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 line item “Realized and unrealized losses (gains) on derivative instruments, net” in the Consolidated Statement of Operations.

The table below sets forth Forest’s outstanding commodity swaps as of December 31, 2013.



Commodity Swaps
	Natural Gas (NYMEX HH)			Oil (NYMEX WTI)
Swap Term	Bbtu Per Day	Weighted Average Hedged Price per MMBtu		Barrels Per Day	Weighted Average Hedged Price per Bbl
Calendar 2014	70	$	4.38	3,500	$	95.34
Calendar 2015	20	4.20		—	—

In connection with several natural gas and oil swaps entered into, Forest granted option instruments (several swaptions and puts) to the swap counterparties in exchange for Forest receiving premium hedged prices on the natural gas and oil swaps. Under the terms of the swaption agreements, the counterparties have the option to enter into future swaps with Forest. The swaptions may not be exercised until their expiration dates. Under the terms of the put agreements, the counterparties have the option to put specified quantities of oil to Forest at specified prices. The puts may be exercised monthly by the counterparties. The table below sets forth the outstanding commodity options as of December 31, 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 2016	December 2014	10	$	4.18	—	$	—
Oil Swaptions:
Calendar 2015	December 2014	—	—		3,000	100.00
Calendar 2015	December 2014	—	—		1,000	106.00
Calendar 2015	December 2014	—	—		1,000	99.75
Calendar 2015	December 2014	—	—		1,000	99.00
Oil Put Options:
Monthly Calendar 2014	Monthly Calendar 2014	—	—		2,000	70.00

Derivative Instruments Entered Into Subsequent to December 31, 2013

Subsequent to December 31, 2013, through February 19, 2014, Forest entered into the following derivative instruments:

____________________________________________


(1)	Represents the hedged floor and ceiling price per MMBtu.

Interest Rate Derivatives

Forest voluntarily terminated its interest rate swaps in June 2013 for proceeds of $11.4 million, which are included as realized gains in the line item “Realized and unrealized losses (gains) on derivative instruments, net” in the Consolidated Statement of Operations for the year ended December 31, 2013. The original maturity date of the interest rate swaps was February 2014.

Fair Value and Gains and Losses

The table below summarizes the location and fair value amounts of Forest’s derivative instruments reported in the 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 8 for more information on the fair values of Forest’s derivative instruments.



	December 31,
	2013		2012
	(In Thousands)
Current assets:
Derivative instruments:
Commodity	$	5,192	$	28,690
Interest rate	—		11,500
Total current assets	$	5,192	$	40,190
Long-term assets:
Derivative instruments:
Commodity	$	400	$	6,775
Interest rate	—		1,560
Total long-term assets	$	400	$	8,335
Current liabilities:
Derivative instruments:
Commodity	$	4,542	$	9,347
Long-term liabilities:
Derivative instruments:
Commodity	$	—	$	7,204

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



	Year Ended December 31,
	2013			2012			2011
	(In Thousands)
Commodity derivatives:
Realized gains	$	(14,252	)	$	(100,420	)	$	(37,535	)
Unrealized losses (gains)	17,863			31,630			(37,542		)
Interest rate derivatives:
Realized gains	(12,885		)	(11,352		)	(11,442		)
Unrealized losses (gains)	13,060			7,496			(1,545		)
Realized and unrealized losses (gains) on derivative instruments, net	$	3,786		$	(72,646	)	$	(88,064	)

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 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 December 31, 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 $4.5 million at December 31, 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 December 31, 2013, Forest owed a net derivative liability to its counterparties, the fair value of which was $3.5 million. In the absence of netting provisions, at December 31, 2013, Forest would be exposed to a risk of loss of $5.6 million under its derivative agreements, and Forest’s derivative counterparties would be exposed to a risk of loss of $4.5 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 Consolidated Balance Sheets as of the dates indicated.



	Derivative Assets
	December 31, 2013			December 31, 2012
	(In Thousands)
Gross amounts of recognized assets	$	5,592		$	48,525
Gross amounts offset in the balance sheet	—			—
Net amounts of assets presented in the balance sheet	5,592			48,525
Gross amounts not offset in the balance sheet:
Derivative instruments	(1,049		)	(13,537		)
Cash collateral received	—			—
Net amount	$	4,543		$	34,988



	Derivative Liabilities
	December 31, 2013			December 31, 2012
	(In Thousands)
Gross amounts of recognized liabilities	$	4,542		$	16,551
Gross amounts offset in the balance sheet	—			—
Net amounts of liabilities presented in the balance sheet	4,542			16,551
Gross amounts not offset in the balance sheet:
Derivative instruments	(1,049		)	(13,537		)
Cash collateral pledged	—			—
Net amount	$	3,493		$	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. However, the legislation could have a substantial impact on Forest’s counterparties and increase the cost of Forest’s derivative agreements in the future.

Commodity Collars

Natural Gas (NYMEX HH)

Collar Term

Bbtu
Per Day

Hedged Price
per MMBtu

January 2015 - March 2015

$ 4.50/5.31