -- $ 5.0
====== =====
Assumptions
Discount rate............................................. 6.5% 7.0%
Long-term rate of employee compensation increase.......... 2.5% 3.5%
Long-term annual rate of return on plan assets............ 6.5% 7.0%
The following table sets forth, for the supplemental plans, reconciliations
of the beginning and ending balances of the benefit obligation, and the funded
status of the plans:
AS AT SEPTEMBER 30,
-------------------
2000 2001
------ -------
Change in benefit obligation
Benefit obligation -- beginning of year................... $ 6.0 $ 6.0
Obligation assumed on Numac acquisition................... -- 7.2
Interest cost............................................. 0.5 0.6
Benefits paid............................................. (0.5) (0.9)
----- ------
Benefit obligation -- end of year.................... $ 6.0 $ 12.9
===== ======
Reconciliation of funded status
Funded status............................................. $(6.0) $(12.9)
Unamortized net actuarial (gain) loss..................... 0.5 --
----- ------
Pension obligation recognized on balance sheet....... $(5.5) $(12.9)
===== ======
The Company recorded pension expense of $0.4 million, $0.4 million and $0.7
million in 1999, 2000 and 2001, respectively.
23
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS
(a) Commodity price risk
The Company generally sells its crude oil and natural gas under short-term
market-based contracts. As a result of the acquisition of Numac (note 2), the
Company acquired crude oil and natural gas sales contracts. The crude oil
contracts fixed the price on 12,700 barrels per day of production. After
December 31, 2001, 5,700 barrels per day of production will continue to be
hedged under these contracts. The natural gas sales contracts were entered into
for two purposes. The first series of contracts effectively swapped floating
prices for fixed prices. The second series of contracts fixed the basis
differential on natural gas sales.
The Company has also entered into electricity purchase contracts in order
to fix the cost of electricity used in operations. The contracts fix the price
on up to 42 mega-watt hours per day at various prices through 2005.
(b) Interest rate risk
The Company has entered into fixed rate debt agreements and interest rate
swap agreements in order to manage its interest rate exposure on debt
instruments. These agreements are described in note 4.
(c) Foreign currency exchange risk
The Company is exposed to foreign currency fluctuations as crude oil and
natural gas prices received are referenced to U.S. dollar denominated prices. As
a result of the Numac acquisition, the Company acquired foreign exchange swap
contracts which fix the exchange rate on up to U.S. $4.0 million of currency
each month. In addition, the Company has borrowed United States dollars on a
long-term basis.
(d) Credit risk
A substantial portion of the Company's accounts receivable are with
customers and joint venture partners in the oil and gas industry and are subject
to normal industry credit risks. Purchasers of the Company's natural gas, crude
oil and natural gas liquids are subject to an internal credit review to minimize
the risk of non-payment.
The Company is also exposed to credit risk associated with possible
non-performance by financial instrument counterparties. In an effort to minimize
credit risk, it is the Company's practice to only enter into financial
arrangements with established counterparties who have an investment grade credit
rating as determined by recognized credit rating agencies.
(e) Fair value of financial instruments
The carrying amounts of financial instruments included in the consolidated
balance sheet, other than long term debt, approximate their fair value due to
their short term maturity.
The estimated fair values of long term debt and derivative instruments have
been determined based on discounted cash flow analysis using current market
interest rates for financial instruments with similar maturities.
24
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying values and estimated fair values of long term debt and
derivative instruments are as follows:
2000 2001
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
Long-term debt........................... $(1,126.9) $(1,128.7) $(1,350.1) $(1,360.7)
Interest rate swaps on bank loans........ $ -- $ (2.2) $ (1.2) $ (13.9)
Foreign currency swap.................... $ -- $ -- $ -- $ (5.6)
Oil and gas sales contracts.............. $ -- $ -- $ -- $ (6.7)
Electricity purchase contracts........... $ -- $ -- $ -- $ (25.7)
12. COMMITMENTS
The Company has acquired interests in northern Canada for total work
expenditure proposals of $379.6 million. Work expenditures commenced in fiscal
2000, with an estimated $99.4 million of eligible expenditures incurred to
September 30, 2001. Expenditures will continue over the next four years and
include obligations to drill at least one well on each licence or permit. The
proposals are supported by deposits of $85.8 million in letters of credit. The
letters of credit will be reduced proportionately after approval of eligible
expenditures incurred.
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP") that, in
most respects, conform to accounting
25
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principles generally accepted in the United States ("U.S. GAAP"). Canadian GAAP
differs from U.S. GAAP in the following respects:
YEAR ENDED SEPTEMBER 30
------------------------
NOTE 1999 2000 2001
---- ------ ------ ------
Earnings from continuing operations, as reported
Impact of U.S. GAAP.................................. $ 66.4 $248.2 $602.3
Full cost accounting............................... A 72.2 64.9 59.5
Related income taxes............................ (31.5) (28.2) (25.7)
Foreign exchange on long term debt................. B -- (1.6) (17.4)
Related income taxes............................ -- 0.4 3.8
Accounting for income taxes -- impact on depletion
and depreciation expense........................ C (2.6) (13.9) (25.3)
Related income taxes............................ 2.3 12.0 10.7
Derivative financial instruments................... D -- -- (25.0)
Related income taxes............................ -- -- 11.4
------ ------ ------
Earnings from continuing operations, as adjusted..... 106.8 281.8 594.3
Discontinued operations.............................. 4.0 65.3 --
------ ------ ------
Earnings, as adjusted................................ $110.8 $347.1 $594.3
====== ====== ======
YEAR ENDED SEPTEMBER 30
------------------------
1999 2000 2001
------ ------ ------
Basic earnings per common share
From continuing operations, as adjusted................... $0.86 $2.21 $4.53
From discontinued operations.............................. 0.03 0.51 --
----- ----- -----
$0.89 $2.72 $4.53
===== ===== =====
Diluted earnings per common share
From continuing operations, as adjusted................... $0.86 $2.17 $4.43
From discontinued operations.............................. 0.03 0.51 --
----- ----- -----
$0.89 $2.68 $4.43
===== ===== =====
Under U.S. GAAP, classification of certain revenue and expense items
differs from Canadian GAAP. These classification differences do not have an
impact on reported earnings.
Balance sheet items in accordance with U.S. GAAP are as follows:
2000 2001
------------------- -------------------
CANADIAN U.S. CANADIAN U.S.
NOTE GAAP GAAP GAAP GAAP
---- -------- -------- -------- --------
Current assets, net of current
liabilities......................... $ (63.0) $ (63.0) $ (280.9) $ (280.9)
Property, plant and equipment......... A,C 3,725.4 3,466.2 5,574.8 5,272.6
Other assets.......................... B 2.7 1.1 29.4 10.4
Long term debt........................ 1,126.9 1,126.9 1,350.1 1,350.1
Other credits......................... 133.6 133.6 141.2 191.9
Deferred taxes........................ A,C 841.1 906.3 1,823.8 1,679.2
Capital stock......................... 905.3 905.3 889.8 889.8
Retained earnings..................... A-D 658.2 332.2 1,118.4 905.5
Accumulated other comprehensive
loss................................ D -- -- -- (14.4)
26
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash flows by activity on the consolidated statement of cash flows in
accordance with U.S. GAAP would be as follows:
YEAR ENDED SEPTEMBER 30
-------------------------------
1999 2000 2001
------- --------- ---------
Cash flows from operating activities................. $ 400.8 $ 764.1 $ 1,629.7
Cash flows from investing activities................. $(287.0) $(1,119.2) $(1,642.8)
Cash flows from financing activities................. $(113.8) $ 355.1 $ 13.1
On the consolidated statements of cash flows, site restoration expenditures
of $6.3 million, $10.1 million and $11.3 million, which are disclosed as
investing activities under Canadian GAAP in 1999, 2000 and 2001, respectively,
would be disclosed as operating activities under U.S. GAAP.
Under U.S. GAAP, presentation of certain cash flow items differs from
Canadian GAAP. These presentation differences do not have an impact on reported
cash flows.
