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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 [Fee Required]
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
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: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, Par Value $.10 Per Share
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 $167,636,694 as of February 28, 1999 (based
on the last reported sale price of such stock on the New York Stock Exchange
Composite Tape).
There were 44,647,295 shares of the registrant's Common Stock, Par Value
$.10 Per Share outstanding as of February 28, 1999.
Document incorporated by reference: Proxy Statement of Forest Oil
Corporation relative to the Annual Meeting of Shareholders to be held on May
12, 1999, which is incorporated into Part III of this Form 10- K.
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 40
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 81
Item 11. Executive Compensation 81
Item 12. Security Ownership of Certain Beneficial Owners and Management 81
Item 13. Certain Relationships and Related Transactions 81
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 81
PART I
ITEM 1. BUSINESS
THE COMPANY
Forest Oil Corporation and its subsidiaries are engaged in the acquisition,
exploration, development, production and marketing of natural gas and liquids
in North America. 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.
Since 1995 the Anschutz Corporation, a private Denver-based corporation, has
invested almost $175 million in Forest and currently owns approximately 40%
of our common stock.
Forest's principal reserves and producing properties are located in the
onshore and offshore Gulf of Mexico region, West Texas, Wyoming and western
Canada. Approximately 72% of our oil and gas reserves are in the United
States and 28% are in Canada. Approximately 70% of total 1998 production was
in the United States and approximately 30% was in Canada. We currently
operate 30 offshore platforms in the Gulf of Mexico, and 1998 production from
this area accounted for approximately 36% of our total production on an MCFE
basis. (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.)
Forest's estimated proved reserves were 775 BCFE at December 31, 1998, of
which approximately 73% was natural gas. This represents an increase of 47%
compared to estimated proved reserves of 526 BCFE at December 31, 1997 of
which approximately 72% was natural gas.
Forest operates from production offices located in Lafayette, Louisiana;
Denver, Colorado; and Calgary, Alberta. Forest's corporate headquarters are
located in Denver, Colorado. On December 31, 1998 Forest had 274 employees,
of whom 211 were salaried and 63 were hourly. Of the salaried employees, 17
were employed by ProMark, our marketing and processing business. For
financial information relating to our industry and operational segments, see
Note 13 of Notes to Consolidated Financial Statements.
OPERATING STRATEGY
Forest's strategy is to focus on exploration, development and acquisition of
oil and gas producing properties located in selected areas in North America.
We concentrate on areas where we have expertise and experience, and where we
believe significant exploration potential exists within a well-defined
marketing infrastructure. We intend to pursue this strategy through the
following initiatives:
DIVERSIFY NORTH AMERICAN OPERATIONS. Through our acquisitions and capital
programs in Canada, we have significantly diversified our operations and
added long-lived reserves and production assets to our development portfolio.
Expansion into Canada has also provided diversification to the exploration
portfolio through exposure to exploratory plays with different geological and
geophysical characteristics. We further diversified in 1998 with a
significant acquisition onshore in South Louisiana. This acquisition added
substantial development projects to our portfolio, as well as deep
exploratory opportunities similar to those we have offshore in the Gulf of
Mexico.
In addition, we believe that our geographic positions provide attractive
natural gas market diversification. We believe that this diversification
could benefit our operating margins as improvements in the infrastructure of
the North American gas transportation system create price differentials that
are more closely related to proximity to markets rather than the availability
of transportation. Supporting this belief is the fact that the average price
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differential between Canadian spot gas prices and Henry Hub spot gas prices
for the three months ended December 31, 1998 decreased by approximately $1.41
U.S. per MMBTU compared to the same period in the prior year.
INCREASE RESERVES THROUGH FOCUSED EXPLORATION. Forest explores as a source of
growth, targeting opportunities that benefit from the selective use of
advanced technologies in mature basins (such as new 3-D seismic processing
techniques and production and completion methods) as well as those
opportunities in emerging basins which may not require new technology. Since
improving our capitalization, we have accelerated the exploration of our
prospect inventory, increased the inventory of prospects, and have generally
retained a larger working interest in such prospects. Forest seeks to
maintain a balanced exploration portfolio that includes higher risk
exploration prospects (primarily in the Northwest Territories and Alberta
foothills) that have the potential for large reserves, as well as lower risk
projects (primarily in the Gulf of Mexico). We participate in exploration
activities through selective drilling for our own account, as well as through
farmout arrangements in certain circumstances. In 1998, Forest dedicated
almost 50% of direct exploration and development spending to exploration
activities. In 1999, we have reduced our exploration and development budget
but have still dedicated approximately 40% to exploration activities.
ENHANCE EXISTING PROPERTIES THROUGH AN ACTIVE DEVELOPMENT PROGRAM. We
continually evaluate new imaging, drilling and completion technologies and
their potential application to our existing properties in order to identify
additional development opportunities. We also pursue workovers,
recompletions, secondary recovery operations and other production enhancement
techniques on our properties to increase production.
Our development expenditures and activities on our existing properties
increased in 1998 as compared to prior years. We increased our expenditures
for development from $13.2 million in 1995 to $70.6 million in 1998. We have,
however, reduced our 1999 capital expenditure budget (exploration and
development) due to lower oil and gas prices. We have budgeted net outlays
after property sales of approximately $60 million for 1999, which is less
than our expected cash flow from our producing properties. Approximately 60%
of the 1999 capital expenditures is budgeted for development projects and 40%
for exploration. Approximately two-thirds of budgeted expenditures are
dedicated to U.S. projects and one-third to Canadian projects.
CONTINUE TO PURSUE ATTRACTIVE ACQUISITIONS. We continue to pursue
acquisitions of producing properties. Our selection criteria include (i)
strategic location in a core area of operations or establishment of a new
core area through the acquisition of a significant property base, (ii)
potential for increasing reserves and production through lower risk
exploitation and development, (iii) exploration potential that is consistent
with our objectives, (iv) attractive potential return on investment, and (v)
opportunities for improved operating efficiencies. In Canada, we have an
additional criterion that natural gas properties include sufficient plant
processing capacity and adequate access to markets.
CONTROL OPERATIONS TO MAXIMIZE EFFICIENCIES. We emphasize control of
operations in all of our core operating areas and in our evaluation of
acquisition opportunities. Control of operations positions us to maximize
synergies and operating efficiencies and to control the timing and costs of
drilling operations in order to increase margins and the returns on capital
investments.
CONSERVE CAPITAL RESOURCES. Under the current difficult operating environment
caused by low oil and gas prices, we have reduced budgeted direct exploration
and development spending for 1999 by 40% compared to 1998. By reducing our
planned spending, we plan to improve our liquidity position by using any
excess cash flow from operations to reduce indebtedness.
MAINTAIN FINANCIAL FLEXIBILITY. We are committed to maintaining financial
flexibility, which we believe is important for the successful execution of
our strategy. From January 1, 1995 through December 31, 1998, Forest added a
total of approximately $385 million of common equity through the issuance of
common stock. We seek to reduce our level of debt as a percentage of our
capitalization.
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1998 TRANSACTIONS
In February 1998, Forest purchased interests in oil and gas properties in 13
fields located onshore in Louisiana from a private company for total
consideration of approximately $231 million. The consideration consisted of
approximately $217 million of cash and one million shares of Forest common
stock. The properties had estimated proved reserves of approximately 189 BCFE
at the time of purchase.
In May 1998, we acquired certain oil and gas interests of Unocal Canada
Exploration Limited and Unocal Canada Limited in the Northwest Territories
and frontier areas of Canada. The assets acquired included Unocal's 35%
working interest in the P-66 discovery well on the Flett Prospect in the
southern Northwest Territories, approximately 225,000 net acres of lands in
the Northwest Territories held under exploration licenses on a work permit
basis, certain other working interests and Unocal's data base including
seismic, surface geology, reservoir engineering and other information
collected during Unocal's 40 years of exploration activity in the Northwest
Territories.
In June 1998, we retired our only remaining nonrecourse production payment
loan by issuing to the lender 271,214 shares of common stock valued at
$3,750,000. The loan, which originated in May 1992, had a remaining principal
amount of approximately $14.6 million and a book value of approximately $9.9
million. The loan was secured primarily by certain oil and gas properties in
Oklahoma and the Gulf of Mexico. As a result of the settlement, we recorded
an extraordinary gain of approximately $6.2 million in June 1998.
In June 1998, Forest issued 5.9 million shares of common stock to Anschutz in
exchange for certain oil and gas assets. The oil and gas assets acquired
included an interest in the Anschutz Ranch East Field located in Utah and
Wyoming. Our interest in this field had net proved developed producing
reserves estimated at approximately 72 BCFE at the date of acquisition. We
also acquired all of Anschutz's Canadian oil and gas assets, comprised
primarily of approximately 170,000 net acres of undeveloped land as well as
5.2 BCFE of estimated proved reserves. Our acquisition included certain of
Anschutz's international oil and gas assets comprised of 13 international
projects encompassing approximately 18 million net acres of undeveloped land.
In August 1998, we acquired all of the outstanding common shares of Saxon
Petroleum Inc. not previously owned by us in exchange for approximately 1.1
million shares of Forest common stock. We expect to realize general and
administrative cost savings of approximately $1.5 million (U.S.) per year as
a result of the consolidation of the operations of Saxon with those of our
wholly owned Canadian subsidiary, Canadian Forest Oil Ltd.
Acquisitions have been an important component of our growth strategy, but we
have not made acquisitions simply to increase the size of the company.
Rather, we seek to add assets where there is a long-term market or
unrecognized exploration opportunity. Both the Louisiana and Anschutz
acquisitions in 1998 offer Forest upside potential through both exploration
and development of these fields. The Anschutz acquisition offers development
opportunities at the Anschutz Ranch East Field, as well as exploration
opportunities internationally. Through recompletions and workovers, we expect
to increase production on the Louisiana properties in 1999. In addition, we
have identified numerous exploration opportunities in deeper horizons on
these properties.
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 U.S. is generally sold
month to month on the spot market. 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.
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In Canada, liquids are typically sold under short-term contracts at prices
based upon posted field prices. 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 85% of its natural gas production through the ProMark Netback
Pool in 1998.
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 1998 averaged 129 MMCF per day, of
which Canadian Forest supplied approximately 35 MMCF per day or 27%.
Approximately 26% of the volumes sold in the ProMark Netback Pool in 1998
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 two other
marketing services for producers and purchasers of natural gas. ProMark
manages long-term gas supply contracts for its industrial customers by
providing full-service purchasing, accounting and gas nomination services for
these 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.
The assets acquired from Anschutz in 1998 included oil and gas interests in
various foreign countries. The international interests include international
concessions, rights or agreements located in Albania, Austria, Germany,
Italy, Romania, Sicily, South Africa, Spain, Switzerland, Thailand and
Tunisia. Forest intends to further develop prospects and may elect to promote
them out, thereby reducing its working interest while maintaining exposure to
the most attractive opportunities. At this time, we do not anticipate making
any major investments outside of North America. These international interests
comprise approximately 2% of the Company's total assets at December 31, 1998.
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
4
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.
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. It is unclear what impact, if any,
increased competition within the natural gas industry under Order No. 636
will have on the Company's activities, although recent price declines for
natural gas may, in part, reflect increased competition and
5
more efficient gas transportation resulting from Order No 636. 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 begun a broad review
of its transportation regulations, including how they operate in conjunction
with state proposals for retail gas market restructuring, whether to
eliminate cost-of-service rates for short-term transportation, whether to
allocate all short-term capacity on the basis of competitive auctions, and
whether changes to its long-term transportation policies may also be
appropriate to avoid a market bias toward short-term contracts.
While any additional FERC action on these matters would affect the Company
only indirectly, these policy statements and proposed rule changes are
intended to further enhance competition in natural gas markets. The Company
cannot predict what 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. The
Company is not able at this time to predict the effects of Order Nos. 561 and
561-A, if any, on the 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. One of the FERC's recently initiated inquiries involves whether it
should alter its regulatory treatment of pipelines and services on the OCS.
The Company cannot predict the outcome of this inquiry, or what, if any,
affect it 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 under consideration proposals to change 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
take on this matter, nor can it predict at this stage how the Company might be
affected if the MMS adopts such changes.
6
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.
OIL SPILL FINANCIAL RESPONSIBILITY REQUIREMENTS - UNITED STATES. As
originally enacted, the Oil Pollution Act of 1990 (OPA) would have required
the Company to establish $150 million in financial responsibility to cover
oil spill related liabilities. Under recent amendments to the OPA, the
responsible person for an offshore facility located seaward of state waters,
including OCS facilities, will be required to provide evidence of financial
responsibility in the amount of $35 million. Although the financial
responsibility requirement for offshore facilities located landward of the
seaward boundary of state waters (including certain facilities in coastal
inland waters) is a lesser amount ($10 million), the Company currently has a
number of offshore facilities located beyond state waters and, thus, is
subject to the $35 million financial responsibility requirement. On August
11, 1998, the MMS promulgated a final rule implementing the financial
responsibility requirements set forth under the OPA amendments. The amount of
financial responsibility may be increased, 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 the facility may exceed the applicable threshold volumes
specified under the MMS final rule. The Company expects that financial
responsibility could be established through insurance, guaranty, indemnity,
surety bond, letter of credit, qualification as a self insurer or a
combination thereof. The Company cannot predict whether these financial
responsibility requirements under the OPA amendments or the MMS final rule
will result in the imposition of significant additional annual costs to the
Company in the future, but in any event, the impact of the OPA amendments and
the MMS rule is not expected to be any more burdensome to the Company than it
will be to other similarly situated companies involved in oil and gas
exploration and production in the Gulf of Mexico. The Company currently
satisfies similar requirements for its OCS leases under OCSLA.
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, producers of oil negotiate sales contracts directly with oil
purchasers, with the result that the market determines the price of oil. The
price depends in part on oil quality, prices of competing fuels, distance to
market, the value of refined products, and the supply/demand balance. Oil
exports may be made pursuant to export contracts with terms not exceeding one
year in the case of light crude, and not exceeding two years in the case of
heavy crude, provided that an order approving any such export has been
obtained from the National Energy Board (NEB). Any oil export to be made
pursuant to a contract of longer duration (to a maximum of 25 years) requires
an exporter to obtain an export license from the NEB and the issue of such a
license requires the approval of the Governor in Council.
In Canada, the price of natural gas sold in interprovincial and international
trade is determined by negotiation between buyers and sellers. Natural gas
exported from Canada is subject to regulation by the NEB and the Government
of Canada. 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 and the Government of Canada. As is the case
with oil, natural gas exports for a term of less than two years or for a term
of 2 to 20 years (in quantities of not more than 30,000 m(3)/day) must be made
pursuant to an NEB order, or, in the case of exports for a longer duration
(to a maximum of 25 years) or a larger quantity, pursuant to an export
license from the NEB with the Governor in Council's approval.
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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.
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.
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.
