Notes to Consolidated Financial Statements

1 NATURE OF OPERATIONS

The financial statements include the accounts of Frontier Oil Corporation, a Wyoming corporation, and its wholly-owned subsidiaries, including Frontier Holdings Inc., collectively referred to as Frontier or the Company. The Company is an independent energy company engaged in crude oil refining and wholesale marketing of refined petroleum products (the “refining operations”).

The Company operates refineries (the “Refineries”) in Cheyenne, Wyoming and El Dorado, Kansas with a total crude oil capacity of over 150,000 barrels per day. The Company focuses its marketing efforts in the Rocky Mountain and Plains States regions of the United States. The Company purchases the crude oil to be refined and markets the refined petroleum products produced, including various grades of gasoline, diesel fuel, jet fuel, asphalt, chemicals and petroleum coke.

Prior to the third quarter of 1997, the Company also explored for and produced oil and gas in Canada. Operating results for the Company’s oil and gas operations are presented as discontinued operations in the accompanying statements of operations.

2 SIGNIFICANT ACCOUNTING POLICIES

Property, Plant and Equipment

Property, plant and equipment is depreciated based on the straight-line method over the estimated useful lives. The estimated useful lives are:

Refinery plant and equipment	5 to 20 years
Pipeline and pumps	10 to 20 years
Furniture, fixtures and other	3 to 10 years

Maintenance and repairs are expensed as incurred. The costs for turnarounds (scheduled and required shutdown of refinery operating units for significant overhaul and refurbishment) are ratably accrued over the period from the prior turnaround to the next scheduled turnaround. Major improvements are capitalized, and the assets replaced are retired.

Inventories

Inventories of crude oil, other unfinished oils and all finished products are recorded at the lower of cost on a first in, first out (FIFO) basis or market. Refined product exchange transactions are considered asset exchanges with deliveries offset against receipts. The net exchange balance is included in inventory. Inventories of materials and supplies are recorded at the lower of average cost or market.

Schedule of Components of Inventory

Environmental Expenditures

Environmental expenditures are expensed or capitalized based upon their future economic benefit. Costs which improve a property’s pre-existing condition and costs which prevent future environmental contamination are capitalized. Costs related to environmen-tal damage resulting from operating activi- ties subsequent to acquisition are expensed. Liabilities for these expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated.

Refined Product Revenues

Revenues are recognized when product ownership is transferred to the customer. Excise and other taxes on products sold are netted against revenues.

Derivative Instruments and Hedging Activities

The Company, at times, enters into commodity derivative contracts to manage its price exposure to its inventory positions, purchases of foreign crude oil and consumption of natural gas in the refining process. The commodity derivative contracts used by the Company may take the form of futures contracts or price swaps and are entered into with reputable counterparties. The Company believes there is minimal credit risk with respect to its counterparties. The Company accounts for its commodity derivative contracts under the hedge (or deferral) method of accounting. As such, gains or losses on commodity derivative contracts are recognized in refining operating costs when the associated transactions are consummated.

Interest

Interest is reported net of interest income and interest capitalized. Interest income of $1.5 million, $1.5 million and $2.0 million was recorded in the years ended December 31, 1999, 1998 and 1997, respectively. During 1998, the Company capitalized interest of $101,000. The Company capitalizes interest on debt incurred to fund the construction of a significant asset.

Stock Based Compensation

Compensation cost is measured using the intrinsic value method. Under this method, com-pensation cost is the excess, if any, of the quoted market value of the Company’s common stock at the grant date over the amount the employee must pay to acquire the stock. No compensation cost was recognized for the years ended December 31, 1999, 1998 and 1997.

Intercompany Transactions

Significant intercompany transactions are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Statement

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

Statement 133, as amended, is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is fiscal quarters beginning June 16, 1998 and thereafter). Statement 133 cannot be applied retroactively. Statement 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the company’s election, before January 1, 1998).

The Company is currently evaluating the provisions of Statement 133, but has not yet determined the impact it will have on its financial statements.