(a) Full cost accounting
Under the full cost method of accounting in the United States, a ceiling
test is applied to ensure that capitalized oil and gas property costs do not
exceed the present value, discounted at 10%, of the unescalated estimated future
net revenues from the production of proven reserves, plus the cost of
unevaluated properties less management's estimate of impairment, less applicable
taxes. The Company applied the U.S. GAAP ceiling test on an annual basis until
September 30, 2000 and on a quarterly basis thereafter. Under Canadian GAAP,
future net revenues are not discounted but interest and general and
administrative expenses are deducted.
As a result of applying the U.S. GAAP ceiling test rules in prior years,
the Company recorded additional depletion of $711.0 million ($400.0 million
after tax) that reduced the carrying amount of its property, plant and
equipment. This additional depletion was not recorded for Canadian GAAP
purposes. As a result, depletion and depreciation expense is lower under U.S.
GAAP.
Based on September 30, 2001 market prices for oil and natural gas, the
Company's costs to be recovered exceeded discounted future net revenues by $1.1
billion after-tax. This after-tax amount would have resulted in a pre-tax
reduction in the carrying value of property, plant and equipment of $1.9 billion
at September 30, 2001. However, market prices for oil and natural gas changed
significantly subsequent to the balance sheet date. Based on market prices for
oil and natural gas at the date of the auditors' report on the Company's
consolidated financial statements, the Company's discounted future net revenues
were in excess of related costs to be recovered. Accordingly, the Company did
not record a reduction in the carrying value of its property, plant and
equipment at September 30, 2001.
(b) Foreign exchange on long-term debt
U.S. GAAP requires long term debt denominated in foreign currencies be
translated at the rates of exchange in effect on the balance sheet date, with
inclusion of the resulting gain or loss in earnings for the period. Canadian
GAAP requires these gains and losses be amortized over the life of the long-term
debt.
(c) Accounting for income taxes -- impact on depletion and depreciation
expense
U.S. GAAP required the adoption of the liability method of accounting for
income taxes in 1993, while under Canadian GAAP the Company followed the
deferral method until September 30, 2000.
On October 1, 2001, the Company adopted the liability method for Canadian
GAAP purposes. While this eliminated a conceptual difference between Canadian
and U.S. GAAP, adoption under Canadian
27
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GAAP resulted in a charge of $120.8 million to retained earnings, whereas, under
U.S. GAAP, this adjustment would be reflected in property, plant and equipment.
As a result of the different implementation methods, differences in depletion
and depreciation expense will continue to exist in future years.
(d) Derivative financial instruments
The Company has designated, for Canadian GAAP purposes, its derivative
financial instruments as hedges of anticipated revenue and expenses. In
accordance with Canadian GAAP, payments or receipts on these contracts are
recognized in earnings concurrently with the hedged transaction. The fair value
of contracts deemed to be hedges are not reflected in the financial statements.
Effective October 1, 2000, for U.S. GAAP purposes, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (as amended by
SFAS No. 137 and 138). The statement, as amended, establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value,
and that changes in the fair value be recognized currently in earnings unless
specific hedge accounting criteria are met, including formal documentation
requirements. The standard has been applied prospectively.
(e) Recent developments in U.S. accounting standards
The Financial Accounting Standards Board recently issued Statement No. 143,
Accounting for Asset Retirement Obligations. This Statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. Statement
No. 143 requires an enterprise to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of a tangible long-lived asset. Since the
requirement is to recognize the obligation when incurred, approaches that have
been used in the past to accrue the asset retirement obligation over the life of
the asset are no longer acceptable. Statement No. 143 also requires the
enterprise to record an increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the remaining useful life of the asset. The liability is changed
at the end of each period to reflect the passage of time (i.e., accretion
expense) and changes in the estimated future cash flows underlying the initial
fair value measurement. Enterprises are required to adopt Statement No. 143 for
fiscal years beginning after June 15, 2002. Anderson Exploration is currently
assessing the impact that adoption of this standard would have on the
consolidated financial position and results of operations of the Company.
The Financial Accounting Standards Board also recently issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement
No. 144 will replace previous United States generally accepted accounting
principles regarding accounting for impairment of long-lived assets and
accounting and reporting for discontinued operations. Enterprises utilizing
generally accepted accounting principles of the United States will be required
to adopt Statement No. 144 for financial statements issued for periods beginning
after December 15, 2001. Anderson Exploration is currently assessing the impact
that adoption of this standard would have on the consolidated financial position
and results of operations of the Company.
14. SUBSEQUENT EVENTS
On September 6, 2001, Devon Acquisition Corporation, a wholly-owned
subsidiary of Devon, submitted an offer to the Company's shareholders to acquire
all of the issued and outstanding shares for cash at a price of $40.00 per
share. Upon expiry of the offer on October 12, 2001, 97 percent of the shares of
the Company were tendered to the offer. Devon Acquisition Corporation took up
and paid for the shares
28
ANDERSON EXPLORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tendered to the offer on October 15, 2001. The remaining three percent of the
shares outstanding were acquired on October 17, 2001 and Anderson Exploration
Ltd. became a wholly-owned subsidiary of Devon Acquisition Corporation. The cost
of acquiring the shares, including payments made for vested stock options and
share appreciation rights, and repayment of Anderson Exploration's bank credit
facilities was financed by a loan of $5.9 billion from a wholly-owned subsidiary
of Devon.
On October 18, 2001, Anderson Exploration and Devon Acquisition Corporation
were amalgamated and, on October 25, 2001, the amalgamated company was continued
under the Business Corporations Act (Alberta) and changed its name to Devon
Canada Corporation.
29
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information relates to
Devon's acquisition of Anderson completed on October 17, 2001 for approximately
$3.5 billion. The unaudited pro forma combined financial information includes a
balance sheet as of September 30, 2001, which assumes the acquisition of
Anderson occurred on that date. The unaudited pro forma combined financial
information also includes statements of operations for the year ended December
31, 2000 and the nine months ended September 30, 2001, which assume the
acquisition occurred on January 1, 2000.
The following unaudited pro forma combined financial information is based
on the historical financial statements of Devon and Anderson. The pro forma
information is based on the estimates and assumptions set forth in the notes to
such information. The pro forma information is preliminary and is being
furnished solely for information purposes and, therefore, is not necessarily
indicative of the results of operations or financial position that might have
been achieved for the dates or periods indicated, nor is it necessarily
indicative of the results of operations or financial position that may occur in
the future.
Anderson's historical financial information is prepared in accordance with
accounting standards generally accepted in Canada, and is presented in Canadian
dollars. Anderson's historical volumetric production data is prepared in
accordance with the Canadian convention whereby such production data is shown
before applicable royalty deductions. Also, Anderson's fiscal year ends on
September 30, as opposed to Devon's year-end of December 31. For purposes of
providing the pro forma effect of the Anderson acquisition on Devon's financial
condition and results of operations, the following adjustments were made to
Anderson's historical financial data:
- Anderson's historical results for the year ended September 30, 2000 were
converted to results for the year ended December 31, 2000. This
conversion was done by subtracting Anderson's historical interim results
for the three months ended December 31, 1999 and adding its historical
interim results for the three months ended December 31, 2000. Anderson's
historical results for the year ended September 30, 2001 were converted
to results for the nine months ended September 30, 2001. This conversion
was done by subtracting Anderson's historical interim results for the
three months ended December 31, 2000.
- Anderson's balance sheet data as of September 30, 2001, and its results
of operations for the year ended December 31, 2000 and the nine months
ended September 30, 2001, were converted to accounting principles
generally accepted in the United States, including the full cost method
of accounting for oil and gas properties. Such information was also
converted to U.S. dollars using the appropriate exchange rates.
- Anderson's historical volumetric production data was converted to the
U.S. convention whereby such production data is shown after applicable
royalty deductions.
30
The information was prepared based on the following:
- Devon will account for the Anderson acquisition using the purchase method
of accounting.
