DERIVATIVE INSTRUMENTS

Commodity Derivatives

Forest periodically enters into commodity derivative instruments as an attempt to moderate the effects of wide fluctuations in commodity prices on Forest’s cash flow and to manage the exposure to commodity price risk. Forest’s commodity derivative instruments generally serve as effective economic hedges of commodity price exposure; however, Forest has elected not to designate its derivatives as hedging instruments for accounting purposes. As such, Forest recognizes all changes in fair value of its derivative instruments as unrealized gains or losses on derivative instruments in the Condensed Consolidated Statement of Operations.

The table below sets forth Forest’s outstanding commodity swaps as of June 30, 2013.



Commodity Swaps
	Natural Gas (NYMEX HH)			Oil (NYMEX WTI)
Remaining Term	Bbtu Per Day	Weighted Average Hedged Price per MMBtu		Barrels Per Day	Weighted Average Hedged Price per Bbl
July 2013 - October 2013	145	$	3.99	4,000	$	95.53
November 2013 - December 2013	160	3.98		4,000	95.53
Calendar 2014	80	4.34		—	—

In connection with several natural gas and oil swaps entered into, Forest granted swaptions to the swap counterparties in exchange for Forest receiving premium hedged prices on the natural gas and oil swaps. These swaptions grant the swap counterparties the option to enter into future swaps with Forest and may not be exercised until their expiration dates. The table below sets forth the outstanding swaptions as of June 30, 2013.



Commodity Options
		Natural Gas (NYMEX HH)			Oil (NYMEX WTI)
Underlying Term	Option Expiration	Underlying Bbtu Per Day	Underlying Hedged Price per MMBtu		Underlying Barrels Per Day	Underlying Hedged Price per Bbl
Gas Swaptions:
Calendar 2014	December 2013	30	$	4.50	—	$	—
Calendar 2014	December 2013	10	4.51		—	—
Oil Swaptions:
Calendar 2014	December 2013	—	—		4,000	100.00
Calendar 2014	December 2013	—	—		1,000	109.00
Calendar 2015	December 2014	—	—		3,000	100.00

Derivative Instruments Entered Into Subsequent to June 30, 2013

Subsequent to June 30, 2013, through August 6, 2013, Forest entered into the following derivative agreements:



Commodity Swaps
	Oil (NYMEX WTI)
Swap Term	Barrels Per Day	Weighted Average Hedged Price per Bbl
July 2013 - December 2013	2,000	$	99.70
Calendar 2014	3,000	95.10

In addition to the swaps shown in the table above, Forest entered into 15 Bbtu per day of purchased natural gas swaps for the period September 2013 - December 2013 that directly offset 15 Bbtu per day of sold natural gas swaps. Additionally, Forest unwound the last two months of a Calendar 2013 natural gas swap covering 20 Bbtu per day at a hedged price of $4.03 per MMBtu. This brings Forest’s natural gas swap position for the period July 2013 - December 2013 to 133.4 Bbtu per day at a weighted average hedged price of $4.01 per MMBtu.



Commodity Options
		Oil (NYMEX WTI)
Underlying Term	Option Expiration	Underlying Barrels Per Day	Underlying Hedged Price per Bbl
Oil Swaptions:
Calendar 2015⁽¹⁾	December 2014	1,000	$	106.00
Calendar 2015⁽¹⁾	December 2014	1,000	99.75
Calendar 2015⁽¹⁾	December 2014	1,000	99.00
Oil Put Options:
Monthly Calendar 2014	Monthly Calendar 2014	2,000	70.00

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(1)	In connection with entering into these oil swaptions, Forest terminated three of its existing oil swaptions with the counterparties for Calendar 2014. Two of the terminated swaptions covered 2,000 barrels per day with a hedged price per barrel of $100.00, and the third terminated swaption covered 1,000 barrels per day with a hedged price per barrel of $109.00.

Interest Rate Derivatives

Forest voluntarily terminated its interest rate swaps in June 2013 for proceeds of $11.4 million.

Fair Value and Gains and Losses

The table below summarizes the location and fair value amounts of Forest’s derivative instruments reported in the Condensed Consolidated Balance Sheets as of the dates indicated. These derivative instruments are not designated as hedging instruments for accounting purposes. For financial reporting purposes, Forest does not offset asset and liability fair value amounts recognized for derivative instruments with the same counterparty under its master netting arrangements. See “Credit Risk” below for more information regarding Forest’s master netting arrangements and gross and net presentation of derivative instruments. See also Note 7 for more information on the fair values of Forest’s derivative instruments.



	June 30, 2013		December 31, 2012
	(In Thousands)
Current assets:
Derivative instruments:
Commodity	$	17,211	$	28,690
Interest rate	—		11,500
Total current assets	$	17,211	$	40,190
Long-term assets:
Derivative instruments:
Commodity	$	5,504	$	6,775
Interest rate	—		1,560
Total long-term assets	$	5,504	$	8,335
Current liabilities:
Derivative instruments:
Commodity	$	3,829	$	9,347
Long-term liabilities:
Derivative instruments:
Commodity	$	2,310	$	7,204

The table below summarizes the amount of derivative instrument gains and losses reported in the Condensed Consolidated Statements of Operations as realized and unrealized (gains) losses on derivative instruments, net, for the periods indicated. These derivative instruments are not designated as hedging instruments for accounting purposes.