Cash Flow Reporting

Highly liquid investments with a maturity, when purchased, of three months or less are considered to be cash equivalents. Cash payments for interest during 1999, 1998 and 1997 were $7 million, $6.3 million and $18.4 million, respectively. Cash payments for income taxes during 1999, 1998 and 1997 were $406,000, $582,000 and $930,000, respectively.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

3 EL DORADO REFINERY ACQUISITION

On November 16, 1999, Frontier acquired the 110,000 barrels per day crude oil refinery located in El Dorado, Kansas from Equilon Enterprises LLC (“Equilon”). The Company also purchased the crude oil, intermediate product and finished product inventories at the refinery at closing.

Total consideration for the acquisition of the refinery consisted of $170 million cash. In addition, the Company will make contingent earn-out payments for the next eight years equal to one-half of the excess over $60 million per year of the El Dorado Refinery’s revenues less its material costs and operating costs, other than depreciation. The total amount of these contingent payments is capped at $40 million, with an annual cap of $7.5 million. Any contingency payment will be recorded when determinable. Such contingency payment, if any, will be recorded as additional acquisition cost. Total consideration for the acquisition of the inventory at closing consisted of approximately $53.1 million cash. The purchase was paid for from the proceeds of $190 million 11 3/4% Senior Notes due 2009 issued by the Company on November 5, 1999 and a new revolving credit facility.

The acquisition is accounted for under the purchase method of accounting. The purchase price allocation is expected to be finalized during 2000 based on further evaluation of the acquired assets and assumed liabilities.

Operating results for the El Dorado Refinery have been included in the statement of operations and cash flows from November 17, 1999. The following is the unaudited pro forma financial information giving effect to the El Dorado Refinery as if it had occurred at the beginning of 1998.

Unaudited Pro Forma Information

4 DEBT

Schedule of Long-term Debt

Senior Notes

On November 5, 1999, the Company issued $190 million principal amount of 11 3/4% Senior Notes due 2009. The 11 3/4% Notes were issued at a price of 98.562%. The 11 3/4% Notes are redeemable, at the option of the Company, at 105.875% after November 15, 2004, declining to 100% in 2007. Prior to November 15, 2004, the Company may at its option redeem the 11 3/4% Notes at a defined make-whole amount, plus accrued and unpaid interest. In addition, prior to November 15, 2002, the Company may redeem up to 35% of the principal amount of the 11 3/4% Notes with proceeds from an equity offering at a redemption price of 111 3/4% of the principal amount of the 11 3/4% Notes. Interest is paid semiannually. The net proceeds were utilized to acquire the El Dorado Refinery.

On February 9, 1998, the Company issued $70 million of 9 1/8% Senior Notes due 2006. The 9 1/8% Notes are redeemable, at the option of the Company, at 104.563% after February 15, 2002, declining to 100% in 2005. Prior to February 15, 2002, the Company may at its option redeem the 9 1/8% Notes at a defined make-whole amount, plus accrued and unpaid interest. In addition, prior to February 4, 2001, the Company may redeem up to 35% of the principal amount of the 9 1/8% Notes with proceeds from an equity offering at a redemption price of 109 1/8% of the principle amount of the 9 1/8% Notes. Interest is paid semiannually.

Early Retirement of Debt

Based on early debt redemptions during 1998, the Company recognized an extraordinary loss of approximately $3.0 million, net of taxes, due to the redemption premiums on retired issues of senior notes and convertible debentures and the write-off of related remaining debt issuance costs. The redemptions and retirement of these debt obligations were funded with proceeds from the issuance of the 9 1/8% Senior Notes.

Revolving Credit Facility

The refining operations have a working capital credit facility with a group of ten banks which expires on November 16, 2002. The facility is a collateral-based facility with total capacity of up to $175 million, of which maximum cash borrowings are $100 million. Any unutilized capacity after cash borrowings is available for letters of credit. Short-term debt outstanding was $26 million and $3.8 million, respectively at December 31, 1999 and 1998. Standby letters of credit outstanding were $39.6 million and $7.7 million at December 31, 1999 and 1998, respectively.

