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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-13515
FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)
State of incorporation: New York I.R.S. Employer Identification No.
25-0484900
1600 Broadway
Suite 2200
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 303-812-1400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock, Par Value $.10 Per Share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $277,224,247 as of
February 29, 2000 (based on the last reported sale price of such stock on the
New York Stock Exchange Composite Tape).
There were 53,778,496 shares of the registrant's Common Stock, Par
Value $.10 Per Share outstanding as of February 29, 2000.
Document incorporated by reference: Proxy Statement of Forest Oil
Corporation relative to the Annual Meeting of Shareholders to be held on May
10, 2000, which is incorporated into Part III of this Form 10- K.
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TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business 1
Item 2. Properties 17
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 4A. Executive Officers of Forest 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial and Operating Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 85
Item 11. Executive Compensation 85
Item 12. Security Ownership of Certain Beneficial Owners and Management 85
Item 13. Certain Relationships and Related Transactions 85
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 85
PART I
This section highlights information that is discussed in more detail in the
remainder of the document. Throughout this document we make statements that
are classified as "forward-looking". Please refer to the "Forward-Looking
Statements" section on page 16 of this document for an explanation of these
types of assertions. We also use the terms "Forest", "Company", "we", "our"
and "us" to refer to Forest Oil Corporation.
ITEM 1. BUSINESS
THE COMPANY
Forest Oil Corporation is an independent oil and gas company engaged in the
acquisition, exploration, development, production and marketing of natural
gas and liquids. Forest was incorporated in New York in 1924, the successor
to a company formed in 1916, and has been a publicly held company since 1969.
The Anschutz Corporation, a private Denver-based corporation, currently owns
approximately 37% of our common stock.
Forest operates from production offices located in Lafayette, Louisiana;
Denver, Colorado; and Calgary, Alberta and runs its international business
(other than Canada) from an office located in Houston, Texas. Forest's
corporate headquarters is located in Denver, Colorado. On December 31, 1999
Forest had 272 employees, of whom 207 were salaried and 65 were hourly. Of
the salaried employees, 16 were employed by ProMark, our marketing and
processing business. For financial information relating to our operational
segments, see Note 13 of Notes to Consolidated Financial Statements.
Forest's estimated proved reserves were 718 BCFE at December 31, 1999 of
which approximately 73% was natural gas. As of December 31, 1999, our
estimated proved developed reserves were approximately 81% of total estimated
proved reserves.
Forest's principal reserves and producing properties are all located in North
America. In the United States, we have business units operating in three
areas: offshore Gulf of Mexico, onshore Gulf of Mexico, and the Western
United States. Our fourth business unit is in Canada, where our oil and gas
operations are conducted by our wholly owned subsidiary, Canadian Forest Oil
Ltd. Our fifth business unit consists of our interests in various other
countries, including Thailand, South Africa, Italy, Switzerland and Tunisia;
activity in these areas has, to date, been exploratory in nature and is
conducted by our wholly owned subsidiary, Forest Oil International.
At December 31, 1999, approximately 73% of our oil and gas reserves were in
the United States and approximately 27% were in Canada. Approximately 74% of
our total production in 1999 was in the United States and approximately 26%
was in Canada. During 1999, we produced approximately 241 MMCFE per day. (An
MCF is one thousand cubic feet of natural gas. MMCF is used to designate one
million cubic feet of natural gas and BCF refers to one billion cubic feet of
natural gas. MCFE means thousands of cubic feet of natural gas equivalents,
using a conversion ratio of one barrel of liquids to six MCF of natural gas.
BCFE means billions of cubic feet of natural gas equivalents. With respect to
liquids, the term BBL means one barrel of liquids whereas MBBLS is used to
designate one thousand barrels of liquids. The term liquids is used to
describe oil, condensate and natural gas liquids.)
SALES AND MARKETS
OIL AND GAS OPERATIONS. Forest's U.S. production is generally sold at the
wellhead to oil and natural gas purchasing companies in the areas where it is
produced. Liquids are typically sold under short-term contracts at prices
based upon posted field prices. Natural gas in the United States is generally
sold month to month on the spot market.
1
Currently, nearly all of our U.S. natural gas is sold at the wellhead at spot
market prices. The term "spot market" as used herein refers to contracts with
a term of six months or less or contracts which call for a redetermination of
sales prices every six months or earlier. We believe that the loss of one or
more of our current natural gas spot purchasers should not have a material
adverse effect on Forest's business in the United States because any
individual spot purchaser could be readily replaced by another spot purchaser
who would pay approximately the same sales price.
In Canada, liquids are typically sold under short-term contracts at prices
based upon posted prices at Alberta pipeline and processing hubs netted back
to the field. Canadian Forest's natural gas production is sold primarily
through the ProMark Netback Pool which is operated by ProMark, the marketing
subsidiary of Canadian Forest. Canadian Forest sold approximately 90% of its
natural gas production through the ProMark Netback Pool in 1999.
Although pipeline expansions are ongoing in Canada, the lack of firm natural
gas pipeline capacity continues to affect the ability to market natural gas
production. The prorating of capacity on the oil and liquids pipeline systems
may also affect the ability to market oil and liquids production.
MARKETING AND TRADING ACTIVITIES. The ProMark Netback Pool matches major end
users with providers of gas supply through arranged transportation channels,
and uses a netback pricing mechanism to establish the wellhead price paid to
producers. Under this netback arrangement, producers receive the blended
market price less related transportation and other direct costs. ProMark
charges a marketing fee for marketing and administering the gas supply pool.
The ProMark Netback Pool gas sales in 1999 averaged 104 MMCF per day, of
which Canadian Forest supplied approximately 35 MMCF per day or 34%.
Approximately 7% of the volumes sold in the ProMark Netback Pool in 1999 were
sold at fixed prices. The remainder of the volumes sold were priced in a
variety of ways, including prices based on indices.
In addition to operating the ProMark Netback Pool, ProMark provides other
marketing services for producers and consumers of natural gas. ProMark
manages long-term gas supply contracts for industrial customers and provides
full-service purchasing, accounting and gas nomination services for both
producers and customers on a fee-for-services basis. ProMark also buys and
sells gas in its trading operation for terms as short as one day and as long
as one to two years. Profits generated by trading are derived from the spread
between the prices of gas purchased and sold. ProMark follows procedures to
offset its gas purchase or sales commitments with other gas purchase or sales
contracts, thereby limiting its exposure to price risk. We are, however,
exposed to credit risk in that there exists the possibility that the
counterparties to agreements will fail to perform their contractual
obligations. The credit of counterparties is evaluated and letters of credit
or parent guarantees are obtained when considered necessary to minimize
credit risk.
OTHER FOREIGN OPERATIONS
Forest considers, from time to time, certain oil and gas opportunities in
other foreign countries. Foreign oil and natural gas operations are subject
to certain risks, such as nationalization, confiscation, terrorism,
renegotiation of existing contracts and currency fluctuations. Forest
monitors the political, regulatory and economic developments in any foreign
countries in which it operates.
Assets acquired from The Anschutz Corporation in 1998 included oil and gas
interests in various foreign countries. We currently hold 17 concessions
covering approximately 21.7 million gross undeveloped acres located in
Albania, Germany, Italy, Romania, South Africa, Switzerland, Thailand and
Tunisia. In 2000, drilling is planned in Thailand and Switzerland and, if the
wells are successful, we anticipate commencing development plans. In South
Africa, where Forest shot 3D seismic over an existing discovery, development
plans are being prepared and we anticipate drilling a delineation well in
early 2001. These international interests comprise approximately 3% of our
total assets at December 31, 1999.
2
COMPETITION
The oil and natural gas industry is intensely competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. Forest's competitive position depends on
our geological, geophysical and engineering expertise, our financial
resources, our ability to develop properties and our ability to select,
acquire and develop proved reserves. We compete with a substantial number of
other companies having larger technical staffs and greater financial and
operational resources. Many such companies not only engage in the
acquisition, exploration, development and production of oil and natural gas
reserves, but also carry on refining operations, generate electricity and
market refined products. We also compete with major and independent oil and
gas companies in the marketing and sale of oil and gas to transporters,
distributors and end users. The oil and natural gas industry competes with
other industries supplying energy and fuel to industrial, commercial and
individual consumers. Forest competes with other oil and natural gas
companies in attempting to secure drilling rigs and other equipment necessary
for drilling and completion of wells. Such equipment may be in short supply
from time to time. Finally, companies not previously investing in oil and
natural gas may choose to acquire reserves to establish a firm supply or
simply as an investment. Such companies provide competition for Forest.
Forest's business is affected not only by such competition, but also by
general economic developments, governmental regulations and other factors
that affect our ability to market our oil and natural gas production. The
prices of oil and natural gas realized by Forest are highly volatile. The
price of oil is generally dependent on world supply and demand, while the
price we receive for our natural gas is tied to the specific markets in which
such gas is sold. Declines in crude oil prices or natural gas prices
adversely impact Forest's activities. Our financial position and resources
may also adversely affect our competitive position. Lack of available funds
or financing alternatives will prevent us from executing our operating
strategy and from deriving the expected benefits therefrom. For further
information concerning Forest's financial position, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ProMark also faces significant competition from other gas marketers, some of
whom are significantly larger in size and have greater financial resources
than ProMark, Canadian Forest or Forest.
REGULATION
UNITED STATES. Various aspects of the Company's oil and natural gas
operations are regulated by administrative agencies under statutory
provisions of the states where such operations are conducted and by certain
agencies of the Federal government for operations on Federal leases. All of
the jurisdictions in which the Company owns or operates producing crude oil
and natural gas properties have statutory provisions regulating the
exploration for and production of crude oil and natural gas, including
provisions requiring permits for the drilling of wells and maintaining
bonding requirements in order to drill or operate wells and provisions
relating to the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilled
and the plugging and abandoning of wells. The Company's operations are also
subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration units and
the number of wells which may be drilled in an area and the unitization or
pooling of crude oil and natural gas properties. In this regard, some states
can order the pooling or integration of tracts to facilitate exploration
while other states rely on voluntary pooling of lands and leases. In
addition, state conservation laws establish maximum rates of production from
crude oil and natural gas wells, generally prohibit the venting or flaring of
natural gas, and impose certain requirements regarding the ratability or fair
apportionment of production from fields and individual wells. Some states,
such as Texas and Oklahoma, have, in recent years, reviewed and substantially
revised methods previously used to make monthly determinations of allowable
rates of production from fields and individual wells. The effect of these
regulations is to limit the amounts of crude oil and natural gas the Company
can produce from its wells, and to limit the number of wells or the location
at which the Company can drill.
3
The Federal Energy Regulatory Commission (FERC) regulates the transportation
and sale for resale of natural gas in interstate commerce under the Natural
Gas Act of 1938 (NGA) and the Natural Gas Policy Act of 1978 (NGPA). In the
past, the Federal government has regulated the prices at which oil and gas
could be sold. The Natural Gas Wellhead Decontrol Act of 1989 (the Decontrol
Act) removed all NGA and NGPA price and nonprice controls affecting
producers' wellhead sales of natural gas effective January 1, 1993. While
sales by producers of natural gas, and all sales of crude oil, condensate and
natural gas liquids can currently be made at uncontrolled market prices,
Congress could reenact price controls in the future.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and
636-C (Order No. 636), which require interstate pipelines to provide
transportation separate, or "unbundled", from the pipelines' sales of gas.
Also, Order No. 636 requires pipelines to provide open-access transportation
on a basis that is equal for all gas supplies. Although Order No. 636 does
not directly regulate gas producers like the Company, the FERC has stated
that it intends for Order No. 636 to foster increased competition within all
phases of the natural gas industry. The courts have largely affirmed the
significant features of Order No. 636 and numerous related orders pertaining
to the individual pipelines, although certain appeals remain pending and the
FERC continues to review and modify its open access regulations. In
particular, the FERC has recently issued Order No. 637, which, among other
things, (i) lifts the cost-based cap on pipeline transportation rates in the
capacity release market until September 30, 2002, for releases of pipeline
capacity of less than one year, (ii) permits pipelines to charge different
maximum cost-based rates for peak and off-peak times, (iii) encourages
auctions for pipeline capacity, (iv) requires pipelines to implement
imbalance management services, and (v) restricts the ability of pipelines to
impose penalties for imbalances, overruns, and non-compliance with
operational flow orders. Order No. 637 also requires the FERC Staff to
analyze whether the FERC should implement additional fundamental policy
changes, including, among other things, whether to pursue performance-based
ratemaking or other non-cost based ratemaking techniques and whether the FERC
should mandate greater standardization in terms and conditions of service
across the interstate pipeline grid. In addition, the FERC recently
implemented new regulations governing the procedure for obtaining
authorization to construct new pipeline facilities and has issued a policy
statement, which it largely affirmed in a recent order on rehearing,
establishing a presumption in favor of requiring owners of new pipeline
facilities to charge rates based solely on the costs associated with such new
pipeline facilities.
While any additional FERC action on these matters would affect the Company
only indirectly, these changes are intended to further enhance competition in
natural gas markets. The Company cannot predict what further action the FERC
will take on these matters, nor can it predict whether the FERC's actions
will achieve its stated goal of increasing competition in natural gas
markets. However, the Company does not believe that it will be treated
materially differently than other natural gas producers and markets with
which it competes.
In Order Nos. 561 and 561-A, the FERC established an indexing system under
which oil pipelines are able to change their transportation rates, subject to
prescribed ceiling levels. The indexing system, which allows or may require
pipelines to make rate changes to track changes in the Producer Price Index
for Finished Goods, minus one percent, became effective January 1, 1995. In
certain circumstances, these rules permit oil pipelines to establish rates
using traditional cost of service or other methods of rate making. To date,
the Company does not believe Order Nos. 561 and 561-A have materially
increased transportation costs associated with oil production from the
Company's oil producing operations.
The Outer Continental Shelf Lands Act (OCSLA) requires that all pipelines
operating on or across the Outer Continental Shelf (the OCS) provide
open-access, non-discriminatory service. To date, the FERC has not issued
rules to implement the OCSLA's requirements on gatherers and other
non-jurisdictional entities, though it has issued such rules for interstate
pipelines. Pursuant to one of the FERC's recently initiated inquiries
involving whether it should alter its regulatory treatment of pipelines and
services on the OCS, the FERC has recently proposed to adopt certain
reporting requirements concerning OCS rates and terms and conditions of
service, which requirements are
4
applicable, with certain limited exceptions, to both gas pipelines and
gatherers operating on the OCS. The purpose of the proposed requirements is
to provide regulators and other interested parties with sufficient
information to detect and then seek to remedy discriminatory conduct in such
operations. The Company cannot predict what, if any, affect this matter may
have on the Company.
Certain operations the Company conducts are on federal oil and gas leases,
which the Minerals Management Service (MMS) administers. The MMS issues such
leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to the OCSLA (which are subject to change by the MMS). For
offshore operations, lessees must obtain MMS approval for exploration plans
and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement
of drilling. Lessees must also comply with detailed MMS regulations
governing, among other things, engineering and construction specifications
for offshore production facilities, safety procedures, flaring of production,
plugging and abandonment of OCS wells, calculation of royalty payments and
the valuation of production for this purpose and removal of facilities. To
cover the various obligations of lessees on the OCS, the MMS generally
requires that lessees post substantial bonds or other acceptable assurances
that such obligations will be met. The cost of such bonds or other surety can
be substantial and there is no assurance that the Company can continue to
obtain bonds or other surety in all cases. Under certain circumstances, the
MMS may require any Company operations on federal leases to be suspended or
terminated. Any such suspension or termination could materially and adversely
affect the Company's financial condition and operations.
The MMS has recently proposed changes to the method of calculating royalties
and the valuation of crude oil produced from federal leases. These changes,
if adopted, would modify the valuation procedures for crude oil to reduce use
of oil posted prices and assign a value to crude oil intended to better
reflect market value. The Company cannot predict what action the MMS will
ultimately take on this matter, nor can it predict at this stage how the
Company might be affected if the MMS adopts such changes.
Additional proposals and proceedings that might affect the oil and gas
industry are regularly considered by Congress, states, the FERC and the
courts. The Company cannot predict when or whether any such proposals may
become effective. In the past, the natural gas industry has been heavily
regulated. There is no assurance that the regulatory approach currently
pursued by the FERC will continue indefinitely. Notwithstanding the
foregoing, the Company does not anticipate that compliance with existing
federal, state and local laws, rules and regulations will have a material or
significantly adverse effect upon the capital expenditures, earnings or
competitive position of the Company or its subsidiaries. No material portion
of Forest's business is subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the Federal government.
CANADA. The oil and natural gas industry in Canada is subject to extensive
controls and regulations imposed by various levels of government. It is not
expected that any of these controls or regulations will affect the operations
of the Company in a manner materially different than they would affect other
oil and gas companies of similar size. All current legislation is a matter of
public record and the Company is unable to predict what additional
legislation or amendments may be created.
In Canada, oil exports are subject to regulation by the National Energy Board
(NEB), an independent federal regulatory agency. Exports may be made pursuant
to export orders with terms not exceeding one year in the case of light
crude, and not exceeding two years in the case of heavy crude. Natural gas
exported from Canada is also subject to regulation by the NEB. Exporters are
free to negotiate prices and other terms with purchasers, provided that the
export contracts must continue to meet certain criteria prescribed by the
NEB. Natural gas exports for a term of less than two years must be made
pursuant to an NEB order, or, in the case of exports for a longer duration
(to a maximum of 25 years) pursuant to an export license from the NEB with
government of Canada approval.
5
The provincial governments of Alberta, British Columbia and Saskatchewan also
regulate the volume of natural gas which may be removed from those provinces
for consumption elsewhere based on such factors as reserve availability,
transportation arrangements and market considerations.
In addition to federal regulation, each province has legislation and
regulations which govern land tenure, royalties, production rates,
environmental protection and other matters. The royalty regime is a
significant factor in the profitability of oil and natural gas production.
Royalties payable on production from lands other than Crown lands are
determined by negotiations between the mineral owner and the lessee. Crown
royalties are determined by government regulation and are generally
calculated as a percentage of the value of the gross production, and the rate
of royalties payable generally depends in part on prescribed reference
prices, well productivity, geographical location, field discovery date and
the type or quality of the petroleum product produced.
From time to time the governments of Canada, Alberta, British Columbia and
Saskatchewan have established incentive programs which have included royalty
rate deductions, royalty holidays and tax credits for the purpose of
encouraging oil and natural gas exploration or enhanced recovery projects.
The trend in recent years has been for provincial governments to allow such
programs to expire without renewal, and consequently few such programs are
currently operative.
In Alberta, certain producers of oil or natural gas are entitled to a credit
against the royalties to the Crown by virtue of the ARTC (Alberta royalty tax
credit) program. The credit is determined by applying a specified rate to a
maximum of $2 million CDN of Alberta Crown royalties payable for each
producer or associated group of producers. The specified rate is a function
of the Royalty Tax Credit reference price (RTCRP) which is set quarterly by
the Alberta Department of Energy and ranges from 25% to 75%, depending on oil
and gas par prices for the previous calendar quarter. Canadian Forest is
eligible for ARTC credits only on eligible properties acquired and wells
drilled after the change of control. Crown royalties on production from
producing properties acquired from corporations claiming maximum entitlement
to ARTC will generally not be eligible.
The review of the ARTC program announced in December 1997 is now complete.
The ARTC program will retain its basic structure, but effective January 1,
2001 there will be changes to filing requirements and record keeping.
Oil and natural gas royalty holidays and reductions for specific wells reduce
the amount of Crown royalties paid by the Company to the provincial
governments. In Alberta, the ARTC program provides a rebate on Alberta Crown
royalties paid in respect of eligible producing properties in Alberta.
REGULATION IN NORTHWEST TERRITORIES OF CANADA. Currently, the provincial
governments have jurisdiction over the exploration and development of oil and
gas resources in the provinces of Canada and the federal government has
jurisdiction over the exploration and development of oil and gas resources in
the Canadian territories. The Yukon, Northwest Territories and Nunavut
governments recently signed a Northern Cooperation Accord for the purpose of
cooperating to seek jurisdiction over the oil and gas resources in these
territories. If jurisdiction over the oil and gas resources in these
territories were to be transferred to the territorial governments, the
territorial governments would have the authority to regulate the grant of
drilling permits, the construction of pipelines and other matters affecting
oil and gas exploration and development activities. We are unable to predict
whether any transfer of jurisdiction to the territorial governments would
affect our proposed exploration and development activities in the Northwest
Territories, although it is possible that the territorial governments would
adopt policies or regulations that could delay or limit our proposed
exploration and development activities, delay or prevent the construction of
pipelines or result in the payment of higher royalties or taxes than would
otherwise be the case under the current federal regulatory framework.
Canadian Forest's right to produce oil and gas from its Northwest Territories
properties, along with the production rights of other industry participants
in these properties, are subject to finalizing the commercial discovery
licenses and production licenses for the wells to be produced. Until the
particulars for these licenses and the related spacing units are finalized,
Canadian Forest's share of production cannot be finally determined.
6
NORTH AMERICAN FREE TRADE AGREEMENT. On January 1, 1994 the North American
Free Trade Agreement (NAFTA) among the governments of Canada, the United
States and Mexico became effective. NAFTA carries forward most of the
material energy terms contained in the Canada-U.S. Free Trade Agreement. In
the context of energy resources, Canada continues to remain free to determine
whether exports to the United States or Mexico will be allowed provided that
any export restrictions do not: (i) reduce the proportion of energy resource
exported relative to domestic use (based upon the proportion prevailing in
the most recent 36-month period), (ii) impose an export price higher than the
domestic price, and (iii) disrupt normal channels of supply. All three
countries are prohibited from imposing minimum export or import price
requirements. NAFTA contemplates clearer disciplines on regulators to ensure
fair implementation of any regulatory changes and to minimize disruption of
contractual arrangements, which is important for Canadian natural gas exports.
ENVIRONMENTAL MATTERS. Extensive U.S. federal, state and local laws govern
oil and natural gas operations, regulate the discharge of materials into the
environment or otherwise relate to the protection of the environment.
Numerous governmental departments issue rules and regulations to implement
and enforce such laws which are often difficult and costly to comply with and
which carry substantial administrative, civil and even criminal penalties for
failure to comply. Some laws, rules and regulations relating to protection of
the environment may, in certain circumstances, impose "strict liability" for
environmental contamination, rendering a person liable for environmental and
natural resource damages and cleanup costs without regard to negligence or
fault on the part of such person. Other laws, rules and regulations may
restrict the rate of oil and natural gas production below the rate that would
otherwise exist or even prohibit exploration or production activities in
sensitive areas. In addition, state laws often require some form of remedial
action to prevent pollution from former operations, such as closure of
inactive pits and plugging of abandoned wells. The regulatory burden on the
oil and natural gas industry increases its cost of doing business and
consequently affects its profitability. These laws, rules and regulations
affect the operations of the Company, as well as the oil and gas exploration
and production industry in general. Compliance with environmental
requirements generally could have a material adverse effect upon the capital
expenditures, earnings or competitive position of Forest and its
subsidiaries. The Company believes that it is in substantial compliance with
current applicable environmental laws, rules and regulations and that
continued compliance with existing requirements will not have a material
adverse impact on the Company. Nevertheless, changes in existing
environmental laws or the adoption of new environmental laws have the
potential to adversely affect the Company's operations. For instance, a few
U.S. courts have ruled that certain wastes associated with the production of
crude oil may be classified as hazardous substances under the Comprehensive
Environmental Response, Compensation, and Liability Act (commonly called
Superfund) and thus the Company could become subject to the burdensome
cleanup and liability standards established under the federal Superfund
program if significant concentrations of such wastes were determined to be
present at the Company's properties or to have been produced as a result of
the Company's operations.
The OPA and regulations thereunder impose a variety of requirements on
"responsible parties" related to the prevention of oil spills and liability
for damages resulting from such spills in U.S. waters. A "responsible party"
includes the owner or operator of a pipeline, vessel or onshore facility, or
the lessee or permittee of the area in which an offshore facility is located.
OPA assigns liability to each responsible party for oil cleanup costs and a
variety of public and private damages from oil spills. OPA also requires
operators of offshore OCS facilities to demonstrate to the MMS that they
possess at least $35 million in financial resources that are available to pay
for costs that may be incurred in responding to an oil spill. This financial
responsibility amount can increase up to a maximum of $150 million if the MMS
determines that a greater amount is justified based on specific risks posed
by the operations or if the worst case oil-spill discharge volume possible at
a facility exceeds applicable threshold volumes established by the MMS under
its recently issued rules pertaining to covered offshore facilities. While
liability limits apply in some circumstances, a party cannot take advantage
of liability limits if the spill was caused by gross negligence or willful
misconduct or resulted from violation of a federal safety, construction or
operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. Even if
applicable, the liability limits for offshore facilities require the
responsible party to pay all removal costs, plus up to $75 million in other
damages. Few defenses exist to the liability imposed by OPA.
7
The U.S. Water Pollution Control Act (commonly called the Clean Water Act)
imposes restrictions and strict controls regarding the discharge of produced
waters and other oil and gas wastes in navigable waters. Many state discharge
regulations and the federal National Pollutant Discharge Elimination System
generally prohibit the discharge of produced water and sand, drilling fluids,
drill cuttings and certain other substances related to the oil and gas
industry into coastal waters. Although the costs to comply with these zero
discharge mandates under federal or state law may be significant, the entire
industry is expected to experience similar costs in the western Gulf of
Mexico and the Company believes that these costs will not have a material
adverse impact on the Company's financial condition and operations.
In Canada, the oil and natural gas industry is currently subject to
environmental regulation pursuant to provincial and federal legislation.
Environmental legislation provides for restrictions and prohibitions on
releases or emissions of various substances produced or utilized in
association with certain oil and gas industry operations. In addition,
legislation requires that well and facility sites be abandoned and reclaimed
to the satisfaction of provincial authorities. A breach of such legislation
may result in the imposition of fines and penalties.
In Alberta, environmental compliance has been governed by the Alberta
Environmental Protection and Enhancement Act (AEPEA) since September 1, 1993.
In addition to replacing a variety of older statutes which related to
environmental matters, AEPEA also imposes certain environmental
responsibilities on oil and natural gas operators in Alberta and in certain
instances also imposes greater penalties for violations.
British Columbia's Environmental Assessment Act became effective June 30,
1995. This legislation rolls the previous processes for the review of major
energy projects into a single environmental assessment process which
contemplates public participation in the environmental review.
Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the costs of clean-up operations,
public liability and physical damage, there is no assurance that such
insurance will be adequate to fully cover all such costs or that such
insurance will continue to be available in the future or that such insurance
will be available at premium levels that justify its purchase. The occurrence
of a significant environmental-related event not fully insured or indemnified
against could have a material adverse effect on the Company's financial
condition and operations.
The Company has established guidelines to be followed to comply with U.S. and
Canadian environmental laws, rules and regulations. The Company has
designated a compliance officer whose responsibility is to monitor regulatory
requirements and their impacts on the Company and to implement appropriate
compliance procedures. The Company also employs an environmental manager
whose responsibilities include causing Forest's operations to be carried out
in accordance with applicable environmental guidelines and implementing
adequate safety precautions. Although the Company maintains pollution
insurance against the costs of clean-up operations, public liability and
physical damage, there is no assurance that such insurance will be adequate
to cover all such costs or that such insurance will continue to be available
in the future.
