Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
OR
¨
 
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 001-38606


BERRY PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation or organization)
 
81-5410470
(I.R.S. Employer Identification Number)
5201 Truxtun Avenue
Bakersfield, California 93309
(661) 616-3900
(Address of principal executive offices, including zip code
Registrant’s telephone number, including area code):

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 ¨    No ý

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”,“smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer x
 
Smaller reporting company ¨
         Emerging Growth Company ý
 
 
 
 
 
 
     
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No ý


Shares of common stock outstanding as of July 31, 2018                        81,336,762



TABLE OF CONTENTS

 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 5.
Item 6.
 
 







PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
Berry Corp. (Successor)
 
June 30, 2018
December 31, 2017
ASSETS


Current assets:


Cash and cash equivalents
$
3,600

$
33,905

Accounts receivable, net of allowance for doubtful accounts of $950 at June 30, 2018 and $970 at December 31, 2017
56,860

54,720

Restricted cash
19,710

34,833

Other current assets
14,981

14,066

Total current assets
95,151

137,524

Noncurrent assets:


Oil and natural gas properties
1,382,777

1,342,453

Accumulated depletion and amortization
(88,548
)
(54,785
)
 
1,294,229

1,287,668

Other property and equipment
112,618

104,879

Accumulated depreciation
(8,928
)
(5,356
)
 
103,690

99,523

Other noncurrent assets
22,086

21,687

Total assets
$
1,515,156

$
1,546,402

LIABILITIES AND EQUITY


Current liabilities:


Accounts payable and accrued expenses
$
113,170

$
97,877

Derivative instruments
11,447

49,949

Liabilities subject to compromise
19,710

34,833

Total current liabilities
144,327

182,659

Noncurrent liabilities:


Long-term debt
457,333

379,000

Derivative instruments
3,563

25,332

Deferred income taxes

1,888

Asset retirement obligation
88,575

94,509

Other noncurrent liabilities
12,862

3,704

Commitments and Contingencies-Note 5



Equity:


Series A Preferred Stock ($.001 par value, 250,000,000 shares authorized and 37,669,805 shares issued at June 30, 2018 and 35,845,001 shares issued at December 31, 2017)
335,000

335,000

Common stock ($.001 par value, 750,000,000 shares authorized and 33,087,889 shares issued at June 30, 2018 and 32,920,000 issued at December 31, 2017
33

33

Additional paid-in-capital
536,188

545,345

Treasury stock, at cost
(20,006
)

Accumulated deficit
(42,719
)
(21,068
)
Total equity
808,496

859,310

Total liabilities and equity
$
1,515,156

$
1,546,402

The accompanying notes are an integral part of these condensed consolidated financial statements

3


BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Berry Corp.
(Successor)
Berry LLC
(Predecessor)
 
Three Months Ended
Three Months Ended
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
February 28, 2017
Revenues and other:




 






Oil, natural gas and natural gas liquids sales
$
137,385

$
101,884

 
$
263,010

$
135,562

$
74,120

Electricity sales
5,971

5,712

 
11,423

6,603

3,655

(Losses) gains on oil and natural gas derivatives
(78,143
)
23,962

 
(112,787
)
48,085

12,886

Marketing revenues
518

809

 
1,302

1,090

633

Other revenues
251

2,355

 
317

3,037

1,424


65,982

134,722

 
163,265

194,377

92,718

Expenses and other:
 
 
 
 
 
 
Lease operating expenses
41,517

45,726

 
85,819

58,790

28,238

Electricity generation expenses
3,135

4,465

 
7,725

5,613

3,197

Transportation expenses
2,343

9,404

 
5,321

13,059

6,194

Marketing expenses
407

730

 
987

1,000

653

General and administrative expenses
12,482

22,257

 
24,466

31,800

7,964

Depreciation, depletion, amortization and accretion
21,859

20,549

 
40,288

27,571

28,149

Taxes, other than income taxes
8,715

10,249

 
16,972

13,330

5,212

(Gains) losses on sale of assets and other, net
123

5

 
123

5

(183
)

90,581

113,385

 
181,701

151,168

79,424

Other income and (expenses):
 
 
 
 
 
 
Interest expense
(9,155
)
(4,885
)
 
(16,951
)
(6,600
)
(8,245
)
Other, net
(239
)
2,916

 
(212
)
2,916

(63
)

(9,394
)
(1,969
)
 
(17,163
)
(3,684
)
(8,308
)
Reorganization items, net
456

713

 
9,411

(593
)
(507,720
)
Income (loss) before income taxes
(33,537
)
20,081

 
(26,188
)
38,932

(502,734
)
Income tax expense (benefit)
(5,476
)
7,961

 
(4,537
)
15,435

230

Net income (loss)
(28,061
)
12,120

 
(21,651
)
23,497

$
(502,964
)
Dividends on Series A Preferred Stock
(5,650
)
(5,404
)
 
(11,301
)
(7,196
)
n/a

Net income (loss) attributable to common stockholders
$
(33,711
)
$
6,716

 
$
(32,952
)
$
16,301

n/a

Net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
Basic
$
(0.84
)
$
0.17

 
$
(0.82
)
$
0.41

n/a

Diluted
$
(0.84
)
$
0.16

 
$
(0.82
)
$
0.31

n/a

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


BERRY PETROLEUM CORPORATION (Successor)
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in thousands)
(Unaudited)




Series A Preferred Stock
Common stock
Additional Paid-in Capital
Accumulated Deficit
Treasury Stock
Total equity
Balance, December 31, 2017
$
335,000

$
33

$
545,345

$
(21,068
)
$

$
859,310

Stock-based compensation


2,320



2,320

Share repurchase for payment of taxes on equity awards


(176
)


(176
)
Cash dividends declared on Series A Preferred Stock


(11,301
)


(11,301
)
Purchase of rights to common stock




(20,006
)
(20,006
)
Net (loss) income



(21,651
)

(21,651
)
Balance, June 30, 2018
$
335,000

$
33

$
536,188

$
(42,719
)
$
(20,006
)
$
808,496




The accompanying notes are an integral part of these condensed consolidated financial statements.

5


BERRY PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Berry Corp.
Berry LLC
 
(Successor)
(Predecessor)
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
June 30, 2017
February 28, 2017
Cash flow from operating activities:
 
 
 
Net income (loss)
$
(21,651
)
$
23,497

$
(502,964
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation, depletion, amortization and accretion
40,288

27,571

28,149

Amortization of debt issuance costs
2,651

7

416

Stock-based compensation expense
2,320



Deferred income taxes
(4,537
)
14,268

9

(Decrease) increase in allowance for doubtful accounts
(20
)


Derivative activities:
 
 
 
  Total (gains) losses
112,787

(48,085
)
(12,886
)
     Cash settlements
(46,110
)
5,856

534

  Cash settlements on early-terminated derivatives
(126,949
)


(Gains) losses on sale of assets and other, net
123

(25
)
(25
)
Reorganization items, net
(10,763
)
(1,385
)
501,872

Changes in assets and liabilities:
 
 
 
  (Increase) decrease in accounts receivable
(2,120
)
16,543

(9,152
)
  (Increase) decrease in other assets
(1,859
)
(5,657
)
(2,842
)
  Increase (decrease) in accounts payable and accrued expenses
8,421

2,461

18,330

  Increase (decrease) in other liabilities
(2,129
)
9,886

990

Net cash (used in) provided by operating activities
(49,548
)
44,937

22,431

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
  Development of oil and natural gas properties
(37,609
)
(23,258
)
(859
)
  Purchases of other property and equipment
(7,760
)
(9,620
)
(2,299
)
  Proceeds from sale of property, plant, equipment and other
3,022