- The unaudited pro forma balance sheet has been prepared as if the
Anderson acquisition occurred on September 30, 2001. The unaudited
pro forma statements of operations have been prepared as if the Anderson
acquisition occurred on January 1, 2000.
- In the nine-month period ended September 30, 2001, Devon recognized a
$49.5 million after-tax gain from the cumulative effect of a change in
accounting principle. This related to Devon's adoption, as of January 1,
2001, of a new accounting principle related to accounting for derivative
financial instruments. The $49.5 million gain is not included in the
unaudited pro forma combined statements of operations for the nine months
ended September 30, 2001.
- There is no adjustment to the historical data to reflect annual cost
savings of approximately $25 million that Devon expects to result from
the elimination of duplicate expenses after the Anderson acquisition.
- In June 2000, Anderson sold its 50% interest in a pipeline transportation
company. For the year ended December 31, 2000, Anderson recognized
earnings from discontinued operations, net of tax, of $44.2 million. This
gain is not included in the summary unaudited pro forma combined
statements of operations for the year ended December 31, 2000.
No pro forma adjustments have been made with respect to the following
unusual items. These items are reflected in the historical results of Devon or
Anderson, as applicable, and should be considered when making period-to-period
comparisons:
- In 2000, Devon recognized $60.4 million of expenses related to its merger
with Santa Fe Snyder Corporation. Devon accounted for the Santa Fe Snyder
merger using the pooling-of-interests method of accounting and,
therefore, the expenses incurred related to the merger were expensed. The
after-tax effect of these expenses in 2000 was $37.2 million.
- On May 17, 2000, Anderson acquired all the outstanding shares of Ulster
Petroleums Ltd. The summary unaudited pro forma combined statements of
operations do not include any results from Ulster's operations prior to
May 17, 2000.
- On February 12, 2001, Anderson acquired all of the outstanding shares of
Numac Energy Inc. The summary unaudited pro forma combined statements of
operations do not include any results from Numac's operations prior to
February 12, 2001.
- During the first nine months of 2001, Devon elected to discontinue
operations in Malaysia, Qatar, Thailand and on certain properties in
Brazil. Accordingly, during the first nine months of 2001, Devon recorded
an $87.9 million charge associated with the impairment of those
properties. The after-tax effect of this reduction was $68.8 million.
- Anderson had compensation plans pursuant to which it periodically issued
awards referred to as "share appreciation rights" under which employees
could earn compensation based on increases in the market price of
Anderson's stock. Anderson awarded these rights in lieu of stock option
grants. Pro forma general and administrative expenses reported in the
31
accompanying unaudited pro forma statements of operations for the year
ended December 31, 2000 and the nine months ended September 30, 2001
include $4.6 million and $5.6 million, respectively, of expenses related
to these plans. After taxes, these plans had the effect of decreasing
unaudited pro forma net earnings in the 2000 and 2001 periods by $2.6
million and $3.2 million, respectively. Devon acquired all outstanding
rights as part of the Anderson acquisition. Accordingly, these rights
will not affect the combined company's net earnings subsequent to the
closing of the Anderson acquisition.
- Devon's historical results of operations for the year 2000 and the first
nine months of 2001 include $41.3 million and $25.4 million,
respectively, of amortization expense for goodwill related to previous
mergers. As of January 1, 2002, in accordance with new accounting
pronouncements recently issued, such goodwill will cease to be amortized
and, instead, will be tested for impairment at least annually. No
goodwill amortization expense has been recognized in the pro forma
statements of operations for the goodwill related to the merger and the
Anderson acquisition.
32
DEVON-ANDERSON
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2001
ANDERSON
DEVON HISTORICAL
HISTORICAL RECLASSIFIED DEVON-
RECLASSIFIED U.S. GAAP PRO FORMA ANDERSON
(NOTE 1) (NOTE 5) ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
(IN THOUSANDS)
ASSETS:
Current assets......................... $ 819,902 $ 145,397 $ -- $ 965,299
Property and equipment, net............ 5,743,523 3,288,683 684,029(a) 9,716,235
Investment in common stock of
ChevronTexaco Corporation........... 601,083 -- -- 601,083
Goodwill, net.......................... 269,305 -- 1,972,757(a) 2,242,062
Fair value of derivative instruments... 151,415 -- -- 151,415
Other assets........................... 147,262 6,572 89,543(a) 274,639
31,262(c)
------------ ---------- ----------- -----------
Total assets................... $ 7,732,490 $3,440,652 $ 2,777,591 $13,950,733
============ ========== =========== ===========
LIABILITIES:
Current liabilities.................... $ 561,798 $ 323,312 $ -- $ 885,110
Debentures exchangeable into shares of
ChevronTexaco Corporation common
stock............................... 645,461 -- -- 645,461
Other long-term debt................... 1,339,316 855,021 6,729(a) 5,780,298
3,547,970(c)
31,262(c)
Other long-term liabilities............ 227,648 38,936 (31,861)(a) 234,723
Fair value of derivative instruments... 76,440 32,108 -- 108,548
Deferred income taxes.................. 1,112,822 1,063,482 351,284(a) 2,527,588
STOCKHOLDERS' EQUITY:
Preferred stock........................ 1,500 -- -- 1,500
Common stock........................... 12,977 594,380 (594,380)(b) 12,977
Additional paid-in capital............. 3,594,814 65,878 (65,878)(b) 3,594,814
Retained earnings...................... 380,049 619,189 (619,189)(b) 380,049
Accumulated other comprehensive loss... (29,542) (151,654) 151,654(b) (29,542)
Treasury stock......................... (190,387) -- -- (190,387)
Other.................................. (406) -- -- (406)
------------ ---------- ----------- -----------
Total stockholders' equity..... 3,769,005 1,127,793 (1,127,793) 3,769,005
------------ ---------- ----------- -----------
Total liabilities and
stockholders' equity......... $ 7,732,490 $3,440,652 $ 2,777,591 $13,950,733
============ ========== =========== ===========
33
DEVON-ANDERSON
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
ANDERSON
DEVON HISTORICAL
HISTORICAL RECLASSIFIED DEVON-
RECLASSIFIED U.S. GAAP PRO FORMA ANDERSON
(NOTE 1) (NOTE 5) ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Oil sales................................ $1,078,759 $ 247,966 $ -- $1,326,725
Gas sales................................ 1,485,221 655,505 -- 2,140,726
NGL sales................................ 154,465 95,879 -- 250,344
Gas services revenue..................... 53,186 7,774 -- 60,960
Other.................................... 41,078 2,665 (386)(g) 43,357
---------- ---------- --------- ----------
Total revenues................... 2,812,709 1,009,789 (386) 3,822,112
---------- ---------- --------- ----------
COSTS AND EXPENSES:
Lease operating expenses................. 440,780 154,073 -- 594,853
Transportation costs..................... 53,309 39,709 -- 93,018
Production taxes......................... 103,244 3,189 -- 106,433
Gas services costs and expenses.......... 28,606 4,040 -- 32,646
Depreciation, depletion and amortization
of property and equipment............. 693,340 216,225 87,009(d) 996,574
Amortization of goodwill................. 41,332 -- -- 41,332
General and administrative expenses...... 93,008 40,400 -- 133,408
Expenses related to previous mergers..... 60,373 -- -- 60,373
Interest expense......................... 154,329 46,830 242,519(e) 423,624
(20,054)(f)
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term
debt.................................. 2,408 760 -- 3,168
---------- ---------- --------- ----------
Total costs and expenses......... 1,670,729 505,226 309,474 2,485,429
---------- ---------- --------- ----------
Earnings before income tax expense......... 1,141,980 504,563 (309,860) 1,336,683
INCOME TAX EXPENSE:
Current.................................. 130,793 14,439 (698)(h) 144,534
Deferred................................. 280,845 215,481 (131,319)(h) 365,007
---------- ---------- --------- ----------
Total income tax expense......... 411,638 229,920 (132,017) 509,541
---------- ---------- --------- ----------
Net earnings............................... 730,342 274,643 (177,843) 827,142
Preferred stock dividends.................. 9,735 -- -- 9,735
---------- ---------- --------- ----------
Net earnings applicable to common
stockholders............................. $ 720,607 $ 274,643 $(177,843) $ 817,407
========== ========== ========= ==========
Net earnings per average common share
outstanding:
Basic.................................... $ 5.66 $ 6.42
Diluted.................................. 5.50 6.24
Weighted average common shares outstanding:
Basic.................................... 127,421 127,421
Diluted.................................. 131,730 131,730
34
DEVON-ANDERSON
