<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 1-13515
FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)
New York 25-0484900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Broadway
Suite 2200
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 812-1400
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.
Yes X No
----- -----
Number of Shares
Outstanding
Title of Class of Common Stock October 31, 1999
- -------------------------------------- -----------------
Common Stock, Par Value $.10 Per Share 53,805,809
<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,264 3,415
Accounts receivable 63,351 55,587
Other current assets 3,711 2,374
--------- ---------
Total current assets 70,326 61,376
Net property and equipment, at cost 677,401 663,310
Goodwill and other intangible assets, net 22,214 22,689
Other assets 8,438 12,361
--------- ---------
$ 778,379 759,736
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 56,264 49,389
Accrued interest 3,482 9,970
Other current liabilities 4,579 1,669
--------- ---------
Total current liabilities 64,325 61,028
Long-term debt 383,687 505,450
Other liabilities 13,920 16,181
Deferred income taxes 7,099 8,086
Shareholders' equity:
Common stock 5,379 4,465
Capital surplus 721,633 589,972
Accumulated deficit (405,751) (415,050)
Accumulated other comprehensive loss (11,461) (9,948)
Treasury stock, at cost (452) (448)
--------- ---------
Total shareholders' equity 309,348 168,991
--------- ---------
$ 778,379 759,736
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
PRODUCTION
Natural gas (mmcf) 15,485 16,389 48,230 44,351
========= ========= ========= =========
Oil, condensate and natural
liquids (thousands of barrels) 1,134 1,103 3,308 3,104
========= ========= ========= =========
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing $ 42,414 35,906 130,434 104,748
Oil and gas sales:
Gas 35,119 30,278 100,372 86,785
Oil, condensate and natural gas liquids 15,601 11,831 40,267 37,151
--------- --------- --------- ---------
Total oil and gas sales 50,720 42,109 140,639 123,936
--------- --------- --------- ---------
Total revenue 93,134 78,015 271,073 228,684
Operating expenses:
Marketing and processing 41,438 34,238 125,289 99,502
Oil and gas production 10,386 11,793 34,089 29,997
General and administrative 4,031 6,015 12,012 15,192
Depreciation and depletion 22,203 26,968 66,569 74,163
Impairment of oil and gas properties - 140,000 - 140,000
--------- --------- --------- ---------
Total operating expenses 78,058 219,014 237,959 358,854
--------- --------- --------- ---------
Earnings (loss) from operations 15,076 (140,999) 33,114 (130,170)
Other income and expense:
Other (income) expense, net 129 (1,686) 32 (8,468)
Interest expense 10,820 10,168 31,884 28,429
Translation (gain) loss on subordinated debt (755) 5,166 (7,272) 8,328
--------- --------- --------- ---------
Total other income and expense 10,194 13,648 24,644 28,289
--------- --------- --------- ---------
Earnings (loss) before income taxes and
extraordinary item 4,882 (154,647) 8,470 (158,459)
Income tax expense (benefit):
Current (17) 550 (98) 1,499
Deferred (505) (17,105) (1,329) (16,459)
--------- --------- --------- ---------
(522) (16,555) (1,427) (14,960)
--------- --------- --------- ---------
Earnings (loss) before extraordinary item 5,404 (138,092) 9,897 (143,499)
Extraordinary item - gain (loss) on extinguishment
of debt (598) - (598) 6,196
--------- --------- --------- ---------
Net earnings (loss) $ 4,806 (138,092) 9,299 (137,303)
========= ========= ========= =========
Weighted average number of common shares
outstanding 48,556 44,176 45,967 39,651
Basic and diluted earnings (loss) per common share:
Earnings (loss) attributable to common stock
before extraordinary item $ .11 (3.13) .21 (3.62)
Extraordinary item - gain (loss) on
extinguishment of debt (.01) - (.01) .16
--------- --------- --------- ---------
Earnings (loss) attributable to common stock $ .10 (3.13) .20 (3.46)
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- -----------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before extraordinary item $ 9,897 (143,499)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and depletion 66,569 74,163
Impairment of oil and gas properties - 140,000
Translation (gain) loss on subordinated debt (7,272) 8,328
Amortization of deferred debt costs 958 664
Deferred income tax benefit (1,329) (16,459)
Other, net (3,386) (125)
Decrease (increase) in accounts receivable (2,589) 9,853
Increase in other current assets (5,163) (2,540)
Increase (decrease) in accounts payable 4,071 (10,001)
Decrease in accrued interest and other current liabilities (2,077) (1,221)
-------- --------
Net cash provided by operating activities 59,679 59,163
Cash flows from investing activities:
Capital expenditures for property and equipment (83,313) (443,496)
Less stock issued for acquisition - 97,376
-------- --------
(83,313) (346,120)
Proceeds from sales of assets 17,341 8,584
Increase in other assets, net (506) (627)
-------- --------
Net cash used by investing activities (66,478) (338,163)
Cash flows from financing activities:
Proceeds of common stock offering, net of cost 131,188 -
Proceeds from bank borrowings 96,288 431,331
Repayments of bank borrowings (309,485) (238,834)
Issuance of 10 1/2% senior subordinated notes, net of issuance costs 98,825 -
Issuance of 8 3/4% senior subordinated notes, net of issuance costs - 74,616
Redemption of 11 1/4% senior subordinated notes (9,083) -
Proceeds from the exercise of options 1,388 -
Decrease in other liabilities, net (2,453) (1,377)
-------- --------
Net cash provided by financing activities 6,668 265,736
Effect of exchange rate changes on cash (20) (144)
-------- --------
Net decrease in cash and cash equivalents (151) (13,408)
Cash and cash equivalents at beginning of period 3,415 18,191
-------- --------
Cash and cash equivalents at end of period $ 3,264 4,783
======== ========
Cash paid (refunded) during the period for:
Interest $ 39,945 32,035
Income taxes $ (177) 1,278
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, all adjustments, consisting of
normal recurring accruals, have been made which are necessary for a fair
presentation of the financial position of Forest at September 30, 1999 and
the results of operations for the three and nine month periods ended
September 30, 1999 and 1998. Quarterly results are not necessarily indicative
of expected annual results because of the impact of fluctuations in prices
received for liquids (oil, condensate and natural gas liquids) and natural
gas and other factors. For a more complete understanding of Forest's
operations and financial position, reference is made to the consolidated
financial statements, and related notes thereto, filed with Forest's annual
report on Form 10-K for the year ended December 31, 1998, previously filed
with the Securities and Exchange Commission.