25

     Deposit on acquisition of properties

(39,450
)

Net cash used in investing activities
(42,347
)
(72,328
)
(3,133
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from sale of Series A Preferred Stock


335,000

Repayments on pre-emergence credit facility


(497,668
)
Borrowings on emergence credit facility

36,000


Repayments on emergence credit facility

(51,000
)

Proceeds from issuance of senior unsecured notes
400,000



Repayments on new credit facility
(409,800
)


Borrowings on new credit facility
96,800



Dividends paid on Series A Preferred Stock
(11,301
)


Purchase of treasury stock
(20,006
)


Share repurchase for payment of taxes on equity awards
(176
)


Debt issuance costs
(9,050
)


Net cash provided by (used in) financing activities
46,467

(15,000
)
(162,668
)
Net decrease in cash, cash equivalents and restricted cash
(45,428
)
(42,391
)
(143,370
)
Cash, cash equivalents and restricted cash:
 
 
 
Beginning
68,738

85,034

228,404

Ending
$
23,310

$
42,643

$
85,034

The accompanying notes are an integral part of these condensed consolidated financial statements.

6



Note 1 - Basis of Presentation
 
“Berry Corp.” refers to Berry Petroleum Corporation, a Delaware corporation which, on and after February 28, 2017 is the sole member of Berry Petroleum Company, LLC.
“Berry LLC” refers to Berry Petroleum Company, LLC, a Delaware limited liability company.
As the context may require, the “Company”, “we”, “our” or similar words refer to (i) Berry Corp. (the "Successor”) and Berry LLC, its consolidated subsidiary, as of and after February 28, 2017, as a whole or (ii) either Berry Corp. or Berry LLC on an individual basis as of and after February 28, 2017. References to historical activities of the “Company” prior to February 28, 2017, refer to activities of Berry LLC (the "Predecessor”).
“LINN Energy” refers to Linn Energy, LLC, a Delaware limited liability company of which Berry LLC was formerly a wholly-owned, indirect subsidiary.
Nature of Business
Berry Corp. is an independent oil and natural gas company that was incorporated under Delaware law on February 13, 2017. Berry Corp. operates through its wholly-owned subsidiary, Berry LLC. Our properties are located in the United States (“U.S.”), in California (in the San Joaquin and Ventura Basins), Utah (in the Uinta Basin), Colorado (in the Piceance Basin) and east Texas.
In July, we completed the initial public offering ("IPO") of our common stock and as a result, on July 26, 2018, our common stock began trading on the NASDAQ Global Select Market under the ticker symbol BRY.
Principles of Consolidation and Reporting
The information reported herein reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. This report should be read in conjunction with the financial statements and notes in the Company's audited financial statements for the year ended December 31, 2017 presented in our final prospectus dated July 25, 2018 as filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended, on July 27, 2018 (the "prospectus").
The condensed consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Successor and its wholly owned subsidiary after February 28, 2017 and the accounts of the Predecessor prior to February 28, 2017. All significant intercompany transactions and balances have been eliminated upon consolidation. For oil and gas exploration and production joint ventures in which we have a direct working interest, we account for our proportionate share of assets, liabilities, revenue, expense and cash flows within the relevant lines of the financial statements.
Bankruptcy Accounting
Upon emergence from bankruptcy on February 28, 2017, we adopted fresh start accounting which resulted in Berry Corp. becoming the financial reporting entity. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the condensed consolidated financial statements on or after February 28, 2017 are not comparable to the condensed consolidated financial statements prior to that date.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP required management of the Company to make informed estimates and assumptions about future events. These estimates and the

7


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.
As fair value is a market-based measurement, it was determined based on the assumptions that we believe market participants would use. We based these assumptions on management's best estimates and judgment. Management evaluates its assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, that management believes to be reasonable under the circumstances. Such assumptions are adjusted when management determines that facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in these assumptions resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
The estimates that are particularly significant to our financial statements include estimates of our reserves of oil and gas, future cash flows from oil and gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and expenses, fair values of commodity derivatives and fair values of assets acquired and liabilities assumed. In addition, as part of fresh-start accounting, we made estimates and assumptions related to our reorganization value, liabilities subject to compromise and the fair value of assets and liabilities recorded.
Accounting and Disclosure Changes
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued rules to improve the accounting for share-based payment transactions. We early-adopted these rules retrospectively on April 1, 2018 and as a result are reporting cash paid to tax authorities when we withhold shares from an employee's award as a cash outflow for financing activities on the statement of cash flows. There was no change to the other financial statements as a result of adopting these rules.

In November 2016, the FASB issued rules intended to address the diversity in practice in classification and presentation of changes in restricted cash on the statement of cash flows. We adopted these rules retrospectively on January 1, 2018, as a result of which we included restricted cash amounts in our beginning and ending cash balances on the statement of cash flows and included a disclosure reconciling cash and cash equivalents presented on the balance sheets to cash, cash equivalents and restricted cash on the statement of cash flows.
New Accounting Standards Issued, But Not Yet Adopted

In February 2016, the FASB issued rules requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months and to include qualitative and quantitative disclosures with respect to the amount, timing, and uncertainty of cash flows arising from leases. As an emerging growth company, we have elected to delay the adoption of these rules until they are applicable to non-SEC issuers which is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We expect the adoption of these rules to primarily impact other assets and other liabilities and do not expect a material impact on our consolidated results of operations.

During 2016, the FASB issued rules clarifying the new revenue recognition standard issued in 2014. The new rules are intended to improve and converge the financial reporting requirements for revenue from contracts with customers. We are an emerging growth company and have elected to delay adoption of these rules until they are applicable to non-SEC issuers which is for fiscal years beginning after December 31, 2018. We are currently evaluating the impact of the adoption of these rules on our consolidated financial statements and related disclosures.
Note 2 - Emergence from Voluntary Reorganization under Chapter 11
On December 16, 2013, an affiliate of LINN Energy, LinnCo, LLC (“LinnCo”), acquired all the outstanding common shares of Berry Petroleum Company and contributed Berry Petroleum Company to LINN Energy in exchange for LINN Energy units. In connection with its acquisition by LINN Energy, Berry Petroleum Company was converted from a Delaware corporation into a Delaware limited liability company and changed its name to “Berry Petroleum Company, LLC.” Linn Acquisition Company, LLC, a direct subsidiary of LINN Energy, became Berry LLC’s sole member.

