4. Debt and Related Expenses
A summary of Devon's short-term and long-term debt is as follows:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (In millions) | ||||||
| Senior Credit Facility borrowings | $ | 1,450 | — | |||
| Commercial paper | 1,004 | 1,808 | ||||
| Debentures exchangeable into shares of Chevron common stock: 4.90% due August 15, 2008 |
381 | 444 | ||||
| 4.95% due August 15, 2008 | 271 | 316 | ||||
| Discount on exchangeable debentures | (11 | ) | (33 | ) | ||
| Other debentures and notes: 4.375% due October 1, 2007 |
— | 400 | ||||
| 10.125% due November 15, 2009 | 177 | 177 | ||||
| 6.875% due September 30, 2011 | 1,750 | 1,750 | ||||
| 7.25% due October 1, 2011 | 350 | 350 | ||||
| 8.25% due July 1, 2018 | 125 | 125 | ||||
| 7.50% due September 15, 2027 | 150 | 150 | ||||
| 7.875% due September 30, 2031 | 1,250 | 1,250 | ||||
| 7.95% due April 15, 2032 | 1,000 | 1,000 | ||||
| Fair value adjustment on debt related to interest rate swaps | — | (5 | ) | |||
| Net premium on other debentures and notes | 31 | 41 | ||||
| 7,928 | 7,773 | |||||
| Less amount classified as short-term debt | 1,004 | 2,205 | ||||
| Long-term debt | $ | 6,924 | 5,568 | |||
Maturities of short-term and long-term debt as of December 31, 2007, excluding premiums and discounts, are as follows (in millions):
| 2008 | $ 1,004 |
| 2009 | 177 |
| 2010 | — |
| 2011 | 2,100 |
| 2012 | 2,102 |
| 2013 and thereafter | 2,525 |
| Total | $ 7,908 |
Credit Lines
Devon has two revolving lines of credit that can be accessed to provide liquidity. As of December 31, 2007, Devon's combined available capacity under these credit facilities, net of $198 million of outstanding letters of credit and $1.0 billion of outstanding commercial paper, was $1.3 billion.
Devon's $2.5 billion five-year, syndicated, unsecured revolving line of credit (the "Senior Credit Facility") matures on April 7, 2012, and all amounts outstanding will be due and payable at that time unless the maturity is extended. Prior to each April 7 anniversary date, Devon has the option to extend the maturity of the Senior Credit Facility for one year, subject to the approval of the lenders.
The Senior Credit Facility includes a five-year revolving Canadian subfacility in a maximum amount of U.S. $500 million. Amounts borrowed under the Senior Credit Facility may, at the election of Devon, bear interest at various fixed rate options for periods of up to twelve months. Such rates are generally less than the prime rate. However, Devon may elect to borrow at the prime rate. The Senior Credit Facility currently provides for an annual facility fee of $1.8 million that is payable quarterly in arrears. As of December 31, 2007, there were $1.4 billion of borrowings under the Senior Credit Facility at an average rate of 5.27%.
On August 7, 2007, Devon established a new $1.5 billion 364-day, syndicated, unsecured revolving senior credit facility (the "Short-Term Facility"). This facility provides Devon with provisional interim liquidity until the proceeds from divestitures of assets in Africa are received. The Short-Term Facility was also used to support an increase in Devon's commercial paper program from $2 billion to $3.5 billion.
The Short-Term Facility matures on August 5, 2008. At that time, all amounts outstanding will be due and payable unless the maturity is extended. Prior to August 5, 2008, Devon has the option to convert any outstanding principal amount of loans under the Short-Term Facility to a term loan that will be repayable in a single payment on August 4, 2009.
Amounts borrowed under the Short-Term Facility bear interest at various fixed rate options for periods of up to 12 months. Such rates are generally less than the prime rate. Devon may also elect to borrow at the prime rate. The Short-Term Facility currently provides for an annual facility fee of approximately $0.8 million that is payable quarterly in arrears. As of December 31, 2007, there were no borrowings under the Short-Term Facility.
The Senior Credit Facility and Short-Term Facility contain only one material financial covenant. This covenant requires Devon's ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. As defined in the agreement, total funded debt excludes the debentures that are exchangeable into shares of Chevron common stock. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of December 31, 2007, Devon was in compliance with this covenant. Devon's debt-to-capitalization ratio at December 31, 2007, as calculated pursuant to the terms of the agreement, was 23.8%.
Commercial Paper
Devon also has access to short-term credit under its commercial paper program. Total borrowings under the commercial paper program may not exceed $3.5 billion. Also, any borrowings under the commercial paper program reduce available capacity under the Senior Credit Facility or the Short-Term Facility on a dollar-for-dollar basis. Commercial paper debt generally has a maturity of between one and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2007, Devon had $1.0 billion of commercial paper debt outstanding at an average rate of 5.07%. The average borrowing rate for Devon's $1.8 billion of commercial paper debt outstanding at December 31, 2006 was 5.37%. Outstanding commercial paper is classified as short-term debt in the accompanying consolidated balance sheets.
