10-Q 1 a10-q.txt FORM 10-Q 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 June 30, 2000 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 July 31, 2000 ------------------------------ ------------- Common Stock, Par Value $.10 Per Share 54,121,689 PART I. FINANCIAL INFORMATION FOREST OIL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 2000 1999 --------------- ----------------- (In Thousands) ASSETS Current assets: Cash and cash equivalents $ 6,826 3,155 Accounts receivable 78,711 64,719 Other current assets 8,503 3,484 ---------- ------- Total current assets 94,040 71,358 Net property and equipment, at cost 715,537 697,616 Goodwill and other intangible assets, net 20,616 22,092 Other assets 9,151 8,986 ---------- ------- $ 839,344 800,052 ========== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 70,315 72,589 Accrued interest 9,972 10,105 Other current liabilities 2,626 3,481 ---------- ------- Total current liabilities 82,913 86,175 Long-term debt 395,676 371,680 Other liabilities 13,857 14,262 Deferred income taxes 10,247 8,951 Shareholders' equity: Common stock 5,412 5,381 Capital surplus 724,369 721,832 Accumulated deficit (378,852) (396,007) Accumulated other comprehensive loss (11,012) (11,774) Treasury stock, at cost (3,266) (448) ---------- ------- Total shareholders' equity 336,651 318,984 ---------- ------- $ 839,344 800,052 ========== =======
See accompanying notes to condensed consolidated financial statements. 1 FOREST OIL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended ------------------------ ----------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 --------- -------- -------- -------- (In Thousands Except Production and Per Share Amounts) PRODUCTION Natural gas (mmcf) 14,512 15,751 28,408 32,745 ========== ====== ======= ====== Oil, condensate and natural gas liquids (thousands of barrels) 1,003 1,118 2,029 2,174 ========== ====== ======= ====== STATEMENTS OF CONSOLIDATED OPERATIONS Revenue: Marketing and processing $ 58,716 40,514 102,718 80,846 Oil and gas sales: Gas 40,813 32,291 75,971 65,253 Oil, condensate and natural gas liquids 18,912 14,782 38,263 24,666 ---------- ------ ------- ------ Total oil and gas sales 59,725 47,073 114,234 89,919 ---------- ------ ------- ------ Total revenue 118,441 87,587 216,952 170,765 Operating expenses: Marketing and processing 57,645 39,664 100,693 79,135 Oil and gas production 10,696 12,438 20,367 23,703 General and administrative 4,470 3,883 8,103 7,981 Depreciation and depletion 23,443 21,767 45,554 44,366 ---------- ------ ------- ------ Total operating expenses 96,254 77,752 174,717 155,185 ---------- ------ ------- ------ Earnings from operations 22,187 9,835 42,235 15,580 Other income and expense: Other expense (income), net 310 683 214 (2,555) Interest expense 9,448 10,407 18,524 21,064 Translation loss (gain) on subordinated debt 4,101 (4,301) 4,814 (6,517) ---------- ------ ------- ------ Total other income and expense 13,859 6,789 23,552 11,992 ---------- ------ ------- ------ Earnings before income taxes and extraordinary item 8,328 3,046 18,683 3,588 Income tax expense (benefit): Current 141 78 306 (81) Deferred 1,113 (1,075) 1,414 (824) ---------- ------ ------- ------ 1,254 (997) 1,720 (905) ---------- ------ ------- ------ Earnings before extraordinary item 7,074 4,043 16,963 4,493 Extraordinary item - gain on extinguishment of debt 192 - 192 - ---------- ------ ------- ------ Net earnings $ 7,266 4,043 17,155 4,493 ========== ====== ======= ====== Weighted average number of common shares outstanding 53,677 44,655 53,687 44,651 ========== ====== ======= ====== Basic earnings per common share $ .14 .09 .32 .10 ========== ====== ======= ====== Diluted earnings per common share $ .13 .09 .32 .10 ========== ====== ======= ======
See accompanying notes to condensed consolidated financial statements. 2 FOREST OIL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended ------------------------------ June 30, June 30, 2000 1999 --------- -------- (In Thousands) Cash flows from operating activities: Net earnings before extraordinary item $ 16,963 4,493 Adjustments to reconcile net earnings before extraordinary item to net cash provided by operating activities: Depreciation and depletion 45,554 44,366 Amortization of deferred debt costs 740 610 Translation loss (gain) on subordinated debt 4,814 (6,517) Deferred income tax expense 1,414 (824) Other, net 558 (2,946) Decrease (increase) in accounts receivable (18,081) 3,087 Increase in other current assets (1,680) (2,093) Decrease in accounts payable (7,373) (381) Increase in accrued interest and other current liabilities 4,877 291 --------- -------- Net cash provided by operating activities 47,786 40,086 Cash flows from investing activities: Capital expenditures for property and equipment (73,609) (48,656) Proceeds from sales of assets 7,234 14,781 Increase in other assets, net (1,464) (976) --------- -------- Net cash used by investing activities (67,839) (34,851) Cash flows from financing activities: Proceeds from bank borrowings 71,757 66,151 Repayments of bank borrowings (42,024) (168,780) Issuance of 10 1/2% senior subordinated notes, net of issuance costs - 98,561 Redemption of 8 3/4% senior subordinated notes (4,630) - Redemption of 11 1/2% senior subordinated notes - (45) Proceeds from the exercise of options 1,963 - Purchase of treasury stock (2,818) - Decrease in other liabilities, net (567) (2,081) --------- -------- Net cash provided (used) by financing activities 23,681 (6,194) Effect of exchange rate changes on cash 43 (43) --------- -------- Net increase (decrease) in cash and cash equivalents 3,671 (1,002) Cash and cash equivalents at beginning of period 3,155 3,415 --------- -------- Cash and cash equivalents at end of period $ 6,826 2,413 ========= ======== Cash paid (refunded) during the period for: Interest $17,763 23,286 Income taxes $(3,319) 470
See accompanying notes to condensed consolidated financial statements. 3 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (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 June 30, 2000 and the results of operations for the three and six month periods ended June 30, 2000 and 1999. 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, 1999, previously filed with the Securities and Exchange Commission. The components of total comprehensive earnings for the periods consist of net earnings, foreign currency translation and changes in the unfunded pension liability and are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 -------- ----- ------ ------ (In Thousands) Net earnings $ 7,266 4,043 17,155 4,493 Other comprehensive net earnings (loss) 522 (881) 762 (1,262) -------- ----- ------ ------ Total comprehensive earnings $ 7,788 3,162 17,917 3,231 ======== ===== ====== ======
(2) NET PROPERTY AND EQUIPMENT Components of net property and equipment are as follows:
June 30, December 31, 2000 1999 ------------ ------------ (In Thousands) Oil and gas properties $ 2,210,029 2,154,514 Buildings, transportation and other equipment 18,006 14,593 ------------ ---------- 2,228,035 2,169,107 Less accumulated depreciation, depletion and valuation allowance (1,512,498) (1,471,491) ------------ ---------- $ 715,537 697,616 ============ ==========
4 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (3) GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets recorded in the acquisition of Producer's Marketing Ltd. (ProMark), the Company's Canadian gas marketing subsidiary, consist of the following:
June 30, December 31, 2000 1999 ---------- ------------ (In Thousands) Goodwill $ 15,491 15,873 Gas marketing contracts 13,518 13,848 ---------- ------ 29,009 29,721 Less accumulated amortization (8,393) (7,629) ---------- ------ $ 20,616 22,092 ========== ======