8


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




On May 11, 2016 (the “Petition Date”), the LINN entities ("LINN Entities") and, consequently, Berry LLC (collectively, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for relief under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Debtors’ Chapter 11 cases were administered jointly under the caption In re Linn Energy, LLC, et al., Case No. 16-60040 (collectively, the “Chapter 11 Proceedings”). During the pendancy of the Chapter 11 Proceedings, the debtors in the Chapter 11 Proceedings (the “Debtors”), operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
In December 2016, Berry LLC and Linn Acquisition Company, LLC, on the one hand, and LINN Energy and its other affiliated debtors, on the other hand, filed separate plans of reorganization with the Bankruptcy Court. The “Amended Joint Chapter 11 Plan of Reorganization of Linn Acquisition Company, LLC and Berry Petroleum Company, LLC” (the “Plan”) was filed on December 13, 2016. On January 27, 2017, the Bankruptcy Court entered its confirmation order (the “Confirmation Order”) approving and confirming the Plan.
On February 28, 2017, the Plan became effective and was implemented in accordance with its terms. Among other transactions, Linn Acquisition Company, LLC transferred 100% of Berry LLC’s outstanding membership interests to Berry Corp. As a result, Berry LLC emerged from bankruptcy as a wholly-owned subsidiary of Berry Corp., separate from LINN Energy and its affiliates, effective February 28, 2017 (the “Effective Date”).
Plan of Reorganization
On the Effective Date, the Company consummated the following reorganization transactions in accordance with the Plan:
Linn Acquisition Company, LLC transferred 100% of the outstanding membership interests in Berry LLC to Berry Corp. pursuant to an assignment agreement, dated February 28, 2017 between Linn Acquisition Company, LLC and Berry Corp. (the “Assignment Agreement”). Under the Assignment Agreement, Berry LLC became a wholly-owned operating subsidiary of Berry Corp.
The holders of claims under the Company’s Second Amended and Restated Credit Agreement, dated November 15, 2010, by and among Berry LLC, as borrower, Wells Fargo Bank, N.A., as administrative agent, and certain lenders, (as amended, the “Pre-Emergence Credit Facility”), received (i) their pro rata share of a cash paydown and (ii) pro rata participation in the new facility (the “Emergence Credit Facility”). As a result, all outstanding obligations under the Pre-Emergence Credit Facility were canceled and the agreements governing these obligations were terminated.
Berry LLC, as borrower, entered into the Emergence Credit Facility with the holders of claims under the Pre-Emergence Credit Facility, as lenders, and Wells Fargo Bank, N.A, as administrative agent, providing for a new reserve-based revolving loan with up to $550 million in borrowing commitments.
The holders of Berry LLC’s 6.75% senior notes due 2020, issued by Berry LLC pursuant to a Second Supplemental Indenture, dated November 1, 2010, and 6.375% senior notes due 2022, issued by Berry LLC pursuant to a Third Supplemental Indenture, dated March 9, 2012 (collectively, the “Unsecured Notes”), received a right to their pro rata share of either (i) 32,920,000 shares of common stock in Berry Corp. or, for those non-accredited investors holding the Unsecured Notes that irrevocably elected to receive a cash recovery, cash distributions from a $35 million cash distribution pool (the “Cash Distribution Pool”) and (ii) specified rights to participate in a two-tranche offering of rights to purchase Series A Preferred Stock at an aggregate purchase price of $335 million (as further defined in the Plan, the “Berry Rights Offerings”). As a result, all outstanding obligations under the Unsecured Notes were canceled and the indentures and related agreements governing these obligations were terminated.
The holders of unsecured claims against Berry LLC, other than the Unsecured Notes, (the “Unsecured Claims”) received a right to their pro rata share of either (i) 7,080,000 shares of common stock in Berry Corp. or (ii) in the event that such holder irrevocably elected to receive a cash recovery, cash distributions from the Cash Distribution Pool. As a result, all outstanding obligations under the Unsecured Notes and the indentures governing such obligations were canceled and the obligations arising from the Unsecured Claims were extinguished.
Berry LLC settled all intercompany claims against LINN Energy and its affiliates pursuant to a settlement agreement approved as part of the Plan and the Confirmation Order. The settlement agreement provided Berry LLC with a $25 million general unsecured claim against LINN Energy which Berry LLC has fully-reserved.





9


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018





Liabilities Subject to Compromise

Liabilities subject to compromise decreased from approximately $35 million as of December 31, 2017 to approximately $20 million as of June 30, 2018. Activity for our liabilities subject to compromise for the six months ended June 30, 2018 included the return of $9 million in undistributed funds from restricted cash, approximately $6 million in settlement payments to general unsecured creditors and other payments of professional fees incurred to settle these claims.
Reorganization Items, Net
We have incurred and continue to incur expenses associated with the reorganization. Reorganization items, net represent costs and gains directly associated with the Chapter 11 proceedings since the Petition Date, and also include adjustments to reflect the carrying value of certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments were determined. The following table summarizes the components of reorganization items included on the condensed consolidated statements of operations:
 
 
Berry Corp. (Successor)
Berry LLC (Predecessor)
 
Three Months
Ended
Three Months Ended
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
February 28, 2017
 
(in thousands)
 
 
Return of undistributed funds from Cash Distribution Pool
$

$

$
9,000

$

$

Refund of pre-emergence prepaid costs


579



Gain on settlement of liabilities subject to compromise




421,774

Fresh start valuation adjustments




(920,699
)
Legal and other professional advisory fees
(1,178
)
713

(1,802
)
112

(19,481
)
Gain on resolution of pre-emergence liabilities
1,634


1,634



Other



(705
)
10,686

Reorganization items, net
$
456

$
713

$
9,411

$
(593
)
$
(507,720
)

In August 2018, we received an additional return of undistributed funds from the Cash Distribution Pool of approximately $14 million.


10


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




Note 3 - Debt
The following table summarizes our outstanding debt:
 
(in thousands)
 
 
 
 
June 30, 2018
December 31, 2017
Interest Rate
Maturity
Security
RBL Facility
$
66,000

$
379,000

variable rates of 4.5% (2018) and 4.8% (2017), respectively
June 29, 2022
Mortgage on 85% of Present Value of proven oil and gas reserves
2026 Notes
400,000


7.00%
February 15, 2026
Unsecured
Long-Term Debt- Principal Amount
466,000

379,000

 
 
 
Less: Debt Issuance Costs
(8,667
)

 
 
 
Long-Term Debt, net
$
457,333

$
379,000

 
 
 

 
At June 30, 2018 and December 31, 2017, debt issuance costs for the RBL Facility reported in "non current assets" on the balance sheet were approximately $18 million and $21 million net of amortization, respectively. The amortization of debt issuance costs is presented in interest expense on the condensed consolidated statements of operations.
Fair Value
Our debt is recorded at the carrying amount on the balance sheets. The carrying amount of the RBL Facility approximates fair value because the interest rates are variable and reflect market rates. The fair value of the 2026 senior unsecured notes was approximately $408 million at June 30, 2018.
Credit Facilities
On July 31, 2017, we entered into a credit agreement (“RBL Facility”), with Wells Fargo Bank, N.A. as administrative agent and certain lenders with up to $1.5 billion of commitments, subject to a reserves-based borrowing base. In connection with the issuance of the 2026 Notes, the RBL Facility borrowing base was set at $400 million which incorporated a $100 million reduction, or 25% of the face value of the 2026 Notes (as defined below). In March 2018, we completed a borrowing base redetermination which reaffirmed our borrowing base at $400 million with an elected commitment feature that allows us to increase the RBL Facility to $575 million with lender approval.
As of June 30, 2018, the financial performance covenants under our RBL Facility were (i) a leverage ratio of no more than 4.00 to 1.00 and (ii) a current ratio of at least 1.00 to 1.00. At June 30, 2018, our actual ratios were 2.63 to 1.00 and 3.18 to 1.00, respectively. In addition, the RBL Facility currently provides that to the extent we incur unsecured indebtedness, including any amounts raised in the future, the borrowing base will be reduced by an amount equal to 25% of the amount of such unsecured debt. We were in compliance with all financial covenants as of June 30, 2018.
As of June 30, 2018, we had approximately $327 million of available borrowing capacity under the RBL Facility.
As of June 30, 2018 and December 31, 2017, we had letters of credit outstanding of approximately $7 million and $21 million, respectively, under our revolving credit facilities. These letters of credit were issued to support ordinary course of business marketing, insurance, regulatory and other matters.
In July and August 2018, we paid down approximately $105 million on the RBL Facility from the net proceeds we received in the IPO of our common stock (see Note 6). On August 20, 2018, we had approximately $388 million of available borrowing capacity under the RBL Facility and approximately $36 million of cash on hand.
Senior Unsecured Notes Offering
In February 2018, we completed a private issuance of $400 million in aggregate principal amount of 7.00% senior unsecured notes due 2026 (the “2026 Notes”), which resulted in net proceeds to us of approximately $391 million after

