-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WfQtos4wp3o0E+mij1SM106gvpFLaMAUODBR9hbUoNnscDwBOx7HUiqaMHxNn8Fj Ht9zJh/CU3PoJa9qfzXvCA== 0000912057-97-011223.txt : 19970401 0000912057-97-011223.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOREST OIL CORP CENTRAL INDEX KEY: 0000038079 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 250484900 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04597 FILM NUMBER: 97569742 BUSINESS ADDRESS: STREET 1: 1600 BROADWAY STREET 2: STE 2200 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3038121400 10-K 1 10-K - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission File Number: 0-4597 FOREST OIL CORPORATION (Exact name of registrant as specified in its charter) State of incorporation: New York I.R.S. Employer Identification No. 25-0484900 1600 Broadway Suite 2200 Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 303-812-1400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- Common Stock, Par Value $.10 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $328,556,000 as of February 28, 1997 (based on the last sale price of such stock as quoted on the NASDAQ National Market). There were 32,557,469 shares of the registrant's Common Stock, Par Value $.10 Per Share outstanding as of February 28, 1997. Document incorporated by reference: Proxy Statement of Forest Oil Corporation relative to the Annual Meeting of Shareholders to be held on May 14, 1997, which is incorporated into Part III of this Form 10-K. - ------------------------------------------------------------------------------- TABLE OF CONTENTS Page No. -------- PART I Item 1. Business 1 Item 2. Properties 13 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 4A. Executive Officers of Forest 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 22 Item 6. Selected Financial and Operating Data 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Item 8. Financial Statements and Supplementary Data 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36 PART III Item 10. Directors and Executive Officers of the Registrant 78 Item 11. Executive Compensation 78 Item 12. Security Ownership of Certain Beneficial Owners and Management 78 Item 13. Certain Relationships and Related Transactions 78 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 78 PART I ITEM 1. BUSINESS THE COMPANY Forest Oil Corporation and its subsidiaries (Forest or the Company) are engaged in the acquisition, exploration, development, production and marketing of natural gas and crude oil in North America. The Company was incorporated in New York in 1924, the successor to a company formed in 1916, and has been a publicly held company since 1969. The Company is active in several of the major exploration and producing areas in and offshore the United States and in Canada. Forest's principal reserves and producing properties are located in the Gulf of Mexico, Texas, Oklahoma and Alberta, Canada. Approximately 60% of total 1996 production was in the United States and approximately 40% was in Canada. The Company currently operates 45 offshore platforms in the Gulf of Mexico, and 1996 production from this area accounted for approximately 42% of the Company's reported production on an MCFE basis. (An MCF is one thousand cubic feet of natural gas. MMCF is used to designate one million cubic feet of natural gas and BCF refers to one billion cubic feet of natural gas. MCFE means thousands of cubic feet of natural gas equivalents, using a conversion ratio of one barrel of liquids to 6 MCF of natural gas. BCFE means billions of cubic feet of natural gas equivalents. With respect to liquids, the term BBL means one barrel of liquids whereas MBBLS is used to designate one thousand barrels of liquids. The term liquids is used to describe oil, condensate and natural gas liquids.) The Company operates from production offices located in Lafayette, Louisiana; Denver, Colorado; and Calgary, Alberta. Forest's corporate headquarters are located in Denver, Colorado. On December 31, 1996 Forest had 243 employees, of whom 179 were salaried and 64 were hourly. OPERATING STRATEGY The Company's objective is to increase value through sustained profitable growth of its oil and gas reserves and production by pursuing a combined strategy of focused acquisitions, exploration and development, while reducing operating and financial risk. The Company intends to focus its activity onshore and offshore in the Gulf Coast of the U.S. and in the Western Sedimentary Basin both in the U.S. and in Canada. In recent years, the Company has grown primarily by acquiring reserves with exploitation potential, increasing production from existing fields and exploration of its undeveloped acreage. On January 31, 1996 Forest acquired ATCOR Resources Ltd. for approximately $136,000,000, including acquisition costs of approximately $1,000,000. This company, which has been renamed Canadian Forest Oil Ltd. (Canadian Forest), is a Canadian corporation engaged in oil and gas exploration, production and processing in western Canada. Estimated proved reserves acquired in the Canadian Forest transaction were approximately 151 BCFE at an average property acquisition cost of $.85 per MCFE ($.60 per MCFE net of related deferred taxes). As part of the ATCOR acquisition, Forest separated ATCOR's natural gas marketing operation from its exploration and production business and renamed the marketing business Producers Marketing Ltd. (ProMark). In addition to marketing Canadian Forest's own gas production, ProMark provides a full range of gas marketing and management services to outside parties. Other acquisitions by the Company during 1996 totaled 33 BCFE at an average property acquisition cost of $.69 per MCFE. During 1995, the Company's acquisitions totaled 44.0 BCFE at an average property acquisition cost of $.61 per MCFE. These amounts represent primarily the reserves of Saxon Petroleum Inc. (Saxon), a consolidated 1 subsidiary of the Company in which the Company purchased a majority interest on December 20, 1995. Saxon is an Alberta, Canada corporation engaged in oil and gas exploration and production primarily in western Canada. The Company had estimated proved reserves of 481 BCFE at December 31, 1996 of which approximately 70% were natural gas reserves. This represents an increase of 60% compared to estimated proved reserves of 301 BCFE at December 31, 1995 of which approximately 79% was natural gas. Forest has dedicated an increased percentage of its capital expenditure budget to exploration activities in 1997. The Company participates in exploration activities through selective drilling for its own account, as well as through farmout arrangements in certain circumstances. Forest was successful at both 1996 federal offshore sales and at the March 1997 sale. The Company acquired one block at the central (Louisiana) sale in April 1996 and five blocks at the western (Texas) sale in September 1996. The Company was high bidder on eight blocks at the March 1997 central sale, although the leases have not been formally awarded as of March 20, 1997. Forest has also re-established its exploration effort in the Western Sedimentary Basin of the U.S. and Canada. Throughout the remainder of 1997, the Company also intends to continue to pursue its strategy of acquiring additional reserves that satisfy its investment criteria and are within the limits of its capital constraints. Forest continues to evaluate potential acquisitions, as well as various types of business combinations and joint ventures. The Company's operating strategy also includes exploitation activities in the areas of reservoir management and development drilling. Reservoir management involves the effort to enhance value by a combination of reduced costs and the use of techniques such as workovers to increase hydrocarbon recovery. The Company engages in development drilling for additional reserves that offset existing production with the objective of either increasing the density in which wells are drilled or extending reservoirs. The Company believes that it can increase production from, and otherwise enhance the value of, existing fields by utilizing its technical expertise to undertake selective workovers, recompletions and development drilling. As a part of its operating strategy, the Company also conducts an ongoing disposition program of its non-strategic assets. Assets with little value or which are not consistent with the Company's ongoing operating strategy are identified for sale or trade. During 1996, the Company disposed of properties with estimated proved reserves of approximately 1.5 BCF of natural gas and 628,000 barrels of oil for total net proceeds of $6,916,000. In addition, Saxon received proceeds of approximately $10,959,000 representing the liquidation of its preferred shares in Archean Energy Ltd. These shares, which were received through a series of transactions relating to the 1992 sale of the Company's Canadian oil and gas properties, were transferred to Saxon by Forest in 1995. Prior to 1996, the Company was not able to exploit the full potential of its acquisitions due to financial constraints resulting from its highly leveraged capital structure and low natural gas prices. During 1995, the Company sold equity securities to The Anschutz Corporation (Anschutz) for $45,000,000 and restructured $62,400,000 of indebtedness to Joint Energy Development Investments Limited Partnership (JEDI), a Delaware limited partnership the general partner of which is an affiliate of Enron Corp. (Enron). In December 1995, the Company agreed to exchange 1,680,000 shares of common stock for $22,400,000 of JEDI indebtedness and warrants to acquire Forest common stock. In January 1996, the Company completed the purchase of Canadian Forest using the proceeds of a common stock offering and approximately $8,300,000 of borrowings under its bank credit facility. Forest also established a $60,000,000 CDN credit facility secured by the oil and gas properties of Canadian Forest. As a result of these transactions, the Company has improved its financial flexibility significantly. The Company believes such improved financial flexibility should allow Forest to exploit its expanded property base more effectively. During the remainder of 1997, the Company intends to expand its exploration effort as well as pursue its acquisition and exploitation strategy. For further information concerning the Company's acquisitions and operations, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto. 2 SALES AND MARKETS Forest's U.S. production is generally sold at the wellhead to oil and natural gas purchasing companies in the areas where it is produced. Crude oil and condensate are typically sold at prices which are based upon posted field prices. Natural gas in the U.S. is generally sold month to month on the spot market. For the month of March 1997, approximately 94% of the Company's U.S. natural gas was sold at the wellhead at spot market prices. The term "spot market" as used herein refers to contracts with a term of six months or less or contracts which call for a redetermination of sales prices every six months or earlier. The remainder of the Company's U.S. natural gas was committed to both interstate and intrastate natural gas pipeline companies, primarily under volumetric production payment agreements and long-term contracts. The Company believes that the loss of one or more of its current natural gas spot purchasers should not have a material adverse effect on the Company's business in the United States because any individual spot purchaser could be readily replaced by another spot purchaser who would pay approximately the same sales price. In Canada, Canadian Forest's natural gas production is sold primarily through the ProMark Netback Pool. The Netback Pool matches major end users with providers of gas supply through arranged transportation channels and uses a netback pricing mechanism to establish the wellhead price paid to producers. Under this netback arrangement, producers receive the blended market price less related transportation and other direct costs. ProMark charges a marketing fee for marketing and administering the gas supply pool. Canadian Forest sold approximately 81% of its natural gas production through the Netback Pool in 1996. The Netback Pool gas sales in 1996 averaged 125 MMCF per day, of which Canadian Forest supplied approximately 35 MMCF per day or 28%. Approximately 12% of the volumes sold in the Netback Pool in 1996 were sold at fixed prices under long-term contracts. The loss of one or more of such long-term buyers could have a material adverse effect on ProMark and Canadian Forest. In addition to operating the Netback Pool, ProMark provides two other marketing services for producers and purchasers of natural gas. ProMark manages long-term gas supply contracts for its industrial customers by providing full-service purchasing, accounting and gas nomination services for these customers on a fee-for-services basis. ProMark also buys and sells gas in its trading operation for terms as short as one day and as long as one to two years. Profits generated by trading are derived from the spread between the prices of gas purchased and sold. ProMark endeavors to offset its gas purchase or sales commitments with other gas purchase or sales contracts, thereby limiting its exposure to price risk. The Company is, however, exposed to credit risk in that there exists the possibility that the counterparties to agreements will fail to perform their contractual obligations. Substantially all of Forest's oil production in the U.S. and Canada is sold under short-term contracts at prices which are based upon posted field prices. For information concerning sales to major customers, see Note 14 of Notes to Consolidated Financial Statements. OTHER FOREIGN OPERATIONS Forest considers, from time to time, certain oil and gas opportunities in other foreign countries. Foreign oil and natural gas operations are subject to certain risks, such as nationalization, confiscation, terrorism, renegotiation of existing contracts and currency fluctuations. Forest monitors the political, regulatory and economic developments in any foreign countries in which it operates. 3 COMPETITION The oil and natural gas industry is intensely competitive. Competition is particularly intense in the acquisition of prospective oil and natural gas properties and oil and gas reserves. Forest's competitive position depends on its geological, geophysical and engineering expertise, on its financial resources, its ability to develop its properties and its ability to select, acquire and develop proved reserves. Forest competes with a substantial number of other companies having larger technical staffs and greater financial and operational resources. Many such companies not only engage in the acquisition, exploration, development and production of oil and natural gas reserves, but also carry on refining operations, generate electricity and market refined products. The Company also competes with major and independent oil and gas companies in the marketing and sale of oil and gas to transporters, distributors and end users. There is also competition between the oil and natural gas industry and other industries supplying energy and fuel to industrial, commercial and individual consumers. Forest also competes with other oil and natural gas companies in attempting to secure drilling rigs and other equipment necessary for drilling and completion of wells. Such equipment may be in short supply from time to time. Finally, companies not previously investing in oil and natural gas may choose to acquire reserves to establish a firm supply or simply as an investment. Such companies will also provide competition for Forest. Forest's business is affected not only by such competition, but also by general economic developments, governmental regulations and other factors that affect its ability to market its oil and natural gas production. The prices of oil and natural gas realized by Forest are highly volatile. The price of oil is generally dependent on world supply and demand, while the price Forest receives for its natural gas is tied to the specific markets in which such gas is sold. Declines in crude oil prices or natural gas prices adversely impact Forest's activities. The Company's financial position and resources may also adversely affect the Company's competitive position. Lack of available funds or financing alternatives will prevent the Company from executing its operating strategy and from deriving the expected benefits therefrom. For further information concerning the Company's financial position, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ProMark also faces significant competition from other gas marketers, some of whom are significantly larger in size and have greater financial resources than ProMark, Canadian Forest or the Company. REGULATION UNITED STATES. Various aspects of the Company's oil and natural gas operations are regulated by administrative agencies under statutory provisions of the states where such operations are conducted and by certain agencies of the Federal government for operations on Federal leases. The Federal Energy Regulatory Commission (FERC) regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 (NGA) and the Natural Gas Policy Act of 1978 (NGPA). In the past, the Federal government has regulated the prices at which oil and gas could be sold. While sales by producers of natural gas, and all sales of crude oil, condensate and natural gas liquids can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead sales in the natural gas industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act (the Decontrol Act). The Decontrol Act removed all NGA and NGPA price and nonprice controls affecting wellhead sales of natural gas effective January 1, 1993. Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (Order No. 636), which require interstate pipelines to provide transportation separate, or "unbundled", from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation on a basis that is equal for all gas supplies. Although Order No. 636 does not directly regulate the Company's activities, the FERC has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company's activities. Although Order No. 636, assuming it is upheld in its entirety, could provide the Company with additional market access and more fairly applied transportation service rates, Order No. 636 could also subject the Company to more restrictive pipeline imbalance tolerances and greater penalties for violation of 4 those tolerances. Order 636 and subsequent FERC orders issued in individual pipeline restructuring proceedings have been the subject of appeals, the results of which have generally supported the FERC's open-access policy. Last year, the United States Court of Appeals for the District of Columbia Circuit largely upheld Order No. 636. Because further review of certain of these orders is still possible and other appeals remain pending, it is difficult to predict the ultimate impact of the orders on the Company and its production efforts. The FERC has announced several important transportation-related policy statements and proposed rule changes, including the appropriate manner in which interstate pipelines release capacity under Order No. 636 and, more recently, the price which shippers can charge for their released capacity. In addition, in 1995, FERC issued a policy statement on how interstate natural gas pipelines can recover the costs of new pipeline facilities. In January 1996, the FERC issued a policy statement and a request for comments concerning alternatives to its traditional cost-of-service ratemaking methodology. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. While any additional FERC action on these matters would affect the Company only indirectly, these policy statements and proposed rule changes are intended to further enhance competition in natural gas markets. The Company cannot predict what action the FERC will take on these matters, nor can it predict whether the FERC's actions will achieve its stated goal of increasing competition in natural gas markets. However, the Company does not believe that it will be treated materially differently than other natural gas producers and markets with which it competes. Commencing in October 1993, the FERC issued a series of rules (Order Nos. 561 and 561-A) establishing an indexing system under which oil pipelines will be able to change their transportation rates, subject to prescribed ceiling levels. The indexing system, which allows or may require pipelines to make rate changes to track changes in the Producer Price Index for Finished Goods, minus one percent, became effective January 1, 1995 The Company is not able at this time to predict the effects of Order Nos. 561 and 561-A, if any, on the transportation costs associated with oil production from the Company's oil producing operations. The Outer Continental Shelf Lands Act (OCSLA) requires that all pipelines operating on or across the Outer Continental Shelf (the OCS) provide open-access, non-discriminatory service. Although the FERC has opted not to impose the regulations of Order No. 509, in which the FERC implemented the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has retained the authority to exercise jurisdiction over those entities if necessary to permit non-discriminatory access to service or the OCS. Certain operations the Company conducts are on federal oil and gas leases, which the Minerals Management Service (MMS) administers. The MMS issues such leases through competitive bidding. These leases contain relatively standardized terms and require compliance with detailed MMS regulations and orders pursuant to the OCSLA (which are subject to change by the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, the Army Corps of Engineers and the Environmental Protection Agency), lessees must obtain a permit from the MMS prior to the commencement of drilling. The MMS has promulgated regulations requiring offshore production facilities located on the OCS to meet stringent engineering and construction specifications. The MMS proposed additional safety-related regulations concerning the design and operating procedures for OCS production platforms and pipelines. These proposed regulations were withdrawn pending further discussions among interested federal agencies. The MMS also has regulations restricting the flaring or venting of natural gas and has recently proposed to amend such regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has promulgated other regulations governing the plugging and abandonment of wells located offshore and the removal of all production facilities. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met. The cost of such bonds or other surety can be substantial and there is no assurance that the Company can continue to obtain bonds or other surety in all cases. Under certain circumstances, the MMS may require any Company operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect the Company's financial condition and operations. 5 In addition, the MMS is conducting an inquiry into certain contract agreements from which producers on MMS leases have received settlement proceeds that are royalty bearing and the extent to which producers have paid the appropriate royalties on those proceeds. The Company believes that this inquiry will not have a material impact on its financial condition, liquidity or results of operations. The MMS has issued a notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of natural gas produced from federal leases. The principal feature in the amendments, as proposed, would establish an alternative market-index based method to calculate royalties on certain natural gas production sold to affiliates or pursuant to non-arm's-length sales contracts. The MMS has proposed this rulemaking to facilitate royalty valuation in light of changes in the gas marketing environment. The Company cannot predict what action the MMS will take on these matters, nor can it predict at this stage of the rulemaking proceeding how the Company might be affected by amendments to the regulations. The MMS has also issued a notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. This proposed rule would modify the valuation procedures for both arm's length and non-arm's length crude oil transactions to decrease reliance on oil posted prices and assign a value to crude oil that better reflects market value, establish a new MMS form for collecting value differential data, and amend the valuation procedure for the sale of federal royalty oil. The Company cannot predict what action the MMS will take on this matter, nor can it predict at this stage of the rulemaking proceeding how the Company might be affected by this amendment to the MMS' regulations. Additional proposals and proceedings that might affect the oil and gas industry are pending before the FERC and the courts. The Company cannot predict when or whether any such proposals may become effective. In the past, the natural gas industry has been heavily regulated. There is no assurance that the regulatory approach currently pursued by the FERC will continue indefinitely. Notwithstanding the foregoing, the Company does not anticipate that compliance with existing federal, state and local laws, rules and regulations will have a material or significantly adverse effect upon the capital expenditures, earnings or competitive position of the Company or its subsidiaries. No material portion of Forest's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Federal government. OIL SPILL FINANCIAL RESPONSIBILITY REQUIREMENTS - UNITED STATES. As originally enacted, the Oil Pollution Act of 1990 ("OPA") would have required the Company to establish $150 million in financial responsibility to cover oil spill related liabilities. Under recent amendments to the OPA, the responsible person for an offshore facility located seaward of state waters, including OCS facilities, will be required to provide evidence of financial responsibility in the amount of $35 million. Although the financial responsibility requirement for offshore facilities located landward of the seaward boundary of state waters (including certain facilities in coastal inland waters) is a lesser amount ($10 million), the Company currently has a number of offshore facilities located beyond state waters and, thus, is subject to the $35 million financial responsibility requirement. The amount of financial responsibility may be increased, to a maximum of $150 million, if the MMS determines that a greater amount is justified based on specific risks posed by the operations. The Company expects that financial responsibility could be established through insurance, guaranty, indemnity, surety bond, letter of credit, qualification as a self insurer or a combination thereof. The Company cannot predict the final form of any financial responsibility rule that may be adopted by the MMS under OPA, but in any event, the impact of the rule is not expected to be any more burdensome to the Company than it will be to other similarly situated companies involved in oil and gas exploration and production. The Company currently satisfies similar requirements for its OCS leases under OCSLA. CANADA. The oil and natural gas industry in Canada is subject to extensive controls and regulations imposed by various levels of government. It is not expected that any of these controls or regulations will affect the operations of the Company in a manner materially different than they would affect other oil and gas companies of similar size. 6 In Canada, producers of oil negotiate sales contracts directly with oil purchasers, with the result that the market determines the price of oil. The price depends in part on oil quality, prices of competing fuels, distance to market and the value of refined products. Oil exports may be made pursuant to export contracts with terms not exceeding one year in the case of light crude, and not exceeding two years in the case of heavy crude, provided that an order approving any such export has been obtained from the National Energy Board (NEB). Any oil export to be made pursuant to a contract of longer duration requires an exporter to obtain an export license from the NEB and the issue of such a license requires the approval of the Canadian federal government. In Canada, the price of natural gas sold in interprovincial and international trade is determined by negotiation between buyers and sellers. Natural gas exported from Canada is subject to regulation by the Government of Canada through the NEB. Producers and exporters are free to negotiate prices and other terms with purchasers, provided that the export contracts must continue to meet certain criteria prescribed by the NEB. As is the case with oil, natural gas exports for a term of less than two years must be made pursuant to an NEB order, or, in the case of exports for a longer duration, pursuant to an NEB license and Canadian federal government approval. The provincial governments of Alberta, British Columbia and Saskatchewan also regulate the volume of natural gas which may be removed from those provinces for consumption elsewhere based on such factors as reserve availability, transportation arrangements and market considerations. On January 1, 1994 the North American Free Trade Agreement (NAFTA) among the governments of Canada, the United States and Mexico became effective. NAFTA carries forward most of the material energy terms contained in the Canada-U.S. Free Trade Agreement. In the context of energy resources, Canada continues to remain free to determine whether exports to the United States or Mexico will be allowed provided that any export restrictions do not: (i) reduce the proportion of energy resource exported relative to domestic use, (ii) impose an export price higher than the domestic price, and (iii) disrupt normal channels of supply. All three countries are prohibited from imposing minimum export or import price requirements. NAFTA contemplates clearer disciplines on regulators to ensure fair implementation of any regulatory changes and to minimize disruption of contractual arrangements, which is important for Canadian natural gas exports. In addition to federal regulation, each province has legislation and regulations which govern land tenure, royalties, production rates, environmental protection and other matters. The royalty regime is a significant factor in the profitability of oil and natural gas production. Royalties payable on production from lands other than Crown lands are determined by negotiations between the mineral owner and the lessee. Crown royalties are determined by government regulation and are generally calculated as a percentage of the value of the gross production, and the rate of royalties payable generally depends in part on prescribed reference prices, well productivity, geographical location, field discovery date and the type or quality of the petroleum product produced. From time to time the governments of Canada, Alberta, British Columbia and Saskatchewan have established incentive programs which have included royalty rate deductions, royalty holidays and tax credits for the purpose of encouraging oil and natural gas exploration or enhanced recovery projects. In Alberta, a producer of oil or natural gas is entitled to a credit against the royalties payable to the Crown by virtue of the ARTC (Alberta royalty tax credit) program. The ARTC program is based on a price sensitive formula, and the ARTC rate varies between 75%, at prices for oil below $100 per cubic meter, and 25%, at prices above $210 per cubic meter. The ARTC rate is applied to a maximum of $2,000,000 of Alberta Crown royalties payable for each producer or associated group of producers. Crown royalties on production from producing properties acquired from corporations claiming maximum entitlement to ARTC will generally not be eligible for ARTC. The rate is established quarterly based on the average "par price", as determined by the Alberta Department of Energy for the previous quarterly period. Canadian Forest is eligible for ARTC credits only on eligible properties acquired and wells drilled after the change of control. 7 Oil and natural gas royalty holidays and reductions for specific wells reduce the amount of Crown royalties paid by the Company to the provincial governments. The ARTC program provides a rebate on Crown royalties paid in respect of eligible producing properties. ENVIRONMENTAL MATTERS. Extensive federal, state, provincial and local laws govern oil and natural gas operations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. Some laws, rules and regulations relating to protection of the environment may, in certain circumstances, impose "strict liability" for environmental contamination, rendering a person liable for environmental damages and cleanup costs without regard to negligence or fault on the part of such person. Other laws, rules and regulations may restrict the rate of oil and natural gas production below the rate that would otherwise exist or even prohibit exploration or production activities in sensitive areas. In addition, state laws often require some form of remedial action to prevent pollution from former operations, such as closure of inactive pits and plugging of abandoned wells. The regulatory burden on the oil and natural gas industry increases its cost of doing business and consequently affects its profitability. These laws, rules and regulations affect the operations of the Company. Compliance with environmental requirements generally could have a material adverse effect upon the capital expenditures, earnings or competitive position of Forest and its subsidiaries. The Company believes that it is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company. Nevertheless, changes in environmental law have the potential to adversely affect the Company's operations. For instance, at least two separate courts have recently ruled that certain wastes associated with the production of crude oil may be classified as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (commonly called Superfund) and thus the Company could become subject to the burdensome cleanup and liability standards established under the federal Superfund program if significant concentrations of such wastes were determined to be present at the Company's properties or to have been produced as a result of the Company's operations. Alternately, pending amendments to Superfund presently under consideration by the U.S. Congress could relax many of the burdensome cleanup and liability standards established under the Statute. In Canada, the oil and natural gas industry is currently subject to environmental regulation pursuant to provincial and federal legislation. Environmental legislation provides for restrictions and prohibitions on releases or emissions of various substances produced or utilized in association with certain oil and gas industry operations. In addition, legislation requires that well and facility sites be abandoned and reclaimed to the satisfaction of provincial authorities. A breach of such legislation may result in the imposition of fines and penalties. Environmental legislation in Alberta has undergone a major revision and has been consolidated into the ENVIRONMENTAL PROTECTION AND ENHANCEMENT ACT. Under the new Act, environmental standards and compliance for releases, clean-up and reporting are stricter. Also, the range of enforcement actions available and the severity of penalties have been significantly increased. These changes will have an incremental effect on the cost of conducting operations in Alberta. Although the Company maintains insurance against some, but not all, of the risks described above, including insuring the costs of clean-up operations, public liability and physical damage, there is no assurance that such insurance will be adequate to cover all such costs or that such insurance will continue to be available in the future or that such insurance will be available at premium levels that justify its purchase. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on the Company's financial condition and operations. The Company has established guidelines to be followed to comply with environmental laws, rules and regulations. The Company has designated a compliance officer whose responsibility is to monitor regulatory requirements and their impacts on the Company and to implement appropriate compliance procedures. The Company also employs an environmental manager whose responsibilities include causing Forest's operations to be carried out in accordance with applicable environmental guidelines and implementing adequate safety precautions. Although the 8 Company maintains pollution insurance against the costs of clean-up operations, public liability and physical damage, there is no assurance that such insurance will be adequate to cover all such costs or that such insurance will continue to be available in the future. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Certain of the statements set forth under "Item 1. - Business" and "Item 7 - -Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K, such as the statements regarding planned capital expenditures and the availability of capital resources to fund capital expenditures are forward-looking and are based upon the Company's 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 beyond the control of the Company. These factors include, but are not limited to, the matters described below. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's actual results and plans for 1997 and beyond could differ materially from those expressed in the forward-looking statements. Many of the factors which may affect the Company's future operating performance and long-term liquidity are beyond the Company's control, including, but not limited to, oil and natural gas prices, governmental actions and taxes, the availability and attractiveness of properties for acquisition, the adequacy and attractiveness of financing and operational results. The Company is subject to the following risk factors. AVAILABILITY OF FINANCING. The Company 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 nonrecourse production-based financing. The Company continues to examine alternative sources of long-term capital, including bank borrowings or the issuance of debt instruments, the sale of common stock, preferred stock or other equity securities of the Company, the issuance of net profits interests, sales of non-strategic properties, prospects and technical information, or joint venture financing. Availability of these sources of capital and, therefore, the Company's ability to execute its operating strategy will depend upon a number of factors, some of which are beyond the control of the Company. REPLACEMENT OF RESERVES. In general, the volume of production from oil and gas properties declines as reserves are depleted. The decline rates depend on reservoir characteristics and vary from the steep declines characteristic of Gulf of Mexico reservoirs, where the Company has a significant portion of its production, to the relatively slow declines characteristic of long-lived fields in other regions. Except to the extent the Company acquires properties containing proved reserves or conducts successful development and exploration activities, or both, the proved reserves of the Company will decline as reserves are produced. The Company's future natural gas and oil production is, therefore, highly dependent upon its level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, the Company's ability to make the necessary capital investment to maintain or expand its asset base of oil and gas reserves would be impaired. In addition, there can be no assurance that the Company's future development, acquisition and exploration activities will result in additional proved reserves or that the Company will be able to drill productive wells at acceptable costs. VOLATILITY OF NATURAL GAS PRICES. The Company's revenues, profitability and future rate of growth, if any, are substantially dependent upon prevailing prices for oil and natural gas and the ability of the Company to discover or acquire proved reserves. Historically, the prices for oil and natural gas have been quite volatile. The Company anticipates that such markets will continue to be volatile over the next year. The Company is impacted more by natural gas prices than by oil prices, because the majority of its production is natural gas. At December 31, 1996 70% of the Company's estimated proved reserves consisted of natural gas on an Mcfe basis. During 1996, 72% of the Company's total production consisted of natural gas. The volatility of the spot market for natural gas is due to factors beyond the Company's control, including seasonality of demand which may cause the price received for spot market natural gas to vary significantly between seasonal periods. Prices are also affected by actions of state and local agencies, the United States and foreign governments, and international cartels, all of 9 which are beyond the Company's control. These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of oil and natural gas. Any substantial or extended decline in the price of oil or natural gas would have a material adverse effect on the Company's financial condition and results of operations. In order to attempt to minimize the product price volatility to which the Company is subject, the Company, from time to time, enters into energy swap agreements and other financial arrangements with third parties to attempt to reduce the Company's short-term exposure to fluctuations in future oil and natural gas prices. Long-term contracts entered into by the Netback Pool and the volumetric production payment agreements that the Company has entered into further minimize the price volatility to which the Company is subject. For further information concerning market conditions, long-term contracts, production payments and energy swap agreements, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 5, 6, 12 and 13 of Notes to Consolidated Financial Statements. CEILING LIMITATION WRITEDOWNS. The Company reports its operations using the full cost method of accounting for oil and gas properties. The Company capitalizes the cost to acquire, explore for and develop oil and gas properties. Under full cost accounting rules, the net capitalized costs of oil and gas properties may not exceed a "ceiling limit" which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10%, plus the lower of cost or fair market value of unproved properties. If net capitalized costs of oil and gas properties exceed the ceiling limit, the Company is subject to a ceiling limitation writedown to the extent of such excess. A ceiling limitation writedown is a charge to earnings which does not impact cash flow from operating activities. However, such writedowns impact the amount of the Company's shareholders' equity. The risk that the Company will be required to write down the carrying value of its oil and gas properties increases when oil and gas prices are depressed or volatile. In addition, writedowns may occur if the Company has substantial downward revisions in its estimated proved reserves or if purchasers or governmental action cause an abrogation of, or the Company voluntarily cancels, long-term contracts for its natural gas. Although the Company did not have a writedown in 1996 or 1995, the Company had a writedown of $58,000,000 in 1994. No assurance can be given that the Company will not experience additional writedowns in the future. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 18 of Notes to Consolidated Financial Statements. GAS MARKETING. The Company's operations include gas marketing as a result of the Canadian Forest acquisition. ProMark's gas marketing operations consist of the marketing of its own gas production, the purchase and direct sale of third parties' natural gas, the handling of transportation and operations of such third party gas and spot purchasing and selling of natural gas. The profitability of such natural gas marketing operations depends in large part on the ability of the Company to assess and respond to changing market conditions, including credit risk. Profitability of such natural gas marketing operations also depends in large part on the ability of the Company to maximize the volume of third party natural gas which the Company purchases and resells and on the ability of the Company to obtain a satisfactory margin between the purchase price and the sales price for such volumes. The inability of the Company to respond appropriately to changing conditions in the gas marketing business could materially adversely affect the Company's results of operations. GAS PROCESSING. As a result of the Canadian Forest acquisition, the Company's operations include processing of natural gas to extract various natural gas liquids. Canadian Forest's gas processing operations primarily consist of an interest in an ethane extraction plant located near Edmonton, Alberta. In order to obtain from natural gas suppliers volumes of committed natural gas reserves to maintain natural gas throughput at optimal levels, the plant must periodically contract to process additional natural gas volumes provided from new or existing sources. There can be no assurance that the Company will be successful in contracting additional natural gas to maintain optimal levels of throughput. CREDIT RISK. ProMark buys and sells gas in its trading operation for terms as short as one day and as long as one to two years. Profits generated by trading are derived from the spread between the prices of gas purchased and sold. ProMark endeavors to offset its gas purchase or sales commitments with other gas purchase or sales contracts, thereby limiting its exposure to price risk. 10 The Company is, however, exposed to credit risk in that there exists the possibility that the counterparties to agreements will fail to perform their contractual obligations. CURRENCY RISK. Following the acquisition of Canadian Forest in January 1996, a substantial portion of the Company's operations is located in Canada. The expenses of such operations are payable in Canadian dollars and most of the revenue derived from natural gas and oil sales is based upon U.S. dollar prices. The results of such Canadian operations will therefore be subject to the risks of fluctuation in the relative values of Canadian and U.S. dollars. GENERAL RISKS OF OIL AND GAS OPERATIONS. The nature of the oil and gas business involves a variety of risks, including, but not limited to, the risks of operating hazards such as fires, explosions, cratering, blow-outs, adverse weather conditions, pollution, environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, encountering formations with abnormal pressures and, in horizontal wellbores, the increased risk of mechanical failure and collapsed holes, the occurrence of any of which could result in substantial losses to the Company. The Company conducts a substantial portion of its operations offshore in the Gulf of Mexico. Such operations are subject to certain risks including, but not limited to, capsizing, collision, sinking and grounding of rigs and vessels and adverse weather and sea conditions. These risks could result in substantial losses to the Company due to personal injury or loss of life, severe damage or destruction of property and equipment, pollution or other environmental damage clean-up costs, regulatory investigation and penalties and the suspension of operations. The Company maintains insurance against some, but not all, of these risks in amounts that management believes to be reasonable and in accordance with customary oil and gas industry practices. The occurrence of a significant event, however, that is not fully insured could have a material adverse effect on the Company's financial condition and results of operations. COMPETITION. The Company operates in a highly competitive environment. The Company competes with major and independent oil and gas companies for the acquisition of desirable oil and gas properties, as well as the equipment and labor required to develop and operate such properties. The Company also competes with major and independent oil and gas companies in the marketing and sale of oil and natural gas to marketers and end-users. Many of these competitors have financial and other resources substantially greater than those of the Company. DRILLING RISKS. Drilling involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. The cost of drilling and completing wells is often unpredictable, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, weather conditions and shortages or delays in delivery of equipment. There can be no assurance as to the success of the Company's future drilling activities. The Company's current inventory of 2-D and 3-D seismic surveys will not necessarily increase the likelihood that the Company will drill or complete commercially productive wells or that the volumes of reserves discounted, if any, would necessarily be greater than the Company would have discovered without its current inventory of seismic surveys. ACQUISITION RISKS. The Company's growth has been attributable in part to acquisitions of producing properties. The successful acquisition of producing properties requires an assessment of recoverable reserves, future oil and gas prices, operating costs, potential environmental and other liabilities and other factors beyond the Company's control. Such assessments are necessarily inexact and their accuracy inherently uncertain. In connection with such an assessment, the Company performs a review of the subject properties that it believes to be generally consistent with industry practices. Such a review, however, will not reveal all existing or potential problems nor will it permit a buyer to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections may not always be performed on every platform or well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. The Company is generally not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities, and generally acquires interests in the properties on an "as is" basis with limited remedies for breaches of representations and warranties. 11 MARKETABILITY OF OIL AND GAS PRODUCTION. The marketability of the Company's production depends in part upon the availability, proximity and capacity of gas gathering systems, pipelines and processing facilities. U.S. federal and state regulation and Canadian regulation of oil and gas production and transportation, general economic conditions, and changes in supply and demand all could adversely affect the Company's ability to produce and market its oil and natural gas. If market factors were to change dramatically, the financial impact on the Company could be substantial. The availability of markets is beyond the control of the Company and thus represents a significant risk. SEASONALITY OF DEMAND FOR NATURAL GAS. Demand for natural gas is highly seasonal, with demand generally higher in the colder winter months and in hot summer months. To date, the Company generally has been able to sell all of its available spot market natural gas at prevailing spot market prices; thus, the volumes sold by the Company have not fluctuated materially with seasonality. There is no assurance, however, that the Company will be able to continue to achieve this result. GOVERNMENT REGULATION, ENVIRONMENTAL RISKS AND TAXES. Various aspects of the Company's oil and natural gas operations are regulated by administrative agencies under statutory provisions of the states and provinces where such operations are conducted, by certain agencies of the Federal government for operations on Federal leases and by the Canadian government. In the past, the Federal government has regulated the prices at which oil and natural gas could be sold. While sales by producers of natural gas, and all sales of crude oil, condensate and natural gas liquids can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Extensive U.S., state and local laws and Canadian laws govern oil and gas operations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws, rules and regulations may restrict the rate of oil and gas production below the rate that would otherwise exist. The regulatory burden on the oil and gas industry increases its cost of doing business and consequently affects its profitability. These laws, rules and regulations affect the operations of the Company. Compliance with environmental requirements generally could have a material adverse effect upon the capital expenditures, earnings or competitive position of Forest. Although Forest's experience has been to the contrary, there is no assurance that this will continue to be the case. 12 ITEM 2. PROPERTIES Forest's principal reserves and producing properties are oil and gas properties located in the Gulf of Mexico, Texas, Oklahoma and Alberta, Canada. RESERVES Information regarding the Company's proved and proved developed oil and gas reserves and the standardized measure of discounted future net cash flows and changes therein is included in Note 18 of Notes to Consolidated Financial Statements. Since January 1, 1996 Forest has not filed any oil or natural gas reserve estimates or included any such estimates in reports to any Federal or foreign governmental authority or agency, other than the Securities and Exchange Commission (SEC), the MMS and the Department of Energy (DOE). The reserve estimate report filed with the MMS related solely to Forest's Gulf of Mexico reserves. There were no differences between the reserve estimates included in the MMS report, the SEC report, the DOE report and those included herein, except for production and additions and deletions due to the difference in the "as of" dates of such reserve estimates. PRODUCTION The following table shows net liquids and natural gas production for Forest and its subsidiaries for the years ended December 31, 1996, 1995 and 1994: Net Natural Gas and Liquids Production (1)(2) --------------------------------------------- 1996 1995 (3) 1994 ---- ---- ---- United States: Natural Gas (MMCF) 28,624 33,342 48,048 Liquids (MBBLS) 1,104 1,173 1,543 Canada: Natural Gas (MMCF) 13,872 - - Liquids (MBBLS) 1,645 - - (1) Includes amounts delivered pursuant to volumetric production payments. See Note 6 of Notes to Consolidated Financial Statements. (2) Volumes reported for natural gas include immaterial amounts of sulfur production on the basis that one long ton of sulfur is equivalent to 15 MCF of natural gas. Liquids volumes include both oil and condensate and natural gas liquids. (3) Does not include any production relating to the acquisition of Saxon on December 20, 1995 as the amounts involved were not significant. 13 AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT OF PRODUCTION The following table sets forth the average sales prices per MCF of natural gas and per barrel of liquids and the average production cost per equivalent unit of production for the years ended December 31, 1996, 1995 and 1994 for Forest and its subsidiaries: United States Canada (5) --------------------------- ---------- 1996 1995 1994 1996 ------- ------ ------ ------- Average Sales Prices: NATURAL GAS Total production (MMCF)(1) 28,624 33,342 48,048 13,872 Sales price received (per MCF)(2) $ 2.36 1.65 1.86 1.41 Effects of energy swaps (per MCF) (3) (.23) .12 .04 (.04) ------ ------ ------ ------ Average sales price (per MCF)(2) $ 2.13 1.77 1.90 1.37 LIQUIDS: Oil and Condensate: Total production (MBBLS)(4) 964 1,121 1,482 1,308 Sales price received (per BBL) $ 20.03 16.36 14.97 20.64 Effects of energy swaps (per BBL)(3) (1.07) (.50) (.14) (1.82) ------ ------ ------ ------ Average sales price (per BBL) $ 18.96 15.86 14.83 18.82 Natural gas liquids: Total production (MBBLS) 140 52 61 337 Average sales price (per BBL) $ 10.48 15.81 14.79 11.87 Total liquids production (MBBLS) 1,104 1,173 1,543 1,645 Average sales price (per BBL) $ 17.88 15.86 14.83 17.40 Average production cost (per MCFE)(6) $ .56 .56 .39 .52 (1) Total natural gas production includes scheduled deliveries under volumetric production payments, net of royalties, of 3,168 MMCF, 9,120 MMCF, and 16,005 MMCF in 1996, 1995 and 1994, respectively. Natural gas delivered pursuant to volumetric production payment agreements represented approximately 7%, 27% and 33% of total natural gas production in 1996, 1995 and 1994, respectively. For further information concerning volumes and prices recorded under volumetric production payments, see Notes 6 and 14 of Notes to Consolidated Financial Statements. (2) Amounts shown for 1995 exclude the effects of a gas contract settlement. Including such amount, the sales price received and average sales price for natural gas in 1995 were $1.78 and $1.90 per MCF, respectively. For further information regarding the gas contract settlement, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 15 of Notes to Consolidated Financial Statements. (3) Energy swaps were entered into to hedge the price of spot market volumes against price fluctuations. Hedged natural gas volumes were 12,741 MMCF, 10,146 MMCF and 12,184 MMCF for the years ended December 31, 1996, 1995 and 1994, respectively. Hedged oil and condensate volumes were 895,600 barrels, 498,000 barrels and 370,000 barrels for 1996, 1995 and 1994, respectively. The aggregate gains (losses) under energy swap agreements were $(10,422,000), $3,536,000 and $1,810,000, respectively, for the years ended December 31, 1996, 1995 and 1994. (4) An immaterial amount of oil production is covered by scheduled deliveries under volumetric production payments. 14 (5) Alberta's royalty program was restructured in 1994 and remained uncertain throughout much of 1995 and 1996. Canadian production of natural gas liquids for the year ended December 31, 1996 was reduced by 79,000 barrels as a result of royalty adjustments, resulting in an increase in the reported average sales price for natural gas liquids in Canada to $11.87 per barrel from $9.44 or by approximately 26%. The royalty adjustments did not have a significant effect on reported volumes or average sales prices for natural gas or oil and condensate. Canadian Forest continues to receive additional information with respect to royalty calculations and anticipates that revisions to such calculations will continue to occur throughout 1997. The effects of future royalty adjustments cannot be predicted at this time. (6) Production costs were converted to common units of measure using a conversion ratio of one barrel of oil to six MCF of natural gas and one long ton of sulfur to 15 MCF of natural gas. Such production costs exclude all depreciation, depletion and provision for impairment associated with property and equipment. PRODUCTIVE WELLS The following summarizes total gross and net productive wells of the Company and its subsidiaries at December 31, 1996: Productive Wells (1) ------------------------ United States Canada ------------- ------ Gross (2) Gas 278 379 Oil 180 566 ----- ----- Totals (3) 458 945 ----- ----- ----- ----- Net (4) Gas 100.7 127.0 Oil 118.5 225.9 ----- ----- Totals 219.2 352.9 ----- ----- ----- ----- (1) Productive wells are producing wells and wells capable of production, including wells that are shut-in. (2) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (3) Includes 27 dual completions in the United States and 20 dual completions in Canada. Dual completions are counted as one well. If one completion is an oil completion, the well is classified as an oil well. (4) A net well is deemed to exist when the sum of fractional ownership working interests in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. 15 DEVELOPED AND UNDEVELOPED ACREAGE Forest and its subsidiaries held acreage as set forth below at December 31, 1996 and 1995. A majority of the developed acreage is subject to mortgage liens securing either the bank indebtedness or nonrecourse secured debt of the Company and its subsidiaries. A portion of the developed acreage is also subject to production payments. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 5 and 6 of Notes to Consolidated Financial Statements. Developed Acreage (1) Undeveloped Acreage (2) --------------------- ----------------------- Gross (3) Net (4) Gross (3) Net (4) --------- ------- --------- ------- United States: Louisiana offshore 145,549 58,662 53,212 20,774 Oklahoma 63,334 21,710 7,504 1,396 Texas onshore 123,959 61,529 15,813 8,394 Texas offshore 45,382 22,694 40,347 31,694 Wyoming 8,517 4,484 51,076 21,343 Other 26,304 10,959 6,114 1,773 ------- ------- ------- ------- 413,045 180,038 174,066 85,374 Canada Alberta 323,451 111,907 234,625 123,480 Other 61,301 41,191 283,124 43,731 ------- ------- ------- ------- 384,752 153,098 517,749 167,211 ------- ------- ------- ------- Total acreage at December 31, 1996 797,797 333,136 691,815 252,585 ------- ------- ------- ------- ------- ------- ------- ------- Total acreage at December 31, 1995 496,480 211,615 172,354 83,006 ------- ------- ------- ------- ------- ------- ------- ------- (1) Developed acres are those acres which are spaced or assigned to productive wells. (2) Undeveloped acres are considered to be those acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or natural gas, regardless of whether such acreage contains proved reserves. It should not be confused with undrilled acreage held by production under the terms of a lease. (3) A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned. (4) A net acre is deemed to exist when the sum of the fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof. During 1996, the Company's gross and net developed acreage increased approximately 61% and 57%, respectively, and gross and net undeveloped acreage increased approximately 301% and 204%, respectively. The increases were due primarily to the purchase of Canadian Forest. Approximately 29% of the Company's total net undeveloped acreage is under leases that have terms expiring in 1997, if not held by production, and another approximately 8% of net undeveloped acreage will expire in 1998 if not also held by production. 16 DRILLING ACTIVITY Forest and its subsidiaries owned interests in gross and net exploratory and development wells for the years ended December 31, 1996, 1995 and 1994 as set forth below. This information does not include wells drilled under farmout agreements. United States Canada -------------------- ------ 1996 1995 1994 1996 ---- ---- ---- ---- Gross Exploratory Wells: Dry (1) 4 3 2 4 Productive (2) 9 1 2 2 --- --- --- ---- 13 4 4 6 --- --- --- ---- --- --- --- ---- Net Exploratory Wells:(3) Dry (1) 2.0 1.3 2.0 2.9 Productive (2) 3.5 .3 1.3 1.4 --- --- --- ---- 5.5 1.6 3.3 4.3 --- --- --- ---- --- --- --- ---- Gross Development Wells: Dry (1) 3 - - 4 Productive (2) 15 6 5 70 --- --- --- ---- 18 6 5 74 --- --- --- ---- --- --- --- ---- Net Development Wells:(3) Dry (1) .5 - - .9 Productive (2) 1.9 .6 2.1 19.9 --- --- --- ---- 2.4 .6 2.1 20.8 --- --- --- ---- --- --- --- ---- (1) A dry well (hole) is a well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well. (2) Productive wells are producing wells and wells capable of production, including wells that are shut-in. (3) A net well is deemed to exist when the sum of fractional ownership working interests in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. FARMOUT AGREEMENTS Under a farmout agreement, outside parties undertake exploration activities using prospects owned by Forest. This enables the Company to participate in the exploration prospects without incurring additional capital costs, although with a substantially reduced ownership interest in each prospect. In 1996, eleven development wells and one exploratory well were drilled in the United States under farmout agreements. Nine of the development wells were productive and two were dry holes. The exploratory well was a dry hole. In Canada, twelve development wells and five exploratory wells were drilled in 1996 under farmout agreements. Ten of the development wells were productive and two were dry holes. Three of the exploratory wells were productive and two were dry holes. 17 PRESENT ACTIVITIES At December 31, 1996 Forest and its subsidiaries had four development wells that were in the process of being drilled. Two wells (both in Canada) were determined to be productive in 1997 and two wells (one in the U.S. and one in Canada) were determined to be dry holes. An additional development well was being drilled in Canada under a farmout agreement. This well was subsequently determined to be productive. DELIVERY COMMITMENTS At December 31, 1996 Forest and its subsidiaries were obligated to deliver, or to make cash settlement with respect to, approximately 4 BCF of natural gas under the terms of volumetric production payments. The delivery commitments cover approximately 9% of the estimated net proved reserves of natural gas attributable to the subject properties. The production payments are nonrecourse to other properties owned by the Company. For further information concerning the Company's volumetric production payment agreements, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 6 and 18 of Notes to Consolidated Financial Statements. The Company is further obligated to deliver approximately .6 BCF of natural gas under existing long-term contracts in the U.S. A significant portion of Canadian Forest's natural gas production is sold through the ProMark Netback Pool. At December 31, 1996 the ProMark Netback Pool had entered into fixed price contracts to sell approximately 10.7 BCF of natural gas in 1997 at an average price of $1.66 per MCF and approximately 5.4 BCF of natural gas in 1998 at an average price of approximately $1.88 per MCF. Canadian Forest is obligated to deliver approximately 25% of the volumes of natural gas subject to these contracts. 