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. (4) LONG-TERM DEBT Components of long-term debt are as follows:
June 30, December 31, 2000 1999 ---------- ------------ (In Thousands) Global Credit Facility: U.S. borrowings $ 65,000 39,500 Canadian borrowings 36,499 33,235 8 3/4% Senior Subordinated Notes 195,125 199,978 10 1/2% Senior Subordinated Notes 99,052 98,967 ---------- ------- $ 395,676 371,680 ========== =======
The 8 3/4% Senior Subordinated Notes (the 8 3/4% Notes) were issued by Forest's wholly owned subsidiary, Canadian Forest Oil Ltd. (Canadian Forest), and are guaranteed on a senior subordinated basis by Forest. 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 change in the value of the Canadian dollar relative to the U.S. dollar during the second quarter and first six months of 2000, Forest reported noncash translation losses of approximately $4,101,000 and $4,814,000, respectively, compared to noncash translation gains of $4,301,000 and $6,517,000 in the second quarter and first six months of 1999, respectively. 5 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (5) EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings attributable to common stock by the weighted average number of common shares outstanding during each period, excluding treasury shares. Diluted earnings 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 before extraordinary items. The following sets forth the calculation of basic and diluted earnings per share:
Three Months Ended Six Months Ended June 30, June 30, --------------------- ----------------- 2000(1) 1999(2) 2000(3) 1999(2) --------- ------- ------- ------ (In Thousands Except Per Share Amounts) Income before extraordinary item $ 7,074 4,043 16,963 4,493 Weighted average common shares outstanding during the period 53,677 44,655 53,687 44,651 Add dilutive effects of employee stock options 773 348 522 96 --------- ------ ------ ------ Weighted average common shares outstanding including the effects of dilutive securities 54,450 45,003 54,209 44,747 ========= ====== ====== ====== Basic earnings per share before extraordinary item $ .13 .09 .32 .10 ========= ====== ====== ====== Diluted earnings per share before extraordinary item $ .13 .09 .32 .10 ========= ====== ====== ======
(1) At June 30, 2000, options to purchase 1,118,000 shares of common stock at prices ranging from $13.65 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 2002 through 2010. (2) At June 30, 1999, options to purchase 1,758,000 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 periods. These options expire at various dates from 2002 through 2008. (3) At June 30, 2000, options to purchase 1,231,000 shares of common stock at prices ranging from $11.65 to $25.00 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 periods. These options expire at various dates from 2002 through 2010. 6 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (6) BUSINESS AND GEOGRAPHICAL SEGMENTS 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.
Three months ended June 30, 2000 Oil and Gas Operations -------------------------------- ------------------------------------------------------------------- Marketing Offshore Onshore Western Total and Gulf of Gulf of United United Processing Total Mexico Mexico States States Canada Total Canada Company -------- ------- ------- ------ ------ ------- ---------- ------- (In Thousands) Revenue $ 25,509 11,620 9,767 46,896 13,114 60,010 58,431 118,441 Marketing and processing expense - - - - - - 57,645 57,645 Oil and gas production expense 3,256 3,135 1,604 7,995 2,701 10,696 - 10,696 General and administrative expense 1,148 1,148 840 3,136 945 4,081 389 4,470 Depreciation and depletion expense 9,898 5,466 2,615 17,979 4,598 22,577 486 23,063 -------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) from operations $ 11,207 1,871 4,708 17,786 4,870 22,656 (89) 22,567 ======== ======= ======= ======= ======= ======= ======= ======= Capital expenditures $ 26,570 2,972 3,592 33,134 8,649 41,783 - 41,783 ======== ======= ======= ======= ======= ======= ======= ======= Property and equipment, net $128,313 266,060 101,906 496,279 188,323 684,602 - 684,602 ======== ======= ======= ======= ======= ======= ======= =======
Information for Forest's reportable segments relates to the three months ended June 30, 2000 consolidated totals as follows:
(In Thousands) -------------- EARNINGS BEFORE INCOME TAXES: Earnings from operations for reportable segments $ 22,567 Administrative asset depreciation (380) Other income, net (310) Interest expense (9,448) Translation loss on subordinated debt (4,101) ---------- Earnings before income taxes $ 8,328 ========== CAPITAL EXPENDITURES: Reportable segments $ 41,783 International interests 1,894 Administrative assets and other 431 ---------- Total capital expenditures $ 44,108 ========== PROPERTY AND EQUIPMENT, NET: Reportable segments $ 684,602 International interests 25,520 Administrative assets, net and other 5,415 ---------- Total property and equipment, net $ 715,537 ==========
7 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (6) BUSINESS AND GEOGRAPHICAL SEGMENTS, CONTINUED
Three months ended June 30, 1999 Oil and Gas Operations -------------------------------- ------------------------------------------------------------------- Marketing Offshore Onshore Western Total and Gulf of Gulf of United United Processing Total Mexico Mexico States States Canada Total Canada Company -------- ------- ------- ------ ------ ------- ---------- ------- (In Thousands) Revenue $ 19,576 10,445 7,004 37,025 10,133 47,158 40,429 87,587 Marketing and processing expense - - - - - - 39,664 39,664 Oil and gas production expense 3,810 4,227 1,172 9,209 3,229 12,438 - 12,438 General and administrative expense 1,090 830 625 2,545 685 3,230 653 3,883 Depreciation and depletion expense 10,510 4,446 2,236 17,192 3,833 21,025 480 21,505 -------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) from operations $ 4,166 942 2,971 8,079 2,386 10,465 (368) 10,097 ======== ======= ======= ======= ======= ======= ======= ======= Capital expenditures $ 5,446 9,141 1,222 15,809 7,496 23,305 - 23,305 ======== ======= ======= ======= ======= ======= ======= ======= Property and equipment, net $112,300 266,985 100,053 479,338 161,355 640,693 - 640,693 ======== ======= ======= ======= ======= ======= ======= =======
Information for Forest's reportable segments relates to the three months ended June 30, 1999 consolidated totals as follows:
(In Thousands) -------------- EARNINGS BEFORE INCOME TAXES: Earnings from operations for reportable segments $ 10,097 Administrative asset depreciation (262) Other income, net (683) Interest expense (10,407) Translation gain on subordinated debt 4,301 ---------- Earnings before income taxes $ 3,046 ========== CAPITAL EXPENDITURES: Reportable segments $ 23,305 International interests 4,563 Administrative assets and other 827 ---------- Total capital expenditures $ 28,695 ========== PROPERTY AND EQUIPMENT, NET: Reportable segments $ 640,693 International interests 19,175 Administrative assets, net and other 6,612 ---------- Total property and equipment, net $ 666,480 ==========
8 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (6) BUSINESS AND GEOGRAPHICAL SEGMENTS, CONTINUED