In Alberta, a producer of oil or natural gas is entitled to a credit against
the royalties payable to the Crown by virtue of the ARTC (Alberta royalty tax
credit) program. The ARTC program is based on a price sensitive formula, and
the ARTC rate varies between 75%, at prices for oil below $100 CDN per cubic
meter, and 25%, at prices above $210 CDN per cubic meter. The ARTC rate is
applied to a maximum of $2 million CDN of Alberta Crown royalties payable for
each producer or associated group of producers. Crown royalties on production
from producing properties acquired from corporations claiming maximum
entitlement to ARTC will generally not be eligible for ARTC. The rate is
established quarterly based on the average "par price", as determined by the
Alberta Department of Energy for the previous quarterly period. Canadian
Forest is eligible for ARTC credits only on eligible properties acquired and
wells drilled after the change of control. On December 22, 1997 the
Government of Alberta gave notice that they intended to review the ARTC
program. Any changes to the program will not take effect prior to 2001.
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.
ENVIRONMENTAL MATTERS. Extensive U.S. federal, state and local laws govern
oil and natural gas operations regulating the discharge of materials into the
environment or otherwise relating 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 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
8
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. 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 and regulations and that continued compliance with existing requirements
will not have a material adverse impact on the Company. Nevertheless, changes
in environmental law 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. Alternately, pending
amendments to Superfund presently under consideration by the U.S. Congress
could relax many of the burdensome cleanup and liability standards
established under the Statute.
The U.S. Oil Pollution Act (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 an onshore facility
pipeline or vessel, 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 Minerals Management Service (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. 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.
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 new environmental
responsibilities on oil and natural gas operators in Alberta and in certain
instances also imposes greater penalties for violations.
9
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 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.
FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act of 1934, as amended. You can identify these
statements by words such as "may," will," "expect," anticipate," estimate,"
"continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or financial
condition or state other forward-looking information. When considering such
forward-looking statements, you should keep in mind the risk factors and
other cautionary statements in this Form 10-K. The information disclosed
under "Risk Factors" 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 and have declined
significantly recently. 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.
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 REVENUES, CASH FLOWS AND PROFITABILITY. Prices for oil and natural
gas fluctuate widely and have declined significantly recently. The average
spot price received by Forest for natural gas produced in the Gulf Coast
decreased from approximately $2.61 per MCF at December 31, 1997 to $2.17 per
MCF at December 31, 1998 and decreased to approximately $1.70 per MCF at
March 1, 1999. During the same period, the NYMEX price for crude oil
decreased from $17.61 per barrel at December 31, 1997 to $12.06 per barrel at
December 31, 1998 and was $12.24 per barrel at March 1, 1999.
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Natural gas prices affect Forest more than oil prices, because most of its
production and reserves are natural gas. At December 31, 1998, 73% of our
estimated proved reserves consisted of natural gas on an MCFE basis and,
during 1998, approximately 71% 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. We recently reduced our
1999 capital expenditures budget because of lower oil and gas prices. 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 and prices may decline
further. 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 conditions 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 oil or natural gas prices would have a
material adverse effect on our business and financial results. Energy swap
agreements may limit the risk of declines in prices, but such arrangements
may also limit additional revenues from price increases.
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 4, 5, 10 and 11 of Notes to
Consolidated Financial Statements.
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 SEC 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. This process involves 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. Any significant variance
could materially affect the estimated quantities and present value of
reserves set forth in this Form 10-K. 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.
At December 31, 1998, approximately 16% of our estimated proved reserves were
undeveloped. Recovery of undeveloped reserves requires significant capital
expenditures and successful drilling operations. The reserve data assumes
that we will make significant capital expenditures to develop our reserves.
Although we have prepared
11
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.
You should not assume that the present value of future net revenues referred
to in this Form 10-K is the current market value of our estimated oil and gas
reserves. In accordance with SEC 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. Recent significant declines in oil and gas prices have reduced
Forest's present value of future net revenues. 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 proved reserves and
their present value. For example, we have reduced our 1999 capital
expenditure budget. This reduction will delay cash flows and thereby reduce
present value. In addition, the 10% discount factor, which is required by the
SEC 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, 1998, our
long-term debt was $505.5 million including $271.9 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 75% of our total capitalization at December 31, 1998.
Our level of debt affects our operations in several important ways, including
the following:
- a large 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 may 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 higher level
of debt increases the risk that Forest may default on its 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
an 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 could 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.
12
LOWER OIL AND GAS PRICES INCREASE THE RISK OF CEILING LIMITATION WRITEDOWNS.
We use the full cost method to account for 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 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, Forest recorded writedowns of $175 million ($199.5 million pre-tax).
The subsequent significant declines in natural gas prices increase the risk
that we will have a ceiling limitation writedown in the first quarter of
1999. We cannot assure you that we will not experience ceiling limitation
writedowns in the future.
FOREST'S LIQUIDITY IS SUBJECT TO THE RISK OF THE AVAILABILITY OF FINANCING.
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;
- 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; o sales of prospects and technical
information; and o 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.
FOREST'S ABILITY TO REPLACE PRODUCTION WITH NEW RESERVES IS HIGHLY DEPENDENT
ON ACQUISITIONS OR SUCCESSFUL DEVELOPMENT AND EXPLORATION ACTIVITIES, WHICH
IN TURN ARE ADVERSELY AFFECTED BY FOREST'S REDUCED 1999 CAPITAL EXPENDITURES
BUDGET. 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 development and exploration 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 development, acquisition and exploration
activities will result in additional proved reserves or that we will be able
to drill productive wells at acceptable costs.
We have reduced our 1999 capital expenditures budget. It is unlikely,
therefore, that Forest will replace 1999 production based on the lower level
of capital expenditures.
FOREST'S 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, many of which are beyond our control. These
risks include the following:
13
- that no commercially productive oil or natural gas reservoirs will be
found;
- that oil and gas drilling and production activities may be shortened,
delayed or canceled; and
- that our ability to develop, produce and market our reserves may be
limited by:
(1) title problems,
(2) weather conditions,
(3) compliance with governmental requirements, and
(4) mechanical difficulties or shortages or delays in the delivery of
drilling rigs, work boats and other equipment.
In the past, we have had difficulty securing drilling equipment in certain of
our core areas. 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. Dry wells and wells
that are productive but do not produce sufficient net revenues after
drilling, operating and other costs are unprofitable. In addition, our
properties may be susceptible to hydrocarbon draining from production by
other operations on adjacent properties.
Our industry also 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, ruptures or discharges of 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 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, 1999, the combined production from six of our offshore
Gulf of Mexico wells represented approximately 28% of Forest's consolidated
daily deliverability. Our production, revenue and cash flow will be adversely
affected if production from these six wells decreases significantly.
THE PROFITABILITY OF FOREST'S GAS MARKETING ACTIVITIES IS SUBJECT TO NUMEROUS
RISKS, INCLUDING CREDIT RISKS AND RESPONSE TO CHANGING CONDITIONS. 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 obligation.
FOREST'S INTERNATIONAL OPERATIONS ARE SUBJECT TO THE RISKS OF CURRENCY
FLUCTUATIONS AND IN SOME INSTANCES 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. dollar price indices. As a result, Canadian
operations are subject to the risk of fluctuations in the relative values of
the Canadian
14
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 recently acquired
additional oil and gas assets in other countries. Our foreign operations may
also be adversely affected by local political and economic developments,
royalty and tax increases and other foreign laws or policies, as well as U.S.
policies affecting trade, taxation and investment in other countries.
FOREST OPERATES IN A HIGHLY COMPETITIVE INDUSTRY WHICH MAY ADVERSELY AFFECT
ITS 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.
FOREST'S OPERATIONS ARE SUBJECT TO THE NUMEROUS RISKS OF DRILLING. Drilling
involves numerous risks, including the risk that drilling efforts will not
find commercially productive oil or gas reservoirs. The cost of drilling and
completing wells is often unpredictable, and drilling operations may be
shortened, delayed or canceled as a result of a variety of risks. These risks
include unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, weather conditions and shortages
or delays in delivery of equipment. We cannot assure you that our future
drilling activities will be successful. Forest's current inventory of seismic
surveys will not necessarily increase the likelihood that it will drill or
complete commercially productive wells. In addition, the volumes of reserves
discovered, if any, would not necessarily be greater than Forest would have
discovered without its current inventory of seismic surveys.
FOREST'S ACQUISITIONS ARE SUBJECT TO THE RISKS OF THE UNCERTAINTIES OF
RECOVERABLE RESERVES AND POTENTIAL LIABILITIES. Our recent growth is due in
part 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 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 acquisitions at acceptable prices.
THE MARKETABILITY OF FOREST'S 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
changed, the financial impact on Forest could be substantial. The
availability of markets is beyond our control.
FOREST'S OIL AND GAS OPERATIONS ARE SUBJECT TO VARIOUS U.S. FEDERAL, STATE
AND LOCAL AND CANADIAN FEDERAL AND PROVINCIAL GOVERNMENTAL REGULATION THAT
MATERIALLY AFFECT ITS OPERATIONS. Matters regulated include discharge permits
for drilling operations, drilling and abandonment bonds, 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 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 responsibility to address 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, subject to
certain limitations. A substantial spill from one of our facilities
15
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. To
date, our expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been
significant. We believe that we are in substantial compliance with all
applicable laws and regulations. However, the requirements of such laws and
regulations are frequently changed. 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 February 28, 1999, Anschutz owned
approximately 40% 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
prohibits Anschutz from acquiring in excess of 49.9% of the outstanding
shares of common stock. The shareholder agreement 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.
16
ITEM 2. PROPERTIES
Forest's principal reserves and producing properties are oil and gas
properties located in the onshore and offshore Gulf of Mexico region, West
Texas, Wyoming and Alberta, Canada.
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, 1997 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), the MMS and the Department of Energy (DOE). The reserve
estimate report filed with the MMS related solely to Forest's Gulf of Mexico
reserves. There were no differences between the reserve estimates included in
the MMS report, 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, 1998, 1997 and 1996:
Net Natural Gas and Liquids Production (1)
------------------------------------------
1998 1997 (2) 1996 (2)
------------- ------------- -----------
United States:
Natural Gas (MMCF) 47,394 34,018 28,624
Liquids (MBBLS) 2,405 1,267 1,104
Canada:
Natural Gas (MMCF) 14,916 15,017 13,872
Liquids (MBBLS) 1,864 1,940 1,645
Total (MMCFE) 87,924 68,277 58,990
(1) Volumes reported for natural gas include immaterial 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.
(2) Includes amounts delivered pursuant to volumetric production payments. See
Note 5 of Notes to Consolidated Financial Statements.
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, 1998, 1997 and 1996 for
Forest and its subsidiaries:
United States Canada
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- -------- --------- ---------- --------
Average Sales Prices:
NATURAL GAS
Total production (MMCF) (1) 47,394 34,018 28,624 14,916 15,017 13,872
Sales price received (per MCF) $ 2.10 2.53 2.36 1.23 1.46 1.41
Effects of energy swaps (per MCF) (2) .09 (.21) (.23) (.02) - (.04)
--------- --------- -------- --------- ---------- --------
Average sales price (per MCF) $ 2.19 2.32 2.13 1.21 1.46 1.37
LIQUIDS:
Oil and condensate:
Total production (MBBLS) 1,919 1,137 964 1,389 1,498 1,308
Sales price received (per BBL) $ 12.16 18.20 20.03 11.95 18.07 20.64
Effects of energy swaps (per BBL) (2) .45 (.23) (1.07) 1.06 (.08) (1.82)
--------- --------- -------- --------- ---------- --------
Average sales price (per BBL) $ 12.61 17.97 18.96 13.01 17.99 18.82
Natural gas liquids:
Total production (MBBLS) 486 130 140 475 442 337
Average sales price (per BBL) $ 7.00 10.62 10.48 7.25 12.42 11.87
Total liquids production (MBBLS) 2,405 1,267 1,104 1,864 1,940 1,645
Average sales price (per BBL) $ 11.48 17.21 17.88 11.54 16.72 17.40
Average production cost (per MCFE) (3) $ .48 .50 .56 .46 .58 .52
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 801 MMCF and 3,168 MMCF 1997 and
1996, respectively. Natural gas delivered pursuant to volumetric production
payment agreements represented approximately 2% and 7% of total natural gas
production 1997 and 1996, respectively. 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 5 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 26,527 MMCF,
13,990 MMCF and 12,741 MMCF for the years ended December 31, 1998, 1997 and
1996, respectively. Hedged oil and condensate volumes were 392,900 barrels,
949,000 barrels and 895,600 barrels for 1998, 1997 and 1996, respectively.
The aggregate gains (losses) under energy swap agreements were $6,305,000,
$(7,439,000) and $(10,422,000), respectively, for the years ended December
31, 1998, 1997 and 1996 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, 1998:
Productive Wells (1)
-------------------------
United States Canada
------------- ------
Gross (2)
Gas 352 358
Oil 70 440
----- -----
Totals (3) 422 798
----- -----
----- -----
Net (4)
Gas 142.5 130.0
Oil 29.2 217.6
----- -----
Totals 171.7 347.6
----- -----
----- -----
(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 23 dual completions in the United States and 17 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,
1998 and 1997. 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 4 of Notes
to Consolidated Financial Statements.
Developed Acreage (1) Undeveloped Acreage (2)
--------------------- -----------------------
Gross (3) Net (4) Gross (3) Net (4)
--------- -------- ---------- --------
United States:
Louisiana offshore 117,947 53,498 61,133 42,118
Texas onshore 82,134 31,457 42,195 11,393
Texas offshore 36,742 23,624 52,057 29,004
Oklahoma 26,068 5,052 6,892 2,465
Wyoming 10,217 5,604 90,170 52,379
Other 19,765 9,429 23,963 10,912
------- ------- ---------- ----------
292,873 128,664 276,410 148,271
Canada:
Alberta 261,365 117,853 322,971 189,011
Ontario 10,707 5,354 303,681 151,840
Northwest Territories - - 718,166 350,133
Beaufort Sea - - 384,744 7,248
British Columbia offshore - - 112,308 112,308
Other 39,523 23,615 61,216 32,520
------- ------- ---------- ----------
311,595 146,822 1,903,086 843,060
Other:
South Africa - - 8,100,000 7,290,000
Switzerland - - 3,400,000 3,060,000
Tunisia - - 2,520,420 2,520,420
Germany - - 1,369,775 1,369,775
Albania - - 1,113,185 333,956
Italy - - 1,039,090 917,725
Romania - - 766,900 766,900
Thailand - - 730,675 730,675
------- ------- ---------- ----------
- - 19,040,045 16,989,451
------- ------- ---------- ----------
Total acreage at December 31, 1998 604,468 275,486 21,219,541 17,980,782
------- ------- ---------- ----------
------- ------- ---------- ----------
Total acreage at December 31, 1997 707,710 301,579 1,499,682 523,783
------- ------- ---------- ----------
------- ------- ---------- ----------
(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 1998, Forest's gross and net developed acreage decreased approximately
15% and 9%, respectively, as a result of sales of producing properties. Gross
and net undeveloped acreage increased significantly as a result of
international projects acquired in 1998.
Approximately 13% of our net undeveloped acreage at December 31, 1998 is
under leases that have terms expiring in 1999, if not held by production, and
approximately 13% of net undeveloped acreage will expire in 2000 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, 1998, 1997 and 1996 as set
forth below. This information does not include wells drilled under farmout
agreements.