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(In Thousands)
Commodity derivatives:
Realized losses (gains)	$	1,106		$	(31,067	)	$	(8,543	)	$	(52,395	)
Unrealized (gains) losses	(32,823		)	(2,126		)	2,338			(8,572		)
Interest rate derivatives:
Realized gains	(9,803		)	(2,837		)	(12,885		)	(5,721		)
Unrealized losses	9,910			2,015			13,060			3,149
Realized and unrealized gains on derivative instruments, net	$	(31,610	)	$	(34,015	)	$	(6,030	)	$	(63,539	)

Due to the volatility of oil and natural gas prices, the estimated fair values of Forest’s commodity derivative instruments are subject to large fluctuations from period to period. Forest has experienced the effects of these commodity price fluctuations in both the current period and prior periods and expects that volatility in commodity prices will continue.

Credit Risk

Forest executes with each of its derivative counterparties an International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, which is a standard industry form contract containing general terms and conditions applicable to many types of derivative transactions. Additionally, Forest executes, with each of its derivative counterparties, a Schedule, which modifies the terms and conditions of the ISDA Master Agreement according to the parties’ requirements and the specific types of derivatives to be transacted. As of June 30, 2013, all but one of Forest’s derivative counterparties are lenders, or affiliates of lenders, under the Credit Facility. The terms of the Credit Facility provide that any security granted by Forest thereunder shall also extend to and be available to those lenders that are counterparties to derivative transactions. None of these counterparties requires collateral beyond that already pledged under the Credit Facility. The remaining counterparty, a purchaser of Forest’s natural gas production, generally owes money to Forest and therefore does not require collateral under the ISDA Master Agreement and Schedule it has executed with Forest.

The ISDA Master Agreements and Schedules contain cross-default provisions whereby a default under the Credit Facility will also cause a default under the derivative agreements. Such events of default include non-payment, breach of warranty, non-performance of the financial covenant, default on other indebtedness, certain pension plan events, certain adverse judgments, change of control events, and a failure of the liens securing the Credit Facility. In addition, bankruptcy and insolvency events with respect to Forest or certain of its U.S. subsidiaries will result in an automatic acceleration of the indebtedness under the Credit Facility. None of these events of default is specifically credit-related, but some could arise if there were a general deterioration of Forest’s credit. The ISDA Master Agreements and Schedules contain a further credit-related termination event that would occur if Forest were to merge with another entity and the creditworthiness of the resulting entity was materially weaker than that of Forest.

The majority of Forest’s derivative counterparties are financial institutions that are engaged in similar activities and have similar economic characteristics that, in general, could cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Forest does not require the posting of collateral for its benefit under its derivative agreements. However, the ISDA Master Agreements and Schedules generally contain netting provisions whereby if on any date amounts would otherwise be payable by each party to the other, then on such date, the party that owes the larger amount will pay the excess of that amount over the smaller amount owed by the other party, thus satisfying each party’s obligations. These provisions generally apply to all derivative transactions, or all derivative transactions of the same type (e.g., commodity, interest rate, etc.), with the particular counterparty. If all counterparties failed, Forest would be exposed to a risk of loss equal to this net amount owed to Forest, the fair value of which was $18.2 million at June 30, 2013. If Forest suffered an event of default, each counterparty could demand immediate payment, subject to notification periods, of the net obligations due to it under the derivative agreements. At June 30, 2013, Forest owed a net derivative liability to its counterparties, the fair value of which was $1.7 million. In the absence of netting provisions, at June 30, 2013, Forest would be exposed to a risk of loss of $22.7 million under its derivative agreements, and Forest’s derivative counterparties would be exposed to a risk of loss of $6.1 million.

For financial reporting purposes, Forest has elected to not offset asset and liability fair value amounts recognized for derivative instruments with the same counterparty under its master netting arrangements, although such derivative instruments are subject to enforceable master netting arrangements. The following tables disclose information regarding the potential effect of netting arrangements on Forest’s Condensed Consolidated Balance Sheets as of the dates indicated.



	Derivative Assets
	June 30, 2013			December 31, 2012
	(In Thousands)
Gross amounts of recognized assets	$	22,715		$	48,525
Gross amounts offset in the balance sheet	—			—
Net amounts of assets presented in the balance sheet	22,715			48,525
Gross amounts not offset in the balance sheet:
Derivative instruments	(4,484		)	(13,537		)
Cash collateral received	—			—
Net amount	$	18,231		$	34,988



	Derivative Liabilities
	June 30, 2013			December 31, 2012
	(In Thousands)
Gross amounts of recognized liabilities	$	6,139		$	16,551
Gross amounts offset in the balance sheet	—			—
Net amounts of liabilities presented in the balance sheet	6,139			16,551
Gross amounts not offset in the balance sheet:
Derivative instruments	(4,484		)	(13,537		)
Cash collateral pledged	—			—
Net amount	$	1,655		$	3,014

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted, which included derivatives reform as part of a broader financial regulatory reform. Congress delegated many of the details of the Dodd-Frank Act to federal regulatory agencies. Forest currently expects that the Dodd-Frank Act and related rules will have little impact on its existing derivative transactions under its outstanding ISDA Master Agreements and Schedules, or its ability to enter into such transactions and agreements in the future.