18 ITEM 3. LEGAL PROCEEDINGS Royalty owners had filed two separate class action lawsuits against the Company in the State District Court of Caddo County, Oklahoma. In each case the plaintiff alleged unjust enrichment, breach of fiduciary duty, constructive fraud and breach of contract. The claims in both suits were based on the allegation that the Company underpaid royalties on the consideration received pursuant to settlement agreements with ONEOK, Inc. in 1990 and 1992. MODRALL V. FOREST OIL CORPORATION, Case No. CJ-95-67, was filed on March 24, 1995, and the Court, on September 13, 1995, certified a class comprised of the royalty and overriding royalty owners in the three wells involved in the 1992 ONEOK, Inc. settlement. MERCO OF OKLAHOMA, INC. V. FOREST OIL CORPORATION, Case No. CJ-95-230, was filed on September 27, 1995. This suit involves the 1990 ONEOK, Inc. settlement. The plaintiffs in both suits sought actual damages in excess of $10,000, punitive damages in excess of $10,000, an accounting, interest and costs. There had been no specific determination of the amount in controversy in either case. The plaintiffs alleged in both cases that they were entitled to share in all value received by the Company under the aforesaid settlements, including proceeds not attributable to actual gas production. As a result of a ruling by the Oklahoma Supreme Court in a case involving similar issues, both of these cases were dismissed without prejudice on September 12, 1996. The Company entered into a Settlement Agreement and Release with El Paso Natural Gas Company ("El Paso"), effective May 15, 1987, which was later modified by a Partial Termination of Settlement Agreement and Release and Gas Purchase Agreement, effective January 1, 1989. These agreements settled the parties' disputes concerning take-or-pay deficiencies under eight gas purchase contracts covering 16 wells located in Washita County, Oklahoma. The Company received a demand letter dated November 22, 1995 from the same attorney who represented Modrall and Merco, on behalf of a royalty owner in one of the wells covered by the El Paso settlements. A class action petition was filed January 19, 1996 in WRIGHT v. FOREST OIL CORPORATION, et al., Case No. CJ-96-6 in the State District Court of Washita County, Oklahoma. Like the plaintiffs in the MODRALL and MERCO cases, the plaintiff in this case contended that Forest underpaid royalties on the consideration it received under the El Paso settlement. He asserted claims for breach of contract, unjust enrichment, breach of fiduciary duty, constructive fraud and bad faith breach of contract, and sought an accounting and an unspecified amount of actual and punitive damages, interest and costs. This case was also dismissed without prejudice on September 12, 1996 for the same reasons as set forth above. A Petition for Rehearing asking the Oklahoma Supreme Court to reconsider its ruling in the related case was denied. The Company, in the ordinary course of business, is a party to various other legal actions. In the opinion of management, none of these actions, or those discussed above, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition, liquidity or results of operations. 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 4A. EXECUTIVE OFFICERS OF FOREST The following information with respect to the executive officers of Forest is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Years with Name (A) Age Forest Office (B) - ---------------- --- ---------- ---------- William L. Dorn* 48 25 Chairman of the Board and Chairman of the Executive Committee. Chief Executive Officer until December 1995. President until November 1993. Chairman of the Nominating Committee. Robert S. Boswell* 47 11 President since November 1993 and Chief Executive Officer since December 1995. Vice President until November 1993 and Chief Financial Officer until December 1995. Member of the Executive Committee. Director of C.E. Franklin Ltd. and Saxon Petroleum Inc. David H. Keyte 40 9 Vice President and Chief Financial Officer since December 1995. Vice President and Chief Accounting Officer from December 1993 until December 1995. Prior thereto Corporate Controller. Chairman of the Company's Employee Benefits Committee. Director of Saxon Petroleum Inc. Bulent A. Berilgen 48 12 Vice President and Chief Technical Officer since May 1996. Prior thereto Vice President of Operations from December 1993 to May 1996. Prior thereto Vice President - Engineering and Development since January 1992. Director of Saxon Petroleum Inc. Forest D. Dorn 42 19 Vice President-Gulf Coast Region since August 1996. Vice President from February 1991 and General Business Manager from December 1993 to August 1996. Prior thereto General Manager - Operations since January 1992. 20 Years with Name (A) Age Forest Office (B) - ---------------- --- ---------- ---------- Neal A. Stanley 49 - Vice President - Western Region since August 1996. Prior thereto President of Teton Oil and Gas Corporation. V. Bruce Thompson 49 2 Vice President and General Counsel since August 1994. Vice President - Legal of Mid-America Dairymen, Inc. from November 1993 to August 1994. Chief of Staff for Oklahoma Congressman James M. Inhofe until November 1993. Kenton M. Scroggs 44 13 Vice President since December 1993 and prior thereto Treasurer. Member of the Company's Employee Benefits Committee. Daniel L. McNamara 51 25 Secretary and Corporate Counsel. Member of the Company's Employee Benefits Committee. Joan C. Sonnen 43 7 Controller since December 1993. Prior thereto Director of Financial Accounting and Reporting. ____________ *Also a Director (A) William L. Dorn and Forest D. Dorn are brothers. (B) The term of office of each officer is one year from the date of his or her election immediately following the last annual meeting of shareholders and until the officer's respective successor has been elected and qualified or until his or her earlier death, resignation or removal from office whichever occurs first. Each of the named persons has held the office indicated since the last annual meeting of shareholders, except as otherwise indicated. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK Forest Oil Corporation has one class of common equity securities outstanding, its Common Stock, par value $.10 per share (Common Stock). On January 5, 1996, the Company's shareholders approved a reverse stock split of the Common Stock. The reverse stock split resulted in the reclassification of each five shares of Common Stock outstanding into one share. On February 28, 1997 32,557,469 shares of Common Stock were held by 1,745 holders of record. Forest's Common Stock is traded on the Nasdaq National Market. The high and low intraday sales prices of the Common Stock for each quarterly period of the years presented as reported by the Nasdaq National Market are listed in the chart below. All of the following quotations have been adjusted to reflect the 5 to 1 reverse stock split of the Common Stock that occurred on January 8, 1996. There were no dividends on Common Stock in 1995, 1996 or in the first quarter of 1997. High Low ---- --- 1995 ---- First Quarter $ 12-3/16 $ 6-7/8 Second Quarter 11-7/8 7-3/16 Third Quarter 15-5/8 8-1/8 Fourth Quarter 16-9/16 10-5/8 1996 ---- First Quarter $ 16-1/2 $ 10-1/2 Second Quarter 13-5/8 11-1/4 Third Quarter 14-3/4 12-1/2 Fourth Quarter 17-7/8 12-3/8 1997 ---- First Quarter (through February 28) $ 19-3/8 $ 13-1/4 $.75 CONVERTIBLE PREFERRED STOCK The Company called for redemption on February 28, 1997 all 2,877,673 shares of its $.75 Convertible Preferred Stock. The redemption price was $10.00 per share plus accumulated and unpaid dividends to and including the date of redemption (for an aggregate redemption price of $10.06 per share). In lieu of cash redemption, prior to the close of business on February 21, 1997 the holders of the preferred shares had the right to convert each share into 0.7 share of Forest's Common Stock; 2,783,945 shares or 96.7% of the shares outstanding were converted into Forest's Common Stock. The remaining 93,728 preferred shares that were not tendered for conversion were redeemed by Forest at the redemption price of $10.06 per share (at a total cost to Forest of $942,904). Lehman Brothers Inc. purchased 65,616 shares of Forest Oil Common Stock to fund the cash requirement of the redemption in accordance with the terms of its standby purchase agreement with Forest. 22 DIVIDEND RESTRICTIONS The only restrictions on Forest's present or future ability to pay dividends are (i) the provisions of the New York Business Corporation Law (NYBCL), (ii) certain restrictive provisions in the Indenture executed in connection with Forest's 11 1/4% Senior Subordinated Notes due September 1, 2003, and (iii) the Company's Second Amended and Restated Credit Agreement dated January 31, 1997 with The Chase Manhattan Bank (Chase), as agent for a group of banks (the Credit Facility), under which the Company is restricted in amounts it may pay as dividends (other than dividends payable in Common Stock). Under these dividend restrictions, the Company was not prohibited from paying cash dividends on its Common Stock as of March 15, 1997. The Company has not paid dividends on its Common Stock during the past five years and does not anticipate that it will do so in the foreseeable future. The future payments of dividends, if any, on the Common Stock is within the discretion of the Board of Directors and will depend on the Company's earnings, capital requirements, financial condition and other relevant factors. There is no assurance that Forest will pay any dividends. For further information regarding the Company's equity securities and its ability to pay dividends on its Common Stock, see Notes 5, 8 and 9 of Notes to Consolidated Financial Statements. RECENT SALES OF UNREGISTERED SECURITIES On August 1, 1996 the Company issued 2,250,000 shares of Common Stock to Anschutz pursuant to the exercise of an option at a price of $11.64 per share. On November 5, 1996 the Company issued Anschutz 388,888 shares of Common Stock pursuant to the exercise of a warrant at a price of $10.50 per share. On November 5, 1996 the Company issued 2,000,000 shares of Common Stock to JEDI for the extinguishment of approximately $43,000,000 of debt. These transactions were exempt from registration under the Securities Act of 1933 (the 33 Act) pursuant to Section 4(2) of the 33 Act. On November 5, 1996 Anschutz also acquired 1,240,000 shares of Common Stock pursuant to the conversion of 620,000 shares of the Company's Second Series Preferred Stock in a transaction exempt from registration pursuant to Section 3(a)(9) of the 33 Act. 23 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following table sets forth selected data regarding the Company on a historical basis as of and for each of the years in the five-year period ended December 31, 1996. This data should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto. Years Ended December 31, ----------------------------------------------------- 1996 1995 1994 (1) 1993 1992 (2) ---- ---- -------- ---- ------- (In Thousands Except per Share Amounts and Volumes) FINANCIAL DATA Revenue: Marketing and processing $187,374 - - - - Oil and gas sales 128,713 82,275 114,541 102,883 99,239 Miscellaneous, net 1,387 181 1,406 2,265 13,947 -------- ------- ------- ------- ------- Total revenue $317,474 82,456 115,947 105,148 113,186 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Earnings (loss) before income taxes, cumulative effects of changes in accounting principles and extraordinary items $ 6,590 (18,003) (67,844) (10,705) 11,286 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Net earnings (loss) $ 3,305 (17,996) (81,843) (21,213) 7,298 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Weighted average number of common shares outstanding 27,163 7,360 5,619 4,399 2,755 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Net earnings (loss) attributable to common stock $ 1,147 (20,156) (84,004) (23,463) 4,950 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Primary earnings (loss) per share: (3) Earnings (loss) attributable to common stock before cumulative effects of changes in accounting principles and extraordinary items $ (.04) (2.74) (12.46) (2.64) 1.80 Cumulative effect of changes in accounting principles - - (2.49) (.26) - Extraordinary items .08 - - (2.44) - -------- ------- ------- ------- ------- Net earnings (loss) attributable to common stock $.04 (2.74) (14.95) (5.34) 1.80 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Total assets $563,458 321,043 324,832 426,755 378,532 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Long-term debt $168,859 193,879 207,054 194,307 168,321 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Other long-term liabilities $ 53,560 27,139 28,166 27,053 15,285 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Deferred revenue $ 7,591 15,137 35,908 67,228 67,066 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Shareholders' equity $242,443 44,297 6,086 88,156 59,881 -------- ------- ------- ------- ------- -------- ------- ------- ------- -------
24 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA (CONTINUED) Years Ended December 31, ----------------------------------------------------- 1996 1995 1994 (1) 1993 1992 (2) ---- ---- -------- ---- ------- (In Thousands Except per Share Amounts and Volumes) OPERATING DATA Annual production (4): Gas (MMCF) 42,496 33,342 48,048 41,114 29,174 Liquids (MBBLS) 2,749 1,173 1,543 1,493 1,450 Average price received (4): Gas (per MCF) (5) $ 1.89 1.77 1.90 1.88 1.70 Liquids (per Barrel) $ 17.59 15.86 14.83 16.97 18.14 Capital expenditures, net of asset sales $234,556 44,913 29,839 168,169 81,695 Proved Reserves (4) (6): Gas (MMCF) 337,250 238,128 246,996 273,382 194,655 Liquids (MBBLS) 24,014 10,541 7,532 8,198 7,560 Standardized measure of discounted future net cash flows relating to proved oil and gas reserves (6) $559,869 256,917 207,549 262,176 190,971 Total discounted future net cash flows relating to proved oil and gas reserves, including amounts attributable to volumetric production payments (6) $562,995 265,393 230,149 299,053 227,009
- ------------------- (1) Effective January 1, 1994 the Company changed its method of accounting for oil and gas sales from the sales method to the entitlements method. See Note 1 of Notes to Consolidated Financial Statements. (2) Financial data for the year ended December 31, 1992 include the effects of a gas contract settlement, which increased total revenue by $37,541,000 and net earnings by $24,043,000 or $8.73 per share. The average price received for natural gas for the year ended December 31, 1992 excludes the effects of the settlement. (3) Fully diluted earnings (loss) per share was the same as primary earnings (loss) per share in all years except 1992. In 1992, fully diluted earnings per share was $1.45. (4) Includes amounts attributable to required deliveries under volumetric production payments. See Notes 6 and 18 of Notes to Consolidated Financial Statements. (5) Amounts shown for 1995 exclude the effects of a gas contract settlement. Including such amount, the average sales price for 1995 was $1.90 per MCF. For further information regarding the gas contract settlement, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 15 of Notes to Consolidated Financial Statements. (6) The 1996 and 1995 amounts include 100% of the reserves owned by Saxon, a consolidated subsidiary in which the Company holds a majority interest. See Note 2 of Notes to Consolidated Financial Statements. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto. RESULTS OF OPERATIONS NET EARNINGS (LOSS). Net earnings for 1996 were $3,305,000 compared to a net loss of $17,996,000 in 1995. Earnings for the 1996 period include an extraordinary gain on extinguishment of debt of $2,166,000. The improved earnings from continuing operations in 1996 were attributable primarily to increased natural gas and liquids prices as well as increased natural gas and liquids production as a result of the acquisitions of Saxon Petroleum Inc. (Saxon) and Canadian Forest Oil Ltd. (Canadian Forest), which were completed in December 1995 and January 1996, respectively, and to the contribution made by Forest's Canadian marketing and processing subsidiary (ProMark), which was also acquired in January 1996. The net loss for 1995 was $17,996,000 compared to a net loss of $81,843,000 in 1994. The 1995 loss was primarily due to decreased oil and natural gas volumes and lower natural gas prices, offset by $4,263,000 of income associated with a gas contract settlement. The 1994 loss included a $58,000,000 writedown of the book value of the Company's oil and gas properties due to a ceiling test limitation and a charge of $13,990,000 relating to the change in the method of accounting for oil and gas sales from the sales method to the entitlements method. See "Accounting Policies". REVENUE. Total revenue increased 285% to $317,474,000 in 1996 from $82,456,000 in 1995 and decreased 29% in 1995 from $115,947,000 in 1994. The significant increase in total revenue in 1996 is due primarily to the acquisitions of ProMark, Canadian Forest and Saxon. Marketing and processing revenue attributable to the marketing activities of ProMark subsequent to its purchase on January 31, 1996 was $187,374,000. For the eleven months ended December 31, 1996 ProMark marketed approximately 851 MMCF of natural gas per day. Oil and gas sales revenue increased to $128,713,000 in 1996 from $82,275,000 in 1995, or by approximately 56%. Oil and gas sales in 1995 included $4,263,000 of income associated with a gas contract settlement with Columbia Gas Transmission ("Columbia"). The Company had entered into gas sales contracts with Columbia which were rejected by Columbia in connection with its bankruptcy proceedings. The income related to the settlement with Columbia represented approximately 5% of total oil and gas sales in 1995. Natural gas and liquids volumes increased 27% and 134% in 1996, respectively, primarily as a result of the Canadian acquisitions and new production from the Company's offshore Gulf of Mexico platform at High Island 116, partially offset by anticipated production declines in the United States. The average sales price received for natural gas in 1996 increased 7% compared to 1995, exclusive of the effects of income associated with the gas contract settlement. The average sales price received for liquids production in 1996 increased 11% compared to 1995. Oil and gas sales revenue decreased to $82,275,000 in 1995 from $114,541,000 in 1994, or by approximately 28%. In 1995, natural gas and oil production volumes were down 31% and 24%, respectively, compared to 1994. These decreases resulted primarily from limited capital expenditures in 1994 and 1995 that did not allow the Company to replace existing production through acquisitions and drilling. The average sales price for natural gas in 1995 decreased 7% compared to 1994, exclusive of the effects of the income associated with the gas contract settlement. The average sales price for oil in 1995 increased 7% compared to 1994. Oil and gas sales to Enron and certain of its affiliates (Enron Affiliates), the Company's largest customer, represented approximately 25% of oil and gas sales in 1996, compared to 38% in 1995 and 51% in 1994. The decreases during these periods are attributable primarily to the decreases in delivery requirements pursuant to volumetric production payments. In addition, the Company's spot market sales to Enron Affiliates increased to approximately 11 BCFE in 1996 from approximately 8 BCFE in 1995 as a result of higher production volumes available for sale. Spot market sales to Enron Affiliates in 1994 were approximately 16 BCFE. 26 The production volumes and average sales prices for the years ended December 31, 1996, 1995 and 1994 for Forest and its subsidiaries were as follows: Years Ended December 31, ---------------------------- 1996 (5) 1995 1994 -------- ---- ---- NATURAL GAS Total production (MMCF)(1) 42,496 33,342 48,048 Sales price received (per MCF)(2) $ 2.06 1.65 1.86 Effects of energy swaps (per MCF)(3) (.17) .12 .04 ------ ------ ------ Average sales price (per MCF)(2) $ 1.89 1.77 1.90 LIQUIDS Oil and condensate: Total production (MBBLS)(4) 2,272 1,121 1,482 Sales price received (per BBL) $20.38 16.36 14.97 Effects of energy swaps (per BBL)(3) (1.50) (.50) (.14) ------ ------ ------ Average sales price (per BBL) $18.88 15.86 14.83 Natural gas liquids: Total production (MBBLS) 477 52 61 Average sales price (per BBL) $11.46 15.81 14.79 Total liquids production (MBBLS) 2,749 1,173 1,543 Average sales price (per BBL) $17.59 15.86 14.83 - ------------------- (1) Total natural gas production includes scheduled deliveries under volumetric production payments, net of royalties, of 3,168 MMCF, 9,120 MMCF and 16,005 MMCF in 1996, 1995 and 1994, respectively. Natural gas delivered pursuant to volumetric production payment agreements represented approximately 7%, 27% and 33% of total natural gas production in 1996, 1995 and 1994, respectively. For further information concerning volumes and prices recorded under volumetric production payments, see Notes 6 and 18 of Notes to Consolidated Financial Statements. (2) Amounts shown for 1995 exclude the effects of a gas contract settlement. Including such amount, the sales price received and average sales price for natural gas in 1995 were $1.78 and $1.90 per MCF, respectively. For further information regarding the gas contract settlement, see Note 15 of Notes to Consolidated Financial Statements. (3) Energy swaps were entered into to hedge the price of spot market volumes against price fluctuation. Hedged natural gas volumes were 12,741 MMCF, 10,146 MMCF and 12,184 MMCF for the years ended December 31, 1996, 1995 and 1994, respectively. Hedged oil and condensate volumes were 895,600 barrels, 498,000 barrels and 370,000 barrels for the years ended December 31, 1996, 1995 and 1994, respectively. The aggregate gains (losses) under energy swap agreements were $(10,422,000), $3,536,000 and $1,810,000, respectively, for the years ended December 31, 1996, 1995 and 1994. (4) An immaterial amount of oil production is covered by scheduled deliveries under volumetric production payments. (5) Alberta's royalty program was restructured in 1994 and remained uncertain throughout much of 1995 and 1996. Production of natural gas liquids for the year ended December 31, 1996 was reduced by 79,000 barrels as a result of royalty adjustments, resulting in an increase in the reported average sales price for natural gas liquids to $11.46 per barrel from $9.70 or by approximately 18%. The royalty adjustments did not have a significant effect in reported volumes or average sales prices for natural gas or oil and condensate. Canadian Forest continues to receive additional information with respect to royalty calculations and anticipates that revisions to such calculations will continue to occur throughout 1997. The effects of future royalty adjustments cannot be predicted at this time. Miscellaneous net revenue of $1,387,000 in 1996 included the reversal of a $1,136,000 liability for royalties on the proceeds from the gas contract settlement with Columbia. Miscellaneous net revenue was $181,000 in 1995. Miscellaneous net revenue of $1,406,000 in 1994 included income from the sale of miscellaneous pipeline systems and equipment and the reversal of an accounts receivable reserve, partially offset by a reserve for settlement of a 27 royalty dispute and a payment of deferred maintenance costs of a real estate complex formerly used for general business purposes. MARKETING AND PROCESSING EXPENSE. In 1996, marketing and processing expense of $178,706,000 was recorded which relates primarily to the marketing activities of ProMark subsequent to its purchase on January 31, 1996. OIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense increased 43% to $32,199,000 in 1996 from $22,463,000 in 1995 due primarily to production expense associated with the newly-acquired Canadian properties. On an MCFE basis, production expense was $.55 per MCFE in 1996 compared to $.56 in 1995. Oil and gas production expense increased slightly to $22,463,000 in 1995 from $22,384,000 in 1994. On an MCFE basis, however, production expense increased to $.56 per MCFE in 1995 from $.39 per MCFE in 1994. The increased cost per MCFE from 1994 to 1995 is directly attributable to fixed components of oil and gas production expense being allocated over a smaller production base. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased 50% to $13,623,000 in 1996 compared to $9,081,000 in 1995 due primarily to the effect of Canadian acquisitions. General and administrative expense decreased 19% to $9,081,000 in 1995 compared to $11,166,000 in 1994 due primarily to a reduction in the size of the Company's workforce on March 1, 1995. The capitalization rate was approximately 36% in 1996 compared to 43% in 1995 and 40% in 1994. Changes in the capitalization rate result from changes in the percentage of employees' time spent working directly on exploration and development projects. Total overhead costs (capitalized and expensed general and administrative costs) were $21,396,000 in 1996, $15,857,000 in 1995 and $18,719,000 in 1994. Total overhead costs were approximately 35% higher in 1996 compared to 1995 due primarily to the addition of the Canadian operations, which increased Forest's salaried workforce to 179 at December 31, 1996 compared to 115 at December 31, 1995. Total overhead costs were approximately 15% lower in 1995 than in 1994. The Company's salaried workforce in the United States was 115 at December 31, 1995 compared to 143 at December 31, 1994. The decreases in total overhead costs and personnel in 1995 were due primarily to a reduction in the size of the Company's workforce effective March 1, 1995. The following table summarizes the total overhead costs incurred during the periods: Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In Thousands) Overhead costs capitalized $ 7,773 6,776 7,553 General and administrative costs expensed (1) 13,623 9,081 11,166 ------- ------ ------ Total overhead costs $21,396 15,857 18,719 ------- ------ ------ ------- ------ ------ (1) Includes $2,555,000 in 1996 related to marketing and processing operations. INTEREST EXPENSE. Interest expense of $23,307,000 in 1996 decreased $2,016,000 or 8% compared to 1995 due primarily to the restructuring and extinguishment of the nonrecourse secured loan and lower effective interest on the dollar denominated production payment. Interest expense of $25,323,000 in 1995 decreased $1,450,000 or 5% compared to 1994 due primarily to lower effective interest rates related to the nonrecourse secured loan and the dollar denominated production payment. DEPRECIATION AND DEPLETION EXPENSE. Depreciation and depletion expense increased 45% to $63,068,000 in 1996 from $43,592,000 in 1995 due to the increase in production, offset by a decrease in the depletion rate per unit of production. The depletion rate decreased to $1.01 per MCFE in 1996 compared to $1.06 per MCFE in 1995, resulting from the addition of lower cost Canadian production, partially offset by higher anticipated future costs in the United States due to expected increased costs for services. Depreciation and depletion expense decreased 33% 28 to $43,592,000 in 1995 from $65,468,000 in 1994 due to decreased production, as well as a decrease in the depletion rate per unit of production. The depletion rate decreased to $1.06 per MCFE for United States production in 1995 compared to $1.13 in 1994 due to writedowns of the Company's oil and gas properties taken in the third and fourth quarters of 1994. At December 31, 1996 the Company had undeveloped properties with a cost basis of approximately $30,046,000 in the U.S. and $13,870,000 in Canada which were excluded from depletion compared to $28,380,000 in the U.S. at December 31, 1995 and $30,441,000 in the U.S. at December 31, 1994. The increase in 1996 compared to 1995 is due primarily to the acquisition of undeveloped properties in the Canadian Forest purchase. IMPAIRMENT OF OIL AND GAS PROPERTIES. The Company was not required to record a writedown of the carrying value of its oil and gas properties in 1996 or 1995. The Company recorded a writedown of its oil and gas properties of $58,000,000 in 1994 due primarily to a decrease in spot market prices for natural gas. The average Gulf Coast spot price received by the Company for natural gas decreased from $3.89 per MCF at December 31, 1996 to approximately $1.80 per MCF at March 1, 1997. The West Central Texas Intermediate price for crude oil decreased from $23.75 per barrel at December 31, 1996 to approximately $18.00 per barrel at March 1, 1997. The average spot price received for Canadian natural gas production decreased from $2.76 per MMBTU at December 31, 1996 to approximately $1.82 per MMBTU at March 1, 1997. The Canadian spot price received for crude oil decreased from $25.92 per barrel at December 31, 1996 to approximately $20.30 per barrel at March 1, 1997. Writedowns of the full cost pools in the United States and Canada may be required if the depressed price environment persists, undeveloped property values decrease, estimated proved reserve volumes are revised downward or costs incurred in exploration, development, or acquisition activities exceed the discounted future net cash flows from the additional reserves, if any. ACCOUNTING POLICIES. The Company changed its method of accounting for oil and gas sales from the sales method to the entitlements method effective January 1, 1994. Under the sales method previously used by the Company, all proceeds from production credited to the Company were recorded as revenue until such time as the Company had produced its share of related reserves. Under the entitlements method, revenue is recorded based upon the Company's share of volumes sold, regardless of whether the Company has taken its proportionate share of volumes produced. Under the entitlements method, the Company records a receivable or payable to the extent it receives less or more than its proportionate share of the related revenue. The Company believes that the entitlements method is preferable because it allows for recognition of revenue based on the Company's actual share of jointly owned production and provides a better matching of revenue and related expenses. The cumulative effect of the change for the periods through December 31, 1993, was a charge of $13,990,000. The effect of this change on 1994 was an increase in earnings from operations of $3,584,000 and an increase in production volumes of 1,555,000 MCF. There were no related income tax effects in 1994. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" (SFAS No. 121). Oil and gas properties accounted for under the full cost method of accounting are excluded from the scope of SFAS No. 121, but will continue to be subject to the ceiling test limitation. SFAS No. 121 requires that impairment losses be recorded on other long-lived assets used in operations when indicators of impairment are present and either the undiscounted future cash flows estimated to be generated by those assets or the fair market value are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121 had no effect on the Company's financial statements. 29 Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), was issued by the Financial Accounting Standards Board in October 1995. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. The Company adopted SFAS No. 123 effective January 1, 1996, and will continue to use the measurement method prescribed by APB Opinion 25, as permitted under SFAS No. 123. The Company has included the pro forma disclosures required by SFAS No. 123 in Note 9 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company 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 nonrecourse production-based financing. In 1995, the Company completed a series of transactions with Anschutz and JEDI. For total consideration of $45,000,000, the Company issued to Anschutz 3,760,000 shares of Common Stock, 620,000 shares of a new series of convertible preferred stock and a warrant that entitled Anschutz to purchase 3,888,888 shares of Common Stock for $10.50 (the A Warrant). The Company restructured JEDI's existing loan, which had a principal balance of approximately $62,368,000 before unamortized discount of $4,984,000, into two tranches: a $40,000,000 tranche and an approximately $22,400,000 tranche. In consideration for the loan restructuring JEDI received a warrant to purchase 2,250,000 shares of Common Stock at $10.00 per share (the B Warrant). JEDI granted an option to Anschutz (the Anschutz Option) to purchase from JEDI shares purchased pursuant to the B Warrant at an escalating price ranging from $10.00 to $15.50 per share. In December 1995, JEDI exchanged the $22,400,000 tranche and the B Warrant for 1,680,000 shares of Common Stock. In connection with this exchange, the Company assumed JEDI's obligations under the Anschutz Option. Under the Anschutz Option, the Company was then obligated to issue shares directly to Anschutz that previously would have been issued to JEDI pursuant to the B Warrant. 30 In 1996, the Company completed additional transactions that improved its financial position considerably. On January 31, 1996 the Company and Saxon sold 13,200,000 shares of common stock for $11.00 per share in a public offering (the 1996 Public Offering). Of this amount, 1,060,000 shares were sold by Saxon and 12,140,000 shares were sold by Forest. The net proceeds to Forest from the issuance of the shares totaled approximately $125,000,000 after deducting issuance costs and underwriting fees and were used, along with an additional approximately $8,300,000 drawn under the Company's Credit Facility to complete the purchase of Canadian Forest and ProMark. The net proceeds to Saxon of approximately $11,000,000 were used to reduce its bank debt. On August 1, 1996 Anschutz exercised the Anschutz Option to purchase 2,250,000 shares of common stock for $26,200,000 or approximately $11.64 per share. Proceeds received by Forest were used primarily to fund a portion of 1996 capital expenditures. On November 5, 1996 the Company exchanged 2,000,000 shares of common stock plus approximately $13,500,000 in cash to extinguish approximately $43,000,000 of nonrecourse secured debt owed to JEDI. The JEDI debt bore interest at 12-1/2% per annum. In connection with this transaction, Anschutz acquired 1,628,888 shares of common stock by exercising a portion of the A Warrant to purchase 388,888 shares of common stock at $10.50 per share and by converting 620,000 shares of Forest's Second Series Preferred Stock into 1,240,000 shares of common stock. The fair value of the shares of common stock issued to JEDI was estimated based on the quoted market price of the common stock at the date of the transaction, less a discount of 7-1/2% to reflect the lock-up agreement with JEDI that limited JEDI's ability to transfer the shares before May 31, 1997, the size of the block of shares to be issued and the estimated brokerage fees on the ultimate disposition of the shares. The fair value of the common stock issued and the cash paid to JEDI, including related expenses of the transaction, was less than the carrying amount of the debt extinguished. Accordingly, the Company recorded an extraordinary gain on extinguishment of debt in the fourth quarter of 1996 of approximately $2,166,000. On November 14, 1996 the Company filed a shelf registration with the Securities and Exchange Commission to issue up to $250,000,000 in one or more forms of debt or equity securities. Except as otherwise provided in an applicable prospectus supplement, the net proceeds from the sale of the securities will be used for the acquisition of oil and gas properties, capital expenditures, the repayment of subordinated debentures or other debt, repayments of borrowings under revolving credit agreements, or for other general corporate purposes. 31 On February 7, 1997 the Company called for redemption all 2,877,673 shares of its $.75 Convertible Preferred Stock. This conversion eliminated all outstanding preferred stock from Forest's capital structure. In response to its call for redemption, 2,783,945 shares or 96.7% of the shares outstanding were tendered for conversion into common stock on or before the February 21, 1996 deadline. The remaining 93,728 preferred shares that were not tendered for conversion were redeemed by the Company at the redemption price of $10.06 per share (at a total cost of $942,904) on February 28, 1997. Lehman Brothers Inc. purchased 65,616 shares of the Company's common stock to fund the cash requirement of the redemption in accordance with the terms of its standby purchase agreement with Forest. Redemption of the $.75 Convertible Preferred Stock eliminates approximately $2,200,000 of annual preferred dividend payments. Many of the factors which may affect the Company's future operating performance and long-term liquidity are beyond the Company's control, including, but not limited to, oil and natural gas prices, governmental actions and taxes, the availability and attractiveness of properties for acquisition, the adequacy and attractiveness of financing and operational results. The Company continues 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 the Company, the issuance of net profits interests, sales of non-strategic assets, prospects and technical information, or joint venture financing. Availability of these sources of capital and, therefore, the Company's ability to execute its operating strategy will depend upon a number of factors, some of which are beyond the control of the Company. CASH FLOW. Historically, one of the Company's primary sources of capital has been net cash provided by operating activities (operating cash flow). The following summary table reflects comparative cash flow data for the Company for the years ended December 31, 1996, 1995 and 1994. Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In Thousands) Net cash provided (used) by operating activities $ 67,815 (3,062) 42,441 Net cash used by investing activities (226,867) (17,219) (32,307) Net cash provided (used) by financing activities 164,500 20,698 (14,126) Net cash provided by operating activities increased to $67,815,000 in 1996 compared to a net use of cash for operating activities of $3,062,000 in 1995, due to higher natural gas and liquids prices, increased natural gas and liquids production as a result of the Saxon and Canadian Forest acquisitions and the contribution made by ProMark and an increase in accounts payable during 1996. The Company used $226,867,000 for investing activities in 1996 compared to $17,219,000 in 1995. The increase is due primarily to the use of funds to acquire Canadian Forest and higher capital expenditures. Cash provided by financing activities was $164,500,000 in 1996 compared to $20,698,000 in 1995. The increase is due primarily to the net proceeds received from the 1996 Public Offering and the exercise by Anschutz of options and warrants. 32 CAPITAL EXPENDITURES. The Company's expenditures for property acquisition, exploration and development for the past three years were as follows: Years Ended December 31, ---------------------------- 1996 1995 1994 ---- ---- ---- (In Thousands) Property acquisition costs (1): Proved properties $140,875 26,487 9,553 Undeveloped properties 18,080 320 209 -------- ------ ----- 158,955 26,807 9,762 Exploration costs: Direct costs 40,831 11,528 15,229 Overhead capitalized 2,608 1,211 464 -------- ------ ----- 43,439 12,739 15,693 Development costs: Direct costs 36,559 7,633 10,000 Overhead capitalized 5,165 5,565 7,089 -------- ------ ----- 41,724 13,198 17,089 -------- ------ ----- $244,118 52,744 42,544 -------- ------ ----- -------- ------ ----- (1) 1996 amounts consist primarily of the allocation of purchase price to the oil and gas properties acquired in the purchase of Canadian Forest. 1995 amounts consist primarily of the allocation of purchase price to the oil and gas properties acquired in the purchase of Saxon. The Company's 1997 budgeted direct expenditures for exploration and development are approximately $64,000,000 and $61,000,000, respectively. Capitalized overhead in 1997 is expected to be approximately $8,000,000. The Company expects to be able to meet its 1997 capital expenditure financing requirements using cash flows generated by operations, sales of non-strategic assets and borrowings under existing lines of credit. However, there can be no assurance that the Company will have access to sufficient capital to meet its capital requirements. The planned levels of capital expenditures could be reduced if the Company experiences lower than anticipated net cash provided by operations or other liquidity needs or could be increased if the Company experiences increased cash flow or accesses additional sources of capital. The prices the Company receives for its future oil and natural gas production will significantly impact future operating cash flows. No prediction can be made as to the prices the Company will receive for its future oil and gas production. In addition, while the Company intends to continue a strategy of acquiring reserves that meet its investment criteria, no assurance can be given that the Company can locate or finance any property acquisitions. PENDING ACQUISITION: On March 4, 1997 Saxon announced an offer to purchase all of the issued and outstanding Class A shares of Truax Resources Corporation (Truax). Truax shareholders may elect to receive either $2.06 CDN or two Saxon shares for each Truax share tendered, subject to certain minimum and maximum aggregate amounts of Saxon shares. The value of the offer is approximately $38,000,000 CDN. The offer expires April 8, 1997 and is subject to a minimum of two-thirds of the outstanding Class A shares of Truax being tendered and the receipt of necessary regulatory approvals. Truax has recommended that its shareholders do not tender shares pursuant to the Saxon offer. Assuming that the tender offer is successful, Forest currently intends to exercise its rights under its equity participation agreement with Saxon to purchase additional shares to maintain its majority ownership position in Saxon. 33 DISPOSITIONS OF NON-STRATEGIC ASSETS. As a part of its operating strategy, the Company also conducts an ongoing disposition program of its non-strategic assets. Assets with little value or which are not consistent with the Company's ongoing operating strategy are identified for sale or trade. During 1996, the Company disposed of properties with estimated proved reserves of approximately 1.5 BCF of natural gas and 628,000 barrels of oil for total net proceeds of $6,916,000. In addition, Saxon received proceeds of approximately $10,959,000 representing the liquidation of its preferred shares in Archean Energy Ltd. These shares, which were received through a series of transactions relating to the 1992 sale of the Company's Canadian oil and gas properties, were transferred to Saxon by Forest in 1995. In 1995, the Company disposed of properties with estimated proved reserves of approximately 2.4 BCF of natural gas and 6,000 barrels of oil for total net proceeds of $8,715,000. BANK CREDIT FACILITIES. Under the Credit Facility with Chase, as amended, the Company may borrow up to $60,000,000 for working capital and/or general corporate purposes. The borrowing base is subject to formal redeterminations semi-annually, but may be changed at the banks' discretion at any time. The Credit Facility is secured by a lien on, and a security interest in, a majority of the Company's U.S. proved oil and gas properties and related assets (subject to prior security interests granted to holders of volumetric production payment agreements) and a pledge of accounts receivable. The maturity date of the Credit Facility is January 31, 2000. Under the terms of the Credit Facility, the Company is subject to certain covenants and financial tests, including restrictions or requirements with respect to working capital, cash flow, additional debt, liens, asset sales, investments, mergers, cash dividends and reporting responsibilities. At December 31, 1996 the outstanding balance under this facility was $26,400,000. The Company has also used the facility for a $1,500,000 letter of credit. On February 8, 1996 a newly-formed Canadian subsidiary of Forest entered into a credit agreement (the Canadian Credit Facility) with The Chase Manhattan Bank of Canada for the benefit of Canadian Forest and ProMark. The borrowing base under the Canadian Credit Facility is $60,000,000 CDN. The borrowing base is subject to formal redeterminations semi-annually, but may be changed by the bank at its discretion at any time. The maturity date of the Canadian Credit Facility is February 7, 1999. The Canadian Credit Facility is indirectly secured by substantially all the assets of Canadian Forest. Funds drawn under the Canadian Credit Facility can be used for general corporate purposes. Under the terms of the Canadian Credit Facility, the three Canadian subsidiaries are subject to certain covenants and financial tests, including restrictions or requirements with respect to working capital, cash flow, additional debt, liens, asset sales, investments, mergers, cash dividends and reporting responsibilities. At December 31, 1996 the outstanding balance under this facility was $32,500,000 (US). The Company has also used this facility for a letter of credit in the amount of $3,081,000 CDN. In addition to the credit facilities described above, Saxon has a revolving credit facility with a borrowing base of $20,000,000 CDN. The loan is subject to semi-annual review and has demand features; however, repayments are not required provided that borrowings are not in excess of the borrowing base and Saxon complies with other existing covenants. At December 31, 1996 there were no outstanding borrowings under this facility. At February 28, 1997 the amount outstanding under the Credit Facility was $34,600,000, the amount outstanding under the Canadian Credit Facility was $33,622,000 and the amount outstanding under the Saxon revolving credit facility was $7,821,000. WORKING CAPITAL. The Company had a working capital deficit of approximately $12,649,000 at December 31, 1996 compared to a deficit of approximately $9,181,000 at December 31, 1995. The increase in the deficit is attributable primarily to an increase in accounts payable related to exploration and development activities. The Company generally reports a working capital deficit at the end of a period. The working capital deficit is principally the result of accounts payable for capitalized exploration and development costs. Settlement of these payables is funded by cash flow from the Company's operations or, if necessary, by drawdowns on the Company's 34 long-term bank credit facilities. For cash management purposes, drawdowns on the credit facilities are not made until the due dates of the payables. At December 31, 1996 the Company had available borrowing capacity of approximately $60,000,000 under its long-term bank credit facilities. The Company's available credit at December 31, 1996 was adequate to fund the working capital deficit at that date. LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's natural gas production is sold through the ProMark Netback Pool. At December 31, 1996 the ProMark Netback Pool had entered into fixed price contracts to sell approximately 10.7 BCF of natural gas in 1997 at an average price of $1.66 CDN per MCF and approximately 5.4 BCF of natural gas in 1998 at an average price of approximately $1.88 CDN per MCF. Canadian Forest is obligated to deliver approximately 25% of the volumes of natural gas subject to these contracts. HEDGING PROGRAM. In addition to the volumes of natural gas and oil sold under long-term sales contracts and dedicated to volumetric production payments, the Company also uses energy swaps and other financial agreements to hedge against the effects of fluctuations in the sales prices for oil and natural gas produced. In a typical swap agreement, the Company receives the difference between a fixed price per unit of production and a price based on an agreed upon third-party index if the index price is lower. If the index price is higher, the Company pays the difference. The Company's current swaps are settled on a monthly basis. At December 31, 1996 the Company had natural gas swaps and collars for an aggregate of approximately 27.0 BBTU (billion British Thermal Units) per day of natural gas during 1997 at fixed prices ranging from $1.159 per MMBTU (million British Thermal Units) on an Alberta Energy Company "C" (AECO "C") basis to $2.728 per MMBTU on a New York Mercantile Exchange (NYMEX) basis and an aggregate of approximately 3.2 BBTU per day of natural gas during 1998 at fixed prices ranging from $1.159 (AECO "C" basis) to $2.540 (NYMEX basis) per MMBTU. The weighted average hedged price for natural gas under such agreements is $2.15 and $2.18 per MMBTU in 1997 and 1998, respectively. Subsequent to December 31, 1996 the Company entered into a collar to hedge 7.0 BBTU of natural gas per day from April 1997 to September 1997. The floor and ceiling price of the collar are $2.10 and $2.50 per MMBTU (NYMEX basis), respectively. At December 31, 1996 the Company had oil swaps for an aggregate of 1,964 barrels per day of oil during 1997 at fixed prices ranging from $17.90 to $21.05 (NYMEX basis). The weighted average hedged price for oil under such agreements is $19.77 per barrel. Subsequent to December 31, 1996, the Company entered into an oil swap to hedge 200 barrels of oil per day from February 1997 to July 1997 at a fixed price of $23.67 per barrel (NYMEX basis). The Company also entered into a 1998 oil swap to hedge 247 barrels per day from January 1998 to December 1998 at a fixed price of $20.00 per barrel (NYMEX basis). For further information on the Company's outstanding energy swaps, see Note 13 of Notes to Consolidated Financial Statements. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information concerning this Item begins on the following page. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 36 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Forest Oil Corporation: We have audited the accompanying consolidated balance sheets of Forest Oil Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forest Oil Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for oil and gas sales from the sales method to the entitlements method effective January 1, 1994. KPMG PEAT MARWICK LLP Denver, Colorado February 12, 1997 37 FOREST OIL CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, ----------------- 1996 1995 ---- ---- (In Thousands) ASSETS Current assets: Cash and cash equivalents $ 8,626 3,287 Accounts receivable 55,462 17,395 Other current assets 4,996 2,557 -------- ------- Total current assets 69,084 23,239 Net property and equipment, at cost, full cost method (Notes 5 and 6) 458,242 277,599 Investment in affiliate (Note 4) - 11,301 Goodwill and other intangible assets, net 29,439 - Other assets 6,693 8,904 -------- ------- $563,458 321,043 -------- ------- -------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft $ 4,682 2,055 Current portion of long-term debt (Note 5) 2,091 2,263 Accounts payable 64,811 17,456 Accrued interest 4,584 4,029 Other current liabilities 5,565 6,617 -------- ------- Total current liabilities 81,733 32,420 Long-term debt (Notes 3 and 5) 168,859 193,879 Other liabilities 19,844 27,139 Deferred revenue (Note 6) 7,591 15,137 Deferred income taxes 33,716 - Commitments and contingencies (Notes 10, 12 and 13) Minority interest (Note 2) 9,272 8,171 Shareholders' equity (Notes 2, 3, 5, 8 and 9): Preferred stock 15,827 24,359 Common stock, 30,541,105 shares in 1996 (10,660,291 shares in 1995) 3,053 1,066 Capital surplus 438,556 241,241 Common shares to be issued in debt restructuring - 6,073 Accumulated deficit (214,190) (217,495) Foreign currency translation (803) (1,407) Treasury stock, at cost, none in 1996 and 1,060,000 shares in 1995 - (9,540) -------- ------- Total shareholders' equity 242,443 44,297 -------- ------- $563,458 321,043 -------- ------- -------- ------- See accompanying Notes to Consolidated Financial Statements 38 FOREST OIL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- ------- ------- (In Thousands Except Per Share Amounts) Revenue: Marketing and processing $187,374 - - Oil and gas sales: Gas 80,111 59,084 91,309 Gas contract settlement (Note 15) - 4,263 - Oil, condensate and natural gas liquids 48,602 18,928 23,232 -------- ------- ------- Total oil and gas sales 128,713 82,275 114,541 Miscellaneous, net 1,387 181 1,406 -------- ------- ------- Total revenue 317,474 82,456 115,947 Expenses: Marketing and processing 178,706 - - Oil and gas production 32,199 22,463 22,384 General and administrative 13,623 9,081 11,166 Interest 23,307 25,323 26,773 Depreciation and depletion 63,068 43,592 65,468 Minority interest in loss of subsidiary (19) - - Provision for impairment of oil and gas properties - - 58,000 -------- ------- ------- Total expenses 310,884 100,459 183,791 -------- ------- ------- Earnings (loss) before income taxes, cumulative effect of change in accounting principle and extraordinary item 6,590 (18,003) (67,844) Income tax expense (benefit) (Note 7): Current 3,943 (7) 9 Deferred 1,508 - - -------- ------- ------- 5,451 (7) 9 -------- ------- ------- Earnings (loss) before cumulative effect of change in accounting principle and extraordinary item 1,139 (17,996) (67,853) Cumulative effect of change in accounting principle for oil and gas sales (Note 1) - - (13,990) -------- ------- ------- Earnings (loss) before extraordinary item 1,139 (17,996) (81,843) Extraordinary item - gain on extinguishment of debt (Note 3) 2,166 - - -------- ------- ------- Net earnings (loss) $3,305 (17,996) (81,843) -------- ------- ------- -------- ------- ------- Weighted average number of common shares outstanding 27,163 7,360 5,619 -------- ------- ------- -------- ------- ------- Earnings (loss) attributable to common stock $ 1,147 (20,156) (84,004) -------- ------- ------- -------- ------- ------- Primary and fully diluted earnings (loss) per common share: Loss attributable to common stock before cumulative effect of change in accounting principle and extraordinary item $ (.04) (2.74) (12.46) Cumulative effect of change in accounting principle - - (2.49) -------- ------- ------- Loss attributable to common stock before extraordinary item (.04) (2.74) (14.95) Extraordinary item - gain on extinguishment of debt .08 - - -------- ------- ------- Earnings (loss) attributable to common stock $ .04 (2.74) (14.95) -------- ------- ------- -------- ------- ------- See accompanying Notes to Consolidated Financial Statments 39 FOREST OIL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY COMMON SHARES TO BE ACCUMU- FOREIGN PREFERRED COMMON CAPITAL ISSUED IN DEBT LATED CURRENCY TREASURY STOCK STOCK SURPLUS RESTRUCTURING DEFICIT TRANSLATION STOCK --------- ------ ------- -------------- ------- ----------- -------- (In Thousands) Balance December 31, 1993 $ 15,845 565 195,977 - (117,656) (785) (5,790) Net loss - - - - (81,843) - - Exercise of employee stock options (Note 9) - 1 104 - - - - $.75 Convertible Preferred Stock dividends paid in cash (Note 8) - - (2,161) - - - - Treasury stock contributed to the Retire- ment Savings Plan and other (Note 10) - - (1,583) - - - 3,964 Foreign currency translation - - - - - (552) - ------- ------- -------- ----- --------- ------- ------- Balance December 31, 1994 15,845 566 192,337 - (199,499) (1,337) (1,826) Net loss - - - - (17,996) - - Issuance of Common Stock to Anschutz (Note 3) - 376 27,796 - - - - Issuance of Second Series Convertible Preferred Stock to Anschutz (Notes 3 and 8) 8,518 - - - - - - Issuance of warrants to Anschutz (Notes 3 and 9) - - 8,310 - - - - Issuance of warrants to JEDI (Note 3) - - 12,117 - - - - Costs associated with equity issued to Anschutz and JEDI (Note 3) - - (3,940) - - - - Common Stock issued in acquisition of Saxon (Notes 2 and 9) - 106 9,434 - - - (9,540) Common Stock issued and treasury stock contributed to the Retirement Savings Plan (Note 10) - 2 (1,425) - - - 1,826 $.75 Convertible Preferred Stock dividends paid in cash (Note 8) - - (540) - - - - $.75 Convertible Preferred Stock dividends paid in Common Stock (Note 8) - 16 (16) - - - - Conversion of $.75 Convertible Preferred Stock to Common Stock (Note 8) (4) - 4 - - - - Common shares to be issued in JEDI Exchange (Note 3) - - - 6,073 - - - Unfunded pension liability (Note 10) - - (2,836) - - - - Foreign currency translation - - - - - (70) - ------- ------- -------- ----- --------- ------- ------- Balance December 31, 1995 24,359 1,066 241,241 6,073 (217,495) (1,407) (9,540) NET EARNINGS - - - - 3,305 - - ISSUANCE OF COMMON STOCK, NET OF OFFERING COSTS AND MINORITY INTEREST EFFECT OF $706,000 (NOTE 9) - 1,214 124,613 - - - 9,540 COMMON SHARES ISSUED IN JEDI EXCHANGE (NOTE 3) - 168 5,905 (6,073) - - - EXERCISE OF ANSCHUTZ OPTION (NOTES 3 AND 9) - 225 25,962 - - - - EXERCISE OF ANSCHUTZ A WARRANT (NOTES 3 AND 9) - 39 4,044 - - - - ISSUANCE OF COMMON STOCK TO JEDI (NOTE 3) - 200 26,736 - - - - EXERCISE OF PUBLIC WARRANTS (NOTE 9) - 2 334 - - - - CONVERSION OF SECOND SERIES PREFERRED STOCK TO COMMON STOCK (NOTE 8) (8,518) 124 8,394 - - - - EXERCISE OF EMPLOYEE STOCK OPTIONS (NOTE 9) - 3 398 - - - - COMMON STOCK ISSUED AND TREASURY STOCK CONTRIBUTED TO THE RETIREMENT SAVINGS PLAN AND OTHER (NOTE 10) - 3 398 - - - - $.75 CONVERTIBLE PREFERRED STOCK DIVIDENDS PAID IN CASH (NOTE 8) - - (1,619) - - - - $.75 CONVERTIBLE PREFERRED STOCK DIVIDENDS PAID IN COMMON STOCK (NOTE 8) - 9 (9) - - - - CONVERSION OF $.75 CONVERTIBLE PREFERRED STOCK TO COMMON STOCK (NOTE 8) (14) - 14 - - - - UNFUNDED PENSION LIABILITY (NOTE 10) - - 2,145 - - - - FOREIGN CURRENCY TRANSLATION - - - - - 604 - ------- ------- -------- ----- --------- ------- ------- BALANCE DECEMBER 31, 1996 $ 15,827 3,053 438,556 - (214,190) (803) - ------- ------- -------- ----- --------- ------- ------- ------- ------- -------- ----- --------- ------- -------
See accompanying Notes to Consolidated Financial Statements 40 FOREST OIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 1995 1994 ---- ---- ---- (In Thousands) Cash flows from operating activities: Earnings (loss) before cumulative effect of change in accounting principle and extraordinary item $ 1,139 (17,996) (67,853) Adjustments to reconcile loss before cumulative effect of change in accounting principle and extraordinary item to net cash provided (used) by operating activities: Depreciation and depletion 63,068 43,592 65,468 Amortization of deferred debt costs 1,253 1,015 1,029 Provision for impairment of oil and gas properties - - 58,000 Deferred income tax expense 1,508 - - Interest added to principal 3,059 574 2,205 Minority interest in net loss of subsidiary (19) - - Other, net 792 1,714 2,033 (Increase) decrease in accounts receivable (17,441) 4,285 4,839 (Increase) decrease in other current assets (921) (152) 1,078 Increase (decrease) in accounts payable 19,417 (11,458) 4,021 Increase (decrease) in accrued interest and other current liabilities 3,506 (3,865) 2,941 Proceeds from volumetric production payments - - 4,353 Amortization of deferred revenue (7,546) (20,771) (35,673) -------- ------- -------- Net cash provided (used) by operating activities 67,815 (3,062) 42,441 Cash flows from investing activities: Acquisition of subsidiaries: Current assets (22,304) (1,437) - Property and equipment (144,099) (26,530) - Goodwill and other intangible assets (31,163) - - Current liabilities 23,562 2,139 - Long-term debt 701 16,183 - Other liabilities 1,376 - - Deferred taxes 35,575 353 - Minority interest - 8,171 - -------- ------- -------- Cash paid for acquisitions of subsidiaries (136,352) (1,121) - Capital expenditures for property and equipment (108,332) (27,098) (42,780) Proceeds from sales of assets 17,875 8,715 12,941 Increase (decrease) in other assets, net (58) 2,285 (2,468) -------- ------- -------- Net cash used by investing activities (226,867) (17,219) (32,307) Cash flows from financing activities: Proceeds from bank borrowings 194,018 82,600 31,500 Repayments of bank borrowings (176,641) (91,800) (23,500) Proceeds from nonrecourse secured loan - - 1,400 Repayments of nonrecourse secured loan (13,881) (1,143) - Repayments of production payment obligation (3,622) (2,316) (2,771) Redemptions and repurchases of subordinated debentures and secured notes - - (7,171) Proceeds from common stock offering, net of offering costs 136,073 - - Proceeds from exercise of warrants and options 31,945 - 105 Proceeds from capital stock and warrants issued, net - 41,060 - Payment of preferred stock dividends (1,079) (540) (2,161) Debt issuance costs (3) (491) (772) Increase (decrease) in cash overdraft 2,627 (2,390) 551 Decrease in other liabilities, net (4,937) (4,282) (11,307) -------- ------- -------- Net cash provided (used) by financing activities 164,500 20,698 (14,126) Effect of exchange rate changes on cash (109) 1 (88) -------- ------- -------- Net increase (decrease) in cash and cash equivalents 5,339 418 (4,080) Cash and cash equivalents at beginning of year 3,287 2,869 6,949 -------- ------- -------- Cash and cash equivalents at end of year $ 8,626 3,287 2,869 -------- ------- -------- -------- ------- -------- Cash paid during the year for: Interest $ 15,040 22,138 23,989 -------- ------- -------- -------- ------- -------- Income taxes $ 3,428 - 9 -------- ------- -------- -------- ------- --------
