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FOREST OIL CORPORATION INDEX TO FORM 10-Q March 31, 2005

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to

Commission File Number 1-13515

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FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)

New York (State or other jurisdiction of incorporation or organization)		25-0484900 (I.R.S. Employer Identification No.)
1600 Broadway, Suite 2200, Denver, Colorado 80202 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 812-1400

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        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        As of April 30, 2005 there were 60,640,740 shares of the registrant's common stock, par value $.10 per share, outstanding.

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FOREST OIL CORPORATION
INDEX TO FORM 10-Q
March 31, 2005

Part I—FINANCIAL INFORMATION
	Item 1—Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
		Notes to Condensed Consolidated Financial Statements
	Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3—Quantitative and Qualitative Disclosures about Market Risk
	Item 4—Controls and Procedures
Part II—OTHER INFORMATION
	Item 2—Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6—Exhibits
Signatures

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PART I. FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

FOREST OIL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

					March 31, 2005			December 31, 2004
					(In Thousands)
ASSETS
Current assets:
	Cash and cash equivalents				$	5,808		55,251
	Accounts receivable					158,540		151,927
	Current deferred tax asset					74,685		38,321
	Other current assets					29,894		37,969
		Total current assets				268,927		283,468
Property and equipment, at cost:
	Oil and gas properties, full cost method of accounting:
		Proved, net of accumulated depletion of $2,795,147 and $2,701,402				2,484,611		2,495,894
		Unproved				222,930		213,870
			Net oil and gas properties			2,707,541		2,709,764
	Other property and equipment, net of accumulated depreciation and amortization of $29,683 and $28,797					11,128		11,354
			Net property and equipment			2,718,669		2,721,118
Goodwill						67,546		68,560
Other assets						50,233		49,359
					$	3,105,375		3,122,505
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued expenses				$	194,594		217,640
	Derivative instruments					170,754		80,523
	Asset retirement obligations					29,229		25,452
		Total current liabilities				394,577		323,615
Long-term debt						774,423		888,819
Asset retirement obligations						190,067		184,724
Derivative instruments						43,741		20,890
Other liabilities						37,529		35,785
Deferred income taxes						197,387		196,525
Total liabilities						1,637,724		1,650,358
Shareholders' equity:
	Preferred stock, none issued					—		—
	Common stock, 62,529,534 and 61,595,024 shares issued and outstanding					6,253		6,159
	Capital surplus					1,479,261		1,444,367
	Retained earnings					104,843		66,007
	Accumulated other comprehensive (loss) income					(71,757	)	6,780
	Treasury stock, at cost, 1,892,707 and 1,901,807 shares held					(50,949	)	(51,166	)
		Total shareholders' equity				1,467,651		1,472,147
					$	3,105,375		3,122,505

See accompanying Notes to Condensed Consolidated Financial Statements.

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FOREST OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

					Three Months Ended March 31,
					2005			2004
					(In Thousands Except Per Share Amounts)
Revenue:
	Oil and gas sales:
		Natural gas			$	154,526		124,062
		Oil, condensate and natural gas liquids				104,344		69,775
			Total oil and gas sales			258,870		193,837
	Processing income, net					1,421		416
			Total revenue			260,291		194,253
Operating expenses:
	Lease operating expenses					47,860		48,189
	Production and property taxes					9,897		7,448
	Transportation costs					5,172		3,692
	General and administrative					10,756		6,360
	Depreciation and depletion					96,276		79,628
	Impairment of oil and gas properties					2,924		—
	Accretion of asset retirement obligations					4,277		4,275
			Total operating expenses			177,162		149,592
Earnings from operations						83,129		44,661
Other income and expense:
	Interest expense					14,499		12,947
	Unrealized loss on derivative instruments					6,580		1,031
	Other expense (income), net					1,933		(1,455	)
			Total other income and expense			23,012		12,523
Earnings before income taxes and discontinued operations						60,117		32,138
Income tax expense:
	Current					1,557		711
	Deferred					19,689		11,790
			Total income tax expense			21,246		12,501
Earnings from continuing operations						38,871		19,637
Loss from discontinued operations, net of tax						—		(575	)
Net earnings					$	38,871		19,062
Basic earnings per common share:
	Earnings from continuing operations				$	.65		.37
	Loss from discontinued operations, net of tax					—		(.01	)
	Net earnings per common share				$	.65		.36
Diluted earnings per common share:
	Earnings from continuing operations				$	.63		.36
	Loss from discontinued operations, net of tax					—		(.01	)
	Net earnings per common share				$	.63		.35

See accompanying Notes to Condensed Consolidated Financial Statements.

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FOREST OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

				Three Months Ended March 31,
				2005			2004
				(In Thousands)
Operating activities:
	Net earnings			$	38,871		19,062
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and depletion			96,276		79,628
		Impairment of oil and gas properties			2,924		—
		Accretion of asset retirement obligations			4,277		4,275
		Unrealized loss on derivative instruments			6,580		1,031
		Deferred income tax expense			19,689		12,511
		Other, net			(1,134	)	(827	)
	Changes in operating assets and liabilities:
		Accounts receivable			(6,243	)	39,110
		Other current assets			(1,599	)	(10,989	)
		Accounts payable and accrued expenses			(23,558	)	(46,024	)
Net cash provided by operating activities					136,083		97,777
Investing activities:
	Capital expenditures for property and equipment:
		Exploration, development and acquisition costs			(96,603	)	(59,417	)
		Other fixed assets			(693	)	(639	)
	Proceeds from sales of assets				6,867		7,365
	Sale of goodwill and contract value				—		8,493
	Other, net				(6,217	)	(1,002	)
Net cash used by investing activities					(96,646	)	(45,200	)
Financing activities:
	Proceeds from bank borrowings				363,953		241,490
	Repayments of bank borrowings				(477,000	)	(284,000	)
	Proceeds from the exercise of options and warrants				24,383		3,707
	Other, net				1,079		(67	)
Net cash used by financing activities					(87,585	)	(38,870	)
Effect of exchange rate changes on cash					(1,295	)	(67	)
Net (decrease) increase in cash and cash equivalents					(49,443	)	13,640
Cash and cash equivalents at beginning of period					55,251		11,509
Cash and cash equivalents at end of period				$	5,808		25,149
Cash paid during the period for:
	Interest			$	1,583		1,945
	Income taxes				2,473		777

See accompanying Notes to Condensed Consolidated Financial Statements.