11


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




deducting expenses and the initial purchasers’ discount. We used a portion of the net proceeds from the issuance of the 2026 Notes to repay borrowings under the RBL Facility and used the remainder for general corporate purposes.
Note 4 - Derivatives
We have hedged a portion of our forecasted production to reduce exposure to fluctuations in oil and natural gas prices and we target covering our operating expenses and fixed charges two years out. We have also hedged a portion of our exposure to differentials between Brent and WTI. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations that we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions.
Our current hedge positions consist of primarily oil swap contracts and deferred premium purchased put options, though in the past we have also used collars and three-way collars and hedged our exposure to natural gas and natural gas liquids (NGL) price changes. We enter into these transactions with respect to a portion of our projected production to provide an economic hedge against the risk related to the future commodity prices received. We do not enter into derivative contracts for speculative trading purposes. We did not designate any of our contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings.
As part of our hedging program, we entered into a number of derivative transactions that resulted in the following crude oil contracts as of June 30, 2018:  
 
Q3 2018
Q4 2018
FY 2019
FY 2020
Sold Oil Calls (ICE Brent):
 
 
 
 
  Hedged volume (MBbls)
186




  Weighted average price ($/Bbl)
$
81.67

$

$

$

 Purchased Put Options (ICE Brent):
 
 
 
 
  Hedged volume (MBbls)


2,835

455

  Weighted average price ($/Bbl)

$

$
65.00

$
65.00

Fixed Price Swaps (ICE Brent):
 
 
 
 
  Hedged volume (MBbls)
966

966

900


  Weighted average price ($/Bbl)
$
75.13

$
75.13

$
75.66

$

Oil basis differential positions:
 
 
 
 
ICE Brent-NYMEX WTI basis swaps
 
 
 
 
  Hedged volume (MBbls)
92

92

182.5


  Weighted average price ($/Bbl)
$
1.29

$
1.29

$
1.29

$

We earn a premium on our sold oil calls at the time of sale. We make net settlement payments for prices above the indicated weighted-average price per barrel of Brent. If the calls expire unexercised, no payments are received.
For our purchased puts, we would receive settlement payments for prices below the indicated weighted-average price per barrel of Brent. The purchased put options contain deferred premiums of approximately $17.9 million and are reflected in the mark-to-market valuation of the derivatives on the balance sheet at June 30, 2018. The premiums will be payable in conjunction with the monthly settlements of these contracts and thus have been deferred until payments begin in 2019.
For fixed-price swaps, we make settlement payments for prices above the indicated weighted-average price per barrel of Brent and receive settlement payments for prices below the indicated weighted-average price per barrel of Brent.

12


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




 
For oil basis swaps, we make settlement payments if the difference between Brent and WTI is greater than the indicated weighted-average price per barrel and receive settlement payments if the difference between Brent and WTI is below the indicated weighted-average price per barrel.

Our commodity derivatives are measured at fair value using industry-standard models with various inputs including forward prices, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. The following tables present the fair values (gross and net) of our outstanding derivatives as of June 30, 2018 and December 31, 2017:
 
 
Berry Corp. (Successor)
 
June 30, 2018
 
Balance Sheet
Classification
Gross Amounts
Recognized at
Fair Value
Gross Amounts
Offset in the
Balance Sheet
Net Fair Value
Presented in the
Balance Sheet
 
(in thousands)
Liabilities
 
 
 
 
  Commodity Contracts
Current liabilities
$
(11,447
)
$

$
(11,447
)
  Commodity Contracts
Non-current liabilities
(3,563
)

(3,563
)
Total derivatives
 
$
(15,010
)
$

$
(15,010
)



 
Berry Corp. (Successor)
 
December 31, 2017
 
Balance Sheet
Classification
Gross Amounts
Recognized at
Fair Value
Gross Amounts
Offset in the
Balance Sheet
Net Fair Value
Presented in the
Balance Sheet
 
(in thousands)
Liabilities
 
 
 
 
  Commodity Contracts
Current liabilities
$
(49,949
)
$

$
(49,949
)
  Commodity Contracts
Non-current liabilities
(25,332
)

(25,332
)
Total derivatives
 
$
(75,281
)
$

$
(75,281
)


In May 2018, we elected to terminate outstanding commodity derivative contracts for all WTI oil swaps and certain WTI/Brent basis swaps for July 2018 through December 2019 and all WTI oil sold call options for July 2018 through June 2020. Termination costs totaled approximately $127 million and were calculated in accordance with a bilateral agreement on the cost of elective termination included in these derivative contracts; the present value of the contracts using the forward price curve as of the date termination was elected. No penalties were charged as a result of the elective termination. Concurrently, Berry Corp. entered into commodity derivative contracts consisting of Brent oil swaps for July 2018 through March 2019 and Brent oil purchased put options for January 2019 through March 2020. These Brent oil swaps hedge 1.8 MMBbls in 2018 and 0.9 MMBbls in 2019 at a weighted average price of $75.66. These Brent oil purchased put options provide a weighted-average price floor of $65.00 for 2.8 MMBbls in 2019 and 0.5 MMBbls in 2020. We effected these transactions to move from a WTI-based position to a Brent-based position as well as bring our hedged pricing more in line with current market pricing.


13


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018





Note 5 - Lawsuits, Claims, Commitments and Contingencies
In the normal course of business, we, or our subsidiary, are subject to lawsuits, environmental and other claims and other contingencies that seek, or may seek, among other things, compensation for alleged personal injury, breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief.
On May 11, 2016 our predecessor company filed the Chapter 11 Proceeding. Our bankruptcy case was jointly administered with that of Linn Energy and its affiliates under the caption In re Linn Energy, LLC, et al., Case No. 16-60040. On January 27, 2017, the Bankruptcy Court approved and confirmed our plan of reorganization in the Chapter 11 Proceeding. On the Effective Date the plan became effective and was implemented. The Chapter 11 Proceeding will, however, remain pending until final resolution of all outstanding claims. For further information, see Note 2.
We accrue reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. We have not recorded any reserve balances at June 30, 2018 and December 31, 2017. We also evaluate the amount of reasonably possible losses that we could incur as a result of these matters. We believe that reasonably possible losses that we could incur in excess of reserves accrued on our balance sheet would not be material to our consolidated financial position or results of operations.
We have certain commitments under contracts, including purchase commitments for goods and services. At June 30, 2018, purchase obligations of approximately $13 million included a commitment to invest at least $9 million to construct a new access road in connection with our Piceance assets or provide access to an existing road or to pay 50% of the difference between $12 million and the actual amount spent on such access road construction prior to the end of 2019. If we do not obtain extensions for the road obligation, provide access to an existing road or construct a new access road, we may trigger the payment obligation which, if we were unable to negotiate resolution, would reduce our capital available for investment. Also, as of June 30, 2018, we had entered into agreements to purchase natural gas for our operations in 2018 for approximately $7 million.
We, or our subsidiary, or both, have indemnified various parties against specific liabilities those parties might incur in the future in connection with transactions that they have entered into with us. As of June 30, 2018, we are not aware of material indemnity claims pending or threatened against us.
We have entered into operating lease agreements mainly for office space. Lease payments are generally expensed as part of general and administrative expenses. At June 30, 2018, future net minimum lease payments for non-cancelable operating leases (excluding oil and natural gas and other mineral leases, utilities, taxes and insurance and maintenance expense) totaled:
 