See accompanying Notes to Consolidated Financial Statements 41 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - ------------------------------------------------------------------------------- BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - Forest Oil Corporation is engaged in the acquisition, exploration, development, production and marketing of natural gas and crude oil in North America. The Company was incorporated in New York in 1924, the successor to a company formed in 1916, and has been publicly held since 1969. The Company is active in several of the major exploration and producing areas in and offshore the United States and in Canada. The consolidated financial statements include the accounts of Forest Oil Corporation and its consolidated subsidiaries (Forest or the Company). Significant intercompany balances and transactions are eliminated. The Company generally consolidates all subsidiaries in which it controls over 50% of the voting interests. Entities in which the Company does not have a direct or indirect majority voting interest are generally accounted for using the equity method. In the course of preparing the consolidated financial statements, management makes various assumptions and estimates to determine the reported amounts of assets, liabilities, revenue and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions and estimates will occur as a result of the passage of time and the occurrence of future events and, accordingly, actual results could differ from amounts estimated. Unless otherwise indicated, all share amounts, share prices and per share amounts have been adjusted to give effect to a 5 to 1 reverse stock split that was effective on January 8, 1996. CASH EQUIVALENTS - For purposes of the statements of cash flows, the Company considers all debt instruments with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT - The Company uses the full cost method of accounting for oil and gas properties. Separate cost centers are maintained for each country in which the Company has operations. During 1996, the Company's oil and gas operations were conducted in the United States and in Canada. During 1995 and 1994, the Company's oil and gas operations were conducted solely in the United States. All costs incurred in the acquisition, exploration and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration and development activities) are capitalized. Capitalized costs applicable to each cost center are depleted using the units of production method. A reserve is provided for estimated future costs of site restoration, dismantlement and abandonment activities as a component of depletion. Unusually significant investments in unproved properties, including related capitalized interest costs, are not depleted pending the determination of the existence of proved reserves. As of December 31, 1996, 1995 and 1994, there were undeveloped property costs of $30,046,000, $28,380,000 and $30,441,000, respectively, which were not being depleted in the United States and costs of $13,870,000 which were not being depleted in Canada. Of the undeveloped costs in the United States not being depleted at December 31, 1996, approximately 46% were incurred in 1996, 9% in 1995, 3% in 1994, 40% in 1993 and 2% in 1992. All of the undeveloped properties in Canada not being depleted at December 31, 1996 were acquired in 1996. Depletion per unit of production was determined based on conversion to common units of measure using one barrel of oil as an equivalent to six thousand cubic feet (MCF) of natural gas. Depletion per unit of production (MCFE) for each of the Company's cost centers was as follows: United States Canada ------------- ------ 1994 $1.13 - 1995 1.06 - 1996 1.12 .85 42 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): - ------------------------------------------------------------------------------- Pursuant to full cost accounting rules, capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. As a result of this limitation on capitalized costs, the accompanying financial statements include a provision for impairment of oil and gas property costs of $58,000,000 in the United States in 1994. Gain or loss is recognized only on the sale of oil and gas properties involving significant reserves. Buildings, transportation and other equipment are depreciated on the straight-line method based upon estimated useful lives of the assets ranging from five to forty-five years. Net property and equipment at December 31 consists of the following: 1996 1995 ---- ---- (In Thousands) Oil and gas properties $1,457,212 1,216,027 Buildings, transportation and other equipment 10,993 10,502 ---------- --------- 1,468,205 1,226,529 Less accumulated depreciation, depletion and valuation allowance 1,009,963 948,930 ---------- --------- $ 458,242 277,599 ---------- --------- ---------- --------- GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill and other intangible assets recorded in the acquisition of the Company's gas marketing subsidiary consist of the following at December 31, 1996: 1996 ---- (In Thousands) Goodwill $16,728 Gas marketing contracts 14,594 ------- 31,322 Less accumulated amortization 1,883 ------- $29,439 ------- ------- Goodwill is being amortized on a straight line basis over twenty years. The amount attributed to the value of gas marketing contracts acquired is being amortized on a straight line basis over the average life of such contracts of twelve years. GAS MARKETING - The Company's gas marketing subsidiary, ProMark, enters into fixed price agreements to purchase and sell natural gas. ProMark's general strategy for this business is to enter into offsetting purchase and sales contracts. Net open positions relating to these contracts do occur, but have not been significant to date. Revenue from the sale of the gas is recorded as marketing revenue and the cost of the gas sold is recorded as marketing expense. ProMark also provides natural gas marketing aggregation services for third parties. Fees earned for such services are recorded as marketing revenue as the services are performed. OIL AND GAS SALES - The Company changed its method of accounting for oil and gas sales from the sales method to the entitlements method effective January 1, 1994. Under the sales method previously used by the Company, all proceeds from production credited to the Company were recorded as revenue until such time as the Company had produced its share of related reserves. Under the entitlements method, revenue is recorded based upon the Company's share of volumes sold, regardless of whether the Company has taken its proportionate share of volumes produced. 43 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): - ------------------------------------------------------------------------------- Under the entitlements method, the Company records a receivable or payable to the extent it receives less or more than its proportionate share of the related revenue. The Company believes that the entitlements method is preferable because it allows for recognition of revenue based on the Company's actual share of jointly owned production and provides a better matching of revenue and related expenses. The cumulative effect of the change for the periods through December 31, 1993 was a charge of $13,990,000. The effect of this change on 1994 was an increase in earnings from operations of $3,584,000 and an increase in production volumes of 1,555,000 MCF. There were no related income tax effects in 1994. As of December 31, 1996 the Company had produced approximately 2.6 BCF more than its entitled share of production. The estimated value of this imbalance of approximately $4,355,000 is included in the accompanying consolidated balance sheet as a short-term liability of $1,650,000 and a long-term liability of $2,705,000. HEDGING TRANSACTIONS - In order to minimize exposure to fluctuations in oil and natural gas prices, the Company hedges the price of future oil and natural gas production by entering into certain contracts and financial arrangements. These instruments are accounted for as hedges when the instrument is designated as a hedge of the related production and there exists a high degree of correlation between the fair value of the instrument and the fair value of the hedged production. The degree of correlation is assessed periodically. Gains and losses related to these hedging transactions are recognized as adjustments to therevenue recorded for the related production. Costs associated with the purchase of certain hedging instruments are deferred and amortized against revenue related to the hedged production. INCOME TAXES - The Company uses the asset and liability method of accounting for income taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's Canadian operations is the Canadian dollar. Assets and liabilities related to the Company's Canadian operations are generally translated at current exchange rates, and related translation adjustments are reported as a component of shareholders' equity. Income statement accounts are translated at the average rates during the period. EARNINGS (LOSS) PER SHARE - Primary earnings (loss) per share is computed by dividing net earnings (loss) attributable to common stock by the weighted average number of common shares and common share equivalents outstanding during each period, excluding treasury shares. Net earnings (loss) attributable to common stock represents net earnings (loss) less preferred stock dividend requirements of $2,158,000 in 1996, $2,160,000 in 1995 and $2,161,000 in 1994. Common share equivalents include, when applicable, dilutive stock options and warrants using the treasury stock method. Fully diluted earnings (loss) per share is computed assuming, in addition to the above, (i) that convertible preferred stock was converted at the beginning of each period or date of issuance, if later, and (ii) any additional dilutive effect of stock options and warrants. The effects of these assumptions were anti-dilutive in 1996, 1995 and 1994. RECLASSIFICATIONS - Certain amounts in prior years' financial statements have been reclassified to conform to the 1996 financial statement presentation. 44 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (2) ACQUISITIONS: - ------------------------------------------------------------------------------- During 1995, the Company completed acquisitions totaling $26,807,000. The most significant of these was the purchase on December 20, 1995 of a 56% economic (49% voting) interest in Saxon Petroleum Inc. (Saxon) for approximately $22,000,000. Saxon is a Canadian exploration and production company with headquarters in Calgary, Alberta and operations concentrated in western Alberta. In the transaction, Forest received from Saxon 40,800,000 voting common shares, 12,300,000 nonvoting common shares, 15,500,000 convertible preferred shares and warrants to purchase 5,300,000 common shares. The preferred shares and the nonvoting common shares of Saxon are convertible into voting common shares at any time. In exchange, Forest transferred to Saxon its preferred shares of Archean Energy, Ltd., issued to Saxon 1,060,000 common shares of Forest and paid Saxon $1,500,000 CDN. The preferred shares of Archean Energy, Ltd. were recorded at their historical carrying value of $11,301,000. The Forest common shares issued to Saxon were recorded at their estimated fair value determined by reference to the quoted market price of the shares immediately preceding the announcement of the acquisition. Since Forest has majority voting control over Saxon as a result of the voting common shares that it owns and proxies that it holds, it has accounted for Saxon as a consolidated subsidiary from the date of its acquisition. The Company did not record any production or results of operations of Saxon for the period from December 20 to December 31, 1995 as the results of operations for such period were not significant. The Forest common shares held by Saxon were recorded as treasury stock on Forest's consolidated balance sheet at December 31, 1995. In January 1996, Saxon sold these shares in a public offering of Forest Common Stock and used the proceeds to reduce its bank debt. In September 1996, the preferred shares of Archean were redeemed for cash at their approximate carrying value. Subsequent to December 31, 1996 Forest converted its preferred shares of Saxon into 27,192,983 nonvoting common shares and purchased 3,158,142 voting common shares and 2,380,608 nonvoting common shares of Saxon pursuant to an equity participation agreement. These transactions increased Forest's economic interest in Saxon to 66%. On January 31, 1996 the Company completed the acquisition of ATCOR Resources Ltd. of Calgary, Alberta for approximately $136,000,000, including acquisition costs of approximately $1,000,000. The purchase was funded by the net proceeds of a Common Stock offering and approximately $8,300,000 drawn under the Company's bank credit facility. The exploration and production business of ATCOR was renamed Canadian Forest Oil Ltd. (Canadian Forest). Canadian Forest's principal reserves and producing properties are located in Alberta and British Columbia, Canada. As part of the Canadian Forest acquisition, Forest also acquired ATCOR's natural gas marketing business which was renamed Producers Marketing Ltd. (ProMark). 45 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (2) ACQUISITIONS (CONTINUED): - ------------------------------------------------------------------------------- The consolidated balance sheet of Forest includes the accounts of Saxon and Canadian Forest at December 31, 1996. The consolidated statements of operations include the results of operations of Saxon effective January 1, 1996 and the results of operations of Canadian Forest effective February 1, 1996. The following unaudited pro forma consolidated statements of operations information assumes that the Common Stock offering and the acquisitions of Saxon and Canadian Forest occurred as of January 1, 1995: Pro Forma Year Ended December 31, --------------------------------- 1996 1995 ---- ---- (In Thousands Excluding Per Share Amounts) Revenue: Marketing and processing $ 200,715 139,444 Oil and gas sales 132,423 129,326 Miscellaneous, net 1,387 132 --------- ------- Total revenue $ 334,525 268,902 --------- ------- --------- ------- Earnings (loss) before income taxes, and extraordinary item $ 7,512 (9,680) --------- ------- --------- ------- Net earnings (loss) $ 3,687 (15,972) --------- ------- --------- ------- Primary earnings (loss) per share $ .06 (.81) --------- -------- --------- -------- Fully diluted earnings (loss) per share $ .05 (.81) --------- -------- --------- -------- (3) ANSCHUTZ AND JEDI TRANSACTIONS: - ----------------------------------------------------------------------------- During 1995 and 1996, the Company consummated transactions with The Anschutz Corporation (Anschutz) and with Joint Energy Development Investments Limited Partnership (JEDI), a Delaware limited partnership the general partner of which is an affiliate of Enron Corp. (Enron). Pursuant to a purchase agreement between the Company and Anschutz, Anschutz Purchased 3,760,000 shares of the Company's Common Stock and 620,000 shares of a new series of preferred stock which were convertible into 1,240,000 additional shares of Common Stock for a total consideration of $45,000,000. The preferred stock had a liquidation preference of $18.00 per share and received dividends ratably with the Common Stock. In addition, Anschutz received a warrant that entitled it to purchase 3,888,888 shares of the Company's Common Stock for $10.50 per share (the A Warrant). The A Warrant was scheduled to expire July 27, 1998. The Anschutz investment was made in two closings. At the first closing, which occurred on May 19, 1995, Anschutz loaned the Company $9,900,000. The loan carried interest at 8% per annum. The loan was nonrecourse to the company and was secured by oil and gas properties owned by the Company, the preferred stock of Archean Energy Ltd., and a cash collateral account with an initial balance of $2,000,000. At the second closing, which occurred in July 1995, Anschutz converted the loan into 1,100,000 shares of Common Stock and the shares issued were recorded at the carrying amount of the loan ($9,900,000). At the second closing, Anschutz purchased an additional 2,660,000 shares of Common Stock, the convertible preferred stock and the A Warrant for $35,100,000. The total proceeds received by the Company at the second closing were allocated based on the relative fair market values of the Common Stock ($18,272,000), convertible preferred stock ($8,518,000) and the A Warrant ($8,310,000) issued. The Company also entered into a shareholders agreement with Anschutz pursuant to which Anschutz agreed to certain voting, acquisition, and transfer limitations regarding its shares of Common Stock for five years after the second closing. 46 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (3) ANSCHUTZ AND JEDI TRANSACTIONS (CONTINUED): - ------------------------------------------------------------------------------- At the second closing on July 27, 1995, Forest and JEDI restructured JEDI'S existing loan which had a principal balance of approximately $62,368,000 before unamortized discount of $4,984,000. As a part of the restructuring, the existing JEDI loan balance was divided into two tranches: A $40,000,000 tranche, which bore interest at the rate of 12.5% per annum and was due and payable in full on December 31, 2000; and an approximately $22,400,000 tranche, which did not bear interest and was due and payable in full on December 31, 2002. JEDI also relinquished the net profits interest that it held in certain properties of the Company. In consideration, JEDI received a warrant (the B Warrant) that entitled it to purchase 2,250,000 shares of the Company's Common Stock for $10.00 per share. The B Warrant was recorded at its estimated fair value. The fair value of the B Warrant was estimated to be approximately $12,100,000, representing the amount determined using the Black-Scholes Option Pricing Model, based on the market value of the stock at the date of the transaction, less a discount of 10% to reflect the size of the block of shares to be issued and the estimated brokerage fees on the ultimate disposition of the shares. Also at the second closing, JEDI granted an option to Anschutz (the Anschutz Option), pursuant to which Anschutz was entitled to purchase from JEDI up to 2,250,000 shares of the Company's Common Stock at a purchase price per share equal to the lesser of (a) $10.00 plus 18% per annum from July 27, 1995 to the date of exercise of the option, or (b) $15.50. The Anschutz Option was scheduled to terminate on July 27, 1998. JEDI was to satisfy its obligations under the Anschutz Option by exercising the B Warrant. The Company also agreed to use the proceeds from the exercise of the A Warrant to pay principal and interest on the $40,000,000 tranche of the JEDI loan. As a result of the loan restructuring and the issuance of the B Warrant, the Company reduced the recorded amount of the related liability to approximately $45,493,000. No gain or loss was recorded on the loan restructuring since the estimated fair value of the restructured loan and the B Warrant was approximately equal to the original loan balance. In December 1995, JEDI exchanged the $22,400,000 tranche and the B Warrant for 1,680,000 shares of Common Stock (the JEDI Exchange). The fair value of the 1,680,000 shares of Common Stock was estimated to be $15,400,000 based on the quoted market price of the Common Stock at the date of the transaction, less a discount of 35% to reflect the shareholder agreement with JEDI that limited JEDI's ability to vote the shares or to transfer the shares before July 27, 1998, the size of the block of stock and the estimated brokerage fees on the ultimate disposition of the shares. No gain or loss was recorded on the exchange since the estimated fair value of the Common Stock issued less the estimated fair value of the B warrant reacquired was approximately equal to the carrying amount of the $22,400,000 tranche. Pursuant to the JEDI Exchange, the Company assumed JEDI's obligations under the Anschutz Option. Under the Anschutz Option, the Company was then obligated to issue shares directly to Anschutz that previously would have been issued to JEDI pursuant to the B Warrant. On August 1, 1996 the Anschutz Corporation exercised the Anschutz Option to purchase 2,250,000 shares of Common Stock for $26,200,000 or approximately $11.64 per share. Proceeds received by Forest were used primarily to fund a portion of 1996 capital expenditures. On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock plus approximately $13,500,000 cash to extinguish approximately $43,000,000 of nonrecourse secured debt then owed to JEDI. In connection with this transaction, Anschutz acquired 1,628,888 shares of Common Stock by exercising a portion of the A Warrant to purchase 388,888 shares of Common Stock at $10.50 per share and by converting 620,000 shares of Forest's Second Series Preferred Stock into 1,240,000 shares of Common Stock. The term of the remaining 3,500,000 warrants held by Anschutz was extended to July 27, 1999. The fair value of the shares of Common Stock issued to JEDI was estimated based on the quoted market price of the Common Stock at the date of the transaction, less a discount of 7-1/2% to reflect the lock-up agreement with JEDI that limited JEDI's ability to transfer the shares before May 31, 1997, the size of the block of shares to be issued and the estimated brokerage fees on the ultimate disposition of the shares. The fair value of the Common Stock issued and the cash paid to JEDI, including 47 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (3) ANSCHUTZ AND JEDI TRANSACTIONS (CONTINUED): - ------------------------------------------------------------------------------- related expenses of the transaction, was less than the carrying amount of the debt extinguished. Accordingly, the Company recorded an extraordinary gain on extinguishment of debt in the fourth quarter of 1996 of approximately $2,166,000. (4) INVESTMENT IN AFFILIATE: - ------------------------------------------------------------------------------- In 1992, the Company sold its Canadian assets and related operations to CanEagle resources corporation (CanEagle) for approximately $51,250,000 in Canadian funds ($41,000,000 U.S.). In the transaction, the Company received cash of approximately $28,000,000 CDN ($22,400,000 U.S.), net of expenses, and provided financing in the aggregate principal amount of $22,000,000 CDN ($17,600,000 U.S.). On June 24, 1994 CanEagle sold a significant portion of its oil and gas properties to a third party. In conjunction with this transaction, the Company received $6,124,000 CDN ($4,400,000 U.S.) and exchanged its investment in CanEagle for shares of preferred stock of a newly formed entity, Archean Energy, Ltd. (Archean). The Company accounted for the proceeds from the 1992 and 1994 transactions as reductions in the carrying value of its investment in CanEagle. The preferred shares of Archean were recorded at an amount equal to the remaining carrying value of the Company's investment in CanEagle. The Company accounted for its investment in Archean (and CanEagle prior to June 24, 1994) in a manner analagous to equity accounting. Losses were recognized to the extent that losses were attributable to the Company's interest. Earnings were recognized only if realization was assured. Under this method, no earnings or losses were recognized in 1996, 1995 or 1994. In December 1995, in connection with the Saxon acquisition, the Company transferred its Archean preferred stock to Saxon and the Company continued to account for the investment in Archean at its historical carrying value. In September 1996, the preferred shares of Archean were redeemed for cash at their approximate carrying value. (5) LONG-TERM DEBT: - ------------------------------------------------------------------------------- Long-term debt at December 31 consists of the following: 1996 1995 ---- ---- Credit facility $ 26,400 23,800 Canadian Forest credit facility 32,500 - Saxon credit facility - 16,437 Nonrecourse secured loan - 40,322 Production payment obligation 12,596 16,218 11-1/4% Senior Subordinated Notes 99,421 99,365 -------- -------- 170,917 196,142 Less current portion (2,058) (2,263) -------- -------- Long-term debt $168,859 193,879 -------- -------- -------- -------- CREDIT FACILITY: The Company has a secured credit facility (the Credit Facility) with The Chase Manhattan Bank, NA. (Chase) as agent for a group of banks. Under the Credit Facility, as amended, the Company may borrow up to $60,000,000 for working capital and/or general corporate purposes. Advances under this facility bear interest at rates ranging from the banks' prime rate to prime plus 3/4% or, alternatively, the London interbank offered rate (LIBOR) plus 1.0% to LIBOR plus 1 3/4% depending on the ratio of debt to total capitalization for the Company. The borrowing base is subject to formal redetermination semi-annually, but may be changed at the banks' discretion at any time. 48 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (5) LONG-TERM DEBT (CONTINUED): - ------------------------------------------------------------------------------- The Credit Facility is secured by a lien on, and a security interest in, a majority of the Company's domestic proved oil and gas properties and related assets (subject to prior security interests granted to holders of volumetric production payment agreements) and a pledge of accounts receivable. The maturity date of the Credit Facility is January 31, 2000. Under the terms of the Credit Facility, the Company is subject to certain covenants and financial tests, including restrictions or requirements with respect to working capital, cash flow, additional debt, liens, asset sales, investments, mergers, cash dividends on capital stock and reporting responsibilities. At December 31, 1996 notes payable of $26,400,000 were outstanding under the Credit Facility with interest at rates ranging from 7.00% to 8.75% per annum. The Company has also used the Credit Facility for a $1,500,000 letter of credit. CANADIAN FOREST CREDIT FACILITY: On February 8, 1996 a newly-formed Canadian subsidiary of Forest entered into a credit agreement (the Canadian Credit Facility) with The Chase Manhattan Bank of Canada for the benefit of Canadian Forest and ProMark. The borrowing base under the Canadian Credit Facility is $60,000,000 CDN. The borrowing base is subject to formal redeterminations semi-annually, but may be changed by the bank at its discretion at any time. The maturity date of the Canadian Credit Facility is February 7, 1999. The Canadian Credit Facility is indirectly secured by substantially all the assets of Canadian Forest. Funds drawn under the Canadian Credit Facility can be used for general corporate purposes. Under the terms of the Canadian Credit Facility, the three Canadian subsidiaries are subject to certain covenants and financial tests including restrictions or requirements with respect to working capital, cash flow, additional debt, liens, asset sales, investments, mergers, cash dividends and reporting responsibilities. At December 31, 1996 the outstanding balance under this facility was $32,500,000 (US) with interest at rates ranging from 7.25% to 7.3125% per annum. Canadian Forest has entered into interest rate swaps which fix the interest rate on approximately $22,000,000 of long-term debt at 10.055% to 10.55% with terms expiring in 1998. The Company has also used this facility for a letter of credit in the amount of $3,081,000 CDN. SAXON CREDIT FACILITY: Saxon has a revolving credit facility with a borrowing base of $20,000,000 CDN. The loan is subject to semi-annual review and has demand features; however, repayments are not required provided that borrowings are not in excess of the borrowing base and Saxon complies with other existing covenants. At December 31, 1996 there was no outstanding balance under this facility. NONRECOURSE SECURED LOAN: On December 30, 1993, the Company entered into a nonrecourse secured loan agreement with JEDI. the terms of the JEDI loan were restructured in 1995 as described in Note 3. Under the terms of the restructured JEDI loan, the Company was required to make payments based on the net proceeds, as defined, from certain subject properties. Payments under the JEDI loan were due monthly and were equal to 90% of total net operating income from the secured properties, reduced by 80% of allowable capital expenditures, as defined. On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock plus approximately $13,500,000 cash to extinguish the remaining balance of the nonrecourse secured debt owed to JEDI of approximately $43,000,000. See Note 3. PRODUCTION PAYMENT OBLIGATION: The dollar-denominated production payment was entered into in 1992 to finance property acquisitions. The original amount of the dollar-denominated production payment was $37,550,000, which was recorded as a liability of $28,805,000 after a discount to reflect a market rate of interest of 15.5%. At December 31, 1996 the remaining principal amount was $16,981,000 and the recorded liability was $12,596,000. Under the terms of this production payment, the Company must make a monthly cash payment which is the greater of a base amount or 85% of net proceeds from the subject properties located in the United States, as defined, except that the amount required to be paid in any given month shall not exceed 100% of the net proceeds from the subject properties. The Company retains a management fee equal to 10% of sales from the properties, which is deducted in the calculation of net proceeds. The Company's current estimate, based on expected production and prices, budgeted capital expenditure levels and expected discount amortization, is that 1997 payments will reduce the recorded liability by approximately $2,058,000, which amount is included in current liabilities, increase the recorded liability by 49 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (5) LONG-TERM DEBT (CONTINUED): - ------------------------------------------------------------------------------- approximately $1,022,000 in 1998, and reduce the recorded liability by $975,000 in 1999, $2,433,000 in 2000 and $2,038,000 in 2001. Properties to which approximately 3% of the Company's estimated proved reserves are attributable, on an mcfe basis, are dedicated to this production payment financing. 11-1/4% SENIOR SUBORDINATED NOTES: On September 8, 1993 the Company completed a public offering of $100,000,000 aggregate principal amount of 11-1/4% Senior Subordinated Notes due September 1, 2003. The Senior Subordinated Notes were issued at a price of 99.259% yielding 11.375% to the holders. The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after September 1, 1998 initially at a redemption price of 105.688%, plus accrued interest to the date of redemption, declining at the rate of 1.896% per year to September 1, 2000 and at 100% thereafter. Under the terms of the Senior Subordinated Notes, the Company must meet certain tests before it is able to pay cash dividends or make other restricted payments, incur additional indebtedness, engage in transactions with its affiliates, incur liens and engage in certain sale and leaseback arrangements. The terms of the Senior Subordinated Notes also limit the Company's ability to undertake a consolidation, merger or transfer of all or substantially all of its assets. In addition, the Company is, subject to certain conditions, obligated to offer to repurchase Senior Subordinated Notes at par value plus accrued and unpaid interest to the date of repurchase, with the net cash proceeds of certain sales or dispositions of assets. Upon a change of control, as defined, the Company will be required to make an offer to purchase the Senior Subordinated Notes at 101% of the principal amount thereof, plus accrued interest to the date of purchase. (6) DEFERRED REVENUE: - -------------------------------------------------------------------------------- From April 1991 through July 1994, the Company entered into various volumetric production payments with entities affiliated with Enron for net proceeds of $139,058,000. Under the terms of these production payments, the Company was required to deliver 80.1 BCF of natural gas and 770,000 barrels of oil over periods ranging from three to eight years. The Company is required to deliver the scheduled volumes from the subject properties or to make a cash payment for volumes produced but not delivered, in combination not to exceed a specified percentage of monthly production. If production levels are not sufficient to meet scheduled delivery commitments, the Company must account for and make up such shortages, at market-based prices, from future production. The Company is responsible for royalties and for production costs associated with operating the properties subject to the production payment agreements. The Company may grant liens on properties subject to the production payment agreements, but it must notify prospective lienholders that their rights are subject to the prior rights of the production payment owner. Amounts received under the production payments were recorded as deferred revenue. Volumes associated with amortization of deferred revenue for the years ended December 31, 1996, 1995 and 1994 were as follows: Net sales volumes attributable to production Volumes delivered (1) payment deliveries (2) ----------------------------- -------------------------- Natural Gas Oil Natural Gas Oil (MMCF) (MBBLS) (MMCF) (MBBLS) ----------- ------- --------- ------- 1996 3,721 87 3,168 74 1995 11,045 173 9,120 145 1994 19,985 218 16,005 182 (1) Amounts settled in cash in lieu of volumes were $1,641,000, $2,433,000 and $5,742,000 for the years ended December 31, 1996, 1995, and 1994, respectively. (2) Represents volumes required to be delivered to Enron affiliates net of estimated royalty volumes. 50 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (6) DEFERRED REVENUE (CONTINUED): - -------------------------------------------------------------------------------- Future amortization of deferred revenue, based on the scheduled deliveries under the production payment agreements, is as follows: Net sales volumes Volumes required to be attributable to production delivered to Enron payment deliveries (1) Annual -------------------- ------------------------ Amortization Natural Gas Natural Gas ------------ (MMCF) (MMCF) (In Thousands) ----------- ----------- 1997 $ 2,439 1,410 1,008 1998 1,592 892 637 1999 1,352 757 541 Thereafter 2,208 1,237 884 ------- ----- ----- $ 7,591 4,296 3,070 ------- ----- ----- ------- ----- -----
(1) Represents volumes required to be delivered to Enron net of estimated royalty volumes. (7) INCOME TAXES: - -------------------------------------------------------------------------------- The income tax expense (benefit) is different from amounts computed by applying the statutory Federal income tax rate for the following reasons: 1996 1995 1994 ---- ---- ---- (In Thousands) Tax expense (benefit) at 35% of income (loss) before income taxes, cumulative effects of changes in accounting principles and extraordinary item $ 2,300 (6,367) (23,749) Change in the valuation allowance for deferred tax assets attributable to income (loss) before income taxes, cumulative effects of changes in accounting principles and extraordinary item (367) 5,732 23,220 Canadian earnings taxed at higher effective rate 1,068 - - Canadian Crown payments (net of Alberta Royalty Tax Credit) not deductible For tax purposes 2,799 - - Canadian resource allowance (3,005) - - Non-deductible depletion and amortization 1,694 - - Expiration of tax carryforwards 643 535 455 Other 319 93 83 ------- ---- ---- Total income tax expense (benefit) $ 5,451 (7) 9 ------- ---- ---- ------- ---- ----
51 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (7) INCOME TAXES (CONTINUED): - ------------------------------------------------------------------------------- Deferred income taxes generally result from recognizing income and expenses at different times for financial and tax reporting. In the U.S., differences result in part from capitalization of certain development, exploration and other costs under the full cost method of accounting, recording proceeds from the sale of properties in the full cost pool, and the provision for impairment of oil and gas properties for financial accounting purposes. In Canada, differences result in part from accelerated cost recovery of oil and gas capital expenditures for tax purposes. The components of the net deferred tax liability at December 31, 1996 and 1995 are as follows: 1996 1995 ---- ---- (In Thousands) Deferred tax assets: Allowance for doubtful accounts $ 296 283 Accrual for retirement benefits 1,128 1,223 Accrual for medical benefits 2,220 2,220 Accrual for sales recorded on the entitlement method 1,499 2,920 Accrual for interest rates swaps 509 - Net operating loss carryforward 46,828 39,264 Depletion carryforward 6,958 6,958 Investment tax credit carryforward 2,576 3,219 Alternative minimum tax credit carryforward 2,187 2,187 Other 613 243 --------- -------- Total gross deferred tax assets 64,814 58,517 Less valuation allowance (43,999) (45,124) --------- -------- Net deferred tax assets 20,815 13,393 Deferred tax liabilities: Property and equipment (48,475) (13,393) Deferred income on long term contracts (6,014) - Other (42) - --------- -------- Total gross deferred tax liabilities (54,531) (13,393) --------- -------- Net deferred tax liability $(33,716) - --------- -------- --------- -------- The net change in the total valuation allowance for the year ended December 31, 1996 was a decrease of $1,125,000, which includes a decrease in the valuation allowance of $758,000 attributable to the extraordinary gain. 52 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (7) INCOME TAXES (CONTINUED): - -------------------------------------------------------------------------------- The Alternative Minimum Tax (AMT) credit carryforward available to reduce future U.S. Federal regular taxes aggregated $2,187,000 at December 31, 1996. this amount may be carried forward indefinitely. U.S. Federal regular and amt net operating loss carryforwards at December 31, 1996 were $133,795,000 and $130,142,000, respectively, and will expire in the years indicated below: Regular AMT ------- --- (In Thousands) 2000 $ 3,590 4,975 2005 8,307 - 2008 28,999 31,799 2009 22,817 22,964 2010 45,736 46,058 2011 24,346 24,346 -------- -------- $133,795 130,142 -------- -------- -------- -------- AMT net operating loss carryforwards can be used to offset 90% of AMT income in future years. Investment tax credit carryforwards available to reduce future U.S. Federal income taxes aggregated $2,576,000 at December 31, 1996 and expire at various dates through the year 2001. Percentage depletion carryforwards available to reduce future U.S. Federal taxable income aggregated $19,879,000 at December 31, 1996. This amount may be carried forward indefinitely. Canadian tax pools available to reduce future Canadian Federal income taxes aggregated approximately $78,000,000 at December 31, 1996. These tax pool balances are deductible on a declining balance basis ranging from ten to one hundred percent of the balance annually. These amounts may be carried forward indefinitely. The availability of some of these U.S. Federal tax attributes to reduce current and future U.S. taxable income of the Company is subject to various limitations under the Internal Revenue Code. In particular, the Company's ability to utilize such tax attributes could be limited due to the occurrence of an "ownership change" within the meaning of Section 382 of the Internal Revenue Code resulting from the Anschutz transaction in 1995 and the public stock issuance in 1996. under the general provisions of Section 382 of the code, the Company's net operating loss carryforwards will be subject to an annual limitation as to their use of approximately $5,700,000. Even though the Company is limited in its ability to use the net operating loss carryovers under these provisions of Section 382, it may be entitled to use these net operating loss carryovers to offset (a) gains recognized in the five years following the ownership change on the disposition of certain assets, to the extent that the value of the assets disposed of exceeds their tax basis on the date of the ownership change or (b) any item of income which is properly taken into account in the five years following the ownership change but which is attributable to periods before the ownership change ("built-in gain"). The ability of the Company to use these net operating loss carryovers to offset built-in gain first requires that the Company have total built-in gains at the time of the ownership change which are greater than a threshold amount. In addition, the use of these net operating loss carryforwards to offset built-in gain cannot exceed the amount of the total built-in gain. The Company has not finalized its calculation of the amount of built-in gains at the date of the ownership change, but estimates that its ability to fully utilize its net operating loss carryforwards may be limited by these provisions. Due to limitations in the Internal Revenue Code, other than the Section 382 limitations discussed above, the Company believes it is unlikely that it will be able to use any significant portion of its investment tax credit carryforwards before they expire. 53 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (8) PREFERRED STOCK: - ------------------------------------------------------------------------------- $.75 CONVERTIBLE PREFERRED STOCK: The Company had 10,000,000 shares of $.75 Convertible Preferred Stock authorized, par value $.01 per share, of which there were 2,877,673 shares outstanding at December 31, 1996 and 2,880,173 shares outstanding at December 31, 1995, with an aggregate liquidation preference of $28,776,730 at December 31, 1996 and $28,801,730 at December 31, 1995. This stock was convertible at any time, at the option of the holder, at the rate of .7 shares of Common Stock for each share of $.75 Convertible Preferred Stock, subject to adjustment upon occurrence of certain events. During 1996, 2,500 shares of $.75 Convertible Preferred Stock were converted into 1,750 shares of Common Stock; during 1995, 800 shares of $.75 Convertible Preferred Stock were converted into 560 shares of Common Stock; there were no conversions in 1994. The $.75 Convertible Preferred Stock was redeemable, in whole or in part, at the option of the Company, after July 1, 1996 at $10.00 per share plus accumulated and unpaid dividends. Cumulative annual dividends of $.75 per share were payable quarterly, in arrears, on the first day of February, May, August and November, when and as declared. Until December 31, 1993, the Company was required to pay such dividends in shares of Common Stock. After such date, dividends could be paid in cash or, at the Company's election, in shares of Common Stock or in a combination of cash and Common Stock; however, the Company was prohibited from paying cash dividends on its $.75 Convertible Preferred Stock from the February 1, 1995 dividend through the March 8, 1996 dividend due to restrictions contained in the Credit Facility with its lending banks. After such date, dividends could be paid in cash or at the Company's election, in shares of Common Stock or in a combination of cash and Common Stock. Under the terms of the $.75 Convertible Preferred Stock, Common Stock delivered in payment of dividends was valued for dividend payment purposes at between 75% and 90%, depending on trading volume, of the average last reported sales price of the Common Stock during a specified period prior to the record date for the dividend payment. During any period in which dividends on preferred stock were in arrears, no dividends or distributions, except for dividends paid in shares of Common Stock, could be paid or declared on the Common Stock, nor could any shares of Common Stock be acquired by the Company. The Company called for redemption on February 28, 1997 all 2,877,673 shares of its $.75 Convertible Preferred Stock. The redemption price was $10.00 per share plus accumulated and unpaid dividends to and including the date of redemption (for an aggregate redemption price of $10.06 per share). In lieu of cash redemption, prior to the close of business on February 21, 1997 the holders of the preferred shares had the right to convert each share into 0.7 share of Forest's Common Stock. As of February 21, 1997 2,783,945 shares or 96.7% of the shares outstanding were tendered for conversion into Common Stock. The remaining 93,728 shares that were not tendered for conversion were redeemed by the Company at the redemption price of $10.06 per share on February 28, 1997. SECOND SERIES PREFERRED STOCK: At December 31, 1995 the Company had 620,000 shares of Second Series Preferred Stock authorized, par value $.01 per share, of which there were 620,000 shares outstanding, with an aggregate liquidation preference of $11,160,000. Each share of Second Series Preferred Stock (1) was convertible into 2 shares of Common Stock, (2) had no right to vote, (3) had the right to receive dividends on the dates and in the form that dividends were payable on the Common Stock, and (4) had the right, upon any liquidation, dissolution or winding up of the Company, before any distribution is made on any shares of Common Stock, to be paid the amount of $18.00 and, after there shall have been paid to each share of Common Stock the amount of $9.00, had the right to receive distributions on the dates and in the form that distributions are payable on the Common Stock. On November 5, 1996 all 620,000 shares of the Company's Second Series Preferred Stock were converted into 1,240,000 shares of Common Stock. (9) COMMON STOCK: COMMON STOCK: The Company has 200,000,000 shares of Common Stock authorized, par value $.10 per share. On January 5, 1996 a 5-to-1 reverse stock split was approved by the Company's shareholders. The reverse split became effective on January 8, 1996. unless otherwise indicated, all share amounts have been adjusted to give effect to the 5-to-1 reverse stock split. 54 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (9) COMMON STOCK (CONTINUED): - ------------------------------------------------------------------------------- On January 31, 1996 13,200,000 shares of Common Stock were sold for $11.00 per share in a public offering. Of this amount 1,060,000 shares were sold by Saxon and 12,140,000 were sold by Forest. The net proceeds to Forest and Saxon from the issuance of shares totaled approximately $136,000,000 after deducting issuance costs and underwriting fees. In October 1993, the Board of Directors adopted a shareholders' rights plan (the Plan) and entered into the rights agreement. The Company paid a dividend distribution of one Preferred Share Purchase Right (the Rights) on each outstanding share of the Company's Common Stock. The Rights are exercisable only if a person or group acquires 20% or more of the Company's Common Stock or announces a tender offer which would result in ownership by a person or group of 20% or more of the Common Stock. Each Right initially entitles each shareholder to buy 1/100th of a share of a new series of Preferred Stock at an exercise price of $30.00, subject to adjustment upon certain occurrences. Each 1/100th of a share of such new Preferred Stock that can be purchased upon exercise of a right has economic terms designed to approximate the value of one share of Common Stock. The Rights will expire on October 29, 2003, unless extended or terminated earlier. In connection with the Anschutz transaction, the Company amended the Rights Agreement to exempt from the provisions of the Rights Agreement shares of Common Stock acquired by Anschutz and JEDI in the Anschutz and JEDI transactions, including shares later acquired pursuant to the conversion of the Second Series Preferred Stock or the exercise of the A Warrant and the Anschutz option. The amendment to the Rights Agreement did not exempt other shares of Common Stock acquired by Anschutz or JEDI from the provisions of the Rights Agreement. WARRANTS: At December 31, 1995 the Company had outstanding 1,244,715 warrants to purchase shares of its Common Stock (the public warrants). Each Public Warrant entitled the holder to purchase one-fifth share of Common Stock at a price of $3.00 and was noncallable. During 1996, 112,185 warrants were exercised to purchase 22,437 shares of Common Stock. On October 1, 1996 the remaining Public Warrants expired. In December 1995, the Company assumed JEDI's obligations under the Anschutz Option. On August 1, 1996 Anschutz exercised the Anschutz Option for $26,200,000 or approximately $11.64 per share and Anschutz received 2,250,000 shares of Common Stock. At December 31, 1996 the Company has outstanding the A Warrant that is held by Anschutz. At that date, the A Warrant entitled the holder to purchase 3,500,000 shares of Common Stock at a price of $10.50 per share. The Warrant expires on July 27, 1999. On November 5, 1996 Anschutz exercised a portion of the A Warrant and purchased 388,888 shares of Common Stock at $10.50 per share. STOCK OPTIONS: In March 1992, the Company adopted the 1992 Stock Option Plan under which non-qualified stock options may be granted to key employees and non-employee directors. The aggregate number of shares of Common Stock which the Company may issue under options granted pursuant to this plan may not exceed 10% of the total number of shares outstanding or issuable at the date of grant pursuant to outstanding rights, warrants, convertible or exchangeable securities or other options. The exercise price of an option may not be less than 85% of the fair market value of one share of the Company's Common Stock on the date of grant. The options vest 20% on the date of grant and an additional 20% on each grant anniversary date thereafter. 55 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (9) COMMON STOCK (CONTINUED): - ------------------------------------------------------------------------------- The following table summarizes the activity in the Company's stock-based compensation plan for the years ended December 31, 1994, 1995 and 1996: Weighted Average Number of Number of Exercise Shares Shares Price Exercisable --------- -------- ----------- Outstanding at December 31, 1993 610,800 $ 19.99 155,320 Granted at fair value 62,000 25.00 Exercised (7,000) 15.00 Cancelled (7,000) 25.00 --------- -------- Outstanding at December 31, 1994 658,800 20.46 372,080 Cancelled (30,800) 20.52 --------- -------- Outstanding at December 31, 1995 628,000 20.46 461,200 Granted at fair value 1,383,900 12.74 Exercised (35,120) 11.42 Cancelled (515,200) 20.47 --------- -------- Outstanding at December 31, 1996 1,461,580 $ 13.37 362,460 --------- -------- --------- -------- The fair value of each option granted in 1996 was estimated using the Black-Scholes option pricing model with the following assumptions: expected option life of 5 years; risk free interest rates ranging from 5.261% to 6.022%; estimated volatility of 59.95%; and dividend yield of zero percent. The weighted average fair market value of options granted during 1996 was estimated to be $7.22 per share based on these assumptions. 56 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (9) COMMON STOCK (CONTINUED): - -------------------------------------------------------------------------------- The following table summarizes information about options outstanding at December 31, 1996: Options Outstanding Options Excercisable ---------------------------------- --------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number of Contractual Exercise Number of Exercise Exercise Price Shares Life Price Shares Price -------------- --------- ----------- -------- --------- --------- $11.25-12.63 666,080 9.23 $11.53 107,360 $11.59 $14.00-15.00 737,500 9.45 14.17 197,100 14.34 $25.00 58,000 5.75 25.00 58,000 25.00 ------------ --------- ---- ------ ------- ------ $11.25-25.00 1,461,580 9.20 $13.37 362,460 $15.23 ------------ --------- ---- ------ ------- ------ ------------ --------- ---- ------ ------- ------ The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost is recognized for options granted at a price equal to the fair market value of the common stock. Had compensation cost for the Company's stock-based compensation plan been determined using the fair value of the options at the grant date, the Company's net income for the year ended December 31, 1996 would have been $2,230,000 and net earnings per share would have been less than $.01 per share. There were no stock options granted in 1995; accordingly, no compensation cost would have been recognized in that year. (10) EMPLOYEE BENEFITS - -------------------------------------------------------------------------------- PENSION PLANS: The Company has a qualified defined benefit pension plan which covers its U.S. employees (Pension Plan). The Pension Plan has been curtailed and all benefit accruals were suspended effective May 31, 1991. The benefits under the Pension Plan are based on years of service and the employee's average compensation during the highest consecutive sixty-month period in the fifteen years prior to retirement. No contribution was made to the Plan in 1996, 1995 or 1994. The following table sets forth the Pension Plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31: 1996 1995 -------- -------- (In Thousands) Actuarial present value of accumulated benefit obligation (all benefits are vested) $(25,959) $(27,485) -------- -------- -------- -------- Projected benefit obligation for service rendered to date $(25,959) $(27,485) Plan assets at fair market value, consisting primarily of listed stocks, bonds and other fixed income obligations 24,897 24,270 -------- -------- Unfunded pension liability (1,062) (3,215) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 2,012 4,133 -------- -------- Pension asset recognized in the balance sheet $ 950 $ 918 -------- -------- -------- -------- 57 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (10) EMPLOYEE BENEFITS (CONTINUED): - -------------------------------------------------------------------------------- For 1996, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.75% and the expected long-term rate of return on assets was 9%. For 1995, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% and the expected long-term rate of return on assets was 9%. For 1994 the discount rate used in determining the actuarial present value of the projected benefit obligation was 9% and the expected long-term rate of return on assets was 9%. The components of net pension expense (benefit) for the years ended December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 ------- ------- ------- (In Thousands) Net pension expense (benefit) included the following components: Interest cost on projected benefit obligation $ 1,926 $ 2,049 $ 1,976 Actual return on plan assets (3,056) (3,243) (245) Net amortization and deferral 1,098 1,234 (1,955) ------- ------- ------- Net pension expense (benefit) $ (32) $ 40 $ (224) ------- ------- ------- ------- ------- ------- The Company has a non-qualified unfunded supplementary retirement plan that provides certain officers with defined retirement benefits in excess of qualified plan limits imposed by Federal tax law. Benefit accruals under this plan were suspended effective May 31, 1991 in connection with suspension of benefit accruals under the Pension Plan. At December 31, 1996 the projected benefit obligation under this plan totaled $604,000, which amount is included in other liabilities in the accompanying balance sheet. The projected benefit obligation is determined using the same discount rate as is used for calculations for the Pension Plan. In 1993, as a result of the change in the discount rate for the Pension Plan and the supplementary retirement plan, the Company recorded a liability of $3,038,000, representing the unfunded pension liability, and a corresponding decrease in capital surplus. As a result of changes in the discount rate for the Pension Plan and the supplementary retirement plan, the Company records corresponding changes in the liability and capital surplus. In 1994, the Company reduced the liability representing the unfunded pension liability by approximately $1,570,000, with a corresponding increase in capital surplus. In 1995, the Company increased the unfunded pension liability by approximately $2,836,000, with a corresponding decrease in capital surplus. In 1996, the Company reduced the unfunded pension liability by approximately $2,145,000, with a corresponding increase in capital surplus. Canadian Forest's employees are members of a non-contributory defined benefit pension plan (Canadian Pension Plan). The benefits under the Canadian Pension Plan are based on years of service, the employee's average annual compensation during the highest consecutive sixty month period of pensionable service and the employee's age at retirement. Canadian Forest's contribution to the Canadian Pension Plan was $47,000 in 1996. 58 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (10) EMPLOYEE BENEFITS (CONTINUED): - -------------------------------------------------------------------------------- The following table sets forth the Canadian Pension Plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31: 1996 -------------- (In Thousands) Actuarial present value of accumulated benefit obligation (all benefits are vested) $(4,119) ------- ------- Projected benefit obligation for service rendered to date $(4,119) Plan assets at fair market value, consisting primarily of listed stocks, bonds and other fixed income obligations 4,922 ------- Pension surplus 803 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (915) ------- Pension liability recognized in the balance sheet $ (112) ------- ------- For 1996, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7% and the expected long-term rate of return on assets was 7%. The components of net pension expense for the year ended December 31 is as follows: 1996 -------------- (In Thousands) Net pension expense included the following components: Interest cost on projected benefit obligation $ 456 Actual return on plan assets (310) Net amortization and deferral (69) ------- Net pension expense $ 77 ------- ------- RETIREMENT SAVINGS PLANS: The Company sponsors a qualified tax deferred savings plan in accordance with the provisions of Section 401(k) of the Internal Revenue Code for its U.S. employees. Employees may defer up to 10% of their compensation, subject to certain limitations. The Company matches the employee contributions up to 5% of employee compensation. In the first six months of 1995 and in 1994, Company contributions were made using treasury stock. In the last six months of 1995 and in the first nine months of 1996, Company contributions were made by issuing authorized but unissued shares of Common Stock. In the last three months of 1996, Company contributions were made in cash. The expense associated with the Company's contribution was $399,000 in 1996, $423,000 in 1995 and $516,000 in 1994. Canadian Forest also provides a savings plan which is available to all of its employees. Employees may contribute up to 4% of their salary, subject to certain limitations, with Canadian Forest matching the employee contribution in full. Certain limitations are in effect with respect to withdrawals from the plan. Canadian Forest's contribution to the plan was $95,000 in 1996. 59 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (10) EMPLOYEE BENEFITS (CONTINUED): - -------------------------------------------------------------------------------- EXECUTIVE RETIREMENT AGREEMENTS: The Company entered into agreements in December 1990 (the Agreements) with certain former executives and directors (the Retirees) whereby each executive retired from the employ of the Company as of December 28, 1990. Pursuant to the terms of the Agreements, the Retirees are entitled to receive supplemental retirement payments from the Company in addition to the amounts to which they are entitled under the Company's retirement plan. In addition, the Retirees and their spouses are entitled to lifetime coverage under the Company's group medical and dental plans, tax and other financial services, and payments by the Company in connection with certain club membership dues. The Retirees also continued to participate in the Company's royalty bonus program until December 31, 1995. The Company has also agreed to maintain certain life insurance policies in effect at December 1990, for the benefit of each of the Retirees. The Company's obligation to one retiree under a revised retirement agreement is payable in Common Stock or cash, at the Company's option, in May of each year from 1993 through 1996 at approximately $190,000 per year with the balance of $149,000 payable in May 1997. The Agreements for the other six Retirees provide for supplemental retirement payments totaling approximately $970,000 per year through 1998 and approximately $770,000 per year in 1999 and 2000. The $2,881,000 present value of the amounts due under the agreements, discounted at 13%, is included in other current and long-term liabilities. LIFE INSURANCE: The Company provides life insurance benefits for certain key employees and retirees under split dollar life insurance plans. the premiums for the life insurance policies were $921,000, $921,000 and $916,000 in 1996, 1995 and 1994, respectively, including $831,000 in each of the years 1996, 1995 and 1994 for policies for retired executives. Under the life insurance plans, the Company is assigned a portion of the benefits which is designed to recover the premiums paid. POSTRETIREMENT BENEFITS: The Company accrues expected costs of providing postretirement benefits to employees, their beneficiaries and covered dependents in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (SFAS No. 106). The following table sets forth the status of the postretirement benefit plan and the amounts recognized in the Company's consolidated financial statements at December 31: 1996 1995 ------ ------ (In Thousands) Retired participants $4,522 $4,803 Active participants fully eligible for benefits 256 201 Other active participants 1,101 1,026 ------ ------ Accumulated postretirement benefit obligation (APBO) 5,879 6,030 Plan assets at fair market value - - ------ ------ APBO in excess of plan assets 5,879 6,030 Unrecognized loss (166) (595) ------ ------ Accrued postretirement benefit liability $5,713 $5,435 ------ ------ ------ ------ The discount rates used in determining the actuarial present value of the APBO at December 31, 1996, 1995 and 1994 were 7.75%, 7.25% and 9%, respectively. 60 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (10) EMPLOYEE BENEFITS (CONTINUED): - -------------------------------------------------------------------------------- The components of postretirement benefit expense for the years ended December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 ---- ---- ---- (In Thousands) Service cost $131 $ 83 $103 Interest cost on APBO 418 421 407 ---- ---- ---- Postretirement benefit cost $549 $504 $510 ---- ---- ---- ---- ---- ---- For 1996, a 1% increase in health care cost trends would have increased the APBO by $723,000 and the service and interest cost by $84,000. (11) RELATED PARTY TRANSACTIONS: - -------------------------------------------------------------------------------- Prior to 1995, the Company used a real estate complex (the Complex) owned directly or indirectly by certain stockholders and members of the Board of Directors for Company-sponsored seminars, the accommodation of business guests, the housing of personnel attending corporate meetings and for other general business purposes. In 1994, in connection with the Company's termination of usage, the company paid $662,000 on account of the business use of such property, and an additional $300,000 as a partial reimbursement of deferred maintenance costs. John F. Dorn resigned as an executive officer and director of the Company in 1993. The Company agreed to pay Mr. Dorn his salary at the time of his resignation through September 30, 1996. In addition, the Company provided certain other benefits and services to Mr. Dorn. The present value of the severance package was estimated at $500,000, which amount was recorded as an expense and a liability at December 31, 1993. In March 1994, the Company sold certain non-strategic oil and gas properties to an entity controlled by Mr. Dorn and another former executive officer of the Company for net proceeds, after costs of sale and purchase price adjustments, of $3,661,000. The Company established the sales price based upon an opinion from an independent third party. (12) COMMITMENTS AND CONTINGENCIES: - -------------------------------------------------------------------------------- Future rental payments for office facilities and equipment under the remaining terms of noncancelable leases are $1,810,000, $1,810,000, $1,773,000, $1,615,000 and $1,090,000 for the years ending December 31, 1997 through 2001, respectively. Net rental payments applicable to exploration and development activities and capitalized in the oil and gas property accounts aggregated $1,050,000 in 1996, $972,000 in 1995 and $851,000 in 1994. Net rental payments charged to expense amounted to $3,336,000 in 1996, $3,529,000 in 1995 and $3,512,000 in 1994. Rental payments include the short-term lease of vehicles. None of the leases are accounted for as capital leases. A significant portion of Canadian Forest's natural gas production is sold through the ProMark Netback Pool. At December 31, 1996 the ProMark Netback Pool had entered into fixed price contracts to sell approximately 10.7 BCF of natural gas in 1997 at an average price of $1.66 per MCF and approximately 5.4 BCF of natural gas in 1998 at an average price of approximately $1.88 per MCF. Canadian Forest is obligated to deliver approximately 25% of the volumes of natural gas subject to these contracts. As part of ProMark's gas marketing activities, ProMark has entered into fixed price contracts to purchase and to resell natural gas through 1998. ProMark has commitments to purchase and commitments to resell approximately 300,000 MCF per day through October 31, 1997 and approximately 35,000 MCF per day thereafter through October 31, 1998. The Company could be exposed to loss in the event that a counterparty to these agreements failed to perform in accordance with the terms of the agreements. 61 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (12) COMMITMENTS AND CONTINGENCIES (CONTINUED): The Company, in the ordinary course of business, is a party to various legal actions. In the opinion of management, none of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition, liquidity or results of operations. (13) FINANCIAL INSTRUMENTS: ENERGY SWAPS AND COLLARS: In order to hedge against the effects on the Company's future oil and gas production of declines in oil and natural gas prices, the Company enters into energy swap agreements with third parties and accounts for the agreements as hedges based on analogy to the criteria set forth in Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts". In a typical swap agreement, the Company receives the difference between a fixed price per unit of production and a price based on an agreed-upon third party index if the index price is lower. If the index price is higher, the Company pays the difference. The Company's current swaps are settled on a monthly basis. For the years ended December 31, 1996, 1995 and 1994, the Company's gains (losses) under its swap agreements were $(10,422,000), $3,536,000 and $1,810,000, respectively. The Company also enters into collar agreements with third parties that are accounted for as hedges. A collar agreement is similar to a swap agreement, except that the Company receives the difference between the floor price and the index price only if the index price is below the floor price, and the Company pays the difference between the ceiling price and the index price only if the index price is above the ceiling price. The following table indicates outstanding energy swaps at December 31, 1996: Product Volume Fixed Price Duration --------------- ------------------------ ----------------- ------------ Natural Gas 441 TO 5,761 MMBTU/day $2.300 to $2.535 1/97 - 12/99 Natural Gas 100 TO 250 MMBTU/day $2.2505 to $3.003 1/97 - 12/02 Natural Gas 5,000 MMBTU/day $1.9225 1/97 - 12/97 Natural Gas 3,000 MMBTU/day $2.42 1/97 - 12/97 Natural Gas 10,000 MMBTU/day $2.728 1/97 - 2/97 Natural Gas (1) 1,200 to 1,500 MMBTU/day $1.159 (2) 1/97 -6/98 Oil 250 BBLS/day $18.85 1/97 - 12/97 Oil 332 BBLS/day $17.90 1/97 - 6/97 Oil 250 BBLS/day $20.05 1/97 - 12/97 Oil 250 BBLS/day $21.05 1/97 - 12/97 Oil (1) 350 BBLS/day $18.65 1/97 - 12/97 Oil (1) 350 BBLS/day $20.05 1/97 - 12/97 Oil (1) 350 BBLS/day $21.04 1/97 - 12/97