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)    BASIS OF PRESENTATION

        The Condensed Consolidated Financial Statements included herein are unaudited and include the accounts of Forest Oil Corporation and its consolidated subsidiaries (collectively, "Forest" or the "Company"). In the opinion of management, all adjustments, consisting of normal recurring accruals, have been made which are necessary for a fair presentation of the financial position of Forest at March 31, 2005, the results of operations for the three months ended March 31, 2005 and 2004, and its cash flows for the three months ended March 31, 2005 and 2004. Quarterly results are not necessarily indicative of expected annual results because of the impact of fluctuations in prices received for liquids (oil, condensate, and natural gas liquids) and natural gas and other factors.

        In the course of preparing the Condensed Consolidated Financial Statements, management makes various assumptions, judgments, and estimates to determine the reported amount of assets, liabilities, revenue, and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments, 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 initially established.

        The more significant areas requiring the use of assumptions, judgments, and estimates relate to volumes of oil and gas reserves used in calculating depletion, the amount of future net revenues used in computing the ceiling test limitations, and the amount of future capital costs and abandonment obligations used in such calculations. Assumptions, judgments, and estimates are also required in determining impairments of undeveloped properties, valuing deferred tax assets, and estimating fair values of derivative instruments.

        Certain amounts in the prior year financial statements have been reclassified to conform to the 2005 financial statement presentation.

        For a more complete understanding of Forest's operations, financial position, and accounting policies, reference is made to the consolidated financial statements of Forest, and related notes thereto, filed with Forest's annual report on Form 10-K for the year ended December 31, 2004, previously filed with the Securities and Exchange Commission.

(2)    ACQUISITIONS AND DIVESTITURES

Acquisitions

Recent Acquisition

        On April 1, 2005, Forest purchased a private company whose primary assets are located in the Buffalo Wallow Field in Texas and includes approximately 33,000 gross acres located primarily in Hemphill and Wheeler Counties, Texas. Forest paid $200 million in cash for the stock and assumed approximately $35 million of debt (net of working capital).

Acquisition of The Wiser Oil Company

        In June 2004, Forest completed its acquisition of the common stock of The Wiser Oil Company ("Wiser"), which held oil and gas assets located in the geographic areas of Forest's Gulf Coast, Western, and Canada business units ("the Wiser Acquisition").

        The following unaudited pro forma consolidated statements of operations information assumes that the Wiser Acquisition occurred as of January 1, 2004. The pro forma results of operations is not

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necessarily indicative of the results of operations that would have actually been attained if the transaction had occurred as of January 1, 2004.

Divestitures

        On March 1, 2004, the assets and business operations of Forest's Canadian marketing subsidiary, ProMark, were sold to Cinergy Canada, Inc. ("Cinergy") for $11.2 million CDN. Under the terms of the purchase and sale agreement, Cinergy will market natural gas (not already subject to prior contractual commitments) on behalf of Forest's Canadian exploration and production subsidiary, Canadian Forest Oil Ltd., for five years. Cinergy will also administer the netback pool formerly administered by ProMark. Forest could receive additional contingent payments over the next five years if Cinergy meets certain earnings goals with respect to the acquired business.

        As a result of the sale, ProMark's results of operations have been reported as discontinued operations in the accompanying financial statements. The components of loss from discontinued operations for the three months ended March 31, 2004 are as follows:

(3)    EARNINGS PER SHARE AND COMPREHENSIVE EARNINGS (LOSS)

Earnings per Share

        Basic earnings per share is computed by dividing net earnings from continuing operations attributable to common stock by the weighted average number of common shares outstanding during each period, excluding treasury shares.

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        Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of convertible preferred stock, stock options, unvested restricted stock grants, and warrants.

        The following sets forth the calculation of basic and diluted earnings per share:

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⁽¹⁾

For the three months ended March 31, 2005 and 2004, options to purchase 30,000 and 1,590,400 shares of common stock, respectively, were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common stock during the period.

⁽²⁾

At March 31, 2005, Forest had outstanding 1,751,855 subscription warrants ("Subscription Warrants"). Each Subscription Warrant entitles the holder to purchase 0.8 shares of Common Stock for $10.00, or an equivalent per share price of $12.50. The Subscriptions Warrants were originally scheduled to expire on March 20, 2010 or earlier upon notice of expiration. On April 8, 2005, Forest gave notice that it was accelerating the expiration of the Subscription Warrants to May 9, 2005.

Comprehensive Earnings (Loss)

        Comprehensive earnings (loss) is a term used to refer to net earnings (loss) plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under generally accepted accounting principles are reported as separate components of shareholders' equity instead of net earnings (loss). Items included in Forest's other comprehensive income (loss) for the three months ended March 31, 2005 and 2004 are foreign currency gains (losses) related to the translation of the assets and liabilities of Forest's Canadian operations, changes in the unfunded pension liability, and unrealized gains (losses) related to the change in fair value of derivative instruments designated as cash flow hedges.