 
Amount
 
(in thousands)
2018
$
676

2019
1,170

2020
157

2021
159

2022
160

Thereafter
36

Total minimum lease payments
$
2,358

 
 
Note 6- Equity
Initial Public Offering of Common Stock
In July, we completed our IPO and as a result, on July 26, 2018, our common stock began trading on the NASDAQ Global Select Market under the ticker symbol BRY. The Company sold 10,497,849 shares and the selling stockholders sold 2,545,630

14


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




shares at a price of $14.00 per share. We used a portion of our proceeds to repurchase 1,802,196 shares of our common stock owned by Benefit Street Partners and Oaktree Capital Management. After giving effect to the IPO and the share repurchase, the number of shares of our common stock outstanding increased by 8,695,653. We and the selling stockholders have granted the underwriters the option to purchase up to an additional 1,534,895 shares and 421,626 shares of common stock, respectively, on the same terms and conditions set forth above.
The Company received approximately $136 million in net proceeds from the offering after deducting underwriting discounts and offering expenses payable by us. We did not receive any proceeds from the sale by the selling stockholders. We used approximately $24 million of the net proceeds to purchase shares of our common stock (at a price equal to the price paid by the underwriters for shares of common stock in the offering) from funds affiliated with Benefit Street Partners and Oaktree Capital Management.
Of the remaining approximately $112 million of net proceeds received by us in the IPO, we used approximately $105 million to repay borrowings under our RBL Facility. This included the $60 million we borrowed on the RBL Facility to make the payment to the holders of our Series A Preferred Stock in connection with the conversion of preferred stock to common stock. We used the remainder for general corporate purposes.
In connection with the IPO, each of the 37.7 million shares of our Series A Preferred Stock was automatically converted into 1.05 shares of our common stock or 39.6 million shares in aggregate and the right to receive a cash payment of $1.75 ("Series A Preferred Stock Conversion"). The cash payment was reduced in respect of any cash dividend paid by the Company on such share of Series A Preferred Stock for any period commencing on or after April 1, 2018. Because we paid the second quarter preferred dividend of $0.15 per share in June, the cash payment for the conversion was reduced to $1.60 per share, or approximately $60 million.
Shares Issued and Outstanding
As of July 31, 2018, there were 81,336,762 shares of common stock issued and outstanding including 167,889 common shares that have vested as of June 30, 2018 relating to the Company's Omnibus Incentive Plan. An additional 1,447,998 unvested restricted stock units and performance restricted stock units were outstanding under the Company's Omnibus Incentive Plan as of July 31, 2018. A further 7,080,000 common shares have been reserved for issuance to the general unsecured creditor group pending resolution of disputed claims.
In March 2018, the board of directors approved a cumulative paid-in-kind dividend on the Series A Preferred Stock for the periods through December 31, 2017. The cumulative dividend was 0.050907 per share and approximately 1,825,000 shares in total. Also in March 2018, the board approved a $0.158 per share, or approximately $5.6 million, cash dividend on the Series A Preferred Stock for the quarter ended March 31, 2018. In both cases, the payments were to stockholders of record as of March 15, 2018. In May 2018 the board of directors approved a $0.15 per share, or approximately $5.6 million cash dividend, on the Series A Preferred Stock for the quarter ended June 30, 2018. The payment was to stockholders of record as of June 7, 2018. In July 2018, all shares our of Series A Preferred Stock, approximately 37.7 million in total, were converted to approximately 39.6 million common shares and, as a result, there were no shares of our Series A Preferred Stock outstanding following the IPO.
On August 21, 2018, our board of directors approved a $0.12 per share quarterly cash dividend on our common stock on a pro-rata basis from the date of our IPO through September 30, 2018, which will result in a payment of $0.09 per share.
Purchase of Common Stock
In connection with our IPO, we entered into stock purchase agreements with funds affiliated with each of Benefit Street Partners and Oaktree Capital Management pursuant to which we purchased an aggregate of 1,802,196 shares of our common stock at a price equal to the net proceeds per share received from the IPO of our common stock before expenses. The stock purchase agreement with funds affiliated with Benefit Street Partners requires us to purchase additional shares at the same price if the underwriters exercise their option to purchase additional shares in the IPO.
Treasury Stock Purchase
In March and April 2018, we entered into settlement agreements with two general unsecured creditors from our bankruptcy process. As a result, we paid approximately $20 million to purchase their claims to our common stock that we have reflected as treasury stock. We do not yet know the final amount of shares out of the 7,080,000 set aside that we will issue to third parties with respect to the unsecured claims. When all unsecured claims are settled, we will be able to assign a share count to the treasury stock. See Note 2 under "Plan of Reorganization" and Note 11 for further discussion of the common shares set aside to settle claims.

15


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




 
Stock-Based Compensation

In July 2018, we became a public company and our stock began trading on the NASDAQ Global Select Market. As a result, the estimate of the fair value of our stock-based compensation awards granted will no longer be based on complex models using inputs and assumptions but will be based on the price of our stock at the date of grant.
On June 27, 2018, our board of directors adopted the Berry Petroleum Corporation 2017 Omnibus Incentive Plan, as amended and restated (our “Restated Incentive Plan”). This plan constitutes an amendment and restatement of the plan as in effect immediately prior to the adoption of the Restated Incentive Plan (the "Prior Plan"). The Prior Plan constituted an amendment and restatement of the plan originally adopted as of June 15, 2017 (the "2017 Plan"). The Restated Incentive Plan provides for the grant, from time to time, at the discretion of the board of directors or a committee thereof, of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards and substitute awards. The maximum number of shares of common stock that may be issued pursuant to an award under the Restated Incentive Plan is 10,000,000 inclusive of the number of shares of common stock previously issued pursuant to awards granted under the Prior Plan or the 2017 Plan. The maximum number of shares remaining that may be issued is approximately 8.3 million.
Included in lease operating expenses and general and administrative expenses is stock-based compensation expense of $44,000 and $1.3 million, respectively, for the three months ended June 30, 2018, and $67,000 and $2.3 million, respectively, for the six months ended June 30, 2018. For the three and six months ended June 30, 2017, including the successor and predecessor periods, there were no such expenses. For the six months ended June 30, 2018, stock-based compensation had an immaterial associated income tax benefit.
The table below summarizes the activity relating to restricted stock units ("RSUs") issued under the 2017 Plan during the six months ended June 30, 2018. The RSUs vest ratably over three years. Unrecognized compensation cost associated with the RSUs at June 30, 2018 is approximately $6.8 million which will be recognized over a weighted average period of approximately two years.

 
Number of shares
Weighted average Grant Date Fair Value
 
(shares in thousands)
December 31, 2017
683

$
10.12

Granted
205

$
11.50

Vested
(166
)
$
11.68

Forfeited
(26
)
$
10.12

June 30, 2018
696

$
10.20



16


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




The table below summarizes the activity relating to the performance-based restricted stock units ("PRSUs") issued under the 2017 Plan during the six months ended June 30, 2018. The PRSUs vest if the Company's stock price reaches certain levels over defined periods of time. Unrecognized compensation cost associated with the PRSUs at June 30, 2018 is approximately $3.8 million which will be recognized over a weighted-average period of approximately two years.