(1) Energy swaps related to the oil and gas operations of Canadian Forest and Saxon. (2) Based on Alberta Energy Company "C" (AECO "C", U.S. $) basis. All other swaps are settled on the basis of New York Mercantile Exchange (NYMEX) prices. Subsequent to December 31, 1996 the Company entered into two additional oil swaps. The first oil swap hedges 200 barrels of oil per day from February 1997 to July 1997 at a fixed price of $23.67 per barrel (NYMEX basis). The second oil swap hedges 247 barrels of oil per day from January 1998 to December 1998 at a fixed price of $20.00 per barrel (NYMEX basis). The Company also uses basis swaps in connection with energy swaps to fix the differential between the NYMEX price and the index price at which the hedged gas is to be sold. At December 31, 1996 there are six basis swaps in place through April 1998, for a weighted average volume of 22,000 MMBTU/day. Subsequent to December 31, 1996 the Company entered into six additional basis swaps through December 1997, for a weighted average volume of 18,000 MMBTU/day. 62 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (13) FINANCIAL INSTRUMENTS (CONTINUED): At December 31, 1996 the Company has an outstanding collar to hedge 10,000 MMBTU of natural gas per day from January 1997 through December 1997. The floor and ceiling price of the collar are $2.00 and $2.37 per MMBTU (NYMEX basis), respectively. Subsequent to December 31, 1996 the Company entered into a collar to hedge 7,000 MMBTU of gas per day from April 1997 to September 1997. The floor and ceiling price of the collar are $2.10 and $2.50 per MMBTU (NYMEX basis), respectively. At December 31, 1996 the Company has an outstanding call which covers 10,000 MMBTU of natural gas per day from Janary 1997 to December 1997. In this arrangement, the Company has effectively set a ceiling price of $2.00 per MMBTU (NYMEX basis) in exchange for a premium of $.086 per MMBTU. The Company is exposed to off-balance-sheet risks associated with swap or collar agreements arising from movements in the prices of oil and natural gas and from the unlikely event of non-performance by the counterparty to the swap or collar agreements. Set forth below is the estimated fair value of certain on- and off-balance sheet financial instruments, along with the methods and assumptions used to estimate such fair values as of December 31, 1996: CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The carrying amount of these instruments approximates fair value due to their short maturity. PRODUCTION PAYMENT OBLIGATION: The fair value of the Company's production payment obligation has been estimated as approximately $11,188,000 by discounting the projected future cash payments required under the agreement by 9.7%. SENIOR SUBORDINATED NOTES: The fair value of the Company's 11 1/4% Senior Subordinated Notes was approximately $107,500,000, based upon quoted market prices of the Notes. INTEREST RATE SWAP AGREEMENTS: The fair value of the Company's interest rate swap agreements was a loss of approximately $1,751,000, of which approximately $1,168,000 has been recorded as a liability at December 31, 1996. ENERGY SWAP AGREEMENTS: The fair value of the Company's energy swap agreements was a loss of approximately $5,615,000, based upon the estimated net amount the Company would have to pay to terminate the agreements. BASIS SWAP AGREEMENTS: The fair value of the Company's basis swap agreements was a gain of approximately $173,000, based upon the estimated net amount the Company would receive to terminate the agreements. ENERGY COLLAR AGREEMENTS: The fair value of the Company's energy collar agreements was a loss of approximately $109,000, based upon the estimated net amount the Company would have to pay to terminate the agreements. 63 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (14) MAJOR CUSTOMERS: The Company's sales to individual customers which exceeded 10% of the Company's total revenue in 1995 and 1994 (exclusive of the effects of energy swaps and hedges) are shown below. No single customer accounted for more than 10% of total revenue in 1996. 1995 1994 ------- ------ (In Thousands) Enron Affiliates $30,916 58,805 Chevron USA Production Company 11,893 12,829 The amount shown for Enron Affiliates includes oil and natural gas sales to Enron Gas Marketing Inc., Enron Oil & Gas Company, EOTT Energy Corporation, Cactus Funding Corporation, Cactus Hydrocarbon III Limited Partnership, Enron Gas Services Corporation and Enron Reserve Acquisition. Approximately $6,272,000, $17,217,000 and $29,046,000 represent sales recorded for deliveries under volumetric production payments in the years ended December 31, 1996, 1995 and 1994, respectively. (15) GAS CONTRACT SETTLEMENT: The Company had gas sales contracts with Columbia Gas Transmission (Columbia) which were rejected by Columbia in 1991 in connection with its bankruptcy proceedings. The Company had a secured claim of approximately $1,600,000 relating to Columbia's failure to pay the contract price for a period of time prior to the rejection of the contracts. This amount was recorded as natural gas sales when the gas was delivered in 1991. The Company also had an unsecured claim relating to the rejection of the gas purchase contracts. The Company established a reserve of approximately $750,000 against the secured portion of the bankruptcy claim in 1991. This reserve was reversed in 1994 when it became apparent that the amount the Company would receive in the Columbia settlement would exceed the amount of the secured claim. The reversal of the reserve was recorded as miscellaneous revenue in 1994. In 1995, the creditors reached agreement with Columbia regarding settlement of the various claims. The Company recorded approximately $4,263,000 of revenue as a result of the settlement. This amount represents the Company's portion of the settlement amount related to its unsecured claim, net of a provision for royalties payable. 64 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (In Thousands Except Per Share Amounts) 1996 - ---- REVENUE $60,870 79,544 83,969 93,091 ------- ------ ------ ------ ------- ------ ------ ------ EARNINGS FROM OPERATIONS $20,010 18,743 23,058 29,748 ------- ------ ------ ------ ------- ------ ------ ------ EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM $ (386) (2,901) 879 3,547 ------- ------ ------ ------ ------- ------ ------ ------ NET EARNINGS (LOSS) $ (386) (2,901) 879 5,713 ------- ------ ------ ------ ------- ------ ------ ------ NET EARNINGS (LOSS) ATTRIBUTABLE TO COMMON STOCK $ (926) (3,441) 340 5,174 ------- ------ ------ ------ ------- ------ ------ ------ PRIMARY AND FULLY DILUTED LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (.04) (.14) .01 .10 ------- ------ ------ ------ ------- ------ ------ ------ PRIMARY AND FULLY DILUTED LOSS PER SHARE $ (.04) (.14) .01 .17 ------- ------ ------ ------ ------- ------ ------ ------ 1995 - ---- Revenue $22,361 20,550 17,617 21,928 ------- ------ ------ ------ ------- ------ ------ ------ Earnings from operations $14,900 12,740 10,177 12,914 ------- ------ ------ ------ ------- ------ ------ ------ Net loss $(3,144) (4,815) (6,574) (3,463) ------- ------ ------ ------ ------- ------ ------ ------ Net loss attributable to common stock $(3,684) (5,355) (7,114) (4,003) ------- ------ ------ ------ ------- ------ ------ ------ Primary and fully diluted loss per share $ (.65) (.94) (.84) (.42) ------- ------ ------ ------ ------- ------ ------ ------
65 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (17) BUSINESS AND GEOGRAPHICAL SEGMENTS: - ------------------------------------------------------------------------------ The Company operates in geographic segments in the United States and Canada, and in two business segments as follows: UNITED STATES CANADA TOTAL ------ ------ ----- (IN THOUSANDS) 1996 - ---- GAS MARKETING AND PROCESSING: REVENUE $ 927 186,447 187,374 --------- ------- ------- --------- ------- ------- DEPRECIATION AND DEPLETION EXPENSE $ - 2,263 2,263 --------- ------- ------- --------- ------- ------- OPERATING PROFIT $ 927 5,478 6,405 --------- ------- ------- --------- ------- ------- IDENTIFIABLE ASSETS $ - 54,215 54,215 --------- ------- ------- --------- ------- ------- CAPITAL EXPENDITURES $ - 6,183 6,183 --------- ------- ------- --------- ------- ------- OIL AND GAS OPERATIONS: REVENUE $ 80,811 47,902 128,713 --------- ------- ------- --------- ------- ------- DEPRECIATION AND DEPLETION EXPENSE $ 39,880 20,925 60,805 --------- ------- ------- --------- ------- ------- OPERATING PROFIT $ 21,142 14,567 35,709 --------- ------- ------- --------- ------- ------- IDENTIFIABLE ASSETS $ 326,399 182,844 509,243 --------- ------- ------- --------- ------- ------- CAPITAL EXPENDITURES $ 74,734 169,384 244,118 --------- ------- ------- --------- ------- ------- In 1995 and 1994, the Company's only business segment was oil and gas operations, which were conducted entirely in the United States. 66 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED): - ------------------------------------------------------------------------------ The following information is presented in accordance with Statement of Financial Accounting Standards No. 69, "Disclosure about Oil and Gas Producing Activities," (SFAS No. 69), except as noted. (A) COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES - The following costs were incurred in oil and gas exploration and development activities during the years ended December 31, 1996, 1995 and 1994: UNITED STATES CANADA TOTAL ------- ------ ----- (In Thousands) 1996 - ---- PROPERTY ACQUISITION COSTS (UNDEVELOPED LEASES AND PROVED PROPERTIES) $ 16,122 142,833 (1) 158,955 EXPLORATION COSTS 36,696 6,743 43,439 DEVELOPMENT COSTS 21,916 19,808 41,724 -------- ------- ------- TOTAL $ 74,734 169,384 244,118 -------- ------- ------- -------- ------- ------- 1995 - ---- Property acquisition costs (undeveloped leases and proved properties) $ 844 25,963 (2) 26,807 Exploration costs 12,739 - 12,739 Development costs 13,198 - 13,198 -------- ------- ------- Total $ 26,781 25,963 52,744 -------- ------- ------- -------- ------- ------- 1994 - ---- Property acquisition costs (undeveloped leases and proved properties) $ 9,762 - 9,762 Exploration costs 15,693 - 15,693 Development costs 17,089 - 17,089 -------- ------- ------- Total $ 42,544 - 42,544 -------- ------- ------- -------- ------- ------- (1) Consists primarily of the oil and gas properties acquired in the purchase of Canadian Forest. (2) Consists of the oil and gas properties acquired in the purchase of Saxon. (B) AGGREGATE CAPITALIZED COSTS - The aggregate capitalized costs relating to oil and gas activities as of December 31 for the years indicated are as follows: 1996 1995 1994 ---- ---- ---- (In Thousands) Costs related to proved properties $ 1,381,289 1,169,636 1,109,158 Costs related to unproved properties: Costs subject to depletion 32,007 18,011 32,288 Costs not subject to depletion 43,916 28,380 30,441 ----------- --------- --------- 1,457,212 1,216,027 1,171,887 Less accumulated depletion and valuation allowance 1,001,604 941,482 895,335 ----------- --------- --------- $ 455,608 274,545 276,552 ----------- --------- --------- ----------- --------- ---------
67 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ------------------------------------------------------------------------------ (C) RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES - Results of operations from producing activities for the years ended December 31, 1996, 1995 and 1994 are presented below. Income taxes are different from income taxes shown in the Consolidated Statements of Operations because this table excludes general and administrative and interest expense. UNITED STATES CANADA TOTAL ------ ------ ----- (IN THOUSANDS) 1996 - ---- OIL AND GAS SALES $ 80,811 47,902 128,713 PRODUCTION EXPENSE 19,789 12,410 32,199 DEPLETION EXPENSE 39,331 20,297 59,628 INCOME TAX EXPENSE - 6,864 6,864 --------- ------ ------- 59,120 39,571 98,691 --------- ------ ------- RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES $ 21,691 8,331 30,022 --------- ------ ------- --------- ------ ------- 1995 - ---- Oil and gas sales $ 82,275 - 82,275 Production expense 22,463 - 22,463 Depletion expense 42,973 - 42,973 --------- ------ ------- 65,436 - 65,436 --------- ------ ------- Results of operations from producing activities $ 16,839 - 16,839 --------- ------ ------- --------- ------ ------- 1994 - ---- Oil and gas sales $ 114,541 - 114,541 Production expense 22,384 - 22,384 Depletion expense 64,883 - 64,883 Provision for impairment of oil and gas properties 58,000 - 58,000 --------- ------ ------- 145,267 - 145,267 --------- ------ ------- Results of operations from producing activities $ (30,726) - (30,726) --------- ------ ------- --------- ------ -------
(D) ESTIMATED PROVED OIL AND GAS RESERVES - The Company's estimate of its proved and proved developed future net recoverable oil and gas reserves and changes for 1994, 1995 and 1996 follows. The Canadian reserves at December 31, 1996 and 1995 include 100% of the reserves owned by Saxon, a consolidated subsidiary in which the Company holds a majority interest. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions; i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangement, including energy swap agreements (see Note 13), but not on escalations based on future conditions. 68 FOREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ------------------------------------------------------------------------------ Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved mechanisms of primary recovery are included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. The Company's presentation of estimated proved oil and gas reserves excludes, for each of the years presented, those quantities attributable to future deliveries required under volumetric production payments (see Note 6). In order to calculate such amounts, the Company has assumed that deliveries under volumetric production payments are made as scheduled at expected BTU factors, and that delivery commitments are satisfied through delivery of actual volumes as opposed to cash settlements. The Company has also presented, as additional information, proved oil and gas reserves including quantities attributable to future deliveries required under volumetric production payments. The Company believes that this information is informative to readers of its financial statements as the related oil and gas property costs and deferred revenue are included on the Company's balance sheets for each of the years presented. This additional information is not presented in accordance with SFAS No. 69; however, the Company believes this additional information is useful in assessing its reserve acquisitions and financial position on a comprehensive basis. 69 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): LIQUIDS GAS ------------------------- ------------------------------- (MBBLS) (MMCF) UNITED UNITED STATES CANADA TOTAL STATES CANADA TOTAL ------ ------ ----- ------ ------ ----- Balance at December 31, 1993 7,797 - 7,797 244,096 - 244,096 Revisions of previous estimates 989 - 989 7,848 - 7,848 Extensions and discoveries 41 - 41 9,894 - 9,894 Production (1,361) - (1,361) (32,043) - (32,043) Sales of reserves in place (170) - (170) (6,377) - (6,377) Purchases of reserves in place 17 - 17 8,220 - 8,220 ----- ------ ------ ------- ------- ------- Balance at December 31, 1994 7,313 - 7,313 231,638 - 231,638 Additional disclosures: Volumes attributable to volumetric production payments 219 - 219 15,358 - 15,358 ----- ------ ------ ------- ------- ------- Balance at December 31, 1994, including volumes attributable to volumetric production payments 7,532 - 7,532 246,996 - 246,996 ----- ------ ------ ------- ------- ------- ----- ------ ------ ------- ------- ------- Balance at December 31, 1994 7,313 - 7,313 231,638 - 231,638 Revisions of previous estimates (227) - (227) 2,398 - 2,398 Extensions and discoveries 18 - 18 6,861 - 6,861 Production (1,028) - (1,028) (24,222) - (24,222) Sales of reserves in place (6) - (6) (2,438) - (2,438) Purchases of reserves in place 59 4,338 4,397 1,435 16,218 17,653 ----- ------ ------ ------- ------- ------- Balance at December 31, 1995 6,129 4,338 10,467 215,672 16,218 231,890 Volumes attributable to volumetric production payments 74 - 74 6,238 - 6,238 ----- ------ ------ ------- ------- ------- Balance at December 31, 1995, including volumes attributable to volumetric production payments 6,203 4,338 10,541 221,910 16,218 238,128 ----- ------ ------ ------- ------- ------- ----- ------ ------ ------- ------- ------- BALANCE AT DECEMBER 31, 1995 6,129 4,338 10,467 215,672 16,218 231,890 REVISIONS OF PREVIOUS ESTIMATES 335 (431) (96) (4,989) (3,446) (8,435) EXTENSIONS AND DISCOVERIES 357 4,440 4,797 32,507 7,779 40,286 PRODUCTION (1,030) (1,645) (2,675) (25,456) (13,872) (39,328) SALES OF RESERVES IN PLACE (16) (612) (628) (1,132) (326) (1,458) PURCHASES OF RESERVES IN PLACE 23 12,126 12,149 14,653 96,572 111,225 ----- ------ ------ ------- ------- ------- BALANCE AT DECEMBER 31, 1996 5,798 18,216 24,014 231,255 102,925 334,180 ADDITIONAL DISCLOSURES: VOLUMES ATTRIBUTABLE TO VOLUMETRIC PRODUCTION PAYMENTS - - - 3,070 - 3,070 ----- ------ ------ ------- ------- ------- BALANCE AT DECEMBER 31, 1996, INCLUDING VOLUMES ATTRIBUTABLE TO VOLUMETRIC PRODUCTION PAYMENTS 5,798 18,216 24,014 234,325 102,925 337,250 ----- ------ ------ ------- ------- ------- ----- ------ ------ ------- ------- -------
70 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): Purchases of reserves in place represent volumes recorded on the closing dates of the acquisitions for financial accounting purposes. The revisions of previous estimates for natural gas in 1994 include 5,833 MMCF for an adjustment related to the change in accounting for oil and gas sales from the sales method to the entitlements method. OIL AND CONDENSATE GAS ------------------------- ------------------------------- (MBBLS) (MMCF) UNITED UNITED STATES CANADA TOTAL STATES CANADA TOTAL ------ ------ ----- ------ ------ ----- Proved developed reserves at: December 31, 1993 6,377 - 6,377 187,534 - 187,534 December 31, 1994 6,775 - 6,775 179,574 - 179,574 December 31, 1995 5,678 3,188 8,866 156,471 14,184 170,655 DECEMBER 31, 1996 5,311 13,260 18,571 165,629 70,856 236,485
The Company's proved developed reserves, including amounts attributable to volumetric production payments, are shown below. This disclosure is presented as additional information and is not intended to represent required disclosure pursuant to SFAS No. 69. OIL AND CONDENSATE GAS ------------------------- ------------------------------- (MBBLS) (MMCF) UNITED UNITED STATES CANADA TOTAL STATES CANADA TOTAL ------ ------ ----- ------ ------ ----- Proved developed reserves, including amounts attributable to volumetric production payments at: December 31, 1993 6,778 - 6,778 216,820 - 216,820 December 31, 1994 6,994 - 6,994 194,932 - 194,932 December 31, 1995 5,752 3,188 8,940 162,709 14,184 176,893 DECEMBER 31, 1996 5,311 13,260 18,571 168,699 70,856 239,555
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - Future oil and gas sales and production and development costs have been estimated using prices and costs in effect at the end of the years indicated, except in those instances where the sale of oil and natural gas is covered by contracts, energy swap agreements or volumetric production payments. At December 31, 1996 and 1995, the Canadian amounts include 100% of amounts attributable to the reserves owned by Saxon, a consolidated subsidiary in which the Company holds a majority interest. In the case of contracts, the applicable contract prices, including fixed and determinable escalations, were used for the duration of the contract. Thereafter, the current spot price was used. Future oil and gas sales also include the estimated effects of existing energy swap agreements as discussed in Note 13. Future income tax expenses are estimated using the statutory tax rate of 35% in the United States and a combined Federal and Provincial rate of 44.62% in Canada. Estimates for future general and administrative and interest expenses have not been considered. Changes in the demand for oil and natural gas, inflation and other factors make such estimates inherently imprecise and subject to substantial revision. This table should not be construed to be an estimate of the current market value of the Company's proved reserves. Management does not rely upon the information that follows in making investment decisions. The Company's presentation of the standardized measure of discounted future net cash flows and changes therein excludes, for each of the years presented, amounts attributable to future deliveries required under volumetric production payments. In order to calculate such amounts, the Company has assumed that deliveries under 71 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ------------------------------------------------------------------------------- (E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED) volumetric production payments are made as scheduled, that production costs corresponding to the volumes delivered are incurred by the Company at average rates for the properties subject to the production payments, and that delivery commitments are satisfied through delivery of actual volumes as opposed to cash settlements. The Company has also presented, as additional information, the standardized measure of discounted future net cash flows and changes therein including amounts attributable to future deliveries required under volumetric production payments. The Company believes that this information is informative to readers of its financial statements because the related oil and gas property costs and deferred revenue are shown on the Company's balance sheets for each of the years presented. This additional information is not required to be presented in accordance with SFAS No. 69; however, the Company believes this additional information is useful in assessing its reserve acquisitions and financial position on a comprehensive basis. DECEMBER 31, 1996 ----------------------------------- UNITED STATES CANADA TOTAL ------ ------ ----- (In Thousands) Future oil and gas sales $ 964,943 580,563 1,545,506 Future production and development costs (258,866) (168,136) (427,002) --------- -------- ---------) Future net revenue 706,077 412,427 1,118,504 10% annual discount for estimated timing of cash flows (250,527) (165,788) (416,315) --------- -------- --------- Present value of future net cash flows before income taxes 455,550 246,639 702,189 Present value of future income tax expense (71,339) (70,981) (142,320) --------- -------- --------- Standardized measure of discounted future net cash flows 384,211 175,658 559,869 Additional disclosures: Amounts attributable to volumetric production payments 3,126 - 3,126 --------- -------- --------- Total discounted future net cash flows, including amounts attributable to volumetric production payments $ 387,337 175,658 562,995 --------- -------- --------- --------- -------- ---------
Undiscounted future income tax expense was $134,835,000 in the United States and $127,833,000 in Canada at December 31, 1996. 72 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ------------------------------------------------------------------------------- (E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED) DECEMBER 31, 1995 ----------------------------------- UNITED STATES CANADA TOTAL ------ ------ ----- (In Thousands) Future oil and gas sales $ 554,609 93,021 647,630 Future production and development costs (195,399) (43,060) (238,459) --------- -------- --------- Future net revenue 359,210 49,961 409,171 10% annual discount for estimated timing of cash flows (122,528) (19,108) (141,636) --------- -------- --------- Present value of future net cash flows before income taxes 236,682 30,853 267,535 Present value of future income tax expense (8,855) (1,763) (10,618) --------- -------- --------- Standardized measure of discounted future net cash flows 227,827 29,090 256,917 --------- -------- --------- Additional disclosures: Amounts attributable to volumetric production payments 8,476 - 8,476 Total discounted future net cash flows, including amounts attributable to volumetric production payments $ 236,303 29,090 265,393 --------- -------- --------- --------- -------- ---------
Undiscounted future income tax expense was $22,316,000 in the United States and $2,924,000 in Canada at December 31, 1995. 73 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ----------------------------------------------------------------------------- (E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED) DECEMBER 31, 1994 ----------------------------------- UNITED STATES CANADA TOTAL ------ ------ ----- (In Thousands) Future oil and gas sales $ 502,186 - 502,186 Future production and development costs (193,376) - (193,376) --------- -------- --------- Future net revenue 308,810 - 308,810 10% annual discount for estimated timing of cash flows (100,480) - (100,480) --------- -------- --------- Present value of future net cash flows before income taxes 208,330 - 208,330 Present value of future income tax expense (781) - (781) --------- -------- --------- Standardized measure of discounted future net cash flows 207,549 - 207,549 Additional disclosures: Amounts attributable to volumetric production payments 22,600 - 22,600 --------- -------- --------- Total discounted future net cash flows, including amounts attributable to volumetric production payments $ 230,149 - 230,149 --------- -------- --------- --------- -------- ---------
Undiscounted future income tax expense was $1,348,000 at December 31, 1994. 74 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ------------------------------------------------------------------------------- (E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED) CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES - An analysis of the changes in the standardized measure of discounted future net cash flows during each of the last three years is as follows. At December 31, 1996 and 1995, the Canadian amounts include 100% of the reserves owned by Saxon, a consolidated subsidiary in which the Company holds a majority interest. DECEMBER 31, 1996 ----------------------------------- UNITED STATES CANADA TOTAL ------ ------ ----- (In Thousands) Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year $227,827 29,090 256,917 Changes resulting from: Sales of oil and gas, net of production costs (56,768) (35,492) (92,260) Net changes in prices and future production costs 169,975 96,547 266,522 Net changes in future development costs (14,192) (8,256) (22,448) Extensions, discoveries and improved recovery 60,423 37,491 97,914 Previously estimated development costs incurred during the period 19,734 18,939 38,673 Revisions of previous quantity estimates (4,396) (8,054) (12,450) Sales of reserves in place (2,405) (3,993) (6,398) Purchases of reserves in place 21,948 115,518 137,466 Accretion of discount on reserves at beginning of year before income taxes 24,549 3,085 27,634 Net change in income taxes (62,484) (69,217) (131,701) -------- -------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year 384,211 175,658 559,869 Additional disclosures: Amounts attributable to volumetric production payments 3,126 - 3,126 -------- -------- -------- Total discounted future net cash flows relating to proved oil and gas reserves, including amounts attributable to volumetric production payments, at end of year $387,337 175,658 562,995 -------- -------- -------- -------- -------- --------
The computation of the standardized measure of discounted future net cash flows relating to proved oil and gas reserves at December 31, 1996 was based on average natural gas prices of approximately $3.50 per MCF in the U.S. and approximately $2.10 per MCF in Canada and on average liquids prices of approximately $26.25 per barrel in the U.S. and approximately $19.10 per barrel in Canada. During March 1997, the Company was receiving an average natural gas price of approximately $1.90 per MCF in the U.S. and approximately $1.70 per MCF in Canada and was receiving average liquids prices of approximately $19.20 per barrel in the U.S. and approximately $17.00 per barrel in Canada. Had the lower March 1997 prices been used, the Company's standardized measure of discounted future net cash flows relating to proved oil and gas reserves at December 31, 1996 would have been significantly reduced. 75 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ------------------------------------------------------------------------------ (E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED) DECEMBER 31, 1995 ----------------------------------- UNITED STATES CANADA TOTAL ------ ------ ----- (In Thousands) Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year $207,549 - 207,549 Changes resulting from: Sales of oil and gas, net of production costs (48,090) - (48,090) Net changes in prices and future production costs 43,991 - 43,991 Net changes in future development costs (3,392) - (3,392) Extensions, discoveries and improved recovery 7,231 - 7,231 Previously estimated development costs incurred during the period 7,633 - 7,633 Revisions of previous quantity estimates 127 - 127 Sales of reserves in place (3,114) - (3,114) Purchases of reserves in place 865 30,853 31,718 Accretion of discount on reserves at beginning of year before income taxes 23,102 - 23,102 Net change in income taxes (8,075) (1,763) (9,838) -------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year 227,827 29,090 256,917 -------- ------- -------- Additional disclosures: Amounts attributable to volumetric production payments 8,476 - 8,476 -------- ------- -------- Total discounted future net cash flows relating to proved oil and gas reserves, including amounts attributable to volumetric production payments, at end of year $236,303 29,090 265,393 -------- ------- -------- -------- ------- --------
76 FORREST OIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (18) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED): - ----------------------------------------------------------------------------- (E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (CONTINUED) DECEMBER 31, 1994 -------------- (In Thousands) Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year $262,176 Changes resulting from: Sales of oil and gas, net of production costs (69,607) Net changes in prices and future production costs (80,526) Net changes in future development costs 7,432 Extensions, discoveries and improved recovery 10,817 Previously estimated development costs incurred during the period 10,000 Revisions of previous quantity estimates 16,840 Sales of reserves in place (10,630) Purchases of reserves in place 8,467 Accretion of discount on reserves at beginning of year before income taxes 32,334 Net change in income taxes 20,246 -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year 207,549 Additional disclosures: Amounts attributable to volumetric production payments 22,600 -------- Total discounted future net cash flows relating to proved oil and gas reserves, including amounts attributable to volumetric production payments, at end of year $230,149 -------- -------- 77 PART III For information concerning Item 10 - Directors and Executive Officers of the Registrant, Item 11 - Executive Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and Management and Item 13 - Certain Relationships and Related Transactions, see the definitive Proxy Statement of Forest Oil Corporation relative to the Annual Meeting of Shareholders to be held on May 14, 1997 which will be filed with the Securities and Exchange Commission, which information is incorporated herein by reference. For information concerning Item 10 - Executive Officers of Registrant, see Part I - Item 4A. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements 1. Independent Auditors' Report 2. Consolidated Balance Sheets - December 31, 1996 and 1995 3. Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 4. Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994 5. Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 6. Notes to Consolidated Financial Statements - Years ended December 31, 1996, 1995 and 1994 (2) Financial Statement Schedules All schedules have been omitted because the information is either not required or is set forth in the financial statements or the notes thereto. (3) Exhibits - Forest shall, upon written request to Daniel L. McNamara, Corporate Secretary of Forest, addressed to Forest Oil Corporation, 1600 Broadway, Suite 2200, Denver, CO 80202, provide copies of each of the following Exhibits: Exhibit 3(i) Restated Certificate of Incorporation of Forest Oil Corporation dated October 14, 1993, incorporated herein by reference to Exhibit 3(i) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597). Exhibit 3(i)(a) Certificate of Amendment of the Restated Certificate of Incorporation dated as of July 20, 1995, incorporated herein by reference to Exhibit 3(i)(a) to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597). Exhibit 3(i)(b) Certificate of Amendment of Restated Certificate of Incorporation dated as of July 26, 1995, incorporated herein by reference to Exhibit 3(i)(b) to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597). 78 Exhibit 3(i)(c) Certificate of Amendment of the Restated Certificate of Incorporation dated as of January 5, 1996, incorporated herein by reference to Exhibit 3(i)(c) to Forest Oil Corporation's Registration Statement on Form S-2 (File No. 33-64949). Exhibit 3(ii) Restated By-Laws of Forest Oil Corporation as of May 9, 1990, Amendment No. 1 to By-Laws dated as of April 2, 1991, Amendment No. 2 to By-Laws dated as of May 8, 1991, Amendment No. 3 to By-Laws dated as of July 30, 1991, Amendment No. 4 to By-Laws dated as of January 17, 1992, Amendment No. 5 to By-Laws dated as of March 18, 1993 and Amendment No. 6 to By-Laws dated as of September 14, 1993, incorporated herein by reference to Exhibit 3(ii) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597). Exhibit 3(ii)(a) Amendment No. 7 to By-Laws dated as of December 3, 1993, incorporated herein by reference to Exhibit 3(ii)(a) to Form 10-K for Forest Oil Corporation for the year ended December 31, 1993 (File No. 0-4597). Exhibit 3(ii)(b) Amendment No. 8 to By-Laws dated as of February 24, 1994, incorporated herein by reference to Exhibit 3(ii)(b) to Form 10-K for Forest Oil Corporation for the year ended December 31, 1993 (File No. 0-4597). Exhibit 3(ii)(c) Amendment No. 9 to By-Laws dated as of May 15, 1995, incorporated herein by reference to Exhibit 3(ii)(c) to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597). Exhibit 3(ii)(d) Amendment No. 10 to By-Laws dated as of July 27, 1995, incorporated herein by reference to Exhibit 3(ii)(d) to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597). Exhibit 4.1 Indenture dated as of September 8, 1993 between Forest Oil Corporation and Shawmut Bank, Connecticut, (National Association), incorporated herein by reference to Exhibit 4.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597). Exhibit 4.2 First Supplemental Indenture dated as of February 8, 1996 among Forest Oil Corporation, 611852 Saskatchewan Ltd. and Fleet National Bank of Connecticut (formerly known as Shawmut Bank, Connecticut, National Association, which was formerly known as The Connecticut Bank), incorporated herein by reference to Exhibit 4.2 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1995 (File No. 0-4597). Exhibit 4.3 Amended and Restated Credit Agreement dated as of August 31, 1995 between Forest Oil Corporation and Subsidiaries, Borrower and Subsidiary Guarantors and The Chase Manhattan Bank (National Association), as agent, incorporated herein by reference to Exhibit 4.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1995 (File No. 0-4597). *Exhibit 4.4 Second Amended and Restated Credit Agreement dated as of January 31, 1997 between Forest Oil Corporation and Subsidiary Guarantors and The Chase Manhattan Bank, as agent. Exhibit 4.5 Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated as of December 1, 1993, incorporated herein by reference to Exhibit 4.6 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1993 (File No. 0-4597). Exhibit 4.6 Amendment No. 1 dated as of June 3, 1994 to the Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank 79 (National Association), as agent, incorporated herein by reference to Exhibit 4.9 of Form 10-K for Forest Oil Corporation for the year ended December 31, 1994 (File No. 0-4597). Exhibit 4.7 Amendment No. 2 dated as of August 31, 1995 to the Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as agent, incorporated herein by reference to Exhibit 4.14 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1995 (File No. 0-4597). *Exhibit 4.8 Amendment No. 2 dated as of January 31, 1997 to the Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as of June 3, 1994 between Forest Oil Corporation and The Chase Manhattan Bank, as agent. *Exhibit 4.9 Amendment No. 3 dated as of January 31, 1997 to the Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank, as agent. Exhibit 4.10 Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons) and Fixture Filing dated as of June 3, 1994 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as agent, incorporated herein by reference to Exhibit 4.9 of Form 10-K for Forest Oil Corporation for the year ended December 31, 1994 (File No. 0-4597). Exhibit 4.11 Amendment No. 1 dated as of August 31, 1995 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated June 3, 1994, incorporated herein by reference to Exhibit 4.16 on Form 10-K for Forest Oil Corporation for the year ended December 31, 1995 (File No. 0-4597). Exhibit 4.12 Rights Agreement between Forest Oil Corporation and Mellon Securities Trust Company, as Rights Agent dated as of October 14, 1993, incorporated herein by reference to Exhibit 4.3 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597). Exhibit 4.13 Amendment No. 1 dated as of July 27, 1995 to Rights Agreement dated as of October 14, 1993 between Forest Oil Corporation and Mellon Securities Trust Company, incorporated herein by reference to Exhibit 99.5 of Form 8-K for Forest Oil Corporation dated October 11, 1995 (File No. 0-4597). Exhibit 10.1 Description of Executive Life Insurance Plan, incorporated herein by reference to Exhibit 10.2 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597). Exhibit 10.2 Form of non-qualified Executive Deferred Compensation Agreement, incorporated herein by reference to Exhibit 10.3 to Form 10-Q for Forest Oil Corporation for the years ended December 31, 1990 (File No. 0-4597). Exhibit 10.3 Form of non-qualified Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.4 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597). Exhibit 10.4 Form of Executive Retirement Agreement, incorporated herein by reference to Exhibit 10.5 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597). Exhibit 10.5 Forest Oil Corporation Stock Incentive Plan and Option Agreement, incorporated herein by reference to Exhibit 4.1 to Form S-8 for Forest Oil Corporation dated June 7, 1996 (File No. 0-4597). Exhibit 10.6 Letter Agreement with Richard B. Dorn relating to a revision to Exhibit 10.5, incorporated herein by reference to Exhibit 10.11 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597). 80 Exhibit 10.7 Form of Executive Severance Agreement, incorporated herein by reference to Exhibit 10.9 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1993 (File No. 0-4597). Exhibit 10.8 Shareholders Agreement dated as of July 27, 1995 between Forest Oil Corporation and The Anschutz Corporation incorporated herein by reference to Exhibit 99.7 to Form 8-K for Forest Oil Corporation dated October 11, 1995 (File No. 0-4597). Exhibit 10.9 Tranche A Warrant to Purchase 3,888,888 shares of Common Stock issued to The Anschutz Corporation dated July 27, 1995 incorporated herein by reference to Exhibit 99.6 to Form 8-K for Forest Oil Corporation dated October 11, 1995 (File No. 0-4597). Exhibit 10.10 Shareholders Agreement dated as of January 24, 1996 between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership, incorporated herein by reference to Exhibit 10.12 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1995 (File No. 0-4597). *Exhibit 11 Computation of Earnings Per Share of Common Stock. Forest Oil Corporation and Subsidiaries. *Exhibit 21 List of Subsidiaries of the Registrant. *Exhibit 23 Consent of KPMG Peat Marwick LLP *Exhibit 24 Powers of Attorney of the following Officers and Directors: Philip F. Anschutz, Robert S. Boswell, William L. Britton, Richard J. Callahan, Cortlandt S. Dietler, William L. Dorn, Jordan L. Haines, David H. Keyte, James H. Lee, Craig D. Slater, Joan C. Sonnen, Drake S. Tempest, Michael B. Yanney. *Exhibit 27 Financial Data Schedule - -------------------- * filed herewith. (b) Reports on Form 8-K The following reports on Form 8-K were filed by Forest during the last quarter of 1996: Date of Report Item Reported Financial Statements Filed -------------- ------------- -------------------------- October 30, 1996 Item 5 None November 15, 1996 Item 5 None 81 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOREST OIL CORPORATION (Registrant) Date: March 27, 1997 By: /s/ Daniel L. McNamara ------------------------- Daniel L. McNamara Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- Robert S. Boswell* President and Chief Executive March 27, 1997 (Robert S. Boswell) Officer (Principal Executive Officer) David H. Keyte* Vice President and Chief March 27, 1997 (David H. Keyte) Financial Officer (Principal Financial Officer) Joan C. Sonnen* Controller March 27, 1997 (Joan C. Sonnen) (Chief Accounting Officer) Philip F. Anschutz* Directors of the Registrant March 27, 1997 (Philip F. Anschutz) Robert S. Boswell* (Robert S. Boswell) William L. Britton* (William L. Britton) Richard J. Callahan* (Richard J. Callahan) Cortland S. Dietler* (Cortland S. Dietler) William L. Dorn* (William L. Dorn) Jordan L. Haines* (Jordan L. Haines) James H. Lee* (James H. Lee) Craig D. Slater* (Craig D. Slater) Drake S. Tempest* (Drake S. Tempest) Michael B. Yanney* (Michael B. Yanney) *By /s/ Daniel L. McNamara March 27, 1997 -------------------------------- Daniel L. McNamara (as attorney-in-fact for each of the persons indicated) 82 EX-4.4 2 EXHIBIT 4.4 EXHIBIT 4.4 EXECUTION COPY ================================================================================ FOREST OIL CORPORATION and SUBSIDIARY GUARANTORS ---------------------------- SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of January 31, 1997 ---------------------------- THE CHASE MANHATTAN BANK, as Agent ================================================================================ TABLE OF CONTENTS THIS TABLE OF CONTENTS IS NOT PART OF THE AGREEMENT TO WHICH IT IS ATTACHED BUT IS INSERTED FOR CONVENIENCE OF REFERENCE ONLY. Page ---- Section 1. Definitions and Accounting Matters . . . . . . . . . . . . . . . . . . 1 1.01 Certain Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Accounting Terms and Determinations. . . . . . . . . . . . . . . . . . . . . 23 1.03 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.04 Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.05 Designation of Subsidiaries as Restricted or Unrestricted Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.06 References to Subsidiaries, Restricted Subsidiaries and Unrestricted Subsidiaries in Connection with Calculations of Certain Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 2. Commitments, Loans, Notes and Prepayments. . . . . . . . . . . . . . . 27 2.01 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.02 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.03 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.04 Changes of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.05 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.06 Lending Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.07 Several Obligations; Remedies Independent. . . . . . . . . . . . . . . . . . 33 2.08 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.09 Optional Prepayments and Conversions or Continuations of Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.10 Mandatory Prepayments and Reductions of Commitments. . . . . . . . . . . . . 35 Section 3. Payments of Principal and Interest . . . . . . . . . . . . . . . . . . 36 3.01 Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.02 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 4. Payments; Pro Rata Treatment; Computations; Etc. . . . . . . . . . . . 37 4.01 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.02 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.03 Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (i) Page ---- 4.04 Minimum Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.05 Certain Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.06 Non-Receipt of Funds by the Agent. . . . . . . . . . . . . . . . . . . . . . 40 4.07 Sharing of Payments, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 5. Yield Protection, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 42 5.01 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.02 Limitation on Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . 45 5.03 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.04 Treatment of Affected Loans. . . . . . . . . . . . . . . . . . . . . . . . . 45 5.05 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.06 Additional Costs in Respect of Letters of Credit . . . . . . . . . . . . . . 47 Section 6. Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 6.01 Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 6.02 Obligations Unconditional. . . . . . . . . . . . . . . . . . . . . . . . . . 48 6.03 Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 6.04 Subrogation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6.05 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6.06 Continuing Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6.07 Instrument for the Payment of Money. . . . . . . . . . . . . . . . . . . . . 49 6.08 Rights of Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6.09 General Limitation on Guarantee Obligations. . . . . . . . . . . . . . . . . 50 Section 7. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . 50 7.01 Conditions to Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . 50 7.02 Initial and Subsequent Extensions of Credit. . . . . . . . . . . . . . . . . 53 Section 8. Representations and Warranties . . . . . . . . . . . . . . . . . . . . 54 8.01 Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8.02 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8.03 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8.04 No Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8.05 Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8.06 Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (ii) Page ---- 8.07 Use of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 8.08 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 8.09 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 8.10 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 8.11 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . 56 8.12 Material Agreements and Liens. . . . . . . . . . . . . . . . . . . . . . . . 56 8.13 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 8.14 Subsidiaries, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 8.15 True and Complete Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 9. Covenants of the Obligors. . . . . . . . . . . . . . . . . . . . . . . 60 9.01 Financial Statements Etc . . . . . . . . . . . . . . . . . . . . . . . . . . 60 9.02 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 9.03 Existence, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 9.04 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 9.05 Prohibition of Fundamental Changes . . . . . . . . . . . . . . . . . . . . . 64 9.06 Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 9.07 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 9.08 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 9.09 Dividend Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 9.10 Interest Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . 71 9.11 Working Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 9.12 Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 9.13 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 71 9.14 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 9.15 Certain Obligations Respecting Subsidiaries. . . . . . . . . . . . . . . . . 72 9.16 Additional Subsidiary Guarantors. . . . . . . . . . . . . . . . . . . . . . 72 9.17 Modifications and Payments of Subordinated Indebtedness and Production Payments Indebtedness. . . . . . . . . . . . . . . . . . . . 73 9.18 Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 9.19 Unrestricted Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . 73 9.20 Pledges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 10. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 11. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 11.01 Appointment, Powers and Immunities. . . . . . . . . . . . . . . . . . . . . 77 (iii) Page ---- 11.02 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.03 Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.04 Rights as a Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.05 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 11.06 Non-Reliance on Agent and Other Banks . . . . . . . . . . . . . . . . . . . 79 11.07 Failure to Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 11.08 Resignation or Removal of Agent . . . . . . . . . . . . . . . . . . . . . . 80 11.09 Consents under Other Basic Documents. . . . . . . . . . . . . . . . . . . . 80 11.10 Collateral Sub-Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 12. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 12.01 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 12.03 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 12.04 Amendments, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 12.05 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . 83 12.06 Assignments and Participations. . . . . . . . . . . . . . . . . . . . . . . 83 12.07 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 12.08 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 12.09 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 12.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 12.11 Governing Law; Submission to Jurisdiction . . . . . . . . . . . . . . . . . 86 12.12 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 12.13 Treatment of Certain Information. . . . . . . . . . . . . . . . . . . . . . 87
(iv) SCHEDULE I - Material Agreements and Liens SCHEDULE II - Hazardous Materials SCHEDULE III - Subsidiaries and Investments EXHIBIT A - Form of Note EXHIBIT B - Form of Security Agreement EXHIBIT C-1 - Form of Opinion of Counsel to the Obligors EXHIBIT C-2 - Form of Opinion of Corporate Counsel of the Obligors EXHIBIT D - Form of Opinion of Special Counsel to Chase EXHIBIT E - Form of Mortgage EXHIBIT F - Form of Pledge Agreement EXHIBIT G - Form of Confidentiality Agreement (v) AMENDED AND RESTATED CREDIT AGREEMENT dated as of January 31, 1997, between: FOREST OIL CORPORATION, a corporation duly organized and validly existing under the laws of the State of New York (the "COMPANY"); each of the Subsidiaries of the Company that becomes a guarantor pursuant to Section 9.16 hereof (individually, a "SUBSIDIARY GUARANTOR" and, collectively, the "SUBSIDIARY GUARANTORS" and, together with the Company, the "OBLIGORS"); each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto or which, pursuant to Section 12.06(b) hereof, shall become a "Bank" hereunder (individually, a "BANK" and, collectively, the "BANKS"); and THE CHASE MANHATTAN BANK, a New York bank, as agent for the Banks (in such capacity, together with its successors in such capacity, the "AGENT"). The Company, the Existing Banks (as defined below) and the Agent are parties to an Amended and Restated Credit Agreement dated as of August 31, 1995 (as heretofore modified and supplemented and in effect on the date of this Agreement, (the "ORIGINAL CREDIT AGREEMENT")). The parties hereto wish to amend and restate the Original Credit Agreement in its entirety, all on the terms and conditions hereinafter set forth. Each of the Obligors has requested the Banks to make loans to the Company in an aggregate principal amount not exceeding $100,000,000 at any one time outstanding to provide working capital and for other general corporate purposes of the Company and each of its Subsidiaries. The Company and the Subsidiary Guarantors are engaged as an integrated group in the O&G Business (as hereinafter defined) and in related businesses, and in furnishing the required supplies, services, equipment, credit and other facilities for such integrated operation. The integrated operation requires financing on such a basis that credit supplied to the Company be made available from time to time to the Subsidiary Guarantors, as required for the continued successful operation of the Obligors, separately, and the integrated operation as a whole. Each of the Obligors expects to derive benefit, directly or indirectly, from the loans so made to the Company, both in its separate capacity and as a member of the integrated group, since the successful operation of each of the Obligors is dependent on the continued successful performance of the functions of the integrated group as a whole. Accordingly, the parties hereto agree to amend and restate the Original Credit Agreement so that, amended and restated, it reads in its entirety as provided herein. Section 1. DEFINITIONS AND ACCOUNTING MATTERS. 1.01 CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and VICE VERSA): "ADMINISTRATIVE QUESTIONNAIRE" shall mean an administrative questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Company and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members -2- of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "CONTROL" (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), PROVIDED that, in any event, any Person that owns directly or indirectly securities having 10% or more of the voting power for the election of directors or other governing body of a corporation or 10% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of the Company or any of its Subsidiaries and (b) none of the Restricted Subsidiaries of the Company shall be, for purposes of this definition, Affiliates of the Company. "ANSCHUTZ" shall mean The Anschutz Corporation, a Kansas corporation. "APPLICABLE COMMITMENT FEE RATE" shall mean the percentage per annum set forth opposite the applicable range of Funded Indebtedness to Total Capitalization in Schedule Y below, PROVIDED that the "Applicable Commitment Fee Rate" shall be increased or reduced, as applicable, on the date the Funded Indebtedness to Total Capitalization ratio of the Company and its Restricted Subsidiaries shifts from one range to another. SCHEDULE Y Ratio of Funded Indebtedness Applicable Commitment to Total Capitalization Fee Rate (bps per annum) ----------------------- ------------------------ 0 - .400:1.00 30.0 .401:1.00 to .600:1.00 35.0 .601:1.00 to .700:1.00 37.5 .701:1.00 and greater 50.0 "APPLICABLE LENDING OFFICE" shall mean, for each Bank and for each Type of Loan, the "Lending Office" of such Bank (or of an affiliate of such Bank) designated for such Type of Loan in the Administrative Questionnaire of such Bank or such other office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the office by which its Loans of such Type are to be made and maintained. -3- "APPLICABLE MARGIN" shall mean, with respect to each Type of Loan for any period during which the outstanding Loans and Letters of Credit Liabilities under this Agreement are within the range specified under the "Ratio of Funded Indebtedness to Total Capitalization" in Schedule X below, the percentage per annum set forth opposite the range under such Type of Loan in such Schedule X, PROVIDED that the "Applicable Margin" shall be increased or reduced, as applicable, on the date the Funded Indebtedness to Total Capitalization ratio of the Company and its Restricted Subsidiaries shifts from one range to another. SCHEDULE X Applicable Margin (bps) Ratio of Funded Indebtedness ----------------------- to Total Capitalization Base Rate Loans Eurodollar Loans ----------------------- --------------- ---------------- 0 - .400:1.00 0 100.0 .401:1.00 to .600:1.00 25.0 125.0 .601:1.00 to .700:1.00 50.0 150.0 .701:1.00 and greater 75.0 175.0 "BANKRUPTCY CODE" shall mean the Federal Bankruptcy Code of 1978, as amended from time to time. "BANKS" shall mean (a) on the date hereof, the Banks having Commitments as indicated on the signature pages hereof and (b) thereafter, the Banks from time to time holding Loans and (if the same have not expired or been terminated) Commitments after giving effect to any assignments thereof permitted by Section 12.06 hereof. "BASE RATE" shall mean, for any day, a rate per annum equal to the higher of (a) the Federal Funds Effective Rate for such day plus 1/2 of 1% and (b) the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate. "BASE RATE LOANS" shall mean Loans that bear interest at rates based upon the Base Rate. "BASIC DOCUMENTS" shall mean, collectively, this Agreement, the Notes, the Letter of Credit Documents and the Security Documents. "BORROWING BASE" has the meaning given to such term in Section 1.03 hereof. -4- "BORROWING BASE DEFICIENCY" has the meaning given to such term in Section 2.10(a) hereof. "BUSINESS DAY" shall mean (a) any day on which commercial banks are not authorized or required to close in New York City and (b) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment, Conversion or Interest Period, any day on which dealings in Dollar deposits are carried out in the London interbank market. "CANADIAN FOREST OIL" shall mean Canadian Forest Oil Ltd., an Alberta corporation. "CANADIAN FOREST OIL CREDIT AGREEMENT" shall mean the Amended and Restated Credit Agreement dated as of July 17, 1996 among Canadian Forest Oil, the Subsidiaries of Canadian Forest Oil that may become Subsidiary Borrowers thereunder and Funding Co., as the same may be modified and supplemented and in effect from time to time. "CAPITAL EXPENDITURES" shall mean, for any period, expenditures (including, without limitation, the aggregate amount of Capital Lease Obligations incurred during such period) made by the Company or any of its Restricted Subsidiaries in connection with the acquisition and exploitation of, or the exploration for or development or production of, hydrocarbon reserves or to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, but excluding repairs) during such period computed in accordance with GAAP. "CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "CAPITAL STOCK" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock or partnership interests and any and all warrants, options and rights with respect thereto (whether or not currently exercisable), including each class of common stock and preferred stock of such Person. "CASH FLOW" shall mean, for any period, for the Company and the Restricted Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), the sum of the following: the total sales revenue from natural gas, oil and other hydrocarbon -5- products for such period PLUS cash dividend payments, if any, by an Unrestricted Subsidiary to the Company or a Restricted Subsidiary in an aggregate amount in excess of the aggregate amount of the Investments in such Unrestricted Subsidiary by the Company and the Restricted Subsidiaries during such period PLUS the total Net Cash Payments (excluding the fair market value of non-cash consideration) received by the Company and its Restricted Subsidiaries during such period PLUS the total cash proceeds received by the Company as a result of any Equity Issuance (other than Disqualified Stock of the Company) that has been utilized to repay any Indebtedness (to the extent permitted pursuant to the terms of this Agreement) of the Company PLUS the total cash proceeds received from any Disposition, including any Disposition of Unrestricted Properties to the extent the proceeds of such Disposition are applied during such period in satisfaction of the obligations described in clause (b) of this definition PLUS the net proceeds received from the issuance of any Debt to the extent such net proceeds are applied during such period in satisfaction of the obligations described in clause (b) of this definition MINUS (a) the revenue attributable to Volumetric Production Payments for such period, (b) the amounts paid in satisfaction of obligations under Dollar-Denominated Production Payments for such period, (c) oil and gas production expenses for such period and (d) total overhead costs paid or required to be paid in cash during such period (whether or not capitalized, but net of credits related to such expenses). "CASUALTY EVENT" shall mean, with respect to any Property of any Person, any loss of or damage to, or any condemnation or other taking of, such Property for which such Person or any of its Subsidiaries receives insurance proceeds, or proceeds of a condemnation award or other compensation. "CHANGE OF CONTROL" shall mean any event or series of events by which: (i) any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than Anschutz) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of 40% or more of the total voting power of the Voting Stock of the Company; (ii) the Company consolidates with or merges or amalgamates with or into another Person or conveys, transfers, or leases all or substantially all of its assets to any other Person, or any Person consolidates with, or merges or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction where (a) the outstanding Voting Stock of the Company is changed into or exchanged for Voting Stock of the surviving corporation which is not Disqualified Stock and (b) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction; (iii) the shareholders of the Company approve any plan of liquidation or dissolution of the Company; or (iv) during any period of 12 consecutive months, individuals who at the beginning of such period constituted the board of directors of the Company (or whose nomination for election by the shareholders of the Company was approved by a vote of not less than a majority of the directors of the Company then still in office who were either directors at the beginning of such -6- period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors of the Company then in office. "CHASE" shall mean The Chase Manhattan Bank. "CLOSING DATE" shall mean December 1, 1993, the date upon which the initial extension of credit was made hereunder. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL ACCOUNT" shall have the meaning assigned to such term in Section 4.01 of the Security Agreement. "COMMITMENT" shall mean, for each Bank, the obligation of such Bank to make Loans in an aggregate principal amount up to but not exceeding (a) in the case of a Bank that is a party to this Agreement as of the date hereof, the amount set opposite the name of such Bank on the signature pages hereof under the caption "Commitment" or (b) in the case of any other Bank, the aggregate amount of the Commitments of other Banks acquired by it pursuant to Section 12.06(b) hereof (in each case, as the same may be reduced from time to time pursuant to Section 2.04 hereof or increased or reduced from time to time pursuant to said Section 12.06(b)). "COMMITMENT PERCENTAGE" shall mean, with respect to any Bank, the ratio of the amount of the Commitment of such Bank to the aggregate amount of the Commitments of all of the Banks. "COMMITMENT TERMINATION DATE" shall mean January 31, 2000. "COMMODITY HEDGING AGREEMENT" shall mean, for any Person, an agreement or arrangement between such Person and one or more financial institutions or other entities providing for the transfer or mitigation of risks of fluctuations in prices of hydrocarbons, either generally or under specific circumstances. "CONSOLIDATED SUBSIDIARY" shall mean, for any Person, each Subsidiary of such Person (whether now existing or hereafter created or acquired) the financial statements of which are (or should have been) consolidated with the financial statements of such Person in accordance with GAAP. "CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the continuation pursuant to Section 2.09 hereof of a Eurodollar Loan from one Interest Period to the next Interest Period. -7- "CONVERT", "CONVERSION" and "CONVERTED" shall refer to a conversion pursuant to Section 2.09 hereof of one Type of Loans into another Type of Loans, which may be accompanied by the transfer by a Bank (at its sole discretion) of a Loan from one Applicable Lending Office to another. "DEFICIENCY NOTICE" shall have the meaning assigned to such term in Section 2.10 hereof. "DEFAULT" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "DETERMINATION DATE" shall mean (a) each May 1 and October 15 of each year prior to the Commitment Termination Date and (b) 45 days after each other date, if any, on which a Reserve Evaluation Report is delivered to the Agent as contemplated hereby. "DETERMINATION PERIOD" shall mean each period commencing on a Determination Date and ending on the day next preceding the next succeeding Determination Date. "DISPOSITION" shall mean any sale, assignment, transfer or other disposition of any Property (whether now owned or hereafter acquired) by the Company or any of its Restricted Subsidiaries to any Person (other than by any such Restricted Subsidiary to the Company or any other Restricted Subsidiary, or by the Company to a Restricted Subsidiary), excluding any sale, assignment, transfer or other disposition of (i) any Property sold or disposed of in the ordinary course of business and on ordinary business terms and (ii) any Unrestricted Properties. "DISQUALIFIED STOCK" means any Capital Stock of the Company or any Restricted Subsidiary of the Company which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event or with the passage of time, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the Commitment Termination Date or which is exchangeable or convertible into debt securities of the Company or any Restricted Subsidiary of the Company, except to the extent that such exchange or conversion rights cannot be exercised prior to the Commitment Termination Date. "DIVIDEND PAYMENT" shall mean dividends (in cash, Property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares of any class of stock of the Company or any of its Restricted Subsidiaries or of any warrants, options or other rights to acquire the same (or to make any payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market or equity value of the Company or any of its Restricted Subsidiaries), but excluding dividends payable solely in shares of common stock of the Company. -8- "DOLLAR-DENOMINATED PRODUCTION PAYMENTS" shall mean production payment obligations of the Company or any of its Restricted Subsidiaries which are payable from a specified share of proceeds received from production from specific Properties, together with all undertakings and obligations in connection therewith. "DOLLARS" and "$" shall mean lawful money of the United States of America. "ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, (a) any written or oral notice, claim, demand or other communication (collectively, a "CLAIM") by any other Person alleging or asserting such Person's liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other Property, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, or Release into the environment, of any Hazardous Material at any location, whether or not owned by such Person, or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include, without limitation, any claim by any governmental authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "ENVIRONMENTAL LAWS" shall mean any and all present and future Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. "EQUITY ISSUANCE" shall mean (a) any issuance or sale by the Company or any of its Restricted Subsidiaries after the date of this Agreement of (i) any of its Capital Stock, (ii) any warrants or options exercisable in respect of its Capital Stock or (iii) any other security or instrument representing an equity interest (or the right to obtain any equity interest) in the Company or any of its Restricted Subsidiaries or (b) the receipt by the Company or any of its Restricted Subsidiaries after the date of this Agreement of any capital contribution (whether or not evidenced by any equity security issued by the recipient of such contribution); PROVIDED that Equity Issuance shall not include (x) any such issuance or sale by any Restricted Subsidiary of the Company to the Company or any other Wholly Owned Subsidiary of the Company which is a Restricted Subsidiary, (y) any capital contribution by the Company or any Wholly Owned Subsidiary of the Company which is a Restricted Subsidiary to any other Restricted Subsidiary -9- of the Company or (z) any warrants or options issued to directors, officers or employees of the Company and its Restricted Subsidiaries pursuant to any employee benefit plans, incentive plans or similar programs established in the ordinary course of business. "EQUITY RIGHTS" shall mean, with respect to any Person, any outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of Capital Stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" shall mean any corporation or trade or business that is a member of any group of organizations (a) described in Section 414(b) or (c) of the Code of which the Company is a member and (b) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Company is a member. "EURODOLLAR BASE RATE" shall mean, with respect to any Eurodollar Loan for any Interest Period therefor, the rate per annum quoted by Chase at approximately 11:00 a.m. London time (or as soon thereafter as practicable) on the date two Business Days prior to the first day of such Interest Period for the offering by Chase to leading banks in the London interbank market of Dollar deposits having a term comparable to such Interest Period and in amounts comparable to the principal amount of the Eurodollar Loan to be made by Chase for such Interest Period. If Chase is not participating in any Eurodollar Loan during any Interest Period therefor, the Eurodollar Base Rate for such Loan for such Interest Period shall be determined by reference to the amount of the Loan that Chase would have made or had outstanding had it been participating in such Loan during such Interest Period. "EURODOLLAR LOANS" shall mean Loans the interest rates on which are determined on the basis of rates referred to in the definition of "Eurodollar Base Rate" in this Section 1.01. "EURODOLLAR RATE" shall mean, for any Eurodollar Loan for any Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the Eurodollar Base Rate for such Loan for such Interest Period divided by 1 minus the Reserve Requirement for such Loan for such Interest Period. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Section 10 hereof. -10- "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "EXISTING BANKS" shall mean the financial institutions party to the Original Credit Agreement. "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, PROVIDED that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Effective Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Effective Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Agent. "FUNDED INDEBTEDNESS" shall mean, for the Company and its Restricted Subsidiaries, as of the date of determination, all Indebtedness of such Persons (on a consolidated basis) as of the date of the Company's most recent financial statements (other than in respect of performance or surety bonds and other obligations of a similar nature incurred in the ordinary course of business of such Persons) which by its terms matures more than one year after such date of determination and any such Indebtedness maturing within one year from the date of determination which is renewable or extendable at the option of the obligor to a date more than one year from the date of determination and plus the net increase or minus the net decrease (for the period from the date of the Company's most recent financial statements to the date of determination) in the amount of outstanding Loans and the Letter of Credit Liabilities. "FUNDING CO." shall mean 611852 Saskatchewan Ltd., a corporation organized under the laws of Saskatchewan. "FUNDING CREDIT AGREEMENT" shall mean the Amended and Restated Credit Agreement dated as of July 17, 1996 among Funding Co., the lenders party thereto and The Chase Manhattan Bank of Canada, as administrative agent, as the same may be modified and supplemented from time to time. "FUTURE NET REVENUES" shall mean, for any period, the future gross revenues attributable to all or a part (as specified herein) of Proved Reserves constituting part of the Mortgaged Properties for such period less the sum for such period of all projected Operating Expenses and Capital Expenditures with respect thereto, as set forth in the related Reserve Evaluation Report, and less (without duplication) all amounts projected to be applied to the -11- discharge of any Production Payment and to the unearned balance of any advance payment received under any contract to be performed relating to such Proved Reserves. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those which, in accordance with the last sentence of Section 1.02(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement. "GOVERNMENT AUTHORITY" shall mean any federal, state, municipal, local, territorial, or other governmental subdivision, department, commission, board, bureau, agency, regulatory authority, instrumentality, judicial or administrative body, domestic or foreign. "GUARANTEE" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person or any production or revenues generated by (or any capital or other expenditures incurred in connection with the acquisition and exploitation of, exploration for, development of or production from) any hydrocarbon reserves, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank, surety company or other financial institution or similar entity to issue a letter of credit, surety bond or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative meaning. "HAZARDOUS MATERIAL" shall mean, collectively, (a) any petroleum or petroleum products, flammable explosives, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, and transformers or other equipment that contain dielectric fluid containing polychlorinated biphenyls (PCB's), (b) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants", "pollutants" or words of similar import under any Environmental Law and (c) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated under any Environmental Law. "HYDROCARBON PROPERTIES" shall mean interests which one or more of the Obligors have from time to time in hydrocarbon reserves from which hydrocarbons may be severed or extracted in commercially feasible quantities which hydrocarbon reserves have been given value by the Banks in determining the Borrowing Base. -12- "INDEBTEDNESS" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to purchase or repurchase the same or similar Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) obligations of others secured by a Lien on the Property of such Person, whether or not the respective obligations so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit, surety bonds or similar instruments issued or accepted by banks, surety companies and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) obligations of such Person in respect of obligations of the types specified in other clauses of this definition as a general partner or joint venturer of any partnership or joint venture (other than in respect of obligations incurred in the ordinary course of business); (g) upon the failure of such Person to perform or fulfill any warranties or guaranties of, or similar obligations relating to, production or payment contained in any Non-Recourse Debt, the maximum amount of the obligation of such Person in respect of such warranties, guaranties or similar obligations; (h) the unearned balance of any advance payment received by such Person under any contract to be performed in excess of $250,000 in the aggregate (other than as provided in clause (i) below); (i) the unearned balance of any advance payment received by such Person under any contract to be performed in excess of $2,000,000 in the aggregate resulting from transactions in the ordinary course of such Person's business; and (j) Indebtedness of others Guaranteed by such Person. "INDEPENDENT PETROLEUM ENGINEER" shall mean (a) Ryder Scott Company Petroleum Engineers or (b) such other firm of independent petroleum engineers expert in the matters required to be performed in connection with the preparation and delivery of a Reserve Evaluation Report and satisfactory to the Majority Banks. "INTEREST COVERAGE RATIO" shall mean, for any period, the ratio of (a) Cash Flow for such period to (b) Interest Expense for such period. "INTEREST EXPENSE" shall mean, for any period, interest expense for the Company and the Restricted Subsidiaries for such period (determined on a consolidated basis without duplication in accordance with GAAP) including, without limitation, the following: all interest in respect of Indebtedness accrued or capitalized during such period (whether or not actually paid during such period) (other than interest paid in common stock of the Company) and the net amounts payable (or minus the net amounts receivable) under Interest Rate Protection Agreements of such Persons accrued during such period (whether or not actually paid or received during such period), but excluding the non-cash amortization of deferred debt issuance costs and original issue discount for such period and the interest expense attributable to Dollar- -13- Denominated Production Payments of the Company in existence on the Closing Date for such period. "INTEREST PERIOD" shall mean, with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from a Base Rate Loan or the last day of the next preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the applicable Borrower may select as provided in Section 4.05 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period would otherwise end after the Commitment Termination Date, such Interest Period shall end on the Commitment Termination Date; (ii) each Interest Period that would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clause (i) above, no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loan would otherwise be a shorter period, such Loan shall not be available as a Eurodollar Loan hereunder for such period. "INTEREST RATE PROTECTION AGREEMENT" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more financial institutions or other entities providing for the transfer or mitigation of interest risks, either generally or under specific contingencies. "INVESTMENT" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person, but excluding any such advance, loan or extension of credit having a term not exceeding 90 days representing the purchase price of inventory or supplies sold by such Person in the ordinary course of business); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement or Commodity Hedging Agreement. "ISSUING BANK" shall mean Chase, as the issuer of Letters of Credit under Section 2.03 hereof, together with its successors and assigns in such capacity. -14- "LETTER OF CREDIT" shall have the meaning assigned to such term in Section 2.03 hereof. "LETTER OF CREDIT DOCUMENTS" shall mean, with respect to any Letter of Credit, collectively, any application therefor and any other agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned or at risk with respect to such Letter of Credit or (b) any collateral security for any of such obligations, each as the same may be modified and supplemented and in effect from time to time. "LETTER OF CREDIT INTEREST" shall mean, for each Bank, such Bank's participation interest (or, in the case of the Issuing Bank, the Issuing Bank's retained interest) in the Issuing Bank's liability under Letters of Credit and such Bank's rights and interests in Reimbursement Obligations and fees, interest and other amounts payable in connection with Letters of Credit and Reimbursement Obligations. "LETTER OF CREDIT LIABILITY" shall mean, without duplication, at any time and in respect of any Letter of Credit, the sum of (a) the undrawn face amount of such Letter of Credit PLUS (b) the aggregate unpaid principal amount of all Reimbursement Obligations of the Company at such time due and payable in respect of all drawings made under such Letter of Credit. For purposes of this Agreement, a Bank (other than the Issuing Bank) shall be deemed to hold a Letter of Credit Liability in an amount equal to its participation interest in the related Letter of Credit under Section 2.03 hereof, and the Issuing Bank shall be deemed to hold a Letter of Credit Liability in an amount equal to its retained interest in the related Letter of Credit after giving effect to the acquisition by the Banks other than the Issuing Bank of their participation interests under said Section 2.03. "LIEN" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property (including any Production Payments, advance payment or similar arrangements with respect to minerals in place). For purposes of this Agreement and the other Basic Documents, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. "LOANS" shall mean the loans provided for by Section 2.01(a) hereof. "MAJORITY BANKS" shall mean Banks having at least 66-2/3% of the aggregate amount of the Commitments, or if the Commitments shall have been terminated, Banks holding at least 66-2/3% of the sum of the aggregate unpaid principal amount of the Loans and the Letter of Credit Liabilities in respect of the Commitments. -15- "MARGIN STOCK" shall mean "margin stock" within the meaning of Regulations U and X. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the Property, business, operations, financial condition, prospects, liabilities or capitalization of the Company and its Restricted Subsidiaries taken as a whole, (b) the ability of any Obligor to perform its obligations under any of the Basic Documents to which it is a party, (c) the validity or enforceability of any of the Basic Documents, (d) the rights and remedies of the Banks and the Agent under any of the Basic Documents or (e) the timely payment of the principal of or interest on the Loans or the Reimbursement Obligations or other amounts payable in connection therewith. "MORTGAGE(S)" shall mean, collectively, one or more Mortgages, Deeds of Trust, Assignments of Rents, Security Agreements and Fixture Filings or similar documents executed by the Company in favor of the Agent and Mary Jo Woodford, as Trustee, for the benefit of the Agent and the Banks, in each case substantially in the form of Exhibit E hereto and covering the respective Mortgaged Properties and leasehold interest identified in any Exhibit or Schedule thereto, as the same shall be modified and supplemented and in effect from time to time. "MORTGAGE AMENDMENTS" shall mean the amendments to the Mortgages executed by the Company in connection with this Agreement. "MORTGAGED PROPERTIES" shall mean Hydrocarbon Properties which are subject to the Liens created hereunder and under the Security Documents. "MULTIEMPLOYER PLAN" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and which is covered by Title IV of ERISA. "NET AVAILABLE PROCEEDS" shall mean: (a) in the case of any Disposition by the Company or a Restricted Subsidiary, the amount of Net Cash Payments received in connection with such Disposition; PROVIDED that if 20% or less of the total value of such Net Cash Payments consists of non-cash consideration, and if such non-cash consideration is subjected to the Lien of the Security Documents within 90 days after its receipt by the Company or a Restricted Subsidiary, the amount of such Net Cash Payments received shall be deemed to equal the amount of all cash payments received in connection with such Disposition; (b) in the case of any Casualty Event with respect to any Property of the Company or any of its Restricted Subsidiaries, the aggregate amount of proceeds of insurance, condemnation awards and other compensation received by the Company and -16- its Restricted Subsidiaries in respect of such Casualty Event net of (i) reasonable expenses incurred by the Company and its Restricted Subsidiaries in connection therewith and (ii) contractually required repayments of Indebtedness to the extent secured by a Lien on such Property and any income and transfer taxes payable by the Company or any of its Restricted Subsidiaries in respect of such Casualty Event; and (c) in the case of any Equity Issuance, the aggregate amount of all cash received by the Company and its Restricted Subsidiaries in respect of such Equity Issuance net of commissions, discounts and other transaction costs incurred by the Company and its Restricted Subsidiaries in connection therewith. "NET CASH PAYMENTS" shall mean, with respect to any Disposition, the aggregate amount of all cash payments, and the fair market value of any non-cash consideration, received by the Company and its Restricted Subsidiaries directly or indirectly in connection with such Disposition; PROVIDED that (a) Net Cash Payments shall be net of (i) the amount of any legal, title and recording tax expenses, commissions and other fees and expenses paid by the Company and its Restricted Subsidiaries in connection with such Disposition and (ii) any Federal, state and local income or other taxes estimated to be payable by the Company and its Restricted Subsidiaries as a result of such Disposition (but only to the extent that (x) such estimated taxes are in fact paid to the relevant Federal, state or local governmental authority within three months of date of such Disposition or placed in escrow for the payment of such taxes or (y) the amount of such estimated taxes is less than $2,000,000 and the payment of such taxes is being contested in good faith and by appropriate proceedings), (b) Net Cash Payments shall not include any cash payment (or portion thereof) received in any fiscal year of the Company in respect of such Disposition to the extent that such cash payment (or portion thereof), together with all cash payments with respect to other Dispositions theretofore received in such fiscal year, does not exceed $1,000,000 and (c) Net Cash Payments shall be net of any repayments by the Company or any of its Restricted Subsidiaries of Indebtedness to the extent that (i) such Indebtedness is secured by a Lien on the Property that is the subject of such Disposition and (ii) such Indebtedness is to be repaid as a condition to the Disposition of such Property. "NEW WHOLLY-OWNED SUBSIDIARY" shall have the meaning assigned to such term in Section 9.08 hereof. "NON-RECOURSE DEBT" shall mean any Indebtedness of any Unrestricted Subsidiary, in each case in respect of which the sole recourse of the holder or holders thereof (except to the extent approved by the Majority Banks) is to such Unrestricted Subsidiary and/or one or more of its Subsidiaries (which is an Unrestricted Subsidiary) and/or any other Person (other than the Company and/or any Restricted Subsidiary) and the terms and conditions of the non-recourse provisions of which are reasonably acceptable to the Majority Banks; PROVIDED that the existence in any document executed by any such Unrestricted Subsidiary, in connection with such Non-Recourse Debt (the "SUBJECT DEBT") of a provision which provides for recourse to the -17- Properties or assets of the Company, or any Restricted Subsidiary generally by reason of gross negligence or willful misconduct of such Unrestricted Subsidiary, will not cause the Subject Debt to be excluded from the definition of "Non-Recourse Debt" prior to the time that a claim is made against the Company or such Restricted Subsidiary, as the case may be, alleging the gross negligence or willful misconduct of such Unrestricted Subsidiary (it being understood that immediately upon any such claim being made against the Company or such Restricted Subsidiary the amount of such claim shall cease to be Non-Recourse Debt). "NOTES" shall mean the promissory notes provided for by Section 2.08 hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "O&G BUSINESS" shall mean the lines of business referred to in Section 9.12 hereof. "OPERATING EXPENSES" shall mean, for any period, the sum of the following for the Company and its Restricted Subsidiaries (determined on a consolidated basis in accordance with GAAP) to the extent accrued or paid during such period (without duplication): (i) lease operating expenses; (ii) Taxes; (iii) general and administrative and other overhead expenditures; and (iv) all other expenses paid or accrued. "ORIGINAL FEE LETTER" shall mean the letter agreement dated December 1, 1993 between the Agent and the Company. "ORIGINAL NOTES" shall mean the promissory notes delivered pursuant to the Original Credit Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED INVESTMENTS" shall mean: (a) direct obligations of the United States of America, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States of America, or of any agency thereof, in either case maturing not more than 90 days from the date of acquisition thereof; (b) certificates of deposit issued by any bank or trust company organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits of at least $500,000,000, maturing not more than 90 days from the date of acquisition thereof; (c) commercial paper rated A-1 or better or P-1 by Standard & Poor's Rating Group or Moody's Investors Services, Inc., respectively, maturing not more than 90 days from the date of acquisition thereof; and (d) commercial paper rated A-2 or better (but less than A-1) or P-2 or better (but less than P-1) by Standard and Poor's Rating Group or Moody's Investors Services, Inc. respectively, maturing not more than 30 days from the date of acquisition thereof. -18- "PERSON" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "PLAN" shall mean an employee benefit or other plan established or maintained by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "PLEDGE AGREEMENT" shall mean the Pledge Agreement substantially in the form of Exhibit F hereto between any Obligor required to execute a Pledge Agreement at any time after the date hereof and the Agent, as the same shall be modified and supplemented and in effect from time to time. "POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount under this Agreement, any Note or any other Basic Document that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2% PLUS the Base Rate as in effect from time to time PLUS the Applicable Margin for Base Rate Loans (PROVIDED that, if the amount so in default is principal of a Eurodollar Loan and the due date thereof is a day other than the last day of the Interest Period therefor, the "Post-Default Rate" for such principal shall be, for the period from and including such due date to but excluding the last day of the Interest Period, 2% PLUS the interest rate for such Loan as provided in Section 3.02(b) hereof and, thereafter, the rate provided for above in this definition). "PRESENT VALUE OF RESERVES" shall mean, on any date, estimated net cash flow expressed in Dollars (after development expenses and production taxes) in respect of Proved Reserves attributable to Hydrocarbon Properties calculated in accordance with the Agent's risk factors and product pricing models in effect from time to time and discounted to present value at a discount rate acceptable to the Majority Banks from time to time for Proved Reserves. "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by Chase as its prime rate in effect at its principal office in New York City. "PRODUCERS MARKETING" shall mean Producers Marketing Ltd., a Canadian corporation. "PRODUCTION PAYMENTS" shall mean, collectively, Dollar-Denominated Production Payments and Volumetric Production Payments. "PROPERTY" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. -19- "PROVED RESERVES" shall mean reserves (to the extent of the net interest of the Company and its Restricted Subsidiaries therein) comprised of quantities of hydrocarbons that geologic and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions, PROVIDED that such reserves are recoverable from (a) existing wells, whether from completion intervals currently open and producing to market, or completion intervals currently open but not currently producing or zones behind casing of existing wells, or (b) new wells on undrilled acreage. Proved Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain to be productive when drilled. Other undrilled units may also be credited with Proved Reserves where continuity of production from existing productive formations can be demonstrated with reasonable certainty. For purposes of determining whether any Hydrocarbon Properties of any Obligor (other than Hydrocarbon Properties that have been acquired by such Obligor since the date of the most recent Reserve Evaluation Report or other internal reserve reports prepared by the Company, all of which shall be considered Proved Reserves) contain Proved Reserves, the Banks and the Obligors agree that the most recent Reserve Evaluation Report or other internal reserve reports prepared by the Company shall be determinative. "QUARTERLY DATES" shall mean the last day of March, June, September and December in each year, the first of which shall be the first such day after the date of this Agreement; PROVIDED that if any such day is not a Business Day, then such Quarterly Date shall be the next preceding Business Day. "REGULATION A", "REGULATION D", "REGULATION G", "REGULATION T", "REGULATION U" AND REGULATION X" shall mean, respectively, Regulations A, D, G, T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "REGULATORY CHANGE" shall mean, with respect to any Bank, any change after the date of this Agreement in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "REIMBURSEMENT OBLIGATIONS" shall mean, at any time, the obligations of the Company then outstanding, or which may thereafter arise in respect of all Letters of Credit then outstanding, to reimburse amounts paid by the Issuing Bank in respect of any drawings under a Letter of Credit. "RELEASE" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor -20- environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata. "REPORT DELIVERY DATE" shall mean, with respect to any Reserve Evaluation Report, 45 days prior to the applicable Determination Date. "RESERVE EVALUATION REPORT" shall mean an unsuperceded report that (a) is (i) prepared, in the case of the report required to be delivered by the Company pursuant to Section 9.01(f) hereof in connection with the Determination Date occurring on May 1 of each year, by the Independent Petroleum Engineer on the basis of assumptions and projections which the Company believes in good faith to be reasonable or, in the case of the report required to be delivered by the Company pursuant to Section 9.01(f) hereof in connection with each other Determination Date, by the Independent Petroleum Engineer on the basis of the most recently delivered Reserve Evaluation Report delivered in connection with the Determination Date occurring on May 1 of each year as adjusted for reserve additions and production from the date of such report, each as acceptable to the Independent Petroleum Engineer and (ii) satisfactory in form and substance to the Majority Banks (including as to assumptions) and (b)(x) is prepared on the basis of findings and material data as of a date not more than 60 days prior to the effective date of such report, in the case of a report prepared by the Company and (y) not more than 90 days prior to the effective date of such report, in the case of a report prepared by the Independent Petroleum Engineer, (i) identifies the Hydrocarbon Properties covered thereby, (ii) identifies (in the case of any report prepared by the Company) the Mortgaged Properties, (iii) as to each of the Hydrocarbon Properties, sets forth (A) the Proved Reserves attributable to such Hydrocarbon Property, (B) the total amount of such Proved Reserves attributable to such Hydrocarbon Property that, in the opinion of the preparer of such report, the Company and its Restricted Subsidiaries have the right to produce for their own account in the current and each succeeding calendar year, (C) a projection of the rate of production and the Future Net Revenues of the Company and its Restricted Subsidiaries (including as additional information the data and assumptions used to determine such Future Net Revenues) from such Proved Reserves for the current and each succeeding calendar year, (D) the quantity and type of hydrocarbons recoverable from such Proved Reserves in the current and each succeeding calendar year, (E) an estimate of the projected revenues and expenses attributable to such Proved Reserves in the current and each succeeding calendar year, and (F) any reports or evaluations prepared by the Company regarding the expediency of any change in methods of treatment or operation of all or any wells drilled to produce any of such Proved Reserves that are producing or capable of producing hydrocarbons, any new drilling or development, any method of secondary recovery by repressuring or otherwise, or any other action with respect to such Proved Reserves, the decision as to which may increase or reduce the quantity of hydrocarbons ultimately recoverable, or the rate of production thereof and (c) reconciles (i) the total amount of Proved Reserves attributable to each Hydrocarbon Property and (ii) any material changes in Operating Expenses or Capital Expenditures contained in such Reserve Evaluation Report with the information contained in the immediately preceding Reserve Evaluation Report, if any. -21- "RESERVE REQUIREMENT" shall mean, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including, without limitation, any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change with respect to (i) any category of liabilities that includes deposits by reference to which the Eurodollar Base Rate is to be determined as provided in the definition of "Eurodollar Base Rate" in this Section 1.01 or (ii) any category of extensions of credit or other assets that includes Eurodollar Loans. "RESTRICTED SUBSIDIARY" shall mean any Subsidiary of the Company other than an Unrestricted Subsidiary. "SECOND AMENDMENT FEE LETTER" shall mean the letter agreement dated January 31, 1997 between the Agent and the Company. "SECURITY AGREEMENT" shall mean an Amended and Restated Security Agreement substantially in the form of Exhibit B hereto between the Obligors and the Agent, as the same shall be modified and supplemented and in effect from time to time. "SECURITY DOCUMENTS" shall mean, collectively, the Security Agreement, the Pledge Agreement, the Mortgages and all Uniform Commercial Code financing statements required by this Agreement, the Security Agreement, the Pledge Agreement or the Mortgages to be filed with respect to the security interests in personal Property and fixtures created pursuant to the Security Agreement, the Pledge Agreement or the Mortgages. "SENIOR SUBORDINATED DEBT" shall mean the Indebtedness of the Company in respect of the 11 1/4% Senior Subordinated Notes of the Company due September 1, 2003 issued pursuant to the Senior Subordinated Debt Documents. "SENIOR SUBORDINATED DEBT DOCUMENTS" shall mean all documents and agreements executed and delivered in connection with the original issuance of the Senior Subordinated Debt, including the Indenture dated as of September 8, 1993 between the Company and Shawmut Bank Connecticut, National Association, as trustee, as the same shall, subject to Section 9.17 hereof, be modified and supplemented and in effect from time to time. "SUBORDINATED INDEBTEDNESS" shall mean, collectively, (a) the Senior Subordinated Debt, and (b) any other Indebtedness of any of the Obligors outstanding on the date hereof (i) for which any Obligor is directly and primarily liable, (ii) in respect of which none of the Company's other Restricted Subsidiaries is contingently or otherwise obligated and (iii) which is subordi- -22- nated to the obligations of the respective Obligors to pay principal of and interest on the Loans, Reimbursement Obligations and Notes hereunder, and any extensions on renewals thereof, but excluding any increases in the outstanding amount thereof, on terms, and pursuant to documentation containing other terms (including interest, amortization, covenants and events of default), in form and substance satisfactory to the Majority Banks. "SUBSIDIARY" shall mean, for any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "WHOLLY OWNED SUBSIDIARY" shall mean any such corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are so owned or controlled. "TANGIBLE NET WORTH" shall mean, as at any date for any Person, the sum for such Person (determined on a consolidated basis without duplication in accordance with GAAP as of the date of its most recent financial statement) and plus any increase occurring during the period from the date of the Company's most recent financial statements to the date of determination as a result of any Equity Issuance by the Company, of the following: (a) the amount of capital stock, PLUS (b) the amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, MINUS the amount of such deficit), MINUS (c) the sum of the following: cost of treasury shares and the book value of all assets which should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) but in any event including goodwill (other than goodwill reflected on the financial statements of Canadian Forest Oil), minority interests, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, all accounting reserves; PLUS (d) the amount of noncash writedowns of long-lived assets in compliance with GAAP guidelines or Securities and Exchange Commissions rules or regulations. "TAXES" shall mean all taxes, levies, imposts, stamp taxes, duties, charges to tax, fees, deductions, withholdings, royalties, charges, compulsory loans or restrictions or conditions -23- resulting in a charge which are imposed, levied, collected, withheld or assessed by any political subdivision or taxing authority as of the date of this Agreement or at any time in the future together with interest thereon and penalties with respect thereto, if any, and any payments of principal, interest, charges, fees or other amounts made on or in respect thereof, including without limitation production and severance taxes and windfall profit taxes, and "TAX" and "TAXATION" shall be construed accordingly provided that "TAXES" shall exclude taxes imposed on or measured by the overall net income of a Person. "3189503" shall mean 3189503 Canada Ltd., a Canadian Corporation. "TOTAL CAPITALIZATION" shall mean, for any Person, as of the date of determination, the sum of the Tangible Net Worth of such Person (or, in the case of the Company, the Tangible Net Worth of the Company and its Restricted Subsidiaries) as of such date of determination PLUS the Funded Indebtedness of such Person (or, in the case of the Company, the Funded Indebtedness of the Company and its Restricted Subsidiaries) as of such date of determination. "TYPE" shall have the meaning assigned to such term in Section 1.04 hereof. "UNRESTRICTED PROPERTIES" shall mean the Hydrocarbon Properties of the Company and its Restricted Subsidiaries that (A) are (i) not Mortgaged Properties and (ii) that do not contain Proved Reserves and (B) are encumbered by Dollar-Denominated Production Payments in existence on the Closing Date. "UNRESTRICTED SUBSIDIARY" shall mean such Subsidiaries of the Company (other than Subsidiary Guarantors) as may be designated by the Company as "Unrestricted Subsidiaries" as provided in Section 1.05 hereof. "VOLUMETRIC PRODUCTION PAYMENTS" shall mean production payment obligations of the Company or any of its Subsidiaries which are payable from a specified share of production from specific Properties, together with all undertakings and obligations in connection therewith. "VOTING STOCK" means, with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of Directors or other governing body of such Person. 1.02 ACCOUNTING TERMS AND DETERMINATIONS. (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the time of delivery thereof in the manner described in subsection (b) below) -24- be prepared, in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Banks hereunder (which, prior to the delivery of the first financial statements under Section 9.01 hereof, shall mean the audited financial statements as at December 31, 1995 referred to in Section 8.02 hereof). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Banks pursuant to Section 9.01 hereof (or, prior to the delivery of the first financial statements under Section 9.01 hereof, used in the preparation of the audited financial statements as at December 31, 1995 referred to in Section 8.02 hereof) unless (i) the Company objects to the Banks in writing to determining such compliance on such basis at the time of delivery of such financial statements to the Banks or (ii) the Majority Banks shall object to the Company (through the Agent) in writing to so determining such compliance within 30 days after such delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 9.01 hereof, shall mean the financial statements referred to in Section 8.02 hereof). (b) At the reasonable request of the Majority Banks the Company shall deliver to the Banks (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. (c) None of the Company and its Subsidiaries will change the last day of their respective fiscal years from December 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30 of each year, respectively. 1.03 BORROWING BASE. (a) RESERVE EVALUATION REPORTS. The Company has furnished to the Agent and the Banks a reserve report as of July 1, 1996, which report shall be deemed to be the initial Reserve Evaluation Report. On or before each Report Delivery Date, the Company shall furnish to the Agent and the Banks an updated Reserve Evaluation Report. (b) BORROWING BASE. During the period commencing on the date hereof and ending on such date the first redetermination of the Borrowing Base becomes effective as provided below in this Section 1.03(b), the Borrowing Base shall be $60,000,000 (subject to any -25- adjustments and redeterminations provided for by Sections 1.03(c), 1.03(d) and 1.03(e) hereof) which amount has been determined on the basis of the initial Reserve Evaluation Report referred to in the first sentence of Section 1.03(a) hereof (with such adjustments to the rates, factors, values, estimates, assumptions and computations set forth in such Reserve Evaluation Report as are acceptable to the Majority Banks). As promptly as reasonably practicable after its receipt of each Reserve Evaluation Report furnished to it pursuant to the second sentence of Section 1.03(a) hereof, the Agent (in consultation with the Majority Banks) shall endeavor to redetermine the Borrowing Base on the basis of such Reserve Evaluation Report in the manner provided in this clause (b), notify the Banks of such redetermination and, if such redetermination is approved by each of the Banks (in the case of an increase in the Borrowing Base) or by the Majority Banks (in the case of (i) a decrease in the Borrowing Base or (ii) no change in the Borrowing Base), as applicable, notify the Company of the Borrowing Base as so redetermined and such redetermined Borrowing Base shall become effective on the Determination Date next following each Report Delivery Date (or, if later, on the date notified by the Agent to the Company) and shall remain effective until again redetermined as provided in this Section 1.03(b) (subject to any adjustments and redeterminations provided for by Sections 1.03(c), 1.03(d) and 1.03(e) hereof). The determination by the Agent and each of the Banks or the Majority Banks, as the case may be, of the Borrowing Base for any Determination Period shall be made on the basis of parameters which may include the Present Value of Reserves attributable to Hydrocarbon Properties included in the Mortgaged Properties as set forth in the Reserve Evaluation Report for such Determination Period, subject, however, to such adjustments as the Agent, with the concurrence of each of the Banks or the Majority Banks, as the case may be, may make in its and their sole discretion to the rates, factors, values, estimates, assumptions and computations set forth in such Reserve Evaluation Report and any other relevant information or factors, including without limitation, any additional Indebtedness or other obligations that may be incurred by the Company and its Subsidiaries that the Majority Banks may deem appropriate. (c) MATERIAL CHANGE. The Company agrees to notify the Agent promptly of any material change of which the Company or any of its Restricted Subsidiaries is aware which reduces or may result in a reduction of the Borrowing Base by more than 10%. Promptly upon receipt of such notice, the Agent (in consultation with the Banks) shall endeavor to adjust the Borrowing Base pursuant to the procedures set forth in Section 1.03(b) hereof. (d) REDETERMINATION. If so requested by the Majority Banks or the Company at any time, the Agent shall, as promptly as reasonably practicable after the receipt of such request, endeavor to redetermine (in consultation with the Company and the Banks) the Borrowing Base as then in effect on the basis of the then most recent Reserve Evaluation Report (subject, however, to such additional adjustments to the rates, factors, values, estimates, assumptions and computations as set forth therein as the Agent, with the concurrence of the Majority Banks, may determine to be appropriate) and any other relevant information and factors, including, without limitation, any additional Indebtedness or other obligations that have been or are reasonably anticipated to be incurred by the Company and its Restricted Subsidiaries -26- and any Hydrocarbon Properties acquired by the Company and its Restricted Subsidiaries which are not subject to any Lien other than Liens created hereunder or under the Security Documents, Liens permitted by Section 9.06 hereof, that the Majority Banks may deem appropriate and otherwise as provided in Section 1.03(b) hereof, PROVIDED that no Hydrocarbon Properties acquired by any Subsidiary of the Company after the date hereof shall be included in the calculation of the Borrowing Base unless such Subsidiary is a Subsidiary Guarantor under this Agreement. As promptly as reasonably practical following its redetermination of the Borrowing Base the Agent shall notify the Banks of such redetermination and, if such redetermination is approved by each of the Banks (in the case of an increase in the Borrowing Base) or by the Majority Banks (in the case of a decrease in the Borrowing Base), as applicable, notify the Company of the Borrowing Base as so redetermined and such redetermined Borrowing Base shall become effective immediately upon delivery to the Company of such notice of redetermination. (e) DETERMINATIONS, ETC. All determinations and redeterminations and adjustments by the Agent provided for above in this Section 1.03 or in the definition of "Present Value of Reserves" in Section 1.01 (and any determinations and decisions by the Majority Banks in connection therewith, including any thereof approving or disapproving a proposed redetermination or redetermination by the Agent or effecting any adjustment to any element included in a Reserve Evaluation Report or the determination or redetermination of the Borrowing Base) shall be made on a reasonable basis, in good faith and in a manner reasonably consistent with the basis on which the initial Borrowing Base was determined to be acceptable to the Banks (but after giving effect to changes in facts and circumstance occurring after the date of such initial determination including, but not limited to, reserves and production, operating expenses and economic assumptions with respect to price of hydrocarbons and inflation), and any such determination, redetermination or adjustment shall consider any other relevant information or factors, including without limitation, any additional Indebtedness or other obligations that may be incurred by the Company and its Restricted Subsidiaries that the Majority Banks may deem appropriate, PROVIDED that no Hydrocarbon Properties acquired by any Subsidiary of the Company after the date hereof shall be included in the calculation of the Borrowing Base unless such Subsidiary is a Subsidiary Guarantor under this Agreement. 1.04 TYPES OF LOANS. Loans hereunder are distinguished by "Type". The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar Loan, each of which constitutes a Type. 1.05 DESIGNATION OF SUBSIDIARIES AS RESTRICTED OR UNRESTRICTED SUBSIDIARIES. The Company may, but only with the approval of the Majority Banks, designate (by notice to the Agent which shall promptly notify the Banks) a Restricted Subsidiary by delivery of a new Schedule III hereto (other than a Subsidiary Guarantor) to be an Unrestricted Subsidiary or an Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that the Company may, without such approval, designate (by notice to the Agent which shall promptly notify the Banks) a -27- corporation or other entity that is formed or acquired as a direct or indirect Subsidiary of the Company after the date hereof (no part of the business or assets of which was owned by the Company or a Restricted Subsidiary prior to the date of such formation or acquisition) to be an Unrestricted Subsidiary on or prior to the date of such formation or acquisition if, after giving effect thereto, the Company would be in compliance with its obligations with respect to such Subsidiary as an Unrestricted Subsidiary under Section 9.19 hereof and no other Default shall have occurred and be continuing. 1.06 REFERENCES TO SUBSIDIARIES, RESTRICTED SUBSIDIARIES AND UNRESTRICTED SUBSIDIARIES IN CONNECTION WITH CALCULATIONS OF CERTAIN FINANCIAL RATIOS. References (whether in the singular or the plural) to Subsidiaries, Restricted Subsidiaries and Unrestricted Subsidiaries in the definitions of "Cash Flow" and "Interest Expense" in Section 1.01 hereof shall, for purposes of calculating Cash Flow or Interest Expense (as the case may be) for a period or part of a period ending prior to the date of this Agreement, be deemed to refer to corporations or other entities that would have been "Subsidiaries", "Restricted Subsidiaries" or "Unrestricted Subsidiaries" (as the case may be) had this Agreement been in effect on the first day of such period. Section 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS. 2.01 LOANS. (a) Each Bank severally agrees, in accordance with the terms and conditions of this Agreement, to make one or more loans to the Company in Dollars during the period from and including the Closing Date to and including the Commitment Termination Date, in an aggregate amount up to but not exceeding the lesser of (x) the Commitment of such Bank and (y) an amount equal to such Bank's Commitment Percentage multiplied by the Borrowing Base determined pursuant to the immediately preceding Reserve Evaluation Report; PROVIDED that (i) in no event shall the aggregate principal amount of all Loans, together with the aggregate amount of all Letter of Credit Liabilities, exceed the lesser of (x) the aggregate amount of the Commitments as in effect from time to time any (y) the Borrowing Base determined pursuant to the immediately preceding Reserve Evaluation Report and (ii) the Company may not borrow Loans or obtain Letters of Credit under this Agreement at any time while a Borrowing Base Deficiency exists. The aggregate of the Commitments of the Banks on the date hereof is $100,000,000. (b) Subject to the terms and conditions of this Agreement, during the period from and including the Closing Date to but not including the Commitment Termination Date, the Company may borrow, repay and reborrow the Loans by means of Base Rate Loans and Eurodollar Loans, and may Convert Loans of one Type into Loans of another Type (as provided in Section 2.08 hereof) or Continue Loans of one Type as Loans of the same Type (as provided -28- in Section 2.08 hereof); PROVIDED that no more than three separate Interest Periods in respect of Eurodollar Loans may be outstanding at any one time. (c) Notwithstanding any provision of this Section 2.01 to the contrary, the aggregate amount of Letter of Credit Liabilities outstanding under this Agreement shall not at any time exceed the least of (i) $10,000,000, (ii) the aggregate of the Commitments and (iii) the Borrowing Base. (d) On the date this Agreement becomes effective: (i) The Company shall pay all accrued and unpaid commitment fees and letter of credit fronting fees outstanding under the Original Credit Agreement for the account of each "Bank" under the Original Credit Agreement; (ii) each "Eurodollar Loan" outstanding under the Original Credit Agreement shall be deemed a Eurodollar Loan hereunder in the amount, with the same rate of interest and maturity date as such "Eurodollar Loan" under the Original Credit Agreement, and the obligations of the Company with respect to such "Eurodollar Loan," including accrued and unpaid interest shall be deemed carried forward hereunder (and, as such, such Eurodollar Loans may not be allocated ratably among the Banks), and the execution and delivery of this Agreement and the extension of such Loans hereunder shall not entitle any "Bank" under the Original Credit Agreement to seek compensation pursuant to Section 5.05 hereof or thereof; (iii) each "Base Rate Loan" under the Original Credit Agreement shall be deemed to be repaid with the proceeds of a new Base Rate Loan under this Agreement; (iv) each "Letter of Credit" under the Original Credit Agreement shall be deemed to be issued pursuant to the terms hereof without payment of any additional issuance or amendment fees; and (v) the Original Credit Agreement and the commitments thereunder shall be superseded by this Agreement and such commitments shall terminate. 2.02 BORROWINGS. The Company shall give the Agent (which shall promptly notify the Banks) notice of each borrowing hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m. New York time on the date specified for each borrowing hereunder, each -29- Bank shall make available the amount of the Loan or Loans to be made by it on such date to the Agent, at an account specified by the Agent maintained by the Agent with Chase, in immediately available funds, for account of the Company. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company maintained with Chase in New York, New York, designated by the Company. At the time of each such notice of borrowing hereunder the Company shall deliver a certificate of the Chief Financial Officer, the Treasurer or an Assistant Treasurer of the Company which certificate shall indicate the ratio of Funded Indebtedness to Total Capitalization of the Company and its Restricted Subsidiaries after giving effect to such borrowing and shall show, in reasonable detail, the calculations used to derive such ratio. 2.03 LETTERS OF CREDIT. Subject to the terms and conditions of this Agreement, the Commitments may be utilized, upon the request of the Company, in addition to the Loans provided for by Section 2.01(a) hereof, for the issuance by the Issuing Bank of letters of credit (collectively, "LETTERS OF CREDIT") for account of the Company and its Restricted Subsidiaries, PROVIDED that in no event shall (i) the aggregate amount of all Letter of Credit Liabilities, together with the aggregate principal amount of the Loans, exceed the lesser of (A) the aggregate of the Commitments and (B) the Borrowing Base as determined pursuant to the immediately preceding Reserve Evaluation Report, (ii) the outstanding aggregate amount of all Letter of Credit Liabilities exceed $10,000,000 and (iii) the expiration date of any Letter of Credit extend beyond the earlier of the Commitment Termination Date and the date 12 months following the issuance of such Letter of Credit. The following additional provisions shall apply to Letters of Credit: (a) The Company shall give the Agent at least three Business Days' irrevocable prior notice (effective upon receipt) specifying the Business Day (which shall be no later than 30 days preceding the Commitment Termination Date) each Letter of Credit is to be issued and the account party or parties therefor and describing in reasonable detail the proposed terms of such Letter of Credit (including the beneficiary thereof) and the nature of the transactions or obligations proposed to be supported thereby (including whether such Letter of Credit is to be a commercial letter of credit or a standby letter of credit). Upon receipt of any such notice, the Agent shall advise the Issuing Bank of the contents thereof. (b) On each day during the period commencing with the issuance by the Issuing Bank of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Bank shall be deemed to be utilized for all purposes of this Agreement in an amount equal to such Bank's Commitment Percentage of the then undrawn face amount of such Letter of Credit. Each Bank (other than the Issuing Bank) agrees that, upon the issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in the Issuing Bank's liability under such Letter of Credit in an -30- amount equal to such Bank's applicable Commitment Percentage of such liability, and each such Bank (other than the Issuing Bank) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to the Issuing Bank to pay and discharge when due, its Commitment Percentage of the Issuing Bank's liability under such Letter of Credit. (c) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the Issuing Bank shall promptly notify the Company (through the Agent) of the amount to be paid by the Issuing Bank as a result of such demand and the date on which payment is to be made by the Issuing Bank to such beneficiary in respect of such demand. Notwithstanding the identity of the account party of any Letter of Credit, the Company agrees to pay and reimburse the Agent for account of the Issuing Bank for the amount of each demand for payment under such Letter of Credit at or prior to the date on which payment is to be made by the Issuing Bank to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. (d) Forthwith upon its receipt of a notice referred to in clause (c) of this Section 2.03, the Company shall advise the Agent whether or not the Company intends to borrow hereunder to finance its obligations to reimburse the Issuing Bank for the amount of the related demand for payment and, if it does, submit a notice of such borrowing as provided in Section 4.05 hereof. In the event that the Company fails to so advise the Agent, or if the Company fails to reimburse the Issuing Bank for a demand for payment under a Letter of Credit by the date of such payment, the Agent shall give each Bank prompt notice of the amount of the demand for payment, specifying such Bank's Commitment Percentage of the amount of the related demand for payment. (e) Each Bank (other than the Issuing Bank) shall pay to the Agent for the account of the Issuing Bank at an account specified by the Issuing Bank maintained by the Issuing Bank at Chase in New York, New York in Dollars and in immediately available funds, the amount of such Bank's Commitment Percentage of any payment under a Letter of Credit upon notice by the Issuing Bank (through the Agent) to such Bank requesting such payment and specifying such amount. Each Bank's obligation to make such payments to the Agent for account of the Issuing Bank under this clause (e), and the Issuing Bank's right to receive the same, shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, (i) the failure of any other Bank to make its payment under this clause (e), the financial condition of the Company and the other Obligors (or any other account party), the existence of any Default or (ii) the termination of the Commitments. Each such payment to the Issuing Bank shall be made without any offset, abatement, withholding or reduction whatsoever. If any Bank shall default in its obligation to make any such payment to the Agent for account of the Issuing Bank, for so long as such default shall -31- continue the Agent shall at the request of the Issuing Bank withhold from any payments received by the Agent under this Agreement or any Note for account of such Bank the amount so in default and the Agent shall pay the same to the Issuing Bank in satisfaction of such defaulted obligation. (f) Upon the making of each payment by a Bank to the Issuing Bank pursuant to clause (e) above in respect of any Letter of Credit, such Bank shall, automatically and without any further action on the part of the Agent, the Issuing Bank or such Bank, acquire (i) a participation in an amount equal to such payment in the Reimbursement Obligation owing to the Issuing Bank by the Company hereunder and under the Letter of Credit Documents relating to such Letter of Credit and (ii) a participation in a percentage equal to such Bank's Commitment Percentage of its Commitment in any interest or other amounts payable by the Company hereunder and under such Letter of Credit Documents in respect of such Reimbursement Obligation (other than the commissions, charges, costs and expenses payable to the Issuing Bank pursuant to clause (g) of this Section 2.03). Upon receipt by the Issuing Bank from or for account of the Company of any payment in respect of any Reimbursement Obligation or any such interest or other amount (including by way of setoff or application of proceeds of any collateral security) the Issuing Bank shall promptly pay to the Agent for account of each Bank, such Bank's Commitment Percentage of its Commitment of such payment, each such payment by the Issuing Bank to be made in the same money and funds in which received by the Issuing Bank. In the event any payment received by the Issuing Bank and so paid to the Banks hereunder is rescinded or must otherwise be returned by the Issuing Bank, each Bank shall, upon the request of the Issuing Bank (through the Agent), repay to the Issuing Bank (through the Agent) the amount of such payment paid to such Bank, with interest at the rate specified in clause (j) of this Section 2.03. (g) The Company agrees to pay to the Agent for account of the Issuing Bank in respect of each Letter of Credit issued to the Company or any of its Subsidiaries an issuance fee in an amount equal to the Applicable Margin for Eurodollar Loans per annum of the daily average undrawn face amount of such Letter of Credit for the period from and including the date of issuance of such Letter of Credit to and including the date such Letter of Credit is drawn in full, expires or is terminated (such fee to be non-refundable, to be paid in arrears on each Quarterly Date and on the Commitment Termination Date and to be calculated, for any day, after giving effect to any payments made under such Letter of Credit on such day). The Issuing Bank shall pay to the Agent for account of each Bank (other than the Issuing Bank), from time to time at reasonable intervals (but in any event at least quarterly), but only to the extent actually received from the Company, an amount equal to such Bank's Commitment Percentage of all such fees in respect of each Letter of Credit (including any such fee in respect of any period of any renewal or extension thereof). In addition, the Company agrees to pay to the Agent for account of the Issuing Bank on the issuance date, a fronting fee in respect of each Letter -32- of Credit in an amount equal to the greater of (i) $1,000 and (ii) 1/2 of 1% of the face amount of such Letter of Credit plus all commissions, charges, costs and expenses in the amounts customarily charged by the Issuing Bank from time to time in like circumstances with respect to the issuance of each Letter of Credit and drawings and other transactions relating thereto. (h) Promptly following the end of each calendar month, the Issuing Bank shall deliver (through the Agent) to each Bank and the Company notice describing the aggregate amount of all Letters of Credit outstanding at the end of such month. Upon the request of any Bank from time to time, the Issuing Bank shall deliver any other information in its possession reasonably requested by such Bank with respect to each Letter of Credit then outstanding. (i) The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Section 7 hereof, be subject to the conditions precedent that (i) such Letter of Credit shall be in such form, contain such terms and support such transactions as shall be satisfactory to the Issuing Bank consistent with its then current practices and procedures with respect to letters of credit of the same type and (ii) the Company shall have executed and delivered such applications, agreements and other instruments relating to such Letter of Credit as the Issuing Bank shall have reasonably requested consistent with its then current practices and procedures with respect to letters of credit of the same type, PROVIDED that in the event of any conflict between any such application, agreement or other instrument and the provisions of this Agreement or any Security Document, the provisions of this Agreement and the Security Documents shall control. (j) To the extent that any Bank fails to pay any amount required to be paid pursuant to clause (e) or (f) of this Section 2.03 on the due date therefor, such Bank shall pay interest to the Issuing Bank (through the Agent) on such amount from and including such due date to but excluding the date such payment is made (i) during the period from and including such due date to but excluding the date three Business Days thereafter, at a rate per annum equal to the Federal Funds Effective Rate (as in effect from time to time) and (ii) thereafter, at a rate per annum equal to the Base Rate (as in effect from time to time) plus 2%. (k) The issuance by the Issuing Bank of any modification or supplement to any Letter of Credit hereunder shall be subject to the same conditions applicable under this Section 2.03 to the issuance of new Letters of Credit, and no such modification or supplement shall be issued hereunder unless either (x) the respective Letter of Credit affected thereby would have complied with such conditions had it originally been issued hereunder in such modified or supplemented form or (y) each Bank shall have consented thereto. -33- The Company hereby indemnifies and holds harmless each Bank and the Agent from and against any and all claims and damages, losses, liabilities, costs or expenses which such Bank or the Agent may incur (or which may be claimed against such Bank or the Agent by any Person whatsoever) by reason of or in connection with the execution and delivery or transfer of or payment or refusal to pay by the Issuing Bank under any Letter of Credit; PROVIDED that the Company shall not be required to indemnify any Bank or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent caused by (x) the willful misconduct or gross negligence of the Issuing Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) in the case of the Issuing Bank, such Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this Section 2.03 is intended to limit the other obligations of the Company, any Bank or the Agent under this Agreement. 2.04 CHANGES OF COMMITMENTS. (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Loans or Letter of Credit Liabilities are outstanding, to terminate the Commitments and (ii) to reduce the aggregate unused amount of the Commitments (for which purpose use of the Commitments shall be deemed to include the aggregate amount of Letter of Credit Liabilities); PROVIDED that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof and (y) each partial reduction shall be in an aggregate amount at least equal to $1,000,000 or in multiples of $500,000 in excess thereof. (c) The Commitments once terminated or reduced may not be reinstated. 