The facility provides working capital financing for operations, generally the financing of crude and product supply. It is generally secured by the Refineries’ current assets. The agreement provides for a quarterly commitment fee of .375 of 1% to .500 of 1% per annum. Interest rates are based, at the Company’s option, on the agent bank’s prime rate plus .25% to 1%, the prevailing Federal Funds Rate plus 2% to 2.75% or the reserve-adjusted LIBOR plus 1.5% to 2.25%. Standby letters of credit issued bear a fee of 1.125% to 1.875% annually, plus standard issuance and renewal fees. In all cases the rate and fees discussed above increase from the lower to higher levels as the ratio of funded debt to earnings, as defined, increases. The agreement includes certain financial covenant requirements relating to the Refineries’ working capital, cash earnings and tangible net worth. In addition, the Company is required to maintain $25 million in cash through March 31, 2001. However, if EBITDA (earnings before interest, taxes, depreciation and amortization) for the six months ended June 30, 2000 is at least $40 million, the requirement will be reduced to $12.5 million, and if EBITDA for the nine months ended September 30, 2000 is at least $50 million, the requirement will be eliminated.

Restrictions on Loans, Transfer of Funds and Payment of Dividends

The revolving credit facility restricts the Refineries as to the distribution of capital assets and the transfer of cash in the form of dividends, loans or advances when there are any outstanding borrowings under the facility or when a default exists or would occur. The Company is currently in compliance with the provisions of its credit agreement.

Five-year Maturities

The 9 1/8% Senior Notes are due 2006 and the 11 3/4% Senior Notes are due 2009; until then there are no maturities of long-term debt.

5 INCOME TAXES

The following is the provision (benefit) for income taxes for the three years ended December 31, 1999, 1998 and 1997.

Provision (Benefit) for Income Taxes

The following is a reconciliation of the provision (benefit) for income taxes computed at the statutory United States income tax rates on pretax income (loss) and the provision (benefit) for income taxes as reported for the three years ended December 31, 1999, 1998 and 1997.

Reconciliation of Tax Provision

The following are the significant components, by type of temporary differences or carryforwards, of deferred tax liabilities and tax assets, computed at the federal statutory rate, as of December 31, 1999 and 1998.

Components of Federal Deferred Taxes

Realization of deferred tax assets is dependent on the Company’s ability to generate taxable income within the life of the tax loss carryforwards. As a result of the Company’s history of operating losses, a valuation allowance has been provided for deferred tax assets that are not offset by scheduled future reversals of deferred tax liabilities.

At December 31, 1999, the Company had regular net operating loss (“NOL”) carryforwards for United States tax reporting purposes of $135.1 million available to reduce future federal taxable income. The regular NOL carryforwards will expire as follows: $13.6 million in 2002, $7.7 million in 2003, $11.3 million in 2004, $29.5 million in 2005, $17.2 million in 2006, $13.7 million in 2007, $11.3 million in 2008, $2.2 million in 2009, $16.1 million in 2010, $4.4 million in 2011 and $8.1 million in 2019. The Company also has $8.7 million tax depletion carryforwards which are indefinitely available to reduce future federal taxable income.

Also, at December 31, 1999, the Company had alternative minimum tax net operating loss (“AMT NOL”) carryforwards for United States tax reporting of $87.5 million to reduce future taxable income. The AMT NOL carryforwards will expire as follows: $26.5 million in 2005, $13.1 million in 2006, $11.6 million in 2007, $8.6 million in 2008, $1.4 million in 2009, $16.8 million in 2010, $2.7 million in 2011 and $6.8 million in 2019.

The Company has alternative minimum tax carryforwards of $1.3 million which are indefinitely available to reduce future United States income taxes payable.

The Company has no remaining state net operating losses to reduce future state taxable income. A state deferred tax liability of $1.9 million was provided at December 31, 1999 reflecting the estimated state tax effect of temporary differences, primarily for differences in depreciation for property, plant and equipment.

