FOREST OIL CORPORATION INTRODUCTION TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Exhibit 99.1

INTRODUCTION TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
On October 11, 2012, Forest Oil Corporation (“Forest”) entered into an Agreement for Purchase and Sale of Assets (the “Agreement”) with Texas Petroleum Investment Company (“TPIC”).  Pursuant to the Agreement, Forest agreed to sell to TPIC oil and gas properties located in the State of Louisiana (the “Oil and Gas Assets”) and various other related assets (together with the Oil and Gas Assets, the “Assets”). The transaction closed on November 16, 2012. The sales price for the Assets was $220 million, which was subject to customary adjustments to reflect an economic effective date of August 1, 2012. Xxxxxx received $11 million of the sales price as a deposit upon execution of the Agreement and the remaining $197 million at closing, for total consideration received of $208 million. Forest used the net proceeds to reduce borrowings outstanding under its credit facility. The net proceeds do not include sale proceeds of approximately $2 million to be received in the future related to Assets on which third parties possess preferential purchase rights that have been or may yet be exercised.
 
The following unaudited pro forma condensed consolidated financial statements and explanatory notes present how the condensed consolidated financial statements of Forest may have appeared had the sale of the Assets occurred as of September 30, 2012 (with respect to the balance sheet information presented) or as of January 1, 2011 (with respect to the statement of operations information presented).
 
The unaudited pro forma condensed consolidated financial statements have been derived from and should be read together with the historical consolidated financial statements and the related notes of Forest included in its Annual Report on Form 10-K for the year ended December 31, 2011 and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
 
The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and do not purport to represent what the results of operations or financial position of Forest would actually have been had the transaction described above occurred on the dates noted above, or to project the results of operations or financial position of Forest for any future periods. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable. The pro forma adjustments are directly attributable to the transaction and are expected to have a continuing impact on the results of operations of Forest. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma financial information have been made.




1


UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2012

 
Historical
 
Pro Forma Adjustments
 
Pro Forma
 
 (In Thousands)
ASSETS
 
 
 
 
 
Current assets:
 

 
 

 
 
Cash and cash equivalents
$
39,169

 
$
208,432

(a)
$
247,601

Accounts receivable
77,210

 
—

 
77,210

Derivative instruments
43,853

 
—

 
43,853

Other current assets
16,278

 
—

 
16,278

Total current assets
176,510

 
208,432

 
384,942

Property and equipment:
 

 
 

 
 
Oil and natural gas properties, full cost method of accounting:
 

 
 

 
 
Proved, net of accumulated depletion
1,774,587

 
(240,224
)
(b)
1,534,363

Unproved
442,275

 
(1,753
)
(b)
440,522

Net oil and natural gas properties
2,216,862

 
(241,977
)
 
1,974,885

Other property and equipment, net of accumulated depreciation and amortization
16,327

 
—

 
16,327

Assets held for sale
27,373

 
—

 
27,373

Net property and equipment
2,260,562

 
(241,977
)
 
2,018,585

Deferred income taxes
9,851

 
—

 
9,851

Goodwill
239,420

 
—

 
239,420

Derivative instruments
5,273

 
—

 
5,273

Other assets
90,762

 
(28
)
(c)
90,734

 
$
2,782,378

 
$
(33,573
)
 
$
2,748,805

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 
Current liabilities:
 

 
 

 
 
Accounts payable and accrued liabilities
$
189,753

 
$
(372
)
(d)
$
189,381

Current portion of long-term debt
296,002

 
—

 
296,002

Accrued interest
29,663

 
—

 
29,663

Derivative instruments
7,759

 
—

 
7,759

Deferred income taxes
9,851

 
—

 
9,851

Other current liabilities
20,743

 
(3,163
)
(e)
17,580

Total current liabilities
553,771

 
(3,535
)
 
550,236

Long-term debt
1,796,369

 
—

 
1,796,369

Asset retirement obligations
79,133

 
(30,024
)
(e)
49,109

Derivative instruments
16,640

 
—

 
16,640

Other liabilities
93,688

 
(14
)
(c)
93,674

Total liabilities
2,539,601

 
(33,573
)
 
2,506,028

Shareholders’ equity:
 

 
 

 
 
Preferred stock, none issued and outstanding
—

 
—

 
—

Common stock
11,823

 
—

 
11,823

Capital surplus
2,538,129

 
—

 
2,538,129

Accumulated deficit
(2,289,461
)
 
—

 
(2,289,461
)
Accumulated other comprehensive loss
(17,714
)
 
—

 
(17,714
)
Total shareholders’ equity
242,777

 
—

 
242,777

 
$
2,782,378

 
$
(33,573
)
 
$
2,748,805


See accompanying notes to unaudited pro forma condensed consolidated financial statements.