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
ANDERSON
DEVON HISTORICAL
HISTORICAL RECLASSIFIED DEVON-
RECLASSIFIED U.S. GAAP PRO FORMA ANDERSON
(NOTE 1) (NOTE 5) ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Oil sales.................................. $ 722,672 $218,733 $ -- $ 941,405
Gas sales.................................. 1,474,986 720,241 -- 2,195,227
NGL sales.................................. 94,746 82,754 -- 177,500
Gas services revenue....................... 46,151 5,950 -- 52,101
Other...................................... 27,733 (1,248) (243)(g) 26,242
---------- -------- --------- ----------
Total revenues..................... 2,366,288 1,026,430 (243) 3,392,475
---------- -------- --------- ----------
COSTS AND EXPENSES:
Lease operating expenses................... 362,884 169,191 -- 532,075
Transportation costs....................... 51,936 37,444 -- 89,380
Production taxes........................... 95,025 4,459 -- 99,484
Gas services costs and expenses............ 30,824 3,094 -- 33,918
Depreciation, depletion and amortization of
property and equipment.................. 572,939 257,482 15,239(d) 845,660
Amortization of goodwill................... 25,384 -- -- 25,384
General and administrative expenses........ 73,867 36,350 -- 110,217
Interest expense........................... 104,825 49,780 181,909(e) 319,493
(17,021)(f)
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt.......................... -- 14,719 -- 14,719
Change in fair value of derivative
instruments............................. 3,844 13,652 -- 17,496
Reduction of carrying value of oil and gas
properties.............................. 87,853 -- -- 87,853
---------- -------- --------- ----------
Total costs and expenses........... 1,409,381 586,171 180,127 2,175,679
---------- -------- --------- ----------
Earnings before income tax expense........... 956,907 440,259 (180,370) 1,216,796
INCOME TAX EXPENSE:
Current.................................... 117,213 13,201 (1,449)(h) 128,965
Deferred................................... 267,757 155,932 (64,738)(h) 358,951
---------- -------- --------- ----------
Total income tax expense........... 384,970 169,133 (66,187) 487,916
---------- -------- --------- ----------
Net earnings before cumulative effect of
change in accounting principle............. 571,937 271,126 (114,183) 728,880
Preferred stock dividends.................... 7,301 -- -- 7,301
---------- -------- --------- ----------
Net earnings applicable to common
stockholders............................... $ 564,636 $271,126 $(114,183) $ 721,579
========== ======== ========= ==========
Net earnings per average common share
outstanding:
Basic...................................... $ 4.40 $ 5.63
Diluted.................................... 4.26 5.43
Weighted average common shares outstanding:
Basic...................................... 128,274 128,274
Diluted.................................... 133,982 133,982
35
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 2000 AND SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma balance sheet and statements of
operations present the pro forma effect of the Anderson acquisition on Devon's
historical balance sheet as of September 30, 2001 and Devon's historical
statements of operations for the year ended December 31, 2000 and the nine
months ended September 30, 2001.
Anderson's historical amounts presented in the accompanying unaudited pro
forma balance sheet and statements of operations have been converted to
accounting principles generally accepted in the United States and to U.S.
dollars. For information on such conversions, see Note 5.
Devon's historical balances for other revenue have been reclassified to
include separate line items for gas services revenue and gas services costs and
expenses to conform to Devon's expected presentation subsequent to its merger
with Mitchell Energy and Development Corp.
All dollar references in the accompanying unaudited pro forma combined
financial information and related notes are to U.S. dollars, except that "C$"
refers to Canadian dollars.
2. METHOD OF ACCOUNTING FOR THE ACQUISITION
Devon will account for the Anderson acquisition using the purchase method
of accounting for business combinations. Accordingly, Anderson's assets acquired
and liabilities assumed by Devon will be revalued and recorded at their
estimated "fair values." In the Anderson acquisition, Devon paid C$40 per share
for each outstanding common share, including associated rights, of Anderson. On
a pro forma basis, assuming that the Anderson acquisition had occurred on
September 30, 2001, this would have resulted in Devon paying approximately $3.3
billion in cash to Anderson stockholders, as well as an additional $0.1 billion
of cash which would have been paid to Anderson employees for the intrinsic value
of outstanding stock options and appreciation rights. These U.S. dollar amounts
are based on the September 30, 2001 exchange rate of C$1.00 to U.S.$0.6333.
36
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
3. PRO FORMA ADJUSTMENTS RELATED TO THE ANDERSON ACQUISITION
The Devon-Anderson unaudited pro forma balance sheet includes the following
adjustments:
(a) This entry adjusts the historical book values of Anderson's assets
and liabilities to their estimated fair values as of September 30, 2001.
The calculation of the total purchase price and the preliminary allocation
to assets and liabilities are shown below.
(IN THOUSANDS,
EXCEPT FOR
SHARE PRICE)
--------------
Calculation and preliminary allocation of purchase price:
Number of Anderson common shares outstanding.............. 131,693
Acquisition price per share............................... $ 25.33
----------
Cash to be paid to Anderson stockholders.................. 3,336,049
Cash to be paid to settle Anderson employees' stock
options and appreciation rights........................ 86,921
----------
3,422,970
Plus estimated acquisition costs to be incurred........... 125,000
----------
Total purchase price.............................. 3,547,970
Plus fair value of liabilities to be assumed by Devon:
Current liabilities....................................... 323,312
Long-term debt............................................ 861,750
Other long-term liabilities............................... 7,075
Fair value of financial instruments....................... 32,108
Deferred income taxes..................................... 1,414,766
----------
Total purchase price plus liabilities assumed..... $6,186,981
==========
Fair value of assets to be acquired by Devon:
Current assets............................................ $ 145,397
Proved oil and gas properties............................. 2,636,077
Unproved oil and gas properties........................... 1,317,412
Other property and equipment.............................. 19,223
Other assets.............................................. 96,115
Goodwill.................................................. 1,972,757
----------
Total fair value of assets to be acquired......... $6,186,981
==========
The total purchase price includes $125 million of estimated
acquisition costs. These costs include investment banking expenses,
severance, legal and accounting fees, printing expenses and other
merger-related costs. These costs have been added to long-term debt in the
Devon-Anderson unaudited pro forma balance sheet.
The purchase price allocation is preliminary and is subject to change
due to several factors, including: (1) changes in the fair values of
Anderson's assets and liabilities as of the effective time of the Anderson
acquisition; (2) the actual acquisition costs incurred; (3) the number of
Anderson shares and stock options and appreciation rights outstanding as of
the effective time of the Anderson acquisition; and (4) changes in Devon's
valuation estimates that may be made between now and the effective time of
the Anderson acquisition. These changes will not be known until after the
effective time of the Anderson acquisition. However, Devon does not believe
that the final purchase price allocation will differ materially from the
estimated allocation presented herein.
37
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
(b) This adjustment includes a $594.4 million reduction of common
stock, a $65.9 million reduction of additional paid-in capital, a $619.2
million reduction of retained earnings and a $151.7 million reduction in
accumulated other comprehensive loss. These adjustments eliminate the
historical book value of Anderson's stockholders' equity.
(c) This adjustment increases long-term debt by $3.5 billion to
include the long-term debt that Devon would have incurred at September 30,
2001, to fund the Anderson acquisition. Of this increase in debt, $3.0
billion represents borrowings of long-term debt issued on October 3, 2001,
with a weighted average fixed rate of 7.4%, including amortization of
discounts and related costs. Of this $3.0 billion, $1.75 billion is due in
2011 and $1.25 billion is due in 2031. The remaining $0.5 billion increase
in debt represents borrowings under Devon's $3 billion, variable interest
rate, five-year credit facility entered into on October 12, 2001. Debt
under this facility matures between 2003 and 2005.