United States Canada
--------------------- --------------------
1998 1997 1996 1998 1997 1996
Gross Exploratory Wells:
Dry (1) 6 4 4 7 5 4
Productive (2) 7 8 9 2 7 2
---- ---- ---- ---- ---- ----
13 12 13 9 12 6
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Net Exploratory Wells:(3)
Dry (1) 4.3 1.4 2.0 5.6 3.9 2.9
Productive (2) 4.7 4.0 3.5 .7 5.3 1.4
---- ---- ---- ---- ---- ----
9.0 5.4 5.5 6.3 9.2 4.3
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Gross Development Wells:
Dry (1) - 5 3 2 15 4
Productive (2) 9 13 15 14 31 70
---- ---- ---- ---- ---- ----
9 18 18 16 46 74
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Net Development Wells:(3)
Dry (1) - .7 .5 2.0 10.6 .9
Productive (2) 2.6 4.0 1.9 10.0 21.5 19.9
---- ---- ---- ---- ---- ----
2.6 4.7 2.4 12.0 32.1 20.8
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
(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 1998, seven exploratory wells were drilled in the United States under
farmout agreements. Six were productive and one was a dry hole. In Canada,
two exploratory wells were drilled in 1998 under farmout agreements, both of
which were productive.
PRESENT ACTIVITIES
At December 31, 1998 Forest and its subsidiaries had six exploratory wells
and one development well that were in the process of being drilled. Of the
six exploratory wells, one (in the U.S.) reached total depth and is currently
being evaluated. Of the five remaining exploratory wells (in Canada), three
have been drilled and are being evaluated and the remaining two are still
being drilled. The development well (in the U.S.) is still being drilled.
DELIVERY COMMITMENTS
A significant portion of Canadian Forest's natural gas production is sold
through the ProMark Netback Pool. At December 31, 1998 the ProMark Netback
Pool had entered into fixed price contracts to sell approximately 2.2 BCF of
natural gas in 1999 at an average price of $2.80 CDN per MCF and
approximately 5.4 BCF of natural gas in 2000 at an average price of
approximately $2.24 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
1998, Canadian Forest supplied 27% of the gas for the Netback Pool.
The Company is obligated to deliver approximately 200 MMCF of natural gas
under existing long-term contracts in the U.S.
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 (A) Age Forest Office (B)
- ------------------------ --- ---------- ----------
William L. Dorn* 50 27 Chairman of the Board and Chairman of the
Executive Committee. Chief Executive
Officer until December 1995. Chairman of
the Nominating Committee. Member of the
Board of Directors since 1982.
Robert S. Boswell* 49 13 President since November 1993 and Chief
Executive Officer since December 1995 and
Chief Financial Officer until December 1995.
Member of the Board of Directors since 1986.
Member of the Company's Executive Committee.
Director of C.E. Franklin Ltd.
David H. Keyte 42 11 Executive Vice President and Chief Financial
Officer since November 1997. Vice President
and Chief Financial Officer 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 44 21 Senior Vice President - Gulf Coast Region
since November 1997. Vice President - Gulf
Coast Region August 1996. Prior thereto Vice
President and General Business Manager from
December 1993 to August 1996. Member of the
Company's Employee Benefits Committee.
23
Years with
Name (A) Age Forest Office (B)
- ------------------------ --- ---------- ----------
Neal A. Stanley 51 2 Senior Vice President - Western Region since
November 1997. Vice President - Western
Region August 1996. Prior thereto President
of Teton Oil and Gas Corporation.
Donald H. Stevens 46 1 Vice President - Capital Markets and Treasurer
since December 1998. Vice President - Capital
Markets and Strategic Initiatives August 1997.
Prior thereto Vice President - Corporate Relations
and Capital Markets of Barrett Resources Corporation.
Joan C. Sonnen 45 9 Corporate Secretary since March 1999 and
Controller since December 1993. Member of the
Company's Employee Benefits Committee.
- -------------------
*Also a Director
(A) William L. Dorn and Forest D. Dorn are brothers.
(B) 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 28, 1999, the Company's 44,647,295 shares of Common Stock were
held by 1,559 holders of record.
Forest's Common Stock was listed on the New York Stock Exchange on November
18, 1997; prior thereto it was traded on the Nasdaq National Market. 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 1997, 1998, or in the first quarter of 1999.
High Low
---- ---
1997: First Quarter $ 19-3/8 $ 12-7/8
Second Quarter 15-3/8 12-1/4
Third Quarter 18-1/2 13-1/4
Fourth Quarter 19 13-3/16
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 (through March 10) $ 8-15/16 $ 5-3/8
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 dividends restrictions,
Forest was not prohibited from paying cash dividends on its Common Stock as
of March 10, 1999.
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 4, 7 and 8 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, 1998. 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,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands Except Per Share Amounts)
FINANCIAL DATA
Revenue:
Marketing and processing $ 151,079 184,399 187,374 - -
Oil and gas sales 170,740 155,242 128,713 82,275 114,541
---------- ------- ------- ------ -------
Total revenue $ 321,819 339,641 316,087 82,275 114,541
Earnings (loss) before cumulative effect of change
in accounting principle and extraordinary items $ (197,786) 3,089 1,139 (17,996) (67,853)
Net earnings (loss) $ (191,590) (9,270) 3,305 (17,996) (81,843)
Weighted average number of common shares outstanding 40,910 33,669 25,062 7,360 5,619
Net earnings (loss) attributable to common stock $ (191,590) (9,459) 1,147 (20,156) (84,004)
Basic earnings (loss) per share:
Earnings (loss) attributable to common stock
before cumulative effect of change in
accounting principle and extraordinary items $ (4.83) .09 (.04) (2.74) (12.46)
Cumulative effect of change in accounting
principle - - - - (2.49)
Extraordinary items .15 (.37) .09 - -
---------- ------- ------- ------ -------
Net earnings (loss) attributable to common stock $ (4.68) (.28) .05 (2.74) (14.95)
Diluted earnings (loss) per share:
Earnings (loss) attributable to common
stock before cumulative effect of change in
accounting principle and extraordinary items $ (4.83) .08 (.04) (2.74) (12.46)
Cumulative effect of change in accounting principle - - - - (2.49)
Extraordinary items .15 (.35) .09 - -
---------- ------- ------- ------ -------
Net earnings (loss) attributable to common stock $ (4.68) (.27) .05 (2.74) (14.95)
Total assets $ 759,736 647,782 563,458 321,043 324,832
Long-term debt $ 505,450 254,760 168,859 193,879 207,054
Other long-term liabilities $ 24,267 51,787 53,560 27,139 28,166
Deferred revenue $ - - 7,591 15,137 35,908
Shareholders' equity $ 168,991 261,827 242,443 44,297 6,086
26
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA (CONTINUED)
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands Except per Share Amounts and Volumes)
OPERATING DATA
Annual production: (1)
Gas (MMCF) 62,310 49,035 42,496 33,342 48,048
Liquids (MBBLS) 4,269 3,207 2,749 1,173 1,543
Average price received:
Gas (per MCF) (2) $ 1.95 2.06 1.89 1.77 1.90
Liquids (per Barrel) $ 11.51 16.92 17.59 15.86 14.83
Capital expenditures, net of asset sales 461,452 147,130 234,556 44,913 29,839
Proved Reserves: (3)
Gas (MMCF) 564,264 378,315 334,180 231,890 231,638
Liquids (MBBLS) 35,069 24,636 24,014 10,467 7,313
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves (3) $ 522,831 439,570 559,869 256,917 207,549
- -------------------
(1) Includes amounts attributable to required deliveries under volumetric
production payments. See Note 5 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 is a wholly owned subsidiary as
of December 31, 1998.
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
The net loss for 1998 was $191,590,000 compared to a net loss of $9,270,000
in 1997. 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
Canadian Forest. The 1997 period included 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 these items, 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.
The net loss for 1997 was $9,270,000 compared to net earnings of $3,305,000
in 1996. Earnings for the 1996 period include an extraordinary gain on
extinguishment of debt of $2,166,000. Exclusive of the 1997 items mentioned
above and the 1996 extraordinary gain on extinguishment of debt, net income
would have been $7,140,000 in 1997 and $1,139,000 in 1996. The improvement in
1997 was attributable primarily to higher natural gas prices and increased
production from successful drilling programs in 1996 and 1997.
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. Marketing and
processing revenue decreased by 2% to $184,399,000 in 1997 from $187,374,000
in 1996 and the related marketing and processing expense decreased by 2% to
$175,847,000 in 1997 from $178,706,000 in the previous year. The gross margin
reported for marketing and processing activities was $8,552,000 in 1997 which
is comparable to $8,668,000 reported in 1996.
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 are 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.
Oil and gas sales revenue increased by 21% to $155,242,000 in 1997 from
$128,713,000 in 1996. Production volumes for natural gas in 1997 increased
15% from 1996 due primarily to discoveries in the Gulf of Mexico being
brought onto production. Production volumes for liquids were 17% higher in
1997 than in 1996 due primarily to new production from Gulf of Mexico and
Canadian properties. The average sales price received for natural gas in 1997
increased 9% compared to the average sales price received in 1996. The
average sales price received by Forest for its liquids production during 1997
decreased 4% compared to the average sales price received during 1996.
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
28
production base. The decrease was partially offset by the effects of
significant expensed workovers in the Onshore Gulf Coast Region.
Oil and gas production expense of $36,284,000 in 1997 increased 13% from
$32,199,000 in 1996 due primarily to expenses relating to new production from
Gulf of Mexico properties, temporary transportation expenses associated with
the Bigoray field in Alberta and the inclusion of twelve months of costs for
Canadian Forest in 1997 versus only eleven months in 1996. On an MCFE basis,
production expense was $.53 per MCFE in 1997 compared to $.55 in 1996.
The production volumes, weighted average sales prices and production expenses
for the years ended December 31, 1998, 1997 and 1996 for Forest and its
subsidiaries were as follows:
Year Ended December 31, 1998
-----------------------------------------------------------------
Gulf Coast Region
------------------- Western Total Total
Offshore Onshore Region U.S. Canada Company
-------- ------- ------- ----- ------ -------
NATURAL GAS
Total 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:
Total 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:
Total 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
Total production (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.
29
Year Ended December 31, 1997
-----------------------------------------------------------------
Gulf Coast Region
------------------- Western Total Total
Offshore Onshore Region U.S. Canada Company
-------- ------- ------- ----- ------ -------
NATURAL GAS
Total 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:
Total 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:
Total 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
Total production (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.
30
Year Ended December 31, 1996
-----------------------------------------------------------------
Gulf Coast Region
------------------- Western Total Total
Offshore Onshore Region U.S. Canada Company
-------- ------- ------- ----- ------ -------
NATURAL GAS
Total production (MMCF) (1) 20,718 4,251 3,655 28,624 13,872 42,496
Sales price received (per MCF) $ 2.48 1.94 2.17 2.36 1.41 2.06
Effects of energy swaps (per MCF) (2) (.31) - - (.23) (.04) (.17)
-------- ------ ----- ------ ------ ------
Average sales price (per MCF) $ 2.17 1.94 2.17 2.13 1.37 1.89
LIQUIDS
Oil and condensate:
Total production (MBBLS) 704 127 133 964 1,308 2,272
Sales price received (per BBL) $ 19.85 20.06 20.92 20.03 20.64 20.38
Effects of energy swaps (per BBL) (2) (1.47) - - (1.07) (1.82) (1.50)
-------- ------ ----- ------ ------ ------
Average sales price (per BBL) $ 18.38 20.06 20.92 18.96 18.82 18.88
Natural gas liquids:
Total production (MBBLS) - 132 8 140 337 477
Average sales price (per BBL) $ - 10.11 13.63 10.48 11.87 11.46
Total liquids production (MBBLS) 704 259 141 1,104 1,645 2,749
Average sales price (per BBL) $ 18.41 14.98 20.50 17.88 17.40 17.59
TOTAL
Total production (MMCFE) 24,942 5,805 4,501 35,248 23,742 58,990
Average sales price (per MCFE) $ 2.31 2.09 2.41 2.29 2.00 2.18
Operating expense (per MCFE) .51 .62 .75 .56 .52 .55
-------- ------ ----- ------ ------ ------
Netback (per MCFE) $ 1.80 1.47 1.66 1.73 1.48 1.63
-------- ------ ----- ------ ------ ------
-------- ------ ----- ------ ------ ------
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 3,168 MMCF. Natural gas delivered
pursuant to volumetric production payment agreements represented
approximately 7% 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 12,741 MMCF and
hedged oil and condensate volumes were 895,600 barrels. The aggregate net
loss under energy swap agreements was $10,422,000 for the period and was
accounted for as a reduction of oil and gas sales.
31
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 approximately $1,500,000 of transition
costs associated with our acquisition of the minority interest in Saxon
Petroleum, Inc. These increases were partially offset by a premium refund in
the first quarter of 1998 which lowered insurance costs. General and
administrative expense increased 24% to $16,864,000 in 1997 compared to
$13,623,000 in 1996 due primarily to a larger number of employees who were
hired to support the Company's increased operations and its expanded
exploration and development programs.
Total overhead costs (capitalized and expensed general and administrative
costs) were $27,966,000 in 1998, $24,993,000 in 1997 and $21,396,000 in 1996.
Total overhead costs increased by 12% in 1998 compared to 1997 and by 17% in
1997 compared to 1996. The increases are attributable to increased headcount
to support our larger property base. The following table summarizes total
overhead costs incurred during the periods:
Years Ended December 31,
----------------------------------
1998 1997 1996
-------- ------ ------
(In Thousands)
Overhead costs capitalized $ 8,117 8,129 7,773
General and administrative costs expensed (1) 19,849 16,864 13,623
-------- ------ ------
Total overhead costs $ 27,966 24,993 21,396
-------- ------ ------
-------- ------ ------
Number of salaried employees at end of year (2) 211 218 193
-------- ------ ------
-------- ------ ------
(1) Includes $2,819,000, $2,992,000 and $2,555,000 in 1998, 1997 and 1996,
respectively, related to marketing and processing operations.
(2) Includes the employees of Saxon in 1997 and 1996.
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.
Depreciation and depletion expense increased 27% to $79,991,000 in 1997 from
$63,068,000 in 1996 due to higher production and higher per-unit expense. The
depletion rate increased to $1.12 per MCFE in 1997 compared to $1.01 per MCFE
in 1996, primarily as a result of higher per-unit development costs in the
Gulf of Mexico due to increased costs for services during that time period.
At December 31, 1998 Forest had undeveloped properties with a cost basis of
approximately $58,609,000 in the U.S. and $26,443,000 in Canada which were
not subject to depletion, compared to $41,226,000 in the U.S. and $19,675,000
in Canada at December 31, 1997 and $30,046,000 in the U.S. and $13,870,000 in
Canada at December 31, 1996. The increase in 1998 compared to 1997 is
attributable primarily to undeveloped acreage acquired onshore Louisiana,
reduced by undeveloped property impairments. The increase in 1997 compared to
1996 is due primarily to acquisitions of undeveloped acreage in both the U.S.
and Canada. At December 31, 1998 the Company also had approximately
$14,435,000 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 a writedown 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 in 1999 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
decreased from $2.17 per MCF at December 31, 1998 to approximately $1.70 per
MCF at March 1, 1999. The average price received for natural gas produced in
Canada decreased from $2.20 CDN per MMBTU at December 31, 1998 to
approximately $1.80 CDN per MMBTU at March 1, 1999. The NYMEX price for crude
oil was $12.06 per barrel at December 31, 1998 and was $12.24 per barrel at
March 1, 1999. Based on these prices, Forest anticipates that it would record
an additional writedown in the first quarter of 1999.