2


UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

 
Historical
 
Pro Forma Adjustments
 
Pro Forma
 
(In Thousands, Except Per Share Amounts)
Revenues:
 

 
 

 
 
Oil, natural gas, and natural gas liquids sales
$
450,609

 
$
(63,393
)
(f)
$
387,216

Interest and other
123

 
—

 
123

Total revenues
450,732

 
(63,393
)
 
387,339

Costs, expenses, and other:
 

 
 

 
 
Lease operating expenses
82,167

 
(9,742
)
(f)
72,425

Production and property taxes
26,935

 
(7,881
)
(f)
19,054

Transportation and processing costs
11,167

 
(11
)
(f)
11,156

General and administrative
45,221

 
—

 
45,221

Depreciation, depletion, and amortization
213,802

 
(18,158
)
(g)
195,644

Ceiling test write-down of oil and natural gas properties
713,750

 
5,829

(h)
719,579

Impairment of properties
79,529

 
—

 
79,529

Interest expense
103,932

 
(2,592
)
(i)
101,340

Realized and unrealized gains on derivative instruments, net
(40,744
)
 
—

 
(40,744
)
Other, net
42,102

 
(1,757
)
(j)
40,345

Total costs, expenses, and other
1,277,861

 
(34,312
)
 
1,243,549

Loss before income taxes
(827,129
)
 
(29,081
)
 
(856,210
)
Income tax
175,269

 
(10,530
)
(k)
192,647

 
 
 
27,908

(l)
 
Net loss
$
(1,002,398
)
 
$
(46,459
)
 
$
(1,048,857
)
 
 
 
 
 
 
Basic loss per common share
$
(8.73
)
 
 
 
$
(9.14
)
Diluted loss per common share
(8.73
)
 
 
 
(9.14
)
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
114,784

 
 
 
114,784

Diluted
114,784

 
 
 
114,784


See accompanying notes to unaudited pro forma condensed consolidated financial statements.


3


UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2011

 
Historical
 
Pro Forma Adjustments
 
Pro Forma
 
(In Thousands, Except Per Share Amounts)
Revenues:
 
 
 
 
 
Oil, natural gas, and natural gas liquids sales
$
703,531

 
$
(94,721
)
(f)
$
608,810

Interest and other
1,026

 
—

 
1,026

Total revenues
704,557

 
(94,721
)
 
609,836

Costs, expenses, and other:
 
 
 
 
 
Lease operating expenses
99,158

 
(11,713
)
(f)
87,445

Production and property taxes
40,632

 
(11,541
)
(f)
29,091

Transportation and processing costs
13,728

 
(11
)
(f)
13,717

General and administrative
65,105

 
—

 
65,105

Depreciation, depletion, and amortization
219,684

 
(20,987
)
(g)
198,697

Interest expense
149,755

 
(198
)
(i)
149,557

Realized and unrealized gains on derivative instruments, net
(88,064
)
 
—

 
(88,064
)
Other, net
17,164

 
(2,225
)
(j)
14,939

Total costs, expenses, and other
517,162

 
(46,675
)
 
470,487

Earnings from continuing operations before income taxes
187,395

 
(48,046
)
 
139,349

Income tax
89,135

 
(17,378
)
(k)
71,757

Net earnings from continuing operations
$
98,260

 
$
(30,668
)
 
$
67,592

 
 
 
 
 
 
Basic earnings from continuing operations per common share
$
.86

 
 
 
$
.59

Diluted earnings from continuing operations per common share
.85

 
 
 
.59

 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
111,690

 
 
 
111,690

Diluted
112,868

 
 
 
112,868

 
 
 
 
 
 

See accompanying notes to unaudited pro forma condensed consolidated financial statements.