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        The components of comprehensive earnings (loss) are as follows:

(4)    STOCK-BASED COMPENSATION

      Forest applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations to account for its stock-based compensation plans. Accordingly, no compensation cost is recognized for options granted at a price equal to or greater than the fair market value of the common stock. Compensation cost is recognized over the vesting period of options granted at a price less than the fair market value of the common stock at the date of the grant. No compensation cost is recognized for stock purchase rights that qualify under Section 423 of the Internal Revenue Code as a non-compensatory plan. Had compensation cost for Forest's stock option grants and stock purchase rights been determined using the fair value of the options at the grant date as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, Forest's pro forma net earnings and earnings per common share would have been as follows:

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(5)    LONG-TERM DEBT

      Components of long-term debt are as follows:

		March 31, 2005									December 31, 2004
		Principal			Unamortized Premium (Discount)		Other(1)		Total		Principal		Unamortized Premium (Discount)		Other(1)		Total
		(In Thousands)
U.S. Credit Facility		$	39,000		—		—		39,000		152,000		—		—		152,000
Canadian Credit Facility			—		—		—		—		—		—		—		—
8% Senior Notes Due 2008			265,000		(317	)	7,385		272,068		265,000		(341	)	7,952		272,611
8% Senior Notes Due 2011			285,000		8,719		5,623		299,342		285,000		9,042		5,829		299,871
73/4% Senior Notes Due 2014			150,000		(2,169	)	16,182		164,013		150,000		(2,228	)	16,565		164,337
		$	739,000		6,233		29,190		774,423		852,000		6,473		30,346		888,819

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⁽¹⁾

Represents the unamortized portion of gains realized upon termination of interest rate swaps that were accounted for as fair value hedges. The gains are being amortized as a reduction of interest expense over the terms of the note issues.

(6)    PROPERTY AND EQUIPMENT

      Forest uses the full cost method of accounting for oil and gas properties. Separate cost centers are maintained for each country in which Forest has operations. During the periods presented, Forest's primary oil and gas operations were conducted in the United States and Canada. 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) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. For the three months ended March 31, 2005 and 2004, Forest capitalized $6.2 million and $5.8 million, respectively, of general and administrative costs related to exploration and development activity. Costs associated with production and general corporate activities are expensed in the period incurred.

        Investments in unproved properties, including related capitalized interest costs, are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data obtained relating to the properties. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized, or is reported as a period expense, as appropriate.

        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 using current prices, including the effects of derivative instruments but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, and a discount factor of 10%; plus

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(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. There were no such provisions for impairment of oil and gas properties in the periods presented, although our Canadian full cost pool, in particular, could be adversely impacted by moderate declines in commodity prices. Gain or loss is not recognized on the sale of oil and gas properties unless the sale significantly alters the relationship between capitalized costs and estimated proved oil and gas reserves attributable to a cost center.

        Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, as adjusted for future development costs and asset retirement obligations, are amortized over the total estimated proved reserves. Furniture and fixtures, computer hardware and software, and other equipment are depreciated on the straight-line or declining balance method, based upon estimated useful lives of the assets ranging from five to 14 years.

(7)    ASSET RETIREMENT OBLIGATIONS

        Forest records estimated future asset retirement obligations pursuant to the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period to present value. Capitalized costs are depleted as a component of the full cost pool using the units of production method. Forest's asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties.

        The following table summarizes the activity for Forest's asset retirement obligations for the three months ended March 31, 2005 and 2004:

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8)    EMPLOYEE BENEFITS

        The following table sets forth the components of the net periodic cost of Forest's defined benefit pension plans and postretirement benefits in the United States for the three months ended March 31, 2005 and 2004:

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⁽¹⁾

Forest has recently concluded that the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). As a result of the Act's subsidy, Forest's projected benefit obligation was reduced by approximately $.5 million.

(9)    DERIVATIVE INSTRUMENTS

        Forest recognizes the fair value of its derivative instruments as assets or liabilities on the balance sheet. The accounting treatment for the changes in fair value is dependent upon whether or not a derivative instrument is a cash flow hedge or a fair value hedge, and upon whether or not the derivative qualifies as an effective hedge. Changes in fair value of cash flow hedges are recognized, to the extent the hedge is effective, in other comprehensive income until the hedged item is recognized in earnings. For fair value hedges, to the extent the hedge is effective, there is no effect on the statement of operations because changes in fair value of the derivative offset changes in the fair value of the hedged item. For derivative instruments that do not qualify as fair value hedges or cash flow hedges and ineffective portions of hedges designated as cash flow hedges, changes in fair value are recognized in earnings as other income or expense. Unless otherwise noted, all of Forest's derivative instruments in place at March 31, 2005 have been designated as cash flow hedges.

Commodity Hedges

        Forest periodically hedges a portion of its oil and gas production through swap, basis swap, and collar agreements. The purpose of the hedges is to provide a measure of stability to Forest's cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk.

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        The tables below set forth, as of March 31, 2005, the quantity of oil and gas hedged under commodity swaps and collars.

		Swaps
		Natural Gas (NYMEX HH)					Oil (NYMEX WTI)
		Bbtu Per Day		Weighted Average Hedged Price per MMBtu			Barrels Per Day		Weighted Average Hedged Price per Bbl
Second Quarter 2005		110.0		$	5.18		9,500		$	36.95
Third Quarter 2005		110.0			5.18		8,500			35.42
Fourth Quarter 2005		103.4			5.09		8,500			35.42
First Quarter 2006		50.0			6.02		4,000			31.58
Second Quarter 2006		50.0			6.02		4,000			31.58
Third Quarter 2006		50.0			6.02		4,000			31.58
Fourth Quarter 2006		50.0			6.02		4,000			31.58

		Costless Collars
		Natural Gas (NYMEX HH)					Oil (NYMEX WTI)
		Bbtu Per Day		Weighted Average Hedged Floor and Ceiling Price per MMBtu			Barrels Per Day		Weighted Average Hedged Floor and Ceiling Price per Bbl
Second Quarter 2005		30.0		$	6.45/7.39		2,500		$	43.80/50.57
Third Quarter 2005		30.0			6.45/7.39		1,000			42.00/47.30
Fourth Quarter 2005		23.4			6.48/7.42		1,000			42.00/47.30
First Quarter 2006		—			—		1,000			42.00/47.30
Second Quarter 2006		—			—		1,000			42.00/47.30
Third Quarter 2006		—			—		1,000			42.00/47.30
Fourth Quarter 2006		—			—		1,000			42.00/47.30