Six months ended June 30, 2000 Oil and Gas Operations ------------------------------ ------------------------------------------------------------------- Marketing Offshore Onshore Western Total and Gulf of Gulf of United United Processing Total Mexico Mexico States States Canada Total Canada Company -------- ------- ------- ------ ------ ------- ---------- ------- (In Thousands) Revenue $ 46,548 23,583 17,876 88,007 26,720 114,727 102,225 216,952 Marketing and processing expense - - - - - - 100,693 100,693 Oil and gas production expense 5,709 6,391 2,901 15,001 5,366 20,367 - 20,367 General and administrative expense 1,867 2,061 1,422 5,350 1,984 7,334 769 8,103 Depreciation and depletion expense 19,327 10,804 4,898 35,029 8,813 43,842 986 44,828 -------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) from operations $ 19,645 4,327 8,655 32,627 10,557 43,184 (223) 42,961 ======== ======= ======= ======= ======= ======= ======= ======= Capital expenditures $ 33,013 5,186 6,722 44,921 24,457 69,378 - 69,378 ======== ======= ======= ======= ======= ======= ======= ======= Property and equipment, net $128,313 266,060 101,906 496,279 188,323 684,602 - 684,602 ======== ======= ======= ======= ======= ======= ======= =======
Information for Forest's reportable segments relates to the six months ended June 30, 2000 consolidated totals as follows:
(In Thousands) -------------- EARNINGS BEFORE INCOME TAXES: Earnings from operations for reportable segments $ 42,961 Administrative asset depreciation (726) Other income, net (214) Interest expense (18,524) Translation loss on subordinated debt (4,814) ---------- Earnings before income taxes $ 18,683 ========== CAPITAL EXPENDITURES: Reportable segments $ 69,378 International interests 3,513 Administrative assets and other 718 ---------- Total capital expenditures $ 73,609 ========== PROPERTY AND EQUIPMENT, NET: Reportable segments $ 684,602 International interests 25,520 Administrative assets, net and other 5,415 ---------- Total property and equipment, net $ 715,537 ==========
9 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (6) BUSINESS AND GEOGRAPHICAL SEGMENTS, CONTINUED
Six months ended June 30, 1999 Oil and Gas Operations ------------------------------ ------------------------------------------------------------------- Marketing Offshore Onshore Western Total and Gulf of Gulf of United United Processing Total Mexico Mexico States States Canada Total Canada Company -------- ------- ------- ------ ------ ------- ---------- ------- (In Thousands) Revenue $ 39,838 17,880 13,931 71,649 18,464 90,113 80,652 170,765 Marketing and processing expense - - - - - - 79,135 79,135 Oil and gas production expense 6,894 8,595 2,593 18,082 5,621 23,703 - 23,703 General and administrative expense 2,361 1,705 1,196 5,262 1,414 6,676 1,305 7,981 Depreciation and depletion expense 22,650 8,174 4,335 35,159 7,730 42,889 945 43,834 -------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) from operations $ 7,933 (594) 5,807 13,146 3,699 16,845 (733) 16,112 ======== ======= ======= ======= ======= ======= ======= ======= Capital expenditures $ 7,813 15,092 2,386 25,291 17,289 42,580 - 42,580 ======== ======= ======= ======= ======= ======= ======= ======= Property and equipment, net $112,300 266,985 100,053 479,338 161,355 640,693 - 640,693 ======== ======= ======= ======= ======= ======= ======= =======
Information for Forest's reportable segments relates to the six months ended June 30, 1999 consolidated totals as follows:
(In Thousands) -------------- EARNINGS BEFORE INCOME TAXES: Earnings from operations for reportable segments $ 16,112 Administrative asset depreciation (532) Other income, net 2,555 Interest expense (21,064) Translation gain on subordinated debt 6,517 ---------- Earnings before income taxes $ 3,588 ========== CAPITAL EXPENDITURES: Reportable segments $ 42,580 International interests 4,771 Administrative assets and other 1,305 ---------- Total capital expenditures $ 48,656 ========== PROPERTY AND EQUIPMENT, NET: Reportable segments $ 640,693 International interests 19,175 Administrative assets, net and other 6,612 ---------- Total property and equipment, net $ 666,480 ==========
10 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION Canadian Forest is the issuer of the 8 3/4% Notes (see Note 4). ProMark, which is a wholly owned subsidiary of Canadian Forest, is a subsidiary guarantor of the 8 3/4% Notes. The 8 3/4% Notes are unconditionally guaranteed on a senior subordinated basis by Forest. The indenture executed in connection with the 8 3/4% Notes does not place significant restrictions on a subsidiary's ability to make distributions to the parent. The Company has not presented separate financial statements and other disclosures concerning Canadian Forest or ProMark because management has determined that such information is not material to holders of the 8 3/4% Notes; however, the following condensed consolidating financial information is being provided as of June 30, 2000 and December 31, 1999 and for the three and six months ended June 30, 2000 and June 30, 1999. Investments in subsidiaries are accounted for on the cost basis. Earnings or losses of subsidiaries are therefore not reflected in the related investment accounts. The principal eliminating entries eliminate investments in subsidiaries and intercompany balances. 11 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS JUNE 30, 2000
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Eliminating Forest Oil Corporation Ltd. Ltd. Entries Corporation ----------- --------- --------- ----------- ----------- (In Thousands) ASSETS Current assets: Cash and cash equivalents $ 5,090 447 1,289 - 6,826 Accounts receivable 45,234 7,845 25,632 - 78,711 Other current assets 7,281 1,134 88 - 8,503 ---------- -------- ------- ------- -------- Total current assets 57,605 9,426 27,009 - 94,040 Net property and equipment, at cost, full cost method 531,914 183,536 87 - 715,537 Goodwill and other intangible assets, net - - 20,616 - 20,616 Intercompany investments 19,432 25,713 - (45,145) - Other assets 6,318 2,833 - - 9,151 ---------- -------- ------- ------- -------- $ 615,269 221,508 47,712 (45,145) 839,344 ========== ======== ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 35,807 9,497 25,011 - 70,315 Accrued interest 4,955 5,013 4 - 9,972 Other current liabilities 2,315 311 - - 2,626 ---------- -------- ------- ------- -------- Total current liabilities 43,077 14,821 25,015 - 82,913 Long-term debt 164,052 231,624 - - 395,676 Other liabilities 13,825 32 - - 13,857 Deferred income taxes - 22,085 (11,838) - 10,247 Shareholders' equity: Common stock 5,412 19,432 25,265 (44,697) 5,412 Capital surplus 724,369 - - - 724,369 Accumulated deficit (327,688) (62,602) 11,438 - (378,852) Accumulated other comprehensive loss (4,960) (3,884) (2,168) - (11,012) Treasury stock, at cost (2,818) - - (448) (3,266) ---------- -------- ------- ------- -------- Total shareholders' equity 394,315 (47,054) 34,535 (45,145) 336,651 ---------- -------- ------- ------- -------- $ 615,269 221,508 47,712 (45,145) 839,344 ========== ======== ======= ======= ========
12 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Eliminating Forest Oil Corporation Ltd. Ltd. Entries Corporation ----------- --------- --------- ----------- ----------- (In Thousands) Revenue: Marketing and processing $ 285 - 58,431 - 58,716 Oil and gas sales: Gas 33,400 7,413 - - 40,813 Oil, condensate and natural gas liquids 10,237 8,675 - - 18,912 ---------- -------- ------- ------- -------- Total oil and gas sales 43,637 16,088 - - 59,725 ---------- -------- ------- ------- -------- Total revenue 43,922 16,088 58,431 - 118,441 Expenses: Marketing and processing - - 57,645 - 57,645 Oil and gas production 7,995 2,701 - - 10,696 General and administrative 3,136 945 389 - 4,470 Depreciation and depletion 18,293 4,664 486 - 23,443 ---------- -------- ------- ------- -------- Total operating expenses 29,424 8,310 58,520 - 96,254 ---------- -------- ------- ------- -------- Earnings from operations 14,498 7,778 (89) - 22,187 Other income and expense: Other (income) expense, net 352 (64) (1) 23 310 Interest expense 4,348 5,100 23 (23) 9,448 Translation loss on subordinated debt - 4,101 - - 4,101 ---------- -------- ------- ------- -------- Total other income and expense 4,700 9,137 22 - 13,859 ---------- -------- ------- ------- -------- Earnings (loss) before income taxes and extraordinary item 9,798 (1,359) (111) - 8,328 Income tax expense (benefit): Current - 101 40 - 141 Deferred - 1,173 (60) - 1,113 ---------- -------- ------- ------- -------- - 1,274 (20) - 1,254 ---------- -------- ------- ------- -------- Earnings (loss) before extraordinary item 9,798 (2,633) (91) - 7,074 Extraordinary item - gain on extinguishment of debt - 192 - - 192 ---------- -------- ------- ------- -------- Net earnings (loss) $ 9,798 (2,441) (91) - 7,266 ========== ======== ======= ======= ========