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:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 4,806 (138,092) 9,299 (137,303)
Other comprehensive loss (251) (1,177) (1,513) (2,180)
-------- -------- -------- --------
Total comprehensive net
earnings (loss) $ 4,555 (139,269) 7,786 (139,483)
======== ======== ======== ========
</TABLE>
(2) ACQUISITIONS
In February 1998, Forest 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 bank credit facility, and the issuance of $75,000,000
principal amount of 8 3/4% subordinated notes (see Note 7) and 1,000,000
shares of Common Stock. Estimated proved reserves acquired in the Louisiana
Acquisition were approximately 189 BCFE at the time of purchase.
In June 1998, Forest issued 5,950,000 shares of common stock to The
Anschutz Corporation (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.
Forest's interest in this field had net proved developed producing reserves
estimated at approximately 72 BCFE at the date of acquisition. Forest
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. The acquisition also 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) COMMON STOCK OFFERING
In August 1999, Forest sold 9,000,000 shares of Common Stock in a
public offering for $15.4375 per share. The net proceeds will be used to fund
identified exploration and development activities in the Northwest
Territories and other core areas, as well as for other projects or property
acquisitions and for general corporate purposes. Pending such uses, we used
the proceeds of the offering to reduce indebtedness under our global credit
facility.
4
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(4) SUBSIDIARIES
SAXON PETROLEUM INC. In December 1995, Forest purchased a 56%
economic (49% voting) interest in Saxon Petroleum Inc. (Saxon) for
approximately $22,000,000. Saxon was a Canadian exploration and production
company with headquarters in Calgary, Alberta and operations concentrated in
western Alberta. Since Forest had majority voting control over Saxon as a
result of the voting common shares owned and proxies that it held, it
accounted for Saxon as a consolidated subsidiary from the date of its
acquisition. During 1997, Forest converted preferred shares of Saxon into
common shares and acquired additional common shares of Saxon pursuant to an
equity participation agreement. These transactions increased Forest's
ownership in Saxon to a 65% economic (49% voting) interest. In August 1998,
Forest acquired all of the outstanding common shares of Saxon 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 September 30, 1999.
In October 1998, ownership of Saxon was transferred from Forest to
its wholly owned subsidiary, Canadian Forest Oil Ltd. In June 1999, Saxon was
liquidated into Canadian Forest.
CANADIAN FOREST OIL LTD. In January 1996, Forest 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 6). Forest 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 September 30, 1999
and December 31, 1998 and for the nine months ended September 30, 1999 and
1998. These amounts include the effects of the transfer of the investment in
Saxon to Canadian Forest effective October 1998.
5
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(4) SUBSIDIARIES, CONTINUED
<TABLE>
<CAPTION>
September 30, December 31,
CANADIAN FOREST OIL LTD. 1999 1998
------------- ------------
<S> <C> <C>
(In Thousands)
Summarized Consolidated Balance Sheet Information:
ASSETS
Current assets $ 27,133 22,240
Net property and equipment 159,196 132,081
Goodwill and other intangible assets, net 22,214 22,689
Investment in affiliate 99 95
Note receivable from parent 6,887 42,266
Other assets 3,225 3,384
--------- ---------
$ 218,754 222,755
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities $ 28,371 27,646
Long-term debt 36,785 35,398
8 3/4% Senior Subordinated Notes 199,978 199,976
Other liabilities 350 345
Deferred income taxes 7,099 9,656
Shareholder's equity (deficit) (53,829) (50,266)
--------- ---------
$ 218,754 222,755
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
------------- ------------
<S> <C> <C>
(In Thousands)
Summarized Consolidated Statements of Operations
Information:
Revenue $ 155,951 118,790
========= =========
Income (loss) before income taxes $ 631 (42,058)
========= =========
Net income (loss) $ 2,298 (31,051)
========= =========
</TABLE>
(5) NET PROPERTY AND EQUIPMENT
Components of net property and equipment are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Oil and gas properties $ 2,111,507 2,029,352
Buildings, transportation and
other equipment 13,862 12,356
----------- ----------
2,125,369 2,041,708
Less accumulated depreciation,
depletion and valuation allowance 1,447,968 1,378,398
----------- ----------
$ 677,401 663,310
=========== ==========
</TABLE>
6
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets recorded by Forest's gas marketing
subsidiary consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Goodwill $ 15,616 14,980
Gas marketing contracts 13,624 13,070
-------- --------
29,240 28,050
Less accumulated amortization (7,026) (5,361)
-------- --------
$ 22,214 22,689
======== ========
</TABLE>
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 12 years.
(7) LONG-TERM DEBT
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Global Credit Facility $ 84,785 271,856
Saxon Credit Facility - 24,942
8 3/4% Senior Subordinated Notes 199,978 199,976
10 1/2% Senior Subordinated Notes 98,924 -
11 1/4% Senior Subordinated Notes - 8,676
-------- --------
$383,687 505,450
======== ========
</TABLE>
In February 1998, Canadian Forest issued $75,000,000 principal
amount of 8 3/4% subordinated notes which were sold at 100.375%. Net proceeds
were used to provide funds for the Louisiana Acquisition. The notes issued in
1998 were subsequently exchanged for notes of the same series of 8 3/4% Notes
issued in September 1997.
Forest 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 increase in the value of the Canadian dollar
relative to the U.S. dollar during the third quarter and first nine months of
1999, Forest reported translation gains of approximately $755,000 and
$7,272,000, respectively, compared to translation losses of $5,166,000 and
$8,328,000 in the third quarter and first nine months of 1998, respectively.
In June 1998, Forest settled its remaining nonrecourse production
payment obligation for 271,214 shares of 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. As a
result of this settlement, Forest recorded an extraordinary gain on
extinguishment of debt of $6,196,000 (net of related expenses) in the second
quarter of 1998.
7
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(7) LONG-TERM DEBT, CONTINUED
In February 1999 Forest completed a public offering, at 98.811% of
par, of $100,000,000 principal amount of 10 1/2% Senior Subordinated Notes
due 2006.
In September 1999 Forest redeemed the remaining principal amount of
its 11 1/4% Senior Subordinated Notes at 103.792% of par. As a result of this
redemption, Forest recorded an extraordinary loss on extinguishment of debt
of $598,000 in the third quarter of 1999.
(8) 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.
Diluted earnings (loss) per share is computed by adjusting the
average number of common shares outstanding for the dilutive effect, if any,
of stock options. The effect of potentially dilutive securities is based on
earnings (loss) before extraordinary items.