 
Number of shares
Weighted average Grant Date Fair Value
 
(shares in thousands)
December 31, 2017
622

$
7.09

Granted
132

$
7.49

Vested

$

Forfeited
(2
)
$
7.09

June 30, 2018
752

$
7.11

Note 7 - Income taxes
 
Prior to the Effective Date, Berry LLC was a limited liability company treated as a disregarded entity for federal and state income tax purposes, with the exception of the state of Texas. Limited liability companies are subject to Texas margin tax. As such, with the exception of the state of Texas, Berry LLC was not a taxable entity, it did not directly pay federal and state income taxes and recognition was not given to federal and state income taxes for the operations of Berry LLC. Upon emergence from bankruptcy, Berry Corp. acquired the assets of Berry LLC in a taxable asset acquisition as part of the restructuring. Consequently, we are now taxed as a corporation and have no net operating loss carryforwards for the periods prior to February 28, 2017.
 
On December 22, 2017, the U.S. the Tax Cuts and Jobs Act (the “Act”) which made significant changes to the Internal Revenue Code of 1986, including lowering the maximum federal corporate rate from 35 percent to 21 percent and imposing limitations on the use of net operating losses arising in taxable years ending after December 31, 2017.  This was the key contributor to the decrease in our effective rate from 40% in the 2017 Successor periods to 16% and 17% in the three and six months ended June 30, 2018, respectively.  We anticipate earnings for fiscal year 2018, in part due to the termination and resetting of our hedge positions in May 2018. These earnings consequently allow for the release of our valuation allowance, described below, resulting in an effective tax rate less than the maximum federal and applicable state tax rate for the six months ended June 30, 2018. There were no current income taxes during the six months ended June 30, 2018

Our accounting for the U.S. Tax Reform Act is incomplete. As noted at year-end, however, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments to income tax expense for the revaluation of deferred tax assets and liabilities from 35 percent to 21 percent associated with the reduction in the U.S. corporate income tax rate, and for a valuation allowance on certain deferred tax assets impacted by the Act. We have not revised any of the 2017 provisional estimates. Any subsequent adjustments to these amounts will be recorded to income tax expense in the quarter the analysis is complete.

17


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




Note 8 - Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows

Other current assets reported on the condensed consolidated balance sheets included the following:  
 
Berry Corp. (Successor)
 
June 30, 2018
December 31, 2017
 
(in thousands)
Prepaid expenses
$
6,692

$
6,901

Oil inventories, materials and supplies
7,062

5,938

Other
1,227

1,227

 
$
14,981

$
14,066

The major classes of inventory were not material and therefore not stated separately. Other non-current assets at June 30, 2018 and December 31, 2017, included approximately $18 million and $20 million of deferred financing costs, net of amortization, respectively.
           
Accounts payable and accrued expenses on the condensed consolidated balance sheets included the following:

 
Berry Corp. (Successor)
 
June 30, 2018
December 31, 2017
 
(in thousands)
Accounts payable-trade
$
10,698

$
15,469

Accrued expenses
57,531

34,359

Royalties payable
18,811

25,793

Greenhouse gas liability
5,732

10,446

Taxes other than income tax liability
9,428

8,437

Accrued interest
10,970


Other

3,373

 
$
113,170

$
97,877


18


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018





Supplemental Cash Flow Information
Supplemental disclosures to the statements of cash flows are presented below:
 
Berry Corp.
Berry LLC
 
(Successor)
(Predecessor)
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
June 30, 2017
February 28, 2017
 
(in thousands)
 
Supplemental Disclosures of Significant Non-Cash Investing Activities:
 
 
 
  (Decrease) increase in accrued liabilities related to purchases of property and equipment
$
8,614

$
1,172

$
2,249

Supplemental Disclosures of Cash Payments/(Receipts):
 
 
 
  Interest
$
3,298

$
5,261

$
8,057

  Income taxes
$

$
1,168

$

  Reorganization items, net
$
1,352

$
(792
)
$
11,838

 
The following table provides a reconciliation of Cash, Cash Equivalents and Restricted Cash as reported in the Consolidated Statements of Cash Flows to the line items within the Consolidated Balance Sheets:

 
Berry Corp. (Successor)
Berry LLC (Predecessor)
(in thousands)
Six Months Ended
Four Months Ended
Two Months Ended
Beginning of Period
June 30, 2018
June 30, 2017
February 28, 2017
Cash and cash equivalents
$
33,905

$
32,049

$
30,483

Restricted cash
34,833

52,860

197,793

Restricted cash in other noncurrent assets

125

128

Cash, cash equivalents and restricted cash
$
68,738

$
85,034

$
228,404

 
 
 
 
Ending of Period
 
 
 
Cash and cash equivalents
$
3,600

$
3,735

$
32,049

Restricted cash
19,710

38,908

52,860

Restricted cash in other noncurrent assets


125

Cash, cash equivalents and restricted cash
$
23,310

$
42,643

$
85,034



Restricted cash is primarily associated with cash reserved to settle claims with the general unsecured creditors resulting from implementation of the Plan. Cash and cash equivalents consists primarily of highly liquid investments with original maturities of three months or less and are stated at cost, which approximates fair value.
Note 9 - Certain Relationships and Related Party Transactions
In connection with our emergence from bankruptcy, we entered into agreements with certain of our affiliates and with parties who received shares of our common stock and Series A Preferred Stock in exchange for their claims.

19


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018





Transition Services and Separation Agreement (“TSSA”)
On the Effective Date, Berry LLC entered into the TSSA with LINN Energy and certain of its subsidiaries to facilitate the separation of Berry LLC’s operations from LINN Energy’s operations. Pursuant to the TSSA, (i) LINN Energy continued to provide, or cause to be provided, certain administrative, management, operating, and other services and support to the Company during a transitional period following the Effective Date (the “Transition Services”), (ii) the LINN Energy debtors and Berry LLC separated their previously combined enterprise and (iii) the LINN Energy debtors transferred to Berry LLC certain assets that relate to Berry LLC’s properties or its business, in each case under the terms and conditions specified in the TSSA.
Under the TSSA, Berry LLC reimbursed LINN Energy for any and all reasonable, third-party out-of-pocket costs and expenses, without markup, actually incurred by LINN Energy, to the extent documented, in connection with providing the Transition Services. Additionally, Berry LLC paid to LINN Energy a management fee equal to $6 million per month, prorated for partial months, during the period from the Effective Date through the last day of the second full calendar month after the Effective Date (the “Transition Period”) and $2.7 million per month, prorated for partial months, from the first day following the Transition Period through the last day of the second full calendar month thereafter (the “Accounting Period”). During the Accounting Period, the scope of the Transition Services was reduced to specified accounting and administrative functions. The Transition Period under the TSSA ended April 30, 2017, and the Accounting Period ended June 30, 2017.
For the four months ended June 30, 2017, we incurred management fee expenses of approximately $17 million under the TSSA. Since the agreement commenced on the Effective Date, no expenses were incurred for the period ended February 28, 2017.
Note 10 - Acquisitions and Divestitures

Chevron North Midway-Sunset Acquisition
In April 2018, we acquired from LINN Energy Holdings, LLC two leases on an aggregate of 214 acres and a lease option on 490 acres (the "Chevron North Midway-Sunset Acquisition") of land owned by Chevron U.S.A. in the north Midway-Sunset field immediately adjacent to assets we currently operate. We assumed a drilling commitment of approximately $34.5 million over a 5-year term and would assume a further minimum 40 well drilling commitment if we exercise our option; but otherwise we paid no consideration. Our drilling commitment will be tolled for a month for each consecutive 30-day period for which the posted price of WTI is less than $45 per barrel. This transaction is consistent with our business strategy to investigate areas beyond our known productive areas.
Note 11- Earnings Per Share
The Predecessor was organized as a limited liability company and, as such, did not issue any stock. Accordingly, we have not presented earnings per share calculations for the predecessor company periods.