13 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Eliminating Forest Oil Corporation Ltd. Ltd. Entries Corporation ----------- --------- --------- ----------- ----------- (In Thousands) Revenue: Marketing and processing $ 493 - 102,225 - 102,718 Oil and gas sales: Gas 62,736 12,761 474 - 75,971 Oil, condensate and natural gas liquids 21,138 16,605 520 - 38,263 ---------- -------- ------- ------- -------- Total oil and gas sales 83,874 29,366 994 - 114,234 ---------- -------- ------- ------- -------- Total revenue 84,367 29,366 103,219 - 216,952 Expenses: Marketing and processing - - 100,693 - 100,693 Oil and gas production 15,001 5,290 76 - 20,367 General and administrative 5,350 1,984 769 - 8,103 Depreciation and depletion 35,628 8,612 1,314 - 45,554 ---------- -------- ------- ------- -------- Total operating expenses 55,979 15,886 102,852 - 174,717 ---------- -------- ------- ------- -------- Earnings from operations 28,388 13,480 367 - 42,235 Other income and expense: Other (income) expense, net 276 (5,655) 5,229 364 214 Interest expense 8,278 10,246 364 (364) 18,524 Translation loss on subordinated debt - 4,814 - - 4,814 ---------- -------- ------- ------- -------- Total other income and expense 8,554 9,405 5,593 - 23,552 ---------- -------- ------- ------- -------- Earnings (loss) before income taxes and extraordinary item 19,834 4,075 (5,226) - 18,683 Income tax expense (benefit): Current - 238 68 - 306 Deferred - 20,757 (19,343) - 1,414 ---------- -------- ------- ------- -------- - 20,995 (19,275) - 1,720 ---------- -------- ------- ------- -------- Earnings (loss) before extraordinary item 19,834 (16,920) 14,049 - 16,963 Extraordinary item - gain on extinguishment of debt - 192 - - 192 ---------- -------- ------- ------- -------- Net earnings (loss) $ 19,834 (16,728) 14,049 - 17,155 ========== ======== ======= ======= ========
14 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2000
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Forest Oil Corporation Ltd. Ltd. Corporation ----------- --------- --------- ----------- (In Thousands) Cash flow from operating activities: Net earnings (loss) before extraordinary item $ 19,834 (16,920) 14,049 16,963 Adjustments to reconcile net earnings (loss) before extraordinary item to net cash provided by operating activities: Depreciation and depletion 35,628 8,612 1,314 45,554 Amortization of deferred debt costs 541 199 - 740 Translation loss on subordinated debt - 4,814 - 4,814 Deferred income tax expense (benefit) - 20,757 (19,343) 1,414 Other, net 674 (115) (1) 558 Increase in accounts receivable (8,036) (4,312) (5,733) (18,081) Decrease (increase) in other current assets (5,279) 1,168 2,431 (1,680) Decrease in accounts payable (5,985) (1,356) (32) (7,373) Increase (decrease) in accrued interest and other current liabilities (834) (3,651) 9,362 4,877 ---------- -------- ------- ------- Net cash provided by operating activities 36,543 9,196 2,047 47,786 Cash flows from investing activities: Capital expenditures for property and equipment (49,056) (24,553) - (73,609) Proceeds from sale of assets 5,553 1,681 - 7,234 Increase in other assets, net (1,464) - - (1,464) ---------- -------- ------- ------- Net cash used by investing activities (44,967) (22,872) - (67,839) Cash flows from financing activities: Proceeds from bank borrowings 63,500 8,257 - 71,757 Repayments of bank borrowings (38,000) (4,024) - (42,024) Redemption of 8 3/4% senior subordinated notes - (4,630) - (4,630) Proceeds from the exercise of options 1,963 - - 1,963 Purchase of treasury stock (2,818) - - (2,818) Decrease in other liabilities, net (262) (305) - (567) ---------- -------- ------- ------- Net cash provided (used) by financing activities 24,383 (702) - 23,681 Intercompany advances, net (14,429) 15,054 (625) - Effect of exchange rate changes on cash (70) 114 (1) 43 ---------- -------- ------- ------- Net increase in cash and cash equivalents 1,460 790 1,421 3,671 Cash and cash equivalents at beginning of year 3,630 (343) (132) 3,155 ---------- -------- ------- ------- Cash and cash equivalents at end of year $ 5,090 447 1,289 6,826 ========== ======== ======= =======
15 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1999
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Eliminating Forest Oil Corporation Ltd. Ltd. Entries Corporation ----------- --------- --------- ----------- ----------- (In Thousands) ASSETS Current assets: Cash and cash equivalents $ 3,630 (343) (132) - 3,155 Accounts receivable 36,972 4,921 22,826 - 64,719 Other current assets 2,228 1,176 80 - 3,484 ---------- -------- ------- ------- -------- Total current assets 42,830 5,754 22,774 - 71,358 Intercompany receivables 226 65,646 - (65,872) - Net property and equipment, at cost, full cost method 523,540 121,196 52,880 - 697,616 Goodwill and other intangible assets, net - - 22,092 - 22,092 Intercompany investments 24,315 25,713 - (50,028) - Other assets 5,810 3,176 - - 8,986 ---------- -------- ------- ------- -------- $ 596,721 221,485 97,746 (115,900) 800,052 ========== ======== ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 41,792 14,733 16,064 - 72,589 Accrued interest 4,844 5,261 - - 10,105 Other current liabilities 3,260 221 - - 3,481 ---------- -------- ------- ------- -------- Total current liabilities 49,896 20,215 16,064 - 86,175 Intercompany payables 12,746 - 53,126 (65,872) - Long-term debt 138,467 233,213 - - 371,680 Other liabilities 13,924 338 - - 14,262 Deferred income taxes - 1,714 7,237 - 8,951 Shareholders' equity Common stock 5,381 24,315 25,265 (49,580) 5,381 Capital surplus 721,832 - - - 721,832 Accumulated deficit (341,993) (51,404) (2,610) - (396,007) Accumulated other comprehensive loss (3,532) (6,906) (1,336) - (11,774) Treasury stock, at cost - - - (448) (448) ---------- -------- ------- ------- -------- Total shareholders' equity 381,688 (33,995) 21,319 (50,028) 318,984 ---------- -------- ------- ------- -------- $ 596,721 221,485 97,746 (115,900) 800,052 ========== ======== ======= ======= ========
16 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Eliminating Forest Oil Corporation Ltd. Ltd. Entries Corporation ----------- --------- --------- ----------- ----------- (In Thousands) Revenue: Marketing and processing $ 85 - 40,429 - 40,514 Oil and gas sales: Gas 27,818 4,473 - - 32,291 Oil, condensate and natural gas liquids 8,998 5,784 - - 14,782 ---------- -------- ------- ------- -------- Total oil and gas sales 36,816 10,257 - - 47,073 ---------- -------- ------- ------- -------- Total revenue 36,901 10,257 40,429 - 87,587 Expenses: Marketing and processing - - 39,664 - 39,664 Oil and gas production 9,209 3,229 - - 12,438 General and administrative 2,545 685 653 - 3,883 Depreciation and depletion 17,349 3,926 492 - 21,767 ---------- -------- ------- ------- -------- Total operating expenses 29,103 7,840 40,809 - 77,752 ---------- -------- ------- ------- -------- Earnings (loss) from operations 7,798 2,417 (380) - 9,835 Other income and expense: Other (income) expense, net 567 (428) (544) 1,088 683 Interest expense 5,973 4,849 673 (1,088) 10,407 Translation gain on subordinated debt - (4,301) - - (4,301) ---------- -------- ------- ------- -------- Total other income and expense 6,540 120 129 - 6,789 ---------- -------- ------- ------- -------- Earnings (loss) before income taxes 1,258 2,297 (509) - 3,046 Income tax expense (benefit): Current - (14) 92 - 78 Deferred - (850) (225) - (1,075) ---------- -------- ------- ------- -------- - (864) (133) - (997) ---------- -------- ------- ------- -------- Net earnings (loss) $ 1,258 3,161 (376) - 4,043 ========== ======== ======= ======= ========