Other income of $7,561,000 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 of the Company. Other income of $1,289,000 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 U.S. as a result of a
market value adjustment to the carrying value of land purchased in 1982.
Other income of $1,387,000 in 1996 included the reversal of a $1,136,000
liability for royalties on the proceeds from a gas contract settlement.
Interest expense of $38,986,000 in 1998 increased $17,583,000 or 82% compared
to 1997 due primarily to increased outstanding bank debt and subordinated
debt. Interest expense of $21,403,000 in 1997 decreased $1,904,000 or 8%
compared to 1996 due primarily to extinguishment of a nonrecourse secured
loan in the fourth quarter of 1996 and redemption of our 11 1/4% Senior
Subordinated Notes in September and October of 1997. These decreases were
offset in part by interest charges on our 8 3/4% Notes and increased interest
charges on higher average outstanding balances under bank credit facilities
throughout most of 1997.
Foreign currency translation loss was $8,320,000 in 1998 and $4,051,000 in
1997. Foreign currency translation loss relates to translation of the 8 3/4%
Notes issued by Canadian Forest, and is attributable to the decrease in the
value of the Canadian dollar relative to the U.S. dollar during the period.
The value of the Canadian dollar was $.6535 per $1.00 U.S. at December 31,
1998 compared to $.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 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. The extraordinary gain on
extinguishment of debt in 1996 of $2,166,000 relates to the extinguishment of
nonrecourse secured debt.
33
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. In 1996, 1997, 1998 and early 1999, we completed several
transactions that improved our financial position.
- - In January 1996 Forest and Saxon sold 13,200,000 shares of Common Stock for
$11.00 per share in a public offering. Of this amount, 1,060,000 shares
were sold by Saxon and 12,140,000 shares were sold by Forest. The net
proceeds to Forest from the issuance of the shares totaled approximately
$136,000,000 after deducting issuance costs and underwriting fees.
- - In August 1996 Anschutz exercised an option to purchase 2,250,000 shares of
Common Stock for $26,200,000 or approximately $11.64 per share.
- - In November 1996 Forest exchanged 2,000,000 shares of Common Stock plus
approximately $13,500,000 in cash to extinguish approximately $43,000,000
of nonrecourse secured debt. In connection with this transaction, Anschutz
acquired 1,628,888 shares of Common Stock by exercising warrants to
purchase 388,888 shares of Common Stock at $10.50 per share and by
converting 620,000 shares of Forest's Second Series Preferred Stock into
1,240,000 shares of Common Stock.
- - In February 1997 Forest called for redemption all 2,877,673 shares of our
$.75 Convertible Preferred Stock. In response to the call for redemption,
2,783,945 shares were tendered for conversion into Common Stock. We
redeemed the remaining 93,728 shares. Lehman Brothers Inc. purchased 65,616
shares of Common Stock to fund the cash requirement of the redemption. This
conversion and redemption eliminated all outstanding preferred stock from
Forest's capital structure and eliminated approximately $2,200,000 of
annual preferred dividend payments.
- - In August 1997 Anschutz acquired 3,500,000 shares of Common Stock through
the exercise of a warrant for $8.60 per share resulting in cash proceeds to
Forest of $30,100,000. The original exercise price was $10.50 per share.
The reduction in the exercise price offered to Anschutz reflected an
approximate 10% present value discount computed to the warrants' expiration
date of July 27, 1999.
- - In September 1997, pursuant to a tender offer, $90,233,000 of Forest's
outstanding $100,000,000 aggregate principal amount of 11 1/4% Senior
Subordinated Notes due 2003 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. On October 17, 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 $1,000.00 principal amount. As a result of the
tender offer, 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. Also in September 1997 Canadian Forest completed an offering of
$125,000,000 of 8 3/4% Notes, which were sold at 99.745% of par and
guaranteed on a senior subordinated basis by Forest. The effects of the
tender and new offering resulted in estimated annual cash savings of
approximately $5,000,000 to $6,000,000 related to interest and taxes.
- - In February 1998 Canadian Forest issued $75,000,000 principal amount of 8
3/4% Notes, an add-on to the issue of 8 3/4% Notes completed in September
1997. The net proceeds funded a portion of our purchase of interests in oil
and natural gas properties in 13 fields located onshore Louisiana from a
private company for total consideration of approximately $230,776,000. The
consideration consisted of approximately $216,557,000 in cash and 1,000,000
shares of Common Stock.
- - In June 1998 Forest issued 5,950,000 shares of common stock to Anschutz in
exchange for certain oil and gas assets located in the U.S. and Canada, as
well as 13 international projects.
34
- - In June 1998 we settled our only remaining nonrecourse production payment
loan by issuing 271,214 shares of common stock to the lender, Bank of
America National Trust & Savings Association. The loan, which originated in
May 1992, had a remaining principal amount of approximately $14,600,000 and
a book value of approximately $9,966,000. The loan was secured primarily by
certain oil and gas properties in Oklahoma and the Gulf of Mexico. As a
result of the settlement, we recorded an extraordinary gain of $6,196,000
in 1998.
- - In February 1999 we issued $100,000,000 of 10 1/2% Senior Subordinated
Notes due 2006 which were sold at 98.811% of par.
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. At current production and borrowing levels, Forest's sensitivity to
price declines is significantly increased compared to prior periods. No
prediction can be made as to the prices we will receive for our future oil
and gas production. Additionally, we have six offshore Gulf of Mexico wells
whose combined production represents approximately 28% of our consolidated
daily deliverability at March 1, 1999. Our production, revenue and cash flow
could be adversely affected if production from these properties decreases
significantly.
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 $225,000,000 and $25,000,000, 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, including cash dividends on
preferred stock, 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 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. We may increase the
number of properties that are pledged under the facility.
At December 31, 1998, the borrowing base was $300,000,000 and the outstanding
borrowings under the global credit facility were $261,400,000 in the U.S. and
$10,456,000 in Canada. At February 28, 1999, the borrowing base was
$250,000,000 and the outstanding borrowings under the Global Credit Facility
were $165,700,000 in the U.S. and $7,611,000 in Canada, with an average
effective interest rate of 6.6%. The reductions in the borrowing base and in
the outstanding amount since December 31, 1998 were due primarily to issuance
of the 10 1/2% Notes and use of the net proceeds therefrom to repay a portion
of the outstanding balance under the global credit facility. At February 28,
1999 the Company has also used the global credit facility for Letters of
Credit in the amount of $233,000 in the U.S. and $1,144,000 CDN in Canada.
Saxon Petroleum is an unrestricted subsidiary under the terms of Forest's
global credit facility and its subordinated debt. Saxon, a wholly-owned
subsidiary of Canadian Forest Oil Ltd., has a separate credit facility with a
$37,500,000 CDN borrowing base, of which $36,962,000 CDN was drawn as of
February 28, 1999. The lender issued a notice to Saxon on March 10, 1999 that
it intends to decrease the borrowing base by $9,000,000 CDN. Forest is
examining various alternatives with respect to this credit facility, but has
the ability to fund the potential borrowing base reduction from the global
credit facility if necessary.
35
WORKING CAPITAL. Forest had a working capital surplus of approximately
$348,000 at December 31, 1998 compared to approximately $22,062,000 at
December 31, 1997. The decrease in the surplus is due primarily to cash used
in 1998 to fund capital expenditures in the United States and Canada.
In the U.S., Forest periodically 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.
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 $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.
Net cash provided by operating activities decreased to $60,535,000 in 1997
compared to $70,442,000 in 1996 due primarily to increased production as well
as higher natural gas prices being more than offset by funds used for the
settlement of volumetric production payment obligations. We used $151,638,000
for investing activities in 1997 compared to $226,870,000 in 1996. The 1996
outlays included $136,191,000 for the acquisition of Canadian Forest, whereas
the 1997 outlays consist primarily of exploration and development costs. Cash
provided by financing activities in 1997 was $101,233,000 in 1996 compared to
$161,876,000 in 1996. The 1997 period included cash inflows from the issuance
of 8 3/4% Notes, the exercise of a warrant by Anschutz and net borrowings on
the credit facilities, offset by cash used for the redemption of 11 1/4%
Notes. The 1996 period included $136,073,000 of net proceeds from a public
offering of common stock.
36
CAPITAL EXPENDITURES. Expenditures for property acquisition, exploration and
development for the past three years were as follows:
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------ ------ ------
(In Thousands)
Property acquisition costs (1):
Proved properties $ 290,915 7,499 140,875
Undeveloped properties 48,249 880 18,080
------- ------- -------
339,164 8,379 158,955
Exploration costs:
Direct costs 57,149 61,851 40,831
Overhead capitalized 3,265 3,587 2,608
------- ------- -------
60,414 65,438 43,439
Development costs:
Direct costs 65,721 77,836 36,559
Overhead capitalized 4,852 4,542 5,165
------- ------- -------
70,573 82,378 41,724
------- ------- -------
$ 470,151 156,195 244,118
------- ------- -------
------- ------- -------
(1) 1998 amounts consist primarily of oil and gas properties acquired onshore
Louisiana and from Anschutz. 1996 amounts consist primarily of the
allocation of purchase price to the oil and gas properties acquired in the
purchase of Canadian Forest.
Forest's budgeted 1999 direct expenditures for exploration and development
are approximately $75,000,000. We intend to meet 1999 capital expenditure
financing requirements using cash flows generated by operations, sales of
non-strategic assets and 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 has offered for sale property packages in each of
our operating regions.
During 1998, Forest 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. During 1996, we disposed of
properties with estimated proved reserves of approximately 1.5 BCF of natural
gas and 628,000 barrels of oil for total net proceeds of $6,916,000. In
addition, Saxon received proceeds of approximately $10,959,000 representing
the liquidation of preferred shares in Archean Energy Ltd. These shares,
which were received through a series of transactions relating to the 1992
sale of Forest's Canadian oil and gas properties, were transferred to Saxon
by Forest in 1995.
37
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. We expect to realize
general and administrative cost savings of approximately $1,500,000 (U.S.)
per year as a result of the consolidation of the operations of Saxon with
those of Canadian Forest.
YEAR 2000 ISSUES. The Year 2000 issue results from computer programs being
written using two digits (rather than four) to define the applicable year. As
a result, certain of Forest's computer applications that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This situation could result in system failure, miscalculations and
disruption of operations including, among other things, a temporary inability
to process transactions, operate equipment with date-sensitive computer
controls or communicate electronically with other parties.
Forest has instituted a Year 2000 Project that addresses the effects the Year
2000 will have on software applications and analyzes upgrades and purchases
that may be required. In addition, the Year 2000 Project assesses the
potential impact on Forest in the event that other parties with whom we do
business do not implement systems which are Year 2000 compliant.
We commenced our Year 2000 Project in 1996, in conjunction with a review of
the functionality of the hardware and software in certain existing systems.
Replacement of the lease and land system with Year 2000 compliant software
was completed in early 1997. Review of systems solutions for our primary
business applications, including those used for accounting, production
reporting and oil and gas reserve reporting, was completed during 1997 and
early 1998. Possible solutions explored by Forest included modification of
existing systems to make them Year 2000 compliant, replacement of existing
systems with new systems which were Year 2000 compliant and/or provided
greater functionality and, in certain areas, replacement of systems by
outsourcing processes to a third party.
Forest completed its review of accounting systems in early 1998, deciding to
replace its U.S. accounting system with a new system that will be Year 2000
compliant and also provide greater functionality. The identification of
necessary enhancements to the base product was completed in mid-1998, after
which the programming and data conversion processes commenced. In Canada, we
plan to upgrade to a newer release of our existing oil and gas accounting
software in order to be Year 2000 compliant. We expect to be fully
operational on our new accounting systems in the U.S. and Canada by the third
quarter of 1999.
We are also installing an updated version of our U.S. production accounting
software. The new version is Year 2000 compliant and also provides greater
functionality. Installation of this software commenced in mid-1998.
Completion of this project, which also requires updated interface programming
to the accounting and reserve systems, is expected to occur in the second
quarter of 1999. The Company does not use an automated production reporting
system in Canada.
Forest's U.S. oil and gas reserve software will also be updated to a version
that is Year 2000 compliant. This upgrade, which requires some revision to
interface programming, is expected to be complete by the third quarter of
1999. In Canada, we installed new oil and gas reserve software that is Year
2000 compliant.
The new systems described above are expected to make Forest's business
computer systems Year 2000 compliant in all material respects during the
third quarter of 1999. Remaining business systems have also been reviewed for
Year 2000 compliance. To date, no significant instances of noncompliance have
been noted.
During the course of the projects described above, there have been and will
continue to be significant time requirements placed on Forest's managers and
staff in the affected areas. Wherever possible, we have contracted additional
personnel to supplement programming efforts and to "backfill" critical
positions so that normal workflow is not adversely affected. However, the
ability of Forest's information technology staff to respond to new issues is
expected to be hampered during the upcoming year due to the difficulty
encountered in attracting and retaining qualified personnel.
38
A Year 2000 Steering Committee was formed in early 1998 consisting of
representatives from the Finance, Accounting, Legal, Operations and
Information Systems disciplines. Based on the Committee's recommendations,
Forest entered into contracts with several consultants to provide additional
support to our efforts to ensure Year 2000 compliance. In the U.S., a
national consulting firm was engaged to assist in the identification,
classification and itemization of Year 2000 issues not previously identified.
This effort encompassed a review of all field operations (operated and
non-operated), significant vendor and customer relationships and business
systems not included in the projects described above. The consulting firm has
also been assisting Forest personnel in the assessment and remediation of
Year 2000 issues. The consultants commenced their work in November 1998 and
expect to complete the project in mid-1999. Canadian Forest has engaged a
consultant to review its business systems and has retained outside legal
counsel to provide support to management in the review of third party
relationships.
Forest believes that its Year 2000 project is approximately 75% complete as
of February 28, 1999.
The internal and external costs associated with implementation of business
systems for accounting, production reporting and oil and gas reserve
reporting during 1998 and 1999 are expected to be between $2,500,000 and
$3,000,000. Of this amount, approximately 20% to 30% would have been required
to make our old systems Year 2000 compliant, and the remainder is for
upgraded hardware and software. The cost of the reviews being undertaken by
outside consultants contracted by the Year 2000 Steering Committee in the
U.S. and Canada is expected to be $200,000 to $300,000. The remediation cost
of non-compliant items noted in such reviews has not yet been quantified, but
is not expected to exceed $300,000.
Forest believes that a failure to complete Year 2000 compliance, or a failure
by parties with whom Forest has material relationships to complete Year 2000
compliance, could have a material adverse effect on our financial condition
and results of operations. We believe we can provide the resources necessary
to ensure Year 2000 compliance prior to 2000, and thereby reduce the
possibility of significant interruptions of normal business operations. We
also believe that a sufficient number of alternate customers and suppliers
exist if current customers or suppliers are delayed in their efforts to
achieve Year 2000 compliance.
Forest has not, to date, implemented a Year 2000 Contingency Plan because it
is our goal to have major issues resolved by mid-1999. If, however, Forest's
Year 2000 Project falls behind schedule, we would expect to develop and
implement a Year 2000 Contingency Plan by mid-1999.
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 15, 1999. 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.