We calculate basic earnings (loss) per share by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during each period. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement, such as those shares contemplated by the Plan, are considered common shares outstanding and are included in the computation of net income (loss) per share. Accordingly, the 40 million shares of common stock contemplated by the Plan, without regard to actual issuance dates, were included in the computation of net income (loss) per share for the three and six months ended June 30, 2018, the three months ended June 30, 2017, and the four months ended June 30, 2017. The actual amount of our common stock that will be issued from the 7,080,000 shares reserved for Unsecured Claims and included in the 40 million shares above, cannot be known until all claims are settled, adjustments have been made based on the stock to be received by Unsecured Claims and claims under the Unsecured Notes and, the final number of shares of common stock to be received per dollar of Unsecured Claims, is known. However, while we do not yet know the final amount of shares that we will issue to third parties, we have entered into agreements in March and April 2018 that materially reduced that number.
The Series A Preferred Stock was not a participating security, therefore, we calculated diluted EPS using the “if-converted" method under which the preferred dividends are added back to the numerator and the convertible preferred stock is assumed to be converted at the beginning of the period. No incremental shares of Series A Preferred Stock were included in the diluted EPS

20


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




calculation for the three and six months ended June 30, 2018, as their effect was antidilutive under the “if-converted” method. However, the convertible preferred stock may potentially dilute basic earnings per share in the future.
In July 2018, all outstanding shares of our Series A Preferred Stock were converted to common shares in connection with the IPO of our common stock (see Note 6).
 
Berry Corp. (Successor)
Berry LLC
 
(Predecessor)
 
Three Months Ended
Three Months Ended
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
February 28, 2017
 
(in thousands except per share amounts)
Basic EPS calculation


 



Net income (loss)
$
(28,061
)
$
12,120

 
$
(21,651
)
23,497

n/a
   less: Dividends on Series A Preferred Stock
(5,650
)
(5,404
)
 
(11,301
)
(7,196
)
n/a
Net income (loss) available to common stockholders
$
(33,711
)
$
6,716

 
$
(32,952
)
$
16,301

n/a
Weighted-average shares of common stock outstanding
33,010

32,920

 
32,971

32,920

n/a
Shares of common stock distributable to holders of Unsecured Claims
7,080

7,080

 
7,080

7,080

n/a
Weighted-average common shares outstanding-basic
40,090

40,000

 
40,051

40,000

n/a
Basic Earnings (loss) per share
$
(0.84
)
$
0.17

 
$
(0.82
)
$
0.41

n/a
Diluted EPS calculation


 
 
 
 
Net income (loss)
$
(28,061
)
$
12,120

 
$
(21,651
)
$
23,497

n/a
  less: Dividends on Series A Preferred Stock
(5,650
)
(5,404
)
 
(11,301
)
(7,196
)
n/a
Net income (loss) available to common stockholders
$
(33,711
)
$
6,716

 
$
(32,952
)
$
16,301

n/a
Weighted-average shares of common stock outstanding
33,010

32,920

 
32,971

32,920

n/a
Shares of common stock distributable to holders of Unsecured Claims
7,080

7,080

 
7,080

7,080

n/a
Weighted-average common shares outstanding-basic
40,090

40,000

 
40,051

40,000

n/a
Dilutive effect of potentially dilutive securities

35,845

 

35,845

n/a
Weighted-average common shares outstanding-diluted
40,090

75,845

 
40,051

75,845

n/a
Diluted Earnings (loss) per share
$
(0.84
)
$
0.16

 
$
(0.82
)
$
0.31

n/a

Note 12- Pro Forma Financial Data

PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial information of Berry Corp. gives effect to the issuance of the 2026 Notes, the Series A Preferred Stock Conversion and the IPO including the application of net proceeds from the IPO. The unaudited pro forma condensed consolidated statement of operations is presented for the six months ended June 30, 2018. The unaudited pro forma condensed consolidated balance sheet is presented as of June 30, 2018. This unaudited pro forma condensed consolidated financial information should be read in conjunction with Berry Corp.’s historical consolidated financial statements as of and for the six months ended June 30, 2018.
The unaudited pro forma condensed consolidated statement of operations gives effect to the issuance of the 2026 Notes, the Series A Preferred Stock Conversion and the IPO, including the application of net proceeds from the offering, as if each had

21


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




been completed as of January 1, 2017. The unaudited pro forma condensed consolidated balance sheet gives effect to the same transactions as if each had been completed on June 30, 2018.
The unaudited pro forma condensed consolidated financial statements are for informational and illustrative purposes only and are not necessarily indicative of the financial results that would have been had the events and transactions occurred on the dates assumed, nor are such financial statements necessarily indicative of the results of operations in future periods. The pro forma adjustments, as described in the accompanying notes, are based upon currently available information. The historical financial information has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the 2026 Notes, the Series A Preferred Stock Conversion, the IPO and the application of net proceeds from the offering, (ii) factually supportable, and (iii) expected to have a continuing impact on the Company’s consolidated results.
Background
2026 Notes
In February 2018, we completed a private issuance of $400 million in aggregate principal amount of 7.00% senior unsecured notes due 2026, which resulted in net proceeds of approximately $391 million after deducting expenses and the initial purchasers' discount. A portion of these proceeds were used to repay borrowings under the RBL Facility and the remainder for general corporate purposes.
Series A Preferred Stock Conversion and Common Stock Offering
In connection with our IPO, we amended the Series A Preferred Stock certificate of designation to provide for the automatic conversion of all outstanding shares of Series A Preferred Stock. Pursuant to the amendment, each outstanding share of Series A Preferred Stock was automatically converted into (i) 1.05 shares of common stock and (ii) the right to receive $1.75, minus the amount of any cash dividend paid by the Company on such share of Series A Preferred Stock in respect of any period commencing on or after April 1, 2018.
We received approximately $136 million of net proceeds from the IPO after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We did not receive any proceeds from the sale of shares by the selling stockholders. We used approximately $24 million of the net proceeds to purchase shares of our common stock (at a price equal to the price paid by the underwriters for shares of common stock in the offering) from funds affiliated with Benefit Street Partners and Oaktree Capital Management. Of the remaining approximately $112 million of net proceeds received by us in the IPO, we used approximately $105 million to repay borrowings under our RBL Facility. This included the amounts we borrowed in July on the RBL Facility to make the payment to the holders of our Series A Preferred Stock in connection with the conversion of preferred stock to common stock. We used the remainder for general corporate purposes.