The Company believes that it is reasonably likely that the trend in
environmental legislation and regulation will continue toward stricter
standards. The Company is committed to meeting its responsibilities to
protect the environment wherever it operates and anticipates making increased
expenditures of both a capital and expense nature as a result of increasingly
stringent laws relating to the protection of the environment.
8
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS FORM 10-K,
THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING FOREST.
OIL AND GAS PRICE DECLINES AND THEIR VOLATILITY COULD ADVERSELY AFFECT
FOREST'S REVENUE, CASH FLOWS AND PROFITABILITY. Prices for oil and natural
gas fluctuate widely. The average spot price received by Forest for natural
gas produced in the Gulf of Mexico increased from approximately $2.17 per MCF
at December 31, 1998, to $2.33 per MCF at December 31, 1999 and was
approximately $2.74 per MCF at March 1, 2000. During the same period, the
NYMEX price for West Texas Intermediate crude oil increased from $12.06 per
barrel to $25.60 per barrel and was $31.77 per barrel at March 1, 2000.
Natural gas prices affect Forest more than oil prices, because most of our
production and reserves are natural gas. At December 31, 1999, 73% of our
estimated proved reserves consisted of natural gas on an MCFE basis and,
during 1999, approximately 70% of our total production consisted of natural
gas.
Forest's revenues, profitability and future rate of growth depend
substantially upon the prevailing prices of oil and natural gas. Prices also
affect the amount of cash flow available for capital expenditures and our
ability to borrow money or raise additional capital. The amount we can borrow
from banks is subject to redetermination based on current prices. In
addition, we may have ceiling test writedowns when prices decline. Lower
prices may also reduce the amount of oil and natural gas that Forest can
produce economically.
We cannot predict future oil and natural gas prices. Factors that can cause
this fluctuation include:
- relatively minor changes in the supply of and demand for oil and
natural gas;
- market uncertainty;
- the level of consumer product demand;
- weather conditions;
- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political and economic conditions in oil producing countries,
particularly those in the Middle East;
- the foreign supply of oil and natural gas;
- the price of oil and gas imports; and
- overall economic conditions.
We enter into energy swap agreements and other financial arrangements at
various times to attempt to minimize the effect of oil and natural gas price
fluctuations. We cannot assure you that such transactions will reduce risk or
minimize the effect of any decline in oil or natural gas prices. Any
substantial or extended decline in the prices of or demand for oil or natural
gas would have a material adverse effect on our financial condition and
results of operations. Energy swap arrangements may limit the risk of
declines in prices, but such arrangements may also limit further revenues
from price increases.
9
For further information concerning prices, market conditions and energy swap
agreements, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 9 and 11 of Notes to
Consolidated Financial Statements.
WE MAY NOT BE ABLE TO OBTAIN ADEQUATE FINANCING TO EXECUTE OUR OPERATING
STRATEGY. We have historically addressed our long-term liquidity needs
through the use of bank credit facilities, the issuance of debt and equity
securities and the use of cash provided by operating activities. We continue
to examine the following alternative sources of long-term capital:
- bank borrowings or the issuance of debt securities;
- the sale of common stock, preferred stock or other equity
securities;
- the issuance of nonrecourse production-based financing or net
profits interests;
- sales of non-strategic properties;
- sales of prospects and technical information; and
- joint venture financing.
The availability of these sources of capital will depend upon a number of
factors, some of which are beyond our control. These factors include general
economic and financial market conditions, oil and natural gas prices and the
value and performance of Forest. We may be unable to execute our operating
strategy if we cannot obtain capital from these sources.
ESTIMATES OF OIL AND GAS RESERVES ARE UNCERTAIN AND INHERENTLY IMPRECISE. This
Form 10-K contains estimates of our proved oil and gas reserves and the
estimated future net revenues from such reserves. These estimates are based upon
various assumptions, including assumptions required by the Securities and
Exchange Commission relating to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. The process of
estimating oil and gas reserves is complex. Such process requires significant
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. Therefore, these
estimates are inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from those estimated. Our properties may also
be susceptible to hydrocarbon drainage from production by operators on
adjacent properties. Any significant variance could materially affect the
estimated quantities and present value of reserves set forth. In addition, we
may adjust estimates of proved reserves to reflect production history,
results of exploration and development, prevailing oil and gas prices and
other factors, many of which are beyond our control. Actual production,
revenue, taxes, development expenditures and operating expenses with respect
to our reserves will likely vary from the estimates used. Such variances may
be material.
At December 31, 1999, approximately 19% of our estimated proved reserves were
undeveloped. Undeveloped reserves, by their nature, are less certain.
Recovery of undeveloped reserves requires significant capital expenditures
and successful drilling operations. The estimates of our future reserves
include the assumption that we will make significant capital expenditures to
develop our reserves. Although we have prepared estimates of our oil and gas
reserves and the costs associated with these reserves in accordance with
industry standards, we cannot assure you that the estimated costs are
accurate, that development will occur as scheduled or that the results will
be as estimated. See Note 14 of Notes to Consolidated Financial Statements.
10
You should not assume that the present value of future net revenues referred
to is the current market value of our estimated oil and gas reserves. In
accordance with Securities and Exchange Commission requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the date of the estimate. Actual future
prices and costs may be materially higher or lower than the prices and costs
as of the date of the estimate. Any changes in consumption by gas purchasers
or in governmental regulations or taxation will also affect actual future net
cash flows. The timing of both the production and the expenses from the
development and production of oil and gas properties will affect the timing
of actual future net cash flows from estimated proved reserves and their
present value. In addition, the 10% discount factor, which is required by the
Securities and Exchange Commission to be used in calculating discounted
future net cash flows for reporting purposes, is not necessarily the most
accurate discount factor. The effective interest rate at various times and
the risks associated with Forest or the oil and gas industry in general will
affect the accuracy of the 10% discount factor.
LEVERAGE MATERIALLY AFFECTS OUR OPERATIONS. As of December 31, 1999, our
long-term debt was approximately $371.7 million, including $72.7 million
outstanding under our global bank credit facility with a syndicate of banks
led by The Chase Manhattan Bank and The Chase Manhattan Bank of Canada. Our
long-term debt represented 54% of our total capitalization at December 31,
1999.
Our level of debt affects our operations in several important ways, including
the following:
- a significant portion of our cash flow from operations is used to
pay interest on borrowings;
- the covenants contained in the agreements governing our debt limit
our ability to borrow additional funds or to dispose of assets;
- the covenants contained in the agreements governing our debt may
affect our flexibility in planning for, and reacting to, changes
in business conditions;
- a high level of debt could impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes; and
- the terms of the agreements governing our debt permit our
creditors to accelerate payments upon an event of default or a
change of control.
In addition, we may significantly alter our capitalization in order to make
future acquisitions or develop our properties. These changes in
capitalization may significantly increase our level of debt. A high level of
debt increases the risk that we may default on our debt obligations. Our
ability to meet our debt obligations and to reduce our level of debt depends
on our future performance. General economic conditions and financial,
business and other factors affect our operations and our future performance.
Many of these factors are beyond our control.
If Forest is unable to repay its debt at maturity out of cash on hand, it
could attempt to refinance such debt, or repay such debt with the proceeds of
any equity offering. We cannot assure you that Forest will be able to
generate sufficient cash flow to pay the interest on its debt or that future
borrowings or equity financing will be available to pay or refinance such
debt. In addition, Forest's bank borrowing base is subject to semi-annual
redeterminations. Forest could be forced to repay a portion of its bank
borrowings due to redeterminations of its borrowing base, and we cannot
assure you that we will have sufficient funds to make such repayments. If we
are not able to negotiate renewals of our borrowings or to arrange new
financing, we may have to sell significant assets. Any such sale would have a
material adverse effect on our business and financial results. Factors that
will affect our ability to raise cash through an offering of our capital
stock or a refinancing of our debt include financial market conditions and
our value and performance at the time of such offering or other financing. We
cannot assure you that any such offering or refinancing can be successfully
completed.
11
LOWER OIL AND GAS PRICES MAY CAUSE US TO RECORD CEILING LIMITATION
WRITEDOWNS. We use the full cost method of accounting to report our oil and
gas operations. Accordingly, we capitalize the cost to acquire, explore for
and develop oil and gas properties. Under full cost accounting rules, the net
capitalized costs of oil and gas properties may not exceed a "ceiling limit"
which is based upon the present value of estimated future net cash flows from
proved reserves, discounted at 10%, plus the lower of cost or fair market
value of unproved properties. If net capitalized costs of oil and gas
properties exceed the ceiling limit, we must charge the amount of the excess
to earnings. This is called a "ceiling limitation writedown." This charge
does not impact cash flow from operating activities, but does reduce our
shareholders' equity. The risk that we will be required to write down the
carrying value of our oil and gas properties increases when oil and gas
prices are low or volatile. In addition, writedowns may occur if we
experience substantial downward adjustments to our estimated proved reserves
or if purchasers cancel long-term contracts for our natural gas production.
In 1998, we recorded after-tax writedowns of $175 million ($199.5 million
pre-tax). We cannot assure you that we will not experience ceiling limitation
writedowns in the future.
WE MAY NOT BE ABLE TO REPLACE PRODUCTION WITH NEW RESERVES. In general, the
volume of production from oil and gas properties declines as reserves are
depleted. The decline rates depend on reservoir characteristics. Gulf of
Mexico reservoirs experience steep declines, while the declines in long-lived
fields in other regions are relatively slow. A significant portion of our
production is from Gulf of Mexico reservoirs. Our reserves will decline as
they are produced unless we acquire properties with proved reserves or
conduct successful exploration and development activities. Forest's future
natural gas and oil production is highly dependent upon its level of success
in finding or acquiring additional reserves. The business of exploring for,
developing or acquiring reserves is capital intensive and uncertain. We may
be unable to make the necessary capital investment to maintain or expand our
oil and gas reserves if cash flow from operations is reduced and external
sources of capital become limited or unavailable. We cannot assure you that
our future exploration, development and acquisition activities will result in
additional proved reserves or that we will be able to drill productive wells
at acceptable costs.
OUR OPERATIONS ARE SUBJECT TO NUMEROUS RISKS OF OIL AND GAS DRILLING AND
PRODUCTION ACTIVITIES. Oil and gas drilling and production activities are
subject to numerous risks, including the risk that no commercially productive
oil or natural gas reservoirs will be found. The cost of drilling and
completing wells is often uncertain. Oil and gas drilling and production
activities may be shortened, delayed or canceled as a result of a variety of
factors, many of which are beyond our control. These factors include:
- unexpected drilling conditions;
- pressure or irregularities in formations;
- equipment failures or accidents;
- weather conditions; and
- shortages in experienced labor or shortages or delays in the
delivery of equipment.
The prevailing prices of oil and natural gas also affect the cost of and the
demand for drilling rigs, production equipment and related services.
We cannot assure you that the new wells we drill will be productive or that we
will recover all or any portion of our investment. Drilling for oil and natural
gas may be unprofitable. Drilling activities can result in dry wells and wells
that are productive but do not produce sufficient net revenues after operating
and other costs.
OUR INDUSTRY EXPERIENCES NUMEROUS OPERATING RISKS. The oil and gas industry
experiences numerous operating risks. These operating risks include the risk of
fire, explosions, blow-outs, pipe failure, abnormally pressured formations and
environmental hazards. Environmental hazards include oil spills, gas leaks,
pipeline ruptures or discharges of
12
toxic gases. If any of these industry operating risks occur, we could have
substantial losses. Substantial losses may be caused by injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. Additionally, a substantial portion of our oil and gas operations
is located offshore in the Gulf of Mexico. The Gulf of Mexico area
experiences tropical weather disturbances, some of which can be severe enough
to cause substantial damage to facilities and possibly interrupt production.
In accordance with industry practice, we maintain insurance against some, but
not all, of the risks described above. We cannot assure you that our
insurance will be adequate to cover losses or liabilities. Also, we cannot
predict the continued availability of insurance at premium levels that
justify its purchase.
FOREST'S CONCENTRATION OF ASSETS INCREASES ITS EXPOSURE TO PRODUCTION
DECLINES. At March 1, 2000, the combined production from four of our offshore
Gulf of Mexico wells represented approximately 23% of our consolidated daily
deliverability. Our production, revenue and cash flow will be adversely
affected if production from these wells decreases significantly.
THE PROFITABILITY OF OUR GAS MARKETING ACTIVITIES MAY BE LIMITED. Our
operations include gas marketing through our subsidiary, ProMark. ProMark's
gas marketing operations consist of the marketing of gas production in
Canada, the purchase and direct sale of third parties' natural gas, the
handling of transportation and operations of third party gas and spot
purchasing and selling of natural gas. The profitability of such natural gas
marketing operations depends on our ability to assess and respond to changing
market conditions, including credit risk. Profitability also depends on our
ability to maximize the volume of third party natural gas that we purchase
and resell and to obtain a satisfactory margin between the purchase price and
the sales price for such volumes. If we are unable to respond accurately to
changing conditions in the gas marketing business, our results of operations
could be materially adversely affected. In addition, ProMark sells a
significant portion of its volumes at fixed prices under long-term contracts.
The loss of one or more such long-term buyers could have a material adverse
effect on Forest. ProMark buys and sells gas in its trading operations for
terms varying from one day to two years. Profits from trading are derived
from the difference between the price of gas purchased and the price of gas
sold. ProMark tries to limit its exposure to price risk by offsetting its gas
purchase or sales commitments with other gas purchase or sales contracts.
However, ProMark is exposed to credit risk because the counterparties to
agreements might not perform their contractual obligations.
OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY CURRENCY
FLUCTUATIONS AND ECONOMIC AND POLITICAL DEVELOPMENTS. We have significant
operations in Canada. The expenses of such operations are payable in Canadian
dollars while most of the revenue from natural gas and oil sales is based
upon U.S. dollars price indices. As a result, Canadian operations are subject
to the risk of fluctuations in the relative value of the Canadian and U.S.
dollars. Forest is also required to recognize foreign currency translation
gains or losses related to the debt issued by our Canadian subsidiary because
the debt is denominated in U.S. dollars and the functional currency of such
subsidiary is the Canadian dollar. We have also acquired additional oil and
gas assets in other countries. Our foreign operations may also be adversely
affected by political and economic developments, royalty and tax increases
and other laws or policies in these countries, as well as U.S. policies
affecting trade, taxation and investment in other countries.
COMPETITION WITHIN OUR INDUSTRY MAY ADVERSELY AFFECT OUR OPERATIONS. We
operate in a highly competitive environment. Forest competes with major and
independent oil and gas companies for the acquisition of desirable oil and
gas properties and the equipment and labor required to develop and operate
such properties. Forest also competes with major and independent oil and gas
companies in the marketing and sale of oil and natural gas. Many of these
competitors have financial and other resources substantially greater than
ours.
OUR FUTURE ACQUISITIONS MAY NOT CONTAIN ECONOMICALLY RECOVERABLE RESERVES.
Our recent growth is due in part to acquisitions of producing properties. The
successful acquisition of producing properties requires an assessment of a
number of factors beyond our control. These factors include recoverable
reserves, future oil and gas prices, operating costs and potential
environmental and other liabilities. Such assessments are inexact and their
accuracy is inherently uncertain. In connection with such assessments, we
perform a review of the subject properties, which we
13
believe is generally consistent with industry practices. However, such a
review will not reveal all existing or potential problems. In addition, the
review will not permit a buyer to become sufficiently familiar with the
properties to fully assess their deficiencies and capabilities. We do not
inspect every platform or well. Even when a platform or well is inspected,
structural and environmental problems are not necessarily discovered. We are
generally not entitled to contractual indemnification for preclosing
liabilities, including environmental liabilities. Normally, we acquire
interests in properties on an "as is" basis with limited remedies for
breaches of representations and warranties. In addition, competition for
producing oil and gas properties is intense and many of our competitors have
financial and other resources which are substantially greater than those
available to us. Therefore, we cannot assure you that we will be able to
acquire oil and gas properties that contain economically recoverable reserves
or that we will acquire such properties at acceptable prices.
THE MARKETABILITY OF FOREST'S PRODUCTION DEPENDS IN MOST PART UPON THE
AVAILABILITY, PROXIMITY AND CAPACITY OF GAS GATHERING SYSTEMS, PIPELINES AND
PROCESSING FACILITIES. The marketability of our production depends in part
upon the availability, proximity and capacity of gas gathering systems,
pipelines and processing facilities. U.S. federal and state and Canadian
regulation of oil and gas production and transportation, general economic
conditions, and changes in supply and demand all could adversely affect our
ability to produce and market oil and natural gas. If market factors
dramatically change, the financial impact on Forest could be substantial. The
availability of markets is beyond our control.
OUR OIL AND GAS OPERATIONS ARE SUBJECT TO VARIOUS U.S. FEDERAL, STATE AND
LOCAL AND CANADIAN FEDERAL AND PROVINCIAL GOVERNMENTAL REGULATIONS THAT
MATERIALLY AFFECT OUR OPERATIONS. Our oil and gas operations are subject to
various U.S. federal, state and local and Canadian federal and provincial
governmental regulations. These regulations may be changed in response to
economic or political conditions. Matters regulated include permits for
discharges of wastewaters and other substances generated in connection with
drilling operations, bonds or other financial responsibility requirements to
cover drilling contingencies and well plugging and abandonment costs, reports
concerning operations, the spacing of wells, and unitization and pooling of
properties and taxation. At various times, regulatory agencies have imposed
price controls and limitations on oil and gas production. In order to
conserve supplies of oil and gas, these agencies have restricted the rates of
flow of oil and gas wells below actual production capacity. In addition, the
Oil Pollution Act of 1990 requires operators of offshore facilities to prove
that they have the financial capability to respond to costs that may be
incurred in connection with potential oil spills. Under such law and other
federal and state environmental statutes, owners and operators of certain
defined facilities are strictly liable for such spills of oil and other
regulated substances, subject to certain limitations. A substantial spill
from one of our facilities could have a material adverse effect on our
results of operations, competitive position or financial condition. Federal,
state, provincial and local laws regulate production, handling, storage,
transportation and disposal of oil and gas, by-products from oil and gas and
other substances and materials produced or used in connection with oil and
gas operations. We cannot predict the ultimate cost of compliance with these
requirements or their effect on our operations.
THE SIGNIFICANT OWNERSHIP POSITION OF ANSCHUTZ COULD LIMIT FOREST'S ABILITY
TO ENTER INTO CERTAIN TRANSACTIONS. As of March 7, 2000, Anschutz owned
approximately 37% of the outstanding shares of our common stock. Pursuant to
a shareholder agreement between Anschutz and Forest, Anschutz may designate
three of Forest's directors. Therefore, Anschutz can substantially influence
matters considered by Forest's board of directors. The shareholder agreement,
which also prohibits Anschutz from acquiring in excess of 49.9% of the
outstanding shares of Forest's common stock, terminates on July 27, 2000.
Under certain circumstances, Anschutz could veto proposed transactions
between Forest and third parties. For example, Anschutz could veto a merger
of Forest, which under applicable law requires the approval of the holders of
two-thirds of the outstanding shares of common stock. Control of Forest most
likely could not be transferred to a third party without Anschutz's consent
and agreement. A third party probably would not offer to pay a premium to
acquire Forest without the prior agreement of Anschutz, even if the Board of
Directors should choose to attempt to sell Forest in the future. In addition,
shareholder approval would be required by New York Stock Exchange rules for
the issuance of common stock to a third party in an amount in excess of 20%
of the outstanding common stock. Anschutz's opposition to such a transaction
could significantly reduce the likelihood of its approval.
14
WE DO NOT PAY DIVIDENDS. We have not declared any cash dividends on our
common stock in a number of years and have no intention to do so in the near
future. In addition, we are restricted from doing so by our global credit
agreement and the indentures pursuant to which our subordinated notes were
issued.
OUR RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS HAVE PROVISIONS THAT
DISCOURAGE CORPORATE TAKEOVERS AND COULD PREVENT SHAREHOLDERS FROM REALIZING
A PREMIUM ON THEIR INVESTMENT. Certain provisions of our Restated Certificate
of Incorporation and By-Laws and provisions of the New York Business
Corporation Law may have the effect of delaying or preventing a change in
control. Our directors are elected to staggered terms. Also, our Restated
Certificate of Incorporation authorizes our board of directors to issue
preferred stock without shareholder approval and to set the rights,
preferences and other designations, including voting rights of those shares
as the board may determine. Additional provisions include restrictions on
business combinations and the availability of authorized but unissued common
stock. These provisions, alone or in combination with each other and with the
rights plan described below, may discourage transactions involving actual or
potential changes of control, including transactions that otherwise could
involve payment of a premium over prevailing market prices to shareholders
for their common stock.
Our board of directors has adopted a shareholder rights plan. The existence
of the rights plan may impede a takeover of Forest not supported by the
board, including a proposed takeover that may be desired by a majority of our
shareholders or involving a premium over the prevailing market price of our
common stock.
15
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
The information in this Form 10-K may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These statements appear in a
number of places and include statements regarding our plans, beliefs or
current expectations including those plans, beliefs and expectations of our
officers and directors with respect to, among other things:
- budgeted capital expenditures;
- increases in oil and gas production;
- our outlook on oil and gas prices;
- estimates of our oil and gas reserves;
- our future financial condition or results of operations; and
- our business strategy and other plans and objectives for future
operations.
When considering such forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this Form 10-K. The risk
factors noted in this Form 10-K and other factors noted throughout this Form
10-K, including certain risks and uncertainties, could cause our actual
results to differ materially from those contained in any forward-looking
statement. Prices for oil and natural gas fluctuate widely. Numerous
uncertainties are inherent in estimating proved oil and natural gas reserves
and in projecting future rates of production and timing of development
expenditures. Many of these uncertainties are beyond our control. Reserve
engineering is a subjective process of estimating underground accumulations
of oil and natural gas that cannot be measured in an exact way. The accuracy
of any reserve estimate depends on the quality of available data and the
interpretation of such data by geological engineers. As a result, estimates
made by different engineers often vary from one another. In addition, the
results of drilling, testing and production activities may justify revisions
of estimates that were made previously. If significant, such revisions would
change the schedule of any further production and development drilling.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered.
All forward-looking statements attributable to Forest are expressly qualified
in their entirety by this cautionary statement.
16
ITEM 2. PROPERTIES
Forest's principal reserves and producing properties are oil and gas
properties located in the United States in the Gulf of Mexico, Louisiana,
Texas, Oklahoma and Wyoming and in Canada in Alberta and the Northwest
Territories.
RESERVES
Information regarding Forest's proved and proved developed oil and gas
reserves and the standardized measure of discounted future net cash flows and
changes therein is included in Note 14 of Notes to Consolidated Financial
Statements.
Since January 1, 1999 Forest has not filed any oil or natural gas reserve
estimates or included any such estimates in reports to any Federal or foreign
governmental authority or agency, other than the Securities and Exchange
Commission (SEC) and the Department of Energy (DOE). There were no
differences between the reserve estimates included in the SEC report, the DOE
report and those included herein, except for production and additions and
deletions due to the difference in the "as of" dates of such reserve
estimates.
PRODUCTION
The following table shows net liquids and natural gas production for Forest
and its subsidiaries for the years ended December 31, 1999, 1998 and 1997:
Net Natural Gas and Liquids Production (1)
------------------------------------------
1999 1998 1997
---- ---- ----
United States:
Natural Gas (MMCF) 49,279 47,394 34,018
Liquids (MBBLS) 2,712 2,405 1,267
Canada:
Natural Gas (MMCF) 12,423 14,916 15,017
Liquids (MBBLS) 1,685 1,864 1,940
Total (MMCFE) 88,084 87,924 68,277
(1) Volumes reported for natural gas include insignificant amounts of sulfur
production on the basis that one long ton of sulfur is equivalent to 15 MCF
of natural gas. Liquids volumes include both oil and condensate and natural
gas liquids.
17
AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT OF PRODUCTION
The following table sets forth the average sales prices per MCF of natural
gas and per barrel of liquids and the average production cost per equivalent
unit of production for the years ended December 31, 1999, 1998 and 1997 for
Forest and its subsidiaries:
United States Canada
----------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
------ -------- ------ ------- ------ ------
Average Sales Prices:
NATURAL GAS
Production (MMCF) (1) 49,279 47,394 34,018 12,423 14,916 15,017
Sales price received (per MCF) $ 2.28 2.10 2.53 1.61 1.23 1.46
Effects of energy swaps (per MCF) (2) .03 .09 (.21) (.07) (.02) -
------ ------ ------ ------ ------ ------
Average sales price (per MCF) $ 2.31 2.19 2.32 1.54 1.21 1.46
LIQUIDS:
Oil and condensate:
Production (MBBLS) 1,985 1,919 1,137 1,254 1,389 1,498
Sales price received (per BBL) $ 17.18 12.16 18.20 16.80 11.95 18.07
Effects of energy swaps (per BBL) (2) (3.11) .45 (.23) (2.37) 1.06 (.08)
------ ------ ------ ------ ------ ------
Average sales price (per BBL) $ 14.07 12.61 17.97 14.43 13.01 17.99
Natural gas liquids:
Production (MBBLS) 727 486 130 431 475 442
Average sales price (per BBL) $ 9.95 7.00 10.62 10.70 7.25 12.42
Total liquids production (MBBLS) 2,712 2,405 1,267 1,685 1,864 1,940
Average sales price (per BBL) $ 12.97 11.48 17.21 13.48 11.54 16.72
Average production cost (per MCFE) (3) $ .51 .48 .50 .58 .46 .58
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 801 MMCF in 1997. Natural gas
delivered pursuant to volumetric production payment agreements represented
approximately 2% of total natural gas production in 1997. On June 30, 1997
the Company repurchased its last remaining volumetric production payment.
For further information concerning volumes and prices recorded under
volumetric production payments, see Note 4 of Notes to Consolidated
Financial Statements.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 32,481 MMCF,
26,527 MMCF and 13,990 MMCF for the years ended December 31, 1999, 1998 and
1997, respectively. Hedged oil and condensate volumes were 2,075,000
barrels, 392,900 barrels and 949,000 barrels for 1999, 1998 and 1997,
respectively. The aggregate gains (losses) under energy swap agreements
were $(8,684,000), $6,305,000 and $(7,439,000), respectively, for the years
ended December 31, 1999, 1998 and 1997 and were accounted for as increases
(reductions) to oil and gas sales.
(3) Production costs were converted to common units of measure using a
conversion ratio of one barrel of oil to six MCF of natural gas and one
long ton of sulfur to 15 MCF of natural gas. Such production costs exclude
all depreciation, depletion and provision for impairment associated with
property and equipment.
18
PRODUCTIVE WELLS
The following summarizes total gross and net productive wells of Forest and
its subsidiaries at December 31, 1999:
Productive Wells (1)
---------------------------
United States Canada
--------------- --------
Gross (2)
Gas 351 245
Oil 56 286
--- ---
Totals (3) 407 531
=== ===
Net (4)
Gas 164 124
Oil 27 211
--- ---
Totals 191 335
=== ===
(1) Productive wells are producing wells and wells capable of production,
including wells that are shut-in.