39
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 U.S. and Canada and, through its marketing subsidiary
ProMark, 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, 1998
the ProMark Netback Pool had entered into fixed price contracts to sell
approximately 2.2 BCF of natural gas in 1999 at an average price of $2.80 CDN
per MCF and approximately 5.4 BCF of natural gas in 2000 at an average price
of approximately $2.24 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 1998 Canadian Forest supplied 27% of the gas for the Netback Pool.
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. At December 31, 1998 Forest had natural gas swaps for an
aggregate of approximately 78 BBTU (billion British Thermal Units) per day of
natural gas during 1999 at fixed prices ranging from $1.51 per MMBTU (million
British Thermal Units) on an Alberta Energy Company "C" (AECO "C") basis to
$2.66 per MMBTU on a New York Mercantile Exchange (NYMEX) basis and an
aggregate of approximately 2 BBTU per day of natural gas during 2000 at fixed
prices ranging from $2.01 to $2.34 per MMBTU (NYMEX basis). The weighted
average hedged price for natural gas under such agreements is $2.20 and $2.12
per MMBTU in 1999 and 2000, respectively. Forest had no oil swaps in place at
December 31, 1998.
Subsequent to December 31, 1998 we entered into oil swaps for 3,000 barrels
of oil per day from March 1999 to December 1999 at a weighted average fixed
price of $14.17 per barrel (NYMEX basis).
TRADING ACTIVITIES. In addition to operating the ProMark Netback Pool and
managing long-term gas supply contracts for industrial 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, 1998, ProMark's trading operations had contracts to purchase an aggregate
of 39.4 BCF of natural gas in 1999 at an average price of $2.36 CDN per MCF
and had contracts to sell an aggregate of 42.6 BCF of natural gas in 1999 at
an average price of $2.37 CDN per MCF.
40
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 the year
2007.
OPERATIONS OUTSIDE OF NORTH AMERICA. The foreign interests acquired from
Anschutz in 1998 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, 1998:
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---------- --------- -------- -------- -------- ---------- ---------- -----------
(In Thousands)
Bank credit facilities:
Variable rate $ 296,798 - - - - - 296,798 296,798
Average interest rate 7.12% - - - - - 7.12%
Long-term debt
Fixed rate - - - - $ 8,676 199,976 208,652 186,763
Average interest rate - - - - 11.25% 8.75% 8.85%
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.
41
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
February 8, 1999
42
FOREST OIL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1998 1997
----------- -----------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,415 18,191
Accounts receivable 55,587 65,720
Other current assets 2,374 4,649
----------- -----------
Total current assets 61,376 88,560
Net property and equipment, at cost, full cost method (Notes 4 and 5) 663,310 521,293
Goodwill and other intangible assets, net 22,689 26,243
Other assets 12,361 11,686
----------- -----------
$ 759,736 647,782
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,389 59,719
Accrued interest 9,970 4,152
Other current liabilities 1,669 2,627
----------- -----------
Total current liabilities 61,028 66,498
Long-term debt (Notes 2, 3 and 4) 505,450 254,760
Other liabilities 16,181 17,020
Deferred income taxes (Note 6) 8,086 34,767
Minority interest (Note 2) - 12,910
Shareholders' equity (Notes 2, 3, 4, 7 and 8):
Common stock, 44,647,297 shares (36,320,236 shares in 1997) 4,465 3,632
Capital surplus 589,972 488,908
Accumulated deficit (415,050) (223,460)
Accumulated other comprehensive loss (9,948) (7,253)
Treasury stock, at cost, 9,922 shares (448) -
----------- -----------
Total shareholders' equity 168,991 261,827
----------- -----------
$ 759,736 647,782
----------- -----------
----------- -----------
See accompanying Notes to Consolidated Financial Statements.
43
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- --------- ----------
(In Thousands Except Per Share Amounts)
Revenue:
Marketing and processing $ 151,079 184,399 187,374
Oil and gas sales:
Gas 121,615 100,993 80,111
Oil, condensate and natural gas liquids 49,125 54,249 48,602
---------- --------- ----------
Total oil and gas sales 170,740 155,242 128,713
---------- --------- ----------
Total revenue 321,819 339,641 316,087
Operating expenses:
Marketing and processing 144,758 175,847 178,706
Oil and gas production 41,983 36,284 32,199
General and administrative 19,849 16,864 13,623
Depreciation and depletion 100,105 79,991 63,068
Impairment of oil and gas properties 199,500 - -
---------- --------- ----------
Total operating expenses 506,195 308,986 287,596
---------- --------- ----------
Earnings (loss) from operations (184,376) 30,655 28,491
Other income and expense:
Other income, net (7,561) (1,289) (1,387)
Interest expense 38,986 21,403 23,307
Minority interest in earnings (loss) of subsidiary (517) 108 (19)
Translation loss on subordinated debt 8,320 4,051 -
---------- --------- ----------
Total other income and expense 39,228 24,273 21,901
---------- --------- ----------
Earnings (loss) before income taxes and extraordinary item (223,604) 6,382 6,590
Income tax expense (benefit) (Note 6):
Current 1,272 707 3,943
Deferred (27,090) 2,586 1,508
---------- --------- ----------
(25,818) 3,293 5,451
---------- --------- ----------
Earnings (loss) before extraordinary item (197,786) 3,089 1,139
Extraordinary item - gain (loss) on extinguishment of debt (Notes 3 and 4) 6,196 (12,359) 2,166
---------- --------- ----------
Net earnings (loss) $(191,590) (9,270) 3,305
---------- --------- ----------
---------- --------- ----------
Earnings (loss) attributable to common stock $(191,590) (9,459) 1,147
---------- --------- ----------
---------- --------- ----------
Weighted average number of common shares outstanding 40,910 33,669 25,062
---------- --------- ----------
---------- --------- ----------
Basic earnings (loss) per common share:
Earnings (loss) attributable to common stock before
extraordinary item $ (4.83) .09 (.04)
Extraordinary item - gain (loss) on extinguishment of debt .15 (.37) .09
---------- --------- ----------
Earnings (loss) attributable to common stock $ (4.68) (.28) .05
---------- --------- ----------
---------- --------- ----------
Diluted earnings (loss) per common share:
Earnings (loss) attributable to common stock before
extraordinary item $ (4.83) .08 (.04)
Extraordinary item - gain (loss) on extinguishment of debt .15 (.35) .09
---------- --------- ----------
Earnings (loss) attributable to common stock $ (4.68) (.27) .05
---------- --------- ----------
---------- --------- ----------
See accompanying Notes to Consolidated Financial Statements.
44
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON ACCUMULATED
SHARES TO BE ACCUMU- OTHER
PREFERRED COMMON CAPITAL ISSUED IN DEBT LATED COMPREHENSIVE TREASURY
STOCK STOCK SURPLUS RESTRUCTURING DEFICIT INCOME (LOSS) STOCK
---------- -------- --------- --------------- --------- ------------- --------
(In Thousands)
Balance December 31, 1995 $ 24,359 1,066 245,545 6,073 (217,495) (5,711) (9,540)
Net earnings - - - - 3,305 - -
Common Stock issued, net of
offering costs and minority
interest effect of $706,000
(Note 8) - 1,214 124,613 - - - 9,540
Common Stock issued in JEDI Exchange
(Note 3) - 168 5,905 (6,073) - - -
Anschutz Option exercised
(Notes 3 and 8) - 225 25,962 - - - -
Anschutz A Warrant exercised
(Notes 3 and 8) - 39 4,044 - - - -
Common Stock issued to JEDI (Note 3) - 200 26,736 - - - -
Public Warrants exercised (Note 8) - 2 334 - - - -
Conversion of Second Series Preferred
Stock to Common Stock (Note 7) (8,518) 124 8,394 - - - -
Employee stock options exercised
(Note 8) - 3 398 - - - -
Common Stock issued to the Retirement
Savings Plan and other (Note 9) - 3 398 - - - -
$.75 Convertible Preferred Stock
dividends paid in cash (Note 7) - - (1,619) - - - -
$.75 Convertible Preferred Stock dividends
paid in Common Stock (Note 7) - 9 (9) - - - -
Conversion of $.75 Convertible Preferred
Stock to Common Stock (Note 7) (14) - 14 - - - -
Unfunded pension liability (Note 9) - - - - - 2,145 -
Foreign currency translation - - - - - 604 -
---------- -------- --------- --------------- --------- ------------- --------
Balance December 31, 1996 15,827 3,053 440,715 - (214,190) (2,962) -
Net loss - - - - (9,270) - -
Anschutz A Warrant exercised
(Notes 3 and 8) - 350 29,750 - - - -
$.75 Convertible Preferred Stock
Redemption (Note 7) (15,827) 202 14,825 - - - -
Common Stock issued to subsidiary
(Note 8) - 20 2,797 - - - (2,817)
Common Stock sold by subsidiary (Note 8) - - - - - - 2,817
Employee options exercised (Note 8) - 5 607 - - - -
Restricted stock bonus awards (Note 8) - 2 214 - - - -
Unfunded pension liability (Note 9) - - - - - (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 8) - 100 14,119 - - - -
COMMON STOCK ISSUED IN THE ANSCHUTZ
ACQUISITION (NOTES 2 AND 8) - 595 66,970 - - - -
COMMON STOCK ISSUED TO MINORITY
SHAREHOLDERS OF SAXON (NOTES 2 AND 8) - 109 15,920 - - - (448)
COMMON STOCK ISSUED FOR SETTLEMENT OF
PRODUCTION PAYMENT OBLIGATION
(NOTES 4 AND 8) - 27 3,723 - - - -
COMMON STOCK ISSUED FOR DIRECTOR
COMPENSATION - 1 107 - - - -
RESTRICTED STOCK BONUS AWARDS (NOTE 8) - 1 225 - - - -
UNFUNDED PENSION LIABILITY (NOTE 9) - - - - - (804) -
FOREIGN CURRENCY TRANSLATION - - - - - (1,891) -
---------- -------- --------- --------------- --------- ------------- --------
BALANCE DECEMBER 31, 1998 $ - 4,465 589,972 - (415,050) (9,948) (448)
---------- -------- --------- --------------- --------- ------------- --------
---------- -------- --------- --------------- --------- ------------- --------
See accompanying Notes to Consolidated Financial Statements.
45
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- --------- ----------
(In Thousands)
Cash flows from operating activities:
Net earnings (loss) before preferred dividends and extraordinary item $ (197,786) 3,089 1,139
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and depletion 100,105 79,991 63,068
Impairment of oil and gas properties 199,500 - -
Amortization of deferred debt costs 902 942 1,253
Interest added to principal - - 3,059
Minority interest in earnings (loss) of subsidiary (517) 108 (19)
Translation loss on subordinated debt 8,320 4,051 -
Deferred income tax expense (benefit) (27,090) 2,586 1,508
Other, net (181) 619 792
(Increase) decrease in accounts receivable 8,539 (5,954) (17,441)
(Increase) decrease in other current assets 1,663 (5,168) (921)
Increase (decrease) in accounts payable (13,809) (1,403) 22,044
Increase (decrease) in accrued interest and other current liabilities 9,798 (9,970) 3,506
Settlement of volumetric production payment obligation - (6,832) -
Amortization of deferred revenue - (1,524) (7,546)
---------- --------- ----------
Net cash provided by operating activities 89,444 60,535 70,442
Cash flows from investing activities:
Acquisition of subsidiaries:
Capital expenditures for property and equipment (471,754) (156,799) (108,332)
Less stock issued for acquisition 97,376 - -
---------- --------- ----------
(374,378) (156,799) (108,332)
Cash paid for acquisition of subsidiary - - (136,352)
Proceeds from sales of assets 10,302 9,669 17,875
Investment in subsidiaries - (3,489) -
Increase in other assets, net (1,218) (1,019) (61)
---------- --------- ----------
Net cash used by investing activities (365,294) (151,638) (226,870)
Cash flows from financing activities:
Proceeds from bank borrowings 464,088 279,068 194,018
Repayments of bank borrowings (276,468) (226,009) (176,641)
Repayments of production payment obligation (58) (2,592) (3,622)
Issuance of 8 3/4% senior subordinated notes, net of issuance costs 74,589 121,479 -
Redemption of 11 1/4% senior subordinated notes - (100,303) -
Repayments of nonrecourse secured loan - - (13,881)
Proceeds from capital stock and warrants issued, net - 2,817 136,073
Proceeds from exercise of options and warrants - 32,461 31,945
Costs of preferred stock conversion - (800) -
Payment of preferred stock dividends - (540) (1,079)
Decrease in other liabilities, net (1,197) (4,348) (4,937)
---------- --------- ----------
Net cash provided by financing activities 260,954 101,233 161,876
Effect of exchange rate changes on cash 120 (565) (109)
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents (14,776) 9,565 5,339
Cash and cash equivalents at beginning of year 18,191 8,626 3,287
---------- --------- ----------
Cash and cash equivalents at end of year $ 3,415 18,191 8,626
---------- --------- ----------
---------- --------- ----------
Cash paid during the year for:
Interest $ 35,534 20,999 15,040
Income taxes $ 1,172 4,105 3,428
See accompanying Notes to Consolidated Financial Statements.
46
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -------------------------------------------------------------------------------
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - Forest Oil
Corporation is engaged in the acquisition, exploration, development,
production and marketing of natural gas and crude oil in North America. 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.
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.
Unless otherwise indicated, all share amounts, share prices and per share
amounts have been adjusted to give effect to a 5 to 1 reverse stock split
that was effective on January 8, 1996.
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 1998, 1997 and 1996, the
Company's 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. 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, 1998, 1997 and 1996, there were undeveloped property costs
of $58,609,000, $41,226,000 and $30,046,000, respectively, which were not
being depleted in the United States and $26,443,000, $19,675,000 and
$13,870,000, respectively, which were not being depleted in Canada. Of the
undeveloped costs in the United States not being depleted at December 31,
1998, approximately 43% were incurred in 1998, 20% in 1997, 14% in 1996, 1%
in 1994, 21% in 1993 and 1% in 1992. Of the undeveloped costs in Canada not
being depleted at December 31, 1998, 22% were incurred in 1998, 36% in 1997
and 42% in 1996.
During 1998, the Company acquired interests in 13 international projects.
Costs of approximately $14,435,000 related to these international interests
are not being depleted pending determination of the existence of proved
reserves.
Depletion per unit of production was determined 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. Depletion per unit of production (MCFE) for
each of the Company's cost centers was as follows:
United States Canada
------------- ------
1998 $1.20 .85
1997 1.24 .93
1996 1.12 .85
47
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- -------------------------------------------------------------------------------
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 1997 or 1996.
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:
1998 1997
------------ ------------
(In Thousands)
Oil and gas properties $ 2,029,352 1,594,443
Buildings, transportation and
other equipment 12,356 11,157
------------ ------------
2,041,708 1,605,600
Less accumulated depreciation,
depletion and valuation allowance (1,378,398) (1,084,307)
------------ ------------
$ 663,310 521,293
------------ ------------
------------ ------------
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, 1998 and 1997:
1998 1997
------------ ------------
(In Thousands)
Goodwill $ 14,980 16,029
Gas marketing contracts 13,070 13,986
------------ ------------
28,050 30,015
Less accumulated amortization (5,361) (3,772)
------------ ------------
$ 22,689 26,243
------------ ------------
------------ ------------
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.
48
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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, 1998 the
Company had produced approximately 444,000 MMCF more than its entitled share
of production. The estimated value of this imbalance of approximately
$1,229,000 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 1998, 1997
or 1996.