Prior to the sale of its Canadian oil and gas operations in June 1997, the Company conducted business in Canada. As a result of an audit in 1999 of its Canadian tax returns for the years 1995, 1996 and 1997 conducted by the Canada Customs and Revenue Agency (formerly Revenue Canada), the Company was assessed for approximately C$27 million of additional taxes. More than C$20 million of this assessment relates to certain foreign exploration and development expenditure deductions. The Department of Finance in Canada has drafted and released proposed legislation that would eliminate this portion of the assessment. Approximately C$5 million of the assessment relates to the deductibility of certain interest costs in 1995, which were not challenged by the Canada Customs and Revenue Agency in its audits of previous periods. Other deductions of approximately C$2 million comprise the balance of the assessment. The Company has filed a Notice of Objection to portions of the assessment totaling approximately C$25 million and additionally, is awaiting, as is the Canada Customs and Revenue Agency, the passing of legislation that will resolve the foreign exploration and development expenditure deduction portion of the assessment, before arguing the remaining assessment. The Company intends to vigorously contest the tax assessment and believes that it will be successful in its appeal, either at the regulatory level or before the Courts. While the Company acknowledges the uncertainties associated with tax disputes, management currently believes that this matter will be resolved without a material effect on the Company’s financial position or results of operations.

6 COMMON STOCK

Earnings per Share

The following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share (“EPS”) for income (loss) from continuing operations for the years ended December 31, 1999, 1998 and 1997.

Certain of the Company’s stock options that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.

Non-employee Directors Stock Grant Plan

During 1995, the Company established a stock grant plan for non-employee directors. The purpose of the plan is to provide a part of non-employee directors compensation in Company stock. The plan will be beneficial to the Company and its stockholders by allowing non-employee directors to have a personal financial stake in the Company through an ownership interest in the Company’s common stock. The plan may grant an aggregate of 60,000 shares of the Company’s common stock held in treasury. The Company made grants to directors under this plan of 2,500 shares in 1999 and 1997.

Stock Option Plans

The Company has stock option plans which authorize the granting of restricted stock and options to purchase shares. The plans through December 31, 1999 have reserved for issuance a total of 5,959,355 shares of common stock of which 2,687,181 shares were granted and exercised, 2,115,884 shares were granted and were outstanding and 1,156,290 shares were available to be granted. Options under the plans are granted at not less than fair market value on the date of grant. No entries are made in the accounts until the options are exercised, at which time the proceeds are credited to common stock and paid-in capital. Generally, the options vest ratably throughout their one to five-year terms.

The following table summarizes information about stock options outstanding at December 31, 1999:

Had compensation costs been determined based on the fair value at the grant dates for awards made in 1999 and 1997 (no awards were made in 1998), the Company’s net income (loss) and EPS would have been the pro forma amounts indicated below for the years ended December 31, 1999, 1998 and 1997:

The fair value of grants was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used: risk-free interest rates of 5.21% and 5.91%, expected volatilities of 46.64%, and 41.07%, expected lives of 3.50 and 2.32 years and no dividend yield in 1999 and 1997, respectively.

7 EMPLOYEE BENEFIT PLANTS

Contribution Plans

The Company sponsors defined contribution plans for its employees. All employees may participate by contributing a portion of their annual earnings to the plans. The Company makes basic and/or matching contributions on behalf of participating employees. The cost of the plans for the three years ended December 31, 1999, 1998 and 1997 was $2.0 million, $1.4 million and $1.3 million, respectively.

Pension Plan

The Company is establishing a defined cash balance pension plan, effective January 1, 2000, for eligible El Dorado employees to supplement retirement benefits those employees would lose upon the sale of the El Dorado Refinery to Frontier. No other current or future employees will be eligible to participate in the plan. The projected benefit obligation for the plan as of December 31, 1999 is $9.6 million. The principal assumptions used in the calculation were a discount rate of 7.5% and compensation increases of 3.5%.

Postretirement Health Care

The Company provides postretirement health care to certain employees of the El Dorado Refinery. Eligible employees are employees hired on or before January 1, 1991 by the refinery and who satisfy certain age and service requirements. The Company is currently in negotiation with its union employees as to the eligibility for this benefit. As a result, changes to the retirement health care may be made upon completion of the negotiations.

As of December 31, 1999, the Company has accrued $7.7 million for accumulated postretirement obligations for the covered active employees. The postretirement healthcare costs for 1999 totaled $115,000, consisting of service cost of $47,000 and interest cost of $68,000. The principal assumptions used in the computation were a discount rate of 7.75% and an assumed health care cost trend rate of 6.5% for 1999, decreasing by 1/2% per year to an ultimate rate of 5.0%. Increasing or decreasing the assumed health care cost trend by 1% would increase (decrease) the accumulated postretirement benefit obligation as of December 31, 1999 by approximately $1.8 million and ($1.5 million), respectively.