(2) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest
is owned.
(3) Includes 27 dual completions in the United States and six dual
completions in Canada. Dual completions are counted as one well. If one
completion is an oil completion, the well is classified as an oil well.
(4) A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells is
the sum of the fractional working interests owned in gross wells
expressed as whole numbers and fractions thereof.
19
DEVELOPED AND UNDEVELOPED ACREAGE
Forest and its subsidiaries held acreage as set forth below at December 31,
1999 and 1998. A majority of the developed acreage is subject to mortgage
liens securing our bank indebtedness. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 3 of Notes
to Consolidated Financial Statements.
Developed Acreage (1) Undeveloped Acreage (2)
------------------------ --------------------------
Gross (3) Net (4) Gross (3) Net (4)
--------- -------- ----------- --------
United States:
Louisiana offshore 112,947 48,587 51,134 38,472
Texas onshore 52,987 15,901 30,120 12,227
Texas offshore 36,382 23,444 54,937 30,444
Oklahoma 23,438 3,956 5,570 2,278
Wyoming 5,661 3,351 94,959 55,911
Other 19,016 9,680 9,099 5,362
---------- ---------- ---------- ----------
250,431 104,919 245,819 144,694
Canada:
Alberta 243,101 111,855 309,093 171,308
Ontario 10,707 5,354 153,799 76,899
Northwest Territories - - 718,166 345,022
Beaufort Sea - - 384,746 7,258
British Columbia offshore - - 112,308 112,308
Other 32,011 21,252 91,692 44,505
---------- ---------- ---------- ----------
285,819 138,461 1,769,804 757,300
Other:
South Africa - - 12,980,000 8,177,400
Switzerland - - 1,851,000 1,665,900
Tunisia - - 2,212,000 1,548,400
Germany - - 1,369,000 1,369,000
Albania - - 1,009,000 302,700
Italy - - 820,000 820,000
Romania - - 767,000 767,000
Thailand - - 730,000 730,000
---------- ---------- ---------- ----------
- - 21,738,000 15,380,400
---------- ---------- ---------- ----------
Total acreage at December 31, 1999 536,250 243,380 23,753,623 16,282,394
========== ========== ========== ==========
Total acreage at December 31, 1998 604,468 275,486 21,219,541 17,980,782
========== ========== ========== ==========
(1) Developed acres are those acres which are spaced or assigned to
productive wells.
(2) Undeveloped acres are considered to be those acres on which wells have
not been drilled or completed to a point that would permit the production
of commercial quantities of oil or natural gas, regardless of whether
such acreage contains proved reserves. It should not be confused with
undrilled acreage held by production under the terms of a lease.
(3) A gross acre is an acre in which a working interest is owned. The number
of gross acres is the total number of acres in which a working interest
is owned.
(4) A net acre is deemed to exist when the sum of the fractional ownership
working interests in gross acres equals one. The number of net acres is
the sum of the fractional working interests owned in gross acres
expressed as whole numbers and fractions thereof.
20
During 1999, Forest's gross and net developed acreage decreased approximately
11% and 12%, respectively, as a result of sales of producing properties and
lease expirations. Gross undeveloped acreage increased approximately 12% due
primarily to the addition of acreage in South Africa, offset partially by
relinquishment of acreage in Switzerland. Net undeveloped acreage decreased
9% due primarily to the relinquishment of acreage in Switzerland.
Approximately 14% of our net undeveloped acreage at December 31, 1999 is
under leases that have terms expiring in 2000, if not held by production, and
approximately 9% of net undeveloped acreage will expire in 2001 if not also
held by production.
DRILLING ACTIVITY
Forest and its subsidiaries owned interests in gross and net exploratory and
development wells for the years ended December 31, 1999, 1998 and 1997 as set
forth below. This information does not include wells drilled under farmout
agreements.
United States Canada
---------------------- ---------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Gross Exploratory Wells:
Dry (1) 3 6 4 5 7 5
Productive (2) 13 7 8 1 2 7
---- ---- ---- ---- ---- ----
16 13 12 6 9 12
==== ==== ==== ==== ==== ====
Net Exploratory Wells:(3)
Dry (1) 1.7 4.3 1.4 2.4 5.6 3.9
Productive (2) 5.7 4.7 4.0 1.0 .7 5.3
---- ---- ---- ---- ---- ----
7.4 9.0 5.4 3.4 6.3 9.2
==== ==== ==== ==== ==== ====
Gross Development Wells:
Dry (1) - - 5 - 2 15
Productive (2) 6 9 13 8 14 31
---- ---- ---- ---- ---- ----
6 9 18 8 16 46
==== ==== ==== ==== ==== ====
Net Development Wells:(3)
Dry (1) - - .7 - 2.0 10.6
Productive (2) 3.2 2.6 4.0 1.9 10.0 21.5
---- ---- ---- ---- ---- ----
3.2 2.6 4.7 1.9 12.0 32.1
==== ==== ==== ==== ==== ====
(1) A dry well (hole) is a well found to be incapable of producing either oil
or natural gas in sufficient quantities to justify completion as an oil
or natural gas well.
(2) Productive wells are producing wells and wells capable of production,
including wells that are shut-in.
(3) A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells is
the sum of the fractional working interests owned in gross wells
expressed as whole numbers and fractions thereof.
21
FARMOUT AGREEMENTS
Under a farmout agreement, outside parties undertake exploration activities
on prospects owned by Forest. This enables us to participate in the
exploration prospects without incurring additional capital costs, although
with a substantially reduced ownership interest in each prospect.
In 1999, one exploratory well was drilled in the United States under a
farmout agreement and was a dry hole. In Canada, two exploratory wells were
drilled in 1999 under farmout agreements. One well was productive and the
other was a dry hole.
PRESENT ACTIVITIES
At December 31, 1999 Forest and its subsidiaries had four exploratory wells
(2.4 net) and one development well (0.3 net) that were in the process of
being drilled. Of the four exploratory wells, one in Canada is still being
evaluated (0.3 net), one in Canada is still being drilled (0.4 net), one in
Canada was productive (0.7 net) and one in the United States was a dry hole
(1.0 net). The development well, which is in the United States, was
determined to be productive.
At December 31, 1999 Forest and its subsidiaries also had two exploratory
wells (0.9 net) and three development wells (0.9 net) under evaluation. Of
the two exploratory wells, which are in Canada, one was a dry hole (0.5 net)
and one was productive (0.4 net). One development well in the United States
(0.1 net) is still being evaluated and has not been completed. Two
development wells were in Canada, one of which was determined to be
productive (0.3 net) and the other is still being evaluated (0.5 net).
DELIVERY COMMITMENTS
A significant portion of Canadian Forest's natural gas production is sold
through the ProMark Netback Pool. At December 31, 1999 the ProMark Netback
Pool had entered into fixed price contracts to sell approximately 5.4 BCF of
natural gas in 2000 at an average price of $2.36 CDN per MCF and
approximately 5.3 BCF of natural gas in 2001 at an average price of
approximately $2.43 CDN per MCF. Canadian Forest, as one of the producers in
the ProMark Netback Pool, is obligated to deliver a portion of this gas. In
1999, Canadian Forest supplied 34% of the gas for the Netback Pool.
There are no long-term delivery commitments in the United States as of
December 31, 1999.
In addition to its commitments to the ProMark Netback Pool, Canadian Forest
is committed to sell an additional .4 BCF of natural gas in 2000 at a fixed
Alberta price of approximately $3.18 CDN per MCF and another .5 BCF of
natural gas in 2001 at a fixed Alberta price of approximately $3.30 CDN per
MCF.
22
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of business, is a party to various legal
actions. In the opinion of management, none of these actions, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS OF FOREST
The following information with respect to the executive officers of Forest is
furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Years with
Name Age Forest Office (A)
- ------------------- --- ----------- ----------
Robert S. Boswell 50 14 Chairman of the Board since March 2000.
Chief Executive Officer since December
1995 and President from November 1993
to March 2000. Chief Financial Officer
until December 1995. Member of the Board
of Directors since 1986. Chairman of
the Company's Executive Committee and
Nominating Committee. Director of
C.E. Franklin Ltd.
David H. Keyte 43 12 Executive Vice President and Chief
Financial Officer since November 1997.
Prior thereto Vice President and Chief
Financial Officer since December 1995.
Vice President and Chief Accounting
Officer from December 1993 until December
1995. Chairman of the Company's Employee
Benefits Committee.
Forest D. Dorn 45 22 Senior Vice President - Gulf Coast Region
since November 1997. Prior thereto Vice
President - Gulf Coast Region since August
1996. Vice President and General Business
Manager from December 1993 to August 1996.
Member of the Company's Employee Benefits
Committee.
Neal A. Stanley 52 3 Senior Vice President - Western Region since
November 1997. Vice President - Western
Region from August 1996 to November 1997.
Prior thereto President of Teton Oil and
Gas Corporation.
23
Years with
Name Age Forest Office (A)
- ------------------- --- ----------- ----------
James W. Knell 49 12 Vice President - Gulf Coast Region since
May 1999. Prior thereto Gulf Coast
Business Unit Manager since November
1997. Corporate Drilling and Production
Manager from December 1992 to November
1997.
Joan C. Sonnen 46 10 Vice President - Controller and Corporate
Secretary since May 1999. Prior thereto
Corporate Secretary since March 1999 and
Controller since December 1993. Member
of the Company's Employee Benefits
Committee.
Donald H. Stevens 47 2 Vice President - Capital Markets and Treasurer
since December 1998. Vice President - Capital
Markets and Strategic Initiatives from August
1997 to December 1998. Prior thereto Vice
President-Corporate Relations and Capital
Markets of Barrett Resources Corporation.
Director of FieldPoint Petroleum Corporation.
- ---------------
(A) The term of office of each officer is one year from the date of his or
her election immediately following the last annual meeting of
shareholders and until the officer's respective successor has been
elected and qualified or until his or her earlier death, resignation or
removal from office whichever occurs first. Each of the named persons has
held the office indicated since the last annual meeting of shareholders,
except as otherwise indicated.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
Forest Oil Corporation has one class of common equity securities outstanding,
its Common Stock, par value $.10 per share (Common Stock).
On February 29, 2000, the Company's 53,778,496 shares of Common Stock were
held by 1,466 holders of record.
Forest's Common Stock is listed on the New York Stock Exchange. The high and
low intraday sales prices of the Common Stock for each quarterly period of
the years presented are listed in the chart below. There were no dividends
declared on the Common Stock in 1998, 1999, or in the first quarter of 2000.
High Low
---- ---
1998: First Quarter $ 17-3/8 $ 13
Second Quarter 16-1/4 13-1/4
Third Quarter 14-3/4 8
Fourth Quarter 11-3/4 7-9/16
1999: First Quarter $ 8-15/16 $ 5-3/8
Second Quarter 13-9/16 7-1/2
Third Quarter 18-1/18 12-11/16
Fourth Quarter 16-7/8 9
2000: First Quarter (through March 17) $ 12-1/2 $ 7-1/4
DIVIDEND RESTRICTIONS
The restrictions on Forest's present or future ability to pay dividends are
(i) the provisions of the New York Business Corporation Law (NYBCL), (ii)
certain restrictive provisions in the Indentures executed in connection with
Canadian Forest's 8 3/4% Senior Subordinated Notes due September 15, 2007
which are guaranteed by Forest and Forest's 10 1/2% Senior Subordinated Notes
due 2006, and (iii) the Fourth Amended and Restated Credit Agreement dated
March 4, 1999 with The Chase Manhattan Bank, as agent for a group of banks,
under which Forest is restricted in amounts it may pay as dividends (other
than dividends payable in Common Stock). Under these restrictions, Forest was
not prohibited from paying cash dividends on its Common Stock as of March 17,
2000.
Forest has not paid dividends on its Common Stock during the past five years
and does not anticipate that it will do so in the foreseeable future. The
future payment of dividends, if any, on the Common Stock is within the
discretion of the Board of Directors and will depend on Forest's earnings,
capital requirements, financial condition and other relevant factors. There
is no assurance that Forest will pay any dividends. For further information
regarding the Company's equity securities and its ability to pay dividends on
its Common Stock, see Notes 3 and 7 of Notes to Consolidated Financial
Statements.
25
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data of
Forest on a historical basis as of and for each of the years in the five-year
period ended December 31, 1999. This data should be read in conjunction with
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto.
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands Except Per Share Amounts)
FINANCIAL DATA
Revenue:
Marketing and processing $ 166,283 151,079 184,399 187,374 -
Oil and gas sales 190,975 170,740 155,242 128,713 82,275
------- ------- ------- ------- -------
Total revenue $ 357,258 321,819 339,641 316,087 82,275
Earnings (loss) before extraordinary items $ 19,641 (197,786) 3,089 1,139 (17,996)
Net earnings (loss) $ 19,043 (191,590) (9,270) 3,305 (17,996)
Weighted average number of common shares outstanding 47,943 40,910 33,669 25,062 7,360
Net earnings (loss) attributable to common stock $ 19,043 (191,590) (9,459) 1,147 (20,156)
Basic earnings (loss) per share:
Earnings (loss) attributable to common stock
before extraordinary items $ .41 (4.83) .09 (.04) (2.74)
Extraordinary items (.01) .15 (.37) .09 -
------- ------- ------- ------- -------
Earnings (loss) attributable to common stock $ .40 (4.68) (.28) .05 (2.74)
Diluted earnings (loss) per share:
Earnings (loss) attributable to common
stock before extraordinary items $ .41 (4.83) .08 (.04) (2.74)
Extraordinary items (.01) .15 (.35) .09 -
------- ------- ------- ------- -------
Earnings (loss) attributable to common stock $ .40 (4.68) (.27) .05 (2.74)
Total assets $ 800,052 759,736 647,782 563,458 321,043
Long-term debt $ 371,680 505,450 254,760 168,859 193,879
Other long-term liabilities $ 23,213 24,267 51,787 53,560 27,139
Deferred revenue $ - - - 7,591 15,137
Shareholders' equity $ 318,984 168,991 261,827 242,443 44,297
26
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA (CONTINUED)
Years Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands Except Volumes and Prices)
OPERATING DATA
Annual production: (1)
Gas (MMCF) 61,702 62,310 49,035 42,496 33,342
Liquids (MBBLS) 4,397 4,269 3,207 2,749 1,173
Average price received:
Gas (per MCF) (2) $ 2.16 1.95 2.06 1.89 1.77
Liquids (per Barrel) $ 13.16 11.51 16.92 17.59 15.86
Capital expenditures, net of asset sales $ 104,612 461,452 147,130 234,556 44,913
Proved Reserves: (3)
Gas (MMCF) 525,007 564,264 378,315 334,180 231,890
Liquids (MBBLS) 32,127 35,069 24,636 24,014 10,467
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves (3) $ 650,093 522,831 439,570 559,869 256,917
- ------------------------------
(1) Amounts shown for 1997, 1996 and 1995 include amounts attributable to
required deliveries under volumetric production payments. See Note 4 of
Notes to Consolidated Financial Statements.
(2) Amounts shown for 1995 exclude the effects of a gas contract settlement.
Including such amount, the average sales price for 1995 was $1.90 per MCF.
(3) The 1998, 1997, 1996 and 1995 amounts include 100% of the reserves owned by
Saxon, a consolidated subsidiary in which the Company held a majority
interest in 1997, 1996 and 1995, but which was a wholly owned subsidiary as
of December 31, 1998. In June 1999, Saxon was liquidated into Canadian
Forest.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Forest's Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
Net earnings for 1999 were $19,043,000 compared to a net loss of $191,590,000
in 1998. The 1999 period included an extraordinary loss on extinguishment of
debt of $598,000, as well as a noncash gain on currency translation of
$10,561,000. The 1998 period included a writedown of oil and gas properties
of $175,000,000, net of related deferred taxes ($199,500,000 pre-tax), an
extraordinary gain on extinguishment of debt of $6,196,000 and a noncash loss
on currency translation of $8,320,000 related to subordinated debt issued by
a Canadian subsidiary. Exclusive of these items, net earnings would have been
$9,080,000 in 1999 compared to a net loss of $14,466,000 in 1998. The
improvement in earnings was due primarily to higher prices and lower
depletion expense.
The net loss for 1998 was $191,590,000 compared to a net loss of $9,270,000
in 1997. The loss for the 1997 period includes an extraordinary loss on
extinguishment of debt of $12,359,000, as well as a noncash loss on currency
translation of $4,051,000. Exclusive of the 1998 items mentioned above and
the 1997 extraordinary loss on extinguishment of debt and loss on
translation, the net loss would have been $14,466,000 in 1998 compared to net
income of $7,140,000 in 1997. Higher production volumes in 1998 were more
than offset by lower natural gas and liquids sales prices and higher interest
and depletion expense.
Marketing and processing revenue increased by 10% to $166,283,000 in 1999
from $151,079,000 in 1998 and the related marketing and processing expense
increased by 12% to $162,617,000 in 1999 from $144,758,000 in the previous
year. The gross margin reported for marketing and processing activities
decreased to $3,666,000 in 1999 from $6,321,000 in 1998. The decrease
resulted from the effects of an increasingly competitive market which caused
trading margins to tighten, and lower gas processing income due to the sale
of processing facilities in the first quarter of 1999. Marketing and
processing revenue decreased by 18% to $151,079,000 in 1998 from $184,399,000
in 1997 and the related marketing and processing expense decreased by 18% to
$144,758,000 in 1998 from $175,847,000 in the previous year. The gross margin
for marketing and processing activities decreased 26% to $6,321,000 in 1998
from $8,552,000 in 1997. The decrease resulted from lower volumes processed
and a decrease in product prices.
Oil and gas sales revenue increased by 12% to $190,175,000 in 1999 from
$170,040,000 in 1998 due primarily to higher natural gas and liquids prices.
The average sales prices received for natural gas and liquids in 1999
increased 11% and 14%, respectively, compared to the average sales prices
received in 1998. Production volumes for natural gas and liquids on an MCFE
basis were less than 1% higher in 1999 compared to 1998. Increases in natural
gas production in the Offshore Gulf of Mexico and in the Western region of
the United States were offset by declines in the Onshore Gulf Coast and in
Canada. The increases were attributable to 1998 discoveries in the Gulf of
Mexico and to a full year of operations for the Anschutz Ranch property
acquired in mid-1998. In the Onshore Gulf Coast region, production declines
were steeper than previously expected. Canadian production was affected by
delays in bringing new production online in the Northwest Territories and by
the effects of property dispositions.
Oil and gas sales revenue increased by 10% to $170,740,000 in 1998 from
$155,242,000 in 1997. Revenue from higher production volumes was partially
offset by lower prices received for both oil and natural gas. Production
volumes for natural gas in 1998 increased 27% from 1997. Production volumes
for liquids (consisting of oil, condensate and natural gas liquids) were 33%
higher in 1998 than in 1997. The increases in 1998 were due to Gulf of Mexico
discoveries and volumes attributable to producing properties acquired in
1998. The average sales price received for natural gas in 1998 decreased 5%
compared to the average sales price received in 1997. The average sales price
received for liquids production in 1998 decreased 32% compared to the average
sales price received during 1997.
28
Oil and gas production expense increased 10% to $46,279,000 in 1999 from
$41,983,000 in 1998, due primarily to non-recurring direct operating expenses
in the Onshore Gulf Coast Region and workovers in Canada. On an MCFE basis,
production expense was $.53 per MCFE in 1999 compared to $.48 in 1998. The
increase in the per-unit expense is attributable to higher costs being spread
over essentially the same production base.
Oil and gas production expense of $41,983,000 in 1998 increased 16% from
$36,284,000 in 1997. The 1998 period includes additional production expense
related to acquired properties. On an MCFE basis, production expense
decreased 9% to $.48 per MCFE in 1998 compared to $.53 in 1997. The decrease
is due primarily to lower per-unit costs related to certain 1998 property
acquisitions as well as offshore fixed costs being spread over a larger
production base. The decrease was partially offset by the effects of
significant expensed workovers in the Onshore Gulf Coast Region.
The production volumes, weighted average sales prices and production expenses
for the years ended December 31, 1999, 1998 and 1997 for Forest and its
subsidiaries were as follows:
Year Ended December 31, 1999
--------------------------------------------------------------------------
Offshore Onshore Western Total
Gulf of Gulf United United Total
Mexico Coast States States Canada Company
---------- -------- ------- --------- -------- ---------
NATURAL GAS
Production (MMCF) 28,471 10,670 10,138 49,279 12,423 61,702
Sales price received (per MCF) $ 2.35 2.33 2.07 2.28 1.61 2.15
Effects of energy swaps (per
MCF) (1) .02 .03 .04 .03 (.07) .01
------- ------- ------- ------- ------- -------
Average sales price (per MCF) $ 2.37 2.36 2.11 2.31 1.54 2.16
LIQUIDS
Oil and condensate:
Production (MBBLS) 918 867 200 1,985 1,254 3,239
Sales price received (per BBL) $ 15.99 18.18 18.31 17.18 16.80 17.03
Effects of energy swaps (per
BBL) (1) (2.64) (3.80) (2.25) (3.11) (2.37) (2.82)
------- ------- ------- ------- ------- -------
Average sales price (per BBL) $ 13.35 14.38 16.06 14.07 14.43 14.21
Natural gas liquids:
Production (MBBLS) 1 178 548 727 431 1,158
Average sales price (per BBL) $ 11.00 9.34 10.15 9.95 10.70 10.23
Total liquids production (MBBLS) 919 1,045 748 2,712 1,685 4,397
Average sales price (per BBL) $ 13.35 13.52 11.73 12.97 13.48 13.16
TOTAL PRODUCTION
Production volumes (MMCFE) 33,985 16,940 14,626 65,551 22,533 88,084
Average sales price (per MCFE) $ 2.35 2.32 2.06 2.28 1.86 2.16
Operating expense (per MCFE) .38 .85 .42 .51 .58 .53
------- ------- ------- ------- ------- -------
Netback (per MCFE) $ 1.97 1.47 1.64 1.77 1.28 1.63
======= ======= ======= ======= ======= =======
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
32,481 MMCF and hedged oil and condensate volumes were 2,075,000
barrels. The aggregate net loss under energy swap agreements was
$8,684,000 for the period and was accounted for as a reduction of oil
and gas sales.
29
Year Ended December 31, 1998
-----------------------------------------------------------------------
Offshore Onshore Western Total
Gulf of Gulf United United Total
Mexico Coast States States Canada Company
---------- --------- ------- -------- ------ --------
NATURAL GAS
Production (MMCF) 26,521 12,883 7,990 47,394 14,916 62,310
Sales price received (per MCF) $ 2.12 2.16 1.92 2.10 1.23 1.89
Effects of energy swaps (per
MCF) (1) .08 .15 .03 .09 (.02) .06
------ ------ ------ ------ ------ ------
Average sales price (per MCF) $ 2.20 2.31 1.95 2.19 1.21 1.95
LIQUIDS
Oil and condensate:
Production (MBBLS) 903 794 222 1,919 1,389 3,308
Sales price received (per BBL) $ 11.50 12.69 13.00 12.16 11.95 12.07
Effects of energy swaps (per
BBL) (1) .95 - - .45 1.06 .71
------ ------ ------ ------ ------ ------
Average sales price (per BBL) $ 12.45 12.69 13.00 12.61 13.01 12.78
Natural gas liquids:
Production (MBBLS) 4 167 315 486 475 961
Average sales price (per BBL) $ 9.00 8.45 6.21 7.00 7.25 7.13
Total liquids production (MBBLS) 907 961 537 2,405 1,864 4,269
Average sales price (per BBL) $ 12.44 11.96 9.01 11.48 11.54 11.51
TOTAL PRODUCTION
Production volumes (MMCFE) 31,963 18,649 11,212 61,824 26,100 87,924
Average sales price (per MCFE) $ 2.18 2.21 1.82 2.12 1.51 1.94
Operating expense (per MCFE) .37 .67 .49 .48 .46 .48
------ ------ ------ ------ ------ ------
Netback (per MCFE) $ 1.81 1.54 1.33 1.64 1.05 1.46
====== ====== ====== ====== ====== ======
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
26,527 MMCF and hedged oil and condensate volumes were 392,900 barrels.
The aggregate net gain under energy swap agreements was $6,305,000 for
the period and was accounted for as an increase to oil and gas sales.
30
Year Ended December 31, 1997
------------------------------------------------------------------------
Offshore Onshore Western Total
Gulf of Gulf United United Total
Mexico Coast States States Canada Company
---------- --------- ---------- --------- --------- ----------
NATURAL GAS
Production (MMCF) (1) 26,515 4,868 2,635 34,018 15,017 49,035
Sales price received (per MCF) $ 2.60 2.27 2.32 2.53 1.46 2.20
Effects of energy swaps (per
MCF) (2) (.26) - - (.21) - (.14)
------ ------ ------ ------ ------ ------
Average sales price (per MCF) $ 2.34 2.27 2.32 2.32 1.46 2.06
LIQUIDS
Oil and condensate:
Production (MBBLS) 936 91 110 1,137 1,498 2,635
Sales price received (per BBL) $ 17.87 19.84 19.63 18.20 18.07 18.13
Effects of energy swaps (per
BBL) (2) (.28) - - (.23) (.08) (.15)
------ ------ ------ ------ ------ ------
Average sales price (per BBL) $ 17.59 19.84 19.63 17.97 17.99 17.98
Natural gas liquids:
Production (MBBLS) - 121 9 130 442 572
Average sales price (per BBL) $ - 10.55 11.56 10.62 12.42 12.01
Total liquids production (MBBLS) 936 212 119 1,267 1,940 3,207
Average sales price (per BBL) $ 17.59 14.54 19.02 17.21 16.72 16.92
TOTAL PRODUCTION
Production volumes (MMCFE) 32,131 6,140 3,349 41,620 26,657 68,277
Average sales price (per MCFE) $ 2.44 2.29 2.51 2.42 2.04 2.27
Operating expense (per MCFE) .42 .63 1.02 .50 .58 .53
------ ------ ------ ------ ------ ------
Netback (per MCFE) $ 2.02 1.66 1.49 1.92 1.46 1.74
====== ====== ====== ====== ====== ======
(1) Total natural gas production includes scheduled deliveries under
volumetric production payments, net of royalties, of 801 MMCF. Natural
gas delivered pursuant to volumetric production payment agreements
represented approximately 2% of total natural gas production. On June
30, 1997 the Company repurchased its last remaining volumetric
production payment.
(2) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
13,990 MMCF and hedged oil and condensate volumes were 949,000 barrels.
The aggregate net loss under energy swap agreements was $7,439,000 for
the period and was accounted for as a reduction of oil and gas sales.
31
General and administrative expense decreased 23% to $15,362,000 in 1999
compared to $19,849,000 in 1998. The 1998 period included approximately
$1,500,000 of non-recurring expenses of a Canadian subsidiary, Saxon
Petroleum, Inc., as a result of its decision to investigate strategic
alternatives, whereas the 1999 period reflects the efficiencies achieved by
combining Saxon's operations with those of Canadian Forest. General and
administrative expense increased 18% to $19,849,000 in 1998 compared to
$16,864,000 in 1997. There were higher employee related costs in the 1998
period as a result of increased headcount and costs related to 1998 property
acquisitions, as well as the non-recurring expenses incurred by Saxon. These
increases were partially offset by a premium refund in the first quarter of
1998 which lowered insurance costs.