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 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 the Company's
Canadian operations 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 decline in the value of the Canadian dollar relative to the
U.S. dollar, the Company reported noncash translation losses of approximately
$8,320,000 and $4,051,000 for the years ended December 31, 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 and
$2,158,000 in 1996.
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.
49
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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:
1998 (1) 1997 (2) 1996 (3)
---------- ---------- ---------
(In Thousands Except Per Share Amounts)
Income (loss) before extraordinary item $ (197,786) 3,089 1,139
Less: Preferred stock dividends - (189) (2,158)
---------- ---------- ---------
Income (loss) before extraordinary item available to
common stockholders $(197,786) 2,900 (1,019)
---------- ---------- ---------
---------- ---------- ---------
Weighted average common shares outstanding during
the period 40,910 33,669 25,062
Add dilutive effects of:
$.75 Convertible preferred stock - 326 -
Employee options - 229 -
Anschutz warrants - 737 -
---------- ---------- ---------
Weighted average common shares outstanding during
the period including the effects of dilutive securities 40,910 34,961 25,062
---------- ---------- ---------
---------- ---------- ---------
Basic earnings (loss) per share before extraordinary item $ (4.83) 0.09 (0.04)
---------- ---------- ---------
---------- ---------- ---------
Diluted earnings (loss) per share before extraordinary item $ (4.83) 0.08 (0.04)
---------- ---------- ---------
---------- ---------- ---------
(1) 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.
(2) 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.
(3) At December 31, 1996, options to purchase 1,461,580 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, 1996. The effect of the assumed exercises of these
options was antidilutive. These options expire at various dates from 2002
to 2006.
50
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- -------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (Statement No. 130), effective for years
beginning after December 15, 1997. Statement No. 130 establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The Company adopted
Statement No. 130 effective January 1, 1998 and, accordingly, has reported
accumulated other comprehensive loss as a separate line item in the
shareholders' equity section of its consolidated balance sheets at December
31, 1998 and 1997. The components of total comprehensive income (loss) for
the periods 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, 1995 $ (1,407) (4,304) (5,711) (217,495) (223,206)
1996 activity 604 2,145 2,749 3,305 6,054
----------- ---------- ------------- --------- --------------
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)
----------- ---------- ------------- --------- --------------
----------- ---------- ------------- --------- --------------
RECLASSIFICATIONS - Certain amounts in prior years' financial statements have
been reclassified to conform to the 1998 financial statement presentation.
(2) ACQUISITIONS:
- -------------------------------------------------------------------------------
SAXON PETROLEUM INC.:
During 1995, the Company acquired a 56% economic (49% voting) interest in
Saxon Petroleum Inc. (Saxon) for approximately $22,000,000. In the
transaction, Forest received from Saxon 40,800,000 voting common shares,
12,300,000 nonvoting common shares which are convertible to voting shares at
any time, 15,500,000 convertible preferred shares and warrants to purchase
5,300,000 common shares. In exchange, Forest transferred to Saxon a Canadian
investment valued at $11,301,000, issued to Saxon 1,060,000 common shares of
Forest and paid Saxon $1,500,000 CDN. The Forest common shares issued to
Saxon were recorded at their estimated fair value determined by reference to
the quoted market price of the shares immediately preceding the announcement
of the acquisition.
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.
In January 1996, Saxon sold its Forest common shares in a public offering of
Forest Common Stock. In September 1996, the Canadian investment transferred
to Saxon was redeemed for cash at its approximate carrying value.
On January 21, 1997 Forest converted its preferred shares of Saxon into
27,192,983 nonvoting common shares. Through December 31, 1997, pursuant to an
equity participation agreement, Forest also acquired 5,569,542 voting common
shares and 2,380,608 nonvoting common shares of Saxon in exchange for 196,856
common shares of
51
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) ACQUISITIONS (CONTINUED):
- -------------------------------------------------------------------------------
Forest. Such shares were subsequently sold by Saxon. Also in 1997, Forest's
wholly-owned subsidiary Canadian Forest acquired 993,600 voting common shares
of Saxon in exchange 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. A former officer of Saxon returned 9,922
shares of Forest Common Stock to Saxon in exchange for extinguishment of a
loan. These shares held by Saxon have been recorded as treasury stock at
December 31, 1998.
In October 1998, ownership of Saxon was transferred from Forest to its wholly
owned subsidiary Canadian Forest Oil Ltd.
CANADIAN FOREST OIL LTD.:
On January 31, 1996 the Company acquired ATCOR Resources Ltd. of Calgary,
Alberta for approximately $136,000,000, including acquisition costs of
approximately $1,000,000. The purchase was funded by the net proceeds of a
Common Stock offering and approximately $8,300,000 drawn under the Company's
bank credit facility. The exploration and production business of ATCOR was
renamed Canadian Forest Oil Ltd. (Canadian Forest). Canadian Forest's
principal reserves and producing properties are located in Alberta and
British Columbia, Canada. As part of the Canadian Forest acquisition, Forest
also acquired ATCOR's natural gas marketing business which was renamed
Producers Marketing Ltd. (ProMark).
Canadian Forest is the issuer of the 8 3/4% Senior Subordinated Notes (the 8
3/4% Notes) (see Note 4). The Company has not presented separate financial
statements and other disclosures concerning Canadian Forest because
management has determined that such information is not material to holders of
the 8 3/4% Notes; however, the following summarized consolidated financial
information is being provided for Canadian Forest as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996. These amounts
include the effects of the transfer of the Company's investment in Saxon to
Canadian Forest effective in October 1998.
DECEMBER 31, December 31,
1998 1997
------------ ------------
(In Thousands)
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION:
ASSETS
Current assets $ 22,240 35,630
Net property and equipment 132,081 117,394
Goodwill and other intangible assets, net 22,689 26,243
Investment in affiliate 95 -
Note receivable from parent 42,266 -
Other assets 3,384 3,320
------------ ------------
$ 222,755 182,587
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities $ 27,646 24,029
Long-term debt 35,398 -
8 3/4% Senior Subordinated Notes 199,976 124,690
Other liabilities 345 396
Deferred income taxes 9,656 36,282
Shareholder's equity (deficit) (50,266) (2,810)
------------ ------------
$ 222,755 182,587
------------ ------------
------------ ------------
52
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) ACQUISITIONS (CONTINUED):
- -------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------
1998 1997 1996
----------- ------------- -----------
(In Thousands)
SUMMARIZED CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Revenue $172,368 214,045 224,757
----------- ------------- -----------
----------- ------------- -----------
Income (loss) before income taxes $(69,062) (3,321) 9,685
----------- ------------- -----------
----------- ------------- -----------
Net income (loss) $(47,840) (4,952) 4,739
----------- ------------- -----------
----------- ------------- -----------
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 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 assets comprised of 13 international projects
encompassing approximately 18 million net acres of undeveloped land.
(3) ANSCHUTZ AND JEDI TRANSACTIONS:
- -------------------------------------------------------------------------------
Beginning in 1995, the Company consummated certain transactions with The
Anschutz Corporation (Anschutz) and with Joint Energy Development Investments
Limited Partnership (JEDI), a Delaware limited partnership the general
partner of which is an affiliate of Enron Corp. (Enron).
Pursuant to a purchase agreement between the Company and Anschutz, in 1995
Anschutz purchased 3,760,000 shares of the Company's Common Stock and 620,000
shares of a new series of preferred stock which were convertible into
1,240,000 shares of Common Stock for a total consideration of $45,000,000.
The preferred stock had a liquidation preference of $18.00 per share and
received dividends ratably with the Common Stock. In addition, Anschutz
received a warrant that entitled it to purchase 3,888,888 shares of the
Company's Common Stock for $10.50 per share. The Company also entered into a
shareholders agreement with Anschutz pursuant to which Anschutz agreed to
certain voting, acquisition, and transfer limitations regarding its shares of
Forest Common Stock for five years.
Also in 1995, in connection with a restructuring of a loan payable to JEDI,
JEDI received a warrant that entitled it to purchase 2,250,000 shares of the
Company's Common Stock for $10.00 per share. In addition, JEDI granted an
option to Anschutz, pursuant to which Anschutz was entitled to purchase from
JEDI up to 2,250,000 shares of the Company's Common Stock for $10.00 per
share plus interest from the date of grant. The Company also agreed to use
proceeds from the exercise of the original Anschutz warrant to pay principal
and interest on a portion of the JEDI loan.
In December 1995, JEDI exchanged a portion of the loan and the warrant it
held for 1,680,000 shares of Common Stock. The Company also assumed JEDI's
obligation to sell 2,250,000 shares to Anschutz.
On August 1, 1996, The Anschutz Corporation exercised its option to purchase
2,250,000 shares of Common Stock for $26,200,000 or approximately $11.64 per
share.
53
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(3) ANSCHUTZ AND JEDI TRANSACTIONS (CONTINUED):
- -------------------------------------------------------------------------------
On November 5, 1996, the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 cash to extinguish the remaining balance of
the nonrecourse secured debt then owed to JEDI. In connection with this
transaction, Anschutz acquired 1,628,888 shares of Common Stock by exercising
warrants to purchase 388,888 shares of Common Stock at $10.50 per share and
by converting 620,000 shares of Forest's Second Series Preferred Stock into
1,240,000 shares of Common Stock. The term of the remaining 3,500,000
warrants held by Anschutz was extended to July 27, 1999. The fair value of
the shares of Common Stock issued to JEDI was estimated based on the quoted
market price of the Common Stock at the date of the transaction, less a
discount of 7 1/2% to reflect the lock-up agreement with JEDI that limited
JEDI's ability to transfer the shares before May 31, 1997, the size of the
block of shares to be issued and the estimated brokerage fees on the ultimate
disposition of the shares. The fair value of the Common Stock issued and the
cash paid to JEDI, including related expenses of the transaction, was less
than the carrying amount of the debt extinguished. Accordingly, the Company
recorded an extraordinary gain on extinguishment of debt in the fourth
quarter of 1996 of approximately $2,166,000.
On August 28, 1997 Anschutz acquired 3,500,000 shares of Common Stock through
the exercise of its remaining warrants for $8.60 per share resulting in cash
proceeds to Forest of $30,100,000. The original exercise price was $10.50 per
share. The reduction in the exercise price offered to Anschutz reflected an
approximate 10% present value discount computed to the warrants' expiration
date of July 27, 1999.
(4) LONG-TERM DEBT:
- -------------------------------------------------------------------------------
Long-term debt at December 31 consists of the following:
1998 1997
------------ -----------
(In Thousands)
Global Credit facility:
U.S. borrowings $ 261,400 85,550
Canadian borrowings 10,456 -
Saxon Credit Facility 24,942 25,840
Production payment obligation - 10,004
11 1/4% Senior Subordinated Notes 8,676 8,676
8 3/4% Senior Subordinated Notes 199,976 124,690
------------ -----------
Long-term debt $ 505,450 254,760
------------ -----------
------------ -----------
U.S. AND CANADIAN FOREST CREDIT FACILITIES: At December 31, 1998 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
$300,000,000 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 $275,000,000 and $25,000,000,
respectively. The borrowing base was reduced to $250,000,000 following the
issuance of $100,000,000 principal amount of 10 1/2% Senior Subordinated
Notes due 2006 (the 10 1/2% Notes) in February 1999. 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, including cash dividends on
preferred stock, working capital, cash flow, additional debt, liens, asset
sales, investments, mergers, cash dividends 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.
54
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(4) LONG-TERM DEBT (CONTINUED):
- -------------------------------------------------------------------------------
At December 31, 1998 the outstanding U.S. balance under the Global Credit
Facility was $261,400,000 and $10,456,000 in Canada with a weighted average
interest rate of 7.1% 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
$3,830,000 CDN in Canada. Proceeds of the 10 1/2% Notes were used to pay down
a portion of the U.S. balance under the Global Credit Facility in February
1999.
SAXON CREDIT FACILITY:
Saxon, a wholly owned subsidiary of Canadian Forest, had a credit facility
with a borrowing base of $38,100,000 CDN at December 31, 1998, of which
$37,264,000 CDN was drawn as of that date.
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. The 11 1/4% Notes are callable at decreasing
premium amounts. The call price is currently 105.688% of principal amount,
decreasing in annual increments to 100% in September 2001.
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. A portion of the proceeds was used to fund the tender offer for the
11 1/4% Notes described above.
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 decline in the value of the Canadian dollar
relative to the U.S. dollar during 1998 and 1997, the Company reported
noncash translation losses of approximately $8,320,000 and $4,051,000,
respectively, in those years.
10 1/2% SENIOR SUBORDINATED NOTES:
In February 1999, Forest completed a public offering of $100,000,000
principal amount of 10 1/2% Senior Subordinated Notes due 2006. The 10 1/2%
Notes were issued at 98.811% of par.
55
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(5) 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. The purchase price of approximately $6,832,000
plus expenses was funded by advances under the Company's Credit Facility.
Amounts received under the production payments were recorded as deferred
revenue. Volumes associated with amortization of deferred revenue for the
years ended December 31, 1997 and 1996 were as follows:
Net sales volumes
attributable to production
Volumes delivered (1) payment deliveries (2)
------------------------------ -----------------------------
Natural Gas Oil Natural Gas Oil
(MMCF) (MBBLS) (MMCF) (MBBLS)
-------------- ------------- --------------- -----------
1997 951 - 801 -
1996 3,721 87 3,168 74
(1) Amounts settled in cash in lieu of volumes were $700,000 and
$2,433,000 for the years ended December 31, 1997 and 1996,
respectively.
(2) Represents volumes required to be delivered to Enron affiliates net of
estimated royalty volumes.