		Three-way Collars
		Oil (NYMEX WTI)
		Barrels per Day		Weighted Average Hedged Lower Floor Price per Bbl			Weighted Average Hedged Upper Floor Price per Bbl			Weighted Average Hedged Ceiling Price per Bbl
Second Quarter 2005		1,500		$	24.00		$	28.00		$	32.00
Third Quarter 2005		1,500			24.00			28.00			32.00
Fourth Quarter 2005		1,500			24.00			28.00			32.00

        In connection with the acquisition of a private company on April 1, 2005, as discussed in Note 2 to these Condensed Consolidated Financial Statements, Forest assumed various costless collar agreements. Together, these agreements cover 20.0 Bbtu of natural gas production per day with weighted average floor and ceiling prices of $5.13 and $6.86, respectively. The agreements expire at the end of December 2005.

        Forest also uses basis swaps in connection with natural gas swaps in order to fix the price differential between the NYMEX price and the index price at which the hedged gas is sold. At

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March 31, 2005, there were basis swaps not designated as cash flow hedges in place with weighted average volumes of 40.0 Bbtu per day for the remainder of 2005.

        The table below sets forth realized and unrealized losses Forest incurred related to its hedging activities by the periods indicated.

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⁽¹⁾

Included in oil and gas sales in the Condensed Consolidated Statements of Operations.

⁽²⁾

Included in other expense (income), net in the Condensed Consolidated Statements of Operations.

⁽³⁾

Included in net cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

⁽⁴⁾

Included in net cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.

        At March 31, 2005, the net fair value of Forest's commodity derivative contracts was a net liability of $213.1 million. The net $213.1 million includes a derivative asset of $1.4 million (of which $.9 million was classified as current) and a derivative liability of $214.5 million (of which $170.8 million was classified as current). Based on the estimated fair values of the derivative contracts at March 31, 2005, Forest would reclassify net losses of $169.9 million into earnings related to the derivative contracts during the next 12 months; however, actual gains or losses recognized may differ materially. Forest is exposed to risks associated with swap and collar agreements arising from movements in the prices of oil and natural gas and from the unlikely event of non-performance by the counterparties to the swap and collar agreements.

Interest Rate Swaps

        In prior years, Forest entered into interest rate swaps designated as fair value hedges of fixed rate debt. The swaps were intended to exchange the fixed interest rates on the notes for variable rates over the terms of the notes. Forest terminated these interest rate swaps in 2002 and 2003. The aggregate gains of $40.7 million were deferred and added to the carrying value of the related debt, and are being amortized as a reduction of interest expense over the remaining terms of the notes. During the three months ended March 31, 2005 and 2004, Forest recognized a portion of the gains by reducing interest expense by $1.2 million in each period.

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(10)    BUSINESS AND GEOGRAPHICAL SEGMENTS

        Segment information has been prepared in accordance with Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. At March 31, 2005, Forest had five reportable segments consisting of oil and gas operations in five business units (Gulf Coast, Western, Alaska, Canada, and International). Forest's remaining processing activities are not significant and therefore are not reported as a separate segment, but are included as a reconciling item in the information below. The segments were determined based upon the type of operations in each business unit and the geographical location of each. The segment data presented below was prepared on the same basis as the Condensed Consolidated Financial Statements.

Three Months Ended March 31, 2005

			Oil and Gas Operations
			Gulf Coast			Western		Alaska		Total U.S.		Canada		International		Total Company
			(In Thousands)
Revenue			$	148,028		51,407		26,402		225,837		33,033		—		258,870
Expenses:
	Lease operating expenses			20,062		8,351		14,225		42,638		5,222		—		47,860
	Production and property taxes			3,562		4,596		563		8,721		1,176		—		9,897
	Transportation costs			949		459		1,837		3,245		1,927		—		5,172
	General and administrative			3,189		1,329		826		5,344		1,488		264		7,096
	Depletion			59,313		9,519		11,957		80,789		14,656		—		95,445
	Impairment of oil and gas properties			—		—		—		—		—		2,924		2,924
	Accretion of asset retirement obligations			3,389		293		359		4,041		236		—		4,277
Earnings (loss) from operations			$	57,564		26,860		(3,365	)	81,059		8,328		(3,188	)	86,199
Capital expenditures			$	37,165		23,519		1,723		62,407		33,929		267		96,603
Net oil and gas properties			$	1,262,369		611,243		376,154		2,249,766		404,212		53,563		2,707,541
Goodwill			$	16,772		37,331		—		54,103		13,443		—		67,546

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        Information for reportable segments relates to Forest's March 31, 2005 consolidated totals as follows:

Three Months Ended March 31, 2004

			Oil and Gas Operations
			Gulf Coast			Western		Alaska		Total U.S.		Canada		International		Total Company
			(In Thousands)
Revenue			$	124,220		35,212		16,959		176,391		17,446		—		193,837
Expenses:
	Lease operating expenses			28,726		5,787		10,927		45,440		2,749		—		48,189
	Production and property taxes			2,886		3,094		755		6,735		713		—		7,448
	Transportation costs			950		160		2,535		3,645		47		—		3,692
	General and administrative			1,647		361		849		2,857		810		—		3,667
	Depletion			47,800		7,272		15,904		70,976		7,782		—		78,758
	Accretion of asset retirement obligations			3,526		292		358		4,176		99		—		4,275
Earnings (loss) from operations			$	38,685		18,246		(14,369	)	42,562		5,246		—		47,808
Capital expenditures			$	38,985		8,307		2,392		49,684		8,212		1,521		59,417
Net oil and gas properties			$	1,225,322		410,378		404,307		2,040,007		301,184		57,525		2,398,716

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        Information for reportable segments relates to Forest's March 31, 2004 consolidated totals as follows:

(11)    IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment ("SFAS 123(R)"), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) is effective for public companies for interim or annual periods beginning after December 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after December 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. SFAS 123(R) also requires the tax benefits in excess of recognized compensation expenses to be reported as a financing cash flow, rather than as an operating cash flow as currently required. This requirement may serve to reduce Forest's future cash provided by operating activities and increase future cash provided by financing activities, to the extent of associated tax benefits that may be realized in the future.