This adjustment also includes $31.3 million of costs estimated to be
incurred in connection with issuing this debt.
The Devon-Anderson unaudited pro forma statements of operations include the
following adjustments:
(d) This adjustment increases historical depreciation, depletion and
amortization expense to reflect the adjustment of Anderson's assets from
historical book value to fair value. For Anderson's oil and gas producing
properties acquired, pro forma depreciation, depletion and amortization
expense was calculated using the equivalent units-of-production method.
Anderson's proved oil and gas reserves, divided by its annualized
production for the first nine months of 2001, yields an estimated reserve
life of ten years.
(e) This adjustment increases interest expense due to the $3.5 billion
of long-term debt that Devon would have incurred at September 30, 2001, to
fund the Anderson acquisition. This adjustment has been calculated using an
average interest rate of 7.4% on the $3.0 billion of fixed rate debt, and
an estimated rate of 3.17%, plus the amortization of estimated financing
costs to be incurred, on the $0.5 billion of variable rate debt. The
assumed interest rate on the variable rate debt is based on the terms of
Devon's $3 billion credit facility. The actual rates on this variable rate
debt will vary with changes in market rates. A change in the interest rate
of 0.125% would change the pro forma interest expense by $0.8 million.
(f) This adjustment reduces interest expense to reflect the repayment
of Anderson's bank debt with debt borrowed under Devon's $3 billion credit
facility that bears a lower interest rate, plus a decrease in interest
expense related to the effect of valuing Anderson's fixed-rate debt at the
estimated fair value of such debt. The adjustment relating to the repayment
of Anderson's bank debt reduced interest expense for the year 2000 and the
first nine months of 2001 by $17.6 million and $15.2 million, respectively.
The adjustment relating to recording Anderson's fixed-rate debt at fair
value decreased interest expense for the year 2000 and the first nine
months of 2001 by $2.5 million and $1.8 million, respectively.
(g) This adjustment reduces the Alberta Royalty Tax Credit as a result
of the acquisition of Anderson.
(h) This adjustment records the income tax impact of all pro forma
adjustments at an effective tax rate of approximately 43% for the year 2000
and 37% for the nine months ended September 30, 2001. The rate for the
first nine months of 2001 includes the effect of a change in Canadian tax
rates enacted during the second quarter of 2001. Excluding the retroactive
effect of this rate change, the rate applied to the 2001 pro forma
adjustments would have been 40%.
38
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
4. GOODWILL
The preliminary allocation of the purchase price for the Anderson
acquisition includes approximately $2.0 billion of goodwill. In July 2001, the
Financial Accounting Standards Board issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." As
a result of these two recent pronouncements, goodwill recorded in connection
with business combinations completed after June 30, 2001 (including the Anderson
acquisition) will not be amortized but, instead, will be tested for impairment
at least annually. Accordingly, the Devon-Anderson unaudited pro forma
statements of operations included in this note include no amortization of the
goodwill to be recorded in the Anderson acquisition.
Statement No. 142 will be adopted by Devon as of January 1, 2002. Until
that date, goodwill recognized from business combinations completed prior to
June 30, 2001 must continue to be amortized. Therefore, Devon's historical
goodwill related to previous mergers has not been reversed in the Devon-
Anderson unaudited pro forma statements of operations included in this note. As
of January 1, 2002, goodwill related to these previous mergers will no longer be
amortized but, instead, will be tested for impairment at least annually. The
Devon-Anderson unaudited pro forma statements of operations included in this
note for the year ended December 31, 2000 and the nine months ended September
30, 2001 include amortization of goodwill related to previous mergers of $41.3
million and $25.4 million, respectively.
As indicated in Note 3, the allocation of the Anderson acquisition purchase
price is preliminary. Devon is in the process of finalizing the purchase price
allocation. During this process, Devon may determine that there are intangible
assets acquired in the Anderson acquisition separate and apart from goodwill. To
the extent that such intangible assets, if any, have definite useful lives, the
value assigned to those intangible assets would be amortized over such lives.
Although the amount allocated to such intangible assets, if any, will not be
known until Devon finalizes the purchase price allocation, Devon does not
believe that any such value, or the related amortization, would have a material
effect on the Devon-Anderson unaudited pro forma financial information presented
herein.
5. CONVERSION OF ANDERSON'S HISTORICAL FINANCIAL STATEMENTS
Anderson prepares its historical financial statements based on a fiscal
year of September 30. To conform to Devon's year-end of December 31, Anderson's
historical results for the year ended September 30, 2000 were converted to
results for the year ended December 31, 2000. This conversion was done by
subtracting Anderson's historical interim results for the three months ended
December 31, 1999 and adding its historical interim results for the three months
ended December 31, 2000. Anderson's historical results for the year ended
September 30, 2001 were converted to results for the nine months ended September
30, 2001. This conversion was done by subtracting Anderson's historical interim
results for the three months ended December 31, 2000.
Anderson prepares its historical financial statements using accounting
principles generally accepted in Canada ("Canadian GAAP") and Canadian dollars.
The following tables provide information relating to the conversion of
Anderson's historical financial statements to those prepared using accounting
principles generally accepted in the United States ("U.S. GAAP") and U.S.
dollars.
39
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
ANDERSON UNAUDITED U.S. GAAP BALANCE SHEET
AS OF SEPTEMBER 30, 2001
U.S. GAAP
ANDERSON AND OTHER ANDERSON
HISTORICAL ADJUSTMENTS U.S. GAAP CONVERTED TO
C$ C$ C$ U.S.$
----------- ----------- ----------- ------------
(IN THOUSANDS)
ASSETS:
Current assets..................... C$ 229,586 C$ -- C$ 229,586 $ 145,397
Property and equipment, net........ 5,574,842 (514,400)(a) 5,192,930 3,288,683
212,200(c)
(79,712)(e)
Other assets....................... 29,377 (19,000)(b) 10,377 6,572
----------- ---------- ----------- ----------
Total assets............... C$5,833,805 C$(400,912) C$5,432,893 $3,440,652
=========== ========== =========== ==========
LIABILITIES:
Current liabilities................ C$ 510,520 C$ -- C$ 510,520 $ 323,312
Long-term debt..................... 1,350,104 -- 1,350,104 855,021
Other long-term liabilities........ 141,193 (79,712)(e) 61,481 38,936
Fair value of derivative
instruments..................... -- 50,700(d) 50,700 32,108
Deferred income taxes.............. 1,823,851 (225,100)(a) 1,679,271 1,063,482
(4,780)(b)
108,000(c)
(22,700)(d)
STOCKHOLDERS' EQUITY:
Common stock....................... 800,989 -- 800,989 594,380
Additional paid-in capital......... 88,778 -- 88,778 65,878
Retained earnings.................. 1,118,370 (289,300)(a) 905,450 619,189
(14,220)(b)
104,200(c)
(13,600)(d)
Accumulated other comprehensive
loss............................ -- (14,400)(d) (14,400) (151,654)
----------- ---------- ----------- ----------
Total stockholders'
equity................... 2,008,137 (227,320) 1,780,817 1,127,793
----------- ---------- ----------- ----------
Total liabilities and
stockholders' equity..... C$5,833,805 C$(400,912) C$5,432,893 $3,440,652
=========== ========== =========== ==========
40
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
ANDERSON UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
U.S. GAAP
ANDERSON AND OTHER ANDERSON
HISTORICAL ADJUSTMENTS U.S. GAAP CONVERTED TO
C$ C$ C$ U.S.$
---------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Oil sales............................... C$ 444,045 C$(75,760)(f) C$ 368,285 $ 247,966
Gas sales............................... 1,210,216 (236,646)(f) 973,570 655,505
NGL sales............................... 149,637 (7,235)(f) 142,402 95,879
Less royalties.......................... (393,104) 393,104(f) -- --
Gas services revenue.................... -- 11,546(f) 11,546 7,774
Other................................... 13,708 (9,750)(f) 3,958 2,665
---------- --------- ---------- ----------