The following sets forth the calculation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
1999(1) 1998(2) 1999(3) 1998(2)
-------- --------- ------ --------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item $ 5,404 (138,092) 9,897 (143,499)
======== ========= ====== ========
Weighted average common shares outstanding
during the period 48,556 44,176 45,967 39,651
Add dilutive effects of employee stock options 813 - 280 -
-------- --------- ------ --------
Weighted average common shares outstanding
including the effects of dilutive securities 49,369 44,176 46,247 39,651
======== ========= ====== ========
Basic earnings (loss) per share before
extraordinary item $ .11 (3.13) .21 (3.62)
======== ========= ====== ========
Diluted earnings (loss) per share before
extraordinary item $ .11 (3.13) .21 (3.62)
======== ========= ====== ========
</TABLE>
(1) At September 30, 1999, options to purchase 482,000 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
earnings per share because the exercise prices of these options were
greater than the average market price of the common stock during the
period. These options expire at various dates from 2003 through 2008.
(2) At September 30, 1998, options to purchase 1,886,260 shares of common
stock at prices ranging from $9.31 to $25.00 per share were
outstanding, but were not included in the computation of diluted
earnings per share because the effect of the assumed exercise of these
stock options was antidilutive. These options expire at various dates
from 2000 through 2008.
(3) At September 30, 1999, options to purchase 1,663,560 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
earnings per share because the exercise prices of these options were
greater than the average market price of the common stock during the
period. These options expire at various dates from 2003 through 2008.
8
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(9) 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 Forest's consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended September 30, 1999
- -------------------------------------
Oil and Gas Operations
-------------------------------------------------------------------- Marketing
Gulf Coast Region and
-------------------- Western Total Processing Total
Offshore Onshore Region U.S. Canada Total Canada Company
-------- ------- ------ ---- ------ ----- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 20,806 11,052 8,091 39,949 11,076 51,025 42,109 93,134
Marketing and processing expense - - - - - - 41,438 41,438
Oil and gas production expense 2,736 1,811 2,100 6,647 3,739 10,386 - 10,386
General and administrative expense 1,126 922 636 2,684 712 3,396 635 4,031
Depreciation and depletion expense 10,248 4,947 2,221 17,416 4,064 21,480 519 21,999
-------- ------- ------ ------ ------ ------ ------ -------
Earnings (loss) from operations $ 6,696 3,372 3,134 13,202 2,561 15,763 (483) 15,280
======== ======= ====== ====== ====== ====== ====== =======
Capital expenditures $ 11,100 11,406 2,049 24,555 8,463 33,018 - 33,018
======== ======= ====== ====== ====== ====== ====== =======
Property and equipment, net $114,011 273,894 100,027 487,932 163,900 651,832 - 651,832
======== ======= ====== ====== ====== ====== ====== =======
</TABLE>
Information for Forest's reportable segments relates to the three months
ended September 30, 1999 consolidated totals as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
EARNINGS BEFORE INCOME TAXES:
Earnings from operations for reportable segments $ 15,280
Administrative asset depreciation (204)
Other expense, net (129)
Interest expense (10,820)
Translation gain on subordinated debt 755
----------
Earnings before income taxes $ 4,882
==========
CAPITAL EXPENDITURES:
Reportable segments $ 33,018
International interests 1,006
Administrative assets and other 633
----------
Total capital expenditures $ 34,657
==========
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 651,832
International interests 20,157
Administrative assets, net and other 5,412
----------
Total property and equipment, net $ 677,401
==========
</TABLE>
9
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(9) BUSINESS AND GEOGRAPHICAL SEGMENTS, CONTINUED
<TABLE>
<CAPTION>
Three months ended September 30, 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 14,858 11,407 7,088 33,353 8,844 42,197 35,818 78,015
Marketing and processing expense - - - - - - 34,238 34,238
Oil and gas production expense 2,869 3,727 1,849 8,445 3,348 11,793 - 11,793
General and administrative expense 1,005 1,077 646 2,728 2,617 5,345 670 6,015
Depreciation and depletion expense 10,834 6,419 3,521 20,774 5,431 26,205 549 26,754
Impairment of oil and gas properties 38,000 42,000 22,000 102,000 38,000 140,000 - 140,000
--------- ------- ------- ------- ------- ------- ------ --------
Earnings (loss) from operations $ (37,850) (41,816) (20,928) (100,594) (40,552) (141,146) 361 (140,785)
========= ======= ======= ======= ======= ======= ====== ========
Capital expenditures $ 19,477 6,595 7,268 33,340 20,250 53,590 10 53,600
========= ======= ======= ======= ======= ======= ====== ========
Property and equipment, net $ 149,024 278,838 111,631 539,493 158,726 698,219 4,716 702,935
========= ======= ======= ======= ======= ======= ====== ========
</TABLE>
Information for Forest's reportable segments relates to the three months ended
September 30, 1998 consolidated totals as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
LOSS BEFORE INCOME TAXES:
Loss from operations for reportable segments $ (140,785)
Administrative asset depreciation (214)
Other income, net 1,686
Interest expense (10,168)
Translation loss on subordinated debt (5,166)
-----------
Loss before income taxes $ (154,647)
===========
CAPITAL EXPENDITURES:
Reportable segments $ 53,600
International interests -
Administrative assets and other 474
-----------
Total capital expenditures $ 54,074
===========
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 702,935
International interests 11,000
Administrative assets, net and other 4,491
-----------
Total property and equipment, net $ 718,426
===========
</TABLE>
10
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(9) BUSINESS AND GEOGRAPHICAL SEGMENTS, CONTINUED
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
- ------------------------------------
Oil and Gas Operations
-------------------------------------------------------------- Marketing
Gulf Coast Region and
---------------------- Western Total Processing Total
Offshore Onshore Region U.S. Canada Total Canada Company
-------- ------- ------ ---- ------ ----- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 60,644 28,932 22,022 111,598 29,540 141,138 129,935 271,073
Marketing and processing expense - - - - - - 125,289 125,289
Oil and gas production expense 9,630 10,406 4,693 24,729 9,360 34,089 - 34,089
General and administrative expense 3,487 2,627 1,832 7,946 2,126 10,072 1,940 12,012
Depreciation and depletion expense 32,898 13,121 6,556 52,575 11,794 64,369 1,464 65,833