Total overhead costs (capitalized and expensed general and administrative
costs) were $24,235,000 in 1999, $27,996,000 in 1998 and $24,993,000 in 1997.
Total overhead costs decreased by 13% in 1999 compared to 1998 and increased
by 12% in 1998 compared to 1997. The following table summarizes total
overhead costs incurred during the periods:
Years Ended December 31,
---------------------------------
1999 1998 1997
------ ------ ------
(In Thousands)
Overhead costs capitalized $ 8,873 8,117 8,129
General and administrative costs expensed (1) 15,362 19,849 16,864
------ ------ ------
Total overhead costs $ 24,235 27,966 24,993
====== ====== ======
Number of salaried employees at end of year (2) 207 211 218
====== ====== ======
(1) Includes $2,059,000, $2,819,000 and $2,992,000 in 1999, 1998 and 1997,
respectively, related to marketing and processing operations.
(2) Includes the employees of Saxon in 1997.
Depreciation and depletion expense decreased 12% to $88,190,000 in 1999 from
$100,105,000 in 1998 due to a lower per-unit rate. The depletion rate
decreased to $.96 per MCFE in 1999 compared to $1.10 per MCFE in 1998. This
decline is attributable to favorable per-unit costs associated with 1998
acquisitions and Gulf of Mexico discoveries, as well as to writedowns of oil
and gas properties in the third and fourth quarters of 1998. Depreciation and
depletion expense increased 25% to $100,105,000 in 1998 from $79,991,000 in
1997 due to higher production, slightly offset by a lower per-unit expense.
The depletion rate decreased to $1.10 per MCFE in 1998 compared to $1.12 per
MCFE in 1997. The lower depletion rate during 1998 is attributable to
favorable per-unit costs associated with 1998 acquisitions and offshore Gulf
of Mexico discoveries, as well as to the effects of the writedown of oil and
gas properties in the third quarter of 1998.
At December 31, 1999 Forest had undeveloped properties with a cost basis of
approximately $54,545,000 in the U.S. and $39,580,000 in Canada which were
not subject to depletion, compared to $58,609,000 in the U.S. and $26,443,000
in Canada at December 31, 1998 and $41,226,000 in the U.S. and $19,675,000 in
Canada at December 31, 1997. The increase in 1999 is due primarily to wells
in progress in Canada. The increase in 1998 compared to 1997 is attributable
primarily to undeveloped acreage acquired onshore Louisiana, reduced by
undeveloped property impairments. At December 31, 1999 the Company also had
approximately $21,493,000 of costs related to international interests. These
costs are not being depleted pending establishment of proved reserves.
In the third and fourth quarters of 1998, Forest recorded writedowns of its
oil and gas properties pursuant to the ceiling test limitation prescribed by
the Securities and Exchange Commission for companies using the full cost
method of accounting. The writedowns totaled $175,000,000 ($199,500,000
pre-tax) and were primarily a result of declining oil and gas prices.
32
Additional writedowns of the full cost pools in the United States and Canada
may be required if prices decline, undeveloped property values decrease,
estimated proved reserve volumes are revised downward or costs incurred in
exploration, development, or acquisition activities in the respective full
cost pools exceed the discounted future net cash flows from the additional
reserves, if any, attributable to each of the cost pools. The average spot
price received for natural gas produced in the Gulf Coast increased from
$2.33 per MCF at December 31, 1999 to approximately $2.74 per MCF at March 1,
2000. The average price received for natural gas produced in Canada increased
from $2.65 CDN per MMBTU at December 31, 1999 to approximately $2.89 CDN per
MMBTU at March 1, 2000. The NYMEX price for crude oil was $25.60 per barrel
at December 31, 1999 and was $31.77 per barrel at March 1, 2000.
Other income of $2,629,000 in 1999 included a gain of approximately
$2,500,000 from the sale of gas processing facilities in the first quarter of
1999. Other income of $8,078,000 in 1998 included approximately $6,600,000
(before tax) relating to a gas contract settlement in Canada and $1,400,000
of death benefits received under a life insurance policy covering a former
executive officer. Other income of $1,181,000 in 1997 included approximately
$2,100,000 of accrued royalties reversed as a result of court decisions in
Oklahoma; income of approximately $595,000 recognized by Canadian Forest
following resolution of prior year crown royalty issues; and approximately
$1,400,000 of expense recorded in the United States as a result of a market
value adjustment to the carrying value of land purchased in 1982.
Interest expense of $40,873,000 in 1999 increased $1,887,000 or 5% compared
to 1998 due primarily to the issuance of the 10 1/2% Senior Subordinated
Notes due 2006 (the 10 1/2% Notes), partially offset by lower bank debt
balances. Interest expense of $38,986,000 in 1998 increased $17,583,000 or
82% compared to 1997 due primarily to higher levels of outstanding bank debt
and subordinated debt.
The foreign currency translation gains (losses) were $10,561,000 in 1999,
$(8,320,000) in 1998 and $(4,051,000) in 1997. Foreign currency translation
gains and losses relate to translation of the 8 3/4% Notes issued by Canadian
Forest, and are attributable to the increases and decreases in the value of
the Canadian dollar relative to the U.S. dollar during the period. The value
of the Canadian dollar was $.6924 per $1.00 U.S. at December 31, 1999
compared to $.6535 at December 31, 1998 and $.6992 at December 31, 1997.
Forest is required to recognize the noncash foreign currency translation
gains or losses related to the 8 3/4% Notes because the debt is denominated
in U.S. dollars and the functional currency of Canadian Forest is the
Canadian dollar.
The extraordinary loss on extinguishment of debt of $598,000 in 1999 resulted
from redemption of $8,631,000 remaining principal amount of 11 1/4% Senior
Subordinated Notes at 103.792% of par value. The extraordinary gain on
extinguishment of debt in 1998 resulted from settlement of Forest's remaining
nonrecourse production payment obligation in exchange for 271,214 shares of
the Company's Common Stock valued at $3,750,000. The obligation had a
remaining book value of approximately $9,966,000 when it was settled and we
recorded an extraordinary gain on extinguishment of debt of $6,196,000 after
related expenses. The extraordinary loss on the extinguishment of debt in
1997 of $12,359,000 relates to the tender offer for our 11 1/4% Notes.
LIQUIDITY AND CAPITAL RESOURCES
Forest has historically addressed its long-term liquidity needs through the
issuance of debt and equity securities, when market conditions permit, and
through the use of bank credit facilities and cash provided by operating
activities. During 1999, we completed several transactions that improved our
financial position.
- - In February 1999 we issued, at 98.811% of par, $100,000,000 of 10 1/2%
Notes. The net proceeds were used to reduce indebtedness under our global
credit facility.
33
- - In August 1999 we sold 9,000,000 shares of Common Stock in a public
offering for $15.4375 per share. The net proceeds were used to fund
exploration and development activities in the Northwest Territories and
other core areas, and for general corporate purposes. The remaining
proceeds were used to reduce indebtedness under our global credit
facility.
- - In September 1999 we redeemed the remaining $8,631,000 principal amount
of 11 1/4% Senior Subordinated Notes at 103.792% of par. As a result of
this redemption, we recorded an extraordinary loss on extinguishment of
debt of $598,000 in the third quarter of 1999.
We continue to examine alternative sources of long-term capital, including
bank borrowings, the issuance of debt instruments, the sale of common stock,
preferred stock or other equity securities of Forest, the issuance of net
profits interests, sales of non-strategic assets, prospects and technical
information, and joint venture financing. Availability of these sources of
capital and, therefore, our ability to execute our operating strategy will
depend upon a number of factors, some of which are beyond Forest's control.
In addition, the prices we receive for future oil and natural gas production
and the level of production will significantly impact future operating cash
flows. No prediction can be made as to the prices we will receive for our
future oil and gas production. Additionally, we have four offshore Gulf of
Mexico wells whose combined production currently represents approximately 23%
of our consolidated daily deliverability. Our production, revenue and cash
flow could be adversely affected if production from these properties
decreases significantly.
STOCK PURCHASE PROGRAMS. In March 2000 we announced that we plan to
repurchase shares of Forest's securities in the open market from time to time
in a total amount not to exceed $25,000,000. We also announced a stock
buyback program pursuant to which we will purchase shares of Forest's common
stock from holders of fewer than 100 shares.
BANK CREDIT FACILITIES. Forest and its subsidiaries, Canadian Forest and
ProMark, have a $300,000,000 global credit facility which currently provides
for a global borrowing base of $250,000,000 through a syndicate of banks led
by The Chase Manhattan Bank and The Chase Manhattan Bank of Canada. The
maximum credit facility allocations in the United States and Canada are
currently $200,000,000 and $50,000,000, respectively. The borrowing base is
subject to semi-annual redeterminations. Funds borrowed under the global
credit facility can be used for general corporate purposes. Under the terms
of the global credit facility, Forest, Canadian Forest and ProMark are
subject to certain covenants and financial tests, including restrictions or
requirements with respect to cash dividends, working capital, cash flow,
additional debt, liens, asset sales, investments, mergers and reporting
responsibilities.
The global credit facility is secured by a lien on, and a security interest
in, a portion of our proved oil and gas properties in the United States,
related assets, pledges of accounts receivable, and a pledge of 66% of the
capital stock of Canadian Forest. The global credit facility is also
indirectly secured by substantially all of the assets of Canadian Forest. We
may increase the number of properties that are pledged under the facility.
At December 31, 1999, the outstanding borrowings under the global credit
facility were $39,500,000 in the United States and $33,235,000 in Canada. At
March 17, 2000, the outstanding borrowings were $53,500,000 in the United
States and $40,319,000 in Canada, with an average effective interest rate of
6.9%. At March 17, 2000 Forest had also used the global credit facility for
letters of credit in the amount of $775,000 in the United States and
$1,137,000 CDN in Canada.
WORKING CAPITAL. Forest had a working capital deficit of approximately
$14,817,000 at December 31, 1999 compared to a working capital surplus of
approximately $348,000 at December 31, 1998. The decrease in working capital
is due primarily to an increase in payables related to exploration and
development activities in the fourth quarter of 1999 compared to the
corresponding period in 1998. Periodically, Forest reports working capital
deficits at the end of a period. Such working capital deficits are
principally the result of accounts payable for capitalized exploration and
development costs. Settlement of these payables is funded by cash flow from
operations or, if necessary, by drawdowns on long-term bank credit
facilities. For cash management purposes, drawdowns on the credit facilities
are not made until the due dates of the payables.
34
CASH FLOW. Historically, one of Forest's primary sources of capital has been
net cash provided by operating activities. Net cash provided by operating
activities increased to $110,513,000 in 1999 compared to $89,444,000 in 1998.
The 1999 period included higher production revenue due to higher oil and gas
prices and additional funds provided by net working capital changes. We used
$105,646,000 for investing activities in 1999 compared to $365,294,000 in
1998. Cash used in the 1998 period was greater than cash used in the 1999
period due primarily to the acquisitions of our onshore Louisiana properties.
Cash used by financing activities in 1999 was $5,139,000 compared to cash
provided by financing activities of $260,954,000 in 1998. The 1999 period
included net proceeds of $98,561,000 from the issuance of the 10 1/2% Notes
and net proceeds of $131,188,000 from the issuance of common stock, offset by
net repayments of bank borrowings of $225,765,000. The 1998 period included
net bank borrowings of $187,620,000 and net proceeds of $74,589,000 from the
issuance of the 8 3/4% Notes.
Net cash provided by operating activities increased to $89,444,000 in 1998
compared to $60,535,000 in 1997. The 1998 period included higher production
revenue and proceeds related to settlement of a Canadian gas purchase
contract, offset by lower oil and natural gas prices and higher interest
costs. The 1997 period included payment related to settlement of a volumetric
production payment obligation. We used $365,294,000 for investing activities
in 1998 compared to $151,638,000 in 1997. The increase in cash used in the
1998 period is due primarily to the acquisition of properties onshore in
Louisiana. Cash provided by financing activities in 1998 was $260,954,000
compared to $101,233,000 in 1997. The 1998 period included $74,589,000 of
proceeds from the issuance of 8 3/4% Notes and net drawdowns on credit
facilities of approximately $187,620,000. The 1997 period included
approximately $121,479,000 of proceeds from the issuance of 8 3/4% Notes,
$30,100,000 of proceeds from the exercise of a warrant by Anschutz and
approximately $53,059,000 of net drawdowns on the credit facilities, offset
by approximately $100,303,000 used for the redemption of 11 1/4% Notes.
CAPITAL EXPENDITURES. Expenditures for property acquisition, exploration and
development for the past three years were as follows:
Years Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Property acquisition costs (1):
Proved properties $ 1,043 290,915 7,499
Undeveloped properties 1,200 48,249 880
------- ------- -------
2,243 339,164 8,379
Exploration costs:
Direct costs 61,978 57,149 61,851
Overhead capitalized 3,789 3,265 3,587
------- ------- -------
65,767 60,414 65,438
Development costs:
Direct costs 49,259 65,721 77,836
Overhead capitalized 5,084 4,852 4,542
------- ------- -------
54,343 70,573 82,378
------- ------- -------
$ 122,353 470,151 156,195
======= ======= =======
(1) 1998 amounts consist primarily of oil and gas properties acquired onshore
Louisiana and from Anschutz.
35
Forest's anticipated expenditures for exploration and development in 2000 are
approximately $116,000,000, including capitalized overhead of approximately
$9,000,000. We intend to meet our 2000 capital expenditure financing
requirements using cash flows generated by operations, sales of non-strategic
assets and, if necessary, borrowings under existing lines of credit. There
can be no assurance, however, that we will have access to sufficient capital
to meet these capital requirements. The planned levels of capital
expenditures could be reduced if we experience lower than anticipated net
cash provided by operations or other liquidity needs, or could be increased
if we experience increased cash flow or access additional sources of capital.
In addition, while Forest intends to continue a strategy of acquiring
reserves that meet our investment criteria, no assurance can be given that we
can locate or finance any property acquisitions.
DISPOSITIONS OF NON-STRATEGIC ASSETS. As a part of our ongoing operations, we
dispose of non-strategic assets. Assets with little value or which are not
consistent with our operating strategy are identified for sale or trade. At
the present time, Forest is offering for sale certain properties in each of
our operating regions.
During 1999, Forest disposed of properties with estimated proved reserves of
approximately 7.7 BCF of natural gas and 956,000 barrels of oil for total net
proceeds of $8,756,000. Also during 1999, we disposed of gas processing
facilities for net proceeds of $7,174,000 and disposed of a long-term
investment for net proceeds of $4,565,000. During 1998, we disposed of
properties with estimated proved reserves of approximately 6.2 BCF of natural
gas and 2,440,000 barrels of oil for total net proceeds of $10,302,000.
Properties with estimated proved reserves of approximately 4.1 BCF of natural
gas and 257,000 barrels of oil were disposed of in 1997 for total net
proceeds of $9,669,000.
INVESTMENT IN SAXON PETROLEUM INC. In August 1998, we acquired all of the
outstanding common shares of Saxon Petroleum Inc. not previously owned by us
in exchange for 1,081,256 shares of Forest common stock. In October 1998,
ownership of Saxon was transferred from Forest to its wholly owned
subsidiary, Canadian Forest. In June 1999, Saxon was liquidated into Canadian
Forest.
RECENT ACCOUNTING PRONOUNCEMENT. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (Statement No.
133), effective beginning with the first quarter of fiscal years beginning
after June 30, 2000. Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company has not determined the impact Statement No. 133 will have on its
financial statements and believes that such determination will not be
meaningful until closer to the date of initial adoption.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Forest is exposed to market risk, including the effects of adverse changes in
commodity prices, foreign currency exchange rates and interest rates as
discussed below.
COMMODITY PRICE RISK
Forest produces and sells natural gas, crude oil and natural gas liquids for
its own account in the United States and Canada and, through ProMark, its
marketing subsidiary, markets natural gas for third parties in Canada. As a
result, our financial results are affected when prices for these commodities
fluctuate. Such effects can be significant. In order to manage commodity
prices and to reduce the impact of fluctuations in prices, we enter into
long-term contracts and use a hedging strategy. Under our hedging strategy,
Forest enters into energy swaps and other financial instruments. We use the
hedge or deferral method of accounting for these activities and, as a result,
gains and losses on the related instruments are generally offset by similar
changes in the realized prices of the commodities. ProMark also enters into
trading activities on a limited basis in Canada.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's natural
gas production is sold through the ProMark Netback Pool. At December 31, 1999
the ProMark Netback Pool had entered into fixed price contracts to sell
approximately 5.4 BCF of natural gas in 2000 at an average price of $2.36 CDN
per MCF and approximately 5.3 BCF of natural gas in 2001 at an average price
of approximately $2.43 CDN per MCF. Canadian Forest, as one of the producers
in the ProMark Netback Pool, is obligated to deliver a portion of this gas.
In 1999 Canadian Forest supplied 34% of the gas for the Netback Pool.
In addition to its commitments to the ProMark Netback Pool, Canadian Forest
is committed to sell .4 BCF of natural gas in 2000 at a fixed price of
approximately $3.18 CDN per MCF and .5 BCF of natural gas in 2001 at a fixed
price of approximately $3.30 CDN per MCF.
HEDGING PROGRAM. In a typical swap agreement, Forest receives the difference
between a fixed price per unit of production and a price based on an agreed
upon third-party index if the index price is lower. If the index price is
higher, Forest pays the difference. Our current swaps are settled on a
monthly basis. As of March 17, 2000 Forest had the following swaps in place:
Natural Gas Oil
------------------------- ----------------------------
Average Average
BBTU's Hedged Price Barrels Hedged Price
per Day per MMBTU per Day per BBL
------- ------------ -------- -------------
2000 59.4 $ 2.51 2,281 $ 20.53
2001 21.7 $ 2.45 - $ -
2002 16.7 $ 2.48 - $ -
In addition, the Company utilizes collars that establish a price between a
floor and ceiling to hedge natural gas and oil prices. As of March 17, 2000
Forest had collars in place for 2000 covering 5.8 BBTU's of natural gas per
day with an average floor price of $2.79 per MMBTU and an average ceiling
price of $3.03 per MMBTU, and 3,500 barrels of oil per day with an average
floor price of $18.19 per barrel and an average ceiling price of $20.93 per
barrel.
The Company also uses basis swaps in connection with natural gas swaps to fix
the differential price between the NYMEX price and the index price at which
the hedged gas is sold. At March 17, 2000 there were basis swaps in place
with weighted average volumes of 42,091 MMBTU's per day in 2000 and 14,151
MMBTU's per day in 2001.
37
TRADING ACTIVITIES. In addition to operating the ProMark Netback Pool and
managing gas supply for customers on a fee-for-service basis, ProMark also
buys and sells natural gas in its trading operations. Profits or losses
generated by trading are based on the spread between the prices of natural
gas purchased and sold. ProMark follows procedures to offset its gas purchase
or sales commitments with gas purchase or sales contracts, thereby limiting
its exposure to price risk. At December 31, 1999, ProMark's trading
operations had contracts to purchase an aggregate of 5.7 BCF of natural gas
in 2000 at an average price of $2.96 CDN per MCF and had contracts to sell an
aggregate of 5.7 BCF of natural gas in 2000 at an average price of $2.97 CDN
per MCF.
FOREIGN CURRENCY EXCHANGE RISK
Forest conducts business in several foreign currencies and thus is subject to
foreign currency exchange rate risk on cash flows related to sales, expenses,
financing and investing transactions. In the past, we have not entered into
any foreign currency forward contracts or other similar financial instruments
to manage this risk.
CANADA. The Canadian dollar is the functional currency of Canadian Forest. As
a result, Canadian Forest is exposed to foreign currency translation risk
related to translation of the principal amount of the 8 3/4% Notes issued by
it in late 1997 and early 1998 because these notes are denominated in U.S.
dollars. The $200,000,000 principal amount of the debt is due in 2007.
OPERATIONS OUTSIDE OF NORTH AMERICA. The foreign concessions held by Forest
are in relatively early stages of exploratory activities. Expenditures
incurred relative to these interests subsequent to their acquisition have
been primarily U.S. dollar-denominated.
INTEREST RATE RISK
At the present time, Forest has no financial instruments in place to manage
the impact of changes in interest rates. Therefore, our exposure to changes
in interest rates results from short-term and long-term debt with both fixed
and floating interest rates. The following table presents principal or
notional amounts and related average interest rates by year of maturity for
Forest's debt obligations at December 31, 1999:
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollar Amounts In Thousands)
Bank credit facilities:
Variable rate $ - 72,735 - - - - 72,735 72,735
Average interest rate - 6.92% - - - - 6.92%
Long-term debt:
Fixed rate $ - - - - - 298,945 298,945 287,250
Average interest rate - - - - - 9.33% 9.33%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning this Item begins on the following page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Forest Oil Corporation:
We have audited the accompanying consolidated balance sheets of Forest Oil
Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forest
Oil Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
February 11, 2000
39
FOREST OIL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1999 1998
-------- --------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,155 3,415
Accounts receivable 64,719 55,587
Other current assets 3,484 2,374
------- -------
Total current assets 71,358 61,376
Net property and equipment, at cost, full cost method (Note 3) 697,616 663,310
Goodwill and other intangible assets, net 22,092 22,689
Other assets 8,986 12,361
------- -------
$ 800,052 759,736
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72,589 49,389
Accrued interest 10,105 9,970
Other current liabilities 3,481 1,669
------- -------
Total current liabilities 86,175 61,028
Long-term debt (Notes 2, 3 and 15) 371,680 505,450
Other liabilities 14,262 16,181
Deferred income taxes (Note 5) 8,951 8,086
Shareholders' equity (Notes 2, 3 and 7)
Common stock, 53,809,159 shares (44,647,297 shares in 1998) 5,381 4,465
Capital surplus 721,832 589,972
Accumulated deficit (396,007) (415,050)
Accumulated other comprehensive loss (11,774) (9,948)
Treasury stock, at cost, 31,062 shares in 1999 and 1998 (448) (448)
------- -------
Total shareholders' equity 318,984 168,991
------- -------
$ 800,052 759,736
======= =======
See accompanying Notes to Consolidated Financial Statements.
40
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1999 1998 1997
------ ------ ------
(In Thousands Except Per Share Amounts)
Revenue:
Marketing and processing $166,283 151,079 184,399
Oil and gas sales:
Gas 133,094 121,615 100,993
Oil, condensate and natural gas liquids 57,881 49,125 54,249
------- ------- -------
Total oil and gas sales 190,975 170,740 155,242
------- ------- -------
Total revenue 357,258 321,819 339,641
Operating expenses:
Marketing and processing 162,617 144,758 175,847
Oil and gas production 46,279 41,983 36,284
General and administrative 15,362 19,849 16,864
Depreciation and depletion 88,190 100,105 79,991
Impairment of oil and gas properties - 199,500 -
------- ------- -------
Total operating expenses 312,448 506,195 308,986
------- ------- -------
Earnings (loss) from operations 44,810 (184,376) 30,655
Other income and expense:
Other income, net (2,629) (8,078) (1,181)
Interest expense 40,873 38,986 21,403
Translation (gain) loss on subordinated debt (Note 3) (10,561) 8,320 4,051
------- ------- -------
Total other income and expense 27,683 39,228 24,273
------- ------- -------
Earnings (loss) before income taxes and extraordinary items 17,127 (223,604) 6,382
Income tax expense (benefit) (Note 5):
Current (2,921) 1,272 707
Deferred 407 (27,090) 2,586
------- ------- -------
(2,514) (25,818) 3,293
------- ------- -------
Earnings (loss) before extraordinary items 19,641 (197,786) 3,089
Extraordinary items - gain (loss) on extinguishment of debt (Note 3) (598) 6,196 (12,359)
------- ------- -------
Net earnings (loss) $ 19,043 (191,590) (9,270)
======= ======= =======
Earnings (loss) attributable to common stock $ 19,043 (191,590) (9,459)
======= ======= =======
Weighted average number of common shares outstanding 47,943 40,910 33,669
======= ======= =======
Basic earnings (loss) per common share:
Earnings (loss) attributable to common stock before
extraordinary items $ .41 (4.83) .09
Extraordinary items - gain (loss) on extinguishment of debt (.01) .15 (.37)
------- ------- -------
Earnings (loss) attributable to common stock $ .40 (4.68) (.28)
======= ======= =======
Diluted earnings (loss) per common share:
Earnings (loss) attributable to common stock before
extraordinary items $ .41 (4.83) .08
Extraordinary items - gain (loss) on extinguishment of debt (.01) .15 (.35)
------- ------- -------
Earnings (loss) attributable to common stock $ .40 (4.68) (.27)
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
41
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
ACCUMU- OTHER
PREFERRED COMMON CAPITAL LATED COMPREHENSIVE TREASURY
STOCK STOCK SURPLUS DEFICIT INCOME (LOSS) STOCK
-------- -------- -------- -------- ------------- --------
(In Thousands)
Balance December 31, 1996 $ 15,827 3,053 440,715 (214,190) (2,962) -
Net loss - - - (9,270) - -
Warrant exercised by Anschutz (Note 7) - 350 29,750 - - -
$.75 Convertible Preferred Stock
Redemption (Note 6) (15,827) 202 14,825 - - -
Common Stock issued to subsidiary
(Note 7) - 20 2,797 - - (2,817)
Common Stock sold by subsidiary
(Note 7) - - - - - 2,817
Employee options exercised (Note 7) - 5 607 - - -
Common stock issued as compensation
(Note 7) - 2 214 - - -
Increase in unfunded pension liability
(Note 8) - - - - (1,063) -
Foreign currency translation - - - - (3,228) -
-------- -------- -------- -------- -------- --------
Balance December 31, 1997 - 3,632 488,908 (223,460) (7,253) -
Net loss - - - (191,590) - -
Common Stock issued in the Louisiana
Acquisition (Notes 2 and 7) - 100 14,119 - - -
Common Stock issued in the Anschutz
Acquisition (Notes 2 and 7) - 595 66,970 - - -
Common Stock issued to minority
shareholders of Saxon (Notes 2 and 7) - 109 15,920 - - (448)
Common Stock issued for settlement
of production payment obligation
(Notes 3 and 7) - 27 3,723 - - -
Common Stock issued as compensation - 2 332 - - -
(Note 7)
Increase in unfunded pension liability
(Note 8) - - - - (804) -
Foreign currency translation - - - - (1,891) -
-------- -------- -------- -------- -------- --------
BALANCE DECEMBER 31, 1998 - 4,465 589,972 (415,050) (9,948) (448)
NET EARNINGS - - - 19,043 - -
COMMON STOCK ISSUED, NET OF OFFERING
COSTS (NOTE 7) - 900 130,288 - - -
COMMON STOCK ISSUED AS
COMPENSATION (NOTE 7) - 1 103 - - -
EMPLOYEE OPTIONS EXERCISED (NOTE 7) - 14 1,414 - - -
EMPLOYEE STOCK PURCHASE PLAN (NOTE 7) - 1 55 - - -
REDUCTION IN UNFUNDED PENSION LIABILITY
(NOTE 8) - - - - 493 -
FOREIGN CURRENCY TRANSLATION - - - - (2,319) -
-------- -------- -------- -------- -------- --------
BALANCE DECEMBER 31, 1999 $ - 5,381 721,832 (396,007) (11,774) (448)
======== ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
42
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998 1997
------- -------- --------
(In Thousands)
Cash flows from operating activities:
Net earnings (loss) before preferred dividends and extraordinary items $ 19,641 (197,786) 3,089
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and depletion 88,190 100,105 79,991
Impairment of oil and gas properties - 199,500 -
Amortization of deferred debt costs 1,341 902 942
Translation (gain) loss on subordinated debt (10,561) 8,320 4,051
Deferred income tax expense (benefit) 407 (27,090) 2,586
Other, net (3,529) (698) 727
(Increase) decrease in accounts receivable (4,949) 8,539 (5,954)
(Increase) decrease in other current assets (3,304) 1,663 (5,168)
Increase (decrease) in accounts payable 18,244 (13,809) (1,403)
Increase (decrease) in accrued interest and other current liabilities 5,033 9,798 (9,970)
Settlement of volumetric production payment obligation - - (6,832)
Amortization of deferred revenue - - (1,524)
-------- -------- --------
Net cash provided by operating activities 110,513 89,444 60,535
Cash flows from investing activities:
Capital expenditures for property and equipment (125,083) (471,754) (156,799)
Less stock issued for acquisition - 97,376 -
-------- -------- --------
(125,083) (374,378) (156,799)
Proceeds from sale of assets 20,471 10,302 9,669
Increase in other assets, net (1,034) (1,218) (4,508)
-------- -------- --------
Net cash used by investing activities (105,646) (365,294) (151,638)
Cash flows from financing activities:
Proceeds from bank borrowings 112,427 464,088 279,068
Repayments of bank borrowings (338,192) (276,468) (226,009)
Repayments of production payment obligation - (58) (2,592)
Issuance of 10 1/2% senior subordinated notes, net of issuance costs 98,561 - -
Redemption of 11 1/4% senior subordinated notes (9,083) - (100,303)
Issuance of 8 3/4% senior subordinated notes, net of issuance costs - 74,589 121,479
Proceeds of common stock offering, net of offering costs 131,188 - -
Proceeds from exercise of options and warrants 1,589 - 32,461
Proceeds from capital stock issued, net - - 2,817
Costs of preferred stock conversion - - (800)
Payment of preferred stock dividends - - (540)
Decrease in other liabilities, net (1,629) (1,197) (4,348)
-------- -------- --------
Net cash provided (used) by financing activities (5,139) 260,954 101,233
Effect of exchange rate changes on cash 12 120 (565)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (260) (14,776) 9,565
Cash and cash equivalents at beginning of year 3,415 18,191 8,626
-------- -------- --------
Cash and cash equivalents at end of year $ 3,155 3,415 18,191
======== ======== ========
Cash paid (refunded) during the year for:
Interest $ 42,596 35,534 20,999
Income taxes $ (101) 1,172 4,105
See accompanying Notes to Consolidated Financial Statements.