(6) INCOME TAXES:
- -------------------------------------------------------------------------------
The income tax expense (benefit) is different from amounts computed by
applying the statutory Federal income tax rate for the following reasons:
1998 1997 1996
------------ -------------- -------------
(In Thousands)
Tax expense (benefit) at 35% of income (loss)
before income taxes and extraordinary item $ (78,261) 2,234 2,300
Change in the valuation allowance for deferred
tax assets attributable to income (loss) before
income taxes and extraordinary item 51,620 (3,102) (367)
Tax expense (benefit) of higher
effective rate on Canadian income (loss) (7,200) 85 1,068
Canadian branch income taxable in
both Canada and U.S. 1,733 1,283 -
Canadian Crown payments (net of Alberta Royalty
Tax Credit) not deductible for tax purposes 2,012 3,181 2,799
Canadian resource allowance (2,210) (3,995) (3,005)
Canadian non-deductible depletion and
amortization 3,960 1,934 1,694
Canadian large corporation tax 519 540 269
Expiration of tax carryforwards 450 1,041 643
Nondeductible foreign exchange losses and other 1,559 92 50
------------ -------------- -------------
Total income tax expense (benefit) $ (25,818) 3,293 5,451
------------ -------------- -------------
------------ -------------- -------------
56
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) 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, 1998 and 1997 are as follows:
DECEMBER 31, 1998
-------------------------------------------
UNITED STATES CANADA TOTAL
------------- ---------- -------
(IN THOUSANDS)
Deferred tax assets:
Accrual for retirement benefits $ 466 154 620
Accrual for medical benefits 2,083 - 2,083
Accrual for sales recorded on the
entitlement method 452 - 452
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 828 - 828
------------- ---------- -------
Total gross deferred tax assets 72,229 8,993 81,222
Less valuation allowance (72,229) (5,189) (77,418)
------------- ---------- -------
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)
------------- ---------- -------
------------- ---------- -------
57
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES (CONTINUED):
- -------------------------------------------------------------------------------
December 31, 1997
--------------------------------------------
United States Canada Total
------------- ---------- -------
(In Thousands)
Deferred tax assets:
Accrual for retirement benefits $ 687 178 865
Accrual for medical benefits 2,028 - 2,028
Accrual for sales recorded on the
entitlement method 1,538 - 1,538
Unrealized foreign exchange losses - 1,402 1,402
Accrual for interest rate swaps - 169 169
Investment in subsidiaries 4,971 - 4,971
Deferred revenue - 938 938
Net operating loss carryforward 39,016 2,313 41,329
Depletion carryforward 6,958 - 6,958
Investment tax credit carryforward 1,539 - 1,539
Alternative minimum tax credit carryforward 2,201 - 2,201
Other 261 127 388
------------- ---------- -------
Total gross deferred tax assets 59,199 5,127 64,326
Less valuation allowance (41,727) (3,313) (45,040)
------------- ---------- -------
Net deferred tax assets 17,472 1,814 19,286
Deferred tax liabilities:
Property and equipment (15,752) (31,143) (46,895)
Deferred income on long term contracts - (5,243) (5,243)
Long term liabilities (1,720) - (1,720)
Other - (195) (195)
------------- ---------- -------
Total gross deferred tax liabilities (17,472) (36,581) (54,053)
------------- ---------- -------
Net deferred tax liability $ - (34,767) (34,767)
------------- ---------- -------
------------- ---------- -------
The net changes in the valuation allowance for the years ended December 31,
1998, 1997 and 1996 were increases of $32,378,000, $1,224,000 and $786,000,
respectively, which resulted from:
1998 1997 1996
------------ ---------- ---------
(In Thousands)
Increase (decrease) in the valuation allowance for deferred
tax assets attributable to income (loss) before income
taxes and extraordinary item $ 51,620 (3,102) 1,544
Increase (decrease) in the valuation allowance attributable
to the difference between book basis and tax basis of
acquisitions (17,073) - -
Increase (decrease) in the valuation allowance attributable
to the extraordinary gain (loss) (2,169) 4,326 (758)
------------ ---------- ---------
Net increase in the valuation allowance $ 32,378 1,224 786
------------ ---------- ---------
------------ ---------- ---------
58
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES (CONTINUED):
- -------------------------------------------------------------------------------
The Alternative Minimum Tax (AMT) credit carryforward available to reduce
future U.S. Federal regular taxes aggregated $2,201,000 at December 31, 1998.
This amount may be carried forward indefinitely. U.S. Federal regular and AMT
net operating loss carryforwards at December 31, 1998 were $111,790,000 and
$105,700,000, respectively, and will expire in the years indicated below:
Regular AMT
--------- --------
(In Thousands)
2000 $ 3,590 3,987
2005 8,307 -
2008 28,999 31,799
2009 22,817 22,964
2010 45,737 46,059
2011 268 -
2012 206 580
2013 1,866 311
--------- --------
$ 111,790 105,700
--------- --------
--------- --------
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 $1,095,000 at December 31, 1998 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, 1998. This amount may be carried forward indefinitely.
Canadian net operating losses available to reduce future Canadian Federal
income taxes were $9,360,000 ($14,280,000 CDN) at December 31, 1998 and will
expire in the years indicated below:
(In Thousands)
1999 $ 33
2000 171
2001 876
2002 545
2003 2,289
2004 5,446
--------
$ 9,360
--------
--------
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 $119,772,000 ($182,829,000 CDN) at
December 31, 1998. 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 limitation of approximately
$5,700,000. To the extent of any net unrealized built-in gains at the time of
an
59
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES (CONTINUED):
- -------------------------------------------------------------------------------
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.
(7) PREFERRED STOCK:
- -------------------------------------------------------------------------------
$.75 CONVERTIBLE PREFERRED STOCK:
At December 31, 1996 the Company had 10,000,000 shares of $.75 Convertible
Preferred Stock authorized, par value $.01 per share, of which there were
2,877,673 shares outstanding with an aggregate liquidation preference of
$28,776,730.
In February 1997, the Company called for redemption all 2,877,673 shares of
the $.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.
SECOND SERIES PREFERRED STOCK:
At December 31, 1995 the Company had 620,000 shares of Second Series
Preferred Stock authorized, par value $.01 per share, of which there were
620,000 shares outstanding with an aggregate liquidation preference of
$11,160,000. On November 5, 1996 all 620,000 shares of the Second Series
Preferred Stock were converted into 1,240,000 shares of Common Stock.
(8) COMMON STOCK:
- -------------------------------------------------------------------------------
COMMON STOCK:
The Company has 200,000,000 shares of Common Stock authorized, par value $.10
per share. In January 1996 a 5-to-1 reverse stock split was approved by the
Company's shareholders. Unless otherwise indicated, all share amounts have
been adjusted to give effect to the 5-to-1 reverse stock split.
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 4.
In March 1997 and May 1997, pursuant to its Equity Participation Agreement
with Saxon, Forest exercised its right to purchase from the treasury of Saxon
7,950,150 shares (2,380,608 non-voting) of common stock. In consideration,
Forest issued 196,856 shares of Forest Common Stock to Saxon valued at $14.31
per share. The shares issued by Forest to Saxon were classified as treasury
shares prior to their sale by Saxon in October 1997.
In January 1996, 13,200,000 shares of Common Stock were sold for $11.00 per
share in a public offering. Of this amount 1,060,000 shares were sold by
Saxon and 12,140,000 were sold by Forest. The net proceeds to Forest and
Saxon from the issuance of shares totaled approximately $136,000,000 after
deducting issuance costs and underwriting fees.
60
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK (CONTINUED):
- -------------------------------------------------------------------------------
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. In connection with the Anschutz
transaction, the Company amended the Rights Agreement to exempt from the
provisions of the Rights Agreement shares of Common Stock acquired by
Anschutz and JEDI in connection with the transactions described in Note 3.
WARRANTS:
At December 31, 1995 the Company had outstanding 1,244,715 warrants to
purchase shares of its Common Stock (the Public Warrants). Each Public
Warrant entitled the holder to purchase one-fifth of a share of Common Stock
at a price of $3.00 and was noncallable. During 1996, 112,185 warrants were
exercised to purchase 22,437 shares of Common Stock. On October 1, 1996 the
remaining Public Warrants expired.
In December 1995, the Company assumed JEDI's obligations under an option
granted to Anschutz. In August 1996, Anschutz exercised the option for
$26,200,000 or approximately $11.64 per share and received 2,250,000 shares
of Common Stock.
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, 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.
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
61
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK (CONTINUED):
- -------------------------------------------------------------------------------
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. The following table
summarizes the activity in the Company's stock-based compensation plan for
the years ended December 31, 1996, 1997 and 1998:
Weighted
Average Number of
Number of Exercise Shares
Shares Price Exercisable
----------- --------- -------------
Outstanding at December 31, 1995 628,000 $ 20.46 461,200
Granted at fair value 1,383,900 12.74
Exercised (35,120) 11.42
Cancelled (515,200) 20.47
----------- ---------
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
----------- ---------
----------- ---------
The following table summarizes information about options outstanding at
December 31, 1998:
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
---------------- ------------ ----------- ---------- ------------- -----------
$ 8.38-10.38 57,500 9.79 $ 9.80 11,500 $ 9.80
$ 11.25 436,660 7.10 11.25 252,500 11.25
$ 11.65-13.94 134,000 7.96 12.61 69,000 12.63
$ 14.00 586,200 7.84 14.00 351,400 14.00
$ 14.25-17.75 603,000 8.28 16.95 255,900 16.63
$ 25.00 58,000 3.75 25.00 58,000 25.00
---------------- ------------ ----------- ---------- ------------- -----------
$ 8.38-25.00 1,875,360 7.75 $ 14.42 998,300 $ 14.48
---------------- ------------ ----------- ---------- ------------- -----------
---------------- ------------ ----------- ---------- ------------- -----------
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. Had
compensation cost for the Company's stock-based compensation plan been
determined using the fair value of the options at the grant date, the
Company's net loss for the years ended December 31, 1998, 1997 and 1996 would
have been $195,187,000, $11,864,000 and 2,230,000, respectively, and the
basic loss per share would have been $4.77, $.36 and less than $.01 per
share, respectively.
62
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK (CONTINUED):
- -------------------------------------------------------------------------------
The fair value of each option granted in 1998 and 1997 was estimated using
the Black-Scholes option pricing model. The following assumptions were used
in 1998: expected option life of 5 years; risk free interest rates ranging
from 4.193% to 5.565%; estimated volatility of 57.22%; and dividend yield of
zero percent. The weighted average fair 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 5.771% to 6.839%; 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. The following assumptions were used in
1996: expected option life of 5 years; risk free interest rates ranging from
5.261% to 6.022%; estimated volatility of 59.95%; and dividend yield of zero
percent. The weighted average fair market value of options granted during
1996 was estimated to be $7.22 per share based on these assumptions.
(9) EMPLOYEE BENEFITS:
- -------------------------------------------------------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 132,
Employers' Disclosures about Pension and Other Postretirement Benefits
(Statement No. 132). Statement No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans.
The Company has a qualified defined benefit pension plan which covers its
U.S. employees (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.
The following tables set forth the plans' benefit obligations, fair value of
plan assets and funded status at December 31, 1998 and 1997:
BENEFIT OBLIGATIONS: Pension Benefits Postretirement Benefits
--------------------- ---------------------------
1998 1997 1998 1997
----------- -------- ------------- ------------
(In Thousands) (In Thousands)
Projected benefit obligation at the beginning of the year $ 27,318 26,641 6,561 5,879
Service cost - - 190 148
Interest cost 1,924 1,976 486 454
Actuarial gain 1,543 1,237 897 597
Benefits paid (2,385) (2,536) (622) (605)
Retiree contributions - - 75 88
----------- -------- ------------- ------------
Projected benefit obligation at the end of the year $ 28,400 27,318 7,587 6,561
----------- -------- ------------- ------------
----------- -------- ------------- ------------
63
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS (CONTINUED):
FAIR VALUE OF PLAN ASSETS: Pension Benefits Postretirement Benefits
--------------------- ---------------------------
1998 1997 1998 1997
----------- -------- ------------- ------------
(In Thousands) (In Thousands)
Fair value of plan assets at beginning of the year $ 24,808 24,889 - -
Actual return on plan assets 2,807 2,394 - -
Employer contribution 57 61 - -
Benefits paid (2,385) (2,536) - -
----------- -------- ------------- ------------
Fair value of plan assets at the end of the year $ 25,287 24,808 - -
----------- -------- ------------- ------------
----------- -------- ------------- ------------
FUNDED STATUS: Pension Benefits Postretirement Benefits
--------------------- ---------------------------
1998 1997 1998 1997
----------- -------- ------------- ------------
(In Thousands) (In Thousands)
Excess of projected benefit obligation over plan assets $ (3,113) (2,510) (7,587) (6,561)
Unrecognized actuarial gain 4,025 3,222 1,635 764
----------- -------- ------------- ------------
Net amount recognized $ 912 712 (5,952) (5,797)
----------- -------- ------------- ------------
----------- -------- ------------- ------------
Amounts recognized in the balance sheet consist of:
Prepaid pension cost $ 1,355 1,159 - -
Accrued benefit liability (3,113) (2,510) (5,952) (5,797)
Accumulated other comprehensive income 2,670 2,063 - -
----------- -------- ------------- ------------
Net amount recognized $ 912 712 (5,952) (5,797)
----------- -------- ------------- ------------
----------- -------- ------------- ------------
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, 1998, 1997 and 1996:
Pension Benefits Postretirement Benefits
------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ---------- --------- --------
(In Thousands) (In Thousands)
Interest cost $ 1,924 1,976 1,971 $ 191 147 131
Expected return on plan assets (2,130) (2,139) (1,958) 486 454 418
Recognized actuarial loss 62 16 5 25 - -
-------- -------- -------- ---------- --------- --------
Total net periodic cost $ (144) (147) 18 $ 702 601 549
-------- -------- -------- ---------- --------- --------
-------- -------- -------- ---------- --------- --------
Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
-------- -------- -------- ---------- --------- --------
-------- -------- -------- ---------- --------- --------
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 1998:
Postretirement Benefits
---------------------------------
1% Increase 1% Decrease
--------------- ---------------
(In Thousands)
Effect on service and interest cost components $ 102 (88)
Effect on postretirement benefit obligation 919 (820)
64
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS (CONTINUED):
- -------------------------------------------------------------------------------
For measurement purposes, an 8.7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. 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:
1998 $ (804)
1997 $ (1,063)
1996 $ 2,145
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, 1998 and 1997:
BENEFIT OBLIGATIONS: 1998 1997
---------- ---------
(In Thousands of Canadian Dollars)
Projected benefit obligation at the beginning of the year $ 6,239 5,787
Service cost 261 249
Interest cost 446 416
Benefits paid (258) (213)
---------- ---------
Projected benefit obligation at the end of the year $ 6,688 6,239
---------- ---------
---------- ---------
FAIR VALUE OF PLAN ASSETS: 1998 1997
---------- ---------
(In Thousands of Canadian Dollars)
Fair value of plan assets at beginning of the year $ 8,171 7,256
Actual return on plan assets 636 1,099
Employer contributions 31 30
Benefits paid (258) (214)
---------- ---------
Fair value of plan assets at the end of the year $ 8,580 8,171
---------- ---------
---------- ---------
FUNDED STATUS: 1998 1997
---------- ---------
(In Thousands of Canadian Dollars)
Excess of assets over projected benefit obligation $ 1,892 1,933
Unrecognized prior service cost - 72
Unrecognized actuarial loss (1,858) (1,850)
Unrecognized asset at transition (336) (405)
---------- ---------
Pension accrual $ (302) (250)
---------- ---------
---------- ---------
65
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) 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, 1998, 1997 and 1996:
1998 1997 1996
-------- -------- --------
(In Thousands of Canadian Dollars)
Service cost $ 260 250 235
Interest cost 446 415 390
Expected return on plan assets (510) (466) (425)
Amortization of unrecognized transition asset (114) (74) (95)
-------- -------- --------
Total net periodic pension cost $ 82 125 105
-------- -------- --------
-------- -------- --------
Discount rate 7.00% 7.00% 7.00%
-------- -------- --------
-------- -------- --------
Expected return on plan assets 7.00% 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 U.S.
employees. Employees may defer up to 15% of their compensation, subject to
certain limitations. The Company matches the employee contributions up to 5%
of employee compensation. Certain limitations are in effect with respect to
withdrawals from the plan. In 1998, 1997 and the last three months of 1996,
Company contributions were made in cash. In the first nine months of 1996,
Company contributions were made by issuing authorized but unissued shares of
Common Stock. The expense associated with the Company's contributions was
$551,000 in 1998, $482,000 in 1997 and $399,000 in 1996.
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 $201,000 in 1998, and $117,000 in 1997 and $95,000 in 1996.