-------- ------- ------ ------ ------ ------ ------ -------
Earnings from operations $ 14,629 2,778 8,941 26,348 6,260 32,608 1,242 33,850
======== ======= ====== ====== ====== ====== ====== =======
Capital expenditures $ 18,913 26,498 4,435 49,846 25,752 75,598 - 75,598
======== ======= ====== ====== ====== ====== ====== =======
Property and equipment, net $114,011 273,894 100,027 487,932 163,900 651,832 - 651,832
======== ======= ====== ====== ====== ====== ====== =======
</TABLE>
Information for Forest's reportable segments relates to the nine months ended
September 30, 1999 consolidated totals as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
EARNINGS BEFORE INCOME TAXES:
Earnings from operations for reportable segments $ 33,850
Administrative asset depreciation (736)
Other expense, net (32)
Interest expense (31,884)
Translation gain on subordinated debt 7,272
----------
Earnings before income taxes $ 8,470
==========
CAPITAL EXPENDITURES:
Reportable segments $ 75,598
International interests 5,777
Administrative assets and other 1,938
----------
Total capital expenditures $ 83,313
==========
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 651,832
International interests 20,157
Administrative assets, net and other 5,412
----------
Total property and equipment, net $ 677,401
==========
</TABLE>
11
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(9) BUSINESS AND GEOGRAPHICAL SEGMENTS, CONTINUED
<TABLE>
<CAPTION>
Nine months ended September 30, 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 49,636 31,476 13,441 94,553 29,748 124,301 104,383 228,684
Marketing and processing expense - - - - - - 99,502 99,502
Oil and gas production expense 9,065 8,091 3,738 20,894 9,103 29,997 - 29,997
General and administrative expense 3,222 3,249 1,335 7,806 5,275 13,081 2,111 15,192
Depreciation and depletion expense 33,962 15,698 4,855 54,515 17,262 71,777 1,524 73,301
Impairment of oil and gas properties 38,000 42,000 22,000 102,000 38,000 140,000 - 140,000
--------- ------- ------- ------- ------- ------- ------ --------
Earnings (loss) from operations $ (34,613) (37,562) (18,487) (90,662) (39,892) (130,554) 1,246 (129,308)
========= ======= ======= ======= ======= ======= ====== ========
Capital expenditures $ 56,499 258,216 68,960 383,675 47,653 431,328 - 431,328
========= ======= ======= ======= ======= ======= ====== ========
Property and equipment, net $ 149,024 278,838 111,631 539,493 158,726 698,219 4,716 702,935
========= ======= ======= ======= ======= ======= ====== ========
</TABLE>
Information for Forest's reportable segments relates to the nine months ended
September 30, 1998 consolidated totals as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
LOSS BEFORE INCOME TAXES:
Loss from operations for reportable segments $ (129,308)
Administrative asset depreciation (862)
Other income, net 8,468
Interest expense (28,429)
Translation loss on subordinated debt (8,328)
----------
Loss before income taxes $ (158,459)
==========
CAPITAL EXPENDITURES:
Reportable segments $ 431,328
International interests 11,000
Administrative assets and other 1,168
----------
Total capital expenditures $ 443,496
==========
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 702,935
International interests 11,000
Administrative assets, net and other 4,491
----------
Total property and equipment, net $ 718,426
==========
</TABLE>
12
<PAGE>
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.
FORWARD-LOOKING STATEMENTS
Certain of the statements set forth in this Form 10-Q, such as the
statements regarding planned capital expenditures and the availability of
capital resources to fund capital expenditures, are forward-looking and are
based on our current belief as to the outcome and timing of such future
events. There are numerous risks and uncertainties that can affect the
outcome and timing of such events, including many factors which are beyond
our control. Should one or more of these risks or uncertainties occur, or
should underlying assumptions prove incorrect, the actual results and plans
for 1999 and beyond could differ materially from those expressed in the
forward-looking statements. For a description of risks affecting Forest's
business, see "Item 1 - Business -Forward-Looking Statements and Risk
Factors" in the 1998 Annual Report on Form 10-K.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER OF 1999
Net earnings for the third quarter of 1999 were $4,806,000 or $.10
per basic and diluted common share compared to a net loss of $138,092,000 or
$3.13 per basic and diluted common share in the corresponding period of 1998.
The current period included a $598,000 extraordinary loss on extinguishment
of 11 1/4% senior subordinated debt and a $755,000 noncash gain on a currency
translation related to subordinated debt issued by a Canadian subsidiary. The
1998 period included a noncash charge for impairment of oil and gas
properties of $125,000,000, net of related deferred taxes ($140,000,000
pre-tax), as well as a noncash loss on currency translation of $5,166,000.
Marketing and processing revenue increased 18% to $42,414,000 in the
third quarter of 1999 from $35,906,000 in the third quarter of 1998, while
related marketing and processing expense increased 21% to $41,438,000
compared to $34,238,000 in the same period of the previous year. The gross
margin reported for marketing and processing activities decreased to $976,000
in the third quarter of 1999 from $1,668,000 in the 1998 period. The decrease
resulted from the effects of a more competitive market which caused trading
margins to tighten, and lower gas processing income due to the sale of
processing facilities in the first quarter of 1999.
Oil and gas sales revenue increased by 20% to $50,720,000 in the
third quarter of 1999 from $42,109,000 in the third quarter of 1998 due
primarily to higher oil and gas prices. Production volumes for natural gas
and liquids (consisting of oil, condensate and natural gas liquids) in the
third quarter of 1999 decreased 3% from the comparable 1998 period, due
primarily to new production in the Gulf of Mexico being more than offset by
normal declines, the effects of curtailed capital spending in the first six
months of 1999, and interruptions of production during maintenance and
capital activities and the effects of property sales in both the United
States and Canada. The average sales prices received for natural gas and
liquids in the third quarter of 1999 increased 23% and 28%, respectively,
compared to the average sales price received in the corresponding 1998 period.
Oil and gas production expense of $10,386,000 in the third quarter
of 1999 decreased 12% from $11,793,000 in the comparable period of 1998
primarily as a result of lower workover expense in the Onshore Gulf Coast
area. On an MCFE basis (MCFE means thousands of cubic feet of natural gas
equivalents, using conversion ratio of one barrel of oil to six MCF of
natural gas), production expense decreased approximately 8% in the third
quarter of 1999 to $.47 per MCFE from $.51 MCFE in the third quarter of 1998.