43
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
DESCRIPTION OF THE BUSINESS - Forest Oil Corporation is engaged in the
acquisition, exploration, development, production and marketing of natural
gas and liquids. The Company was incorporated in New York in 1924, the
successor to a company formed in 1916, and has been publicly held since 1969.
The Company is active in several of the major exploration and producing areas
in and offshore the United States and in Canada, and has exploratory
interests in various other foreign countries.
Beginning in 1995, the Company consummated certain transactions with The
Anschutz Corporation (Anschutz) pursuant to which Anschutz acquired a
significant ownership position in the Company. As of December 31, 1999
Anschutz owned 17,813,263 shares of Forest's Common Stock, or approximately
33% of the outstanding shares. Under the terms of a shareholders agreement,
as amended, Anschutz agreed to certain voting, acquisition and transfer
limitations on its shares of Forest Common Stock until July 27, 2000.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - The consolidated
financial statements include the accounts of Forest Oil Corporation and its
consolidated subsidiaries (Forest or the Company). Significant intercompany
balances and transactions are eliminated. The Company generally consolidates
all subsidiaries in which it controls over 50% of the voting interests.
Entities in which the Company does not have a direct or indirect majority
voting interest are generally accounted for using the equity method.
In the course of preparing the consolidated financial statements, management
makes various assumptions and estimates to determine the reported amounts of
assets, liabilities, revenue and expenses, and in the disclosures of
commitments and contingencies. Changes in these assumptions and estimates
will occur as a result of the passage of time and the occurrence of future
events and, accordingly, actual results could differ from amounts estimated.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the Company
considers all debt instruments with original maturities of three months or
less to be cash equivalents.
PROPERTY AND EQUIPMENT - The Company uses the full cost method of accounting
for oil and gas properties. Separate cost centers are maintained for each
country in which the Company has operations. During 1999, 1998 and 1997, the
Company's primary oil and gas operations were conducted in the United States
and in Canada. All costs incurred in the acquisition, exploration and
development of properties (including costs of surrendered and abandoned
leaseholds, delay lease rentals, dry holes and overhead related to
exploration and development activities) are capitalized. Capitalized costs
applicable to each cost center are depleted using the units of production
method based on conversion to common units of measure using one barrel of oil
as an equivalent to six thousand cubic feet (MCF) of natural gas. A reserve
is provided for estimated future costs of site restoration, dismantlement and
abandonment activities as a component of depletion. Unusually significant
investments in unproved properties, including related capitalized interest
costs, are not depleted pending the determination of the existence of proved
reserves.
As of December 31, 1999, 1998 and 1997, there were undeveloped property costs
of $54,545,000, $58,609,000 and $41,226,000, respectively, which were not
being depleted in the United States and $39,580,000, $26,443,000 and
$19,675,000, respectively, which were not being depleted in Canada. Of the
undeveloped costs in the United States not being depleted at December 31,
1999, approximately 4% were incurred in 1999, 49% in 1998, 15% in 1997, 9% in
1996, 22% in 1994 and 1% in 1993. Of the undeveloped costs in Canada not
being depleted at December 31, 1999, 66% were incurred in 1999, 15% in 1998,
5% in 1997 and 14% in 1996.
The Company holds interests in various international projects. As of December
31, 1999 and 1998, costs related to these international interests of
approximately $21,493,000 and $14,435,000, respectively, were not being
depleted pending determination of the existence of proved reserves.
44
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- --------------------------------------------------------------------------------
Depletion per unit of production (MCFE) for each of the Company's cost
centers was as follows:
United States Canada
------------- ------
1999 $1.06 .70
1998 1.20 .85
1997 1.24 .93
Pursuant to full cost accounting rules, capitalized costs less related
accumulated depletion and deferred income taxes for each cost center may not
exceed the sum of (1) the present value of future net revenue from estimated
production of proved oil and gas reserves using current prices and a discount
factor of 10%; plus (2) the cost of properties not being amortized, if any;
plus (3) the lower of cost or estimated fair value of unproved properties
included in the costs being amortized, if any; less (4) income tax effects
related to differences in the book and tax basis of oil and gas properties.
As a result of this limitation on capitalized costs, the accompanying
financial statements included a provision for impairment of oil and gas
property costs in 1998 of $139,500,000 in the United States and $35,500,000
($60,000,000 pre-tax) in Canada. There were no provisions for impairment of
oil and gas properties in 1999 or 1997. Gain or loss is not recognized on the
sale of oil and gas properties unless the sale significantly alters the
relationship between capitalized costs and proved oil and gas reserves
attributable to a cost center.
Buildings, transportation and other equipment are depreciated on the
straight-line method based upon estimated useful lives of the assets ranging
from five to forty-five years.
Net property and equipment at December 31 consists of the following:
1999 1998
---- ----
(In Thousands)
Oil and gas properties $ 2,154,514 2,029,352
Buildings, transportation and
other equipment 14,593 12,356
----------- -----------
2,169,107 2,041,708
Less accumulated depreciation,
depletion and valuation allowance (1,471,491) (1,378,398)
----------- -----------
$ 697,616 663,310
=========== ===========
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill and other intangible assets
recorded in the acquisition of the Company's gas marketing subsidiary consist
of the following at December 31, 1999 and 1998:
1999 1998
---- ----
(In Thousands)
Goodwill $ 15,873 14,980
Gas marketing contracts 13,848 13,070
--------- ---------
29,721 28,050
Less accumulated amortization (7,629) (5,361)
--------- ---------
$ 22,092 22,689
========= =========
Goodwill is being amortized on a straight line basis over twenty years. The
amount attributed to the value of gas marketing contracts acquired is being
amortized on a straight line basis over the average life of such contracts of
twelve years.
45
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- --------------------------------------------------------------------------------
GAS MARKETING - The Company's gas marketing subsidiary, ProMark, enters into
fixed price agreements to purchase and sell natural gas. ProMark's general
strategy for this business is to enter into offsetting purchase and sales
contracts. Net open positions relating to these contracts do occur, but have
not been significant to date. Revenue from the sale of the gas is recorded as
marketing revenue and the cost of the gas sold is recorded as marketing
expense. ProMark also provides natural gas marketing aggregation services for
third parties. Fees earned for such services are recorded as marketing
revenue as the services are performed.
OIL AND GAS SALES - The Company accounts for oil and gas sales using the
entitlements method. Under the entitlements method, revenue is recorded based
upon the Company's share of volumes sold, regardless of whether the Company
has taken its proportionate share of volumes produced. The Company records a
receivable or payable to the extent it receives less or more than its
proportionate share of the related revenue. As of December 31, 1999 the
Company had produced approximately 743 MMCF more than its entitled share of
production. The estimated value of this imbalance of approximately $1,972,000
is included in the accompanying consolidated balance sheet as a long-term
liability.
No single customer accounted for more than 10% of total revenue in 1999, 1998
or 1997.
HEDGING TRANSACTIONS - In order to minimize exposure to fluctuations in oil
and natural gas prices, the Company hedges the price of future oil and
natural gas production by entering into certain contracts and financial
arrangements. These instruments are accounted for as hedges when the
instrument is designated as a hedge of the related production and there
exists a high degree of correlation between the fair value of the instrument
and the fair value of the hedged production. The degree of correlation is
assessed periodically. In the event that an instrument does not meet the
designation or effectiveness criteria, any gain or loss on the instrument is
recognized immediately in earnings. Otherwise, gains and losses related to
hedging transactions are recognized as adjustments to the revenue recorded
for the related production. If an instrument is settled early, any gains or
losses are deferred and recognized as adjustments to the revenue recorded for
the related hedged production. Costs associated with the purchase of certain
hedging instruments are also deferred and amortized against revenue related
to the hedged production.
INCOME TAXES - The Company uses the asset and liability method of accounting
for income taxes which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences
between financial accounting bases and tax bases of assets and liabilities.
FOREIGN CURRENCY TRANSLATION - The functional currency of Canadian Forest Oil
Ltd. (Canadian Forest), the Company's wholly owned Canadian subsidiary, is
the Canadian dollar. Assets and liabilities related to the Company's Canadian
operations are generally translated at current exchange rates, and related
translation adjustments are reported as a component of shareholders' equity
in accumulated other comprehensive loss. Income statement accounts are
translated at the average rates during the period. The Company is also
required to recognize foreign currency translation gains or losses related to
its 8 3/4% Senior Subordinated Notes due 2007 (the 8 3/4% Notes) because the
debt is denominated in U.S. dollars and the functional currency of Canadian
Forest is the Canadian dollar. As a result of the change in the value of the
Canadian dollar relative to the U.S. dollar, the Company reported noncash
translation gains (losses) of approximately $10,561,000, ($8,320,000) and
($4,051,000) for the years ended December 31, 1999, 1998 and 1997,
respectively.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share is computed by
dividing net earnings (loss) attributable to common stock by the weighted
average number of common shares outstanding during each period, excluding
treasury shares. Net earnings (loss) attributable to common stock represents
net earnings (loss) less preferred stock dividends of $189,000 in 1997.
Diluted earnings (loss) per share is computed by adjusting the average number
of common shares outstanding for the dilutive effect, if any, of convertible
preferred stock, stock options and warrants. The effect of potentially
dilutive securities is based on earnings (loss) before extraordinary items.
46
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- --------------------------------------------------------------------------------
The following sets forth the calculation of basic and diluted earnings per
share for income before extraordinary items for the years ended December 31:
1999 (1) 1998 (2) 1997 (3)
-------- -------- --------
(In Thousands Except Per Share Amounts)
Earnings (loss) before extraordinary items $ 19,641 (197,786) 3,089
Less: Preferred stock dividends - - (189)
-------- -------- --------
Earnings (loss) before extraordinary items available
to common stockholders $ 19,641 (197,786) 2,900
======== ======== ========
Weighted average common shares outstanding
during the period 47,943 40,910 33,669
Add dilutive effects of:
$.75 Convertible preferred stock - - 326
Employee options 325 - 229
Anschutz warrants - - 737
-------- -------- --------
Weighted average common shares outstanding during
the period including the effects of dilutive securities 48,268 40,910 34,961
======== ======== ========
Basic earnings (loss) per share before extraordinary items $ .41 (4.83) 0.09
======== ======== ========
Diluted earnings (loss) per share before extraordinary items $ .41 (4.83) 0.08
======== ======== ========
(1) At December 31, 1999, options to purchase 1,659,360 shares of common stock
at prices ranging from $11.25 to $25.00 per share were outstanding, but
were not included in the computation of diluted loss per share for the year
ended December 31, 1999. The exercise prices of these options were greater
than the average market price of the common shares. These options expire at
various dates from 2003 to 2008.
(2) At December 31, 1998, options to purchase 1,875,360 shares of common stock
at prices ranging from $8.38 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share for the year
ended December 31, 1998. The effect of the assumed exercises of these
options was antidilutive. These options expire at various dates from 2002
to 2008.
(3) At December 31, 1997, options to purchase 473,000 shares of common stock at
prices ranging from $16.50 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share for the year
ended December 31, 1997. The exercise prices of these options were greater
than the average market price of the common shares. These options expire at
various dates from 2002 to 2007.
47
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) - The components of total comprehensive income
(loss) consist of net earnings (loss), foreign currency translation and
changes in the unfunded pension liability and are as follows:
Accumulated
Foreign Unfunded Other Net Total
Currency Pension Comprehensive Earnings Comprehensive
Translation Liability Income (Loss) (Loss) Income (Loss)
----------- ---------- -------------- ---------- --------------
(In Thousands)
Balance at December 31, 1996 $ (803) (2,159) (2,962) (214,190) (217,152)
1997 activity (3,228) (1,063) (4,291) (9,270) (13,561)
--------- ------ ------- -------- --------
Balance at December 31, 1997 (4,031) (3,222) (7,253) (223,460) (230,713)
1998 activity (1,891) (804) (2,695) (191,590) (194,285)
--------- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1998 (5,922) (4,026) (9,948) (415,050) (424,998)
1999 ACTIVITY (2,319) 493 (1,826) 19,043 17,217
--------- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1999 $ (8,241) (3,533) (11,774) (396,007) (407,781)
========= ====== ======= ======== ========
RECLASSIFICATIONS - Certain amounts in prior years' financial statements have
been reclassified to conform to the 1999 financial statement presentation.
(2) ACQUISITIONS:
- --------------------------------------------------------------------------------
SAXON PETROLEUM INC.:
During 1995, the Company acquired a 56% economic (49% voting) interest in
Saxon Petroleum Inc. (Saxon). Since Forest had majority voting control over
Saxon as a result of the voting common shares that it owned and proxies that
it held, it accounted for Saxon as a consolidated subsidiary from the date of
its acquisition.
Through December 31, 1997, pursuant to an equity participation agreement,
Forest acquired additional common shares of Saxon in exchange for 196,856
common shares of Forest valued at $2,817,000. Such shares were subsequently
sold by Saxon. In 1997, Forest's wholly owned subsidiary Canadian Forest
acquired common shares of Saxon for approximately $497,000 CDN. These
transactions increased Forest's economic interest in Saxon to 65%.
In August 1998, the Company acquired all of the outstanding common shares of
Saxon Petroleum Inc. not previously owned by Forest in exchange for 1,081,256
shares of Forest Common Stock valued at $16,029,000. Canadian Forest received
21,140 shares of Forest Common Stock for the shares of common stock of Saxon
that it owned. A former officer of Saxon returned 9,922 shares of Forest
Common Stock in exchange for extinguishment of a loan. These shares have been
recorded as treasury stock at December 31, 1999 and 1998.
In October 1998, ownership of Saxon was transferred from Forest to its wholly
owned subsidiary Canadian Forest Oil Ltd. In June 1999, Saxon was liquidated
into Canadian Forest.
48
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(2) ACQUISITIONS (CONTINUED):
- --------------------------------------------------------------------------------
LOUISIANA ACQUISITION:
In February 1998 the Company purchased interests in oil and natural gas
properties in 13 fields located onshore Louisiana (the Louisiana Acquisition)
from a private company for total consideration of approximately $230,776,000.
The consideration consisted of approximately $216,557,000 of cash, funded
primarily from the Company's bank credit facility and from the issuance of
$75,000,000 principal amount of 8 3/4% Notes and 1,000,000 shares of the
Company's Common Stock.
ANSCHUTZ ACQUISITION:
In June 1998, Forest issued 5,950,000 shares of common stock valued at
$67,565,000 to Anschutz in exchange for certain oil and gas assets (the
Anschutz Acquisition). The oil and gas assets acquired included an interest
in the Anschutz Ranch East Field located in Utah and Wyoming. The acquisition
included certain of Anschutz's international oil and gas projects
encompassing approximately 18 million net acres of undeveloped land.
(3) LONG-TERM DEBT:
- --------------------------------------------------------------------------------
Long-term debt at December 31 consists of the following:
1999 1998
---- ----
(In Thousands)
Global Credit facility:
U.S. borrowings $ 39,500 261,400
Canadian borrowings 33,235 10,456
Saxon Credit Facility - 24,942
11 1/4% Senior Subordinated Notes - 8,676
8 3/4% Senior Subordinated Notes 199,978 199,976
10 1/2% Senior Subordinated Notes 98,967 -
--------- --------
Long-term debt $ 371,680 505,450
========= ========
U.S. AND CANADIAN FOREST CREDIT FACILITIES:
At December 31, 1999 the Company, Canadian Forest and ProMark had a
$300,000,000 global credit facility (the Global Credit Facility) which
provided for a global borrowing base of $250,000,000 through a syndicate of
banks led by The Chase Manhattan Bank and The Chase Manhattan Bank of Canada.
The maximum credit facility allocations in the United States and Canada were
$200,000,000 and $50,000,000, respectively. The borrowing base is subject to
semi-annual redeterminations. Funds borrowed under the Global Credit Facility
can be used for general corporate purposes. Under the terms of the Global
Credit Facility, the Company, Canadian Forest and ProMark are subject to
certain covenants and financial tests, including restrictions or requirements
with respect to cash dividends, working capital, cash flow, additional debt,
liens, asset sales, investments, mergers and reporting responsibilities.
The Global Credit Facility is secured by a lien on, and a security interest
in, a portion of the Company's U.S. proved oil and gas properties, related
assets, pledges of accounts receivable and a pledge of 66% of the capital
stock of Canadian Forest. The Global Credit Facility is also indirectly
secured by substantially all of the assets of Canadian Forest.
49
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(3) LONG-TERM DEBT (CONTINUED):
- --------------------------------------------------------------------------------
At December 31, 1999 the outstanding balance under the Global Credit Facility
was $39,500,000 in the U.S. and $33,235,000 in Canada with a weighted average
interest rate of 6.8% per annum. The Company had also used the Global Credit
Facility for Letters of Credit in the amount of $233,000 in the U.S. and
$1,034,000 CDN in Canada.
PRODUCTION PAYMENT OBLIGATION:
In June 1998 the Company settled its remaining nonrecourse production payment
obligation for 271,214 shares of the Company's Common Stock. The stock was
valued at $3,750,000 based upon the weighted average trading price for the 10
day trading period preceding the closing date. The obligation, which
originated in May 1992, had a remaining book value of approximately
$9,966,000 at the time of the settlement. As a result of this settlement, the
Company recorded an extraordinary gain on extinguishment of debt of
$6,196,000 (net of related expenses) in 1998.
11 1/4% SENIOR SUBORDINATED NOTES:
The Company issued $100,000,000 aggregate principal amount of 11 1/4% Senior
Subordinated Notes due September 1, 2003 (the 11 1/4% Notes) in September
1993. In September 1997, pursuant to a tender offer, $90,233,000 of the
outstanding aggregate principal amount was tendered by the holders. The
purchase price for each $1,000 principal amount of 11 1/4% Notes validly
tendered and accepted was $1,096.96. In October 1997, an additional
$1,091,000 aggregate principal amount of 11 1/4% Notes was tendered at a
purchase price of $1,090.00 for each $1,000 principal amount. As a result of
these purchases, Forest recorded an extraordinary loss of approximately
$12,359,000 relating to the excess of the tender price over the carrying
amount of the 11 1/4% Notes, net of related unamortized debt issuance costs
and original issue discount. In September 1999 Forest redeemed the remaining
principal amount of its 11 1/4% Notes at 103.792% of par. As a result of this
redemption, Forest recorded an extraordinary loss on extinguishment of debt
of $598,000 in the third quarter of 1999.
8 3/4% SENIOR SUBORDINATED NOTES:
In September 1997 Canadian Forest completed an offering of $125,000,000 of
8 3/4% Senior Subordinated Notes due 2007 (the 8 3/4% Notes), which were sold
at 99.745% of par and guaranteed on a senior subordinated basis by the
Company.
In February 1998 Canadian Forest issued $75,000,000 principal amount of
8 3/4% Notes, an add-on to the September 1997 offering.
The Company is required to recognize foreign currency translation gains or
losses related to the 8 3/4% Notes because the debt is denominated in U.S.
dollars and the functional currency of Canadian Forest is the Canadian
dollar. As a result of the change in the value of the Canadian dollar
relative to the U.S. dollar during 1999, 1998 and 1997, the Company reported
noncash translation gains (losses) of approximately $10,561,000, $(8,320,000)
and $(4,051,000), respectively, in those years.
10 1/2% SENIOR SUBORDINATED NOTES:
In February 1999, Forest issued $100,000,000 principal amount of 10 1/2%
Senior Subordinated Notes due 2006 (the 10 1/2% Notes) at 98.811% of par.
50
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(4) DEFERRED REVENUE:
- --------------------------------------------------------------------------------
From 1991 to 1994, the Company sold volumetric production payments to Enron
to fund capital expenditures and property acquisitions. In June 1997 the
Company purchased from Enron the obligation related to its last remaining
volumetric production payment for approximately $6,832,000 plus expenses.
Amounts received under the production payments were recorded as deferred
revenue. Natural gas volumes associated with the amortization of deferred
revenue for the year ended December 31, 1997 were approximately 951,000 MCF
(801,000 MCF net of royalties). Cash settled in lieu of volumes to be
delivered for that period was $700,000.
(5) INCOME TAXES:
- --------------------------------------------------------------------------------
The income tax expense (benefit) is different from amounts computed by
applying the statutory Federal income tax rate for the following reasons:
1999 1998 1997
---- ---- ----
(In Thousands)
Tax expense (benefit) at 35% of income (loss)
before income taxes and extraordinary item $ 5,994 (78,261) 2,234
Change in the valuation allowance for deferred
tax assets attributable to income (loss) before
income taxes and extraordinary item (8,346) 51,620 (3,102)
Tax expense (benefit) of higher
effective rate on Canadian income (loss) 425 (7,200) 85
Canadian branch income taxable in
both Canada and U.S. 409 1,733 1,283
Canadian Crown payments (net of Alberta Royalty
Tax Credit) not deductible for tax purposes 3,261 2,012 3,181
Canadian resource allowance (4,853) (2,210) (3,995)
Canadian non-deductible depletion and
amortization 1,335 3,960 1,934
Canadian large corporation tax 314 519 540
Expiration of tax carryforwards 515 450 1,041
(Nontaxable) nondeductible foreign exchange
(gains) losses and other (1,568) 1,559 92
-------- ------- ------
Total income tax expense (benefit) $ (2,514) (25,818) 3,293
======== ======= ======
51
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(5) INCOME TAXES (CONTINUED):
- --------------------------------------------------------------------------------
Deferred income taxes generally result from recognizing income and expenses
at different times for financial and tax reporting. In the U.S., the largest
current difference is the tax effect of the capitalization of certain
development, exploration and other costs under the full cost method of
accounting, recording proceeds from the sale of properties in the full cost
pool, and the provision for impairment of oil and gas properties for
financial accounting purposes. In Canada, differences result in part from
accelerated cost recovery of oil and gas capital expenditures for tax
purposes.
The components of the net deferred tax liability by geographical segment at
December 31, 1999 and 1998 are as follows:
December 31, 1999
------------------------------------------
United States Canada Total
------------- ------ -----
(In Thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 59 - 59
Accrual for retirement benefits - 150 150
Accrual for medical benefits 2,189 - 2,189
Accrual for sales recorded on the
entitlement method 690 - 690
Unrealized foreign exchange losses - 1,618 1,618
Property and equipment 14,122 - 14,122
Net operating loss carryforward 39,217 3,781 42,998
Depletion carryforward 6,958 - 6,958
Investment tax credit carryforward 595 - 595
Alternative minimum tax credit carryforward 2,219 - 2,219
Other 636 - 636
---------- ------- -------
Total gross deferred tax assets 66,685 5,549 72,234
Less valuation allowance (66,685) (1,618) (68,303)
---------- ------- -------
Net deferred tax assets - 3,931 3,931
Deferred tax liabilities:
Property and equipment - (8,182) (8,182)
Deferred income on long term contracts - (4,163) (4,163)
Other - (537) (537)
---------- ------- -------
Total gross deferred tax liabilities - (12,882) (12,882)
Net deferred tax liability $ - (8,951) (8,951)
========== ======= =======
52
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(5) INCOME TAXES (CONTINUED):
- --------------------------------------------------------------------------------
December 31, 1998
------------------------------------------
United States Canada Total
------------- ------ -----
(In Thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 11 - 11
Accrual for retirement benefits 252 154 406
Accrual for medical benefits 2,083 - 2,083
Accrual for sales recorded on the
entitlement method 430 - 430
Unrealized foreign exchange losses - 4,653 4,653
Property and equipment 19,020 - 19,020
Net operating loss carryforward 39,126 4,186 43,312
Depletion carryforward 6,958 - 6,958
Investment tax credit carryforward 1,095 - 1,095
Alternative minimum tax credit carryforward 2,201 - 2,201
Other 612 - 612
---------- ------- -------
Total gross deferred tax assets 71,788 8,993 80,781
Less valuation allowance (71,788) (5,189) (76,977)
---------- ------- -------
Net deferred tax assets - 3,804 3,804
Deferred tax liabilities:
Property and equipment - (7,175) (7,175)
Deferred income on long term contracts - (4,424) (4,424)
Other - (291) (291)
---------- ------- -------
Total gross deferred tax liabilities - (11,890) (11,890)
---------- ------- -------
Net deferred tax liability $ - (8,086) (8,086)
========== ======= =======
The net changes in the valuation allowance for the years ended December 31,
1999, 1998 and 1997 were increases (decreases) of $(8,674,000), $32,378,000 and
$1,224,000, respectively, which resulted from:
1999 1998 1997
---- ---- ----
(In Thousands)
Increase (decrease) in the valuation allowance for deferred
tax assets attributable to income (loss) before income
taxes and extraordinary item $ (8,346) 51,620 (3,102)
Decrease in the valuation allowance attributable
to the difference between book basis and tax basis of
acquisitions (537) (17,073) -
Increase (decrease) in the valuation allowance attributable
to the extraordinary gain (loss) 209 (2,169) 4,326
-------- ------- ------
Net increase (decrease) in the valuation allowance $ (8,674) 32,378 1,224
======== ======= ======
53
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(5) INCOME TAXES (CONTINUED):
- --------------------------------------------------------------------------------
The Alternative Minimum Tax (AMT) credit carryforward available to reduce
future U.S. Federal regular taxes aggregated $2,219,000 at December 31, 1999.