17 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Eliminating Forest Oil Corporation Ltd. Ltd. Entries Corporation ----------- --------- --------- ----------- ----------- (In Thousands) Revenue: Marketing and processing $ 194 - 80,652 - 80,846 Oil and gas sales: Gas 56,511 8,742 - - 65,253 Oil, condensate and natural gas liquids 14,820 9,846 - - 24,666 ---------- -------- ------- ------- -------- Total oil and gas sales 71,331 18,588 - - 89,919 ---------- -------- ------- ------- -------- Total revenue 71,525 18,588 80,652 - 170,765 Expenses: Marketing and processing - - 79,135 - 79,135 Oil and gas production 18,082 5,621 - - 23,703 General and administrative 5,262 1,414 1,305 - 7,981 Depreciation and depletion 35,472 7,917 977 - 44,366 ---------- -------- ------- ------- -------- Total operating expenses 58,816 14,952 81,417 - 155,185 ---------- -------- ------- ------- -------- Earnings (loss) from operations 12,709 3,636 (765) - 15,580 Other income and expense: Other income, net (254) (3,746) (1,445) 2,890 (2,555) Interest expense 12,477 9,817 1,660 (2,890) 21,064 Translation gain on subordinated debt - (6,517) - - (6,517) ---------- -------- ------- ------- -------- Total other income and expense 12,223 (446) 215 - 11,992 ---------- -------- ------- ------- -------- Earnings (loss) before income taxes 486 4,082 (980) - 3,588 Income tax expense (benefit): Current - (233) 152 - (81) Deferred - (454) (370) - (824) ---------- -------- ------- ------- -------- - (687) (218) - (905) ---------- -------- ------- ------- -------- Net earnings (loss) $ 486 4,769 (762) - 4,493 ========== ======== ======= ======= ========
18 FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (7) SUPPLEMENTAL GUARANTOR INFORMATION, CONTINUED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1999
Canadian Producers Consolidated Forest Oil Forest Oil Marketing Forest Oil Corporation Ltd. Ltd. Corporation ----------- --------- --------- ------------ (In Thousands) Cash flow from operating activities: Net earnings (loss) $ 486 4,769 (762) 4,493 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and depletion 35,472 7,917 977 44,366 Amortization of deferred debt costs 411 199 - 610 Translation gain on subordinated debt - (6,517) - (6,517) Deferred income tax benefit - (454) (370) (824) Other, net (483) (2,462) (1) (2,946) Decrease (increase) in accounts receivable 3,039 (137) 185 3,087 Decrease (increase) in other current assets (1,668) 858 (1,283) (2,093) Increase (decrease) in accounts payable (1,633) 858 394 (381) Increase (decrease) in accrued interest and other current liabilities 2,406 (3,440) 1,325 291 ---------- -------- ------- ------- Net cash provided by operating activities 38,030 1,591 465 40,086 Cash flows from investing activities: Capital expenditures for property and equipment (31,272) (17,384) - (48,656) Proceeds from sale of assets 7,593 7,188 - 14,781 Increase in other assets, net (976) - - (976) ---------- -------- ------- ------- Net cash used by investing activities (24,655) (10,196) - (34,851) Cash flows from financing activities: Proceeds from bank borrowings 41,800 24,351 - 66,151 Repayments of bank borrowings (138,200) (30,580) - (168,780) Issuance of 10 1/2% senior subordinated notes, net of issuance costs 98,561 - - 98,561 Redemption of 11 1/4% senior subordinated notes (45) - - (45) Decrease in other liabilities, net (2,040) (41) - (2,081) ---------- -------- ------- ------- Net cash provided (used) by financing activities 76 (6,270) - (6,194) Intercompany advances, net (15,132) 15,132 - - Effect of exchange rate changes on cash 6 (47) (2) (43) ---------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents (1,675) 210 463 (1,002) Cash and cash equivalents at beginning of year 3,713 (33) (265) 3,415 ---------- -------- ------- ------- Cash and cash equivalents at end of year $ 2,038 177 198 2,413 ========== ======== ======= =======
19 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 2000 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 1999 Annual Report on Form 10-K. RESULTS OF OPERATIONS FOR THE SECOND QUARTER OF 2000 Net earnings for the second quarter of 2000 were $7,266,000 or $.14 per basic and $.13 per diluted common share compared to $4,043,000 or $.09 per basic and diluted common share in the corresponding period of 1999. The current period included a noncash loss on currency translation of $4,101,000 related to subordinated debt issued by Forest's Canadian subsidiary and an extraordinary gain on extinguishment of debt of $192,000. The 1999 period included a noncash gain on currency translation of $4,301,000. Exclusive of currency translation and the extraordinary gain, net earnings for the second quarter of 2000 amounted to $11,175,000 compared to a net loss of $258,000 in the corresponding 1999 period. Marketing and processing revenue increased by 45% to $58,716,000 in the second quarter of 2000 from $40,514,000 in the second quarter of 1999 and the related marketing and processing expense increased by 45% to $57,645,000 in the second quarter of 2000 from $39,664,000 in the same period of the previous year. The increase in marketing revenue and expense is due primarily to higher natural gas prices. The gross margin reported for marketing and processing activities increased to $1,071,000 in the second quarter of 2000 from $850,000 in the second quarter of 1999. The increase resulted from higher gas processing revenues in the United States. Oil and gas sales revenue increased by 27% to $59,725,000 in the second quarter of 2000 from $47,073,000 in the second quarter of 1999 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 second quarter of 2000 decreased 10% from the comparable 1999 period, due primarily to significantly higher production from Eugene Island 53 in the 1999 period. The average sales prices received for natural gas and liquids in the second quarter of 2000 increased 37% and 43%, respectively, compared to the average sales prices received in the corresponding 1999 period. Oil and gas production expense of $10,696,000 in the second quarter of 2000 decreased 14% from $12,438,000 in the comparable period of 1999 primarily as a result of fewer workovers in the Gulf Coast Region, offset in part by higher production taxes due to higher product prices. 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 5% in the second quarter of 2000 to $.52 per MCFE from $.55 MCFE in the second quarter of 1999. 20 The following tables set forth production volumes, weighted average sales prices and production expenses during the periods as follows:
Three Months Ended June 30, 2000 -------------------------------------------------------------------- Offshore Onshore Western Total Gulf of Gulf United United Total Mexico Coast States U.S. Canada Company -------- ------- ------- ------ ------ ------- NATURAL GAS Production (MMCF) 6,738 2,088 2,562 11,388 3,124 14,512 Sales price received (per MCF) $ 3.65 3.55 3.03 3.49 2.12 3.19 Effects of energy swaps (per MCF)(1) (.41) (.46) (.34) (.40) (.30) (.38) ------- ------- ------- ------ ------ ------- Average sales price (per MCF) $ 3.24 3.09 2.69 3.09 1.82 2.81 LIQUIDS Oil and condensate: Production (MBBLS) 196 213 37 446 276 722 Sales price received (per BBL) $ 25.64 27.48 28.76 26.77 28.96 27.61 Effects of energy swaps (per BBL)(1) (7.03) (7.51) (7.73) (7.31) (7.78) (7.49) ------- ------- ------- ------ ------ ------- Average sales price (per BBL) $ 18.61 19.97 21.03 19.46 21.18 20.12 Natural gas liquids: Production (MBBLS) - 47 134 181 100 281 Average sales price (per BBL) $ - 13.87 15.75 15.28 16.22 15.62 Total liquids production (MBBLS) 196 260 171 627 376 1,003 Average liquids sales price (per BBL) $ 18.63 18.87 16.89 18.25 19.86 18.86 TOTAL PRODUCTION Production volumes (MMCFE) 7,914 3,648 3,588 15,150 5,380 20,530 Average sales price (per MCFE) $ 3.22 3.12 2.73 3.08 2.44 2.91 Operating expense (per MCFE) .41 .86 .45 .53 .50 .52 ------- ------- ------- ------ ------ ------- Netback (per MCFE) $ 2.81 2.26 2.28 2.55 1.94 2.39 ======= ======= ======= ====== ====== =======
(1) Energy swaps were entered into to hedge the price of spot market volumes against price fluctuations. Hedged natural gas volumes were 6,061 MMCF in the three months ended June 30, 2000. Hedged oil and condensate volumes were 597,000 barrels in the three months ended June 30, 2000 period. The aggregate net loss under energy swap agreements was $10,906,000 for the period and was accounted for as a decrease to oil and gas sales. 21
Three Months Ended June 30, 1999 -------------------------------------------------------------------- Offshore Onshore Western Total Gulf of Gulf United United Total Mexico Coast States U.S. Canada Company -------- ------- ------- ------ ------ ------- NATURAL GAS Production (MMCF) 7,258 2,777 2,634 12,669 3,082 15,751 Sales price received (per MCF) $ 2.23 2.24 1.91 2.17 1.52 2.04 Effects of energy swaps (per MCF)(1) .02 .06 .03 .03 (.08) .01 ------- ------- ------- ------ ------ ------- Average sales price (per MCF) $ 2.25 2.30 1.94 2.20 1.44 2.05 LIQUIDS Oil and condensate: Production (MBBLS) 211 233 49 493 318 811 Sales price received (per BBL) $ 15.50 16.59 17.20 16.18 15.19 15.79 Effects of energy swaps (per BBL)(1) - (2.51) - (1.18) (.35) (.86) ------- ------- ------- ------ ------ ------- Average sales price (per BBL) $ 15.50 14.08 17.20 15.00 14.84 14.93 Natural gas liquids: Production (MBBLS) 4 51 146 201 106 307 Average sales price (per BBL) $ 6.75 7.53 8.81 8.44 9.19 8.70 Total liquids production (MBBLS) 215 284 195 694 424 1,118 Average liquids sales price (per BBL) $ 15.33 12.90 10.92 13.10 13.42 13.22 TOTAL PRODUCTION: Production volumes (MMCFE) 8,548 4,481 3,804 16,833 5,626 22,459 Average sales price (per MCFE) $ 2.30 2.24 1.91 2.20 1.80 2.09 Operating expense (per MCFE) .45 .94 .31 .55 .57 .55 ------- ------- ------- ------ ------ ------- Netback (per MCFE) $ 1.85 1.30 1.60 1.65 1.23 1.54 ======= ======= ======= ====== ====== =======
(1) Energy swaps were entered into to hedge the price of spot market volumes against price fluctuations. Hedged natural gas volumes were 8,724 MMCF in the three months ended June 30, 1999. Hedged oil and condensate volumes were 608,000 barrels in the three months ended June 30, 1999. The aggregate net loss under energy swap agreements was $526,000 for the period and was accounted for as a decrease to oil and gas sales. General and administrative expense increased 15% to $4,470,000 in the second quarter of 2000 compared to $3,883,000 in the comparable period of 1999. Total overhead costs (capitalized and expensed general and administrative costs) were $7,285,000 in the second quarter of 2000 compared to $5,748,000 in the comparable period of 1999. The increase was due primarily to higher employee related costs and professional service costs. The amount capitalized of $2,815,000 in the second quarter of 2000 increased 51% from the corresponding 1999 period due primarily to increased overhead costs and higher capitalization rates associated with international projects. 22 Depreciation and depletion expense increased 8% to $23,443,000 in the second quarter of 2000 from $21,767,000 in the second quarter of 1999. On a per-unit basis, depletion expense was approximately $1.10 per MCFE in the second quarter of 2000 compared to $.94 per MCFE in the corresponding 1999 period. The increase in the per-unit rate is due primarily to increased anticipated future development costs in the present inflationary environment for oilfield services. Other expense was $310,000 in the second quarter of 2000 compared to $683,000 in the second quarter of 1999. Interest expense decreased 9% to $9,448,000 in the second quarter of 2000 compared to $10,407,000 in the corresponding 1999 period, due primarily to lower bank debt balances. The foreign currency translation loss was $4,101,000 in the second quarter of 2000, compared to a gain of $4,301,000 in the second quarter of 1999. 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 $.6759 per $1.00 U.S. at June 30, 2000 compared to $.6899 at March 31, 2000. Forest is required to recognize the noncash foreign currency translation gains or losses related to the 8 3/4% Notes because the debt is denominated in U.S. dollars and the functional currency of Canadian Forest is the Canadian dollar. The extraordinary gain of $192,000 in the second quarter of 2000 resulted from the purchase of approximately $5,000,000 principal amount of 8 3/4% Notes at an average price of 92.6% of par value. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 Net earnings for the first six months of 2000 were $17,155,000, or $.32 per basic and diluted common share compared to $4,493,000 or $.10 per basic and diluted common share in the first six months of 1999. The current period includes a noncash loss on foreign currency translation of $4,814,000 and an extraordinary gain on extinguishment of debt of $192,000. The 1999 period included a noncash gain on currency translation of $6,517,000. Exclusive of currency translation and the extraordinary gain, net earnings for the first six months of 2000 amounted to $21,777,000 compared to a net loss of $2,024,000 in the corresponding 1999 period. Marketing and processing revenue increased 27% to $102,718,000 in the first six months of 2000 from $80,846,000 in the first six months of 1999, while the related marketing and processing expense increased by 27% to $100,693,000 in the 2000 period from $79,135,000 in the previous year. The increase in marketing revenue and expense is due primarily to higher natural gas prices. The gross margin reported for marketing and processing activities of $2,025,000 in the first six months of 2000 was higher than the gross margin of $1,711,000 in the first six months of 1999. The increase in the gross margin resulted primarily from higher gas processing revenues in the United States. Oil and gas sales revenue increased by 27% to $114,234,000 in the first six months of 2000 from $89,919,000 in the first six months of 1999 due primarily to higher oil and gas prices. Production volumes for natural gas and liquids in the first six months of 2000 decreased 11% from the comparable 1999 period due primarily to significantly higher production from Eugene Island Block 53 in the 1999 period. The average sales price received for natural gas and liquids during the first six months of 2000 increased 34% and 66%, respectively, compared to the average sales price received in the corresponding 1999 period. Oil and gas production expense of $20,367,000 in the first six months of 2000 decreased 14% from $23,703,000 in the comparable period of 1999, primarily as a result of fewer workovers in the Gulf Coast Region, offset in part by higher production taxes due to higher product prices. On an MCFE basis, production expense decreased approximately 4% in the first six months of 2000 to $.50 per MCFE from $.52 per MCFE in the first six months of 1999. 23 The following tables set forth production volumes, weighted average sales prices and production expenses during the periods as follows:
Six Months Ended June 30, 2000 -------------------------------------------------------------------- Offshore Onshore Western Total Gulf of Gulf United United Total Mexico Coast States U.S. Canada Company -------- ------- ------- ------ ------ ------- NATURAL GAS Production (MMCF) 13,013 4,513 4,787 22,313 6,095 28,408 Sales price received (per MCF) $ 3.13 3.04 2.66 3.01 2.15 2.82 Effects of energy swaps (per MCF) (1) (.17) (.16) (.14) (.16) (.12) (.15) ------- ------- ------- ------ ------ ------- Average sales price (per MCF) $ 2.96 2.88 2.52 2.85 2.03 2.67 LIQUIDS Oil and condensate: Production (MBBLS) 399 431 68 898 549 1,447 Sales price received (per BBL) $ 26.43 27.94 28.86 27.34 26.78 27.13 Effects of energy swaps (per BBL)(1) (6.65) (7.03) (7.26) (6.88) (6.74) (6.83) ------- ------- ------- ------ ------ ------- Average sales price (per BBL) $ 19.78 20.91 21.60 20.46 20.04 20.30 Natural gas liquids: Production (MBBLS) - 90 280 370 212 582 Average sales price (per BBL) $ - 13.00 15.52 14.92 15.89 15.27 Total liquids production (MBBLS) 399 521 348 1,268 761 2,029 Average liquids sales price (per BBL) $ 19.79 19.55 16.71 18.84 18.88 18.86 TOTAL PRODUCTION: Production volumes (MMCFE) 15,407 7,639 6,875 29,921 10,661 40,582 Average sales price (per MCFE) $ 3.01 3.04 2.60 2.92 2.50 2.81 Operating expense (per MCFE) .37 .84 .42 .50 .50 .50 ------- ------- ------- ------ ------ ------- Netback (per MCFE) $ 2.64 2.20 2.18 2.42 2.00 2.31 ======= ======= ======= ====== ====== =======
(1) Energy swaps were entered into to hedge the price of spot market volumes against price fluctuations. Hedged natural gas volumes were 12,868 MMCF in the six months ended June 30, 2000. Hedged oil and condensate volumes were 1,239,000 barrels in the six months ended June 30, 2000. The aggregate net loss under energy swap agreements was $14,191,000 for the period and was accounted for as a decrease to oil and gas sales. 24
Six Months Ended June 30, 1999 -------------------------------------------------------------------- Offshore Onshore Western Total Gulf of Gulf United United Total Mexico Coast States U.S. Canada Company -------- ------- ------- ------ ------ ------- NATURAL GAS Production (MMCF) 15,530 5,398 5,352 26,280 6,465 32,745 Sales price received (per MCF) $ 2.01 1.97 1.81 1.97 1.40 1.85 Effects of energy swaps (per MCF) (1) .18 .24 .16 .18 (.05) .14 ------- ------- ------- ------ ------ ------- Average sales price (per MCF) $ 2.19 2.21 1.97 2.15 1.35 1.99 LIQUIDS Oil and condensate: Production (MBBLS) 466 404 110 980 623 1,603 Sales price received (per BBL) $ 11.87 14.26 14.46 13.14 12.96 13.06 Effects of energy swaps (per BBL)(1) - (1.22) - (.50) (.18) (.37) ------- ------- ------- ------ ------ ------- Average sales price (per BBL) $ 11.87 13.04 14.46 12.64 12.78 12.69 Natural gas liquids: Production (MBBLS) 5 90 258 353 218 571 Average sales price (per BBL) $ 7.40 7.39 7.05 7.14 8.23 7.56 Total liquids production (MBBLS) 471 494 368 1,333 841 2,174 Average liquids sales price (per BBL) $ 11.82 12.01 9.27 11.19 11.60 11.35 TOTAL PRODUCTION: Production volumes (MMCFE) 18,356 8,362 7,560 34,278 11,511 45,789 Average sales price (per MCFE) $ 2.16 2.14 1.84 2.09 1.61 1.96 Operating expense (per MCFE) .38 1.03 .34 .53 .49 .52 ------- ------- ------- ------ ------ ------- Netback (per MCFE) $ 1.78 1.11 1.50 1.56 1.12 1.44 ======= ======= ======= ====== ====== =======
(1) Energy swaps were entered into to hedge the price of spot market volumes against price fluctuations. Hedged natural gas volumes were 17,212 MMCF in the six months ended June 30, 1999. Hedged oil and condensate volumes were 678,000 barrels in the six months ended June 30, 1999. The aggregate net gain under energy swap agreements was $3,946,000 for the period and was accounted for as an increase to oil and gas sales. 25 General and administrative expense increased 2% to $8,103,000 in the first six months of 2000 compared to $7,981,000 in the comparable period of 1999. Total overhead costs (capitalized and expensed general and administrative costs) were $13,799,000 in the first six months of 2000 compared to $12,043,000 in the comparable period of 1999. The increase was due primarily to higher employee related costs, offset partially by an insurance dividend in the 2000 period. The amount capitalized of $5,696,000 in the first six months of 2000 increased 40% from the corresponding 1999 period due primarily to increased overhead costs and higher capitalization rates associated with international projects. The following table summarizes the total overhead costs incurred during the periods:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2000 1999 2000 1999 ------- ----- ------ ------ (In Thousands) Overhead costs capitalized $ 2,815 1,865 5,696 4,062 General and administrative costs expensed (1) 4,470 3,883 8,103 7,981 ------- ----- ------ ------ Total overhead costs $ 7,285 5,748 13,799 12,043 ======= ===== ====== ======
(1) Includes $389,000 and $653,000 related to marketing and processing operations for the three month periods ended June 30, 2000 and 1999, respectively, and $769,000 and $1,305,000 for the six month periods ended June 30, 2000 and 1999, respectively. Depreciation and depletion expense increased 3% to $45,554,000 in the first six months of 2000 from $44,366,000 in the first six months of 1999. On a per-unit basis, depletion expense was approximately $1.08 per MCFE in the first six months of 2000 compared to $.94 per MCFE in the corresponding 1999 period. The increase in the per-unit rate is due primarily to increased anticipated future development costs in the present inflationary environment for oilfield services. Other expense was $214,000 in the first six months of 2000 compared to other income of $2,555,000 in the first six months of 1999. The 1999 period includes a gain of approximately $2,500,000 from the sale of a gas processing facility and a gain of approximately $780,000 from the sale of an investment. Interest expense decreased 12% to $18,524,000 in the first six months of 2000 compared to $21,064,000 in the corresponding 1999 period, due primarily to lower bank debt balances, offset in part by additional interest related to our 10 1/2% Notes which were issued in February, 1999. The foreign currency translation loss was $4,814,000 in the first six months of 2000, compared to a gain of $6,517,000 in the first six months of 1999. The value of the Canadian dollar was $.6759 per $1.00 U.S. at June 30, 2000 compared to $.6924 at December 31, 1999. The extraordinary gain on extinguishment of debt in the first six months of 2000 resulted from the purchase of approximately $5,000,000 principal amount of 8 3/4% Notes at 92.6% of par value. 26 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. We continue to examine alternative sources of long-term capital, including bank borrowings, the issuance of debt instruments, the sale of common stock, preferred stock or other equity securities of Forest, the issuance of net profits interests, sales of non-strategic assets, prospects and technical information, and joint venture financing. Availability of these sources of capital and, therefore, our ability to execute our operating strategy will depend upon a number of factors, some of which are beyond Forest's control. In addition, the prices we receive for future oil and natural gas production and the level of production will significantly impact future operating cash flows. No prediction can be made as to the prices we will receive for our future oil and gas production. Additionally, we have 5 offshore Gulf of Mexico wells whose combined production currently represents approximately 27% of our consolidated daily deliverability. Our production, revenue and cash flow could be adversely affected if production from these properties decreases significantly. MERGER WITH FORCENERGY, INC. On July 10, 2000, Forest and Forcenergy jointly announced a proposed merger. Under the merger agreement, Forcenergy common stockholders will receive 1.6 Forest common shares for each share of Forcenergy common stock they own. Forest will also exchange its common shares for Forcenergy's outstanding preferred stock, at a ratio of 68.6141 Forest common shares for each $1,000 principal amount of Forcenergy preferred stock. The exchange ratios are subject to adjustment if a proposed 1-for-2 reverse stock split of Forest common shares is approved. The transaction is subject to approval by the shareholders of both companies and customary regulatory approval. The merger will be accounted for under the pooling of interests method. 