13
<PAGE>
The following tables set forth production volumes, weighted average
sales prices and production expenses during the periods as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
---------------------------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
----------- ------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 7,175 2,806 2,444 12,425 3,060 15,485
Sales price received (per MCF) $ 2.65 2.72 2.27 2.59 1.86 2.45
Effects of energy swaps (per MCF)(1) (.16) (.23) (.06) (.16) (.26) (.18)
----------- ------- -------- ------- ------ ------
Average sales price (per MCF) $ 2.49 2.49 2.21 2.43 1.60 2.27
LIQUIDS
Oil and condensate:
Production (MBBLS) 221 244 47 512 330 842
Sales price received (per BBL) $ 19.53 18.80 21.47 19.36 18.51 19.03
Effects of energy swaps (per BBL)(1) (5.49) (5.95) (3.87) (5.56) (3.55) (4.78)
----------- ------- -------- ------- ------ ------
Average sales price (per BBL) $ 14.04 12.85 17.60 13.80 14.96 14.25
Natural gas liquids:
Production (MBBLS) - 43 146 189 103 292
Average sales price (per BBL) $ - 10.26 12.73 12.29 12.32 12.30
Total liquids production (MBBLS) 221 287 193 701 433 1,134
Average liquids sales price (per BBL) $ 14.18 12.46 13.91 13.40 14.33 13.76
TOTAL PRODUCTION:
Production volumes (MMCFE) 8,501 4,528 3,602 16,631 5,658 22,289
Average sales price (per MCFE) $ 2.47 2.33 2.24 2.38 1.96 2.28
Operating expense (per MCFE) .32 .40 .58 .40 .66 .47
----------- ------- -------- ------- ------ ------
Netback (per MCFE) $ 2.15 1.93 1.66 1.98 1.30 1.81
=========== ======= ======== ======= ====== ======
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
7,949 MMCF in the three months ended September 30, 1999. Hedged oil and
condensate volumes were 783,000 barrels in the three months ended
September 30, 1999. The aggregate net loss under energy swap agreements
was $6,775,000 for the period and was accounted for as a decrease to
oil and gas sales.
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
---------------------------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
----------- ------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 5,944 3,497 3,050 12,491 3,898 16,389
Sales price received (per MCF) $ 2.04 2.07 1.73 1.98 1.03 1.75
Effects of energy swaps (per MCF)(1) .12 .27 (.01) .13 (.01) .10
----------- ------ ------- ------- ----- ------
Average sales price (per MCF) $ 2.16 2.34 1.72 2.11 1.02 1.85
LIQUIDS
Oil and condensate:
Production (MBBLS) 191 206 85 482 328 810
Sales price received (per BBL) $ 10.64 12.50 11.65 11.61 11.54 11.58
Effects of energy swaps (per BBL)(1) 1.19 - - .47 .80 .61
----------- ------ ------- ------- ----- ------
Average sales price (per BBL) $ 11.83 12.50 11.65 12.08 12.34 12.19
Natural gas liquids:
Production (MBBLS) 1 27 144 172 121 293
Average sales price (per BBL) $ 12.00 9.93 5.94 6.60 6.79 6.68
Total liquids production (MBBLS) 192 233 229 654 449 1,103
Average liquids sales price (per BBL) $ 11.83 12.20 8.06 10.64 10.85 10.73
TOTAL PRODUCTION
Production volumes (MMCFE) 7,096 4,895 4,424 16,415 6,592 23,007
Average sales price (per MCFE) $ 2.13 2.25 1.60 2.02 1.34 1.83
Operating expense (per MCFE) .40 .76 .42 .51 .51 .51
----------- ------ ------- ------- ----- ------
Netback (per MCFE) $ 1.73 1.49 1.18 1.51 .83 1.32
=========== ====== ======= ======= ===== ======
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
7,150 MMCF in the three months ended September 30, 1998. Hedged oil and
condensate volumes were 49,000 barrels in the three months ended
September 30, 1998. The aggregate net gain under energy swap agreements
was $2,062,000 for the period and was accounted for as an increase to
oil and gas sales.
General and administrative expense decreased 33% to $4,031,000 in
the third quarter of 1999 compared to $6,015,000 in the comparable period of
1998. Total overhead costs (capitalized and expensed general and
administrative costs) were $5,833,000 in the third quarter of 1999 compared
to $8,264,000 in the comparable period of 1998. The 1998 period included
non-recurring expenses of Saxon as a result of its decision to investigate
strategic alternatives, whereas the 1999 period reflects the efficiencies
achieved by combining Saxon's operations with those of Canadian Forest.
15
<PAGE>
Depreciation and depletion expense decreased 18% to $22,203,000 in
the third quarter of 1999 from $26,968,000 in the third quarter of 1998. On a
per-unit basis, depletion expense was approximately $.96 per MCFE in the
third quarter of 1999 compared to $1.14 per MCFE in the corresponding 1998
period. The decline in the depletion rate during 1999 is attributable to
favorable per-unit costs associated with 1998 acquisitions and Gulf of Mexico
discoveries, as well as to the writedowns of oil and gas properties in the
third and fourth quarters of 1998.
Other income was $1,686,000 in the third quarter of 1998. This
amount includes $1,400,000 of death benefits received under a life insurance
policy covering a former executive officer of the Company.
Interest expense increased 6% to $10,820,000 in the third quarter of
1999 compared to $10,168,000 in the corresponding 1998 period due primarily
to higher interest rates, offset partially by lower average debt levels.
The foreign currency translation gain was $755,000 in the third
quarter of 1999 compared to a loss of $5,166,000 in the third quarter of
1998. Foreign currency translation gains and losses relate to translation of
the 8 3/4% Notes issued by Canadian Forest, and are attributable to the
increases and decreases in the value of the Canadian dollar relative to the
U.S. dollar during the period. The value of the Canadian dollar was $.6812 at
September 30, 1999 compared to $.6528 at September 30, 1998. Forest is
required to recognize the noncash foreign currency translation gains or
losses related to the 8 3/4% Notes because the debt is denominated in U.S.
dollars and the functional currency of Canadian Forest is the Canadian dollar.
The extraordinary loss on extinguishment of debt of $598,000 in the
third quarter of 1999 resulted from the redemption of $8,631,000 remaining
principal amount of 11 1/4% Senior Subordinated Notes at 103.792% of par
value.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Net earnings for the first nine months of 1999 were $9,299,000 or
$.20 per basic and diluted common share compared to a net loss of
$137,303,000 or $3.46 per basic and diluted common share in the first nine
months of 1998. The current period included a $598,000 extraordinary loss on
the extinguishment of 11 1/4% senior subordinated debt and a $7,272,000
noncash gain on currency translation. The 1998 period included a noncash
charge for impairment of oil and gas properties of $125,000,000, net of
related deferred taxes ($140,000,000 pre-tax), a $6,196,000 extraordinary
gain on extinguishment of debt and an $8,328,000 noncash loss on currency
translation.