2.05 COMMITMENT FEE. The Company shall pay to the Agent for account of each Bank a commitment fee on the daily average unused amount of the difference, if any, between (x) each Bank's outstanding Loans and (y) an amount equal to such Bank's Commitment Percentage multiplied by the Borrowing Base determined pursuant to the immediately preceding Reserve Evaluation Report (the "AVAILABLE BORROWING AMOUNT") (for which purpose the aggregate amount of any Letter of Credit Liabilities shall be deemed to be a pro rata use of each Bank's Available Borrowing Amount) for the period from and including the date of this Agreement to but not including the earlier of the date such Bank's Commitment is terminated and the Commitment Termination Date, at the Applicable Commitment Fee Rate. Accrued commitment fees shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. -34- 2.06 LENDING OFFICES. The Loans of each Type made by each Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type. 2.07 SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither any Bank nor the Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank, and no Bank shall have any obligation to the Agent or any other Bank for the failure by such Bank to make any Loan required to be made by such Bank. The amounts payable by the Company at any time hereunder and under the Notes to each Bank shall be a separate and independent debt and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes, and it shall not be necessary for any other Bank or the Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.08 NOTES. (a) The Loans made by each Bank shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A hereto, dated the date hereof, payable to such Bank in a principal amount equal to the amount of its Commitment as originally in effect and otherwise duly completed. (b) The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by such Bank on its books and, prior to any transfer of the Note evidencing the Loans held by it, endorsed by such Bank on the schedule attached to such Note or any continuation thereof; PROVIDED that the failure of such Bank to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing hereunder or under such Note in respect of the Loans evidenced by such Note. (c) No Bank shall be entitled to have its Notes subdivided, by exchange for promissory notes of lesser denominations or otherwise, except in connection with a permitted assignment of all or any portion of such Bank's Commitment, Loans and Note pursuant to Section 12.06(b) hereof. 2.09 OPTIONAL PREPAYMENTS AND CONVERSIONS OR CONTINUATIONS OF LOANS. Subject to Section 4.04 hereof, the Company shall have the right to prepay Loans, or to Convert Loans of one Type into Loans of another Type or Continue Loans of one Type as Loans of the same Type, at any time or from time to time, PROVIDED that: (a) the Company shall give the Agent notice of each such prepayment, Conversion or Continuation as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder); and (b) Eurodollar Loans may be prepaid or Converted only on the last -35- day of an Interest Period for such Loans. Notwithstanding the foregoing, and without limiting the rights and remedies of the Banks under Section 10 hereof, in the event that any Event of Default shall have occurred and be continuing, the Agent may (and at the request of the Majority Banks shall) by notice to the Company suspend the right of the Company to Convert any Loan into a Eurodollar Loan, or to Continue any Loan as a Eurodollar Loan, in which event all Loans shall be Converted (on the last day(s) of the respective Interest Periods therefor) or Continued, as the case may be, as Base Rate Loans. 2.10 MANDATORY PREPAYMENTS AND REDUCTIONS OF COMMITMENTS. (a) BORROWING BASE. The Agent shall notify the Company (in a "DEFICIENCY NOTICE") any time the Borrowing Base as then in effect is less than the aggregate principal amount of the Loans and Letter of Credit Liabilities outstanding at such time (the amount of such difference being called herein the "BORROWING BASE DEFICIENCY") and within 30 days after the date of the Deficiency Notice the Company shall notify the Agent of the Company's intentions with respect to compliance with the procedures set forth in this Section 2.10(a). As specified in such notice from the Company, the Company shall (within 90 days after the date of the Deficiency Notice) (i) prepay (in accordance with the procedures of this Agreement) the outstanding principal of the Loans and, if all of the Loans have been prepaid and a Borrowing Base Deficiency still exists, provide cover for Letter of Credit Liabilities in an amount equal to such Deficiency as specified in clause (e) below and/or (ii) add to the Hydrocarbon Properties (each such additional Property to have a Present Value of Reserves at least equal to $1,000,000) having a loan value, as determined by the Majority Banks, in an amount sufficient so that the aggregate amount of such prepayments and the loan value of such additional Properties shall equal or exceed the Borrowing Base Deficiency. The Company shall, within 120 days of receipt of notice from the Agent that the Properties to be added to the Borrowing Base are acceptable to the Majority Banks, subject such Properties to the Lien of the Mortgages pursuant to documentation and otherwise in a manner satisfactory to the Majority Banks. (b) CASUALTY EVENTS. Upon the date 30 days following the receipt by the Company or any of its Restricted Subsidiaries of the proceeds of insurance, condemnation award or other compensation in respect of any Casualty Event affecting any Hydrocarbon Property other than Unrestricted Properties of any Restricted Subsidiary, the Company shall prepay the Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (e) below), and the Commitments shall be subject to automatic reduction, in an aggregate amount, if any, equal to 100% of the Net Available Proceeds of such Casualty Event not theretofore applied to the repair or replacement of such Hydrocarbon Property, or such lesser amount as is specified in a written notice from the Majority Banks, such prepayment and reduction to be effected in each case in the manner and to the extent specified in clause (d) of this Section 2.10. Nothing in this clause (b) shall be deemed to limit any obligation of the Company and any of its Restricted Subsidiaries pursuant to any of the Security Documents to remit to a collateral or similar account (including, without limitation, the Collateral Account) maintained by the Agent pursuant to any -36- of the Security Documents the proceeds of insurance, condemnation award or other compensation received in respect of any Casualty Event. (c) SALE OF ASSETS. Without limiting the obligation of the Obligors to obtain the consent of the Majority Banks pursuant to Section 9.05 hereof to any Disposition not otherwise permitted hereunder, no later than five Business Days prior to the occurrence of any Disposition, the Company, on behalf of the applicable Obligor will deliver to the Banks a statement, certified by the chief financial officer or treasurer of the Company, in form and detail satisfactory to the Agent, of the amount of the Net Available Proceeds of such Disposition and, to the extent such Net Available Proceeds (when taken together with the Net Available Proceeds of all prior Dispositions as to which a prepayment has not yet been made under this Section 2.10(c)) shall exceed $2,000,000, the Company shall prepay the Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (e) below), and the Borrowing Base shall be subject to automatic reduction, in an aggregate amount equal to 100% of the Net Available Proceeds of such Disposition, or such lesser amount as is specified in a written notice from the Majority Banks (together with 100%, or such lesser amount as is specified in a written notice from the Majority Banks, of the Net Available Proceeds of all prior Dispositions as to which a prepayment has not yet been made under this Section 2.10(c)), such prepayment and reduction to be effected in each case in the manner and to the extent specified in clause (d) of this Section 2.10. Notwithstanding the forgoing, the Company shall not be required to prepay the Loans (and/or provide cover for the Letter of Credit Liabilities pursuant to Section 2.10(e) hereof), and the Borrowing Base shall not be subject to automatic reduction upon any sale of Property, other than any Hydrocarbon Property, pursuant to Section 9.05 hereof. (d) APPLICATION. Prepayments and reductions of Commitments or the Borrowing Base, as the case may be, described in the above clauses of this Section 2.10 shall be effected as follows: the Commitments or the Borrowing Base, as the case may be, shall be automatically reduced by an amount equal to the amount specified in such clauses (and to the extent that, after giving effect to such reduction, the aggregate principal amount of the Loans, together with the aggregate amount of all Letter of Credit Liabilities, would exceed the Commitments or the Borrowing Base, as applicable, the Company shall first, prepay the Loans and second, provide cover for Letter of Credit Liabilities with respect to the Commitments or the Borrowing Base, as applicable, as specified in clause (e) below, in an aggregate amount equal to such excess). (e) COVER FOR LETTER OF CREDIT LIABILITIES. In the event that the Company shall be required pursuant to this Section 2.10, or pursuant to Section 3.01 or 5.07(c) hereof, to provide cover for Letter of Credit Liabilities, the Company shall effect the same by paying to the Agent immediately available funds in an amount equal to the required amount, which funds shall be retained by the Agent in the Collateral Account (as provided in Section 4.04 of the Security Agreement as collateral security in the first instance for the Letter of Credit Liabilities) until such time as the Letters of Credit shall have been terminated and all of the Letter of Credit Liabilities have been paid in full. -37- Section 3. PAYMENTS OF PRINCIPAL AND INTEREST. 3.01 REPAYMENT OF LOANS. The Company hereby promises to pay to the Agent for the account of each Bank the entire outstanding principal amount of such Bank's Loans, and each Loan shall mature, on the Commitment Termination Date. In addition, if following any reduction in the Commitments, the aggregate principal amount of the Loans, together with the aggregate amount of all Letter of Credit Liabilities shall exceed the Commitments, the Company shall first, prepay Loans and second, provide cover for Letter of Credit Liabilities with respect to the Commitments as specified in Section 2.10(e) above, in an aggregate amount equal to such excess. 3.02 INTEREST. The Company hereby promises to pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) during such periods as such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time) PLUS the Applicable Margin, and (b) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Loan for such Interest Period PLUS the Applicable Margin. Notwithstanding the foregoing, the Company hereby promises to pay to the Agent for account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank, on any Reimbursement Obligation held by such Bank and on any other amount payable by the Company hereunder or under the Note held by such Bank to or for account of such Bank, which shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) in the case of a Base Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period therefor and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. -38- Section 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. 4.01 PAYMENTS. (a) Except to the extent otherwise provided herein, all payments of principal, interest, Reimbursement Obligations and other amounts to be made by the Company under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by the Obligors under any other Basic Document, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Agent at an account in New York, New York specified by the Agent, not later than 1:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) Any Bank for whose account any such payment is to be made may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Company with such Bank (with notice to the Company and the Agent). (c) The Company shall, at the time of making each payment under this Agreement or any Note for the account of any Bank, specify to the Agent (which shall so notify the intended recipient(s) thereof) the Loans, Reimbursement Obligations or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fail to so specify, or if an Event of Default has occurred and is continuing, the Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (d) Except to the extent otherwise provided in the last sentence of Section 2.03(e) hereof, each payment received by the Agent under this Agreement or any Note for account of any Bank shall be paid by the Agent promptly to such Bank, in immediately available funds, for account of such Bank's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) each borrowing of Loans from the Banks under Section 2.01 hereof shall be made from the Banks, each payment of commitment fee under Section 2.05 hereof in respect of Commitments shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.04 hereof shall be applied to the respective Commitments of the -39- Banks, pro rata according to the amounts of their respective Commitments; (b) the making, Conversion and Continuation of Loans of a particular Type (other than Conversions provided for by Section 5.04 hereof) shall be made pro rata among the Banks according to the amounts of their respective Commitments (in the case of the making of Loans) or their respective Loans (in the case of Conversions and Continuations of Loans) and the then current Interest Period for each Eurodollar Loan shall be coterminous; (c) each payment or prepayment of principal of Loans by the Company shall be made for the account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; PROVIDED that if immediately prior to giving effect to any such payment in respect of any Loans the outstanding principal amount of the Loans shall not be held by the Banks pro rata in accordance with their respective Commitments in effect at the time such Loans were made (whether by reason of a failure of a Bank to make a Loan hereunder in the circumstances described in the last paragraph of Section 12.04 hereof or otherwise), then such payment shall be applied to the Loans in such manner as shall result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Banks pro rata in accordance with their respective Commitments; and (d) each payment of interest on Loans by the Company shall be made for account of the Banks pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Banks. 4.03 COMPUTATIONS. Interest on Eurodollar Loans and commitment fee and letter of credit fees shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and interest on Base Rate Loans and Reimbursement Obligations shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day that the Base Rate is calculated by reference to the Federal Funds Effective Rate, interest on Base Rate Loans and Reimbursement Obligations shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 MINIMUM AMOUNTS. Except for mandatory prepayments made pursuant to Section 2.10 hereof and Conversions or prepayments made pursuant to Section 5.04 hereof, each borrowing, Conversion and partial prepayment of principal of Loans shall be in an aggregate amount at least equal to $500,000 or in multiples of $100,000 in excess thereof (borrowings, Conversions or prepayments of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings, Conversions and prepayments for purposes of the foregoing, one for each Type or Interest Period). 4.05 CERTAIN NOTICES. Notices by the Company to the Agent of terminations or reductions of the Commitments and of borrowings, Conversions, Continuations and optional prepayments of Loans, of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. New -40- York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: Number of Business Notice Days Prior ------ ---------- Termination or reduction 2 of Commitments Borrowing or prepayment of 1 Base Rate Loans Borrowing or prepayment of, 3 Conversions of or into, Continuations as, or duration of Interest Period for, Eurodollar Loans Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or optional prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 4.04 hereof) and Type of each Loan to be borrowed, Converted, Continued or prepaid and the date of borrowing, Conversion, Continuation or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent shall promptly notify the Banks of the contents of each such notice. In the event that the Company fails to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 4.05, such Loan (if outstanding as a Eurodollar Loan) will be automatically Converted into a Base Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base Rate Loan. 4.06 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Bank or the Company (the "PAYOR") prior to the date on which the Payor is to make payment to the Agent of (in the case of a Bank) the proceeds of a Loan to be made by such Bank, or a participation in a Letter of Credit drawing to be acquired by such Bank, hereunder or (in the case of the Company) a payment to the Agent for account of one or more of the Banks hereunder (such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such -41- assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "ADVANCE DATE") such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Effective Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, PROVIDED that if neither the recipient(s) nor the Payor shall return the Required Payment to the Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Banks, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Post-Default Rate (and, in case the recipient(s) shall return the Required Payment to the Agent, without limiting the obligation of the Company under Section 3.02 hereof to pay interest to such recipient(s) at the Post-Default Rate in respect of the Required Payment) and (ii) if the Required Payment shall represent proceeds of a loan to be made by a Bank to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the rate of interest provided for such Required Payment pursuant to Section 3.02 hereof (and, in case the Company shall return the Required Payment to the Agent, without limiting any claim the Company may have against the Payor in respect of the Required Payment); PROVIDED that the Agent shall only be entitled to retain interest in respect of a Required Payment pursuant to clause (i) or (ii) above from either the Payor or the recipient. 4.07 SHARING OF PAYMENTS, ETC. (a) Each of the Obligors agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option, to offset balances held by it for account of such Obligor at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans, Reimbursement Obligations or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such balances are then due to the Company), in which case it shall promptly notify such Obligor (through the Company) and the Agent thereof, PROVIDED that such Bank's failure to give such notice shall not affect the validity thereof. -42- (b) If any Bank shall obtain from any Obligor payment of any principal of or interest on any Loan or Letter of Credit Liability owing to it or payment of any other amount under this Agreement or any other Basic Document through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans or Letter of Credit Liabilities or such other amounts then due hereunder or thereunder by such Obligor to such Bank than the percentage received by any other Bank, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans or Letter of Credit Liabilities or such other amounts, respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans or Letter of Credit Liabilities or such other amounts, respectively, owing to each of the Banks, PROVIDED that if at the time of such payment the outstanding principal amount of the Loans shall not be held by the Banks pro rata in accordance with their respective Commitments in effect at the time such Loans were made (whether by reason of a failure of a Bank to make a Loan hereunder in the circumstances described in the last paragraph of Section 12.04 hereof or otherwise), then such purchases of participations and/or direct interests shall be made in such manner as will result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Banks pro rata according to the amounts of such Commitments. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Obligors agree that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation. (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of any Obligor. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. -43- Section 5. YIELD PROTECTION, ETC. 5.01 ADDITIONAL COSTS. (a) The Company shall pay directly to each Bank from time to time such amounts as such Bank may determine to be necessary to compensate such Bank for any costs that such Bank determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), resulting from any Regulatory Change that: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any of such Loans (other than taxes imposed on or measured by the overall net income of such Bank or of its Applicable Lending Office for any of such Loans by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement utilized in the determination of the Eurodollar Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, either of the Commitments of such Bank hereunder); or (iii) imposes any other condition affecting this Agreement or its Note (or any of such extensions of credit or liabilities) or its Commitments. If any Bank requests compensation from the Company under this Section 5.01(a), the Company may, by notice to such Bank (with a copy to the Agent), suspend the obligation of such Bank thereafter to make or Continue Eurodollar Loans, or to Convert Prime Rate Loans into Eurodollar Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable), PROVIDED that such suspension shall not affect the right of such Bank to receive the compensation so requested. (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.01, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank that includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank that includes Eurodollar Loans or -44- (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Bank so elects by notice to the Company (with a copy to the Agent), the obligation of such Bank to make or Continue, or to Convert Base Rate Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it determines are attributable to the maintenance by such Bank (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basel Accord (including, without limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12 C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)), of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any Applicable Lending Office or such bank holding company) to a level below that which such Bank (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). For purposes of this Section 5.01(c) and Section 5.06 hereof, "BASEL ACCORD" shall mean the proposals for risk-based capital framework described by the Basel Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. (d) Each Bank shall notify the Company of any event occurring after the date of this Agreement entitling such Bank to compensation under paragraph (a) or (c) of this Section 5.01 as promptly as practicable, but in any event within 45 days, after such Bank obtains actual knowledge thereof; PROVIDED that (i) if any Bank fails to give such notice within 45 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 45 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different Applicable Lending Office for the Loans of such Bank affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in -45- the sole opinion of such Bank, be disadvantageous to such Bank, except that such Bank shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Bank will furnish to the Company a certificate setting forth the basis and amount of each request by such Bank for compensation under paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive, PROVIDED that such determinations and allocations are made on a reasonable basis. 5.02 LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Eurodollar Base Rate for any Interest Period: (a) the Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (b) the Majority Banks determine, which determination shall be conclusive, and notify the Agent that the relevant rates of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not likely to be adequate to cover the cost to such Banks of making or maintaining Eurodollar Loans for such Interest Period; then the Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make additional Eurodollar Loans, to Continue Eurodollar Loans or to Convert Base Rate Loans into Eurodollar Loans, and the Company shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into Base Rate Loans in accordance with Section 2.09 hereof. 5.03 ILLEGALITY. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder, then such Bank shall promptly notify the Company thereof (with a copy to the Agent) and such Bank's obligation to make or Continue, or to Convert Loans of any other Type into, Eurodollar Loans shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.04 hereof shall be applicable). -46- 5.04 TREATMENT OF AFFECTED LOANS. If the obligation of any Bank to make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 5.01 or 5.03 hereof, such Bank's Eurodollar Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Eurodollar Loans (or, in the case of a Conversion required by Section 5.01(b) or 5.03 hereof, on such earlier date as such Bank may specify to the Company with a copy to the Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.01 or 5.03 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Bank's Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Bank as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Base Rate Loans of such Bank that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans. If such Bank gives notice to the Company with a copy to the Agent that the circumstances specified in Section 5.01 or 5.03 hereof that gave rise to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 5.04 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Banks are outstanding, such Bank's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Banks holding Eurodollar Loans and by such Bank are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. 5.05 COMPENSATION. The Company shall pay to the Agent for the account of each Bank, upon the request of such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense that such Bank determines is attributable to: (a) any payment, mandatory or optional prepayment or Conversion of a Eurodollar Loan made by such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 10 hereof) on a date other than the last day of an Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 7 hereof to be satisfied) to borrow a Eurodollar Loan from such Bank on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 hereof. -47- Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid or Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Bank would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Bank). 5.06 ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. Without limiting the obligations of the Company under Section 5.01 hereof (but without duplication), if as a result of any Regulatory Change or any risk-based capital guideline or other requirement heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basel Accord there shall be imposed, modified or deemed applicable any tax, reserve, special deposit, capital adequacy or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder and the result shall be to increase the cost to any Bank or Banks of issuing (or purchasing participations in) or maintaining its obligation hereunder to issue (or purchase participations in) any Letter of Credit hereunder or reduce any amount receivable by any Bank hereunder in respect of any Letter of Credit (which increases in cost, or reductions in amount receivable, shall be the result of such Bank's or Banks' reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by such Bank or Banks (through the Agent), the Company shall pay immediately to the Agent for account of such Bank or Banks, from time to time as specified by such Bank or Banks (through the Agent), such additional amounts as shall be sufficient to compensate such Bank or Banks (through the Agent) for such increased costs or reductions in amount. A statement as to such increased costs or reductions in amount incurred by any such Bank or Banks, submitted by such Bank or Banks to the Company shall be conclusive in the absence of manifest error as to the amount thereof. Section 6. GUARANTEE. 6.01 GUARANTEE. The Subsidiary Guarantors hereby jointly and severally guarantee to each Bank and the Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Banks to, and the Notes held by each Bank of, the Company and all other amounts from time to time owing to the Banks or the Agent by the Company under this Agreement, under the Notes and under any Commodity Hedging Agreements and Interest Rate Protection Agreements to which the Company is a party and by any Obligor under any of the other Basic Documents or under any agreement in respect of a -48- Commodity Hedging Agreement or Interest Rate Protection Agreement to which such Obligor is a party, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "GUARANTEED OBLIGATIONS"). The Subsidiary Guarantors hereby further jointly and severally agree that if the Company shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Subsidiary Guarantors will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. 6.02 OBLIGATIONS UNCONDITIONAL. The obligations of the Subsidiary Guarantors under Section 6.01 hereof are absolute and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Company under this Agreement, the Notes or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 6.02 that the obligations of the Subsidiary Guarantors hereunder shall be absolute and unconditional, joint and several, under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Subsidiary Guarantors hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Subsidiary Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement or the Notes or any other agreement or instrument referred to herein or therein shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or the Notes or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (iv) any Lien granted to, or in favor of, the Agent or any Bank or Banks as security for any of the Guaranteed Obligations shall fail to be perfected. -49- Each of the Subsidiary Guarantors hereby expressly waive diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Agent or any Bank exhaust any right, power or remedy or proceed against the Company and the other Subsidiary Guarantors under this Agreement or the Notes or any other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. Each Subsidiary Guarantor agrees that its obligations pursuant to this Section 6 shall not be affected by any assignment or participation entered into by any Bank pursuant to Section 12.06 hereof. 6.03 REINSTATEMENT. The obligations of the Subsidiary Guarantors under this Section 6 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Company in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise and the Subsidiary Guarantors jointly and severally agree that they will indemnify the Agent and each Bank on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by the Agent or such Bank in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 6.04 SUBROGATION. Until all Loans and Letter of Credit Liabilities have been paid in full and the Commitments have been terminated, each Subsidiary Guarantor hereby waives all rights of subrogation or contribution, whether arising by contract or operation of law (including, without limitation, any such right arising under the Bankruptcy Code) or otherwise by reason of any payment by it pursuant to the provisions of this Section 6. 6.05 REMEDIES. The Subsidiary Guarantors jointly and severally agree that, as between the Subsidiary Guarantors and the Banks, the obligations of the Company under this Agreement and the Notes may be declared to be forthwith due and payable as provided in Section 10 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 10) for purposes of Section 6.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against the Company and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by the Company) shall forthwith become due and payable by the Subsidiary Guarantors for purposes of said Section 6.01. 6.06 CONTINUING GUARANTEE. The guarantee in this Section 6 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. -50- 6.07 INSTRUMENT FOR THE PAYMENT OF MONEY. Each Subsidiary Guarantor hereby acknowledges that the guarantee in this Section 6 constitutes an instrument for the payment of money, and consents and agrees that any Bank or the Agent, at its sole option, in the event of a dispute by such Subsidiary Guarantor in the payment of any moneys due hereunder, shall have the right to bring motion-action under New York CPLR Section 3213. 6.08 RIGHTS OF CONTRIBUTION. The Subsidiary Guarantors hereby agree, as between themselves, that if any Subsidiary Guarantor shall become an Excess Funding Guarantor (as defined below) by reason of the payment by such Subsidiary Guarantor of any Guaranteed Obligations, each other Subsidiary Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the next sentence), pay to such Excess Funding Guarantor an amount equal to such Subsidiary Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the Properties, debts and liabilities of such Excess Funding Guarantor) of the Excess Payment (as defined below) in respect of such Guaranteed Obligations. The payment obligation of a Subsidiary Guarantor to any Excess Funding Guarantor under this Section 6.08 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Subsidiary Guarantor under the other provisions of this Section 6 and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes of this Section 6.08, (i) "EXCESS FUNDING GUARANTOR" shall mean, in respect of any Guaranteed Obligations, a Subsidiary Guarantor that has paid an amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii) "EXCESS PAYMENT" shall mean, in respect of any Guaranteed Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guaranteed Obligations and (iii) "PRO RATA SHARE" shall mean, for any Subsidiary Guarantor, the ratio (expressed as a percentage) of (x) the amount by which the aggregate present fair saleable value of all Properties of such Subsidiary Guarantor (excluding any shares of stock of any other Subsidiary Guarantor) exceeds the amount of all the debts and liabilities of such Subsidiary Guarantor (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of such Subsidiary Guarantor hereunder and any obligations of any other Subsidiary Guarantor that have been Guaranteed by such Subsidiary Guarantor) to (y) the amount by which the aggregate fair saleable value of all Properties of all of the Subsidiary Guarantors exceeds the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of the Company and the Subsidiary Guarantors hereunder and under the other Loan Documents) of all of the Subsidiary Guarantors, determined (A) with respect to any Subsidiary Guarantor that is a party hereto on the date of this Agreement, as of the date of this Agreement, and (B) with respect to any other Subsidiary Guarantor, as of the date such Subsidiary Guarantor becomes a Subsidiary Guarantor hereunder. 6.09 GENERAL LIMITATION ON GUARANTEE OBLIGATIONS. In any action or proceeding involving any state corporate law, or any state or Federal bankruptcy, insolvency, reorganization -51- or other law affecting the rights of creditors generally, if the obligations of any Subsidiary Guarantor under Section 6.01 hereof would otherwise, taking into account the provisions of Section 6.08 hereof, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under said Section 6.01, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Subsidiary Guarantor, any Bank, the Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding. Section 7. CONDITIONS PRECEDENT. 7.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Second Amended and Restated Credit Agreement is subject to the receipt by the Agent of the following documents and evidence, each of which shall be satisfactory to the Agent (and to the extent specified below, to the Majority Banks) in form and substance: (a) CORPORATE DOCUMENTS. The following documents, each certified as indicated below: (i) for each Obligor, a copy of the charter, as amended and in effect, of such Obligor certified as of a recent date by the Secretary of State of its jurisdiction of incorporation, and a certificate from such Secretary of State dated as of a recent date as to the good standing of and charter documents filed by such Obligor; (ii) for each Obligor, a certificate of the Secretary or an Assistant Secretary of such Obligor, dated the date hereof and certifying (A) that the by-laws of such Obligor have not been amended since January 1, 1997, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors of such Obligor authorizing the execution, delivery and performance of such of the Basic Documents to which such Obligor is or is intended to be a party and the extensions of credit hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the charter of such Obligor has not been amended since January 1, 1997, and (D) as to the incumbency and specimen signature of each officer of such Obligor executing such of the Basic Documents to which such Obligor is intended to be a party and each other document to be delivered by such Obligor from time to time in connection therewith (and the Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from such Obligor); and -52- (iii) for each Obligor, a certificate of another officer of such Obligor as to the incumbency and specimen signature of the Secretary or Assistant Secretary, as the case may be, of such Obligor. (b) OFFICER'S CERTIFICATE. A certificate of a senior officer of the Company, dated the date hereof, to the effect set forth in the first sentence of Section 7.02 hereof. (c) OPINION OF COUNSEL TO THE OBLIGORS. An opinion, dated the date hereof, of Vinson & Elkins L.L.P., Counsel of each of the Obligors, substantially in the form of Exhibit C hereto and covering such other matters as the Agent or any Bank may reasonably request (and each Obligor hereby instructs such counsel to deliver such opinion to the Banks and the Agent). (d) OPINION OF SPECIAL COUNSEL TO CHASE. An opinion, dated the date hereof, of Milbank, Tweed, Hadley & McCloy, special counsel to Chase, substantially in the form of Exhibit D hereto. (e) NOTES. The Notes, duly completed and executed in exchange for the Original Notes. (f) SECURITY AGREEMENT. The Security Agreement, duly executed and delivered by the Obligors and the Agent. In addition, the Company and the Subsidiary Guarantors shall have taken such other action (including, without limitation, delivering to the Agent, for filing, appropriately completed and duly executed copies of Uniform Commercial Code financing statements) as the Agent shall have requested in order to perfect the security interests created pursuant to the Security Agreement. (g) PLEDGE AGREEMENT. The Pledge Agreement, duly executed and delivered by each of the Obligors, if any, required by the Majority Banks to execute and deliver the Pledge Agreement and the certificates identified in Section 3 thereof, accompanied by undated stock powers executed in blank. In addition, each of such Obligors, if any, shall have taken such other action (including, without limitation, delivering to the Agent, for filing, appropriately completed and duly executed copies of Uniform Commercial Code financing statements) as the Agent shall have requested in order to perfect the security interests created pursuant to the Pledge Agreement. (h) MORTGAGES. The Mortgage Amendments covering the Hydrocarbon Properties of the Company and its Restricted Subsidiaries located in Louisiana, Oklahoma, Texas (other than Mortgages in respect of the Company's interest in the Loma Vieja field) and Wyoming, in each case duly executed and delivered by the Company in recordable form (in such number of copies as the Agent shall have requested). -53- (i) INSURANCE. A certificate of an officer of the Company as to the existence of all insurance required to be maintained by the Obligors pursuant to Section 9.04 hereof. (j) OPINION OF LOCAL COUNSEL. A favorable opinion from each of Liskow & Lewis, Conner & Winters and Vinson & Elkins L.L.P., special counsel to the Banks in each of Louisiana, Oklahoma and Texas, respectively, dated the date hereof, for each such state and with respect to the properties covered by the Mortgages and located in such respective states, as to the following: (i) Compliance with all applicable state laws, including all applicable recording, filing and registration laws, of the Mortgages, the Mortgage Amendments and the Notes, and the form and manner of the authorization, execution, acknowledgment and delivery of each thereof; (ii) the legal, valid and binding nature of the Mortgages, the Mortgage Amendments and the Notes, and the enforceability thereof in accordance with their respective terms; (iii) the fact that, the Mortgages, as amended by the Mortgage Amendments, constitute a legal, valid and effective mortgage lien upon the mortgaged properties as security for the Indebtedness referred to therein; (iv) the absence of any requirement for any authorization or approval by any public regulatory body or authority, with regard to the valid execution and delivery of, and the validity, legality and effectiveness of, the Mortgages, the Mortgage Amendments and the Notes; (v) as to all recording, filing and registration procedures as shall be necessary under applicable state laws to constitute the Mortgages, as amended by the Mortgage Amendments, a mortgage, pledge and financing statement in accordance with the terms thereof and the intention of the parties thereto, and as to the necessity of any periodic or other rerecording or refiling of the Mortgages, or any other instrument in order to maintain the lien of the Mortgages; and (vi) as to such state or local mortgage recording taxes, stamp taxes, or other fees, taxes or governmental charges as shall be required to be paid in connection with the execution, delivery, filing for record or recording of the Mortgages and the Notes. (k) OTHER DOCUMENTS. Such other documents as the Agent or any Bank or special New York counsel to Chase may reasonably request. -54- The obligation of the Banks to make their initial extension of credit hereunder is also subject to the payment by the Company of such fees as the Company shall have agreed to pay or deliver to any Bank or the Agent in connection herewith, including, without limitation, the fees set forth in the Amendment Fee Letter and the Original Fee Letter, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase in connection with the negotiation, preparation, execution and delivery of this Agreement and the Notes and the other Basic Documents and the extensions of credit hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). 7.02 INITIAL AND SUBSEQUENT EXTENSIONS OF CREDIT. The obligation of the Banks to make any Loans or otherwise extend credit to the Company upon the occasion of each borrowing or other extension of credit hereunder (including the initial extension of credit) is subject to the further conditions precedent that, (x) both immediately prior to the making of such Loans or other extension of credit and also after giving effect thereto and to the intended use thereof: (i) no Default shall have occurred and be continuing; (ii) the representations and warranties made by the Company in Section 8 hereof, and by each Obligor in each of the other Basic Documents to which it is a party, shall be true and complete on and as of the date of the making of such Loans or other extension of credit with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and (iii) the aggregate principal amount of Loans and Letter of Credit Liabilities shall not exceed the Borrowing Base as determined pursuant to Section 1.03 hereof and (y) if the outstanding Loans and Letter of Credit Liabilities exceed or, with the extension of credit then being requested by the Company will exceed $50,000,000, the Company shall have delivered a certificate from the Chief Financial Officer, Treasurer or an Assistant Treasurer stating that (A) all of the obligations under the Basic Documents are "Senior Debt" (as defined in the Senior Subordinated Debt Documents) for the purposes of the Senior Subordinated Debt Documents and (B) the obligations under the Basic Documents (including the extension credit to be made on the date of such certificate) are permitted to be incurred (as defined in the Senior Subordinated Debt Documents) by the Company and its Subsidiaries under the Senior Subordinated Debt Documents and providing the calculations necessary to support the statement made pursuant to this clause (B). Each notice of borrowing or request for the issuance of a Letter of Credit by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice or request and, unless the Company otherwise notifies the Agent prior to the date of such borrowing or issuance, as of the date of such borrowing or issuance). -55- Section 8. REPRESENTATIONS AND WARRANTIES. The Company and the Subsidiary Guarantors represent and warrant to the Banks that: 8.01 CORPORATE EXISTENCE. The Company and each Subsidiary Guarantor: (a) is a corporation, partnership or other entity duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could have a Material Adverse Effect. 8.02 FINANCIAL CONDITION. The Company has heretofore furnished to each of the Banks the consolidated balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 1995 and the related consolidated statements of income, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of KPMG Peat Marwick. All such financial statements are complete and correct and fairly present the consolidated financial condition of the Company and its Consolidated Subsidiaries as at said date and the consolidated results of operations for the fiscal year ended on said date, all in accordance with GAAP. Neither the Company nor any of its Subsidiaries has on the date hereof any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheets as at said date. Since December 31, 1995 there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Consolidated Subsidiaries from that set forth in said financial statements as at said date. 8.03 LITIGATION. Except as disclosed to the Banks in writing prior to the date of this Agreement, there are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company or any of its Subsidiaries) threatened against the Company or any of its Subsidiaries which, if adversely determined could have a Material Adverse Effect. 8.04 NO BREACH. None of the execution and delivery of this Agreement and the Notes and the other Basic Documents, the consummation of the transactions herein and therein contemplated or compliance with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of any Obligor, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of its Restricted Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or -56- instrument, or (except for the Liens created pursuant to the Security Documents) result in the creation or imposition of any Lien upon any Property of the Company or any of its Restricted Subsidiaries pursuant to the terms of any such agreement or instrument. 8.05 ACTION. Each Obligor has all necessary corporate power, authority and legal right to execute, deliver and perform its obligations under each of the Basic Documents to which it is or is intended to be a party; the execution, delivery and performance by each Obligor of each of the Basic Documents to which it is or is intended to be a party have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by each Obligor and constitutes, and each of the Notes and the other Basic Documents to which it is a party when executed and delivered by such Obligor (in the case of the Notes, for value) will constitute, its legal, valid and binding obligation, enforceable against each Obligor in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 8.06 APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by any Obligor of the Basic Documents to which it is a party or for the legality, validity or enforceability hereof or thereof, except for filings and recordings in respect of the Liens created pursuant to the Security Documents. 8.07 USE OF CREDIT. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of any extension of credit hereunder will be used to buy or carry any Margin Stock. 8.08 ERISA. Each Plan, and, to the knowledge of the Company, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law, except where non-compliance will not have a Material Adverse Effect and no event or condition has occurred and is continuing as to which the Company would be under an obligation to furnish a report to the Banks under Section 9.01(e) hereof. 8.09 TAXES. The Company and its U.S. Subsidiaries are members of an affiliated group of corporations filing consolidated returns for Federal income tax purposes, of which the Company is the "common parent" (within the meaning of Section 1504 of the Code) of such group. The Company and its Subsidiaries have filed either directly or indirectly through the -57- Company all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid either directly or indirectly through the Company all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. Except as disclosed to the Banks in writing, the Company has not given or been requested to give a waiver of the statute of limitations relating to the payment of Federal, state, local and foreign taxes or other impositions. 8.10 INVESTMENT COMPANY ACT. Neither the Company nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 8.11 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Company nor any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 8.12 MATERIAL AGREEMENTS AND LIENS. (a) Part A of Schedule I hereto is a complete and correct list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, purchase agreement, guarantee, letter of credit or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or guarantee by, the Company or any of its Restricted Subsidiaries the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000, and the aggregate principal or face amount outstanding or that may become outstanding under each such arrangement is correctly described in Part A of said Schedule I. (b) Part B of Schedule I hereto is a complete and correct list, as of the date of this Agreement, of each Lien securing Indebtedness of any Person the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000 and covering any Property of the Company or any of its Restricted Subsidiaries, and the aggregate Indebtedness secured (or which may be secured) by each such Lien and the Property covered by each such Lien is correctly described in Part B of said Schedule I. 8.13 ENVIRONMENTAL MATTERS. Each of the Company and its Subsidiaries has obtained all environmental, health and safety permits, licenses and other authorizations required under all Environmental Laws to carry on its business as now being or as proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not have a Material Adverse Effect. Each of such permits, licenses and authorizations is in full force and effect and each of the Company and its Subsidiaries is in compliance with the terms -58- and conditions thereof, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply therewith would not have a Material Adverse Effect. In addition, except as set forth in Schedule II hereto: (a) No notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or threatened by any governmental or other entity with respect to any alleged failure by the Company or any of its Subsidiaries to have any environmental, health or safety permit, license or other authorization required under any Environmental Law in connection with the conduct of the business of the Company or any of its Subsidiaries or with respect to any generation, treatment, storage, recycling, transportation, discharge or disposal, or any Release of any Hazardous Materials generated by the Company or any of its Subsidiaries. (b) Neither the Company nor any of its Subsidiaries owns, operates or leases a treatment, storage or disposal facility requiring a permit under the Resource Conservation and Recovery Act of 1976, as amended, or under any comparable state or local statute; and (i) to the knowledge of the Company after due inquiry, no polychlorinated biphenyls (PCB's) are or have been present at any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries; (ii) to the knowledge of the Company after due inquiry, no asbestos or asbestos-containing materials is or has been present at any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries; (iii) to the knowledge of the Company after due inquiry, there are no underground storage tanks or surface impoundments for Hazardous Materials, active or abandoned, at any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries; (iv) to the knowledge of the Company after due inquiry, no Hazardous Materials have been Released at, on or under any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries in a reportable quantity established by statute, ordinance, rule, regulation or order; and -59- (v) to the knowledge of the Company after due inquiry, no Hazardous Materials have been otherwise Released at, on or under any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries that would have a Material Adverse Effect. (c) Neither the Company nor any of its Subsidiaries has transported or arranged for the transportation of any Hazardous Material to any location that is listed on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), listed for possible inclusion on the NPL by the Environmental Protection Agency in the Comprehensive Environmental Response and Liability Information System, as provided for by 40 C.F.R. Section 300.5 ("CERCLIS"), or on any similar state or local list or that is the subject of Federal, state or local enforcement actions or other investigations that may lead to Environmental Claims against the Company or any of its Subsidiaries. (d) No Hazardous Material generated by the Company or any of its Subsidiaries has been recycled, treated, stored, disposed of or Released by the Company or any of its Subsidiaries at any location other than those listed in Schedule II hereto. (e) No oral or written notification of a Release of a Hazardous Material has been filed by or on behalf of the Company or any of its Subsidiaries and no site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries is listed or proposed for listing on the NPL, CERCLIS or any similar state list of sites requiring investigation or clean-up. (f) No Liens have arisen under or pursuant to any Environmental Laws on any site or facility owned, operated or leased by the Company or any of its Subsidiaries, and no government action has been taken or is in process that could subject any such site or facility to such Liens and neither the Company nor any of its Subsidiaries would be required to place any notice or restriction relating to the presence of Hazardous Materials at any site or facility owned by it in any deed to the real property on which such site or facility is located. (g) There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or that are in the possession of the Company or any of its Subsidiaries in relation to any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries which have not been made available to the Banks. -60- 8.14 SUBSIDIARIES, ETC. (a) Set forth in Part A of Schedule III hereto is a complete and correct list, as of the date of this Agreement, of all of the Subsidiaries of the Company, together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary, (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests and (iv) indicating whether each such Subsidiary is a Restricted Subsidiary or an Unrestricted Subsidiary. Except as disclosed in Part A of Schedule III hereto, (x) each of the Company and its Subsidiaries owns, free and clear of Liens (other than Liens created pursuant to the Security Documents), and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Part A of Schedule III hereto, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) there are no outstanding Equity Rights with respect to such Person. (b) Set forth in Part B of Schedule III hereto is a complete and correct list, as of the date of this Agreement, of all Investments (other than Investments disclosed in Part A of said Schedule III hereto and other than Permitted Investments) held by the Company or any of its Subsidiaries in any Person and, for each such Investment, (x) the identity of the Person or Persons holding such Investment and (y) the nature of such Investment. Except as disclosed in Part B of Schedule III hereto, each of the Company and its Subsidiaries owns, free and clear of all Liens (other than Liens created pursuant to the Security Documents), all such Investments. (c) None of the Restricted Subsidiaries of the Company, other than Forest I Development Company, is, on the date of this Agreement, subject to any indenture, agreement, instrument or other arrangement of the type described in the last sentence of 9.15 hereof. 8.15 TRUE AND COMPLETE DISCLOSURE. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Obligors to the Agent or any Bank in connection with the negotiation, preparation or delivery of this Agreement and the other Basic Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by the Obligors to the Agent and the Banks in connection with this Agreement and the other Basic Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to any Obligor that could have a Material Adverse Effect that has not been disclosed herein, in the other Basic Documents or in a report, financial statement, exhibit, -61- schedule, disclosure letter or other writing furnished to the Banks for use in connection with the transactions contemplated hereby or thereby. Section 9. COVENANTS OF THE OBLIGORS. Each Obligor covenants and agrees with the Banks and the Agent that, so long as any Commitment, Loan or Letter of Credit Liability is outstanding and until payment in full of all amounts payable by the Company hereunder: 9.01 FINANCIAL STATEMENTS ETC. The Company shall (for itself and on behalf of each of the other Obligors) deliver to the Agent and each of the Banks: (a) as soon as available and in any event within 60 days after the end of each quarterly fiscal period of each fiscal year of the Company, consolidated and, if prepared, or if the Company has designated any Subsidiary an Unrestricted Subsidiary, consolidating statements of income, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and, if prepared, or if the Company has designated any Subsidiary an Unrestricted Subsidiary, consolidating balance sheets of the Company and its Consolidated Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and, if prepared, or if the Company has designated any Subsidiary an Unrestricted Subsidiary, consolidating figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries, and said consolidating financial statements are materially correct and reconcile to the consolidated financial statements of the Company and its Consolidated Subsidiaries, and that such consolidated financial statements have been prepared in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 100 days after the end of each fiscal year of the Company, consolidated and, if prepared, consolidating statements of income, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for such fiscal year and the related consolidated and, if prepared, or if the Company has designated any Subsidiary an Unrestricted Subsidiary, consolidating balance sheets of the Company and its Consolidated Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the preceding fiscal year, and accompanied (i) in the case of said consolidated statements and balance sheet of the Company, by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated -62- Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles, and (ii) in the case of said consolidating statements and balance sheet, by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidating financial statements are materially correct and reconcile to the consolidated financial statements of the Company and its Consolidated Subsidiaries, and that such consolidated financial statements have been prepared in accordance with GAAP, as at the end of, and for, such fiscal year; (c) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, which the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (d) promptly upon the mailing thereof to the shareholders of the Company generally or to holders of Subordinated Indebtedness generally, copies of all financial statements, reports and proxy statements so mailed; (e) as soon as possible, and in any event within ten days after the Company knows or has reason to believe that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, that the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Company or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (PROVIDED that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041(c) of ERISA of a notice of intent to terminate any Plan or any action taken by the Company or an ERISA Affiliate to terminate any Plan (other than in connection with a standard termination under Section 4041(b) of ERISA); -63- (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Company or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Company or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (f) on or before each Report Delivery Date, a Reserve Evaluation Report; (g) promptly after the Company or any of its Restricted Subsidiaries knows or has reason to believe that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company or any of its Restricted Subsidiaries has taken or proposes to take with respect thereto; (h) within ten days after the Company or any of its Restricted Subsidiaries receives notice of any change in the schedule of payment or delivery of any Production Payment to which the Company or such Restricted Subsidiary is a party, the Company shall give the Agent notice of such change, together with an explanation of the reason for such change; (i) at the time of the receipt by the Company or any Restricted Subsidiary of the net proceeds of any Equity Issuance, the Company shall deliver a certificate of the Chief Financial Officer, Treasurer or Assistant Treasurer of the Company which certificate shall indicate the ratio of Funded Indebtedness to Total Capitalization of the -64- Company and its Restricted Subsidiaries after giving effect to the receipt of the net proceeds of such Equity Issuance and shall show, in reasonable detail, the calculations used to derive such ratio; and (j) from time to time such other information regarding the financial condition, operations, business, prospects or Properties of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Bank or the Agent may reasonably request. The Company will furnish to each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 9.06(k), 9.07(a)(v) and (a)(vi), 9.08(g), 9.09, 9.10, 9.11 and 9.16 hereof as of the end of the respective quarterly fiscal period or fiscal year, which computations in respect of Sections 9.09, 9.10, 9.11 and 9.16 shall be in accordance with GAAP. 9.02 LITIGATION. The Company will promptly give to each Bank notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings which, if adversely determined, would not have a Material Adverse Effect. Without limiting the generality of the foregoing, the Company will give to each Bank notice of the assertion of any Environmental Claim by any Person against, or with respect to the activities of, the Company or any of its Subsidiaries and notice of any alleged violation of or non-compliance with any Environmental Laws or any permits, licenses or authorizations, other than any Environmental Claim or alleged violation which, if adversely determined, would not have a Material Adverse Effect. 9.03 EXISTENCE, ETC. The Company will, and will cause each of its Restricted Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (PROVIDED that nothing in this Section 9.03 shall prohibit any transaction expressly permitted under Section 9.05 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could have a Material Adverse Effect; -65- (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; (e) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; and (f) permit representatives of any Bank or the Agent, at their own risk during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Bank or the Agent (as the case may be). 