        We are required to adopt SFAS 123(R) in the first quarter of 2006. Under SFAS 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123(R); the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123(R), and we expect that the adoption of SFAS 123(R) will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123(R), and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

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        Forest has an Employee Stock Purchase Plan (the "ESPP") that allows eligible employees to purchase annually Forest's common stock at a discount. The provisions of SFAS 123(R) will cause the ESPP to be a compensatory plan. However, the change in accounting for the ESPP is not expected to have a material impact on Forest's financial position, future results of operations, or liquidity. Historically, the ESPP compensatory amounts that would have been recorded under SFAS 123(R) have been nominal.

        On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107"), Share-Based Payment, which expresses views of the staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides the Staff's views regarding the valuation of share-based payment arrangements for public companies. Forest will evaluate the requirements of SAB 107 in connection with Forest's future adoption of SFAS 123(R).

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Forest is an independent oil and gas company engaged in the acquisition, exploration, development, and production of natural gas and liquids in North America and selected international locations. Forest was incorporated in New York in 1924, as the successor to a company formed in 1916, and has been a publicly held company since 1969.

        The following discussion and analysis should be read in conjunction with Forest's Condensed Consolidated Financial Statements and Notes thereto, the information under the heading "Forward-Looking Statements" below, and the information included in Forest's 2004 Annual Report on Form 10-K under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors, and—Critical Accounting Policies, Estimates, Judgments, and Assumptions." Unless the context otherwise indicates, references in this quarterly report on Form 10-Q to "Forest," "we," "ours," "us," or like terms refer to Forest Oil Corporation and its subsidiaries.

First Quarter 2005 Overview

        Our reported earnings of $38.9 million for the first quarter of 2005, or $0.63 per diluted share, was 104% higher than net income of $19.1 million, or $0.35 per diluted share, for the same period in 2004. The quarter-over-quarter net income gains were primarily driven by the following factors:

•

Sales volumes increased 15% to 44.9 Bcfe in the first quarter of 2005 from 39.1 Bcfe in 2004.



•

Average realized prices increased 16% to $5.77 per Mcfe in 2005 from $4.96 per Mcfe in 2004.



•

Increased sales volumes and higher realized prices resulted in oil and natural gas revenues increasing 34% to $258.9 million in the first quarter of 2005 from $193.8 million in the corresponding period in 2004.



•

Lease operating expense declined 13% from $1.23 per Mcfe for the three months ended March 31, 2004 to $1.07 per Mcfe for the three months ended March 31, 2005.

        Other notable events occurring during the quarter include:

•

On February 28, 2005, we announced the planned acquisition of all of the stock of a private company whose primary assets are located in the Buffalo Wallow Field in Texas and include approximately 33,000 gross acres located primarily in Hemphill and Wheeler Counties, Texas. At the time the acquisition was announced, the Buffalo Wallow Field had estimated proved reserves of 120 Bcfe. The acquisition closed on April 1, 2005.



•

We reduced the principal amount of debt outstanding from $852 million at December 31, 2004 to $739 million at March 31, 2005 by using net cash flow from operations, proceeds from the exercise of stock options and warrants, and cash on hand at December 31, 2004.

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Results of Operations

Oil and Gas Sales

        Sales volumes, oil and gas sales revenue, and average sales prices for the first quarter of 2005 and 2004 were as follows:

			March 31, 2005									March 31, 2004
			Natural Gas			Oil and Condensate		Natural Gas Liquids		Total		Natural Gas		Oil and Condensate		Natural Gas Liquids		Total
			(MMcf)			(MBbls)		(MBbls)		(MMcfe)		(MMcf)		(MBbls)		(MBbls)		(MMcfe)
Sales volumes:
	United States			23,283		2,078		449		38,445		21,274		2,118		100		34,582
	Canada			4,407		219		114		6,405		3,137		142		85		4,499
Total				27,690		2,297		563		44,850		24,411		2,260		185		39,081
Revenues (in thousands)(1):
	United States		$	133,077		80,850		11,910		225,837		113,351		60,103		2,937		176,391
	Canada			21,449		7,961		3,623		33,033		10,711		4,556		2,179		17,446
Total			$	154,526		88,811		15,533		258,870		124,062		64,659		5,116		193,837
Average sales price:
	United States(1)		$	5.72		38.91		26.53		5.87		5.33		28.38		29.37		5.10
	Canada(1)			4.87		36.35		31.78		5.16		3.41		32.08		25.64		3.88
Total
	Sales price received		$	5.82		44.81		27.59		6.23		5.38		33.98		27.65		5.46
	Hedging effects			(.24	)	(6.15	)	—		(.46	)	(.30	)	(5.37	)	—		(.50	)
	Net sales price received		$	5.58		38.66		27.59		5.77		5.08		28.61		27.65		4.96

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⁽¹⁾

Includes the effects of hedging. See Note 9 to the Condensed Consolidated Financial Statements for further details regarding hedging activities.

        The increase in oil and gas sales revenue in the first quarter of 2005 compared to the first quarter of 2004 was the result of increased price realizations for both oil and gas combined with higher sales volumes, which were due primarily to increased production resulting from the acquisition of Wiser in June 2004. The average sales prices for the periods presented include realized hedging losses of $20.8 million and $19.5 million for the three months ended March 31, 2005 and 2004, respectively.