This amount may be carried forward indefinitely. U.S. Federal regular and AMT
net operating loss carryforwards at December 31, 1999 were $112,050,000 and
$105,775,000, respectively, and will expire in the years indicated below:
Regular AMT
------- ---
(In Thousands)
2000 $ 3,194 3,209
2005 8,307 -
2008 28,999 31,799
2009 22,817 22,964
2010 45,737 46,058
2011 268 -
2012 206 580
2018 2,522 1,165
--------- --------
$ 112,050 105,775
========= ========
AMT net operating loss carryforwards can be used to offset 90% of AMT income
in future years.
Investment tax credit carryforwards available to reduce future U.S. Federal
income taxes aggregated $595,000 at December 31, 1999 and expire at various
dates through the year 2001. Percentage depletion carryforwards available to
reduce future U.S. Federal taxable income aggregated $19,879,000 at December
31, 1999. This amount may be carried forward indefinitely.
Canadian net operating losses available to reduce future Canadian Federal
income taxes were $8,455,000 ($12,211,000 CDN) at December 31, 1999 and will
expire in the years indicated below:
(In Thousands)
2002 $ 431
2003 2,418
2004 5,441
2005 165
--------
$ 8,455
========
Canadian tax pools relating to the exploration, development and production of
oil and natural gas which are available to reduce future Canadian Federal
income taxes aggregated approximately $144,336,000 ($208,458,000 CDN) at
December 31, 1999. These tax pool balances are deductible on a declining
balance basis ranging from 10% to 100% of the balance annually. The amounts
may be carried forward indefinitely.
The availability of some of the U.S. tax attributes to reduce current and
future U.S. Federal taxable income of the Company is subject to various
limitations under the Internal Revenue Code. In particular, the Company's
ability to utilize such tax attributes could be limited due to the occurrence
of an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code. "Ownership changes" occurred in 1995 following the Anschutz
transaction, in 1996 following the public stock issuance, and in 1998 from
the accumulated effect of several stock issuances and exchanges in 1996, 1997
and 1998. Under the general provisions of Section 382 of the Code, the
Company's ability to utilize substantially all of its net operating loss
carryforwards will be subject to an annual
54
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(5) INCOME TAXES (CONTINUED):
- --------------------------------------------------------------------------------
limitation of approximately $5,700,000. To the extent of any net unrealized
built-in gains at the time of an ownership change, the annual limitation can
be increased by (a) any gains recognized in the five years following an
ownership change on the disposition of certain assets, to the extent that the
value of the assets disposed of exceeded their tax basis on the date of the
ownership change, or (b) any item of income which is properly taken into
account in the five years following the ownership change but which is
attributable to periods before the ownership change. The ability of the
Company to fully utilize its net operating loss carryforwards may be limited
by these provisions.
Due to limitations in the Internal Revenue Code, other than the Section 382
limitations discussed above, the Company believes it is unlikely that it will
be able to use any significant portion of its investment tax credit
carryforwards before they expire.
(6) PREFERRED STOCK:
- --------------------------------------------------------------------------------
In February 1997, the Company called for redemption all 2,877,673 outstanding
shares of the Company's $.75 Convertible Preferred Stock. The redemption
price was $10.00 per share plus accumulated and unpaid dividends to and
including the date of redemption (for an aggregate redemption price of $10.06
per share). In lieu of cash redemption, the holders of the preferred shares
had the right to convert each share into 0.7 share of Forest's Common Stock.
As a result of the call for redemption, 2,783,945 shares or 96.7% of the
shares outstanding were tendered for conversion into Common Stock. The
remaining 93,728 shares that were not tendered for conversion were redeemed
by the Company at the redemption price of $10.06 per share.
(7) COMMON STOCK:
- --------------------------------------------------------------------------------
COMMON STOCK:
The Company has 200,000,000 shares of Common Stock authorized, par value $.10
per share.
In August 1999, 9,000,000 shares of Common Stock were sold for $15.4375 per
share in a public offering. The net proceeds to Forest from the issuance of
shares totaled approximately $131,000,000 after deducting issuance costs and
underwriting fees.
During 1998, the Company issued 8,302,470 shares of Common Stock in
connection with the Louisiana Acquisition, the Anschutz Acquisition, the
purchase of the minority interest in Saxon Petroleum and the settlement of a
production payment obligation, as described in Notes 2 and 3.
In March 1997 and May 1997, pursuant to an equity participation agreement
with Saxon, Forest exercised its right to purchase additional shares of
common stock of Saxon in exchange for 196,856 shares of Forest Common Stock
valued at $2,817,000.
RIGHTS AGREEMENT:
In October 1993, the Board of Directors adopted a shareholders' rights plan
(the Plan) and entered into the Rights Agreement. The Company paid a dividend
distribution of one Preferred Share Purchase Right (the Rights) on each
outstanding share of the Company's Common Stock. The Rights are exercisable
only if a person or group acquires 20% or more of the Company's Common Stock
or announces a tender offer which would result in ownership by a person or
group of 20% or more of the Common Stock. Each Right initially entitles each
shareholder to buy 1/100th of a share of a new series of Preferred Stock at
an exercise price of $30.00, subject to adjustment upon certain occurrences.
Each 1/100th of a share of such new Preferred Stock that can be purchased
upon exercise of a Right has economic terms designed to approximate the value
of one share of Common Stock. The Rights will expire on October 29, 2003,
unless extended or terminated earlier. The Company has amended the Rights
Agreement to exempt from the provisions of the Rights Agreement shares of
Common Stock held by Anschutz.
55
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(7) COMMON STOCK (CONTINUED):
- --------------------------------------------------------------------------------
WARRANTS:
In connection with the transaction with Anschutz in 1995, Anschutz received a
warrant entitling it to purchase 3,500,000 shares of Common Stock at a price
of $10.50 per share. The warrant was scheduled to expire on July 27, 1999. In
November 1996, Anschutz exercised a portion of the warrant and purchased
388,888 shares of Common Stock at $10.50 per share. In August 1997, Anschutz
acquired 3,500,000 shares of Common Stock through the exercise of the
remainder of the warrant for $8.60 per share resulting in cash proceeds to
Forest of $30,100,000. The reduction in the exercise price offered to
Anschutz reflects an approximate 10% present value discount computed to the
warrants' expiration date of July 27, 1999.
At December 31, 1999 and 1998, the Company had no outstanding warrants.
STOCK INCENTIVE PLAN:
In November 1997, three executive officers of the Company received
conditional restricted stock awards in lieu of stock option grants. The
restricted stock awarded was subject to certain conditions and to a two-year
restriction on transfer. If prior to January 1, 1999 the closing price of the
Company's Common Stock during any twenty-consecutive-trading-day period as
reported on the New York Stock Exchange was at least $22.00 per share, a
total of 230,000 shares would have been earned under the conditions of the
restricted stock awards. Additional shares would have been earned for each
$1.00 increase in such average price to a maximum of 850,000 shares if the
average price was $30.00 or higher. No shares of restricted stock were earned
pursuant to these awards and the awards expired on January 1, 1999.
During 1998 and 1997, the Company issued 15,927 and 17,617 shares,
respectively, of restricted Common Stock to officers and employees as a
portion of the bonuses earned for years ended December 31, 1997 and 1996. The
shares vested immediately upon issuance, but are subject to a two-year
restriction on transfer.
In 1999, the Company entered into restricted stock agreements with two
executives covering 40,336 shares of Common Stock. The shares carry
restrictions as to forfeiture, transfer and encumbrance. The restrictions
lapse 20% annually beginning January 1, 2000. Upon lapsing of the
restrictions, the unrestricted shares are issued and the corresponding
restricted shares, if any, are cancelled.
STOCK OPTIONS:
In March 1992, the Company adopted the 1992 Stock Option Plan under which
non-qualified stock options may be granted to key employees and non-employee
directors. The aggregate number of shares of Common Stock which the Company
may issue under options granted pursuant to this plan may not exceed 10% of
the total number of shares outstanding or issuable at the date of grant
pursuant to outstanding rights, warrants, convertible or exchangeable
securities or other options. The exercise price of an option may not be less
than 85% of the fair market value of one share of the Company's Common Stock
on the date of grant. The options vest 20% on the date of grant and an
additional 20% on each grant anniversary date thereafter.
56
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(7) COMMON STOCK (CONTINUED):
- --------------------------------------------------------------------------------
The following table summarizes the activity in the Company's stock-based
compensation plan for the years ended December 31, 1999, 1998 and 1997:
Weighted
Average Number of
Number of Exercise Shares
Shares Price Exercisable
---------- --------- ------------
Outstanding at December 31, 1996 1,461,580 $ 13.37 362,460
Granted at fair value 480,000 17.04
Exercised (43,720) 12.09
Cancelled (61,500) 12.79
--------- -------
Outstanding at December 31, 1997 1,836,360 $ 14.38 679,020
Granted at fair value 192,500 14.67
Cancelled (153,500) 14.22
--------- -------
OUTSTANDING AT DECEMBER 31, 1998 1,875,360 $ 14.42 998,300
GRANTED AT FAIR VALUE 1,253,000 7.47
GRANTED IN EXCESS OF FAIR VALUE 769,500 10.00
EXERCISED (146,000) 9.79
CANCELLED (121,900) 13.60
--------- -------
OUTSTANDING AT DECEMBER 31, 1999 3,629,960 $ 11.30 1,565,180
========= =======
The following table summarizes information about options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Price Shares Life Price Shares Price
- -------------- ------------ ----------- -------- ----------- --------
$ 7.44-9.31 1,169,100 9.21 $ 7.48 186,900 $ 7.52
$ 10.00-10.38 801,500 9.93 10.01 166,400 10.02
$ 11.25-13.94 510,260 6.31 11.60 389,780 11.59
$ 14.00-14.94 604,100 6.96 14.07 465,700 14.05
$ 15.00-17.75 487,000 7.16 17.20 298,400 16.99
$ 25.00 58,000 3.79 25.00 58,000 25.00
- ------------- --------- ---- -------- --------- --------
$ 7.44-25.00 3,629,960 8.23 $ 11.30 1,565,180 $ 13.20
============= ========= ==== ======== ========= ========
The fair value of each option granted in 1999, 1998 and 1997 was estimated
using the Black-Scholes option pricing model. The following assumptions were
used in 1999: expected option life of 5 years; risk free interest rates of
5.06% and 6.31%; estimated volatility of 59.29%; and dividend yield of zero
percent. The weighted average fair market value of options granted during
1999 was estimated to be $4.58 per share based on these assumptions. The
following assumptions were used in 1998: expected option life of 5 years;
risk free interest rates ranging from 4.19% to 5.57%; estimated volatility of
57.22%; and dividend yield of zero percent. The weighted average fair
57
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(7) COMMON STOCK (CONTINUED):
- --------------------------------------------------------------------------------
market value of options granted during 1998 was estimated to be $7.97 per
share based on these assumptions. The following assumptions were used in
1997: expected option life of 5 years; risk free interest rates ranging from
5.77% to 6.84%; estimated volatility of 55.74%; and dividend yield of zero
percent. The weighted average fair market value of options granted during
1997 was estimated to be $9.23 per share based on these assumptions.
STOCK PURCHASE PLAN:
In June 1999, the Company adopted the 1999 Employee Stock Purchase Plan,
under which the Company is authorized to issue up to 250,000 shares of Common
Stock to employees who are regularly scheduled to work more than 20 hours per
week and more than five months in any calendar year. Under the terms of the
plan, employees can choose each quarter to have up to 15% of their annual
base earnings withheld to purchase Common Stock, up to a limit of $25,000 per
calendar year. The purchase price of the stock is 85% of the lower of its
beginning-of-quarter or end-of-quarter market price. The employee is
restricted from selling the stock for a period of six months after purchase.
Under this plan, the Company sold 4,889 shares of Common Stock to employees
in 1999.
The fair value of each stock purchase right granted during 1999 was estimated
using the Black-Sholes option pricing model using the following assumptions:
expected option life of three months; risk free interest rates of 4.65% and
4.86%; estimated volatility of 57.93%; and dividend yield of zero percent.
The weighted average fair market value of purchase rights granted during 1999
was estimated to be $3.81 per share based on these assumptions.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost is recognized for options
granted at a price equal to the fair market value of the common stock. In
addition, no compensation cost is recognized for stock purchase rights that
qualify under Section 423 of the Internal Revenue Code as a noncompensatory
plan. Had compensation cost for the Company's stock-based compensation plans
been determined using the fair value of the options at the grant date, the
Company's net earnings (loss) for the years ended December 31, 1999, 1998 and
1997 would have been $14,321,000, $(195,187,000) and $(11,864,000),
respectively, and the basic earnings (loss) per share would have been $.30,
$(4.77) and $(.36) per share, respectively.
(8) EMPLOYEE BENEFITS:
- --------------------------------------------------------------------------------
The Company has a qualified defined benefit pension plan which covers its
employees in the United States (Pension Plan). The Pension Plan has been
curtailed and all benefit accruals were suspended effective May 31, 1991. The
Company also has a non-qualified unfunded supplementary retirement plan (the
Supplemental Executive Retirement Plan) that provides certain officers with
defined retirement benefits in excess of qualified plan limits imposed by
Federal tax law. Benefit accruals were suspended effective May 31, 1991 in
connection with suspension of benefit accruals under the Pension Plan.
Amounts for both the Pension Plan and the Supplemental Executive Retirement
Plan are combined in the "Pension Benefits" column below.
In addition to the defined benefit pension plans described above, the Company
also accrues expected costs of providing postretirement benefits to
employees, their beneficiaries and covered dependents in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pension," (Statement No. 106). These
amounts, which consist primarily of medical benefits, are presented in the
"Postretirement Benefits" column below.
58
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(8) EMPLOYEE BENEFITS (CONTINUED):
- --------------------------------------------------------------------------------
The following tables set forth the plans' benefit obligations, fair value of
plan assets and funded status at December 31, 1999 and 1998:
BENEFIT OBLIGATIONS: Pension Benefits Postretirement Benefits
------------------ -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands) (In Thousands)
Projected benefit obligation at the beginning of the year $ 28,400 27,318 7,587 6,561
Service cost - - 269 190
Interest cost 1,931 1,924 478 486
Actuarial (gain) loss (1,684) 1,543 (1,252) 897
Benefits paid (2,270) (2,385) (563) (622)
Retiree contributions - - 76 75
------ ------ ------ ------
Projected benefit obligation at the end of the year $ 26,377 28,400 6,595 7,587
====== ====== ===== =====
FAIR VALUE OF PLAN ASSETS: Pension Benefits Postretirement Benefits
----------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands) (In Thousands)
Fair value of plan assets at beginning of the year $ 25,287 24,808 - -
Actual return on plan assets 741 2,807 - -
Plan participants' contribution - - 76 76
Employer contribution 57 57 487 546
Benefits paid (2,270) (2,385) (563) (622)
------ ------ ------ ------
Fair value of plan assets at the end of the year $ 23,815 25,287 - -
====== ====== ====== ======
FUNDED STATUS: Pension Benefits Postretirement Benefits
---------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands) (In Thousands)
Excess of projected benefit obligation over plan assets $ (2,562) (3,113) (6,595) (7,587)
Unrecognized actuarial loss 3,532 4,025 344 1,635
------ ------ ------ ------
Net amount recognized $ 970 912 (6,251) (5,952)
====== ====== ====== ======
Amounts recognized in the balance sheet consist of:
Prepaid pension cost $ 1,399 1,355 - -
Accrued benefit liability (2,562) (3,113) (6,251) (5,952)
Accumulated other comprehensive income 2,133 2,670 - -
------ ------ ------ ------
Net amount recognized $ 970 912 (6,251) (5,952)
====== ====== ====== ======
59
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(8) EMPLOYEE BENEFITS (CONTINUED):
- --------------------------------------------------------------------------------
The following tables set forth the components of the net periodic cost of the
plans and the underlying weighted average actuarial assumptions for the years
ended December 31, 1999, 1998 and 1997:
Pension Benefits Postretirement Benefits
------------------------------ ----------------------------
1999 1998 1997 1999 1998 1997
------ ---- ---- ---- ---- ----
(In Thousands) (In Thousands)
Service cost $ - - - $ 269 191 147
Interest cost 1,931 1,924 1,976 478 486 454
Expected return on plan assets (2,165) (2,130) (2,139) - - -
Recognized actuarial loss 232 62 16 39 25 -
------ ------ ------ ----- ----- ------
Total net periodic cost $ (2) (144) (147) $ 786 702 601
====== ====== ====== ===== ===== ======
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
====== ====== ====== ===== ===== ======
Expected return on plan assets 9.00% 9.00% 9.00% N/A n/a n/a
====== ====== ====== ===== ===== ======
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for 1999:
Postretirement Benefits
-----------------------------
1% Increase 1% Decrease
----------- -----------
(In Thousands)
Effect on service and interest cost components $ 142 (111)
Effect on postretirement benefit obligation 944 (771)
For measurement purposes, a 7.9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease .8% per year until it reaches 5.5% in 2003 and remain at
that level thereafter.
As a result of suspension of benefit accruals under the Pension Plan and the
supplementary retirement plan, the Company records as a liability the
unfunded pension liabilities attributable to these plans. The following
changes in the minimum unfunded pension liability were recorded as
adjustments to other comprehensive income:
1999 $ 493
1998 $ (804)
1997 $ (1,063)
60
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(8) EMPLOYEE BENEFITS (CONTINUED):
- --------------------------------------------------------------------------------
Canadian Forest's employees are members of a non-contributory defined benefit
pension plan (the Canadian Pension Plan). Benefits under the Canadian Pension
Plan are based on years of service, the employee's average annual
compensation during the highest consecutive sixty month period of pensionable
service and the employee's age at retirement.
The following tables set forth the benefit obligations, fair value of plan
assets and funded status at December 31, 1999 and 1998:
BENEFIT OBLIGATIONS: 1999 1998
---- ----
(In Thousands of Canadian Dollars)
Projected benefit obligation at the beginning of the year $ 6,888 6,239
Service cost 400 261
Interest cost 426 446
Benefits paid (380) (258)
----- ------
Projected benefit obligation at the end of the year $ 7,334 6,688
===== ======
FAIR VALUE OF PLAN ASSETS: 1999 1998
---- ----
(In Thousands of Canadian Dollars)
Fair value of plan assets at beginning of the year $ 8,580 8,171
Actual return on plan assets 751 636
Employer contributions 80 31
Benefits paid (380) (258)
----- ------
Fair value of plan assets at the end of the year $ 9,031 8,580
===== ======
FUNDED STATUS: 1999 1998
----- -----
(In Thousands of Canadian Dollars)
Excess of assets over projected benefit obligation $ (1,697) (1,892)
Unrecognized actuarial gain 1,794 1,858
Unrecognized asset at transition 268 336
----- ------
Pension accrual $ 365 302
===== ======
61
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(8) EMPLOYEE BENEFITS (CONTINUED):
- --------------------------------------------------------------------------------
The following tables set forth the components of net periodic pension cost and
the underlying weighted average actuarial assumptions for the years ended
December 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
(In Thousands of Canadian Dollars)
Service cost $ 400 260 250
Interest cost 426 446 415
Expected return on plan assets (477) (510) (466)
Amortization of unrecognized transition asset (68) (69) (70)
Recognized actuarial gains (138) (45) (4)
---- ---- ----
Total net periodic pension cost $ 143 82 125
==== ==== ====
Discount rate 6.00% 7.00% 7.00%
==== ==== ====
Expected return on plan assets 6.00% 7.00% 7.00%
==== ==== ====
RETIREMENT SAVINGS PLANS:
The Company sponsors a qualified tax-deferred savings plan in accordance with
the provisions of Section 401(k) of the Internal Revenue Code for its
employees in the United States. Employees may defer up to 15% of their
compensation, subject to certain limitations. The Company matches employee
contributions up to 5% of employee compensation. Certain limitations are in
effect with respect to withdrawals from the plan. The expense associated with
the Company's contributions was $518,000 in 1999, $551,000 in 1998 and
$482,000 in 1997.
Canadian Forest also provides a savings plan which is available to all of its
employees. Employees may contribute up to 4% of their salary, subject to
certain limitations, with Canadian Forest matching the employee contribution
in full. Certain limitations are in effect with respect to withdrawals from
the plan. The expense associated with Canadian Forest's contribution to the
plan was $150,000 in 1999, $132,000 in 1998 and $117,000 in 1997.
LIFE INSURANCE:
The Company provides life insurance benefits for certain key employees and
retirees under split dollar life insurance plans. The premiums for the life
insurance policies were $596,000 in 1999 of which $506,000 was for policies
of retired executives. The premiums for the life insurance policies were
$921,000 in 1998 and 1997, of which $831,000 was for policies for retired
executives. Under the life insurance plans, the Company is assigned a portion
of the benefits which is designed to recover the premiums paid.
62
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(9) FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------
ENERGY SWAPS AND COLLARS:
In order to hedge against the effects of declines in oil and natural gas
prices on the Company's future oil and gas production, the Company enters
into energy swap agreements with third parties and accounts for the
agreements as hedges based on analogy to the criteria set forth in Statement
of Financial Accounting Standards No. 80, "Accounting for Futures Contracts."
In a typical swap agreement, the Company receives the difference between a
fixed price per unit of production and a price based on an agreed-upon third
party index if the index price is lower. If the index price is higher, the
Company pays the difference. The Company's current swaps are settled on a
monthly basis. For the years ended December 31, 1999, 1998 and 1997, the
Company's gains (losses) under its swap agreements were $(8,684,000),
$6,305,000 and $(7,439,000), respectively. The Company also enters into
collar agreements with third parties that are accounted for as hedges. A
collar agreement is similar to a swap agreement, except that the Company
receives the difference between the floor price and the index price only if
the index price is below the floor price, and the Company pays the difference
between the ceiling price and the index price only if the index price is
above the ceiling price.
As of December 31, 1999 Forest had the following swaps in place:
Natural Gas Oil
-------------------------- -----------------------------
Average Average
BBTU's Hedged Price Barrels Hedged Price
per Day per MMBTU per Day per BBL
------- ------------ ------- ---------------
2000 59.4 $ 2.51 2,281 $ 20.53
2001 21.7 $ 2.45 - $ -
2002 16.7 $ 2.48 - $ -
In addition, the Company utilizes collars that establish a price between a
floor and ceiling to hedge natural gas and oil prices. As of December 31,
1999 Forest had collars in place for 2000 covering 5.8 BBTU's of natural gas
per day with an average floor price of $2.79 per MMBTU and an average ceiling
price of $3.03 per MMBTU, and 3,500 barrels of oil per day with an average
floor price of $18.19 per barrel and an average ceiling price of $20.93 per
barrel.
The Company also uses basis swaps in connection with natural gas swaps to fix
the differential price between the NYMEX price and the index price at which
the hedged gas is sold. At December 31, 1999 there were basis swaps in place
with weighted average volumes of 42,091 MMBTU per day in 2000 and 14,151
MMBTU per day in 2001.
The Company is exposed to off-balance-sheet risks associated with swap
agreements arising from movements in the prices of oil and natural gas and
from the unlikely event of non-performance by the counterparties to the swap
agreements.
Set forth below is the estimated fair value of certain on- and off-balance
sheet financial instruments, along with the methods and assumptions used to
estimate such fair values as of December 31, 1999:
63
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(9) FINANCIAL INSTRUMENTS (CONTINUED):
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE:
The carrying amount of these instruments approximates fair value due to their
short maturity.
SENIOR SUBORDINATED NOTES:
The fair value of the Company's 8 3/4% Notes was approximately $186,000,000,
based upon quoted market prices of the notes.
The fair value of the Company's 10 1/2% Notes was approximately $101,250,000,
based upon quoted market prices of the Notes.
ENERGY SWAP AGREEMENTS:
The fair value of the Company's energy swap agreements was a loss of
approximately $13,525,000, based upon the estimated net amount the Company would
pay to terminate the agreements.
ENERGY COLLAR AGREEMENTS:
The fair value of the Company's energy collar agreements was a loss of
approximately $5,358,000, based upon the estimated net amount the Company would
pay to terminate the agreements.
BASIS SWAP AGREEMENTS:
The fair value of the Company's basis swap agreements was a loss of
approximately $178,000, based upon the estimated net amount the Company would
pay to terminate the agreements.
(10) RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
In September 1999 Canadian Forest formed a joint venture with Anschutz to
explore lands in the Yukon Territory and Northwest Territories of Canada. The
joint venture has a term of 65 months and covers an area of mutual interest of
approximately 1.6 million acres. Anschutz will pay 66.67% of the initial costs
(up to $10,000,000) to acquire seismic and other scientific data across the area
to earn a 50% interest in such data. Anschutz will also pay 66.67% of the costs
to drill the first three wells and 60% of the costs to drill the next three
wells to earn a 50% interest in all the wells. Thereafter, Forest and Anschutz
will each pay 50% of the costs of the joint venture, which Forest will operate.
During the term of the agreement, Anschutz will compensate Forest for general,
technical and administrative overhead.
In 1998, the Company purchased certain oil and gas assets from Anschutz for
$67,565,000 as described in Note 2. Included in the purchase were exploration
concessions in Tunisia and South Africa. Forest (50%) and Anschutz (50%)
subsequently agreed to acquire additional concessions in Tunisia and South
Africa. Effective October 1, 1999, Forest and Anschutz negotiated terms of an
agreement under which Anschutz agreed to repurchase 30% of the original Tunisia
and South Africa blocks sold to Forest and Forest agreed to purchase 20% of the
new Tunisia and South Africa concessions from Anschutz. Consideration was based
on the original purchase price paid to Anschutz by Forest and on actual costs
incurred by the respective parties in obtaining the new concessions. The intent
of the agreement is that Forest will own 70% in the concessions. Forest will be
operator of all four concession blocks and will be reimbursed for general,
technical and administrative overhead. The final agreement was executed in
February, 2000 and requires a payment to Forest by Anschutz of approximately
$1,700,000.
64
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(11) COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------------------------------------------
Future rental payments for office facilities and equipment under the
remaining terms of noncancelable operating leases are $2,156,000, $1,789,000,
$1,613,000, $1,540,000 and $1,562,000 for the years ending December 31, 2000
through 2004, respectively.