9.04 INSURANCE. The Company will, and will cause each of its Restricted Subsidiaries (including without limitation the Subsidiary Guarantors) to, keep insured by financially sound and reputable insurers all Property of a character usually insured by corporations engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such corporations and carry such other insurance as is usually carried by such corporations or as is required by law. 9.05 PROHIBITION OF FUNDAMENTAL CHANGES. The Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, and will not permit any of its Restricted Subsidiaries to, acquire any business or Property from, or capital stock of, or be a party to any acquisition of, any Person except for purchases of inventory and other Property to be sold or used in the ordinary course of business and Investments permitted under Section 9.08 hereof. The Company will not, and will not permit any of its Restricted Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or Property, whether now owned or hereafter acquired including, without limitation, receivables and leasehold interests, but excluding (i) obsolete or worn-out Property, tools or equipment no longer used or useful in its business so long as the amount thereof sold in any single fiscal year by the Company and its Subsidiaries shall not have a fair market value in excess of $1,000,000, (ii) any hydrocarbons produced or sold in the ordinary course of business and on ordinary business terms (excluding, with respect to Properties of the Company or any Restricted Subsidiary existing on the date hereof, and with respect to any Mortgaged Property, Production Payments or any other sale or lease of interests in hydrocarbons in the ground other than Production Payments entered -66- into by the Company or any of its Restricted Subsidiaries prior to the date hereof), (iii) on and after the date hereof, other Properties of the Company and its Restricted Subsidiaries (other than Mortgaged Properties and Unrestricted Properties) provided that the aggregate fair market value of such other Properties conveyed, sold, leased, transferred or otherwise disposed of on or after the date hereof shall not exceed $5,000,000 during any Determination Period, provided, further, that such conveyance, sale, lease, transfer or other disposition shall not include any Accounts or Inventory (each as defined in the Security Agreement) of the Company or any of its Restricted Subsidiaries other than Accounts or Inventory (x) incidental to the sale of Hydrocarbon Properties and (y) created or produced from such Hydrocarbon Properties on or after the effective date of any such conveyance, sale, lease, transfer or other disposition of such Hydrocarbon Properties, (iv) the expiration of leases covering hydrocarbon producing properties and (v) Unrestricted Properties. Notwithstanding the foregoing provisions of this Section 9.05: (a) any Restricted Subsidiary of the Company may be merged or consolidated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other such Restricted Subsidiary; PROVIDED that if any such transaction shall be between a Subsidiary Guarantor and a Restricted Subsidiary not a Subsidiary Guarantor, and such Subsidiary Guarantor is not the continuing or surviving corporation, then the continuing or surviving corporation shall have assumed all of the obligations of such Subsidiary Guarantor hereunder; (b) any Restricted Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its Property (upon voluntary liquidation or otherwise) to the Company or a Wholly Owned Subsidiary of the Company which is a Restricted Subsidiary; PROVIDED that if any such sale is by a Subsidiary Guarantor to a Restricted Subsidiary of the Company not a Subsidiary Guarantor, then such Restricted Subsidiary shall have assumed all of the obligations of such Subsidiary Guarantor hereunder; and (c) the Company or any Restricted Subsidiary of the Company may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving corporation is a Wholly Owned Subsidiary of the Company which is a Restricted Subsidiary and (ii) after giving effect thereto no Default would exist hereunder. 9.06 LIMITATION ON LIENS. The Company will not, nor will it permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of their Property, whether now owned or hereafter acquired, except: (a) Liens created pursuant to the Security Documents; (b) Liens in existence on the date hereof and listed in Part B of Schedule I hereto (excluding, however, following the making of the initial Loans hereunder, Liens securing -67- Indebtedness to be repaid with the proceeds of such Loans, if any, indicated on said Schedule I); (c) Liens imposed by any governmental authority for taxes, assessments, charges or levies not yet due or which are being contested in good faith and by appropriate proceedings if, unless the amount thereof is not material with respect to it or its financial condition, adequate reserves with respect thereto are maintained on the books of the Company or the affected Subsidiaries, as the case may be, in accordance with GAAP; (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 45 days or which are being contested in good faith and by appropriate proceedings and Liens securing judgments (but only to the extent, for an amount and for a period not resulting in an Event of Default under Section 10(h) hereof); (e) pledges or deposits under worker's compensation, unemployment insurance and other social security or similar legislation; (f) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety, stay, appeal and indemnity bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (h) Liens on Property of any corporation which becomes a Restricted Subsidiary of the Company after the date of this Agreement, PROVIDED that such Liens are in existence at the time such corporation becomes a Restricted Subsidiary of the Company and were not created in anticipation thereof; (i) Liens upon real and/or tangible personal Property acquired after the date hereof (by purchase, construction or otherwise) by the Company or any of its Restricted Subsidiaries, each of which Liens either (A) existed on such Property before the time of its acquisition and was not created in anticipation thereof, or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of such Property; PROVIDED that (x) no -68- such Lien shall extend to or cover any Property of the Company or a Restricted Subsidiary other than the Property so acquired and improvements thereon; and (y) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 80% of the fair market value (as determined in good faith by a senior financial officer of the Company) of such Property at the time it was acquired (by purchase, construction or otherwise); PROVIDED that the obligations of the Company or any Restricted Subsidiary of the Company in respect of Capital Lease Obligations under a capital lease of Property other than Hydrocarbon Property entered into in the ordinary course of business may be secured by a Lien on the Property subject to such capital lease; (j) Liens for farm-in, farm-out, joint operating, area of mutual interest agreements or similar agreements entered into by the Company and its Restricted Subsidiaries in the ordinary course of business which the Company or such Restricted Subsidiary determines in good faith to be necessary for or advantageous to the economic development of their Properties; PROVIDED any farm-out agreements covering any Mortgaged Property shall require the prior written consent of the Majority Banks; (k) additional Liens upon real and/or personal Property created after the date hereof, PROVIDED that the aggregate Indebtedness secured thereby and incurred on and after the date hereof shall not exceed $2,500,000 in the aggregate at any one time outstanding; (l) Liens created pursuant to any Commodity Hedging Agreement or Interest Rate Protection Agreement (i) with any Bank or any Affiliate of such Bank, or (ii) with any other Person, PROVIDED that the aggregate Indebtedness secured by all such Liens permitted by this clause (ii) shall not exceed $5,000,000 in the aggregate at any one time outstanding and no such Liens shall extend to any Mortgaged Properties; (m) Liens securing obligations of a Restricted Subsidiary of the Company to the Company or to any Restricted Subsidiary or any obligations of the Company to a Restricted Subsidiary provided that such Liens are not (i) on Mortgaged Properties existing on the date hereof or (ii) on Mortgaged Properties acquired after the date hereof that are not subject to any Lien prior to the Lien of the Mortgage; and (n) any extension, renewal or replacement of the foregoing, PROVIDED that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or Property (other than a substitution of like Property). 9.07 INDEBTEDNESS. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur or suffer to exist any Indebtedness except: (i) Indebtedness to the Agent and the Banks hereunder; -69- (ii) Indebtedness outstanding on the date hereof and listed in Part A of Schedule I hereto (excluding, however, following the making of the initial Loans hereunder, the Indebtedness to be repaid with the proceeds of such Loans, if any, indicated on said Schedule I); (iii) Subordinated Indebtedness; (iv) Indebtedness of Restricted Subsidiaries of the Company to the Company or to other Restricted Subsidiaries of the Company; (v) Indebtedness of the Company and its Subsidiaries secured by Liens permitted by Section 9.06(j) hereof up to but not exceeding $500,000 at any one time outstanding; (vi) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate amount up to but not exceeding $5,000,000 at any one time outstanding; and (vii) Indebtedness ("REFINANCING INDEBTEDNESS") issued in exchange for or the proceeds of which are used to repay, refund, refinance or discharge or otherwise retire any Indebtedness ("REFINANCED INDEBTEDNESS") specified in clause (ii) above, such Refinancing Indebtedness not to exceed the principal amount of, accelerate the maturity of, or increase the interest rate applicable to, the Refinanced Indebtedness outstanding on the date of the issuance of the Refinancing Indebtedness; provided that the Company and its Restricted Subsidiaries may not refinance any Production Payment outstanding on the date hereof with any Production Payment of the Company or any Restricted Subsidiary. (b) The Company will not permit any of its Unrestricted Subsidiaries to create, incur or suffer to exist any Indebtedness except Non-Recourse Debt. 9.08 INVESTMENTS. The Company will not, and will not permit any of its Restricted Subsidiaries to, make or permit to remain outstanding any Investments except: (a) Investments outstanding on the date hereof and identified in Schedule III Part B hereto (excluding Investments in Unrestricted Subsidiaries); (b) operating deposit accounts with banks; (c) Permitted Investments; (d) Investments by the Company and its Restricted Subsidiaries in capital stock of Restricted Subsidiaries to the extent outstanding on the date of the financial statements -70- of the Company and its Consolidated Subsidiaries referred to in Section 8.02 hereof and advances by the Company and its Restricted Subsidiaries to Restricted Subsidiaries of the Company in the ordinary course of business or pursuant to Section 6.08 hereof; (e) Investments in the Capital Stock of any Wholly-Owned Subsidiary of the Company formed or acquired by the Company or any of its other Wholly-Owned Subsidiaries (other than Unrestricted Subsidiaries, 3189503, Canadian Forest Oil and Funding Co.) after the date hereof (a "NEW WHOLLY- OWNED SUBSIDIARY"), provided that (i) such New Wholly-Owned Subsidiary is maintained as a separate Subsidiary of the Company (unless the Majority Banks consent to the merger of such New Wholly-Owned Subsidiary into the Company or into another Wholly-Owned Subsidiary of the Company, except that no such consent shall be required to merge such New Wholly-Owned Subsidiary into another Wholly-Owned Subsidiary of the Company established solely for the purpose of facilitating the acquisition of such New Wholly-Owned Subsidiary (which Wholly-Owned Subsidiary, following such merger, shall have no assets other than the assets of such New Wholly-Owned Subsidiary)), (ii) such New Wholly-Owned Subsidiary is engaged principally in the business of the acquisition and exploitation of, exploration for and/or development, production, processing, marketing, gathering and sales of oil, gas or other hydrocarbons, (iii) immediately following the consummation of each such Investment, such New Wholly-Owned Subsidiary shall have no Indebtedness other than Non-Recourse Debt (provided such Indebtedness may have full recourse to the assets of such Wholly-Owned Subsidiary or any Unrestricted Subsidiary) and, if applicable, Indebtedness hereunder and (iv) the Company complies with Section 9.16 hereof with respect to such New Wholly-Owned Subsidiary immediately following the consummation of such Investment by the Company; (f) Commodity Hedging Agreements and Interest Rate Protection Agreements entered into by the Company and its Restricted Subsidiaries in the ordinary course of business substantially as conducted on the date hereof and not for speculation purposes; (g) additional Investments up to but not exceeding $30,000,000 (or the equivalent) in the aggregate PLUS the net cash proceeds of any Equity Issuance which is applied simultaneously or substantially simultaneously for an Investment, including, without limitation, Investments in Unrestricted Subsidiaries; PROVIDED that any cash dividends received by the Company or any Restricted Subsidiary from an Unrestricted Subsidiary, up to the amount of the Investments in such Unrestricted Subsidiary, shall reduce PRO TANTO the aggregate amount of the Investments in such Unrestricted Subsidiary for purposes of calculating compliance with such $30,000,000 limitation; and (h) undivided fractional interests in hydrocarbon reserves. -71- 9.09 DIVIDEND PAYMENTS. The Company will not, nor will it permit any of its Restricted Subsidiaries to, declare or make any Dividend Payment at any time; PROVIDED that (i) any Wholly-Owned Subsidiaries of the Company may declare and make Dividend Payments to the Company and (ii) the Company or any Restricted Subsidiary may declare and make Dividend Payments in cash, subject to the satisfaction of each of the following conditions on the date of such Dividend Payment and after giving effect thereto: (i) no Default shall have occurred and be continuing or shall occur as a result of the making of such Dividend Payment; and (ii) immediately after giving effect to such Dividend Payment, the aggregate amount of Dividend Payments made during the period commencing on the date hereof through and including the date of such Dividend Payment shall not exceed an amount equal to the sum of (A) 50% of consolidated net income of the Company and its Consolidated Subsidiaries for the period commencing on January 1, 1997 through and including the last day of the fiscal quarter most recently ended prior to the date of such Dividend Payment (the "TRACKING PERIOD") (treated for these purposes as a single accounting period), or 100% of consolidated net losses of the Company and its Consolidated Subsidiaries for the Tracking Period (treated for these purposes as a single accounting period), PLUS 50% of the net cash proceeds received by the Company during the Tracking Period from any Person other than a Subsidiary of the Company as a result of the issuance or sale of Capital Stock (other than Disqualified Capital Stock) of the Company (reduced by 100% of the amount of such net cash proceeds used or intended to be used to prepay, redeem or retire any Subordinated Indebtedness pursuant to Section 9.17 hereof); PROVIDED that no more than 10% of such net cash proceeds may be used to make any Dividend Payment during any fiscal year of the Company and (B) $10,000,000; provided that in no event will the amount determined pursuant to clause (A) hereof be less than zero. For the purpose of this paragraph 9.09(ii), consolidated net income or loss of the Company and its Consolidated Subsidiaries shall exclude the following non-cash items (provided that the same shall be included when they become cash items): (i) any impairment of Properties for accounting purposes under a ceiling test adjustment, (ii) any extraordinary item or (iii) any gain or loss attributable to a change in accounting method which, at the time of recognition in the financial statements of the Company and its Restricted Subsidiaries is not a cash item. To the extent future cash payments are made or received with respect to a change in accounting method and such payment is not otherwise included in the computation of consolidated net income or loss for such period, consolidated net income or loss shall be reduced or increased by the amount of such cash payment or receipt. 9.10 INTEREST COVERAGE RATIO. The Company will not permit the Interest Coverage Ratio for any period of four complete consecutive fiscal quarters (treated for this -72- purpose as a single accounting period) following March 31, 1996, to be less than 2.0 to 1.0 as of the end of any fiscal quarter of the Company. 9.11 WORKING CAPITAL. The Company will not permit the current assets of the Company and its Restricted Subsidiaries (determined on a consolidated basis in accordance with GAAP) to be equal to or less than the current liabilities of the Company and its Restricted Subsidiaries (so determined). For purposes hereof, the terms "CURRENT ASSETS" and "CURRENT LIABILITIES" shall have the respective meanings assigned to them by GAAP, PROVIDED that in any event there shall be (i) included in current assets the aggregate amount of the unused Commitments (but only to the extent such unused Commitments could then be utilized as provided in Section 7.02 hereof), (ii) excluded from current liabilities all Indebtedness hereunder, (iii) excluded from current liabilities all Production Payments and (iv) excluded from current liabilities the current portion of any gas balancing liabilities. 9.12 LINES OF BUSINESS. The Company will not, and will not permit any of its Restricted Subsidiaries to, engage to any substantial extent in any line or lines of business activity other than the business of the acquisition, exploration, development, production, processing, marketing, gathering and sale of hydrocarbons. 9.13 TRANSACTIONS WITH AFFILIATES. Except as expressly permitted by this Agreement, the Company will not, and will not permit any Restricted Subsidiaries to, directly or indirectly: (a) make any Investment in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any Property to an Affiliate; (c) merge into or consolidate with or purchase or acquire Property from an Affiliate; or (d) enter into any other transaction directly or indirectly with or for the benefit of an Affiliate (including, without limitation, guarantees and assumptions of obligations of an Affiliate); PROVIDED that (x) any Affiliate who is an individual may serve as a director, officer or employee of any of the Company and its Subsidiaries and receive reasonable compensation for his or her services in such capacity and (y) any of the Company and its Restricted Subsidiaries may enter into transactions with Affiliates (other than extensions of credit to Affiliates) providing for the leasing of Property, the rendering or receipt of services or the purchase or sale of inventory and other Property in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Company and its Restricted Subsidiaries as the monetary or business consideration which would obtain in a comparable transaction with a Person not an Affiliate. 9.14 USE OF PROCEEDS. The Company will use the proceeds of the Loans hereunder and will use Letters of Credit issued hereunder solely for general corporate purposes (in compliance with all applicable legal and regulatory requirements); PROVIDED that neither the Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 9.15 CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES. The Company will, and will cause each of its Restricted Subsidiaries to, take such action from time to time as shall be -73- necessary to ensure that the Company and each of its Restricted Subsidiaries at all times own (subject only to the Lien of the Pledge Agreement) at least the same percentage of the issued and outstanding shares of each class of stock of each of such Restricted Subsidiaries the stock of which is subject to the Lien of the Pledge Agreement as is owned on the date hereof or, in the case of New Wholly-Owned Subsidiaries created or acquired after the date hereof (other than Funding Co., 3189503, Canadian Forest Oil, and any Wholly-Owned Subsidiaries of such Persons), the stock of which are required to be subject to the Lien of the Pledge Agreement, 100% of each class of stock of each of such Subsidiaries (each of the Subsidiaries referred to above being herein called, a "PLEDGED SUBSIDIARY"). Without limiting the generality of the foregoing, none of the Company and its Restricted Subsidiaries will sell, transfer or otherwise dispose of any shares of stock in any Pledged Subsidiary owned by it, nor permit any Pledged Subsidiary to issue any shares of stock of any class whatsoever to any Person (other than to the Company or another Obligor). In the event that any such additional shares of stock are issued by any Pledged Subsidiary, the respective Obligor agrees forthwith to deliver to the Agent pursuant to the Pledge Agreement the certificates evidencing such shares of stock, accompanied by undated stock powers executed in blank and shall take such other action as the Agent shall request to perfect the security interest created therein pursuant to the Pledge Agreement. The Company will not and will not permit any of its Restricted Subsidiaries to enter into any indenture, agreement, instrument or other arrangement (other than the Indenture included in the Senior Subordinated Debt Documents as initially in effect, the Funding Credit Agreement as initially in effect and the other Loan Documents (as defined therein) and the Canadian Forest Oil Credit Agreement as initially in effect and the other Loan Documents (as defined therein)) that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of Indebtedness of the Company and its Restricted Subsidiaries, the granting of Liens, the declaration or payment of dividends, the making of loans, advances or Investments or the sale, assignment, transfer or other disposition of Property. 9.16 ADDITIONAL SUBSIDIARY GUARANTORS. The Company will take such action, and will cause each of its Subsidiaries to take such action, including without limitation the action specified below in this Section 9.16 from time to time as shall be necessary to ensure that (i) each of such Subsidiaries (other than (i) Unrestricted Subsidiaries, (ii) Forest I Development Company, (iii) Funding Co., (iv) 3189503, (v) Canadian Forest Oil, and (vi) any Wholly-Owned Subsidiaries of the Persons set forth in clauses (iii) through (v)) with Tangible Net Worth of more than 5% of the Tangible Net Worth of the Company and its Consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP is a Subsidiary Guarantor hereunder and (ii) all Subsidiaries that Guarantee the Company's obligations in respect of the Senior Subordinated Indebtedness, other than Funding Co., are Subsidiary Guarantors and in each case, thereby, "OBLIGORS" hereunder. Each Subsidiary of the Company that is required to become a Subsidiary Guarantor after the date hereof shall execute such instruments and agreements, in form and substance satisfactory to, and as required by, the Agent to acknowledge -74- that such Subsidiary has all of the obligations of a Subsidiary Guarantor pursuant to this Agreement. 9.17 MODIFICATIONS AND PAYMENTS OF SUBORDINATED INDEBTEDNESS AND PRODUCTION PAYMENTS INDEBTEDNESS. The Company will not, and will not permit any of its Restricted Subsidiaries to, (a) agree to any amendment, supplement or other modification of any of the Senior Subordinated Debt Documents or any other documents providing for or evidencing any Subordinated Indebtedness or Production Payments or (b) pay, prepay, redeem, retire, purchase or otherwise acquire for value, or defease, any Subordinated Indebtedness or Production Payments except for (subject to the subordination provisions, if applicable, relating thereto) regularly scheduled payments of principal thereof and interest thereon or regularly scheduled redemptions thereof on the respective dates on which such payments or redemptions are required to be made; PROVIDED that the Company may (if no Default has occurred and is continuing or will result therefrom) (i) apply the net cash proceeds received by the Company from any Person other than a Subsidiary of the Company as a result of an Equity Issuance to prepay, redeem or retire any Subordinated Indebtedness or Production Payments; and (ii) refinance such Senior Subordinated Debt provided that (w) the subordination for such Indebtedness remain unchanged; (x) the interest rate applicable to such Indebtedness is not increased; (y) the final maturity of such Indebtedness is not accelerated and (z) the covenants and other provisions thereof are not modified in any respect determined by the Majority Banks to be materially adverse to the Company, any such Restricted Subsidiary or the Banks. 9.18 MORTGAGES. (a) The Company will file or cause to be delivered to the Agent not later than 30 days following the date hereof, Mortgages over the Company's interest in the Hydrocarbon Properties of the Loma Vieja field in Texas. (b) The Company will at the time each Reserve Evaluation Report is delivered cause the Mortgaged Properties to constitute not less than 80% of the Hydrocarbon Properties PROVIDED THAT, if such Mortgage Properties constitute less than 80% of the Hydrocarbon Properties, the Company will within 30 days of the date of delivery to the Agent of such Reserve Evaluation Report cause the Mortgaged Properties to constitute not less than 80% of the Hydrocarbon Properties. 9.19 UNRESTRICTED SUBSIDIARIES. The Company: (a) will cause the management, business and affairs of each of the Company and its Subsidiaries to be conducted in such a manner (including, without limitation, by keeping separate books of account, furnishing separate financial statements of Unrestricted Subsidiaries to creditors and potential creditors thereof and by not permitting Properties of the Company and its respective Subsidiaries to be commingled) so that each Unrestricted Subsidiary that is a corporation will be treated as a corporate entity separate and distinct from the Company and the Restricted Subsidiaries; -75- (b) will not, and will not permit any of the Restricted Subsidiaries to, incur, assume, Guarantee or be or become liable for any Indebtedness or other obligations of any of the Unrestricted Subsidiaries; and (c) will not permit any Unrestricted Subsidiary to hold any capital stock of or other ownership interest in, or any Indebtedness of, any Restricted Subsidiary. 9.20 PLEDGES. The Company anticipates acquiring certain pipeline assets in the Republic of Italy. Promptly upon acquiring such assets the Company shall pledge pursuant to a pledge agreement in the form of Exhibit F hereto, all the stock of any US Subsidiary which owns directly or indirectly all or any portion of such assets. Section 10. EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) The Company shall default in the payment when due (whether at stated maturity or upon mandatory or optional prepayment) of any principal of or interest on any Loan or any Reimbursement Obligation, any fee or any other amount payable by it hereunder or under any other Basic Document; or (b) The Company or any of its Restricted Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Indebtedness aggregating $500,000 or more, or in the payment when due of $100,000 or more under any Interest Rate Protection Agreement or Commodity Hedging Agreement; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness or any event specified in any Interest Rate Protection Agreement or Commodity Hedging Agreement shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at a level specified in relation to the par value thereof or, in the case of an Interest Rate Protection Agreement or Commodity Hedging Agreement, to permit the payments owing under such Interest Rate Protection Agreement or Commodity Hedging Agreement to be liquidated; (c) Any representation, warranty or certification made or deemed made herein or in any other Basic Document (or in any modification or supplement hereto or thereto) by any Obligor, or any certificate furnished to any Bank or the Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or -76- (d) The Company shall default in the performance of any of its obligations under any of Sections 9.01(g), 9.05, 9.06, 9.07, 9.08, 9.09, 9.10, 9.11, 9.12, 9.14, 9.15, 9.17 or 9.18 hereof or any Obligor shall default in the performance of any of its obligations under Section 4.02 or 5.02 of the Security Agreement; or any Obligor shall default in the performance of any of its other obligations in this Agreement or any other Basic Document and such default shall continue unremedied for a period of 30 days after notice thereof to the Company by the Agent or any Bank (through the Agent); or (e) The Company or any of its Restricted Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Restricted Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Restricted Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Restricted Subsidiary or of all or any substantial part of its Property, or (iii) similar relief in respect of the Company or such Restricted Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or such Restricted Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer(s) has or have admitted liability in respect of the full amount of such judgment(s) in excess of $1,000,000 and in respect of which the Majority Banks believe such insurer(s) has or have the financial ability to satisfy the full amount of such judgment(s)) shall be rendered by a one or more courts, administrative tribunals or other -77- bodies having jurisdiction against the Company or any of its Restricted Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and the Company or the relevant Restricted Subsidiary shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) An event or condition specified in Section 9.01(e) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Majority Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or PBGC (or any combination of the foregoing) which would constitute, in the determination of the Majority Banks, a Material Adverse Effect; or (j) Any Governmental Authority shall assert claims against the Company or any of its Subsidiaries, or any other Person shall commence any proceeding against the Company or any of its Subsidiaries before any court, administrative tribunal or other body having jurisdiction over the Company or any of its Subsidiaries, in either such case based on or arising from the generation, storage, transport, handling or disposal of Hazardous Materials by the Company or any of its Subsidiaries or Affiliates, or any predecessor in interest of the Company or any of its Subsidiaries or Affiliates, or relating to any site or facility owned, operated or leased by the Company or any of its Subsidiaries or Affiliates, which claims or liabilities (insofar as they are payable by the Company or any of its Subsidiaries but after deducting any portion thereof which is reasonably expected to be paid by other creditworthy Persons jointly and severally liable therefor), and the amount thereof is, singly or in the aggregate, reasonably anticipated to have a Material Adverse Effect and such claim is not withdrawn or such proceeding is not withdrawn or dismissed, as the case may be, within 45 days after the assertion or commencement thereof, as applicable; or (k) A Change of Control; or (l) Except for expiration in accordance with its terms, any of the Security Documents shall be terminated or shall cease to be in full force and effect, for whatever reason; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 10 with respect to any Obligor, the Agent may and, upon request of the Majority Banks, shall, by notice to the Company, terminate the Commitments and/or declare the principal amount then outstanding of, and the accrued interest on, the Loans, the Reimbursement -78- Obligations and all other amounts payable by the Obligors hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 or 5.06 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 10 with respect to any Obligor, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans, the Reimbursement Obligations and all other amounts payable by the Obligors hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 or 5.06 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor. In addition, upon the occurrence and during the continuance of any Event of Default (if the Agent has declared the principal amount then outstanding of, and accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes to be due and payable), the Company agrees that it shall, if requested by the Agent or the Majority Banks through the Agent (and, in the case of any Event of Default referred to in clause (f) or (g) of this Section 10 with respect to the Company, forthwith, without any demand or the taking of any other action by the Agent or such Banks) provide cover for the Letter of Credit Liabilities by paying to the Agent immediately available funds in an amount equal to the then aggregate undrawn face amount of all Letters of Credit, which funds shall be held by the Agent in the Collateral Account as collateral security in the first instance for the Letter of Credit Liabilities and be subject to withdrawal only as therein provided. Section 11. THE AGENT. 11.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Basic Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and of the other Basic Documents, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 11.05 and the first sentence of Section 11.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Basic Documents, and shall not by reason of this Agreement or any other Basic Document be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or in any other Basic Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Basic Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any collateral security provided for by any of the Security Documents, or of this Agreement, any Note or any other Basic Document or any other document referred to or -79- provided for herein or therein, or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Basic Document; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Basic Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Agent, together with the consent of the Company to such assignment or transfer (to the extent provided in Section 12.06(b) hereof). 11.02 RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Basic Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Majority Banks, and such instructions of the Majority Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 11.03 DEFAULTS. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default (other than the non-payment of principal of or interest on Loans, Reimbursement Obligations or of commitment fees) unless the Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 11.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, PROVIDED that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 11.04 RIGHTS AS A BANK. With respect to its Commitment and the Loans made by it, Chase (and any successor acting as Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise -80- indicates, include the Agent in its individual capacity. Chase (and any successor acting as Agent) and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Obligors (and any of their Subsidiaries or Affiliates) as if it were not acting as the Agent, and Chase and its affiliates may accept fees and other consideration from the Obligors for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 11.05 INDEMNIFICATION. The Banks agree to indemnify the Agent (to the extent not reimbursed under Sections 12.03 and 12.07 hereof, but without limiting the obligations of the Company under said Sections 12.03 and 12.07, and including in any event any payments under any indemnity that the Agent is required to issue to any bank referred to in Section 4.02 of the Security Agreement to which remittances in respect of Accounts, as defined therein, are to be made) ratably in accordance with the aggregate principal amount of the Loans and Reimbursement Obligations held by the Banks (or, if no Loans or Reimbursement Obligations are at the time outstanding, ratably in accordance with their respective Commitments or, if no Loans, Reimbursement Obligations or Commitments are at the time outstanding or in effect, ratably in accordance with their respective Commitments as most recently in effect), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Agent (including by any Bank) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Basic Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Sections 12.03 and 12.07 hereof, and including also any payments under any indemnity that the Agent is required to issue to any bank referred to in Section 4.02 of the Security Agreement to which remittances in respect of Accounts, as defined therein, are to be made, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, PROVIDED that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 11.06 NON-RELIANCE ON AGENT AND OTHER BANKS. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by any Obligor of this Agreement or any of the other Basic Documents or any other document referred to or provided -81- for herein or therein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their Affiliates) that may come into the possession of the Agent or any of its affiliates. 11.07 FAILURE TO ACT. Except for action expressly required of the Agent hereunder and under the other Basic Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 11.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 11.08 RESIGNATION OR REMOVAL OF AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, that shall be a bank which has an office in New York, New York with a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. 11.09 CONSENTS UNDER OTHER BASIC DOCUMENTS. The Agent may, with the prior consent of the Majority Banks (but not otherwise), consent to any modification, supplement or waiver under any of the Basic Documents other than this Agreement, PROVIDED that, without the prior consent of each Bank, the Agent shall not (except as provided herein or in the Security Documents) release any collateral or otherwise terminate any Lien under any Basic Document providing for collateral security, or agree to additional obligations being secured by such collateral security (unless the Lien for such additional obligations shall be junior to the Lien in favor of the other obligations secured by such Basic Document), except that no such consent shall be required, and the Agent is hereby authorized, to release any Lien covering Property which is the subject of a disposition of Property permitted hereunder. -82- Notwithstanding any provision of this Agreement to the contrary, the Agent shall, in connection with any disposition by an Obligor of any Properties, other than Mortgaged Properties, to the extent such Properties are disposed of in accordance with the limitations set forth in Section 9.05(iii) hereof, release such Properties from the Lien of each of the Security Documents, without the consent of any Bank, upon the receipt by the Agent of a certificate from the Obligor seeking such release which certificate shall state (i) that no Default or Event of Default has occurred and is continuing and (ii) that the disposition of such Property in the manner contemplated by such Obligor is permitted pursuant to the terms of this Agreement provided that such release shall not extend to (A) any equipment located on, proceeds from sale of, or production of hydrocarbons from, such Hydrocarbon Properties that are retained by the Company after any farmout or similar agreement and (B) any Inventory or Equipment (as defined in the Security Agreement) that is the subject of such farmout or similar agreement (the "FARMOUT INTEREST") and that is or may be utilized for the exploration, production or marketing of Hydrocarbons attributable to (x) the Farmout Interest and (y) other properties of the Company that are (i) Mortgaged Properties or (ii) described in the Security Documents and intended to be Mortgaged Properties. 11.10 COLLATERAL SUB-AGENTS. Each Bank by its execution and delivery of this Agreement agrees, as contemplated by Section 4.03 of the Security Agreement, that, in the event it shall hold any Permitted Investments referred to therein, such Permitted Investments shall be held in the name and under the control of such Bank, and such Bank shall hold such Permitted Investments as a collateral sub-agent for the Agent thereunder. The Company by its execution and delivery of this Agreement hereby consents to the foregoing. Section 12. MISCELLANEOUS. 12.01 WAIVER. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 12.02 NOTICES. All notices, requests and other communications provided for herein and under the Security Documents (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telecopy or other writing and telecopied, mailed or delivered to the intended recipient: (a) in the case of the Company or any Subsidiary Guarantor, at the "Address for Notices" specified below the name of the Company on the signature pages hereof; -83- (b) in the case of the Agent, at the "Address for Notices" specified below its name on the signature pages hereof; and (c) in the case of any Bank, at its address (or telecopy number) set forth in its Administrative Questionnaire; or, as to any party, at such other address as shall be designated by such party in a notice to the Company and the Agent given in accordance with this Section 12.02. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier (and receipt is electronically confirmed), personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 12.03 EXPENSES. The Company hereby agrees to pay or reimburse each of the Banks and the Agent for paying: (a) all reasonable out-of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and expenses of (i) Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase and (ii) each of the special counsel to the Banks set forth in Section 7.01(j) hereof), in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the other Basic Documents and the extensions of credit hereunder and (ii) any modification, supplement or waiver of any of the terms of this Agreement or any of the other Basic Documents; (b) all reasonable out-of-pocket costs and expenses of the Banks and the Agent (including, without limitation, reasonable counsels' fees) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether or not consummated), or the obligations of the Company hereunder and (ii) the enforcement of this Section 12.03 or Section 12.07; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any of the other Basic Documents or any other document referred to herein or therein and all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by any Basic Document or any other document referred to therein. 12.04 AMENDMENTS, ETC. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Obligors, the Agent and the Majority Banks, or by the Obligors and the Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Agent acting with the consent of the Majority Banks; PROVIDED that: no modification, supplement or waiver shall, unless by an instrument signed by all of the Banks or by the Agent acting with the consent of all of the Banks whose rights or interests are affected thereby: (i) increase, or extend the term of any of the Commitments, or extend the time or waive any requirement for the reduction or termination of any of the Commitments, (ii) extend the date fixed for the payment of principal of or interest on the Loans, the Reimbursement Obligations or any fee hereunder, (iii) reduce the amount of any -84- such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of the Company to prepay Loans, (vi) alter the terms of this Section 12.04 or (vii) modify the definition of the term "Majority Banks" or modify in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, any modification or supplement of this Agreement that increases any of the obligations or reduces or impairs any of the rights of, or otherwise adversely affects the interests of, the Agent or the Issuing Bank under this Agreement or any of the other Basic Documents shall require the consent of the Agent or the Issuing Bank (as the case may be). Anything in this Agreement to the contrary notwithstanding, if: (x) at a time when the conditions precedent set forth in Section 7 hereof to any Loans or other extension of credit hereunder are, in the opinion of the Majority Banks satisfied, any Bank shall fail to fulfill its obligations to make the Loan to be made by it; or (y) any Bank shall fail to pay to the Agent for the account of the Issuing Bank the amount of such Bank's Commitment Percentage of the Commitments of any payment under a Letter of Credit pursuant to Section 2.04(e) hereof; then, for so long as such failure shall continue, such Bank shall (unless the Majority Banks, determined as if such Bank were not a "Bank" hereunder, shall otherwise consent in writing) be deemed for all purposes relating to amendments, modifications, waivers or consents under this Agreement or any of the other Basic Documents (including, without limitation, under this Section 12.04 and under Section 11.09 hereof) to have no Loans, Letter of Credit Liabilities or Commitments, shall not be treated as a "Bank" hereunder when performing the computation of Majority Banks and shall have no rights under the preceding paragraph of this Section 12.04 or under Section 11.09 hereof; provided that any action taken by the other Banks with respect to the matters referred to in the preceding paragraph shall not be effective as against such Bank. 12.05 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 12.06 ASSIGNMENTS AND PARTICIPATIONS. (a) No Obligor may assign any of its rights or obligations hereunder or under the Notes without the prior consent of the Majority Banks and the Agent. (b) Each Bank may assign any of its Loans, its Note, its Commitment, and its Letter of Credit Interest (but only with the consent of, in the case of an outstanding Commitment, the Company and the Agent and, in the case of a Commitment or a Letter of Credit Interest, the -85- Issuing Bank (which consent, in the case of the Company, shall not be unreasonably withheld)); PROVIDED that (i) no such consent by the Company or the Agent or the Issuing Bank, if applicable, shall be required in the case of any assignment to another Bank; (ii) any such partial assignment shall be in an amount at least equal to $3,000,000; and (iii) each such assignment by a Bank of any of its Loans, Notes, Commitments or Letter of Credit Interests shall be made in such manner so that the same portion of its Loans, Notes, Commitments and Letter of Credit Interests is assigned to the respective assignee. Upon execution and delivery by the assignee to Company, the Agent and the Issuing Bank of an instrument in writing pursuant to which such assignee agrees to become a "Bank" hereunder (if not already a Bank) having the Commitments, Loans, and, if applicable, Letter of Credit Interests specified in such instrument, and upon the consent thereto by the Company, the Agent and the Issuing Bank, to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Company, the Agent and the Issuing Bank), the obligations, rights and benefits of a Bank hereunder holding the Commitments, Loans and, if applicable, Letter of Credit Interests (or portions thereof) assigned to it (in addition to the Commitments, Loans and Letter of Credit Interests, if any, theretofore held by such assignee) and the assigning Bank shall, to the extent of such assignment, be released from the Commitments (or portion thereof) so assigned. Upon each such assignment the assigning Bank shall pay the Agent an assignment fee of $5,000. (c) Each Bank may sell or agree to sell to one or more other Persons a participation in not more than 75% of its rights and obligations under this Agreement (including, without limitation, not more than 75% of its Commitment and the Loans and/or Letter of Credit Interest held by it), in which event each purchaser of a participation (a "PARTICIPANT") shall be entitled to the rights and benefits of the provisions of Section 9.01(g) hereof with respect to its participation in such Loans, Letter of Credit Interests and Commitments as if (and the Company shall be directly obligated to such Participant under such provisions as if) such Participant were a "Bank" for purposes of said Section, but, except as otherwise provided in Section 4.07(c) hereof, shall not have any other rights or benefits under this Agreement or any Note or any other Basic Document (the Participant's rights against such Bank in respect of such participation to be those set forth in the agreements executed by such Bank in favor of the Participant). All amounts payable by the Company to any Bank under Section 5 hereof in respect of Loans, Letter of Credit Interests held by it, and its Commitment, shall be determined as if such Bank had not sold or agreed to sell any participations in such Loans, Letter of Credit Interest and Commitment, and as if such Bank were funding each of such Loans, Letter of Credit Interests and Commitment in the same way that it is funding the portion of such Loans, Letter of Credit Interests and Commitment in which no participations have been sold. In no event shall a Bank that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Basic Document except that such Bank may agree with the Participant that it will not, without the consent of the Participant, agree to any of the following (to the extent the rights or interest of the Participant are adversely affected thereby): (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of such Bank's Commitment, -86- (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans, Reimbursement Obligations or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee, (v) alter the rights or obligations of the Company to prepay the related Loans or (vi) consent to any other modification, supplement or waiver hereof or of any of the other Basic Documents to the extent that the same, under Section 11.09 or 12.04 hereof, requires the consent of each Bank. (d) In addition to the assignments and participations permitted under the foregoing provisions of this Section 12.06, including, without limitation, Section 12.06(c) hereof, any Bank may assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations hereunder. (e) A Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 12.13(b) hereof. (f) Anything in this Section 12.06 to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan or Reimbursement Obligation held by it hereunder to the Obligors or any of their Affiliates or Subsidiaries without the prior written consent of each Bank. 12.07 INDEMNIFICATION. The Company hereby agrees (i) to indemnify the Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Agent to any Bank, whether or not the Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the extensions of credit hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the extensions of credit hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified) and (ii) not to assert any claim against the Agent, any Bank, any of their affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein or in any other Basic -87- Document; PROVIDED that the Company may enforce the obligations, if applicable, of the Banks hereunder. Without limiting the generality of the foregoing, the Company will (x) indemnify the Agent for any payments that the Agent is required to make under any indemnity issued to any bank referred to in Section 4.02 of the Security Agreement to which remittances in respect to Accounts, as defined therein, are to be made and (y) indemnify the Agent and each Bank from, and hold the Agent and each Bank harmless against, any losses, liabilities, claims, damages or expenses described in the preceding sentence (but excluding, as provided in the preceding sentence, any loss, liability, claim, damage or expense incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified) arising under any Environmental Law as a result of the past, present or future operations of the Company or any of its Subsidiaries (or any predecessor in interest to the Company or any of its Subsidiaries), or the past, present or future condition of any site or facility owned, operated or leased by the Company or any of its Subsidiaries (or any such predecessor in interest), or any Release or threatened Release of any Hazardous Materials from any such site or facility, including any such Release or threatened Release which shall occur during any period when the Agent or any Bank shall be in possession of any such site or facility following the exercise by the Agent or any Bank of any of its rights and remedies hereunder or under any of the Security Documents. 12.08 SURVIVAL. The obligations of the Company under Sections 5.01, 5.05, 5.06, 5.07, 12.03 and 12.07 hereof, the obligations of the Subsidiary Guarantors under Section 6.03 hereof and the obligations of the Banks under Section 11.05 hereof shall survive the repayment of the Loans and Reimbursement Obligations and the termination of the Commitments. In addition, each representation and warranty made, or deemed to be made by a notice of any extension of credit (whether by means of a Loan or a Letter of Credit), herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any extension of credit hereunder (whether by means of a Loan or a Letter of Credit), any Default which may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Bank or the Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such extension of credit was made. 12.09 CAPTIONS. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 12.11 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and the Notes shall be governed by, and construed in accordance with, the law of the State of New York. Each Obligor hereby submits to the nonexclusive jurisdiction of the United States District Court -88- for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Obligor irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 12.12 WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 12.13 TREATMENT OF CERTAIN INFORMATION. (a) The Company acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Company or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Bank or by one or more subsidiaries or affiliates of such Bank and the Company, subject to Section 12.13(b) hereof, hereby authorizes each Bank to share any information delivered to such Bank by the Company and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such subsidiary or affiliate. (b) Each Bank and the Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied by the Company or any of its Subsidiaries pursuant to this Agreement which is identified by such Person as being confidential at the time the same is delivered to such Bank or the Agent, PROVIDED that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Banks or the Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Agent or any other Bank, (v) in connection with any litigation to which any one or more of the Banks or the Agent is a party, (vi) to a subsidiary or affiliate of such Bank as provided in clause (a) above (provided that neither the Agent nor any Bank shall disclose any non-public information delivered by the Company or any of its Subsidiaries pursuant to this Agreement to any subsidiary or affiliate of the Agent or any such Bank, as the case may be, which is generally engaged in the securities business other than in connection with (x) Commodity Hedging Agreements or Interest Rate Protection Agreements permitted pursuant to Section 9.08(f) hereof or (y) the syndication or participation of the Commitments, Loans or Letter of Credit Interests under this Agreement, without the prior written consent of the Company) or (vii) to any assignee or participant (or -89- prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement substantially in the form of Exhibit G hereto. -90- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. FOREST OIL CORPORATION By /s/ Kenton M. Scroggs --------------------------- Title: V.P. Address for Notices: 1600 Broadway Suite 2200 Denver, Colorado 80202 Attention: Kenton Scroggs Telecopier No.: (303) 812-1602 Telephone No.: (303) 812-1414 -91- BANKS Commitment: $30,000,000 THE CHASE MANHATTAN BANK By --------------------------- Title: Managing Director -92- Commitment: $30,000,000 CHRISTIANIA BANK OG KREDITKASSE By /s/ Carl-Petter Svendsen ---------------------------- Title: First Vice President By /s/ Peter M. Dodge ---------------------------- Title: First Vice President -93- Commitment: $20,000,000 CREDIT LYONNAIS NEW YORK BRANCH By /s/ Pascal Poupelle ---------------------------- Title: Senior Vice President -94- Commitment: $20,000,000 BANK OF MONTREAL By /s/ Robert L. Roberts ----------------------------- Title: Director, U.S. Corporate Banking -95- THE CHASE MANHATTAN BANK, as Agent By ---------------------------- Title: Managing Director Address for Notices to Chase as Agent: The Chase Manhattan Bank One Chase Manhattan Plaza, Eighth Floor New York, New York 10081 Attention: Agency Services, Sandra Miklave Telecopier No.: (212) 552-5658 Telephone No.: (212) 552-7953 SCHEDULE I MATERIAL AGREEMENTS AND LIENS (Sections 8.12 and 9.07(b)) SCHEDULE I TO CREDIT AGREEMENT SCHEDULE II HAZARDOUS MATERIALS (Section 8.13) SCHEDULE II TO CREDIT AGREEMENT SCHEDULE III SUBSIDIARIES AND INVESTMENTS (Sections 8.15 and 9.08(a)) SCHEDULE III TO CREDIT AGREEMENT EX-4.8 3 EXHIBIT 4.8 EXHIBIT 4.8 AMENDMENT NO. 2 TO DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF PRODUCTION, FINANCING STATEMENT (PERSONAL PROPERTY INCLUDING HYDROCARBONS), AND FIXTURE FILING THIS AMENDMENT NO. 2 TO DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF PRODUCTION, FINANCING STATEMENT (PERSONAL PROPERTY INCLUDING HYDROCARBONS) AND FIXTURE FILING (this "AMENDMENT") is entered into as of January 31, 1997 at 9:00 a.m., Mountain Time (the "EFFECTIVE DATE") by and between FOREST OIL CORPORATION, a New York corporation with an address for notice hereunder of 1500 Colorado National Building, 950 17th Street, Denver, Colorado 80202 ("MORTGAGOR") to: 1. THE CHASE MANHATTAN BANK, with an address at One Chase Manhattan Plaza, New York, New York 10081, as agent for each bank referred to below (in such capacity, the "AGENT") (the Agent, together with its successors in such capacity, is hereinafter referred to as the "SECURED PARTY"), as to any and all portions of the Collateral EXCEPT those portions of the Collateral which (i) are located in the State of Texas or in offshore waters adjacent to the State of Texas and subject to the laws of the State of Texas and (ii) constitute interests in or to real property under the law of the State of Texas (the "DT COLLATERAL"); and 2. Mary Jo Woodford, with an address at One Chase Manhattan Plaza, New York, New York 10081, as trustee (successor to Richard F. Betz) (in such capacity, together with her successors and assigns in such capacity, the "TRUSTEE"), but only as to the DT Collateral. A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT. IN CERTAIN STATES, A POWER OF SALE MAY ALLOW THE SECURED PARTY TO TAKE THE COLLATERAL AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS INSTRUMENT. R E C I T A L S A. Mortgagor, certain banks (collectively, the "ORIGINAL BANKS"), and the Agent were parties to a Credit Agreement dated as of December 1, 1993 (as heretofore modified and supplemented and in effect on the date hereof (the "ORIGINAL CREDIT AGREEMENT"). B. Mortgagor, certain banks (collectively, the "EXISTING BANKS"), and the Agent amended and restated the Original Credit Agreement pursuant to an Amended and Restated Credit Agreement dated as of August 31, 1995. C. Mortgagor, certain banks (collectively, the "Banks") and the Agent have agreed to further amend and restate the Original Credit Agreement pursuant to a Second Amended and Restated Credit Agreement dated as of January 31, 1997 (the Original Credit Agreement as so amended and restated and as the same may be further amended and restated and in effect from time to time, being referred to herein as the "CREDIT AGREEMENT"). D. The Original Credit Agreement is secured by, among other things, that certain Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated as of June 3, 1994 from Mortgagor to Secured Party and Trustee (as heretofore modified and supplemented, the "DEED OF TRUST"). E. The Deed of Trust was amended by Amendment No. 1 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated as of August 31, 1995. The Deed of Trust and Amendment No. 1 were duly recorded as set forth on Schedule 1 attached hereto. F. Mortgagor and Secured Party now desire to supplement Exhibit A to the Deed of Trust to include therein certain additional properties to be subject to the lien and security interest of the Deed of Trust. G. Mortgagor and Secured Party now desire to further amend the Deed of Trust to provide for the continuation of the mortgage lien and security interest provided under the Deed of 2 Trust by Mortgagor to the Secured Party, for the benefit of itself and the Banks. NOW, THEREFORE, in view of the foregoing, Mortgagor and Secured Party do hereby agree as follows: 1. All capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Deed of Trust. 2. All references in the Deed of Trust to "this Instrument", as defined in the opening paragraph of the Deed of Trust shall mean the Deed of Trust as amended hereby and as the same may from time to time be further amended or supplemented. 3. The Deed of Trust is hereby amended: (i) by deleting Recital 1 in its entirety and substituting the following therefor: "1. Pursuant to the terms of the Second Amended and Restated Credit Agreement dated as of January 31, 1997 among Mortgagor, certain banks (collectively, the "BANKS"), the Subsidiary Guarantors and the Secured Party (as amended, supplemented and otherwise modified and in effect from time to time, the "CREDIT AGREEMENT"), the Banks have agreed to make loans from time to time under a revolving credit facility to the Mortgagor the aggregate principal or stated amount of which shall not exceed $100,000,000.00 at any one time (maturing January 31, 2000), and issue or acquire participation interests in letters of credit for account of Mortgagor the aggregate amount of the liabilities of the Banks under which shall not exceed $10,000,000.00."; (ii) by deleting Section 1.01A in its entirety and substituting the following therefore: "A. Payment in full when due (whether as stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Banks and all other amounts (including, without limitation, Reimbursement Obligations) from time to time owing to, and obligations to be performed 3 in favor of, the Secured Party and the Banks by the Mortgagor under the Credit Agreement, the Notes and under any of the other Basic Documents (any reborrowings, future advances, readvances, modifications, extensions, substitutions, exchanges and renewals shall enjoy the same priority as the initial advances evidenced by the Notes) and the obligations to be performed in favor of, the Secured Party and the Banks by the Mortgagor under any Commodity Hedging Agreements or Interest Rate Protection Agreements (as those terms are defined in the Credit Agreement)."; and (iii) by deleting Recital 3.F in its entirety and substituting the following therefore: "F. all tenements, hereditaments, appurtenances and properties in any way appertaining, belonging, affixed or incidental to the Lands, Leases, rights, titles, interests and estates described or referred to in paragraphs A, B, C, D and E above, which are now owned or, except with respect to any additional undivided interests as provided in paragraph E above, which may hereafter be acquired (by operation of law or otherwise) by the Mortgagor, including, without limitation, any and all property, real or personal, equipment, improvements, fixtures and other property now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of any of the Leases or the lands covered thereby or pooled or unitized therewith including, without limitation, any and all of the Mortgagor's rights, titles and interests in oil wells, gas wells, injection wells or other wells (including, without limitation, the wells described in Exhibit A hereto) or well equipment, buildings, structures, field separators, liquid extraction plants, plant compressors, pumps, pumping units, pipelines, sales and flow lines, gathering lines, field gathering systems, salt water disposal facilities, tanks and tank batteries, fixtures, valves, 4 fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires towers, casing, tubing and rods, power, telephone and telegraph lines (including without limitation all of the foregoing constituting all or a portion of a production or drilling platform located on Mortgaged Properties or used or useful in the production of Hydrocarbons from Mortgaged Property), surface leases, rights-of-way, easements, servitudes and other surface rights situated upon, used, held for use or useful in connection with the operation and development of the Leases and the Lands covered thereby or pooled or unitized therewith, together with all substitutions, replacements, accessions and attachments to any and all of the foregoing properties (the foregoing rights, interests and properties described in paragraphs A, B, C, D, E and this paragraph F above, and all rights, estates, powers and privileges appurtenant thereto are referred to herein collectively as the "MORTGAGED PROPERTIES" and, individually, as a "MORTGAGED PROPERTY")". 4. Mortgagor hereby confirms that pursuant to and subject to the terms of the Deed of Trust, it has heretofore absolutely and unconditionally granted, bargained, sold, assigned, transferred and conveyed the DT Collateral to the Trustee and granted to the Secured Party a security interest in those portions of the Collateral which (i) are located in the State of Texas or in offshore waters adjacent to the State of Texas and subject to the laws of the State of Texas and (ii) do not constitute DT Collateral. 