Lease Operating Expenses

        Lease operating expenses ("LOE"), the primary component of oil and gas production expense, decreased to $47.9 million for the quarter ended March 31, 2005 from $48.2 million for the corresponding 2004 period. On a per-unit-of-production basis, LOE decreased 13% from $1.23 per Mcfe in the first quarter of 2004 to $1.07 per Mcfe in the first quarter of 2005. The 13% decrease in LOE on an equivalent Mcfe basis is primarily a result of cost control efforts as announced in the third quarter of 2004. The majority of the decrease was attributable to our Gulf Coast business unit, including the assumption as operator on several higher-cost previously outside operated properties.

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Production and Property Taxes

        Production and property taxes increased by 33% or $2.4 million during the first quarter 2005 as compared to the prior year's first quarter. The increase of 33% is in line with the corresponding increase in oil and gas revenues. Forest pays production taxes on the value of its oil and natural gas physically sold. Excluding hedging losses (on which production taxes are not computed) of $20.8 million and $19.5 million for the three months ended March 31, 2005 and 2004, respectively, production and property taxes were 3.5% of oil and gas sales for each period.

Transportation Costs

        Transportation costs increased to $5.2 million in the three months ended March 31, 2005 from $3.7 million for the corresponding 2004 period as a result of increases in production as well as increases in commodity prices. Transportation costs on a per-Mcfe basis were $.12 per Mcfe and $.09 per Mcfe, for the quarters ended March 31, 2005 and 2004, respectively.

General and Administrative Expense; Overhead

        The following table summarizes the components of total overhead costs incurred during the periods:

        The increase in total overhead costs as well as overhead costs expensed was primarily related to an increase in salaries and related burdens caused by our hiring additional employees in conjunction with our corporate growth. Additionally, overhead costs capitalized as a percentage of our total overhead costs decreased from the first quarter of 2004 to the first quarter of 2005.

Depreciation and Depletion

        Depreciation and depletion expense for the three months ended March 31, 2005 was $96.3 million compared to $79.6 million for the same period in 2004. On an equivalent Mcfe basis, depreciation and depletion expense was $2.15 per Mcfe for the three months ended March 31, 2005 compared to $2.04 per Mcfe for the same period in the prior year. The increase of $.11 per Mcfe for the three months ended March 31, 2005 as compared to the corresponding period in the prior year was due to the full effect of marginal Canadian properties sold in the later part of the fourth quarter of 2004. The sales price received per Mcfe was less than the Canadian cost pool's depletion rate, resulting in an increase in the depletion rate on the remaining reserves.

Impairment of Oil and Gas Properties

        During the three months ended March 31, 2005, Forest recorded an impairment of $2.9 million related to certain international properties, principally related to its leaseholds in Romania. The Romania impairment was recorded in the first quarter of 2005 in connection with our decision to exit the country as we rationalize our international assets to concentrate on fewer areas.

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Interest Expense

        Interest expense increased by $1.6 million from $12.9 million for the three months ended March 31, 2004, to $14.5 million for the three months ended March 31, 2005. The $1.6 million increase was due primarily to higher average interest rates for the first quarter of 2005 compared to the same period in 2004; offset by lower average debt balances outstanding in the first quarter of 2005 compared to the first quarter of 2004. Interest expense on a per-Mcfe basis remained relatively consistent at $.32 per Mcfe and $.33 per Mcfe for the three months ended March 31, 2005 and 2004, respectively.

Unrealized Loss on Derivative Instruments

        Unrealized losses on derivative instruments of $6.6 million and $1.0 million for the three months ended March 31, 2005 and 2004, respectively, are a result of the recognition of ineffective portions of derivative instruments which qualify for cash flow hedge accounting, as well as the changes in fair value of derivative instruments that do not qualify for cash flow hedge accounting.

Current and Deferred Income Tax Expense

        Forest recorded current income tax expense of $1.6 million in the three months ended March 31, 2005 compared to $.7 million in the comparable period of 2004. The increase was due primarily to increased federal alternative minimum tax and state income taxes.

        Deferred income tax expense was $19.7 million in the three months ended March 31, 2005 compared to $11.8 million in the comparable period of 2004. The increase was attributable to higher U.S. earnings before income taxes and discontinued operations partially offset by a decreased effective income tax rate on our Canadian operations. The decrease in the Canadian effective income tax rate was due primarily to the reversal of valuation allowances on capital loss carryforwards.

Results of Discontinued Operations

        On March 1, 2004, the assets and business operations of our Canadian marketing subsidiary, ProMark, were sold to Cinergy Canada, Inc. for $11.2 million CDN. See Note 2 to the Condensed Consolidated Financial Statements for more information.

Liquidity and Capital Resources

        In 2005, as in 2004, we expect our cash flow from operations to provide our primary source of liquidity to meet operating expenses and fund capital expenditures other than large acquisitions. Any remaining cash flow from operations will be available for acquisitions, debt repayment, or other corporate purposes.

        The prices we receive for our oil and natural gas production have a significant impact on operating cash flows. While price declines in 2005 would adversely affect the amount of cash flow generated from operations, we utilize a hedging program to mitigate that risk. As of March 31, 2005, Forest had hedged approximately 56.8 Bcfe of its remaining 2005 production primarily to protect the economics of recent acquisitions of oil and gas properties. This level of hedging provides greater certainty of the cash flow we will receive for our 2005 production. Depending on changes in oil and gas futures markets and management's view of underlying oil and natural gas supply and demand trends, we may increase or decrease our current hedging positions. For further information concerning our 2005 and 2006 hedging contracts, see Note 9 to the Condensed Consolidated Financial Statements.