Marketing and processing revenue increased 25% to $130,434,000 in
the first nine months of 1999 from $104,748,000 in the first nine months of
1998. The related marketing and processing expense increased by 26% to
$125,289,000 in the 1999 period from $99,502,000 in the previous year. The
gross margin reported for marketing and processing activities of $5,145,000
in the first nine months of 1999 was 2% lower than the gross margin of
$5,246,000 in the first nine months of 1998. The decrease in the gross margin
resulted from lower trading margins due to a more competitive market and
lower processing income due to the sale of processing facilities in the first
quarter of 1999, offset partially by the gain on the sale of those facilities.
Oil and gas sales revenue increased 13% to $140,639,000 in the first
nine months of 1999 compared to $123,936,000 in the 1998 period. Production
volumes for natural gas and liquids in the first nine months of 1999
increased 9% and 7%, respectively, compared to 1998. The increases in
production are due primarily to discoveries in the Gulf of Mexico being
brought on production, as well as production attributable to property
acquisitions in February and June of 1998. The average sales prices received
for natural gas and liquids in the first nine months of 1999 increased 6% and
2%, respectively, compared to the corresponding 1998 period.
Oil and gas production expense of $34,089,000 in the first nine
months of 1999 increased 14% from $29,997,000 in the comparable period of
1998, primarily as a result of increased workover activity in the first six
months of 1999. On an MCFE basis, production expense increased approximately
4% in the first nine months of 1999 to $.50 per MCFE from $.48 per MCFE in
the first nine months of 1998.
16
<PAGE>
The following tables set forth production volumes, weighted average
sales prices and production expenses during the periods as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
---------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 22,705 8,204 7,796 38,705 9,525 48,230
Sales price received (per MCF) $ 2.22 2.24 1.95 2.16 1.55 2.04
Effects of energy swaps (per MCF)(1) .07 .07 .09 .08 (.12) .04
---------- ------- ------- ------- ------ ------
Average sales price (per MCF) $ 2.29 2.31 2.04 2.24 1.43 2.08
LIQUIDS
Oil and condensate:
Production (MBBLS) 691 648 157 1,496 953 2,449
Sales price received (per BBL) $ 14.37 15.97 16.56 15.29 14.87 15.13
Effects of energy swaps (per BBL)(1) (1.79) (3.00) (1.16) (2.25) (1.34) (1.90)
---------- ------- ------- ------- ------ ------
Average sales price (per BBL) $ 12.58 12.97 15.40 13.04 13.53 13.23
Natural gas liquids:
Production (MBBLS) 1 133 404 538 321 859
Average sales price (per BBL) $ 11.00 8.32 9.10 8.91 9.55 9.15
Total liquids production (MBBLS) 692 781 561 2,034 1,274 3,308
Average liquids sales price (per BBL) $ 12.58 12.18 10.87 11.95 12.53 12.17
TOTAL PRODUCTION:
Production volumes (MMCFE) 26,857 12,890 11,162 50,909 17,169 68,078
Average sales price (per MCFE) $ 2.26 2.21 1.97 2.19 1.73 2.07
Operating expense (per MCFE) .36 .81 .42 .49 .55 .50
---------- ------- ------- ------- ------ ------
Netback (per MCFE) $ 1.90 1.40 1.55 1.70 1.18 1.57
========== ======= ======= ======= ====== ======
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
25,161 MMCF in the nine months ended September 30, 1999. Hedged oil and
condensate volumes were 1,461,000 barrels in the nine months ended
September 30, 1999. The aggregate net loss under energy swap agreements
was $2,838,000 for the period and was accounted for as a decrease to
oil and gas sales.
17
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
---------------------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
---------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 18,126 9,749 5,324 33,199 11,152 44,351
Sales price received (per MCF) $ 2.18 2.18 1.91 2.13 1.16 1.89
Effects of energy swaps (per MCF)(1) .09 .14 (.01) .09 - .07
----------- ------- ------- -------- ------ ------
Average sales price (per MCF) $ 2.27 2.32 1.90 2.22 1.16 1.96
LIQUIDS
Oil and condensate:
Production (MBBLS) 660 580 163 1,403 1,059 2,462
Sales price received (per BBL) $ 11.89 13.18 12.60 12.51 12.17 12.37
Effects of energy swaps (per BBL)(1) 1.05 - - .49 1.20 .79
----------- ------- ------- -------- ------ ------
Average sales price (per BBL) $ 12.94 13.18 12.60 13.00 13.37 13.16
Natural gas liquids:
Production (MBBLS) 1 99 200 300 342 642
Average sales price (per BBL) $ 12.00 8.59 6.27 7.05 7.73 7.41
Total liquids production (MBBLS) 661 679 363 1,703 1,401 3,104
Average liquids sales price (per BBL) $ 12.93 12.51 9.11 11.95 11.99 11.97
TOTAL PRODUCTION:
Production volumes (MMCFE) 22,092 13,823 7,502 43,417 19,558 62,975
Average sales price (per MCFE) $ 2.25 2.26 1.79 2.17 1.53 1.97
Operating expense (per MCFE) .41 .59 .50 .48 .47 .48
----------- ------- ------- -------- ------ ------
Netback (per MCFE) $ 1.84 1.67 1.29 1.69 1.06 1.49
=========== ======= ======= ======== ====== ======
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
18,949 MMCF in the nine months ended September 30, 1998. Hedged oil and
condensate volumes were 365,000 barrels in the nine months ended
September 30, 1998. The aggregate net gain under energy swap agreements
was $4,913,000 for the period and was accounted for as an increase to
oil and gas sales.
18
<PAGE>
General and administrative expense was $12,012,000 in the first nine
months of 1999 compared to $15,192,000 in the comparable period of 1998.
Total overhead costs (capitalized and expensed general and administrative
costs) were $17,876,000 in the first nine months of 1999 compared to
$21,451,000 in the comparable period of 1998. The 1998 period included
non-recurring expenses of Saxon as a result of its decision to investigate
strategic alternatives, whereas the 1999 period reflects the efficiencies
achieved by combining Saxon's operations with those of Canadian Forest.