5. Mortgagor hereby confirms that pursuant to and subject to the Deed of Trust, it has heretofore absolutely and unconditionally granted, bargained, sold, assigned, transferred, pledged, mortgaged, warranted and conveyed to the Secured Party and granted the Secured Party a security interest in all of the Collateral (except the DT Collateral), including, without limitation, all severed and extracted Hydrocarbons and other minerals produced from or attributable to the Mortgaged Property, including, without limitation, all of the proceeds thereof. 5 6. The parties hereto agree that Exhibit A to the Deed of Trust is supplemented by adding thereto Exhibit A attached hereto. All references to Exhibit A in the Deed of Trust shall hereafter refer to Exhibit A in the Deed of Trust and Exhibit A attached hereto. 7. In order to more fully effectuate this Amendment and in order to secure the performance of the Obligations and for and in consideration of the Loans made, and the Letters of Credit issued, pursuant to the Credit Agreement, the Mortgagor hereby: A. GRANTS, BARGAINS, SELLS, ASSIGNS, TRANSFERS, PLEDGES, MORTGAGES, WARRANTS and CONVEYS, and grants a security interest in, the Supplemental Collateral other than the Supplemental DT Collateral to the Secured Party WITH POWER OF SALE pursuant to the Deed of Trust and this Instrument and applicable law, for the benefit and security of the Secured Party, subject to the rights of the Secured Party under the assignment made in PARAGRAPH D below; B. GRANTS, BARGAINS, SELLS, ASSIGNS, TRANSFERS and CONVEYS the Supplemental DT Collateral to the Trustee, IN TRUST, WITH POWER OF SALE pursuant to the Deed of Trust and this Instrument and applicable law, for the benefit of the Secured Party; and C. without limiting the grant in PARAGRAPH A above, grants to the Secured Party a security interest in those portions of the Supplemental Collateral which (i) are located in the State of Texas and subject to the laws of the State of Texas and (ii) do not constitute Supplemental DT Collateral; TO HAVE AND TO HOLD the Supplemental Collateral other than the Supplemental DT Collateral unto the Secured Party, 6 its successors and assigns, forever, and TO HAVE AND TO HOLD the Supplemental DT Collateral unto the Trustee, its successors and assigns, forever, in trust, subject to all of the terms, conditions, covenants and agreements herein set forth, for the security and benefit of the Secured Party and its successors and assigns as holders of the Obligations; and D. UNCONDITIONALLY AND ABSOLUTELY ASSIGNS, CONVEYS, TRANSFERS and SETS OVER to the Secured Party any and all of the Mortgagor's rights in respect of the Supplemental Hydrocarbons, including, without limitation, all severed and extracted Hydrocarbons and other minerals produced from or attributable to the Mortgaged Property, including, without limitation, all of the proceeds thereof. 8. All of the properties, rights and interests described in clauses A through G below are collectively called the "SUPPLEMENTAL COLLATERAL" except for such portions of the Supplemental Collateral which (i) are located in the State of Texas or in offshore waters adjacent to the State of Texas and subject to the laws of the State of Texas and (ii) constitute interests in or to real property under the law of the State of Texas, which are collectively called the "DT SUPPLEMENTAL COLLATERAL": A. All rights, titles and interests of the Mortgagor (but at a minimum the undivided interests specified in Exhibit A attached hereto and incorporated herein by this reference) in and to the oil and gas leases, the oil, gas and mineral leases and other mineral properties or interests described in Exhibit A hereto (collectively, the "SUPPLEMENTAL LEASES") and in the lands and premises covered or affected thereby (the "SUPPLEMENTAL LANDS"), except the rights, titles and interests of the Mortgagor expressly excluded in Exhibit A hereto; B. without limitation of the foregoing, all other right, title and interest of the Mortgagor of whatever kind or character in and to the Supplemental Leases and described in Exhibit A hereto, or lands which are otherwise described in any 7 of the Supplemental Leases or other instruments described in Exhibit A hereto, even though such lands may be incorrectly described in, or omitted from, Exhibit A hereto, except the rights, titles and interests of the Mortgagor expressly excluded in Exhibit A hereto; C. all rights, titles, interests and estates owned by the Mortgagor in and to (i) the properties now or hereafter pooled or unitized with the Supplemental Leases; (ii) all presently existing or future unitization, communitization, pooling agreements, orders and/or declarations of pooled units and the units created thereby (including, without limitation, all units created under orders, regulations, rules or other official acts of any Federal, state or other governmental body or agency having Jurisdiction and so called "working interest units" created under operating agreements, surface use agreements, support agreements or otherwise) which may affect all or any portion of the Supplemental Leases including, without limitation, those units which may be described or referred to in Exhibit A hereto; and (iii) all operating agreements, farmout agreements, farmin agreements, development agreements, participation agreements, area of mutual interest agreements, equipment leases, purchase agreements, sale agreements, option agreements and other agreements which cover, affect or otherwise relate to any of the Supplemental Leases or Supplemental Lands or interests in the Supplemental Leases or Lands described or referred to herein or in Exhibit A hereto or to the production, sale, purchase, exchange, processing, handling, storing, transporting or marketing of the Hydrocarbons (as defined in Section 6.02 hereof) produced from or attributable to such Supplemental Leases or Supplemental Lands or interests therein; D. any property that may from time to time hereafter, by delivery or by writing of any kind, be subjected to the lien and security interest hereof by the Mortgagor or by anyone on the Mortgagor's behalf; and the Secured Party on behalf of the Banks is hereby authorized to receive the same at any time as additional security hereunder; E. all of the rights, titles and interests of every nature whatsoever now owned by the Mortgagor (as the same may be enlarged by the removal of any prior Encumbrance) in and to the Supplemental Lands, Supplemental Leases, rights, titles, interests and estates and every part and parcel thereof, 8 including, without limitation, the Supplemental Lands, Supplemental Leases, rights, titles, interests and estates as the same may be enlarged by the discharge of any payments out of production or by the removal of any charges or Encumbrances (as defined in Section 2.02 of the Deed of Trust) to which any of the Supplemental Lands, Supplemental Leases, rights, titles, interests or estates are subject, or otherwise; together with any and all renewals and extensions of any of the Supplemental Lands, Supplemental Leases, rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by the Mortgagor in and to such Supplemental Lands, Supplemental Leases, rights, titles, interests and estates, excluding any additional undivided interests in such Supplemental Lands, Supplemental Leases, rights, titles, interests and estates, hereafter acquired by the Mortgagor; F. all tenements, hereditaments, appurtenances and properties in any way appertaining, belonging, affixed or incidental to the Supplemental Lands, Supplemental Leases, rights, titles, interests and estates described or referred to in paragraphs A, B, C, D and E above, which are now owned or, except with respect to any additional undivided interests as provided in paragraph E above, which may hereafter be acquired (by operation of law or otherwise) by the Mortgagor, including, without limitation, any and all property, real or personal, equipment, improvements, fixtures and other property now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of any of the Supplemental Leases or the lands covered thereby or pooled or unitized therewith including, without limitation, any and all of the Mortgagor's rights, titles and interests in oil wells, gas wells, injection wells or other wells (including, without limitation, the wells described in Exhibit A hereto) or well equipment, buildings, structures, field separators, liquid extraction plants, plant compressors, pumps, pumping units, pipelines, sales and flow lines, gathering lines, field gathering systems, salt water disposal facilities, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, power, telephone and telegraph lines (including without limitation all of the foregoing constituting all or a portion of 9 a production or drilling platform located on Mortgaged Properties or used or useful in the production of Hydrocarbons from Mortgaged Property), surface leases, rights-of-way, easements, servitudes and other surface rights situated upon, used, held for use or useful in connection with the operation and development of the Supplemental Leases and the Supplemental Lands covered thereby or pooled or unitized therewith, together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing properties (the foregoing rights, interests and properties described in paragraphs A, B, C, D, E and this paragraph F above, and all rights, estates, powers and privileges appurtenant thereto are referred to herein collectively as the "SUPPLEMENTAL MORTGAGED PROPERTIES" and, individually, as a "SUPPLEMENTAL MORTGAGED PROPERTY"); and G. all rights, titles, interests and estates now owned by the Mortgagor in and to all Hydrocarbons in and under and which may be produced from or attributable to the Supplemental Leases and the Supplemental Lands or lands pooled or unitized therewith including, without limitation, all natural gas in tanks and all rents, issues, profits, proceeds (including without limitation, any prepayment for production not taken or payments in lieu of production), products, revenues and other income from or attributable to the Supplemental Leases and the Supplemental Lands covered thereby or pooled or unitized therewith which are subjected or required to be subjected to the liens and security interests of this Instrument; and further including, without limitation, any and all liens and security interests in the Hydrocarbons securing payment of proceeds from the sale of Hydrocarbons. 9. The Deed of Trust as supplemented herein with respect to the Supplemental Collateral is given and effected with a pact de non aliendo, confession of judgment by Mortgagor and waivers of delay notice and appraisement. Mortgagor acknowledges the Obligations secured hereby, whether now existing or to arise hereafter, and confesses judgment thereon in favour of Secured Party, if the Obligations are not paid when due. 10. The parties hereto hereby acknowledge and agree that except as specifically amended, changed or modified hereby, the Deed of Trust shall remain in full force and effect in accordance with its terms. None of the rights, titles and 10 interests existing and to exist under the Deed of Trust are hereby released, diminished or impaired, and Mortgagor hereby reaffirms all agreements and covenants and acknowledges and agrees that, except as previously disclosed by Mortgagor under the Deed of Trust (except to the extent same relate to Collateral that is no longer owned by Mortgagor and other than the representation and warranty set forth in the first sentence of Section 2.02(c) of the Deed of Trust) are true and correct in all material respects as of the date hereof. Mortgagor also represents and warrants to the Banks that the current net overproduced position of the Mortgagor with respect to Hydrocarbons produced from the Mortgaged Properties (expressed in volumetric terms) is not materially greater than the overproduced position of the Mortgagor with respect to the Mortgaged Properties as of August 31, 1995. 11. INSOFAR AS PERMITTED BY OTHERWISE APPLICABLE LAW, THIS AMENDMENT SHALL BE CONSTRUED UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (EXCLUDING CHOICE OF LAW AND CONFLICT OF LAW RULES). MORTGAGOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF NEW YORK AND EACH OTHER STATE WHERE THE COLLATERAL IS LOCATED AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AMENDMENT, THE BASIC DOCUMENTS OR THE OBLIGATIONS IN THE CASE OF A PROCEEDING IN ANY OF SUCH STATES, BY SERVING THE SECRETARY OF STATE OF SUCH STATE IN ACCORDANCE WITH ANY APPLICABLE PROVISIONS OF SUCH STATE'S LAW GOVERNING SERVICE OF PROCESS UPON FOREIGN CORPORATIONS OR ENTITIES. 12. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof. 13. Mortgagor and the Agent acknowledge that the execution of the Credit Agreement does not constitute a payment or prepayment of the Original Credit Agreement, but constitutes an amendment, extension, increase, and modification of the terms thereof. 14. For purposes of executory process under Louisiana law, the Mortgagor declares that on this 3rd day of February, 1997, but effective for all purposes as of the Effective Date, it has appeared in the presence of the undersigned Notary Public and 11 two witnesses and has executed this amendment through Forest Dorn its Vice President, duly authorized pursuant to Resolutions of the Board of Directors of the Mortgagor, a certified copy of which is annexed hereto as Exhibit "B". 15. Mortgagor acknowledges that none of the Obligations have been presented to the undersigned Notary Public to be paraphed for identification with this amendment. 16. Notwithstanding any reference herein to the Credit Agreement or any other Basic Document, no third party shall be obligated to inquire as to whether any term or condition set forth therein has occurred but shall be entitled to rely upon the certificate of the Secured Party as to all events, including but not limited to the occurrence of an Event of Default. 17. For purposes of executory process, the Mortgagor acknowledges and agrees that the existence, amount, terms, and maturity of the Obligations, may be proven by affidavit or verified petition, in accordance with Louisiana law as now existing or hereafter enacted. 12 THUS DONE AND PASSED on this day 3rd day of February, 1997, (the "Effective Date") effective for all purposes as of the Effective Date, in my presence and in the presence of the undersigned competent witnesses who hereunto sign their names with Mortgagor and me, Notary, after reading of the whole. MORTGAGOR: FOREST OIL CORPORATION By: /s/ FDD --------------------------------- Name: Forest D. Dorn Title: Vice President ATTEST: /s/ BEC - ------------------------------------ Asst. Secretary Barbara E. Cheseboro WITNESSES: Richard W. Schelin - ----------------------------------- Sandra W. Newth - ----------------------------------- Michele M. Miller ------------------------------ Notary Public S-1 THUS DONE AND PASSED on this 5th day of February, 1997, (the "Effective Date") effective for all purposes as of the Effective Date in my presence and in the presence of the undersigned competent witnesses who hereunto sign their names with the Agent and the Trustee and me, Notary, after reading of the whole. AGENT: THE CHASE MANHATTAN BANK By: /s/ Mary Jo Woodford --------------------------------- Name: Mary Jo Woodford Title: Vice President ATTEST: /s/ Jean E. Rugani - ----------------------------------- Asst. Corporate Secretary TRUSTEE: By: /s/ Mary Jo Woodford --------------------------------- Name: Mary Jo Woodford Title: Vice President WITNESSES: /s/ Elvine Franzini - ----------------------------------- /s/ Jennifer V. Rao - ----------------------------------- /s/ Virginia Stank ------------------------------ Notary Public S-2 NOTARY'S CERTIFICATE The undersigned Notary Public hereby certifies that attached hereto are certified copies of Resolutions produced by the Mortgagor and attached by me to this Amendment No. 3 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing executed this 3rd day of February, 1997 and effective for all purposes as of August 31, 1995. /s/ Michele M. Miller ------------------------------ Notary Public S-3 ACKNOWLEDGEMENT STATE OF COLORADO ) : ss. CITY AND COUNTY OF DENVER ) BE IT REMEMBERED that I, the undersigned Notary Public duly qualified, commissioned, sworn and acting in and for the county and state aforesaid, hereby certify that, on __________, 1997 there personally appeared before me, the following person, being the designated officer of the corporation set opposite his name, and such corporation being a party to the foregoing Amendment: Forest D. Dorn, the V.P. of Forest Oil Corporation, This Amendment was acknowledged before me on this 3rd day of February, 1997 by Forest D. Dorn, of Forest Oil Corporation, a New York corporation, on behalf of said corporation. LOUISIANA Who being by me duly sworn, deposed and said that he is the designated officer of said corporation described in and which executed the foregoing Amendment, that he signed his name thereto by order of the Board of Directors of said corporation, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as the free act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official notarial seal, in the County of Denver, State of Colorado, this 3rd day of February, 1997. /s/ Michele M. Miller ---------------------------------------- Notary Public, State of Colorado ---------------- Notary's Printed Name: Michele M. Miller ----------------- My Commission expires: September 29, 2000 ------------------ S-4 S-5 ACKNOWLEDGEMENT STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) BE IT REMEMBERED that I, the undersigned Notary Public duly qualified, commissioned, sworn and acting in and for the county and state aforesaid, hereby certify that, on February 5, 1997 there personally appeared before me, the following person, being the designated officer of the banking association set opposite his name, and such corporation being a party to the foregoing Amendment: Mary Jo Woodford, a V.P. of The Chase Manhattan Bank. This Amendment was acknowledged before me on this 5th day of February, 1997 by Mary Jo Woodford, of The Chase Manhattan Bank, on behalf of said bank. LOUISIANA Who being by me duly sworn, deposed and said that he is the designated officer of said bank described in and which executed the foregoing Amendment, that he signed his name thereto by order of the Board of Directors of said bank, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as the free act and deed of said bank. IN WITNESS WHEREOF, I have hereunto set my hand and official notarial seal, in the County of New York, State of New York, this 5th day of February, 1997. /s/ Virginia Stank ---------------------------------------- Notary Public, State of New York ---------------- Notary's Printed Name: Virginia Stank ---------------- My Commission expires: November 30, 1997 ----------------- S-6 ACKNOWLEDGEMENT STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) BE IT REMEMBERED that I, the undersigned Notary Public duly qualified, commissioned, sworn and acting in and for the county and state aforesaid, hereby certify that, on February 5, 1997 there personally appeared before me, the following person, being a party to the foregoing Amendment: This Amendment was acknowledged before me on this 5th day of February, 1997 by Mary Jo Woodford. LOUISIANA Who being by me duly sworn, deposed and said that he is the Trustee described in the foregoing Amendment, that he signed his name thereto, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as him free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and official notarial seal, in the County of New York, State of New York, this 5th day of February, 1997. /s/ Virginia Stank ---------------------------------------- Notary Public, State of New York ---------------- Notary's Printed Name: Virginia Stank ---------------- My Commission expires: November 30, 1997 ----------------- S-7 SCHEDULE 1 SCHEDULE OF RECORDING INFORMATION FOREST OIL CORPORATION and THE CHASE MANHATTAN BANK as Agent 1. Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated June 3, 1994 executed by Forest Oil Corporation ("Forest") in favor of Bettylou J. Robert, as Trustee, for the benefit of The Chase Manhattan Bank, as Agent (all recording references are to the Real Property Records): RECORDED IN THE STATE OF TEXAS COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Brazoria 6/8/94 Recorded 6/8/94 as #94-021547 Chambers 6/10/94 Recorded 6/10/94 as Volume 94-240, Page 215 Fort Bend 6/21/94 Recorded 6/21/94 as Volume 2668, Page 1568 Harris 6/7/94 Recorded 6/7/94 as #P899134 Matagorda 6/8/94 Recorded 6/8/94 as Volume 381, Page 505 Waller 6/8/94 Recorded 6/8/94 as Volume 496, Page 88 2. Financing Statement by Forest in connection with item #1 above and filed as follows: LOCATION DATE FILED FILING INFORMATION -------- ---------- ------------------ Secretary of 6/7/94 Recorded 6/7/94 #110234 State of Texas RECORDED IN THE STATE OF LOUISIANA A. PARISH DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Cameron 6/7/94 Recorded 6/7/94 as MOB 200, File No. 236409 St. Bernard 6/6/94 Recorded 6/6/94 as MOB 732, page 71 Vermillion 6/6/94 Recorded 6/6/94 as Entry No. 9405601 B. Mineral Management Service, Gulf of Mexico Region, June 6, 1994: Lease Files: OCS-G 1152, OCS-G 1153, OCS-G 1977, OCS-G 3393, OCS-G 8645, OCS-G 10658 and OCS-G 13301 2. UCC-1 Financing Statement by Forest Oil Corporation as Debtor, and The Chase Manhattan Bank, as Secured Party. A. PARISH DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Orleans 6/6/94 Recorded 6/6/94 as Instrument No. 36-84158 B. Mineral Management Service, Gulf of Mexico Region, June 6, 1994: Lease Files: 2 OCS-G 1152, OCS-G 1153, OCS-G 1977, OCS-G 3393, OCS-G 8645, OCS-G 10658 and OCS-G 13301 2. Amendment No. 1 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated August 31,1995 executed by Forest Oil Corporation ("Forest") in favor of Bettylou J. Robert, as Trustee, for the benefit of The Chase Manhattan Bank, as Agent: RECORDED IN THE STATE OF TEXAS COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Brazoria 9/27/95 Recorded 9/27/95 as #95-031806 Chambers 9/28/95 Recorded 9/29/95 in Volume 95-277, Page 473 Fort Bend 10/20/95 Recorded 10/20/95 as #9563356 Harris 9/27/95 Recorded 9/27/95 as #R598435 Matagorda 9/27/95 Recorded 9/27/95 in Volume 420, Page 664 Waller 9/28/95 Recorded 9/28/95 in Volume 525, Page 32 RECORDED IN THE STATE OF LOUISIANA A. PARISH DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Vermilion 9/19/95 MOB Entry No. 9509529 St. Bernard 9/19/95 Act No. 315858 MOB 773, folio 105 3 Cameron 9/19/95 File No. 242693 MOB 212 B. Minerals Management Service, Gulf of Mexico Region, September 19, 1995: Lease Files: OCS-G 1152, OCS-G 1153, OCS-G 1977, OCS-G 3393, OCS-G 8645, OCS-G 10658, OCS-G 13301 4 EXHIBIT A 5 EXHIBIT B RESOLUTIONS OF THE BOARD OF DIRECTORS 6 EX-4.9 4 EXHIBIT 4.9 EXHIBIT 4.9 AMENDMENT NO. 3 TO DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF PRODUCTION, FINANCING STATEMENT (PERSONAL PROPERTY INCLUDING HYDROCARBONS), AND FIXTURE FILING THIS AMENDMENT NO. 3 TO DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF PRODUCTION, FINANCING STATEMENT (PERSONAL PROPERTY INCLUDING HYDROCARBONS) AND FIXTURE FILING (this "AMENDMENT") is entered into as of January 31, 1997 at 9:00 a.m., Mountain Time (the "EFFECTIVE DATE") by and between FOREST OIL CORPORATION, a New York corporation with an address for notice hereunder of 1500 Colorado National Building, 950 17th Street, Denver, Colorado 80202 ("MORTGAGOR") to: 1. THE CHASE MANHATTAN BANK, with an address at One Chase Manhattan Plaza, New York, New York 10081, as agent for each bank referred to below (in such capacity, the "AGENT") (the Agent, together with its successors in such capacity, is hereinafter referred to as the "SECURED PARTY"), as to any and all portions of the Collateral EXCEPT those portions of the Collateral which (i) are located in the State of Texas or in offshore waters adjacent to the State of Texas and subject to the laws of the State of Texas and (ii) constitute interests in or to real property under the law of the State of Texas (the "DT COLLATERAL"); and 2. Mary Jo Woodford, with an address at One Chase Manhattan Plaza, New York, New York 10081, as trustee (successor to Ian G.P. Schottlaender) (in such capacity, together with her successors and assigns in such capacity, the "TRUSTEE"), but only as to the DT Collateral. A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT. IN CERTAIN STATES, A POWER OF SALE MAY ALLOW THE SECURED PARTY TO TAKE THE COLLATERAL AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS INSTRUMENT. R E C I T A L S A. Mortgagor, certain banks (collectively, the "ORIGINAL BANKS"), and the Agent were parties to a Credit Agreement dated as of December 1, 1993 (as heretofore modified and supplemented and in effect on the date hereof (the "ORIGINAL CREDIT AGREEMENT"). B. Mortgagor, certain banks (collectively, the "EXISTING BANKS"), and the Agent amended and restated the Original Credit Agreement pursuant to an Amended and Restated Credit Agreement dated as of August 31, 1995. C. Mortgagor, certain banks (collectively, the "BANKS") and the Agent have agreed to further amend and restate the Original Credit Agreement pursuant to a Second Amended and Restated Credit Agreement dated as of January 31, 1997 (the Original Credit Agreement as so amended and restated and as the same may be further amended and restated and in effect from time to time, being referred to herein as the "CREDIT AGREEMENT"). D. The Original Credit Agreement is secured by, among other things, that certain Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated as of December 1, 1993 from Mortgagor to Secured Party and Trustee (as heretofore modified and supplemented, the "DEED OF TRUST"). E. The Deed of Trust was amended by Amendment No. 1 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated as of June 3, 1994 and Amendment No. 2 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated as of August 31, 1995. The Deed of Trust, Amendment No. 1 and Amendment No. 2 were duly recorded as set forth on Schedule 1 attached hereto. F. Mortgagor and Secured Party now desire to supplement Exhibit A to the Deed of Trust to include therein certain additional properties to be subject to the lien and security interest of the Deed of Trust. 2 G. Mortgagor and Secured Party now desire to further amend the Deed of Trust to provide for the continuation of the mortgage lien and security interest provided under the Deed of Trust by Mortgagor to the Secured Party, for the benefit of itself and the Banks. NOW, THEREFORE, in view of the foregoing, Mortgagor and Secured Party do hereby agree as follows: 1. All capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Deed of Trust. 2. All references in the Deed of Trust to "this Instrument", as defined in the opening paragraph of the Deed of Trust shall mean the Deed of Trust as amended hereby and as the same may from time to time be further amended or supplemented. 3. The Deed of Trust is hereby amended: (i) by deleting Recital 1 in its entirety and substituting the following therefor: "1. Pursuant to the terms of the Second Amended and Restated Credit Agreement dated as of January 31, 1997 among Mortgagor, certain banks (collectively, the "BANKS"), the Subsidiary Guarantors and the Secured Party (as amended, supplemented and otherwise modified and in effect from time to time, the "CREDIT AGREEMENT"), the Banks have agreed to make loans from time to time under a revolving credit facility to the Mortgagor the aggregate principal or stated amount of which shall not exceed $100,000,000.00 at any one time (maturing January 31, 2000), and issue or acquire participation interests in letters of credit for account of Mortgagor the aggregate amount of the liabilities of the Banks under which shall not exceed $10,000,000.00."; and (ii) by deleting Section 1.01A in its entirety and substituting the following therefore: "A. Payment in full when due (whether as stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the 3 Banks and all other amounts (including, without limitation, Reimbursement Obligations) from time to time owing to, and obligations to be performed in favor of, the Secured Party and the Banks by the Mortgagor under the Credit Agreement, the Notes and under any of the other Basic Documents (any reborrowings, future advances, readvances, modifications, extensions, substitutions, exchanges and renewals shall enjoy the same priority as the initial advances evidenced by the Notes) and the obligations to be performed in favor of, the Secured Party and the Banks by the Mortgagor under any Commodity Hedging Agreements or Interest Rate Protection Agreements (as those terms are defined in the Credit Agreement)." (iii) by deleting Recital 3.F in its entirety and substituting the following therefore: "F. all tenements, hereditaments, appurtenances and properties in any way appertaining, belonging, affixed or incidental to the Lands, Leases, rights, titles, interests and estates described or referred to in paragraphs A, B, C, D and E above, which are now owned or, except with respect to any additional undivided interests as provided in paragraph E above, which may hereafter be acquired (by operation of law or otherwise) by the Mortgagor, including, without limitation, any and all property, real or personal, equipment, improvements, fixtures and other property now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of any of the Leases or the lands covered thereby or pooled or unitized therewith including, without limitation, any and all of the Mortgagor's rights, titles and interests in oil wells, gas wells, injection wells or other wells (including, without limitation, the wells described in Exhibit A hereto) or well equipment, buildings, structures, field separators, liquid extraction plants, plant compressors, pumps, pumping units, pipelines, 4 sales and flow lines, gathering lines, field gathering systems, salt water disposal facilities, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires towers, casing, tubing and rods, power, telephone and telegraph lines (including without limitation all of the foregoing constituting all or a portion of a production or drilling platform located on Mortgaged Properties or used or useful in the production of Hydrocarbons from Mortgaged Property), surface leases, rights-of-way, easements, servitudes and other surface rights situated upon, used, held for use or useful in connection with the operation and development of the Leases and the Lands covered thereby or pooled or unitized therewith, together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing properties (the foregoing rights, interests and properties described in paragraphs A, B, C, D, E and this paragraph F above, and all rights, estates, powers and privileges appurtenant thereto are referred to herein collectively as the "MORTGAGED PROPERTIES" and, individually, as a "MORTGAGED PROPERTY")". 4. Mortgagor hereby confirms that pursuant to and subject to the terms of the Deed of Trust, it has heretofore absolutely and unconditionally granted, bargained, sold, assigned, transferred and conveyed the DT Collateral to the Trustee and granted to the Secured Party a security interest in those portions of the Collateral which (i) are located in the State of Texas or in offshore waters adjacent to the State of Texas and subject to the laws of the State of Texas and (ii) do not constitute DT Collateral. 5. Mortgagor hereby confirms that pursuant to and subject to the Deed of Trust, it has heretofore absolutely and unconditionally granted, bargained, sold, assigned, transferred, pledged, mortgaged, warranted and conveyed to the Secured Party and granted the Secured Party a security interest in all of the Collateral (except the DT Collateral), including, without 5 limitation, all severed and extracted Hydrocarbons and other minerals produced from or attributable to the Mortgaged Property, including, without limitation, all of the proceeds thereof. 6. The parties hereto agree that Exhibit A to the Deed of Trust is supplemented by adding thereto Exhibit A attached hereto. All references to Exhibit A in the Deed of Trust shall hereafter refer to Exhibit A in the Deed of Trust and Exhibit A attached hereto. 7. In order to more fully effectuate this Amendment and in order to secure the performance of the Obligations and for and in consideration of the Loans made, and the Letters of Credit issued, pursuant to the Credit Agreement, the Mortgagor hereby: A. GRANTS, BARGAINS, SELLS, ASSIGNS, TRANSFERS, PLEDGES, MORTGAGES, WARRANTS and CONVEYS, and grants a security interest in, the Supplemental Collateral other than the Supplemental DT Collateral to the Secured Party WITH POWER OF SALE pursuant to the Deed of Trust and this Instrument and applicable law, for the benefit and security of the Secured Party, subject to the rights of the Secured Party under the assignment made in PARAGRAPH D below; B. GRANTS, BARGAINS, SELLS, ASSIGNS, TRANSFERS and CONVEYS the Supplemental DT Collateral to the Trustee, IN TRUST, WITH POWER OF SALE pursuant to the Deed of Trust and this Instrument and applicable law, for the benefit of the Secured Party; and 6 C. without limiting the grant in PARAGRAPH A above, grants to the Secured Party a security interest in those portions of the Supplemental Collateral which (i) are located in the State of Texas and subject to the laws of the State of Texas and (ii) do not constitute Supplemental DT Collateral; TO HAVE AND TO HOLD the Supplemental Collateral other than the Supplemental DT Collateral unto the Secured Party, its successors and assigns, forever, and TO HAVE AND TO HOLD the Supplemental DT Collateral unto the Trustee, its successors and assigns, forever, in trust, subject to all of the terms, conditions, covenants and agreements herein set forth, for the security and benefit of the Secured Party and its successors and assigns as holders of the Obligations; and D. UNCONDITIONALLY AND ABSOLUTELY ASSIGNS, CONVEYS, TRANSFERS and SETS OVER to the Secured Party any and all of the Mortgagor's rights in respect of the Supplemental Hydrocarbons, including, without limitation, all severed and extracted Hydrocarbons and other minerals produced from or attributable to the Mortgaged Property, including, without limitation, all of the proceeds thereof. 8. All of the properties, rights and interests described in clauses A through G below are collectively called the 7 "SUPPLEMENTAL COLLATERAL" except for such portions of the Supplemental Collateral which (i) are located in the State of Texas or in offshore waters adjacent to the State of Texas and subject to the laws of the State of Texas and (ii) constitute interests in or to real property under the law of the State of Texas, which are collectively called the "DT SUPPLEMENTAL COLLATERAL": A. All rights, titles and interests of the Mortgagor (but at a minimum the undivided interests specified in Exhibit A attached hereto and incorporated herein by this reference) in and to the oil and gas leases, the oil, gas and mineral leases and other mineral properties or interests described in Exhibit A hereto (collectively, the "SUPPLEMENTAL LEASES") and in the lands and premises covered or affected thereby (the "SUPPLEMENTAL LANDS"), except the rights, titles and interests of the Mortgagor expressly excluded in Exhibit A hereto; B. without limitation of the foregoing, all other right, title and interest of the Mortgagor of whatever kind or character in and to the Supplemental Leases and described in Exhibit A hereto, or lands which are otherwise described in any of the Supplemental Leases or other instruments described in Exhibit A hereto, even though such lands may be incorrectly described in, or omitted from, Exhibit A hereto, except the rights, titles and interests of the Mortgagor expressly excluded in Exhibit A hereto; C. all rights, titles, interests and estates owned by the Mortgagor in and to (i) the properties now or hereafter pooled or unitized with the Supplemental Leases; (ii) all presently existing or future unitization, communitization, pooling agreements, orders and/or declarations of pooled units and the units created thereby (including, without limitation, all units created under orders, regulations, rules or other official acts of any Federal, state or other governmental body or agency having Jurisdiction and so called "working interest units" created under operating agreements, surface use agreements, support agreements or otherwise) which may affect all or any portion of the Supplemental Leases including, without limitation, those units which may be described or referred to in Exhibit A hereto; and (iii) all 8 operating agreements, farmout agreements, farmin agreements, development agreements, participation agreements, area of mutual interest agreements, equipment leases, purchase agreements, sale agreements, option agreements and other agreements which cover, affect or otherwise relate to any of the Supplemental Leases or Supplemental Lands or interests in the Supplemental Leases or Lands described or referred to herein or in Exhibit A hereto or to the production, sale, purchase, exchange, processing, handling, storing, transporting or marketing of the Hydrocarbons (as defined in Section 6.02 hereof) produced from or attributable to such Supplemental Leases or Supplemental Lands or interests therein; D. any property that may from time to time hereafter, by delivery or by writing of any kind, be subjected to the lien and security interest hereof by the Mortgagor or by anyone on the Mortgagor's behalf; and the Secured Party on behalf of the Banks is hereby authorized to receive the same at any time as additional security hereunder; E. all of the rights, titles and interests of every nature whatsoever now owned by the Mortgagor (as the same may be enlarged by the removal of any prior Encumbrance) in and to the Supplemental Lands, Supplemental Leases, rights, titles, interests and estates and every part and parcel thereof, including, without limitation, the Supplemental Lands, Supplemental Leases, rights, titles, interests and estates as the same may be enlarged by the discharge of any payments out of production or by the removal of any charges or Encumbrances (as defined in Section 2.02 of the Deed of Trust) to which any of the Supplemental Lands, Supplemental Leases, rights, titles, interests or estates are subject, or otherwise; together with any and all renewals and extensions of any of the Supplemental Lands, Supplemental Leases, rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by the Mortgagor in and to such Supplemental Lands, Supplemental Leases, rights, titles, interests and estates, excluding any additional undivided interests in such Supplemental Lands, Supplemental Leases, rights, titles, interests and estates, hereafter acquired by the Mortgagor; 9 F. all tenements, hereditaments, appurtenances and properties in any way appertaining, belonging, affixed or incidental to the Supplemental Lands, Supplemental Leases, rights, titles, interests and estates described or referred to in paragraphs A, B, C, D and E above, which are now owned or, except with respect to any additional undivided interests as provided in paragraph E above, which may hereafter be acquired (by operation of law or otherwise) by the Mortgagor, including, without limitation, any and all property, real or personal, equipment, improvements, fixtures and other property now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of any of the Supplemental Leases or the lands covered thereby or pooled or unitized therewith including, without limitation, any and all of the Mortgagor's rights, titles and interests in oil wells, gas wells, injection wells or other wells (including, without limitation, the wells described in Exhibit A hereto) or well equipment, buildings, structures, field separators, liquid extraction plants, plant compressors, pumps, pumping units, pipelines, sales and flow lines, gathering lines, field gathering systems, salt water disposal facilities, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, power, telephone and telegraph lines (including without limitation all of the foregoing constituting all or a portion of a production or drilling platform located on Mortgaged Properties or used or useful in the production of Hydrocarbons from Mortgaged Property), surface leases, rights-of-way, easements, servitudes and other surface rights situated upon, used, held for use or useful in connection with the operation and development of the Supplemental Leases and the Supplemental Lands covered thereby or pooled or unitized therewith, together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing properties (the foregoing rights, interests and properties described in paragraphs A, B, C, D, E and this paragraph F above, and all rights, estates, powers and privileges appurtenant thereto are referred to herein collectively as the "SUPPLEMENTAL MORTGAGED PROPERTIES" and, individually, as a "SUPPLEMENTAL MORTGAGED PROPERTY"); and G. all rights, titles, interests and estates now owned by the Mortgagor in and to all Hydrocarbons in and under and which 10 may be produced from or attributable to the Supplemental Leases and the Supplemental Lands or lands pooled or unitized therewith including, without limitation, all natural gas in tanks and all rents, issues, profits, proceeds (including without limitation, any prepayment for production not taken or payments in lieu of production), products, revenues and other income from or attributable to the Supplemental Leases and the Supplemental Lands covered thereby or pooled or unitized therewith which are subjected or required to be subjected to the liens and security interests of this Instrument; and further including, without limitation, any and all liens and security interests in the Hydrocarbons securing payment of proceeds from the sale of Hydrocarbons. 9. The Deed of Trust as supplemented herein with respect to the Supplemental Collateral is given and affected with a pact de non aliendo, confession of judgment by Mortgagor and waivers of delay notice and appraisement. Mortgagor acknowledges the Obligations secured hereby, whether now existing or to arise hereafter, and confesses judgment thereon in favor of Secured Party, if the Obligations are not paid when due. 10. The parties hereto hereby acknowledge and agree that except as specifically amended, changed or modified hereby, the Deed of Trust shall remain in full force and effect in accordance with its terms. None of the rights, titles and interests existing and to exist under the Deed of Trust are hereby released, diminished or impaired, and Mortgagor hereby reaffirms all agreements and covenants and acknowledges and agrees that, except as previously disclosed by Mortgagor under the Deed of Trust (except to the extent same relate to Collateral that is no longer owned by Mortgagor and other than the representation and warranty set forth in the first sentence of Section 2.02(c) of the Deed of Trust) are true and correct in all material respects as of the date hereof. Mortgagor also represents and warrants to the Banks that the current net overproduced position of the Mortgagor with respect to Hydrocarbons produced from the Mortgaged Properties (expressed in volumetric terms) is not materially greater than the overproduced position of the Mortgagor with respect to the Mortgaged Properties as of August 31, 1995. 11. INSOFAR AS PERMITTED BY OTHERWISE APPLICABLE LAW, THIS AMENDMENT SHALL BE CONSTRUED UNDER AND GOVERNED BY THE LAWS OF 11 THE STATE OF NEW YORK (EXCLUDING CHOICE OF LAW AND CONFLICT OF LAW RULES). MORTGAGOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF NEW YORK AND EACH OTHER STATE WHERE THE COLLATERAL IS LOCATED AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AMENDMENT, THE BASIC DOCUMENTS OR THE OBLIGATIONS IN THE CASE OF A PROCEEDING IN ANY OF SUCH STATES, BY SERVING THE SECRETARY OF STATE OF SUCH STATE IN ACCORDANCE WITH ANY APPLICABLE PROVISIONS OF SUCH STATE'S LAW GOVERNING SERVICE OF PROCESS UPON FOREIGN CORPORATIONS OR ENTITIES. 12. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof. 13. Mortgagor and the Agent acknowledge that the execution of the Credit Agreement does not constitute a payment or prepayment of the Original Credit Agreement, but constitutes an amendment, extension, increase, and modification of the terms thereof. 14. For purposes of executory process under Louisiana law, the Mortgagor declares that on this 3rd day of February, 1997, but effective for all purposes as of the Effective Date, it has appeared in the presence of the undersigned Notary Public and two witnesses and has executed this amendment through Forest Dorn its Vice President, duly authorized pursuant to Resolutions of the Board of Directors of the Mortgagor, a certified copy of which is annexed hereto as Exhibit "B". 15. Mortgagor acknowledges that none of the Obligations have been presented to the undersigned Notary Public to be paraphed for identification with this amendment. 16. Notwithstanding any reference herein to the Credit Agreement or any other Basic Document, no third party shall be obligated to inquire as to whether any term or condition set forth therein has occurred but shall be entitled to rely upon the certificate of the Secured Party as to all events, including but not limited to the occurrence of an Event of Default. 17. For purposes of executory process, the Mortgagor acknowledges and agrees that the existence, amount, terms, and maturity of the Obligations, may be proven by affidavit or verified 12 petition, in accordance with Louisiana law as now existing or hereafter enacted. 13 THUS DONE AND PASSED on this day 3rd day of February, 1997, (the "Effective Date") effective for all purposes as of the Effective Date, in my presence and in the presence of the undersigned competent witnesses who hereunto sign their names with Mortgagor and me, Notary, after reading of the whole. MORTGAGOR: FOREST OIL CORPORATION By: /s/ FDD ---------------------------------- Name: Forest D. Dorn Title: V.P. ATTEST: /s/ BEC - ----------------------------------- Asst. Secretary Barbara E. Chesebro WITNESSES: /s/ Sandra W. Newth - ------------------------------ /s/ Richard W. Schelin - ------------------------------ /s/ Michele M. Miller ------------------------------ Notary Public S-1 THUS DONE AND PASSED on this 5th day of February, 1997, (the "Effective Date") effective for all purposes as of the Effective Date in my presence and in the presence of the undersigned competent witnesses who hereunto sign their names with the Agent and the Trustee and me, Notary, after reading of the whole. AGENT: THE CHASE MANHATTAN BANK By: /s/ Mary Jo Woodford ------------------------------ Name: Mary Jo Woodford Title: V.P. ATTEST: /s/ Jean E. Rugani - ------------------------------ Asst. Corporate Secretary TRUSTEE: By: /s/ Mary Jo Woodford ------------------------------ Name: Mary Jo Woodford Title: V.P. WITNESSES: /s/ Elvine Franzini - ------------------------------ /s/ Jennifer V. Rao - ------------------------------ /s/ Virginia Stank ------------------------------ Notary Public S-2 NOTARY'S CERTIFICATE The undersigned Notary Public hereby certifies that attached hereto are certified copies of Resolutions produced by the Mortgagor and attached by me to this Amendment No. 3 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing executed this 3rd day of February, 1997 and effective for all purposes as of August 31, 1995. /s/ Michele M. Miller ------------------------------ Notary Public S-3 ACKNOWLEDGEMENT STATE OF COLORADO ) : ss. CITY AND COUNTY OF DENVER ) BE IT REMEMBERED that I, the undersigned Notary Public duly qualified, commissioned, sworn and acting in and for the county and state aforesaid, hereby certify that, on __________, 1997 there personally appeared before me, the following person, being the designated officer of the corporation set opposite his name, and such corporation being a party to the foregoing Amendment: Forest D. Dorn, the V.P. of Forest Oil Corporation, This Amendment was acknowledged before me on this 3rd day of February, 1997 by Forest D. Dorn, of Forest Oil Corporation, a New York corporation, on behalf of said corporation. LOUISIANA Who being by me duly sworn, deposed and said that he is the designated officer of said corporation described in and which executed the foregoing Amendment, that he signed his name thereto by order of the Board of Directors of said corporation, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as the free act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official notarial seal, in the County of Denver, State of Colorado, this 3rd day of February, 1997. /s/ Michele M. Miller ----------------------------------------- Notary Public, State of Colorado ----------------- Notary's Printed Name: Michele M. Miller ----------------- My Commission expires: September 29, 2000 ------------------ S-4 S-5 ACKNOWLEDGEMENT STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) BE IT REMEMBERED that I, the undersigned Notary Public duly qualified, commissioned, sworn and acting in and for the county and state aforesaid, hereby certify that, on February 5, 1997 there personally appeared before me, the following person, being the designated officer of the banking association set opposite his name, and such corporation being a party to the foregoing Amendment: Mary Jo Woodford, a V.P. of The Chase Manhattan Bank. This Amendment was acknowledged before me on this 5th day of February, 1997 by Mary Jo Woodford, of The Chase Manhattan Bank, a national banking association, on behalf of said national banking association. LOUISIANA Who being by me duly sworn, deposed and said that he is the designated officer of said bank described in and which executed the foregoing Amendment, that he signed his name thereto by order of the Board of Directors of said bank, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as the free act and deed of said bank. IN WITNESS WHEREOF, I have hereunto set my hand and official notarial seal, in the County of New York, State of New York, this 5th day of February, 1997. /s/ Virginia Stank ---------------------------------------- Notary Public, State of New York ---------------- Notary's Printed Name: Virginia Stank ---------------- My Commission expires: November 30, 1997 ----------------- S-6 ACKNOWLEDGEMENT STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) BE IT REMEMBERED that I, the undersigned Notary Public duly qualified, commissioned, sworn and acting in and for the county and state aforesaid, hereby certify that, on February 5, 1997 there personally appeared before me, the following person, being a party to the foregoing Amendment: This Amendment was acknowledged before me on this 5th day of February, 1997 by Mary Jo Woodford. LOUISIANA Who being by me duly sworn, deposed and said that he is the Trustee described in the foregoing Amendment, that he signed his name thereto, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as him free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and official notarial seal, in the County of New York, State of New York, this 5th day of February, 1997. /s/ Virginia Stank ---------------------------------------- Notary Public, State of New York ---------------- Notary's Printed Name: Virginia Stank ---------------- My Commission expires: November 30, 1997 ----------------- S-7 Schedule 1 SCHEDULE OF RECORDING INFORMATION FOREST OIL CORPORATION and THE CHASE MANHATTAN BANK as Agent 1. Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated December 1, 1993 executed by Forest Oil Corporation ("Forest") in favor of Bettylou J. Robert, as Trustee, for the benefit of The Chase Manhattan Bank, as Agent (all recording references are to the Real Property Records): RECORDED IN THE STATE OF TEXAS COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Aransas 12/8/93 Recorded 12/10/93 as #192065 Brazoria 12/8/93 Recorded 12/8/93 as #93-044178 Calhoun 12/8/93 Recorded 12/8/93 in Volume 116, Page 73 Chambers 12/8/93 Recorded 12/10/93 in Volume 93-225, Page 522 Galveston 12/16/93 Recorded 12/16/93 as #9353245 Hidalgo 12/8/93 Recorded 12/8/93 as #357731 Jefferson 12/8/93 Recorded 12/8/93 as #93-41412 Loving 12/8/93 Recorded 12/8/93 in Volume 45, Page 688 Matagorda 12/8/93 Recorded 12/8/93 in Volume 366, Page 787 Pecos 12/8/93 Recorded 12/8/93 in Volume 272, Page 25 Reeves 12/8/93 Recorded 12/8/93 in Volume 533, Page 315 Ward 12/8/93 Recorded 12/9/93 in Volume 175, Page 524 RECORDED IN THE STATE OF OKLAHOMA COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Caddo 12/8/93 Recorded 12/8/93 as No. 93 9150 Oklahoma 12/8/93 Recorded 12/8/93 as No. 03908 Washita 12/8/93 Recorded 12/8/93 as E-1333 RECORDED IN THE STATE OF WYOMING COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Natrona 12/8/93 Recorded 12/8/93 as Instrument #535014 RECORDED IN THE STATE OF LOUISIANA A. PARISH DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Iberia 12/7/93 Entry No. 93-8912 2 MOB A-633, folio _____ Vermilion 12/7/93 Entry No. 9311419 MOB _____, folio _____ St. Mary 12/7/93 Entry No. 206,342 MOB 677, folio 650 Cameron 12/7/93 Entry No. 233834 MOB 197, folio _____ Plaquemines 12/7/93 MOB 231, folio 1 LaFourche 12/7/93 Entry No. 759883 MOB 657, folio _____ Terrebonne 12/7/93 Entry No. 927906 MOB 959, folio _____ Jefferson 12/8/93 Entry No. 9368844 MOB 3629, folio 248 B. Minerals Management Service Gulf of Mexico Region December 7, 1993 Lease Files: OCS-G 0900, OCS-G 0986, OCS-G 0987, OCS-G 0991, OCS-G 0992, OCS-G 0993, OCS-G 0994, OCS-G 0995, OCS-G 0996, OCS-G -997, OCS-G 1216, OCS-G 1217, OCS-G 1979, OCS-G 1980, OCS-G 1981, OCS-G 1982, OCS-G 5517, OCS-G 5625, OCS-G 7793, OCS-G 8434, OCS-G 8457, OCS-G 9627, OCS-G 9651, OCS-G 10742, OCS-G 10785 C. Financing Statement executed by Forest in connection with item # 1 above and filed as follows: LOCATION DATE FILED FILING INFORMATION -------- ---------- ------------------ 3 Secretary of 12/8/93 #230027 State of Texas 2. Amendment No. 1 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated June 3, 1994 executed by Forest Oil Corporation ("Forest") in favor of Bettylou J. Robert, as Trustee, for the benefit of The Chase Manhattan Bank, as Agent: RECORDED IN THE STATE OF TEXAS COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Aransas 6/9/94 Recorded 6/13/94 as #195102 Brazoria 6/8/94 Recorded 6/8/94 as #94-021546 Calhoun 6/8/94 Recorded 6/9/94 in Volume 125, Page 905-915 #35684 Chambers 6/8/94 Recorded 6/10/94 in Volume 94-240, Page 214 Galveston 6/22/94 Recorded 6/22/94 as #9428381 Hidalgo 6/14/94 Recorded 6/14/94 as #392138 Jefferson 6/8/94 Recorded 6/8/94 as #94-9418637 Loving 6/9/94 Recorded 6/9/94 in Volume 46, Page 231 Matagorda 6/8/94 Recorded 6/8/94 in Volume 381, Page 504 Pecos 6/9/94 Recorded 6/9/94 in Volume 274, Page 231 Reeves 6/9/94 Recorded 6/10/94 in Volume 538, Page 228 4 Ward 6/23/94 Recorded 6/23/94 in Volume 177, Page 41 RECORDED IN THE STATE OF LOUISIANA A. COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Cameron 6/7/94 Recorded 6/7/94 Entry No. 236410 MOB 200, folio _____ Iberia 6/6/94 Recorded 6/6/94 Entry No. 94-4017 MOB A-641, folio _____ Jefferson 6/6/94 Recorded 6/6/94 Entry No. 938445 MOB 980, folio _____ LaFourche 6/6/94 Recorded 6/6/94 Entry No. 767362 MOB 670, page 682 Plaquemines 6/7/94 Recorded 6/7/94 MOB 235, folio 1083 St. Mary 6/6/94 Recorded 6/6/94 Entry No. 208,538 MOB 687, folio _____ Terrebonne 6/6/94 Recorded 6/6/94 Entry No. 938445 MOB 980, folio _____ Vermilion 6/6/94 Recorded 6/6/94 Entry No. 9405602 MOB ____, folio _____ B. Minerals Management Service, Gulf of Mexico Region, June 6, 1994. Lease Files: 5 OCS-G 0900, OCS-G 0986, OCS-G 0987, OCS-G 0991, OCS-G 0992, OCS-G 0993, OCS-G 0994, OCS-G 0995, OCS-G 0996, OCS-G 0997, OCS-G 1216, OCS-G 1217, OCS-G 1979, OCS-G 1980, OCS-G 1981, OCS-G 1982, OCS-G 5517, OCS-G 5625, OCS-G 7793, OCS-G 8434, OCS-G 8457, OCS-G 9627, OCS-G 9651, OCS-G 10742, OCS-G 10785 To cover Texas Deed of Trust also filed in OCS-G 6178, 6156, 9086, 5171, 6048, 6069, 3738, 8553 and 12509. 2. UCC-1 Financing Statement by Forest Oil Corporation, as Debtor, and The Chase Manhattan Bank, as Secured Party. a. Orleans Parish, Louisiana December 8, 1993 Under UCC Entry No. 36-79419. b. Minerals Management Service Gulf of Mexico Region December 7, 1993 Lease Files: OCS-G 0900, OCS-G 0986, OCS-G 0987, OCS-G 0991, OCS-G 0992, OCS-G 0993, OCS-G 0994, OCS-G 0995, OCS-G 0996, OCS-G 0997, OCS-G 1216, OCS-G 1217, OCS-G 1979, OCS-G 1980, OCS-G 1981, OCS-G 1982, OCS-G 5517, OCS-G 5625, OCS-G 7793, OCS-G 8434, OCS-G 8457, OCS-G 9627, OCS-G 9651, OCS-G 10742, OCS-G 10785 3. Amendment No. 2 to Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property Including Hydrocarbons), and Fixture Filing dated August 31, 1995 executed by Forest Oil Corporation ("Forest") in favor of Ian G.P. Schottlaender, as Trustee, for the benefit of The Chase Manhattan Bank, as Agent: 6 RECORDED IN THE STATE OF TEXAS COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Arkansas 9/28/95 Recorded 9/28/95 as #202631 Brazoria 9/27/95 Recorded 9/27/95 as #95-031805 Calhoun 9/27/95 Recorded 9/27/95 in Volume 149, Page 818 Chambers 9/28/95 Recorded 9/29/95 in Volume 95-277, Page 484 Galveston 10/11/95 Recorded 10/11/95 as #9539437 Hidalgo 9/29/95 Recorded 9/29/95 as #477853 Jefferson 9/27/95 Recorded 9/27/95 as #95-9528748 Loving 9/28/95 Recorded 9/28/95 in Volume 48, Page 602 Matagorda 9/27/95 Recorded 9/27/95 in Volume 420, Page 675 Pecos 9/28/95 Recorded 9/28/95 in Volume 280, Page 450 Reeves 9/29/95 Recorded 9/29/95 in Volume 554, Page 415 Ward 9/29/95 Recorded 9/29/95 in Volume 181, Page 615 RECORDED IN THE STATE OF OKLAHOMA 7 COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Caddo 9/21/95 Recorded 9/21/95 in Book 2006, Page 63-85 as #95-07098 Oklahoma 9/21/95 Recorded 9/21/95 No. 3098 Washita 9/22/95 Recorded 9/22/95 in Book 826, Page 410-486 RECORDED IN THE STATE OF WYOMING COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Natrona 9/15/95 Recorded 9/15/95 as Instrument #567140 Secretary of State 9/19/95 Recorded 9/18/95 Current document ID: 9526112 1CO4 RECORDED IN THE STATE OF LOUISIANA COUNTY DATE FILED RECORDING INFORMATION ------ ---------- --------------------- Cameron 9/19/95 File No: 242694 MOB 212 Iberia 9/19/95 Entry No: 95-7038 MOB A-665 LaFourche 9/19/95 Entry No: 787079 MOB 700, folio 23 Plaquemines 9/20/95 MOB 249, folio 856 St. Mary 9/19/95 Entry No. 214, 024 MOB 715 Terrebonne 9/19/95 Entry No. 962561 8 MOB 1031, page 402 Vermilion 9/19/95 Entry No. 9509530 MOB 9509530 B. Minerals Management Service, Gulf of Mexico Region, October 10, 1995. Lease Files: OCS-G 0900, OCS-G 0986, OCS-G 0987, OCS-G 0991, OCS-G 0992, OCS-G 0993, OCS-G 0994, OCS-G 0995, OCS-G 0996, OCS-G 0997, OCS-G 1216, OCS-G 1217, OCS-G 1979, OCS-G 1980, OCS-G 1981, OCS-G 1982, OCS-G 5517, OCS-G 5625, OCS-G 7793, OCS-G 8434, OCS-G 8457, OCS-G 9627, OCS-G 9651, OCS-G 10742, OCS-G 10785, OCS-G 6178, OCS-G 6156, OCS-G 9086, OCS-G 5171, OCS-G 6048, OCS-G 6069, OCS-G 3738, OCS-G 8553, OCS-G 12509. 9 EXHIBIT A 10 EXHIBIT B RESOLUTIONS OF THE BOARD OF DIRECTORS 11 EX-11 5 EXHIBIT 11 EXHIBIT 11 FOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES CALCULATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK Years Ended December 31, -------------------------------- 1996 1995 1994 ------- ------- ------- (In Thousands Except Per Share Amounts) Primary earnings (loss) per share: Net earnings (loss) $ 3,305 (17,996) (81,843) Less dividend requirements on $.75 Convertible Preferred Stock (2,158) (2,160) (2,161) ------- ------- ------- Net earnings (loss) attributable to common stock for primary earnings (loss) per share calculation $ 1,147 (20,156) (84,004) ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding 25,062 7,360 5,619 Dilutive effect of: Anschutz Warrants 818 - - Anschutz Option 168 - - Employee stock options 82 - - Second Series Preferred Stock 1,033 - - ------- ------- ------- Weighted average number of common shares outstanding, as adjusted 27,163 7,360 5,619 ------- ------- ------- ------- ------- ------- Primary earnings (loss) per share of common stock $ .04 (2.74) (14.95) ------- ------- ------- ------- ------- ------- Fully diluted earnings (loss) per share: Net earnings (loss) attributable to common stock, as above $ 1,147 (20,156) (84,004) Add dividend requirements on $.75 Convertible Preferred Stock 2,158 2,160 2,161 ------- ------- ------- Net earnings (loss) attributable to common stock for fully diluted earnings (loss) per share calculation $ 3,305 (17,996) (81,843) ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding 25,062 7,360 5,619 Dilutive effect of: Anschutz Warrants 1,415 - - Anschutz Option 148 - - Employee stock options 376 - - Second Series Preferred Stock 1,033 - - $.75 Convertible Preferred Stock 2,014 2,017 2,017 ------- ------- ------- Weighted average number of common shares outstanding, as adjusted 30,048 9,377 7,636 ------- ------- ------- ------- ------- ------- Fully diluted earnings (loss) per share of common stock $ .11* (1.92)* (10.72)* ------- ------- ------- ------- ------- -------
* The fully diluted loss per share is not presented in the Company's financial statements because the effects of assumed exercises and conversions were anti-dilutive. EX-21 6 EXHIBIT 21 EXHIBIT 21 FOREST OIL CORPORATION List of Subsidiaries of the Registrant Name of Subsidiary Jurisdiction in Which Organized ----------------------------- ------------------------------- Saxon Petroleum Inc. Alberta Canadian Forest Oil, Ltd. Alberta EX-23 7 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS FOREST OIL CORPORATION We consent to the incorporation by reference in (i) the Registration Statements (Nos. 2-74151, 2-76946, 33-2748 and 33-59504) on Form S-8 of Forest Oil Corporation - Retirement Savings Plan of Forest Oil Corporation, (ii) the Registration Statement (No. 33-48440) on Form S-8 of Forest Oil Corporation - 1992 Stock Option Plan of Forest Oil Corporation, and (iii) the Registration Statements (Nos. 33-47477 and 33-47478) on Forms S-2 and S-3 of Forest Oil Corporation - Common Stock issuable to Richard Dorn and resales thereof, of our report dated February 11, 1997 relating to the consolidated balance sheets of Forest Oil Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Forest Oil Corporation. Our report on the consolidated financial statements refers to a change in the method of accounting for oil and gas sales from the sales method to the entitlements method effective January 1, 1994. KPMG PEAT MARWICK LLP Denver, Colorado March 27, 1997 EX-24 8 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ PHILIP F. ANSCHUTZ ---------------------------------- Philip F. Anschutz POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ ROBERT S. BOSWELL ---------------------------------- Robert S. Boswell POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ WILLIAM L. BRITTON ---------------------------------- William L. Britton POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ RICHARD J. CALLAHAN ---------------------------------- Richard J. Callahan POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ CORTLANDT S. DIETLER ---------------------------------- Cortlandt S. Dietler POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ WILLIAM L. DORN ---------------------------------- William L. Dorn POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ JORDAN L. HAINES ---------------------------------- Jordan L. Haines POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ DAVID H. KEYTE ---------------------------------- David H. Keyte POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ JAMES H. LEE ---------------------------------- James H. Lee POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ CRAIG D. SLATER ---------------------------------- Craig D. Slater POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ JOAN C. SONNEN ---------------------------------- Joan C. Sonnen POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ DRAKE S. TEMPEST ---------------------------------- Drake S. Tempest POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of FOREST OIL CORPORATION, a New York corporation (the "Company"), does hereby constitute and appoint Daniel L. McNamara and Barbara E. Chesebro his true and lawful attorneys and agents (each with authority to act alone), to do any and all acts and things and to execute any and all instruments which said attorneys and agents deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the preparation and filing of the Form 10-K -- Annual Report for the year ended December 31, 1996 pursuant to Section 13 of the Securities Exchange Act of 1934, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer or director, or both, of the Company to a Form 10-K -- Annual Report for the year ended December 31, 1996, pursuant to Section 13 of the Securities Exchange Act of 1934 or to any amendment thereto filed with the Securities and Exchange Commission and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K -- Annual Report or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of February, 1997. /s/ MICHAEL B. YANNEY ---------------------------------- Michael B. Yanney EX-27 9 EX 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDNESED CONSOLIDATED STATEMENTS OF INCOME AND CONDENSED CONSOLIDATED BALANCE SHEETS ON PAGES 38 THROUGH 39 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 8,626 0 55,462 0 0 69,084 1,468,205 1,009,963 563,458 81,733 168,859 0 15,827 3,053 223,563 563,458 316,087 317,474 210,905 224,528 63,068 0 23,307 6,590 5,451 1,139 0 2,166 0 3,305 .04 .04
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