        Another source of liquidity is our $600 million revolving bank credit facilities, as explained below, under the caption "Bank Credit Facilities." We use the credit facilities to fund daily operating activities and acquisitions in the United States and Canada as needed.

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        The public capital markets have been our principal source of permanent financing. We have issued debt and equity in both public and private offerings in the past, and we expect that these sources of capital should continue to be available to us in the future. Nevertheless, ready access to capital on reasonable terms are subject to many uncertainties, as explained in Forest's 2004 Annual Report on Form 10-K under the heading, "Managements Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors."

Bank Credit Facilities

        We have credit facilities totaling $600 million, consisting of a $550 million U.S. credit facility through a syndicate of banks led by JPMorgan Chase and a $50 million Canadian credit facility through a syndicate of banks led by JPMorgan Chase Bank, Toronto Branch. The credit facilities mature in September 2009. Subject to the agreement of Forest and the applicable lenders, the size of the credit facilities may be increased by $200 million in the aggregate. The credit facilities are collateralized by a portion of Forest's assets.

        Currently, the amount available under the credit facilities is governed by a borrowing base (the "Global Borrowing Base"). The Global Borrowing Base is currently set at $500 million, with $480 allocated to the U.S. credit facility and $20 million allocated to the Canadian credit facility. At March 31, 2005, there were outstanding borrowings of $39 million under the U.S. credit facility at a weighted average interest rate of 4.13%, and there were no outstanding borrowings under the Canadian credit facility. We also had used the credit facilities for approximately $6 million in letters of credit, leaving an unused borrowing amount under the Global Borrowing Base of approximately $455 million at March 31, 2005. Forest expects the lenders to approve an increase in the Global Borrowing Base during the second quarter of 2005.

        On April 30, 2005, amounts outstanding under the U.S. facility were $253 million at a weighted average interest rate of 4.2%, and there were no amounts outstanding under the Canadian facility. The increase in borrowings from March 31, 2005 is the result of borrowings to acquire a private company on April 1, 2005. As a result of increased amounts outstanding, and $7 million in letters of credit, the unused borrowing amount on April 30, 2005 was approximately $240 million.

        The credit facilities include terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, asset sales, hedging activities, investments, dividends, mergers, and acquisitions. The credit facilities also include several financial covenants. Availability, interest rates, security requirements, and other terms of borrowing under the credit facilities will vary based on Forest's credit ratings and financial condition, as governed by certain financial tests. In particular, any time that availability is not governed by the Global Borrowing Base, the amount available and Forest's ability to borrow under the credit facilities is determined by certain financial covenants. Also, even when availability is governed by the Global Borrowing Base, certain financial covenants can still affect the amount available and Forest's ability to borrow amounts under the credit facilities.

Cash Flow

        Net cash provided by operating activities, net cash used by investing activities, and net cash used by financing activities for the three months ended March 31, 2005 and 2004 were as follows:

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        The increase in net cash provided by operating activities in the three months ended March 31, 2005 compared to the same period of 2004 was due primarily to higher oil and gas revenues. The increase in cash used by investing activities in the three months ended March 31, 2005 was due primarily to increased capital spending. Net cash used by financing activities in the three months ended March 31, 2005 included net bank repayments of $113.0 million offset in part by proceeds from the exercise of options and warrants of $24.4 million. The 2004 period included net bank debt repayments of $42.5 million and proceeds from the exercise of options and warrants of approximately $3.7 million.

Warrants

        At March 31, 2005, Forest had outstanding 1,751,855 subscription warrants ("Subscription Warrants"). Each Subscription Warrant entitles the holder to purchase 0.8 shares of Common Stock for $10.00, or an equivalent per share price of $12.50. The Subscriptions Warrants were originally scheduled to expire on March 20, 2010 or earlier upon notice of expiration. On April 8, 2005, Forest gave notice that it was accelerating the expiration of the Subscription Warrants to May 9, 2005.

Capital Expenditures

        Expenditures for property acquisition, exploration, and development were as follows:

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⁽¹⁾

Does not include estimated discounted asset retirement obligations of $6.4 million and $6.8 million related to assets placed in service during the three months ended March 31, 2005 and 2004, respectively.

        Forest's anticipated expenditures for exploration and development in 2005 are estimated to range from $425 million to $475 million. Some of the factors impacting the level of capital expenditures in 2005 include crude oil and natural gas prices, the volatility in these prices, the cost and availability of the oil field services, and weather disruptions.

        In addition, while we intend to continue a strategy of acquiring reserves that meet our investment criteria, no assurance can be given that we can locate or finance any property acquisitions.

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Recent Accounting Pronouncements

        In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment ("SFAS 123(R)"), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) is effective for public companies for interim or annual periods beginning after December 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after December 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. SFAS 123(R) also requires the tax benefits in excess of recognized compensation expenses to be reported as a financing cash flow, rather than as an operating cash flow as currently required. This requirement may serve to reduce Forest's future cash provided by operating activities and increase future cash provided by financing activities, to the extent of associated tax benefits that may be realized in the future.

        We are required to adopt SFAS 123(R) in the first quarter of 2006. Under SFAS 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123(R); the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123(R), and we expect that the adoption of SFAS 123(R) will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123(R), and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

        Forest has an Employee Stock Purchase Plan (the "ESPP") that allows eligible employees to purchase annually Forest's common stock at a discount. The provisions of SFAS 123(R) will cause the ESPP to be a compensatory plan. However, the change in accounting for the ESPP is not expected to have a material impact on Forest's financial position, future results of operations, or liquidity. Historically, the ESPP compensatory amounts that would have been recorded under SFAS 123(R) have been nominal.

        On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107"), Share-Based Payment, which expresses views of the staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides the Staff's views regarding the valuation of share-based payment arrangements for public companies. Forest will evaluate the requirements of SAB 107 in connection with Forest's future adoption of SFAS 123(R).