The following table summarizes the total overhead costs incurred during
the periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Overhead costs capitalized $ 1,802 2,249 5,864 6,259
General and administrative costs
expensed (1) 4,031 6,015 12,012 15,192
------- ------ ------- -------
Total overhead costs $ 5,833 8,264 17,876 21,451
======= ====== ======= =======
</TABLE>
(1) Includes $635,000 and $670,000 related to marketing and processing
operations for the three month periods ended September 30, 1999 and
1998, respectively, and $1,940,000 and $2,111,000 for the nine month
periods ended September 30, 1999 and 1998, respectively.
Depreciation and depletion expense decreased 10% to $66,569,000 in
the first nine months of 1999 from $74,163,000 in the first nine months of
1998. On a per-unit basis, depletion expense was approximately $.95 per MCFE
in the first nine months of 1999 compared to $1.14 per MCFE in the
corresponding 1998 period. The decline in the depletion rate during 1999 is
attributable to favorable per-unit costs associated with 1998 acquisitions
and Gulf of Mexico discoveries, as well as to the writedowns of oil and gas
properties in the third and fourth quarters of 1998. At September 30, 1999
Forest had undeveloped properties with a cost basis of approximately
$53,607,000 in the U.S. and $34,847,000 in Canada which were not subject to
depletion, compared to approximately $52,735,000 in the U.S. and $23,718,000
in Canada at September 30, 1998. The increases in the U.S. and in Canada are
attributable primarily to the purchase of undeveloped acreage. At September
30, 1999 Forest also had approximately $20,157,000 of costs related to
international interests. These costs are not being depleted pending the
establishment of proved reserves.
Other income was $8,468,000 in the first nine months of 1998. The
1998 period includes $6,603,000 of income related to settlement of a Canadian
gas purchase contract and $1,400,000 of death benefits received under a life
insurance policy covering a former executive officer of the Company.
Interest expense increased 12% to $31,884,000 in the first nine
months of 1999 compared to $28,429,000 in the corresponding 1998 period, due
primarily to higher interest rates.
The foreign currency translation gain was $7,272,000 in the first
nine months of 1999, compared to a loss of $8,328,000 in the first nine
months of 1998. Foreign currency translation gains and losses relate to
translation of the 8 3/4% Notes issued by Canadian Forest, and are
attributable to the increases and decreases in the value of the Canadian
dollar relative to the U.S. dollar during the period. The value of the
Canadian dollar was $.6812 at September 30, 1999 compared to $.6535 at
December 31, 1998. Forest is required to recognize the noncash foreign
currency translation gains or losses related to the 8 3/4% Notes because the
debt is denominated in U.S. dollars and the functional currency of Canadian
Forest is the Canadian dollar.
The extraordinary loss on extinguishment of debt of $598,000 in the
first nine months of 1999 resulted from the redemption of $8,631,000
remaining principal amount of 11 1/4% Senior Subordinated Notes at 103.792%
of par value.
19
<PAGE>
The extraordinary gain on extinguishment of debt of $6,196,000 (net
of related expenses) in the first nine months of 1998 resulted from
settlement of the Company's remaining nonrecourse production payment
obligation in exchange for 271,214 shares of Common Stock valued at
$3,750,000. The obligation had a remaining book value of approximately
$9,966,000.
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 1998 and 1999, we completed several transactions
that improved our financial position:
- - 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 United States
and Canada, as well as 13 international projects.
- - In June 1998 we settled our only remaining nonrecourse production
payment loan by issuing 271,214 shares of common stock to the lender.
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, at 98.811% of par, $100,000,000 of 10 1/2%
Senior Subordinated Notes (the 10 1/2% Notes) due 2006.
- - In August 1999 we issued 9,000,000 shares of Common Stock in a public
offering for net proceeds of $131,188,000. The net proceeds will be
used to fund identified exploration and development activities in the
Northwest Territories and other core areas, as well as for other
projects or property acquisitions and for general corporate
purposes. Pending such uses, we used the proceeds of the offering
to reduce indebtedness under our global credit facility.
- - In September 1999 we redeemed the remaining principal amount of the 11
1/4% Senior Subordinated Notes at 103.792% of par. As a result of this
redemption, we recorded an extraordinary loss on extinguishment of debt
of $598,000 in the third quarter of 1999.
We continue to examine alternative sources of long-term capital,
including bank borrowings, the issuance of debt instruments, the sale of
common stock, preferred stock or other equity securities of Forest, the
issuance of net profits interests, sales of non-strategic assets, prospects
and technical information, and joint venture financing. Availability of these
sources of capital and, therefore, our ability to execute our operating
strategy will depend upon a number of factors, some of which are beyond
Forest's control.
In addition, the prices we receive for future oil and natural gas
production and the level of production will significantly impact future
operating cash flows. 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 currently represents approximately 25%
of our consolidated daily deliverability. 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.
At October 31, 1999 the maximum credit facility allocations in the United
States and Canada are $200,000,000 and $50,000,000, respectively. The
borrowing base is subject to semi-annual redeterminations. Funds borrowed
under the global credit facility can be used for general corporate purposes.
Under the terms of the global credit facility, Forest, Canadian Forest and
ProMark are subject to certain covenants and financial tests, including
restrictions or requirements with respect to
20
<PAGE>
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 September 30, 1999, the outstanding borrowings under the global
credit facility were $48,000,000 in the United States and $36,785,000 in
Canada. At October 31, 1999, the outstanding borrowings were $40,500,000 in
the United States and $38,741,000 in Canada, with an average effective
interest rate of 6.19%. At October 31, 1999, Forest had also used the global
credit facility for letters of credit in the amount of $233,000 in the United
States and $1,144,000 CDN in Canada.
WORKING CAPITAL. Forest had a working capital surplus of
approximately $6,001,000 at September 30, 1999 compared to a surplus of
approximately $348,000 at December 31, 1998. The increase in the surplus is
due primarily to higher accounts receivable balances as a result of the
higher product price environment. Periodically, Forest reports working
capital deficits at the end of a period. Such working capital deficits are
principally the result of accounts payable for capitalized exploration and
development costs. Settlement of these payables is funded by cash flow from
operations or, if necessary, by drawdowns on long-term bank credit
facilities. For cash management purposes, drawdowns on the credit facilities
are not made until the due dates of the payables.
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 slightly to $59,679,000 in 1999 compared to
$59,163,000 in 1998. We used $66,478,000 for investing activities in 1999
compared to $338,163,000 in 1998. The higher use of cash in the 1998 period
was due primarily to the Louisiana Acquisition. Net cash provided by
financing activities in 1999 was $6,668,000 compared to $265,736,000 in 1998.