Total revenues.................. 1,424,502 75,259 1,499,761 1,009,789
---------- --------- ---------- ----------
COSTS AND EXPENSES:
Lease operating expenses................ 223,286 5,546(f) 228,832 154,073
Transportation costs.................... -- 58,977(f) 58,977 39,709
Production taxes........................ -- 4,736(f) 4,736 3,189
Gas services costs and expenses......... -- 6,000(f) 6,000 4,040
Depreciation, depletion and amortization
of property and equipment............ 364,642 (63,000)(g) 321,142 216,225
19,500(i)
General and administrative expenses..... 60,003 -- 60,003 40,400
Interest expense........................ 69,782 (229)(h) 69,553 46,830
Deferred effect of changes in foreign
currency exchange rate on long-term
debt................................. -- 1,129(h) 1,129 760
---------- --------- ---------- ----------
Total costs and expenses........ 717,713 32,659 750,372 505,226
---------- --------- ---------- ----------
Earnings before income tax expense........ 706,789 42,600 749,389 504,563
INCOME TAX EXPENSE:
Current................................. 21,445 -- 21,445 14,439
Deferred................................ 307,137 12,900(k) 320,037 215,481
---------- --------- ---------- ----------
Total income tax expense........ 328,582 12,900 341,482 229,920
---------- --------- ---------- ----------
Net earnings before discontinued
operations.............................. C$ 378,207 C$ 29,700 C$ 407,907 $ 274,643
========== ========= ========== ==========
Net earnings per average common share
outstanding:
Basic................................... C$ 2.94 C$ 3.17 $ 2.13
Diluted................................. 2.87 3.09 2.08
Weighted average common shares
outstanding:
Basic................................... 128,806 128,806 128,806
Diluted................................. 131,857 131,857 131,857
41
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
ANDERSON UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
U.S. GAAP
ANDERSON AND OTHER ANDERSON CONVERTED
HISTORICAL ADJUSTMENTS U.S. GAAP TO
C$ C$ C$ U.S.$
----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Oil sales............................. C$ 397,832 C$ (61,371)(f) C$ 336,461 $218,733
Gas sales............................. 1,396,195 (288,302)(f) 1,107,893 720,241
NGL sales............................. 155,668 (28,373)(f) 127,295 82,754
Less royalties........................ (448,920) 448,920(f) -- --
Gas services revenue.................. -- 9,152(f) 9,152 5,950
Other................................. 4,499 (6,418)(f) (1,919) (1,248)
----------- ---------- ----------- --------
Total revenues................ 1,505,274 73,608 1,578,882 1,026,430
----------- ---------- ----------- --------
COSTS AND EXPENSES:
Lease operating expenses.............. 255,861 4,393(f) 260,254 169,191
Transportation costs.................. -- 57,597(f) 57,597 37,444
Production taxes...................... -- 6,859(f) 6,859 4,459
Gas services costs and expenses....... -- 4,759(f) 4,759 3,094
Depreciation, depletion and
amortization of property and
equipment.......................... 421,165 (44,200)(g) 396,065 257,482
19,100(i)
General and administrative expenses... 55,915 -- 55,915 36,350
Interest expense...................... 81,114 (4,541)(h) 76,573 49,780
Deferred effect of changes in foreign
currency exchange rate on long-term
debt............................... -- 22,641(h) 22,641 14,719
Change in fair value of derivative
instruments........................ -- 21,000(j) 21,000 13,652
----------- ---------- ----------- --------
Total costs and expenses...... 814,055 87,608 901,663 586,171
----------- ---------- ----------- --------
Earnings before income tax expense...... 691,219 (14,000) 677,219 440,259
INCOME TAX EXPENSE:
Current............................... 20,306 -- 20,306 13,201
Deferred.............................. 242,609 (2,750)(k) 239,859 155,932
----------- ---------- ----------- --------
Total income tax expense...... 262,915 (2,750) 260,165 169,133
----------- ---------- ----------- --------
Net earnings............................ C$ 428,304 C$ (11,250) C$ 417,054 $271,126
=========== ========== =========== ========
Net earnings per average common share
outstanding:
Basic................................. C$ 3.26 C$ 3.18 $ 2.07
Diluted............................... 3.19 3.11 2.02
Weighted average common shares
outstanding:
Basic................................. 131,241 131,241 131,241
Diluted............................... 134,187 134,187 134,187
42
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
The following adjustments convert Anderson's Canadian GAAP balance sheet to
a U.S. GAAP balance sheet:
(a) This adjustment reflects the cumulative effect of reductions to
the carrying value of Anderson's oil and gas properties using the full cost
ceiling limitations set forth by the Securities and Exchange Commission for
the full cost method of accounting for oil and gas operations.
(b) This adjustment reverses foreign exchange losses deferred under
Canadian GAAP but required to be included in the determination of earnings
under U.S. GAAP.
(c) This adjustment reflects the impact of the adoption of the
liability method of accounting for income taxes under U.S. GAAP.
(d) This adjustment records the fair value of derivative financial
instruments under U.S. GAAP.
(e) This adjustment reclassifies accrued site restoration costs from
other liabilities to accumulated depreciation, depletion and amortization
to conform to Devon's presentation.
The following adjustments convert Anderson's Canadian GAAP statements of
operating results to U.S. GAAP statements of operating results:
(f) This adjustment (1) allocates oil, gas and NGL royalty payments to
oil, gas and NGL revenues in accordance with U.S. GAAP; (2) reclassifies
third party processing revenues from lease operating expenses to gas
services revenues and expenses, and freehold mineral taxes from royalties
to production taxes, to conform to Devon's presentation; and (3)
reclassifies transportation costs which are netted against oil, gas and NGL
sales in Anderson's historical results as expenses in accordance with U.S.
GAAP.
(g) This adjustment records the impact of a lower depreciation,
depletion and amortization rate for U.S. GAAP as a result of a reduction in
carrying value of oil and gas properties which Anderson would have
recognized in 1998 due to a U.S. full cost ceiling limitation.
(h) This adjustment recognizes foreign exchange losses on long-term
debt in accordance with U.S. GAAP.
(i) This adjustment reflects additional depreciation, depletion and
amortization resulting from the accounting for the initial adoption of the
liability method of accounting for income taxes as an adjustment to
property and equipment.
(j) This adjustment records the impact of changes in the fair value of
derivative instruments that do not qualify as hedges under U.S. GAAP.
(k) This adjustment records the income tax impact of all the U.S. GAAP
adjustments described above.
For the September 30, 2001 U.S. GAAP balance sheet, the historical Canadian
dollar amounts were converted to U.S. dollars using the September 30, 2001
exchange rate of C$1.00 to U.S.$0.6333. For the U.S. GAAP statements of
operations for the year ended December 31, 2000 and nine months ended September
30, 2001, Canadian dollars were converted to U.S. dollars using the exchange
rates of $0.6733 and $0.6501, respectively. Such rates are the averages of the
month end exchange rates for the year and nine-month periods.
6. REDUCTION OF CARRYING VALUE OF OIL AND GAS PROPERTIES
Under the full cost method of accounting, the net book value of oil and gas
properties less related deferred income taxes (the "cost to be recovered"), may
not exceed a calculated "full cost ceiling." The ceiling limitation is the
discounted estimated after-tax future net revenues from oil and gas properties.
The ceiling is imposed separately by country. In calculating future net
revenues, current prices and costs are
43
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
generally held constant indefinitely. The costs to be recovered are compared to
the ceiling on a quarterly basis. If the costs to be recovered exceed the
ceiling, the excess is written off as an expense, except as discussed in the
following paragraph.
If, subsequent to the end of the quarter but prior to the applicable
financial statements being published, prices increase to levels such that the
ceiling would exceed the costs to be recovered, a write down otherwise indicated
at the end of the quarter is not required to be recorded. A write down indicated
at the end of a quarter is also not required if the value of additional reserves
proved up on properties after the end of the quarter but prior to the publishing
of the financial statements would result in the ceiling exceeding the costs to
be recovered, as long as the properties were owned at the end of the quarter.