EXECUTIVE RETIREMENT AGREEMENTS:
The Company entered into agreements in December 1990 (the Agreements) with
certain former executives and directors (the Retirees) whereby each executive
retired from the employ of the Company as of December 28, 1990. Pursuant to
the terms of the Agreements, the Retirees or their estates are entitled to
receive supplemental retirement payments from the Company in addition to the
amounts to which they are entitled under the Company's retirement plan. In
addition, the Retirees and their spouses are entitled to lifetime coverage
under the Company's group medical and dental plans, tax and other financial
services, and payments by the Company in connection with certain club
membership dues. The Company has also agreed to maintain certain life
insurance policies in effect at December 1990, for the benefit of each of the
Retirees.
The Company's obligation to one retiree under a revised retirement agreement
was payable in Common Stock or cash, at the Company's option, in May of each
year from 1993 through 1996 at approximately $190,000 per year with the
balance of $149,000 paid in May 1997. The Agreements for the other six
Retirees provide for supplemental retirement payments totaling approximately
$770,000 per year in 1999 and 2000.
The $1,351,000 present value of the remaining amounts due under the
agreements, discounted at 13%, is included in other current and long-term
liabilities.
66
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS (CONTINUED):
- -------------------------------------------------------------------------------
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 $921,000 in each of the years 1998, 1997 and 1996, of
which $831,000 is 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.
(10) COMMITMENTS AND CONTINGENCIES:
- -------------------------------------------------------------------------------
Future rental payments for office facilities and equipment under the
remaining terms of noncancelable operating leases are $1,960,000, $1,793,000,
$1,408,000, $1,253,000 and $1,299,000 for the years ending December 31, 1999
through 2003, respectively.
Net rental payments applicable to exploration and development activities and
capitalized in the oil and gas property accounts aggregated $2,137,000 in
1998, $1,538,000 in 1997 and $1,050,000 in 1996. Net rental payments charged
to expense amounted to $3,948,000 in 1998, $4,149,000 in 1997 and $3,336,000
in 1996. 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, 1998 the ProMark Netback
Pool had entered into fixed price contracts to sell approximately 2.2 BCF of
natural gas in 1999 at an average price of $2.80 CDN per MCF and
approximately 5.4 BCF of natural gas in 2000 at an average price of
approximately $2.24 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
1998 Canadian Forest supplied 27% of the gas for the Netback Pool.
As part of ProMark's gas marketing activities, ProMark has entered into fixed
price contracts to purchase and to resell natural gas through 2000. ProMark
has commitments to purchase and commitments to resell approximately 50,700
MCF per day through October 31, 1999 and approximately 1,400 MCF per day
thereafter through October 31, 2000. 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.
(11) 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, 1998, 1997 and 1996, the
Company's gains (losses) under its swap agreements were $6,305,000,
$(7,439,000), and $(10,422,000), 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.
67
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(11) FINANCIAL INSTRUMENTS (CONTINUED):
- -------------------------------------------------------------------------------
The following table summarizes outstanding natural gas swaps at December 31,
1998:
1999 2000 2001
---------- ---------- ----------
UNITED STATES (1)
Contract volumes (BBTU) 25,262 738 605
Weighted average price (per MMBTU) $ 2.28 2.12 2.14
CANADA (2)
Contract volumes (BBTU) 3,321 - -
Weighted average price (per MMBTU) $ 1.55 - -
(1) Settled on the basis of New York Mercantile Exchange prices.
(2) Settled on the basis of Alberta Energy Company "C" U.S. dollar prices.
The Company had no oil swaps in place at December 31, 1998. Subsequent to
December 31, 1998 the Company entered into oil swaps for 3,000 barrels of oil
per day from March 1999 to December 1999 at a weighted average fixed price of
$14.17 per barrel (NYMEX basis).
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, 1998 there were four basis swaps in
place for the following weighted average volumes:
1999 2000 2001
---------- ---------- ----------
MMBTU/Day 24,719 2,017 1,658
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, 1998:
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% Senior Subordinated Notes was
approximately $178,000,000, based upon quoted market prices of the notes.
The fair value of the Company's 11 1/4% Senior Subordinated Notes was
approximately $8,763,000, based upon quoted market prices of the notes.
ENERGY SWAP AGREEMENTS:
The fair value of the Company's natural gas swap agreements was a gain of
approximately $7,212,000, based upon the estimated net amount the Company
would receive to terminate the agreements.
BASIS SWAP AGREEMENTS:
The fair value of the Company's basis swap agreements was a loss of
approximately $140,000, based upon the estimated net amount the Company would
pay to terminate the agreements.
68
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- -------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
NET EARNINGS (LOSS) ATTRIBUTABLE TO COMMON STOCK $ (1,003) 1,792 (138,092) (54,287)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (.03) (.11) (3.13) (1.22)
BASIC EARNINGS (LOSS) PER SHARE $ (.03) .05 (3.13) (1.22)
DILUTED LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (.03) (.11) (3.13) (1.22)
DILUTED EARNINGS (LOSS) PER SHARE $ (.03) .05 (3.13) (1.22)
1997
Revenue $ 93,063 77,655 81,977 86,946
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Earnings from operations $ 10,607 2,231 6,738 11,079
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Earnings (loss) before extraordinary item $ 4,522 (3,196) 583 1,180
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net earnings (loss) $ 4,522 (3,196) (11,776) 1,180
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net earnings (loss) attributable to common stock $ 4,333 (3,196) (11,776) 1,180
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Basic earnings (loss) per share before extraordinary item $ 0.14 (0.10) 0.02 0.03
Basic earnings (loss) per share $ 0.14 (0.10) (0.35) 0.03
Diluted earnings (loss) per share before extraordinary item $ 0.13 (0.10) 0.02 0.03
Diluted earnings (loss) per share $ 0.13 (0.10) (0.34) 0.03
69
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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, 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
-----------------
-----------------
70
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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
-----------------
-----------------
71
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS (CONTINUED):
- -------------------------------------------------------------------------------
Year ended December 31, 1996
Oil and Gas Operations Marketing
---------------------------- and
Total Processing Total
U.S.(1) Canada Total Canada Company
------- --------- -------- ---------- --------
(In Thousands)
Revenue $ 81,738 47,902 129,640 186,447 316,087
Marketing and processing expense - - - 178,706 178,706
Oil and gas production expense 19,789 12,410 32,199 - 32,199
General and administrative expense 7,430 5,181 12,611 1,012 13,623
Depreciation and depletion expense 39,331 20,297 59,628 2,232 61,860
------- --------- -------- ---------- --------
Earnings from operations $ 15,188 10,014 25,202 4,497 29,699
------- --------- -------- ---------- --------
------- --------- -------- ---------- --------
Capital expenditures $ 211,325 32,732 244,057 61 244,118
------- --------- -------- ---------- --------
------- --------- -------- ---------- --------
Property and equipment, net $ 281,140 166,835 447,975 5,974 453,949
------- --------- -------- ---------- --------
------- --------- -------- ---------- --------
(1) Information for Forest's reportable segments in the United States for 1996
is not available.
Information for Forest's reportable segments relates to the Company's 1996
consolidated totals as follows:
(In Thousands)
----------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
Earnings from operations for reportable segments $ 29,699
Administrative asset depreciation (1,208)
Other income, net 1,387
Interest expense (23,307)
Minority interest in loss of subsidiary 19
----------------
Earnings before income taxes and extraordinary item $ 6,590
----------------
----------------
CAPITAL EXPENDITURES:
Reportable segments $ 244,118
Administrative assets and other 566
----------------
Total capital expenditures $ 244,684
----------------
----------------
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 453,949
Administrative assets, net and other 4,293
----------------
Total property and equipment, net $ 458,242
----------------
----------------
72
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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, 1998, 1997 and 1996:
UNITED INTER-
STATES CANADA NATIONAL TOTAL
------------ ------------ ------------- -----------
(IN THOUSANDS)
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
------------ ------------ ------------- -----------
------------ ------------ ------------- -----------
1996
Property acquisition costs (undeveloped
leases and proved properties) $ 16,122 142,833 - 158,955
Exploration costs 36,696 6,743 - 43,439
Development costs 21,916 19,808 - 41,724
------------ ------------ ------------- -----------
Total $ 74,734 169,384 - 244,118
------------ ------------ ------------- -----------
------------ ------------ ------------- -----------
(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:
1998 1997 1996
--------------- -------------- -------------
(In Thousands)
Costs related to proved properties $ 1,923,521 1,521,325 1,381,289
Costs related to unproved properties:
Costs subject to depletion 6,344 12,217 32,007
Costs not subject to depletion 99,487 60,901 43,916
--------------- -------------- -------------
2,029,352 1,594,443 1,457,212
Less accumulated depletion and valuation allowance (1,367,086) (1,075,940) (1,001,604)
--------------- -------------- -------------
$ 662,266 518,503 455,608
--------------- -------------- -------------
--------------- -------------- -------------
73
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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, 1998, 1997 and
1996 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)
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
--------------- -------------- -------------
--------------- -------------- -------------
1996
Oil and gas sales $ 80,811 47,902 128,713
Production expense 19,789 12,410 32,199
Depletion expense 39,331 20,297 59,628
Income tax expense - 6,864 6,864
--------------- -------------- -------------
59,120 39,571 98,691
--------------- -------------- -------------
Results of operations from producing activities $ 21,691 8,331 30,022
--------------- -------------- -------------
--------------- -------------- -------------
(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 1996, 1997 and 1998 follows. The Canadian reserves at December
31, 1998 and 1997 and 1996 include 100% of the reserves owned by Saxon, a
consolidated subsidiary in which the Company held a majority interest in 1997
and 1996 but which is a wholly-owned subsidiary as of December 31, 1998.
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. Prices include
consideration of changes in existing prices provided only by contractual
arrangement, including energy swap agreements (see Note 11), 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.
74
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(CONTINUED):
- -------------------------------------------------------------------------------
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, 1995 6,129 4,338 10,467 215,672 16,218 231,890
Revisions of previous estimates 335 (431) (96) (4,989) (3,446) (8,435)
Extensions and discoveries 357 4,440 4,797 32,507 7,779 40,286
Production (1,030) (1,645) (2,675) (25,456) (13,872) (39,328)
Sales of reserves in place (16) (612) (628) (1,132) (326) (1,458)
Purchases of reserves in place 23 12,126 12,149 14,653 96,572 111,225
-------- --------- ------- ---------- --------- ---------
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
-------- --------- ------- ---------- --------- ---------
-------- --------- ------- ---------- --------- ---------
75
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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, 1995 5,678 3,188 8,866 156,471 14,184 170,655
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
(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%. At December 31, 1998,
1997 and 1996, 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 and 1996, but which is a wholly owned
subsidiary as of December 31, 1998. 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 11.
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, 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.
76
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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)
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.
December 31, 1996
---------------------------------------
United
States Canada Total
------------ ------------ ----------
(In Thousands)
Future oil and gas sales $ 964,943 580,563 1,545,506
Future production and development costs (258,866) (168,136) (427,002)
------------ ------------ ----------
Future net revenue 706,077 412,427 1,118,504
10% annual discount for estimated timing of cash flows (250,527) (165,788) (416,315)
------------ ------------ ----------
Present value of future net cash flows before income taxes 455,550 246,639 702,189
Present value of future income tax expense (71,339) (70,981) (142,320)
------------ ------------ ----------
Standardized measure of discounted future net cash flows $ 384,211 175,658 559,869
------------ ------------ ----------
------------ ------------ ----------
Undiscounted future income tax expense was $134,835,000 in the United States and
$127,833,000 in Canada at December 31, 1996.
77
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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. At December 31, 1998, 1997 and 1996, the
Canadian amounts include 100% of the reserves owned by Saxon, a consolidated
subsidiary in which the Company held a majority interest in 1997 and 1996,
but is a wholly owned subsidiary as of December 31, 1998.
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. Subsequent to December 31, 1998 the price of natural gas decreased
significantly. At March 1, 1999, the Company was receiving average natural
gas prices of approximately $1.67 per MCF in the U.S. and approximately $1.20
per MCF in Canada. The NYMEX price for crude oil increased from $12.06 per
barrel at December 31, 1998 to $12.24 per barrel at March 1, 1999. Had the
March prices been used, the Company's standardized measure of discounted
future net cash flows relating to proved oil and gas reserves at December 31,
1998 would have been reduced.
78
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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.
79
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(CONTINUED):
- -------------------------------------------------------------------------------
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED)
December 31, 1996
-------------------------------------------
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 $ 227,827 29,090 256,917
Changes resulting from:
Sales of oil and gas, net of production costs (56,768) (35,492) (92,260)
Net changes in prices and future production costs 169,975 96,547 266,522
Net changes in future development costs (14,192) (8,256) (22,448)
Extensions, discoveries and improved recovery 60,423 37,491 97,914
Previously estimated development costs incurred during the period 19,734 18,939 38,673
Revisions of previous quantity estimates (4,396) (8,054) (12,450)
Sales of reserves in place (2,405) (3,993) (6,398)
Purchases of reserves in place 21,948 115,518 137,466
Accretion of discount on reserves at beginning of year before
income taxes 24,549 3,085 27,634
Net change in income taxes (62,484) (69,217) (131,701)
------------ ------------ ----------
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at end of year $ 384,211 175,658 559,869
------------ ------------ ----------
------------ ------------ ----------
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves at December 31, 1996 was based
on average natural gas prices of approximately $3.50 per MCF in the U.S. and
approximately $2.10 per MCF in Canada and on average liquids prices of
approximately $26.25 per barrel in the U.S. and approximately $19.10 per
barrel in Canada.
80
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
1999 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,
1998 and 1997
3. Consolidated Statements of Operations -
Years ended December 31, 1998, 1997
and 1996
4. Consolidated Statements of Shareholders'
Equity - Years ended December 31,
1998, 1997 and 1996
5. Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997
and 1996
6. Notes to Consolidated Financial
Statements - Years ended December 31, 1998,
1997 and 1996
(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).
81
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).
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 (FileNo. 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.
Exhibit 4.7 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).
82
Exhibit 4.8 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 4.9 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 4.10 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 4.11 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 4.12 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 4.13 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 4.14 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 4.15 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 4.16 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 4.17 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).
83
*Exhibit 4.18 Letter Agreement dated October 28, 1997 between
Saxon Petroleum Inc. and Bank of Montreal.
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, William L. Dorn, 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
Current Report on Form 8-K dated December 11, 1998.
84
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, 1999 By: /s/ Joan C. Sonnen
------------------------
Joan C. Sonnen
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 President and Chief Executive Officer March 24, 1999
- ------------------------- (Principal Executive Officer)
(Robert S. Boswell)
/s/ David H. Keyte Executive Vice President and March 24, 1999
- ------------------------- Chief Financial Officer
(David H. Keyte) (Principal Financial Officer)
/s/ Joan C. Sonnen Controller and Corporate Secretary March 24, 1999
- ------------------------- (Principal Accounting Officer)
(Joan C. Sonnen)
Philip F. Anschutz* Directors of the Registrant March 24, 1999
(Philip F. Anschutz)
/s/ Robert S. Boswell
- -------------------------
(Robert S. Boswell)
William L. Britton*
(William L. Britton)
Cortlandt S. Dietler*
(Cortlandt S. Dietler)
William L. Dorn*
(William L. Dorn)
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, 1999
-------------------------
Joan C. Sonnen
(as attorney-in-fact for
each of the persons indicated)
85