Exchangeable Debentures
The exchangeable debentures consist of $381 million of 4.90% debentures and $271 million of 4.95% debentures. The exchangeable debentures were issued on August 3, 1998 and mature August 15, 2008. The exchangeable debentures are callable at 100.5% of principal as of December 31, 2007.
The exchangeable debentures are exchangeable at the option of the holders at any time prior to maturity, unless previously redeemed, for shares of Chevron common stock that Devon owns. In lieu of delivering Chevron common stock to an exchanging debenture holder, Devon may, at its option, pay to such holder an amount of cash equal to the market value of the Chevron common stock. At maturity, holders who have not exercised their exchange rights will receive an amount in cash equal to the principal amount of the debentures.
During 2007, certain holders of exchangeable debentures exercised their option to exchange their debentures for shares of Chevron common stock prior to the debentures' August 15, 2008 maturity date. Devon elected to pay the exchanging debenture holders cash totaling $167 million in lieu of delivering shares of Chevron common stock. As a result of these exchanges, Devon retired outstanding exchangeable debentures with a book value totaling $105 million and reduced the related embedded derivative option's balance by $62 million.
As of December 31, 2007, Devon owned approximately 14.2 million shares of Chevron common stock. The majority of these shares are held for possible exchange when holders redeem their exchangeable debentures. Each $1,000 principal amount of the exchangeable debentures is exchangeable into 18.6566 shares of Chevron common stock, an exchange rate equivalent to $53.60 per share of Chevron stock.
As of December 31, 2007, the exchangeable debentures are due within one year. However, Devon continues to classify this debt as long-term because it has the intent and ability to refinance these debentures on a long-term basis with the available capacity under its existing credit facilities or other long-tem financing arrangements.
The exchangeable debentures were assumed as part of the 1999 acquisition of PennzEnergy. As a result, the fair values of the exchangeable debentures were determined as of August 17, 1999, based on market quotations. In accordance with derivative accounting standards, the total fair value of the debentures was allocated between the interest-bearing debt and the option to exchange Chevron common stock that is embedded in the debentures. Accordingly, a discount was recorded on the debentures and is being accreted using the effective interest method, which raised the effective interest rate on the debentures to 7.76%.
Other Debentures and Notes
Following are descriptions of the various other debentures and notes outstanding at December 31, 2007, as listed in the table presented at the beginning of this note.
Ocean Debt
As a result of the merger with Ocean Energy, Inc., which closed April 25, 2003, Devon assumed $1.8 billion of debt. The table below summarizes the debt assumed that remains outstanding, the fair value of the debt at April 25, 2003, and the effective interest rate of the debt assumed after determining the fair values of the respective notes using April 25, 2003, market interest rates. The premiums resulting from fair values exceeding face values are being amortized using the effective interest method. All of the notes are general unsecured obligations of Devon.
| Fair Value of | Effective Rate of | |||||
|---|---|---|---|---|---|---|
| Debt Assumed | Debt Assumed | Debt Assumed | ||||
| (In millions) | ||||||
| 7.250% due October 2011 (principal of $350 million) | $ | 406 | 4.9 | % | ||
| 8.250% due July 2018 (principal of $125 million) | $ | 147 | 5.5 | % | ||
| 7.500% due September 2027 (principal of $150 million) | $ | 169 | 6.5 | % | ||
10.125% Debentures due November 15, 2009
These debentures were assumed as part of the PennzEnergy acquisition. The fair value of the debentures was determined using August 17, 1999, market interest rates. As a result, a premium was recorded on these debentures, which lowered the effective interest rate to 8.9%. The premium is being amortized using the effective interest method.
6.875% Notes due September 30, 2011 and 7.875% Debentures due September 30, 2031
On October 3, 2001, Devon, through Devon Financing Corporation, U.L.C. ("Devon Financing"), a wholly-owned finance subsidiary, sold these notes and debentures, which are unsecured and unsubordinated obligations of Devon Financing. Devon has fully and unconditionally guaranteed on an unsecured and unsubordinated basis the obligations of Devon Financing under the debt securities. The proceeds from the issuance of these debt securities were used to fund a portion of the acquisition of Anderson Exploration.
7.95% Notes due April 15, 2032
On March 25, 2002, Devon sold these notes, which are unsecured and unsubordinated obligations of Devon. The net proceeds received, after discounts and issuance costs, were $986 million and were used to retire other indebtedness.
Interest Expense
The following schedule includes the components of interest expense between 2005 and 2007.
| Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | |||||||
| (In millions) | |||||||||
| Interest based on debt outstanding | $ | 508 | 486 | 507 | |||||
| Capitalized interest | (102 | ) | (79 | ) | (70 | ) | |||
| Other interest | 24 | 14 | 96 | ||||||
| Total interest expense | $ | 430 | 421 | 533 | |||||
During 2005, Devon redeemed its $400 million 6.75% notes due March 15, 2011 and its zero coupon convertible senior debentures prior to their scheduled maturity dates. The other interest category in the table above includes $81 million in 2005 related to these early retirements.