Forward-Looking Statements

        Certain information included in this quarterly report on Form 10-Q and other materials that we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements that we make include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to our operations, financial condition, and the oil and gas industry. All statements, other than statements of historical facts or present facts, that address activities, events, outcomes, and other matters that Forest plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects,

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estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events.

        These forward-looking statements appear in a number of places and include statements with respect to, among other things, estimates of our oil and gas reserves; estimates of our future natural gas and liquids production, including estimates of any increases in oil and gas production; planned capital expenditures and availability of capital resources to fund capital expenditures; cash flow; our outlook on oil and gas prices; drilling activities and drilling locations; acquisition and development activities and the funding thereof; hedging activities and the results thereof; liquidity; operating costs; operating margins; political and regulatory developments; our future financial condition or results of operations; and our business strategy and other plans and objectives for future operations.

        We caution you that these forward-looking statements are not guarantees of future performance and are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production, and sale of oil and gas. In particular, the risk factors discussed below and in our Annual Report on Form 10-K could affect our actual results and cause our actual results to differ materially from expectations, estimates, plans, or assumptions expressed in, forecasted in, or implied in such forward-looking statement. Among the factors that could cause actual results to differ materially are:

•

commodity price volatility,



•

inflation,



•

lack of availability of goods and services,



•

environmental risks,



•

drilling and other operating risks,



•

regulatory changes,



•

the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production,



•

timing of development expenditures, and



•

interest rates.

        The financial results of our foreign operations are also subject to currency exchange rate risks.

        Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

        All forward-looking statements, expressed or implied, included in this Form 10-Q and attributable to Forest are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Forest or persons acting on its behalf may issue. Forest does not undertake to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-Q with the Securities and Exchange Commission, except as required by law.

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Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to market risk, including the effects of adverse changes in commodity prices, foreign currency exchange rates, and interest rates as discussed below.

Commodity Price Risk

        We produce and sell natural gas, crude oil, and natural gas liquids for our own account in the United States and Canada. As a result, our financial results are affected when prices for these commodities fluctuate. Such effects can be significant.

        In order to reduce the impact of fluctuations in prices, or to protect the economics of property acquisitions, we make use of an oil and gas hedging strategy. Under our hedging strategy, we enter into commodity swaps, collars, and other financial instruments with counterparties who, in general, are participants in our credit facilities. These arrangements, which are based on prices available in the financial markets at the time the contracts are entered into, are settled in cash and do not require physical deliveries of hydrocarbons. Hedging arrangements covered 45% and 63% of our consolidated production, on an equivalent basis, during the three months ended March 31, 2005 and 2004, respectively. We do not enter into derivative instruments for trading purposes.

        See Note 9 to the Condensed Consolidated Financial Statements for information regarding the terms of the Forest's derivative instruments that are sensitive to changes in both current and forward oil and gas prices.

        The following table reconciles the changes that occurred in the fair values of Forest's open derivative contracts during the three months ended March 31, 2005, beginning with the fair value of our commodity contracts on December 31, 2004, less the decrease in fair value during the period, plus the contract losses settled, or recognized, during the period.

Foreign Currency Exchange Risk

        We conduct business in several foreign currencies and thus are subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing, and investing transactions. In the past, we have not entered into any foreign currency forward contracts or other similar financial instruments to manage this risk. Expenditures incurred relative to the foreign concessions held by Forest outside of North America have been primarily United States dollar-denominated, as have cash proceeds related to property sales and farmout arrangements. Substantially all of our Canadian revenues and costs are denominated in Canadian dollars. While the value of the Canadian dollar does fluctuate in relation to the U.S. dollar, we believe that any currency risk associated with our Canadian operations would not have a material impact on our results of operations.

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Interest Rate Risk

        The following table presents principal amounts and related weighted average fixed interest rates by year of maturity for Forest's debt obligations and the fair value of debt obligations at March 31, 2005:

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As of March 31, 2005.

⁽²⁾

The effective interest rates on the 8% Senior Notes due 2008, the 8% Senior Notes due 2011, and the 7³/4% Senior Notes due 2014 are reduced from the coupon rate as a result of amortization of the gains related to termination of the related interest rate swaps.

Item 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        We have established disclosure controls and procedures to ensure that material information relating to Forest and its consolidated subsidiaries is made known to the Officers who certify Forest's financial reports and the Board of Directors. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

        Our Chief Executive Officer, H. Craig Clark, and our Chief Financial Officer, David H. Keyte, evaluated the effectiveness of our disclosure controls and procedures as of the end of the quarterly period ended March 31, 2005. Based on the evaluation, they believe that:

•

our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms; and



•

our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

        There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        In the first quarter of 2005, 158,533 warrants to purchase 102,536 shares of Forest common stock were exercised in cash and cashless exercises. The exercise activity includes certain warrants that expired on February 15, 2005. The warrants were originally issued by Forcenergy Inc in connection with its reorganization under the federal bankruptcy code. Upon the merger of Forcenergy Inc and Forest, the warrants became warrants to acquire shares of Forest common stock. The issuance of the warrants and shares of common stock upon exercise were exempt from registration under the Securities Act of 1933 pursuant to section 1145 of the federal bankruptcy code.

Item 6.    EXHIBITS

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*

Filed herewith.

+

Not considered to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		FOREST OIL CORPORATION (Registrant)
May 9, 2005		By:		/s/  DAVID H. KEYTE       David H. Keyte Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer)
		By:		/s/  VICTOR A. WIND       Victor A. Wind Corporate Controller (Principal Accounting Officer)

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Exhibit Index

Exhibit Number		Description
31.1		Certification of Principal Executive Officer of Forest Oil Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2		Certification of Principal Financial Officer of Forest Oil Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer of Forest Oil Corporation, pursuant to 18 U.S.C. §1350
32.2		Certification of Chief Financial Officer of Forest Oil Corporation, pursuant to 18 U.S.C. §1350

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