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 July 31, 2000 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 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 June 30, 2000, the outstanding borrowings under the global credit facility were $65,000,000 in the U.S. and $36,499,000 in Canada. At July 31, 2000, the outstanding borrowings were $71,000,000 in the U.S. and $33,771,000 in Canada, with an average effective interest rate of 7.6%. At July 31, 2000 Forest had also used the global credit facility for letters of credit in the amount of $747,000 in the United States and $1,645,000 CDN in Canada. In connection with the merger with Forcenergy, the Company is negotiating a new $600 million senior credit facility with a $500 million secured borrowing base, lead by The Chase Manhattan Bank. This facility will replace the existing senior facilities of both Forest and Forcenergy. At June 30, 2000 Forcenergy had an outstanding bank balance of $231 million and Forest had an outstanding bank balance of $65 million in the U.S. and $36 million in Canada. The senior facility will become effective upon the consummation of the merger of Forest and Forcenergy. WORKING CAPITAL. Forest had a working capital surplus of approximately $11,127,000 at June 30, 2000 compared to a deficit of approximately $14,817,000 at December 31, 1999. The increase in working capital is due primarily to an increase in revenue receivables due to higher product prices. Periodically, however, 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 to $47,786,000 in the first six months of 2000 compared to $40,086,000 in the first six months of 1999. The increase was due primarily to higher oil and gas revenue. We used $67,839,000 for investing activities in 2000 compared to $34,851,000 in 1999. Cash used in the 2000 period was greater than the cash used in the 1999 period due primarily to increased acquisition and development activities. Net cash provided by financing activities in 2000 was $23,681,000 compared to net cash used of $6,194,000 in 1999. The 2000 period included $29,733,000 of net bank borrowings. The 1999 period included net repayments of bank borrowings of $102,629,000 offset partially by net proceeds of $98,561,000 from the issuance of the 10 1/2% Notes. 27 CAPITAL EXPENDITURES. Expenditures for property acquisition, exploration and development for the first six months of 2000 and 1999 were as follows:
Six Months Ended -------------------------------- June 30, 2000 June 30, 1999 ------------- ------------- (In Thousands) Property acquisition costs: Proved properties $ 13,758 (1,169) Undeveloped properties (1) 79 ---------- -------- 13,757 (1,090) Exploration costs: Direct costs 24,852 27,813 Overhead capitalized 2,439 1,539 ---------- -------- 27,291 29,352 Development costs: Direct costs 28,586 16,582 Overhead capitalized 3,257 2,523 ---------- -------- 31,843 19,105 ---------- -------- $ 72,891 47,367 ========== ========
Forest's anticipated capital expenditures for 2000 are approximately $165,000,000, including capitalized overhead of approximately $10,600,000. We intend to meet our 1999 capital expenditure financing requirements using cash flows generated by operations, sales of non-strategic assets and, if necessary, borrowings under existing lines of credit. There can be no assurance, however, that we will have access to sufficient capital to meet these capital requirements. The planned levels of capital expenditures could be reduced if we experience lower than anticipated net cash provided by operations or other liquidity needs or could be increased if we experience increased cash flow or access additional sources of capital. In addition, while Forest intends to continue a strategy of acquiring reserves that meet our investment criteria, no assurance can be given that we can locate or finance any property acquisitions. LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's natural gas production is sold through the ProMark Netback Pool. At June 30, 2000 the ProMark Netback Pool had entered into fixed price contracts to sell approximately 2.8 BCF of natural gas through the remainder of 2000 at an average price of $2.37 CDN per MCF and approximately 5.5 BCF of natural gas in 2001 at an average price of approximately $2.45 CDN per MCF. Canadian Forest, as one of the producers in the ProMark Netback Pool, is obligated to deliver a portion of this gas. In 1999 Canadian Forest supplied 34% of the gas for the Netback Pool. 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 August 1, 2000 Forest had the following swaps in place:
Natural Gas Oil ------------------------- -------------------------- Average Average BBTU's Hedged Price Barrels Hedged Price Per Day Per Mmbtu Per Day Per Bbl ------- ------------ ------- ----------- July through December 2000 53.7 $ 2.53 1,400 $ 21.88 2001 22.9 $ 2.54 - $ - 2002 16.7 $ 2.48 - $ -
28 In addition, the Company utilizes collars that establish a price between a floor and ceiling to hedge natural gas and oil prices. As of August 1, 2000 Forest had the following collars in place:
Natural Gas ------------------------------------------------------------- Average Floor Average Ceiling Price Price BBTU's Per Day ------------- --------------- -------------- July through December 2000 $ 2.75 $2.90 3.3
Oil ------------------------------------------------------------- Average Floor Average Ceiling Price Price Barrels Per Day ------------- --------------- -------------- July through December 2000 $ 18.19 $ 20.93 3,500 2001 $ 21.58 $ 27.00 1,500
RECENT ACCOUNTING PRONOUNCEMENTS. In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation - and interpretation of APB Opinion No. 25 ("FIN 44"). This opinion provides guidance on the accounting for certain stock option transactions and subsequent amendments to stock option transactions. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent that FIN 44 covers events occurring during the period from December 15, 1998 and January 12, 2000, but before July 1, 2000, the effects of applying this Interpretation are to be recognized on a prospective basis. The Company does not expect the impact on its financial position or results of operations to be material. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition (SAB 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Subsequently, the SEC released SAB 101B, which delayed the implementation date of SAB 101 for registrants with fiscal years beginning between December 16, 1999 and March 15, 2000. The Company has not yet assessed the impact, if any, that SAB 101 might have on its financial position or results of operations. 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. 29 PART II. OTHER INFORMATION 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 There were no reports on Form 8-K filed by Forest during the second quarter of 2000. 30 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: August 14, 2000 /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) 31