8 COMMITMENTS AND CONTINGENCIES

Lease and Other Commitments

In connection with the acquisition of the El Dorado Refinery, the Company entered into an operating sublease agreement with Equilon for the use of the cogeneration facility at the El Dorado Refinery. The noncancelable operating sublease expires in 2016 with the Company having the option to renew the sublease for an additional eight years. At the end of the renewal sublease term, the Company has the option to purchase the cogeneration facility for the greater of fair value or $22.3 million. The Company also has building, equipment and vehicle operating leases that expire from 2000 through 2005. Operating lease rental expense was $2.7 million, $2.6 million and $2.6 million for the three years ended December 31, 1999, 1998 and 1997, respectively. The approximate future minimum lease payments as of December 31, 1999 are $10.4 million for 2000, $10.2 million for 2001, $8.9 million for 2002, $8.4 million for 2003, $8.2 million for 2004 and $77.7 million thereafter.

The Company contracted for pipeline capacity of approximately 13,800 bpd on the Express Pipeline from Hardisty, Alberta to Guernsey, Wyoming in 1997 for a period of 15 years. The Company’s commitment for pipeline capacity is approximately $5.8 million per year. The agreement allows the Company to assign a portion of its capacity in early years for additional capacity in later years. The Company owns a 25,000 bpd interest in a crude oil pipeline from Guernsey, Wyoming to the Cheyenne Refinery. The Company’s share of operating costs for the crude oil pipeline are recorded as refining operating costs. The Company has commitments to purchase crude oil from various suppliers on a one month to one year basis at daily market posted prices to meet its Refineries’ throughput requirements. The Company has also entered into a one-year foreign crude supply agreement with Equiva Trading Company (“Equiva”), an affiliate of Equilon.

Concentration of Credit Risk

The Company has concentrations of credit risk with respect to sales within the same or related industry and within limited geographic areas. The Company sells its Cheyenne products exclusively at wholesale, principally to independent retailers and major oil companies located primarily in the Denver, western Nebraska and eastern Wyoming regions. The Company sells its El Dorado gasoline, diesel and jet fuel to Equiva, under a 15-year offtake agreement. These products are sold to Equiva at market prices. Beginning in 2000, the Company will retain and market a portion of the El Dorado Refinery’s gasoline and diesel production. This portion will increase 5,000 barrels per day each year for ten years beginning at 5,000 barrels per day in 2000, rising to 50,000 barrels in 2009 and remaining at that level through the term of the agreement. Equiva will purchase all jet fuel production for the first five years.

The Company extends credit to its customers based on ongoing credit evaluations. An allowance for doubtful accounts is provided based on the current evaluation of each customer’s credit risk, past experience and other factors. During 1999, the Company made sales to Equiva and CITGO Petroleum Products of approximately $125 million and $62 million, respectively, which accounted for 25% and 12%, respectively, of consolidated revenues.

Environmental

The Company accrues for environmental costs as indicated in Note 2. Numerous local, state and federal laws, rules and regulations relating to the environment are applicable to the Company’s operations. As a result, the Company falls under the jurisdiction of numerous state and federal agencies and is exposed to the possibility of judicial or administrative actions for remediation and/or penalties brought by those agencies.

The Cheyenne Refinery is party to one consent decree requiring the investigation and, in certain instances, mitigation of environmental impacts resulting from past operational activities. The El Dorado Refinery is a party to a consent decree regarding the implementation of a groundwater management program. Equilon will be responsible for the cost of continued compliance with this order. The Company has obtained a ten-year insurance policy with $25 million coverage for environmental liabilities, with a $500,000 deductible. This insurance will reimburse the Company for losses related to some known and unknown pre-existing conditions at the El Dorado Refinery. Equilon and Frontier will share the premium costs of this policy. In addition, Equilon will be responsible for up to $5 million in costs (including insurance premiums) relating to safety, health and environmental conditions that are not covered under the ten-year insurance policy.