An expense recorded in one period may not be reversed in a subsequent
period even though higher oil and gas prices may have increased the ceiling
applicable to the subsequent period.
Based on oil and natural gas cash market prices as of September 30, 2001,
Devon-Anderson combined's pro forma domestic and Canadian costs to be recovered
exceeded the related ceiling values by $497.5 million, and $659.9 million,
respectively. These after-tax amounts would have resulted in pro forma pre-tax
reductions of the carrying values of Devon-Anderson combined's domestic and
Canadian oil and gas properties of $0.8 billion and $1.1 billion, respectively,
in the third quarter of 2001. However, the cash market prices of natural gas
increased significantly during the month of October 2001. Based on cash market
prices of oil and natural gas as of October 31, 2001, when Devon's consolidated
financial statements were published, Devon-Anderson combined's pro forma
domestic and Canadian ceilings as of September 30, 2001 exceeded the related
costs to be recovered by $414.2 million and $370.5 million, respectively.
Accordingly, Devon-Anderson combined's pro forma results for the nine months
ended September 30, 2001, do not include a related reduction of the carrying
value of oil and gas properties. Due to volatility in oil and gas prices and the
effect of the Anderson acquisition, and the pending acquisition of Mitchell
Energy and Development Corp., there is a possibility that Devon would have to
record a reduction in the carrying value of its oil and gas properties as of
December 31, 2001 or subsequent periods.
The Devon-Anderson combined pro forma results for the nine months ended
September 30, 2001, do include a reduction of the carrying value of oil and gas
properties related to Devon's decision to discontinue its operations in
Malaysia, Qatar, Thailand and on certain properties in Brazil. After meeting the
drilling and capital commitments on these properties, Devon determined that the
properties did not meet Devon's internal criteria to justify further investment.
Accordingly, during the first nine months of 2001, Devon recorded a pre-tax
charge on $87.9 million ($68.8 million after-tax) associated with the impairment
of these international properties.
44
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
7. SUPPLEMENTAL PRO FORMA INFORMATION ON OIL AND GAS OPERATIONS
The following pro forma supplemental information regarding oil and gas
operations is presented pursuant to the disclosure requirements of Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing
Activities."
Pro Forma Costs Incurred
The following tables reflect the costs incurred in oil and gas property
acquisition, exploration and development activities of Devon, Anderson and
Devon-Anderson combined on a pro forma basis, for the year ended December 31,
2000.
DEVON- DEVON-
ANDERSON ANDERSON
DEVON ANDERSON COMBINED DEVON ANDERSON COMBINED
-------- -------- ---------- -------- -------- --------
(IN THOUSANDS)
TOTAL DOMESTIC
------------------------------- ------------------------------
Property acquisition costs:
Proved................... $291,355 $664,705 $ 956,060 $177,072 $-- $177,072
Unproved................. 55,344 111,568 166,912 34,805 -- 34,805
Exploration costs.......... 212,719 198,292 411,011 117,119 -- 117,119
Development costs.......... 636,379 230,345 866,724 466,090 -- 466,090
CANADA INTERNATIONAL
-------------------------------- ------------------------------
Property acquisition costs:
Proved................... $ 69,736 $664,705 $ 734,441 $ 44,547 $-- $ 44,547
Unproved................. 16,977 111,568 128,545 3,562 -- 3,562
Exploration costs.......... 54,769 198,292 253,061 40,831 -- 40,831
Development costs.......... 56,654 230,345 286,999 113,635 -- 113,635
Pro Forma Quantities of Oil and Gas Reserves
The following tables set forth the changes in the net quantities of oil,
natural gas and NGL reserves of Devon, Anderson and Devon-Anderson combined on a
pro forma basis, for the year ended December 31, 2000.
DEVON- DEVON-
ANDERSON ANDERSON
DEVON ANDERSON COMBINED DEVON ANDERSON COMBINED
---------- ---------- ------------ ---------- -------- ----------
TOTAL OIL -- MBBLS DOMESTIC OIL -- MBBLS
-------------------------------------- ----------------------------------
Proved reserves as of
December 31, 1999....... 496,717 -- 496,717 249,424 -- 249,424
Acquisition of
Anderson.............. -- 87,064 87,064 -- -- --
Revisions of
estimates............. (4,135) (8,934) (13,069) (3,196) -- (3,196)
Extensions and
discoveries........... 33,939 9,910 43,849 20,430 -- 20,430
Purchase of reserves.... 24,145 21,882 46,027 20,418 -- 20,418
Production.............. (42,561) (9,333) (51,894) (28,562) -- (28,562)
Sale of reserves........ (48,861) -- (48,861) (32,977) -- (32,977)
---------- ---------- ------------ ---------- ---- ----------
Proved reserves as of
December 31, 2000....... 459,244 100,589 559,833 225,537 -- 225,537
========== ========== ============ ========== ==== ==========
Proved developed reserves
as of:
December 31, 1999....... 301,149 -- 301,149 214,267 -- 214,267
December 31, 2000....... 261,432 71,625 333,057 192,190 -- 192,190
45
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
DEVON- DEVON-
ANDERSON ANDERSON
DEVON ANDERSON COMBINED DEVON ANDERSON COMPANY
---------- ---------- ------------ ---------- ---------- ----------
CANADA OIL -- MBBLS INTERNATIONAL OIL -- MBBLS
-------------------------------------- ----------------------------------
Proved reserves as of
December 31, 1999....... 32,132 -- 32,132 215,161 -- 215,161
Acquisition of
Anderson.............. -- 87,064 87,064 -- -- --
Revisions of
estimates............. 2,872 (8,934) (6,062) (3,811) -- (3,811)
Extensions and
discoveries........... 2,787 9,910 12,697 10,722 -- 10,722
Purchase of reserves.... 3,597 21,882 25,479 130 -- 130
Production.............. (4,760) (9,333) (14,093) (9,239) -- (9,239)
Sale of reserves........ (136) -- (136) (15,748) -- (15,748)
---------- ---------- ------------ ---------- ---- ----------
Proved reserves as of
December 31, 2000....... 36,492 100,589 137,081 197,215 -- 197,215
========== ========== ============ ========== ==== ==========
Proved developed reserves
as of:
December 31, 1999....... 29,268 -- 29,268 57,614 -- 57,614
December 31, 2000....... 29,721 71,625 101,346 39,521 -- 39,521
TOTAL GAS -- MMCF DOMESTIC GAS -- MMCF
-------------------------------------- ----------------------------------
Proved reserves as of
December 31, 1999....... 2,949,627 -- 2,949,627 2,274,386 -- 2,274,386
Acquisition of
Anderson.............. -- 1,481,200 1,481,200 -- -- --
Revisions of
estimates............. 99,223 (121,100) (21,877) 100,844 -- 100,844
Extensions and
discoveries........... 601,317 222,000 823,317 504,977 -- 504,977
Purchase of reserves.... 301,144 388,800 689,944 52,929 -- 52,929
Production.............. (426,146) (181,100) (607,246) (355,087) -- (355,087)
Sale of reserves........ (66,981) -- (66,981) (56,742) -- (56,742)
---------- ---------- ------------ ---------- ---- ----------
Proved reserves as of
December 31, 2000....... 3,458,184 1,789,800 5,247,984 2,521,307 -- 2,521,307
========== ========== ============ ========== ==== ==========
Proved developed reserves
as of:
December 31, 1999....... 2,500,985 -- 2,500,985 1,959,531 -- 1,959,531
December 31, 2000....... 2,631,267 1,213,800 3,845,067 2,087,287 -- 2,087,287
CANADA GAS -- MMCF INTERNATIONAL GAS -- MMCF
-------------------------------------- ----------------------------------
Proved reserves as of
December 31, 1999....... 506,218 -- 506,218 169,023 -- 169,023
Acquisition of
Anderson.............. -- 1,481,200 1,481,200 -- -- --
Revisions of
estimates............. (5,854) (121,100) (126,954) 4,233 -- 4,233
Extensions and
discoveries........... 64,566 222,000 286,566 31,774 -- 31,774