The 1999 period included net proceeds of $98,825,000 from the issuance of the
10 1/2% Notes, net proceeds of $131,188,000 from the issuance of common stock
and net repayments of bank borrowings of $213,197,000. The 1998 period
included net bank borrowings of $192,497,000 and net proceeds of $74,616,000
from the issuance of the 8 3/4% Notes.
CAPITAL EXPENDITURES. Expenditures for property acquisition,
exploration and development for the first nine months of 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---------- -------
(In Thousands)
<S> <C> <C>
Property acquisition costs:
Proved properties $ 72 297,440
Undeveloped properties 1,058 38,452
---------- -------
1,130 335,892
Exploration costs:
Direct costs 44,093 42,537
Overhead capitalized 2,199 2,561
---------- -------
46,292 45,098
Development costs:
Direct costs 30,288 57,728
Overhead capitalized 3,665 3,698
---------- -------
33,953 61,426
---------- -------
$ 81,375 442,416
========== =======
</TABLE>
21
<PAGE>
Forest's anticipated 1999 direct expenditures for exploration and
development are approximately $120,000,000. We intend to meet our 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.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian
Forest's natural gas production is sold through the ProMark Netback Pool. At
September 30, 1999 the ProMark Netback Pool had entered into fixed price
contracts to sell approximately 1.1 BCF of natural gas through the remainder
of 1999 at an average price of $2.39 CDN per MCF and approximately 5.4 BCF of
natural gas in 2000 at an average price of approximately $2.22 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. As of November 5, 1999 Forest had the following swaps in
place:
<TABLE>
<CAPTION>
Natural Gas Oil
--------------------------- ----------------------------
Average Average
BBTU's Hedged Price Barrels Hedged Price
per Day per MMBTU per Day per BBL
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
October through December 1999 83.0 $ 2.39 6,168 $ 16.76
2000 59.3 $ 2.52 1,163 $ 19.44
2001 21.7 $ 2.45 - $ -
2002 16.7 $ 2.48 - $ -
</TABLE>
In addition, the Company utilizes collars that establish a price
between a floor and ceiling to hedge natural gas and oil prices. As of
November 5, 1999 Forest had the following collars in place:
<TABLE>
<CAPTION>
Natural Gas
-------------------------------------------------------------
Average Floor Average Ceiling
Price Price BBTU's Per Day
-------------- --------------- --------------
<S> <C> <C> <C>
2000 $ 2.79 $ 3.03 5.8
Oil
-------------------------------------------------------------
Average Floor Average Ceiling
Price Price Barrels Per Day
-------------- --------------- ---------------
<S> <C> <C> <C>
October through December 1999 $ 21.00 $ 23.00 505
2000 $ 18.19 $ 20.93 3,509
</TABLE>
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.
22
<PAGE>
Forest has established 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, an upgrade to a newer release of our existing oil and
gas accounting software was completed in order to be Year 2000 compliant. In
the United States, we became operational on our new accounting system in the
third quarter of 1999 for all applications except certain auxiliary revenue
processes scheduled to become operational on December 1, 1999. The Company
does not require the use of these processes until February, 2000.
We also installed an updated version of our production accounting
software in the United States. The new version is Year 2000 compliant and
also provides greater functionality. The Company does not use an automated
production reporting system in Canada.
Forest's U.S. oil and gas reserve software was updated to a version
that is Year 2000 compliant in the third quarter of 1999. In Canada, we
previously installed new oil and gas reserve software that is Year 2000
compliant.
The new systems described above resulted in Forest's business
computer systems being Year 2000 compliant during the third quarter of 1999
except as noted above with respect to auxiliary revenue processes. 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 remainder of the
year and early 2000 due to the difficulty encountered in attracting and
retaining qualified personnel.
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
also assisted Forest personnel in the assessment and remediation of Year 2000
issues. The consultants commenced their work in November 1998 and have
completed all significant aspects of the project. Canadian Forest also
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 95%
complete as of November 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
23
<PAGE>
$200,000 to $300,000. The remediation cost of non-compliant items noted in
such reviews 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 we believe all major issues have been resolved or will be resolved.
RECENT ACCOUNTING PRONOUNCEMENT. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement No. 133), effective beginning with the first quarter of fiscal
years beginning after June 30, 2000. Statement No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company has not determined the impact Statement No. 133 will
have on its financial statements and believes that such determination will
not be meaningful until closer to the date of initial adoption.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 2c. RECENT SALE OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the third quarter
of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
* Exhibit 27 Financial Data Schedule.
* Filed with this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by Forest during the third
quarter of 1999:
<TABLE>
<CAPTION>
Date of Report Item Reported Financial Statements Filed
- -------------- ------------- --------------------------
<S> <C> <C>
July 29, 1999 Item 5,7 Condensed Pro Forma Combined Statement
of Operations of Forest Oil Corporation
for the year ended December 31, 1998.
August 17, 1999 Item 7 None
</TABLE>
The following report on Form 8-K/A was filed by Forest during the
third quarter of 1999:
<TABLE>
<CAPTION>
Date of Report Item Reported
- -------------- -------------
<S> <C>
January 22, 1999 Item 5
</TABLE>
25
<PAGE>
SIGNATURES
Pursuant to the requirements 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: November 15, 1999 /s/ Joan C. Sonnen
----------------------------------------------------
Joan C. Sonnen
Vice President - Controller and Corporate Secretary
(Signed on behalf of the registrant)
/s/ David H. Keyte
----------------------------------------------------
David H. Keyte
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 1
THROUGH 3 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTH PERIOD ENDING SEPT. 30,
1999, & IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,264
<SECURITIES> 0
<RECEIVABLES> 63,351
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,326
<PP&E> 2,125,369
<DEPRECIATION> 1,447,968
<TOTAL-ASSETS> 778,379
<CURRENT-LIABILITIES> 64,325
<BONDS> 383,687
0
0
<COMMON> 5,379
<OTHER-SE> 303,969
<TOTAL-LIABILITY-AND-EQUITY> 778,379
<SALES> 271,073
<TOTAL-REVENUES> 271,073
<CGS> 159,378
<TOTAL-COSTS> 171,390
<OTHER-EXPENSES> 59,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,884
<INCOME-PRETAX> 8,470
<INCOME-TAX> (1,427)
<INCOME-CONTINUING> 9,897
<DISCONTINUED> 0
<EXTRAORDINARY> (598)
<CHANGES> 0
<NET-INCOME> 9,299
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