4


NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
 
Note 1   Basis of Presentation
 
The accompanying unaudited pro forma condensed consolidated financial statements and explanatory notes present how the financial statements of Forest may have appeared had the sale of certain oil and gas properties located in the State of Louisiana (the “Oil and Gas Assets”) and various other related assets (together with the Oil and Gas Assets, the “Assets”) occurred as of September 30, 2012 (with respect to the balance sheet information presented) or as of January 1, 2011 (with respect to the statement of operations information presented). The transaction for which these pro forma financial statements are presented is explained in more detail in the introductory paragraph to the accompanying pro forma financial information.
 
Following are descriptions of certain columns included in the accompanying unaudited pro forma condensed consolidated financial statements:
 
Historical—Represents the historical condensed consolidated balance sheet of Forest as of September 30, 2012, the historical condensed consolidated statement of operations of Forest for the nine months ended September 30, 2012, and the historical condensed consolidated statement of operations related to the continuing operations of Forest for the year ended December 31, 2011.
 
Pro Forma Adjustments—Represents the adjustments to the historical condensed consolidated financial statements necessary to arrive at the pro forma financial position of Forest as of September 30, 2012, as if the sale of the Assets occurred as of September 30, 2012, the pro forma results of operations of Forest for the nine months ended September 30, 2012, as if the sale of the Assets occurred as of January 1, 2011, and the pro forma results of Forest’s continuing operations for the year ended December 31, 2011, as if the sale of the Assets occurred as of January 1, 2011.
 
Note 2    Pro Forma Adjustments for the Sale of Assets
 
Condensed Consolidated Balance Sheet
 
(a)
To record net cash proceeds received of $208 million.
 
(b)
To record the sales proceeds attributable to Forest’s proved and unproved oil and gas properties in accordance with the full cost method of accounting.

(c)
To eliminate gas balancing receivables and payables included in the Assets.
 
(d)
To eliminate revenues held in suspense that were transferred to TPIC.
 
(e)
To eliminate the asset retirement obligations associated with the Oil and Gas Assets.

Condensed Consolidated Statements of Operations
 
(f)
To eliminate the revenues and direct operating expenses associated with the Oil and Gas Assets.
 
(g)
To adjust depletion to give effect to the reduction in Forest’s pro forma full cost pool, total estimated proved reserves, and production volumes as a result of the sale of the Oil and Gas Assets.
 
(h)
To adjust the ceiling test write-down of oil and natural gas properties to give effect to the reduction in Forest’s pro forma future net revenues from estimated production of proved oil and gas properties, properties not being amortized, and capitalized costs used in the ceiling test calculations as a result of the sale of the Oil and Gas Assets.
 
(i)
To adjust interest expense to give effect to the application of the net cash proceeds to reduce Forest’s indebtedness under its credit facility.
 
(j)
To eliminate accretion expense attributable to asset retirement obligations associated with the Oil and Gas Assets.


5


(k)
To adjust income tax expense for the effects of the pro forma adjustments at statutory rates.

(l)
To adjust income tax expense to give effect to the increase in the valuation allowance that would have been required associated with the pro forma decrease in income before income taxes. As discussed in Forest’s Quarterly Reports on Form 10-Q for the periods ended September 30, 2012 and June 30, 2012, in the second quarter of 2012, Xxxxxx placed a full valuation allowance against its deferred tax assets.

Note 3 Pro Forma Earnings (Loss) Per Share

The following reconciles pro forma net earnings (loss) from continuing operations as reported in the unaudited pro forma condensed consolidated statements of operations to pro forma net earnings (loss) from continuing operations used for calculating pro forma basic and diluted earnings (loss) from continuing operations per share for the periods presented.

 
Nine Months Ended
 
Year Ended
 
September 30, 2012
 
December 31, 2011
 
(In Thousands)
Pro forma net earnings (loss) from continuing operations
$
(1,048,857
)
 
$
67,592

Pro forma net earnings attributable to participating securities
—

 
(1,402
)
Pro forma net earnings (loss) from continuing operations for basic and diluted earnings per share
$
(1,048,857
)
 
$
66,190


The following reconciles basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the periods presented.
 
Nine Months Ended
 
Year Ended
 
September 30, 2012
 
December 31, 2011
 
(In Thousands)
Weighted average common shares outstanding during the period for pro forma basic earnings (loss) from continuing operations per share
114,784

 
111,690

Dilutive effects of potential common shares
—

 
1,178

Weighted average common shares outstanding during the period, including the effects of dilutive potential common shares, for pro forma diluted earnings (loss) from continuing operations per share
114,784

 
112,868



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Filed: November 21st, 2012
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