Purchase of reserves.... 27,224 388,800 416,024 220,991 -- 220,991
Production.............. (62,284) (181,100) (243,384) (8,775) -- (8,775)
Sale of reserves........ (6,361) -- (6,361) (3,878) -- (3,878)
---------- ---------- ------------ ---------- ---- ----------
Proved reserves as of
December 31, 2000....... 523,509 1,789,800 2,313,309 413,368 -- 413,368
========== ========== ============ ========== ==== ==========
Proved developed reserves
as of:
December 31, 1999....... 501,376 -- 501,376 40,078 -- 40,078
December 31, 2000....... 507,703 1,213,800 1,721,503 36,277 -- 36,277
46
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
DEVON-ANDERSON DEVON-ANDERSON
DEVON ANDERSON COMBINED DEVON ANDERSON COMBINED
------- ---------- -------------- ------- -------- --------------
TOTAL NGLS -- MBBLS DOMESTIC NGLS -- MBBLS
--------------------------------------- -------------------------------------
Proved reserves as of
December 31, 1999....................... 67,817 -- 67,817 50,804 -- 50,804
Acquisition of Anderson................. -- 31,868 31,868 -- -- --
Revisions of estimates.................. 3,312 1,398 4,710 4,296 -- 4,296
Extensions and discoveries.............. 6,041 3,889 9,930 5,092 -- 5,092
Purchase of reserves.................... 33 14,085 14,118 9 -- 9
Production.............................. (7,400) (4,316) (11,716) (6,702) -- (6,702)
Sale of reserves........................ (8,046) -- (8,046) (7,981) -- (7,981)
------- ------- ---------- ------- ---- -------
Proved reserves as of
December 31, 2000....................... 61,757 46,924 108,681 45,518 -- 45,518
======= ======= ========== ======= ==== =======
Proved developed reserves as of:
December 31, 1999....................... 52,102 -- 52,102 48,237 -- 48,237
December 31, 2000....................... 46,256 34,146 80,402 42,155 -- 42,155
CANADA NG INTERNATIONAL NGLS -- MBBLS
--------------------------------------- -------------------------------------
Proved reserves as of
December 31, 1999....................... 4,013 -- 4,013 13,000 -- 13,000
Acquisition of Anderson................. -- 31,868 31,868 -- -- --
Revisions of estimates.................. 343 1,398 1,741 (1,327) -- (1,327)
Extensions and discoveries.............. 571 3,889 4,460 378 -- 378
Purchase of reserves.................... 24 14,085 14,109 -- -- --
Production.............................. (682) (4,316) (4,998) (16) -- (16)
Sale of reserves........................ (65) -- (65) -- -- --
------- ------- ---------- ------- ---- ---------
Proved reserves as of
December 31, 2000....................... 4,204 46,924 51,128 12,035 -- 12,035
======= ======= ========== ======= ==== =========
Proved developed reserves as of:
December 31, 1999....................... 3,865 -- 3,865 -- -- --
December 31, 2000....................... 4,072 34,146 38,218 29 -- 29
47
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
Pro Forma Standardized Measure of Discounted Future Net Cash Flows
The following tables set forth the standardized measure of discounted
future net cash flows relating to proved oil, natural gas and NGL reserves for
Devon, Anderson and Devon-Anderson combined on a pro forma basis, as of December
31, 2000.
DEVON- DEVON-
ANDERSON ANDERSON
DEVON ANDERSON COMBINED DEVON ANDERSON COMBINED
----------- ----------- ----------- ----------- -------- -----------
(IN THOUSANDS)
TOTAL DOMESTIC
--------------------------------------- ------------------------------------
Future cash inflows... $40,594,130 $15,649,818 $56,243,948 $29,143,762 $-- $29,143,762
Future costs:
Development.......... (1,634,888) (394,769) (2,029,657) (915,969) -- (915,969)
Production........... (8,198,640) (1,875,977) (10,074,617) (5,660,966) -- (5,660,966)
Future income tax
expense.............. (9,087,923) (5,447,062) (14,534,985) (6,345,941) -- (6,345,941)
----------- ----------- ----------- ----------- -- -----------
Future net cash
flows................ 21,672,679 7,932,010 29,604,689 16,220,886 -- 16,220,886
10% discount to
reflect timing of
cash flows........... (9,200,492) (3,289,638) (12,490,130) (6,591,538) -- (6,591,538)
----------- ----------- ----------- ----------- -- -----------
Standardized measure
of discounted future
net cash flows....... $12,472,187 $ 4,642,372 $17,114,559 $ 9,629,348 $-- $ 9,629,348
=========== =========== =========== =========== == ===========
CANADA INTERNATIONAL
---------------------------------------- ------------------------------------
Future cash inflows... $ 5,686,629 $15,649,818 $21,336,447 $ 5,763,739 $-- $ 5,763,739
Future costs:
Development.......... (84,492) (394,769) (479,261) (634,427) -- (634,427)
Production........... (616,605) (1,875,977) (2,492,582) (1,921,069) -- (1,921,069)
Future income tax
expense.............. (1,967,441) (5,447,062) (7,414,503) (774,541) -- (774,541)
----------- ----------- ----------- ----------- -- -----------
Future net cash
flows................ 3,018,091 7,932,010 10,950,101 2,433,702 -- 2,433,702
10% discount to
reflect timing of
cash flows........... (1,240,934) (3,289,638) (4,530,572) (1,368,020) -- (1,368,020)
----------- ----------- ----------- ----------- -- -----------
Standardized measure
of discounted future
net cash flows....... $ 1,777,157 $ 4,642,372 $ 6,419,529 $ 1,065,682 $-- $ 1,065,682
=========== =========== =========== =========== == ===========
Future cash inflows are computed by applying year-end prices to the
year-end quantities of proved reserves, except in those instances where fixed
and determinable price changes are provided by contractual arrangements in
existence at year-end. These year-end prices are adjusted for transportation and
other charges, and for geographic differentials. The December 31, 2000 NYMEX oil
price and Henry Hub gas price, upon which the combined company's actual net
prices were based before relevant adjustments, were $26.80 per barrel and $9.23
per Mcf, respectively. Recent prices for oil and gas are substantially less than
these December 31, 2000 prices. As of November 27, 2001, the NYMEX oil price was
$19.48 per barrel, and the Henry Hub gas price was $1.89 per Mcf.
48
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
Pro Forma Changes Relating to the Standardized Measure of Discounted Future
Net Cash Flows
The following table includes the components of the changes in the
standardized measure of discounted future net cash flows of Devon, Anderson,
and Devon-Anderson combined on a pro forma basis, for the year ended
December 31, 2000.
DEVON-
ANDERSON
DEVON ANDERSON COMBINED
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(IN THOUSANDS)
Beginning balance........................ $ 4,768,434 $ -- $ 4,768,434
Acquisition of Anderson.................. -- 1,282,335 1,282,335
Sales of oil, gas and NGLs, net of
production costs....................... (2,121,112) (802,379) (2,923,491)
Net changes in prices and production
costs.................................. 9,753,295 4,948,285 14,701,580
Extensions, discoveries, and improved
recovery, net of future development
costs.................................. 2,742,182 964,721 3,706,903
Purchase of reserves, net of future
development costs...................... 618,134 627,581 1,245,715
Development costs incurred during the
period which reduced future development
costs.................................. 182,533 230,345 412,878
Revisions of quantity estimates.......... 420,250 (234,267) 185,983
Sales of reserves in place............... (818,602) -- (818,602)
Accretion of discount.................... 581,172 207,205 788,377
Net change in income taxes............... (4,221,575) (2,398,295) (6,619,870)
Other, primarily changes in timing....... 567,476 (183,159) 384,317
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Ending balance........................... $12,472,187 $ 4,642,372 $17,114,559
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