Except as discussed above, the Company has been and will be responsible for costs related to compliance with or remediations resulting from environmental regulations. There are currently no identified environmental remediation projects of which the costs can be reasonably estimated. However, the continuation of the present investigative process, other more extensive investigations over time or changes in regulatory requirements could result in future liabilities.

Litigation

The Company is involved in various lawsuits which are incidental to its business. In management’s opinion, the adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial position or results of operations.

Collective Bargaining Agreement Expiration

The Company’s refining units hourly employees are represented by seven bargaining units, the largest being the Paper, Allied- Industrial, Chemical and Energy Workers International Union (“PACE”). Six AFL-CIO affiliated unions represent the Cheyenne craft workers. At the Cheyenne Refinery, the current contract with PACE expires in July 2002, while the current contract with the AFL-CIO affiliated unions expires in June 2005. At the El Dorado Refinery, the current contract with PACE expires in January 2002. The union employees represent approximately 64% of the Company’s work force at December 31, 1999.

9 FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company’s Senior Notes was estimated based on quotations obtained from broker-dealers who make markets in these and similar securities. The bank revolving credit facility is based on floating interest rates and, as such, the carrying amount is a reasonable estimate of fair value. At December 31, 1999 and 1998, the carrying amounts of long-term debt instruments were $257.3 million and $70.0 million, respectively, and the estimated fair values were $250.2 million and $65.1 million.

The Company, at times, enters into commodity derivative contracts in its refining operations for the purpose of managing its refining costs. Since the acquisition of the El Dorado Refinery, the Company has used derivative contracts to change fixed pricing to floating pricing in order to manage its price exposure from the date foreign crude oil is purchased to the date it is processed at the El Dorado Refinery. Delivery of the Company’s foreign crude oil can exceed one month. In addition, from time to time, the Company enters into natural gas futures contracts to hedge its cost of natural gas consumed in the refining process. For the three years ended December 31, 1999, 1998 and 1997, the Company recognized gains (losses) from commodity derivative contracts of ($3.7 million), ($644,000) and $801,000, respectively. As of December 31, 1999, the Company had entered into commodity derivative contracts for the purchase of foreign crude oil and purchase of natural gas. The Company had sold approximately 1.5 million barrels of crude oil on the New York Mercantile Exchange at an average price of $25.86 for repurchase through March 2000. The Company had also purchased an average 7,000 mcf per day of natural gas through March 2000 at $2.13 per mcf. The estimated fair value of the Company’s open crude oil futures contracts and natural gas futures contracts at December 31, 1999 were $456,000 and $122,000, respectively.

10 SALE OF OIL GAS OPERATIONS

On June 16, 1997, the Company completed the sale of all its Canadian oil and gas properties. The transaction was initiated by the Company through a negotiated bid process in order to maximize shareholder value. The oil and gas assets were located in British Columbia and Alberta and included approximately 94 billion cubic feet of natural gas, 1.7 million barrels of oil, condensate and natural gas liquids, 121,500 net undeveloped leasehold acres and a significant amount of seismic data. Additionally, value was received for certain Canadian income tax pools of the Company.

The contract purchase price of C$133.6 million was adjusted from the January 1, 1997 effective date of the sale to June 16, 1997. Net proceeds after these adjustments, transaction expenses and severance costs were approximately C$126.7 million (US$91.3 million) as of June 16, 1997. A net gain of $23.3 million was realized on the transaction. No Canadian taxes were estimated to be payable due to available oil and gas deductions and net operating loss carryforwards. For U.S. federal income taxes, available net operating loss carryforwards were utilized to offset the gain; however, alternative minimum taxes of approximately $800,000 were paid.

The cumulative translation adjustment as of May 5, 1997 (the measurement date of the sale) of $9.9 million was realized against income as a result of the sale. In prior periods, the Company had recognized the currency translation impact of its Canadian operations as a direct reduction to shareholders’ equity. Consequently, the recognition of the cumulative translation adjustment in the accompanying statements of operations has no effect on shareholders’ equity. A net loss of $54,000 from Canadian operations from the measurement date until June 16, 1997 was included in the gain calculation.

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