Net rental payments applicable to exploration and development activities and
capitalized in the oil and gas property accounts aggregated $3,144,000 in
1999, $2,137,000 in 1998 and $1,538,000 in 1997. Net rental payments charged
to expense amounted to $4,806,000 in 1999, $3,948,000 in 1998 and $4,149,000
in 1997 . Rental payments include the short-term lease of vehicles. There are
no leases which are accounted for as capital leases.
A significant portion of Canadian Forest's natural gas production is sold
through the ProMark Netback Pool. At December 31, 1999 the ProMark Netback
Pool had entered into fixed price contracts to sell approximately 5.4 BCF of
natural gas in 2000 at an average price of $2.36 CDN per MCF and
approximately 5.3 BCF of natural gas in 2001 at an average price of
approximately $2.43 CDN per MCF. Canadian Forest, as one of the producers in
the ProMark Netback Pool, is obligated to deliver a portion of this gas. In
1999 Canadian Forest supplied 34% of the gas for the Netback Pool.
In addition to its commitments to the ProMark Netback Pool, Canadian Forest
is committed to sell .4 BCF of natural gas in 2000 at a fixed price of
approximately $3.18 CDN per MCF and .5 BCF of natural gas in 2001 at a fixed
price of approximately $3.30 CDN per MCF.
As part of ProMark's gas marketing activities, ProMark has entered into fixed
price contracts to purchase and to resell natural gas through 2001. ProMark
has commitments to purchase and commitments to resell approximately 18,300
MCF per day through October 31, 2000 and approximately 1,500 MCF per day
thereafter through October 31, 2001. The Company could be exposed to loss in
the event that a counterparty to these agreements failed to perform in
accordance with the terms of the agreements.
The Company, in the ordinary course of business, is a party to various legal
actions. In the opinion of management, none of these actions, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
65
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999
- ----
REVENUE (1) $ 83,178 87,587 93,134 93,359
========= ======== ========= ========
EARNINGS FROM OPERATIONS $ 5,745 9,835 15,076 14,154
========= ======== ========= ========
EARNINGS BEFORE EXTRAORDINARY ITEM $ 450 4,043 5,404 9,744
========= ======== ========= ========
NET EARNINGS $ 450 4,043 4,806 9,744
========= ======== ========= ========
BASIC AND DILUTED EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM $ .01 .09 .11 .18
BASIC AND DILUTED EARNINGS PER SHARE $ .01 .09 .10 .18
1998
- ----
Revenue $ 75,496 75,173 78,015 93,135
========= ======== ========= ========
Earnings (loss) from operations $ 5,898 4,931 (140,999) (54,206)
========= ======== ========= ========
Loss before extraordinary item $ (1,003) (4,404) (138,092) (54,287)
========= ======== ========= ========
Net earnings (loss) $ (1,003) 1,792 (138,092) (54,287)
========= ======== ========= ========
Basic and diluted loss per share before extraordinary item $ (.03) (.11) (3.13) (1.22)
Basic and diluted earnings (loss) per share $ (.03) .05 (3.13) (1.22)
(1) Proceeds from the sale of processing facilities in the first quarter of
1999 have been reclassified from marketing revenue and expense to other
income to conform with the financial statement presentation for the year
ended December 31, 1999.
66
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS:
- --------------------------------------------------------------------------------
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information (Statement No. 131). Forest has five reportable segments:
oil and gas operations in the Gulf Coast Offshore Region, Gulf Coast Onshore
Region, Western Region and in Canada, and marketing and processing operations in
Canada. The segments were determined based upon the type of operations in each
segment and the geographical location of each segment. The segment data
presented below was prepared on the same basis as the consolidated Forest
financial statements.
YEAR ENDED DECEMBER 31, 1999
OIL AND GAS OPERATIONS
---------------------------------------------------- MARKETING
GULF COAST REGION AND
------------------ WESTERN TOTAL PROCESSING TOTAL
OFFSHORE ONSHORE REGION U.S. CANADA TOTAL CANADA COMPANY
-------- ------- ------- ----- ------ ----- ---------- -------
(IN THOUSANDS)
REVENUE $ 79,652 39,993 30,133 149,778 41,844 191,622 165,636 357,258
MARKETING AND PROCESSING EXPENSE - - - - - - 162,617 162,617
OIL AND GAS PRODUCTION EXPENSE 12,772 14,367 6,137 33,276 13,003 46,279 - 46,279
GENERAL AND ADMINISTRATIVE EXPENSE 3,790 3,580 2,542 9,912 3,391 13,303 2,059 15,362
DEPRECIATION AND DEPLETION EXPENSE 41,904 18,331 8,936 69,171 15,726 84,897 2,321 87,218
------- ------- ------- ------- ------- ------- ------- -------
EARNINGS (LOSS) FROM OPERATIONS $ 21,186 3,715 12,518 37,419 9,724 47,143 (1,361) 45,782
======= ======= ======= ======= ======= ======= ======= =======
CAPITAL EXPENDITURES $ 28,744 35,201 6,837 70,782 42,665 113,447 - 113,447
======= ======= ======= ======= ======= ======= ======= =======
PROPERTY AND EQUIPMENT, NET $114,860 277,025 100,068 491,953 178,561 670,514 - 670,514
======= ======= ======= ======= ======= ======= ======= =======
Information for Forest's reportable segments relates to the Company's 1999
consolidated totals as follows:
(IN THOUSANDS)
--------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
EARNINGS FROM OPERATIONS FOR REPORTABLE SEGMENTS $ 45,782
ADMINISTRATIVE ASSET DEPRECIATION (972)
OTHER INCOME, NET 2,629
INTEREST EXPENSE (40,873)
TRANSLATION GAIN ON SUBORDINATED DEBT 10,561
--------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM $ 17,127
========
CAPITAL EXPENDITURES:
REPORTABLE SEGMENTS $ 113,447
INTERNATIONAL INTERESTS 8,905
ADMINISTRATIVE ASSETS AND OTHER 2,731
--------
TOTAL CAPITAL EXPENDITURES $ 125,083
========
PROPERTY AND EQUIPMENT, NET:
REPORTABLE SEGMENTS $ 670,514
INTERNATIONAL INTERESTS 21,493
ADMINISTRATIVE ASSETS, NET AND OTHER 5,609
--------
TOTAL PROPERTY AND EQUIPMENT, NET $ 697,616
========
67
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS (CONTINUED):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Oil and Gas Operations
---------------------------------------------------- Marketing
Gulf Coast Region and
------------------ Western Total Processing Total
Offshore Onshore Region U.S. Canada Total Canada Company
-------- ------- ------- ----- ------ ----- ---------- -------
(In Thousands)
Revenue $ 69,547 41,727 20,411 131,685 39,489 171,174 150,645 321,819
Marketing and processing expense - - - - - - 144,758 144,758
Oil and gas production expense 11,827 12,521 5,543 29,891 12,092 41,983 - 41,983
General and administrative expense 4,625 4,346 1,965 10,936 7,496 18,432 1,417 19,849
Depreciation and depletion expense 47,005 20,558 6,919 74,482 22,226 96,708 2,252 98,960
Impairment of oil and gas properties 51,500 59,500 28,500 139,500 60,000 199,500 - 199,500
------- ------- ------- -------- -------- -------- ------ --------
Earnings (loss) from operations $(45,410) (55,198) (22,516) (123,124) (62,325) (185,449) 2,218 (183,231)
======= ======= ======= ======== ======== ======== ====== ========
Capital expenditures $ 61,483 263,479 85,169 410,131 44,222 454,353 (10) 454,343
======= ======= ======= ======== ======== ======== ====== ========
Property and equipment, net $127,542 260,940 103,752 492,234 146,105 638,339 4,766 643,105
======= ======= ======= ======== ======== ======== ====== ========
Information for Forest's reportable segments relates to the Company's 1998
consolidated totals as follows:
(In Thousands)
--------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
Loss from operations for reportable segments $ (183,231)
Administrative asset depreciation (1,145)
Other income, net 7,561
Interest expense (38,986)
Minority interest in loss of subsidiary 517
Translation loss on subordinated debt (8,320)
--------
Loss before income taxes and extraordinary item $(223,604)
========
CAPITAL EXPENDITURES:
Reportable segments $ 454,343
International interests 14,435
Administrative assets and other 2,976
--------
Total capital expenditures $ 471,754
========
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 643,105
International interests 14,435
Administrative assets, net and other 5,770
--------
Total property and equipment, net $ 663,310
========
68
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS (CONTINUED):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Oil and Gas Operations
---------------------------------------------------- Marketing
Gulf Coast Region and
------------------ Western Total Processing Total
Offshore Onshore Region U.S. Canada Total Canada Company
-------- ------- ------- ----- ------ ----- ---------- -------
(In Thousands)
Revenue $ 78,398 14,980 8,380 101,758 54,347 156,105 183,536 339,641
Marketing and processing expense - - - - - - 175,847 175,847
Oil and gas production expense 13,566 3,896 3,400 20,862 15,422 36,284 - 36,284
General and administrative expense 6,652 1,894 1,088 9,634 5,946 15,580 1,284 16,864
Depreciation and depletion expense 46,319 4,384 1,038 51,741 24,708 76,449 2,412 78,861
-------- ------- ------- -------- ------- ------- ------- -------
Earnings from operations $ 11,861 4,806 2,854 19,521 8,271 27,792 3,993 31,785
======== ======= ======= ======== ======= ======= ======= =======
Capital expenditures $ 76,521 8,676 13,171 98,368 57,617 155,985 28 156,013
======== ======= ======= ======== ======= ======= ======= =======
Property and equipment, net $ 167,449 77,867 71,393 316,709 193,859 510,568 5,510 516,078
======== ======= ======= ======== ======= ======= ======= =======
Information for Forest's reportable segments relates to the Company's 1997
consolidated totals as follows:
(In Thousands)
--------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
Earnings from operations for reportable segments $ 31,785
Administrative asset depreciation (1,130)
Other income, net 1,289
Interest expense (21,403)
Minority interest in earnings of subsidiary (108)
Translation loss on subordinated debt (4,051)
-------
Earnings before income taxes and extraordinary item $ 6,382
=======
CAPITAL EXPENDITURES:
Reportable segments $ 156,013
Administrative assets and other 786
-------
Total capital expenditures $ 156,799
=======
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 516,078
Administrative assets, net and other 5,215
-------
Total property and equipment, net $ 521,293
=======
69
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED):
- --------------------------------------------------------------------------------
The following information is presented in accordance with Statement of Financial
Accounting Standards No. 69, "Disclosure about Oil and Gas Producing
Activities," (Statement No. 69), except as noted.
(A) COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES - The
following costs were incurred in oil and gas exploration and development
activities during the years ended December 31, 1999, 1998 and 1997:
UNITED INTER-
STATES CANADA NATIONAL TOTAL
-------- -------- -------- -------
(IN THOUSANDS)
1999
- ----
PROPERTY ACQUISITION COSTS (UNDEVELOPED
LEASES AND PROVED PROPERTIES) $ 1,203 - 1,040 2,243
EXPLORATION COSTS 20,752 37,150 7,865 65,767
DEVELOPMENT COSTS 48,827 5,516 - 54,343
-------- -------- ------- --------
TOTAL $ 70,782 42,666 8,905 122,353
======== ======== ======= ========
1998
Property acquisition costs (undeveloped
leases and proved properties) $ 310,536 17,628 11,000 339,164
Exploration costs 39,532 17,447 3,435 60,414
Development costs 61,436 9,137 - 70,573
-------- -------- ------- --------
Total $ 411,504 44,212 14,435 470,151
======== ======== ======= ========
1997
- ----
Property acquisition costs (undeveloped
leases and proved properties) $ 1,704 6,675 - 8,379
Exploration costs 50,686 14,752 - 65,438
Development costs 46,160 36,218 - 82,378
-------- -------- ------- --------
Total $ 98,550 57,645 - 156,195
======== ======== ======= ========
(B) AGGREGATE CAPITALIZED COSTS - The aggregate capitalized costs relating to
oil and gas activities at the end of each of the years indicated were as
follows:
1999 1998 1997
---- ---- ----
(In Thousands)
Costs related to proved properties $ 2,032,441 1,923,521 1,521,325
Costs related to unproved properties:
Costs subject to depletion 6,455 6,344 12,217
Costs not subject to depletion 115,618 99,487 60,901
---------- ---------- ----------
2,154,514 2,029,352 1,594,443
Less accumulated depletion and valuation allowance (1,459,738) (1,367,086) (1,075,940)
---------- ---------- ----------
$ 694,776 662,266 518,503
========== ========== ==========
70
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
(C) RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES - Results of operations from
producing activities for the years ended December 31, 1999, 1998 and 1997 are
presented below. Income taxes are different from income taxes shown in the
Consolidated Statements of Operations because this table excludes general and
administrative and interest expense.
UNITED
STATES CANADA TOTAL
---------- -------- -------
(IN THOUSANDS)
1999
- ----
OIL AND GAS SALES $ 147,951 43,024 190,975
PRODUCTION EXPENSE 33,276 13,003 46,279
DEPLETION EXPENSE 69,171 15,726 84,897
INCOME TAX EXPENSE - 5,240 5,240
-------- -------- --------
102,447 33,969 136,416
-------- -------- --------
RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES $ 45,504 9,055 54,559
======== ======== ========
1998
- ----
Oil and gas sales $ 131,251 39,489 170,740
Production expense 29,891 12,092 41,983
Depletion expense 74,482 22,226 96,708
Provision for impairment of oil and gas properties 139,500 60,000 199,500
Income tax benefit - (23,418) (23,418)
-------- -------- --------
243,873 70,900 314,773
-------- -------- --------
Results of operations from producing activities $ (112,622) (31,411) (144,033)
======== ======== ========
1997
- ----
Oil and gas sales $ 100,895 54,347 155,242
Production expense 20,863 15,421 36,284
Depletion expense 51,741 24,708 76,449
Income tax expense - 7,191 7,191
-------- -------- --------
72,604 47,320 119,924
-------- -------- --------
Results of operations from producing activities $ 28,291 7,027 35,318
======== ======== ========
(D) ESTIMATED PROVED OIL AND GAS RESERVES - The Company's estimate of its
proved and proved developed future net recoverable oil and gas reserves and
changes for 1999, 1998 and 1997 follows. The Canadian reserves include 100%
of the reserves owned by Saxon, a consolidated subsidiary in which the
Company held a majority interest in 1997 but which was a wholly owned
subsidiary as of December 31, 1998. In June 1999, Saxon was liquidated into
Canadian Forest.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions; i.e.,
prices and costs as of the date the estimate is made.
71
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
Prices include consideration of changes in existing prices provided only by
contractual arrangement, including energy swap agreements (see Note 9), but
not on escalations based on future conditions. Purchases of reserves in place
represent volumes recorded on the closing dates of the acquisitions for
financial accounting purposes.
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved mechanisms of primary
recovery are included as "proved developed reserves" only after testing by a
pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
LIQUIDS GAS
---------------------------- ------------------------------
(MBBLS) (MMCF)
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
------ ------ ----- ------ ------ -----
Balance at December 31, 1996 5,798 18,216 24,014 231,255 102,925 334,180
Revisions of previous estimates 965 247 1,212 23,173 12,779 35,952
Extensions and discoveries 876 1,688 2,564 37,759 12,005 49,764
Production (1,267) (1,940) (3,207) (34,018) (15,017) (49,035)
Sales of reserves in place (268) 11 (257) (4,349) 217 (4,132)
Purchases of reserves in place 22 288 310 1,033 7,483 8,516
Settlement of volumetric production payment - - - 3,070 - 3,070
------ ------ ------- ------- ------- -------
Balance at December 31, 1997 6,126 18,510 24,636 257,923 120,392 378,315
Revisions of previous estimates 347 (3,095) (2,748) 17,158 (9,231) 7,927
Extensions and discoveries 559 336 895 37,708 31,576 69,284
Production (2,405) (1,864) (4,269) (47,394) (14,916) (62,310)
Sales of reserves in place (2,008) (432) (2,440) (1,964) (4,215) (6,179)
Purchases of reserves in place 18,965 30 18,995 161,089 16,138 177,227
------ ------ ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1998 21,584 13,485 35,069 424,520 139,744 564,264
REVISIONS OF PREVIOUS ESTIMATES 2,108 (438) 1,670 (13,613) (497) (14,110)
EXTENSIONS AND DISCOVERIES 611 64 675 37,941 5,565 43,506
PRODUCTION (2,712) (1,685) (4,397) (49,279) (12,423) (61,702)
SALES OF RESERVES IN PLACE (308) (648) (956) (6,231) (1,462) (7,693)
PURCHASES OF RESERVES IN PLACE 66 - 66 742 - 742
------ ------ ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1999 21,349 10,778 32,127 394,080 130,927 525,007
====== ====== ======= ======= ======= =======
72
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
OIL AND CONDENSATE GAS
---------------------------- -----------------------------
(MBBLS) (MMCF)
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
------ ------ ----- ------ ------ -----
PROVED DEVELOPED RESERVES AT:
DECEMBER 31, 1996 5,311 13,260 18,571 165,629 70,856 236,485
DECEMBER 31, 1997 5,493 14,291 19,784 179,986 109,849 289,835
DECEMBER 31, 1998 16,697 13,485 30,182 332,575 135,174 467,749
DECEMBER 31, 1999 16,096 10,715 26,811 296,683 124,201 420,884
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - Future oil and
gas sales and production and development costs have been estimated using
prices and costs in effect at the end of the years indicated, except in those
instances where the sale of oil and natural gas is covered by contracts,
energy swap agreements or volumetric production payments. All cash flow
amounts, including income taxes, are discounted at 10%. The Canadian amounts
include 100% of amounts attributable to the reserves owned by Saxon, a
consolidated subsidiary in which the Company held a majority interest in
1997, but which was a wholly owned subsidiary as of December 31, 1998. In
June 1999, Saxon was liquidated into Canadian Forest. In the case of
contracts, the applicable contract prices, including fixed and determinable
escalations, were used for the duration of the contract. Thereafter, the
current spot price was used. Future oil and gas sales also include the
estimated effects of existing energy swap agreements as discussed in Note 9.
Future income tax expenses are estimated using the statutory tax rate of 35%
in the United States and a combined Federal and Provincial rate of 44.62% in
Canada. Estimates for future general and administrative and interest expense
have not been considered.
Changes in the demand for oil and natural gas, inflation and other factors
make such estimates inherently imprecise and subject to substantial revision.
This table should not be construed to be an estimate of the current market
value of the Company's proved reserves. Management does not rely upon the
information that follows in making investment decisions.
DECEMBER 31, 1999
------------------------------------
UNITED
STATES CANADA TOTAL
------- ------ -----
(IN THOUSANDS)
FUTURE OIL AND GAS SALES $ 1,431,300 444,147 1,875,447
FUTURE PRODUCTION AND DEVELOPMENT COSTS (486,637) (136,168) (622,805)
--------- --------- ---------
FUTURE NET REVENUE 944,663 307,979 1,252,642
10% ANNUAL DISCOUNT FOR ESTIMATED TIMING OF CASH FLOWS (402,191) (118,574) (520,765)
--------- --------- ---------
PRESENT VALUE OF FUTURE NET CASH FLOWS BEFORE INCOME TAXES 542,472 189,405 731,877
PRESENT VALUE OF FUTURE INCOME TAX EXPENSE (46,876) (34,908) (81,784)
--------- --------- ---------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS $ 495,596 154,497 650,093
========= ========= =========
Undiscounted future income tax expense was $114,101,000 in the United States and
$68,792,000 in Canada at December 31, 1999.
73
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED)
December 31, 1998
-------------------------------------
United
States Canada Total
-------- ------ -----
(In Thousands)
Future oil and gas sales $ 1,081,183 334,242 1,415,425
Future production and development costs (396,423) (137,711) (534,134)
--------- --------- ---------
Future net revenue 684,760 196,531 881,291
10% annual discount for estimated timing of cash flows (251,205) (82,610) (333,815)
--------- --------- ---------
Present value of future net cash flows before income taxes 433,555 113,921 547,476
Present value of future income tax expense (7,193) (17,452) (24,645)
--------- --------- ---------
Standardized measure of discounted future net cash flows $ 426,362 96,469 522,831
========= ========= =========
Undiscounted future income tax expense was $18,327,000 in the United States and
$38,910,000 in Canada at December 31, 1998.
December 31, 1997
-----------------------------------
United
States Canada Total
-------- ------ -----
(In Thousands)
Future oil and gas sales $ 759,556 470,121 1,229,677
Future production and development costs (273,850) (193,733) (467,583)
-------- -------- ---------
Future net revenue 485,706 276,388 762,094
10% annual discount for estimated timing of cash flows (176,507) (99,081) (275,588)
-------- -------- ---------
Present value of future net cash flows before income taxes 309,199 177,307 486,506
Present value of future income tax expense (19,899) (27,037) (46,936)
-------- -------- ---------
Standardized measure of discounted future net cash flows $ 289,300 150,270 439,570
======== ======== =========
Undiscounted future income tax expense was $45,911,000 in the United States and
$57,981,000 in Canada at December 31, 1997.
74
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED)
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING
TO PROVED OIL AND GAS RESERVES - An analysis of the changes in the standardized
measure of discounted future net cash flows during each of the last three years
is as follows. The Canadian amounts include 100% of the reserves owned by Saxon,
a consolidated subsidiary in which the Company held a majority interest in 1997,
but was a wholly owned subsidiary as of December 31, 1998. In June 1999, Saxon
was liquidated into Canadian Forest.
DECEMBER 31, 1999
-----------------------------------------
UNITED
STATES CANADA TOTAL
--------- ------ -----
(IN THOUSANDS)
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at beginning of year $ 426,362 96,469 522,831
Changes resulting from:
Sales of oil and gas, net of production costs (114,675) (30,021) (144,696)
Net changes in prices and future production costs 101,070 107,149 208,219
Net changes in future development costs (42,426) (450) (42,876)
Extensions, discoveries and improved recovery 68,365 3,859 72,224
Previously estimated development costs incurred during the period 41,855 5,246 47,101
Revisions of previous quantity estimates 10,737 (15,746) (5,009)
Sales of reserves in place (786) (5,945) (6,731)
Purchases of reserves in place 1,421 - 1,421
Accretion of discount on reserves at beginning of year before
income taxes 43,356 11,392 54,748
Net change in income taxes (39,683) (17,456) (57,139)
------- ------- -------
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at end of year $ 495,596 154,497 650,093
======= ======= =======
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves at December 31, 1999 was based
on average natural gas prices of approximately $2.40 per MCF in the U.S. and
approximately $1.66 per MCF in Canada and on average liquids prices of
approximately $22.41 per barrel in the U.S. and approximately $19.98 per
barrel in Canada.
75
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED)
December 31, 1998
---------------------------------------
United
States Canada Total
----------- ------ -----
(In Thousands)
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at beginning of year $ 289,300 150,270 439,570
Changes resulting from:
Sales of oil and gas, net of production costs (101,360) (27,397) (128,757)
Net changes in prices and future production costs (236,581) (73,799) (310,380)
Net changes in future development costs (15,191) (737) (15,928)
Extensions, discoveries and improved recovery 46,269 23,140 69,409
Previously estimated development costs incurred during the period 57,285 8,436 65,721
Revisions of previous quantity estimates 18,629 (10,909) 7,720
Sales of reserves in place (6,592) (3,788) (10,380)
Purchases of reserves in place 330,977 3,937 334,914
Accretion of discount on reserves at beginning of year before
income taxes 30,920 17,731 48,651
Net change in income taxes 12,706 9,585 22,291
-------- ------- --------
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at end of year $ 426,362 96,469 522,831
======== ======= ========
The computation of the standardized measure of discounted future net cash flows
relating to proved oil and gas reserves at December 31, 1998 was based on
average natural gas prices of approximately $2.03 per MCF in the U.S. and
approximately $1.38 per MCF in Canada and on average liquids prices of
approximately $9.56 per barrel in the U.S. and approximately $8.91 per barrel in
Canada.
76
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED):
- --------------------------------------------------------------------------------
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED)
December 31, 1997
----------------------------------------
United
States Canada Total
---------- -------- -------
(In Thousands)
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at beginning of year $ 384,211 175,658 559,869
Changes resulting from:
Sales of oil and gas, net of production costs (80,895) (38,926) (119,821)
Net changes in prices and future production costs (218,986) (110,526) (329,512)
Net changes in future development costs (22,830) (19,905) (42,735)
Extensions, discoveries and improved recovery 48,090 19,022 67,112
Previously estimated development costs incurred during the period 42,507 35,329 77,836
Revisions of previous quantity estimates 38,055 13,445 51,500
Sales of reserves in place (5,066) 301 (4,765)
Purchases of reserves in place 3,142 7,264 10,406
Settlement of volumetric production payment 3,126 - 3,126
Accretion of discount on reserves at beginning of year before
income taxes 45,926 24,664 70,590
Net change in income taxes 52,020 43,944 95,964
-------- -------- --------
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at end of year $ 289,300 150,270 439,570
======== ======== ========
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves at December 31, 1997 was based
on average natural gas prices of approximately $2.55 per MCF in the U.S. and
approximately $1.30 per MCF in Canada and on average liquids prices of
approximately $16.73 per barrel in the U.S. and approximately $13.71 per
barrel in Canada.
77
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION:
- --------------------------------------------------------------------------------
Canadian Forest is the issuer of the 8 3/4% Notes (see Note 3). The 8 3/4%
Notes are unconditionally guaranteed on a senior subordinated basis by
Forest. The indenture executed in connection with the 8 3/4% Notes does not
place significant restrictions on a subsidiary's ability to make
distributions to the parent. Saxon became a subsidiary guarantor of the
8 3/4% Notes in August 1998 when it became a wholly owned subsidiary of Forest
Oil Corporation. In October 1998, ownership of Saxon was transferred from
Forest to Canadian Forest. In June 1999, Saxon was liquidated into Canadian
Forest. ProMark, which is a wholly owned subsidiary of Canadian Forest,
became a subsidiary guarantor of the 8 3/4% Notes during 1998.
The Company has not presented separate financial statements and other
disclosures concerning Canadian Forest, ProMark or Saxon because management
has determined that such information is not material to holders of the 8 3/4%
Notes; however, the following condensed consolidating financial information
is being provided as of December 31, 1999 and 1998 and for the years then
ended. Investments in subsidiaries are accounted for on the cost basis.
Earnings or losses of subsidiaries are therefore not reflected in the related
investment accounts. The principal eliminating entries eliminate investments
in subsidiaries and intercompany balances. In 1997, Canadian Forest had
revenue of $214,045,000, a loss before income taxes of $3,321,000 and a net
loss of $4,952,000.
78
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED):
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1999
Canadian Producers Consolidated
Forest Oil Forest Oil Marketing Eliminating Forest Oil
Corporation Ltd. Ltd. Entries Corporation
----------- ---------- ----------- ------------ --------------
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,630 (343) (132) - 3,155
Accounts receivable 36,972 4,921 22,826 - 64,719
Other current assets 2,228 1,176 80 - 3,484
-------- -------- -------- -------- --------
Total current assets 42,830 5,754 22,774 - 71,358
Intercompany receivables 226 65,646 - (65,872) -
Net property and equipment,
at cost, full cost method 523,540 121,196 52,880 - 697,616
Goodwill and other intangible
assets, net - - 22,092 - 22,092
Intercompany investments 24,315 25,713 - (50,028) -
Other assets 5,810 3,176 - - 8,986
-------- -------- -------- -------- --------
$ 596,721 221,485 97,746 (115,900) 800,052
======== ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 41,792 14,733 16,064 - 72,589
Accrued interest 4,844 5,261 - - 10,105
Other current liabilities 3,260 221 - - 3,481
-------- -------- -------- -------- --------
Total current liabilities 49,896 20,215 16,064 - 86,175
Intercompany payables 12,746 - 53,126 (65,872) -
Long-term debt 138,467 233,213 - - 371,680
Other liabilities 13,924 338 - - 14,262
Deferred income taxes - 1,714 7,237 - 8,951
Shareholders' equity
Common stock 5,381 24,315 25,265 (49,580) 5,381
Capital surplus 721,832 - - - 721,832
Accumulated deficit (341,993) (51,404) (2,610) - (396,007)
Accumulated other
comprehensive loss (3,532) (6,906) (1,336) - (11,774)
Treasury stock, at cost - - - (448) (448)
-------- -------- -------- -------- --------
Total shareholders' equity 381,688 (33,995) 21,319 (50,028) 318,984
-------- -------- -------- -------- --------
$ 596,721 221,485 97,746 (115,900) 800,052
======== ======== ======== ======== ========
79
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED):
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Canadian Producers Consolidated
Forest Oil Forest Oil Marketing Eliminating Forest Oil
Corporation Ltd. Ltd. Entries Corporation
----------- ---------- --------- ----------- ------------
(In Thousands)
Revenue:
Marketing and processing $ 647 19 165,617 - 166,283
Oil and gas sales:
Gas 114,137 18,660 297 - 133,094
Oil, condensate and
natural gas liquids 33,814 23,285 782 - 57,881
-------- -------- -------- -------- --------
Total oil and gas sales 147,951 41,945 1,079 - 190,975
-------- -------- -------- -------- --------
Total revenue 148,598 41,964 166,696 - 357,258
Expenses:
Marketing and processing - 21 162,596 - 162,617
Oil and gas production 33,276 12,944 59 - 46,279
General and administrative 9,912 3,391 2,059 - 15,362
Depreciation and depletion 70,163 15,706 2,321 - 88,190
-------- -------- -------- -------- --------
Total operating expenses 113,351 32,062 167,035 - 312,448
-------- -------- -------- -------- --------
Earnings (loss) from operations 35,247 9,902 (339) - 44,810
Other income and expense:
Other (income) expense, net 138 (4,810) (1,733) 3,776 (2,629)
Interest expense 22,396 19,959 2,294 (3,776) 40,873
Translation gain on
subordinated debt - (10,561) - - (10,561)
-------- -------- -------- -------- --------
Total other income and
expense 22,534 4,588 561 - 27,683
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary item 12,713 5,314 (900) - 17,127
Income tax expense (benefit):
Current - (763) (2,158) - (2,921)
Deferred - (2,084) 2,491 - 407
-------- -------- -------- -------- --------
- (2,847) 333 - (2,514)
-------- -------- -------- -------- --------
Earnings (loss) before extraordinary
item 12,713 8,161 (1,233) - 19,641
Extraordinary item - loss on
extinguishment of debt (598) - - - (598)
-------- -------- -------- -------- --------
Net earnings (loss) $ 12,115 8,161 (1,233) - 19,043
======== ======== ======== ======== ========
80
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED):
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
Canadian Producers Consolidated
Forest Oil Forest Oil Marketing Forest Oil
Corporation Ltd. Ltd. Corporation
----------- ---------- --------- -----------
(In Thousands)
Cash flow from operating activities:
Net earnings (loss) before extraordinary item $ 12,713 8,161 (1,233) 19,641
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and depletion 70,163 15,706 2,321 88,190
Amortization of deferred debt costs 940 401 - 1,341
Translation gain on subordinated notes - (10,561) - (10,561)
Deferred income tax expense (benefit) - (2,084) 2,491 407
Other, net (781) (2,748) - (3,529)
(Increase) decrease in accounts receivable (4,448) 356 (857) (4,949)
(Increase) decrease in other current assets (981) 1,037 (3,360) (3,304)
Increase (decrease) in accounts payable 14,894 3,932 (582) 18,244
Increase in accrued interest and other
current liabilities 1,858 1,850 1,325 5,033
-------- ------- -------- -------
Net cash provided by operating
activities 94,358 16,050 105 110,513
Cash flows from investing activities:
Capital expenditures for property and
equipment (82,248) (42,835) - (125,083)
Proceeds from sale of assets 9,772 10,699 - 20,471
Decrease in other assets, net (1,034) - - (1,034)
-------- ------- -------- -------
Net cash used by investing
activities (73,510) (32,136) - (105,646)
Cash flows from financing activities:
Proceeds from bank borrowings 78,600 33,827 - 112,427
Repayments of bank borrowings (300,500) (37,692) - (338,192)
Issuance of 10 1/2% senior subordinated
notes, net of issuance costs 98,561 - - 98,561
Redemption of 11 1/4% senior
subordinated notes (9,083) - - (9,083)
Proceeds of common stock offering, net
of offering costs 131,188 - - 131,188
Proceeds from exercise of options and
warrants 1,589 - - 1,589
Decrease in other liabilities, net (1,588) (41) - (1,629)
-------- ------- -------- -------
Net cash used by financing activities (1,233) (3,906) - (5,139)
Intercompany advances, net (19,713) 19,713 - -
Effect of exchange rate changes on cash 15 (31) 28 12
-------- ------- -------- -------
Net increase (decrease) in cash and cash equivalents (83) (310) 133 (260)
Cash and cash equivalents at beginning of year 3,713 (33) (265) 3,415
-------- ------- -------- -------
Cash and cash equivalents at end of year $ 3,630 (343) (132) 3,155
======== ======= ======== =======
81
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED):
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
Canadian Producers Saxon Consolidated
Forest Oil Forest Oil Marketing Petroleum, Eliminating Forest Oil
Corporation Ltd. Ltd. Inc. Entries Corporation
----------- ----------- ----------- ---------- ------------ --------------
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,713 (33) (265) - - 3,415
Accounts receivable 32,524 3,150 18,376 1,537 - 55,587
Other current assets 1,513 117 532 212 - 2,374
-------- -------- -------- -------- -------- --------
Total current assets 37,750 3,234 18,643 1,749 - 61,376
Intercompany receivables 338 52,747 42,266 - (95,351) -
Net property and equipment,
at cost, full cost method 516,715 106,447 169 39,979 - 663,310
Goodwill and other intangible
assets, net - - 22,689 - - 22,689
Intercompany investments 41,775 68,513 - - (110,288) -
Other assets 8,977 3,384 - - - 12,361
-------- -------- -------- -------- -------- --------
$ 605,555 234,325 83,767 41,728 (205,639) 759,736
======== ======== ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 26,898 5,109 15,702 1,680 - 49,389
Accrued interest 4,783 5,187 - - - 9,970
Other current liabilities 1,463 206 - - - 1,669
-------- -------- -------- -------- -------- --------
Total current liabilities 33,144 10,502 15,702 1,680 - 61,028
Intercompany payables 51,143 - 42,266 1,942 (95,351) -
Long-term debt 270,076 210,432 - 24,942 - 505,450
Other liabilities 15,837 344 - - - 16,181
Deferred income taxes - 12,352 4,490 (8,756) - 8,086
Shareholders' equity
Common stock 4,465 41,775 25,265 42,800 (109,840) 4,465
Capital surplus 589,972 - - - - 589,972
Accumulated deficit (354,108) (40,805) (1,382) (18,755) - (415,050)
Accumulated other
comprehensive loss (4,974) (275) (2,574) (2,125) - (9,948)
Treasury stock, at cost - - - - (448) (448)
-------- -------- -------- -------- -------- --------
Total shareholders' equity 235,355 695 21,309 21,920 (110,288) 168,991
-------- -------- -------- -------- -------- --------
$ 605,555 234,325 83,767 41,728 (205,639) 759,736
======== ======== ======== ======== ======== ========
82
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED):
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
Canadian Producers Saxon Consolidated
Forest Oil Forest Oil Marketing Petroleum, Eliminating Forest Oil
Corporation Ltd. Ltd. Inc. Entries Corporation
----------- ---------- --------- ---------- ----------- ------------
(In Thousands)
Revenue:
Marketing and processing $ 434 14,269 136,083 293 - 151,079
Oil and gas sales:
Gas 103,641 14,293 - 3,681 - 121,615
Oil, condensate and
natural gas liquids 27,610 14,276 - 7,239 - 49,125
-------- -------- -------- -------- -------- --------
Total oil and gas sales 131,251 28,569 - 10,920 - 170,740
-------- -------- -------- -------- -------- --------
Total revenue 131,685 42,838 136,083 11,213 - 321,819
Expenses:
Marketing and processing - 13,070 131,688 - - 144,758
Oil and gas production 29,891 8,113 - 3,979 - 41,983
General and administrative 10,936 3,122 2,819 2,972 - 19,849
Depreciation and depletion 75,108 17,541 2,011 5,445 - 100,105
Impairment of oil and gas
properties 139,500 30,800 - 29,200 - 199,500
-------- -------- -------- -------- -------- --------
Total operating expenses 255,435 72,646 136,518 41,596 - 506,195
-------- -------- -------- -------- -------- --------
Loss from operations (123,750) (29,808) (435) (30,383) - (184,376)
Other income and expense:
Other income, net (1,405) (11,529) (5,373) (517) 10,746 (8,078)
Interest expense 24,430 17,933 5,817 1,552 (10,746) 38,986
Translation loss on subordinated
debt - 8,320 - - - 8,320
-------- -------- -------- -------- -------- --------
Total other income and
expense 23,025 14,724 444 1,035 - 39,228
-------- -------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item (146,775) (44,532) (879) (31,418) - (223,604)
Income tax expense (benefit):
Current - 656 493 123 - 1,272
Deferred - (13,455) (520) (13,115) - (27,090)
-------- -------- -------- -------- -------- --------
- (12,799) (27) (12,992) - (25,818)
-------- -------- -------- -------- -------- --------
Loss before extraordinary item (146,775) (31,733) (852) (18,426) - (197,786)
Extraordinary item - gain on
extinguishment of debt 6,196 - - - - 6,196
-------- -------- -------- -------- -------- --------
Net loss $(140,579) (31,733) (852) (18,426) - (191,590)
======== ======== ======== ======== ======== ========
83
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(15) SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED):
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Canadian Producers Saxon Consolidated
Forest Oil Forest Oil Marketing Petroleum, Forest Oil
Corporation Ltd. Ltd. Inc. Corporation
----------- ---------- --------- ---------- -------------
(In Thousands)
Cash flow from operating activities:
Net loss before extraordinary item $ (146,775) (31,733) (852) (18,426) (197,786)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and depletion 75,108 17,541 2,011 5,445 100,105
Impairment of oil and gas properties 139,500 30,800 - 29,200 199,500
Amortization of deferred debt costs 513 389 - - 902
Translation loss on subordinated notes - 8,320 - - 8,320
Deferred income tax benefit - (13,455) (520) (13,115) (27,090)
Other, net 167 2 (2) (865) (698)
(Increase) decrease in accounts receivable 9,604 3,553 (5,958) 1,340 8,539
(Increase) decrease in other current assets 418 (199) 1,525 (81) 1,663
Increase (decrease) in accounts payable (9,296) (4,268) 2,421 (2,666) (13,809)
Increase in accrued interest and
other current liabilities 4,848 4,359 591 - 9,798
-------- -------- -------- -------- --------
Net cash provided by operating
activities 74,087 15,309 (784) 832 89,444
Cash flows from investing activities:
Capital expenditures for property and
equipment (432,767) (35,131) 4 (3,860) (471,754)
Less stock issued for acquisition 97,376 - - - 97,376
-------- -------- -------- -------- --------
(335,391) (35,131) 4 (3,860) (374,378)
Proceeds from sale of assets 6,218 4,084 - - 10,302
(Increase) decrease in other assets, net 31,671 (32,794) - (95) (1,218)
-------- -------- -------- -------- --------
Net cash used by investing activities (297,502) (63,841) 4 (3,955) (365,294)
Cash flows from financing activities:
Proceeds from bank borrowings 428,899 33,216 - 1,973 464,088
Repayments of bank borrowings (253,049) (22,322) - (1,097) (276,468)
Repayments of production payment
obligation (58) - - - (58)
Issuance of 8 3/4% senior subordinated
notes, net of issuance costs - 74,589 - - 74,589
Decrease in other liabilities, net (1,169) (28) - - (1,197)
-------- -------- -------- -------- --------
Net cash provided by financing activities 174,623 85,455 - 876 260,954
Intercompany advances, net 46,669 (48,916) - 2,247 -
Effect of exchange rate changes on cash 175 (36) (19) - 120
-------- -------- -------- -------- --------
Net decrease in cash and cash equivalents (1,948) (12,029) (799) - (14,776)
Cash and cash equivalents at beginning of year 5,661 11,996 534 - 18,191
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year $ 3,713 (33) (265) - 3,415
======== ======== ======== ======== ========
84
PART III
For information concerning Item 10 - Directors and Executive Officers of the
Registrant, Item 11 - Executive Compensation, Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Item 13 - Certain Relationships
and Related Transactions, see the definitive Proxy Statement of Forest Oil
Corporation relative to the Annual Meeting of Shareholders to be held in May
2000 which will be filed with the Securities and Exchange Commission, which
information is incorporated herein by reference. For information concerning
Item 10 Executive Officers of Registrant, see Part I - Item 4A.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31,
1999 and 1998
3. Consolidated Statements of Operations -
Years ended December 31, 1999, 1998 and 1997
4. Consolidated Statements of Shareholders'
Equity - Years ended December 31, 1999, 1998
and 1997
5. Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 1998 and 1997
6. Notes to Consolidated Financial Statements -
Years ended December 31, 1999, 1998 and 1997
(2) Financial Statement Schedules
All schedules have been omitted because the
information is either not required or is set forth in
the financial statements or the notes thereto.
(3) Exhibits - Forest shall, upon written request to the
Corporate Secretary of Forest, addressed to Forest
Oil Corporation, 1600 Broadway, Suite 2200, Denver,
CO 80202, provide copies of each of the following
Exhibits:
Exhibit 3(i) Restated Certificate of Incorporation of Forest Oil
Corporation dated October 14, 1993, incorporated herein by reference to Exhibit
3(i) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30,
1993 (File No. 0-4597).
Exhibit 3(i)(a) Certificate of Amendment of the Restated Certificate
of Incorporation dated as of July 20, 1995, incorporated herein by reference to
Exhibit 3(i)(a) to Form 10-Q for Forest Oil Corporation for the quarter ended
June 30, 1995 (File No. 0-4597).
Exhibit 3(i)(b) Certificate of Amendment of Restated Certificate of
Incorporation dated as of July 26, 1995, incorporated herein by reference to
Exhibit 3(i)(b) to Form 10-Q for Forest Oil Corporation for the quarter ended
June 30, 1995 (File No. 0-4597).
Exhibit 3(i)(c) Certificate of Amendment of the Restated Certificate
of Incorporation dated as of January 5, 1996, incorporated herein by reference
to Exhibit 3(i)(c) to Forest Oil Corporation's Registration Statement on Form
S-2 (File No. 33-64949).
Exhibit 3(ii) Restated By-Laws of Forest Oil Corporation as of
May 9, 1990, Amendment No. 1 to By-Laws dated as of April 2, 1991, Amendment No.
2 to By-Laws dated as of May 8, 1991, Amendment No. 3 to By-Laws dated as of
July 30, 1991, Amendment No. 4 to By-Laws dated as of January 17, 1992,
Amendment No. 5 to By-Laws dated as of March 18, 1993 and Amendment No. 6 to
By-Laws dated as of September 14, 1993, incorporated herein by reference to
Exhibit 3(ii) to Form 10-Q for Forest Oil Corporation for the quarter ended
September 30, 1993 (File No. 0-4597).
85
Exhibit 3(ii)(a) Amendment No. 7 to By-Laws dated as of December 3,
1993, incorporated herein by reference to Exhibit 3(ii)(a) to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1993 (File No. 0-4597).
Exhibit 3(ii)(b) Amendment No. 8 to By-Laws dated as of February 24,
1994, incorporated herein by reference to Exhibit 3(ii)(b) to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1993 (File No. 0-4597).
Exhibit 3(ii)(c) Amendment No. 9 to By-Laws dated as of May 15, 1995,
incorporated herein by reference to Exhibit 3(ii)(c) to Form 10-Q for Forest Oil
Corporation for the quarter ended June 30, 1995 (File No. 0-4597).
Exhibit 3(ii)(d) Amendment No. 10 to By-Laws dated as of July 27,
1995, incorporated herein by reference to Exhibit 3(ii)(d) to Form 10-Q for
Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597).
Exhibit 4.1 Indenture dated as of September 8, 1993 between
Forest Oil Corporation and Shawmut Bank, Connecticut, (National Association),
incorporated herein by reference to Exhibit 4.1 to Form 10-Q for Forest Oil
Corporation for the quarter ended September 30, 1993 (File No. 0-4597).
Exhibit 4.2 First Supplemental Indenture dated as of February 8,
1996 among Forest Oil Corporation, 611852 Saskatchewan Ltd. and Fleet National
Bank of Connecticut (formerly known as Shawmut Bank, Connecticut, National
Association, which was formerly known as The Connecticut Bank), incorporated
herein by reference to Exhibit 4.2 to Form 10-K for Forest Oil Corporation for
the year ended December 31, 1995 (File No. 0-4597).
Exhibit 4.3 Second Supplemental Indenture dated as of
September 12, 1997 between Forest Oil Corporation, 611852 Saskatchewan Ltd. and
State Street Bank and Trust Company (as successor in interest to Fleet National
Bank of Connecticut (formerly known as Shawmut Bank Connecticut, National
Association)), incorporated herein by reference to Exhibit 4.3 to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1997 (File No. 1-13515).
Exhibit 4.4 Indenture dated as of September 29, 1997 among
Canadian Forest Oil Ltd., Forest Oil Corporation and State Street Bank and Trust
Company, incorporated herein by reference to Exhibit 4.1 to Forest Oil
Corporation's Registration Statement on Form S-4 dated October 31, 1997 (File
No. 333-39255).
Exhibit 4.5 Indenture dated as of February 5, 1999 between
Forest Oil Corporation and State Street Bank and Trust Company, incorporated
herein by reference to Exhibit 4.16 to Forest Oil Corporation's Registration
Statement on Form S-3 dated November 14, 1996, as amended (File No. 333-16125).
Exhibit 4.6 Fourth Amended and Restated Credit Agreement dated
as of March 4, 1999 between Forest Oil Corporation and Subsidiary Guarantors and
The Chase Manhattan Bank, as agent, incorporated herein by reference to Exhibit
4.6 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1998
(File No. 1-13515).
Exhibit 4.7 Amendment No. 1 dated as of June 24, 1999 to the
Fourth Amended and Restated Credit Agreement dated as of March 4, 1999 between
Forest Oil Corporation and Subsidiary Guarantors and The Chase Manhattan Bank,
as agent, incorporated herein by reference to Exhibit 4.1 to Form 10-Q for
Forest Oil Corporation for the quarter ended June 30, 1999 (File No. 1-13515).
Exhibit 4.8 Deed of Trust, Mortgage, Security Agreement,
Assignment of Production, Financing Statement (Personal Property Including
Hydrocarbons), and Fixture Filing dated as of December 1, 1993, incorporated
herein by reference to Exhibit 4.6 to Form 10-K for Forest Oil Corporation for
the year ended December 31, 1993 (File No. 0-4597).
86
Exhibit 4.9 Amendment No. 1 dated as of June 3, 1994 to the
Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as
of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank
(National Association), as agent, incorporated herein by reference to Exhibit
4.9 of Form 10-K for Forest Oil Corporation for the year ended December 31, 1994
(File No. 0-4597).
Exhibit 4.10 Amendment No. 2 dated as of August 31, 1995 to the
Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as
of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank
(National Association), as agent, incorporated herein by reference to Exhibit
4.14 to Form 10-K for Forest Oil Corporation for the year ended December 31,
1995 (File No. 0-4597).
Exhibit 4.11 Amendment No. 3 dated as of January 31, 1997 to the
Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as
of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank,
as agent, incorporated herein by reference to Exhibit 4.9 to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1996 (File No. 0-4597).
Exhibit 4.12 Amendment No. 4 dated as of February 3, 1998 to
Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons and Fixture Filing dated as
of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank,
as agent, incorporated herein by reference to Exhibit 4.13 to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1997 (File No. 1-13515).
Exhibit 4.13 Amendment No. 5 dated as of February 3, 1998 to
Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons and Fixture Filing dated as
of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank,
as agent), incorporated herein by reference to Exhibit 4.14 to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1997 (File No. 1-13515).
Exhibit 4.14 Deed of Trust, Mortgage, Security Agreement,
Assignment of Production, Financing Statement (Personal Property including
Hydrocarbons) and Fixture Filing dated as of June 3, 1994 between Forest Oil
Corporation and The Chase Manhattan Bank (National Association), as agent,
incorporated herein by reference to Exhibit 4.9 of Form 10-K for Forest Oil
Corporation for the year ended December 31, 1994 (File No. 0-4597).
Exhibit 4.15 Amendment No. 1 dated as of August 31, 1995 to Deed
of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated
June 3, 1994, incorporated herein by reference to Exhibit 4.16 on Form 10-K for
Forest Oil Corporation for the year ended December 31, 1995 (File No. 0-4597).
Exhibit 4.16 Amendment No. 2 dated as of January 31, 1997 to the
Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as
of June 3, 1994 between Forest Oil Corporation and The Chase Manhattan Bank, as
agent, incorporated herein by reference to Exhibit 4.8 to Form 10-K for Forest
Oil Corporation for the year ended December 31, 1996 (File No. 0-4597).
Exhibit 4.17 Rights Agreement between Forest Oil Corporation and
Mellon Securities Trust Company, as Rights Agent dated as of October 14, 1993,
incorporated herein by reference to Exhibit 4.3 to Form 10-Q for Forest Oil
Corporation for the quarter ended September 30, 1993 (File No. 0-4597).
Exhibit 4.18 Amendment No. 1 dated as of July 27, 1995 to Rights
Agreement dated as of October 14, 1993 between Forest Oil Corporation and Mellon
Securities Trust Company, incorporated herein by reference to Exhibit 99.5 of
Form 8-K for Forest Oil Corporation dated October 11, 1995 (File No. 0-4597).
87
Exhibit 10.1 Description of Executive Life Insurance Plan,
incorporated herein by reference to Exhibit 10.2 to Form 10-K for Forest Oil
Corporation for the year ended December 31, 1991 (File No. 0-4597).
Exhibit 10.2 Form of non-qualified Executive Deferred Compensation
Agreement, incorporated herein by reference to Exhibit 10.3 to Form 10-Q for
Forest Oil Corporation for the years ended December 31, 1990 (File No. 0-4597).
Exhibit 10.3 Form of non-qualified Supplemental Executive
Retirement Plan, incorporated herein by reference to Exhibit 10.4 to Form 10-K
for Forest Oil Corporation for the year ended December 31, 1990 (File No.
0-4597).
Exhibit 10.4 Form of Executive Retirement Agreement, incorporated
herein by reference to Exhibit 10.5 to Form 10-K for Forest Oil Corporation for
the year ended December 31, 1990 (File No. 0-4597).
Exhibit 10.5 Forest Oil Corporation Stock Incentive Plan and
Option Agreement, incorporated herein by reference to Exhibit 4.1 to Form S-8
for Forest Oil Corporation dated June 7, 1996 (File No. 0-4597).
Exhibit 10.6 Letter Agreement with Richard B. Dorn relating to a
revision to Exhibit 10.5, incorporated herein by reference to Exhibit 10.11 to
Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File
No. 0-4597).
Exhibit 10.7 Form of Executive Severance Agreement, incorporated
herein by reference to Exhibit 10.9 to Form 10-K for Forest Oil Corporation for
the year ended December 31, 1993 (File No. 0-4597).
Exhibit 10.8 Shareholders Agreement dated as of July 27, 1995
between Forest Oil Corporation and The Anschutz Corporation incorporated herein
by reference to Exhibit 99.7 to Form 8-K for Forest Oil Corporation dated
October 11, 1995 (File No. 0-4597).
Exhibit 10.9 First Amendment to Shareholders Agreement dated as of
January 24, 1996 between Forest Oil Corporation and The Anschutz Corporation,
incorporated herein by reference to Exhibit 10.1 to Form 10-K for Forest Oil
Corporation for the year ended December 31, 1997 (File No. 1-13515).
Exhibit 10.10 Shareholders Agreement dated as of January 24, 1996
between Forest Oil Corporation and Joint Energy Development Investments Limited
Partnership, incorporated herein by reference to Exhibit 10.12 to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1995 (File No. 0-4597).
*Exhibit 21 List of Subsidiaries of the Registrant.
*Exhibit 23 Consent of KPMG LLP
*Exhibit 24 Powers of Attorney of the following Officers and
Directors: Philip F. Anschutz, William L. Britton, Cortlandt S. Dietler, Cannon
Y. Harvey, James H. Lee, J. J. Simmons, III, Craig D. Slater, Michael B. Yanney.
*Exhibit 27 Financial Data Schedule
- --------------------------------------------------------------------------------
* filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by Forest during the
fourth quarter of 1999.
88
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FOREST OIL CORPORATION
(Registrant)
Date: March 24, 2000 By: /s/ Joan C. Sonnen
------------------------------------
Joan C. Sonnen
Vice President - Controller and
Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Robert S. Boswell Chairman and Chief Executive Officer March 24, 2000
- ------------------------- (Principal Executive Officer)
(Robert S. Boswell)
/s/ David H. Keyte Executive Vice President and March 24, 2000
- ------------------------- Chief Financial Officer
(David H. Keyte) (Principal Financial Officer)
/s/ Joan C. Sonnen Vice President - Controller and March 24, 2000
- ------------------------- Corporate Secretary
(Joan C. Sonnen) (Principal Accounting Officer)
Philip F. Anschutz* Directors of the Registrant March 24, 2000
(Philip F. Anschutz)
/s/ Robert S. Boswell
- -------------------------
(Robert S. Boswell)
William L. Britton*
(William L. Britton)
Cortlandt S. Dietler*
(Cortlandt S. Dietler)
Cannon Y. Harvey*
(Cannon Y. Harvey)
James H. Lee*
(James H. Lee)
J. J. Simmons, III*
(J. J. Simmons, III)
Craig D. Slater*
(Craig D. Slater)
Michael B. Yanney*
(Michael B. Yanney)
*By /s/ Joan C. Sonnen March 24, 2000
------------------------------
Joan C. Sonnen
(as attorney-in-fact for
each of the persons indicated)
89