22


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2018
(in thousands)
 
Berry Corp. (Successor) June 30, 2018
Series A Preferred Stock Conversion and Common Stock Offering
 
Berry Corp. (Successor) Pro Forma
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
3,600

$

(a) (b)
$
3,600

Accounts receivable, net
56,860

 
 
56,860

Restricted cash
19,710

 
 
19,710

Other current assets
14,981

 
 
14,981

Total current assets
95,151


 
95,151

Noncurrent assets:
 
 
 
 
Oil and natural gas properties (successful efforts method)
1,382,777

 
 
1,382,777

Less accumulated depletion and amortization
(88,548)

 
 
(88,548)

 
1,294,229

 
 
1,294,229

Other property and equipment
112,618

 
 
112,618

Less accumulated depreciation
(8,928)

 
 
(8,928)

 
103,690

 
 
103,690

Other noncurrent assets
22,086

 
 
22,086

Total assets
$
1,515,156

$

 
$
1,515,156

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued
expenses
$
113,170

$

 
$
113,170

Derivative instruments
11,447

 
 
11,447

Liabilities subject to compromise
19,710

 
 
19,710

Total current liabilities
144,327


 
144,327

Noncurrent liabilities:
 
 
 
 
Long-term debt
457,333

(51,538
)
(a)
405,795

Derivative instruments
3,563

 
 
3,563

Asset retirement obligation
88,575

 
 
88,575

Other noncurrent liabilities
12,862

 
 
12,862

 
 
 
 
 
Equity:
 
 
 
 
Successor Series A Preferred Stock ($.001 par value, 250,000,000 shares authorized and 37,669,805 shares issued at June 30, 2018)
335,000

(335,000)

(b)

Successor common stock ($.001 par value, 750,000,000 shares authorized and 33,087,889 shares issued at June 30, 2018)
33

48

(a)(b)
81

Additional paid-in-capital
536,188

386,490

(a)(b)
922,678

Treasury stock, at cost
(20,006
)
 
 
(20,006
)
Accumulated deficit
(42,719)

 
 
(42,719)

 
 
 
 
 
Total equity
808,496

51,538

 
860,034

Total liabilities and equity
$
1,515,156

$

 
$
1,515,156


23


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 2018
(in thousands, except per share amounts)
 
Berry Corp. (Successor) Six Months Ended June 30, 2018
Issuance of 2026 Notes
Series A Preferred Stock Conversion and Common Stock Offering
 
Berry Corp. (Successor) Pro Forma
Revenues and other:
 
 
 
 
 
Oil, natural gas and NGL sales
$
263,010

 
 
 
$
263,010

Electricity sales
11,423

 
 
 
11,423

Gains (losses) on oil and natural gas derivatives
(112,787
)
 
 
 
(112,787
)
Marketing revenues
1,302

 
 
 
1,302

Other revenues
317

 
 
 
317

 
163,265



 
163,265

Expenses and other:
 
 
 
 
 
Lease operating expenses
85,819

 
 
 
85,819

Electricity generation expenses
7,725

 
 
 
7,725

Transportation expenses
5,321

 
 
 
5,321

Marketing expenses
987

 
 
 
987

General and administrative expenses
24,466

 
 
 
24,466

Depreciation, depletion and amortization
40,288

 
 
 
40,288

Taxes, other than income taxes
16,972

 
 
 
16,972

Gains on sale of assets and other, net
123

 
 
 
123

 
181,701



 
181,701

Other income and (expenses):
 
 
 
 
 
Interest expense, net of amounts capitalized
(16,951
)
(854
)
 
(c)
(17,805
)
Other, net
(212
)
 
 
 
(212
)
 
(17,163
)
(854
)

(c)
(18,017
)
Reorganization items, net
9,411

 
 
 
9,411

(Loss) income before income taxes
(26,188
)
(854
)

(c)
(27,042
)
Income tax expense (benefit)
(4,537
)
(147
)
 
(c)
(4,684
)
Net income (loss)   
(21,651
)
(707
)

 
(22,358
)
Dividends on Series A Preferred Stock
(11,301
)
 
11,301

(f)

Net income (loss) available to common stockholders   
$
(32,952
)
$
(707
)
$
11,301

 
$
(22,358
)
Net income (loss) per share of common stock:
 
 
 
 
 
Basic
$
(0.82
)
 
 
 
$
(0.26
)
Diluted
$
(0.82
)
 
 
 
$
(0.26
)
Weighted average common shares outstanding
 
 
 
 
 
Basic (g)
40,051

 
46,333

(d) (e)
86,384

Diluted (g)
40,051

 
46,333

(d) (e)
86,384

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

1. Basis of Presentation

The accompanying unaudited pro forma condensed consolidated statement of operations presents the financial information of Berry Corp. assuming the events and transactions had occurred on January 1, 2017. The consolidated balance sheet presents the information assuming the transactions occurred on June 30, 2018. Issuance of 2026 Notes Adjustments represent

24


BERRY PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018




adjustments to give effect to the Company's issuance and net proceeds from the 2026 Notes to the condensed consolidated statement of operations as of the date assumed. Series A Preferred Stock Conversion and Common Stock Offering Adjustments represent adjustments to give effect to the conversion of preferred stock into common stock, including the payment of cash dividends and the common stock offering to the condensed consolidated financial statements as of the date assumed.

2. Pro Forma Balance Sheet Adjustments

(a) Reflects the issuance of 8,695,653 additional net shares of common stock in the offering, the receipt of approximately $112 million of net proceeds, after the repurchase of 1,802,196 shares for approximately $24 million, from funds affiliated with Benefit Street Partners and Oaktree Capital Management in connection with the IPO and the usage of a portion of the net proceeds to pay down the outstanding balance on the RBL Facility. The number of shares and net proceeds does not include a number of shares issued by us equal to the number of shares purchased by us from funds affiliated with Benefit Street Partners and Oaktree Capital Management in connection with the IPO.

(b) Reflects the conversion of the outstanding shares of Series A Preferred Stock into (1) approximately 39.6 million shares of common stock and (2) the cash payment from the IPO net proceeds of $1.60 on each pre-conversion share of Series A Preferred Stock, or approximately $60 million.

3. Pro Forma Statement of Operations Adjustments

Issuance of 2026 Notes Adjustments
 
(c) The issuance of the 2026 Notes was assumed to have occurred on January 1, 2017 for pro forma purposes and to have resulted in net proceeds of $391 million. As a result, borrowings under the RBL Facility would not have been necessary during this period.

The Company calculated the pro forma adjustment to increase interest expense as a result of the higher interest rate on the 2026 Notes and reversing the interest expense and other fees associated with the RBL Facility for the six months ended June 30, 2018 as follows:
(in thousands)
 
Reversal of interest expense, unused fee and LOC fee on the RBL Facility
$
(3,251
)
Reversal of 2026 Notes interest expense
(10,970
)
Pro Forma- RBL Facility letter of credit fee ($7.1 million outstanding at 2.625%)
93

Pro Forma-RBL Facility unused availability fee ($393 million availability at 0.5%)
982

Pro Forma 2026 Notes interest expense.
14,000

Pro Forma adjustment to increase interest expense
$
854


The effective tax rate applied to the increased interest expense was 17.3% for the six months ended June 30, 2018.

Series A Preferred Stock Conversion and Common Stock Offering Adjustments

(d) Reflects basic and diluted income per common share giving effect to the issuance of 8,695,653 shares of common stock in the IPO, assuming the IPO occurred January 1, 2017. The number of shares and net proceeds does not include shares purchased from the selling stockholders in the IPO or a number of shares issued by us equal to the number of shares purchased by us from funds affiliated with Benefit Street Partners and Oaktree Capital Management in connection with the IPO.

(e) Reflects the conversion of the outstanding shares of Series A Preferred Stock into approximately 37.7 million shares of common stock, assumed to occur on January 1, 2017.

(f) Reflects the effect of reversing the Series A Preferred Stock dividends, assuming the IPO and the Series A Preferred Stock Conversion occurred January 1, 2017.

(g) Share count includes 7 million shares reserved for issuance to the general unsecured creditors resulting from the bankruptcy process.

25



Item 2.

 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and related notes presented in this Quarterly Report on form 10-Q, as well as our audited consolidated financial statements for the year ended December 31, 2017 included in the prospectus. When we use the terms “we,” “us,” “our,” the “Company” or similar words, unless the context otherwise requires, on or prior to the Effective Date (see below), we are referring to Berry LLC, our predecessor company and following February 28, 2017, the effective date ("Effective Date") of the Amended Joint Chapter 11 Plan of Linn Acquisition Company, LLC ("Linn Acquisition") and us (the "Plan"), we are referring to Berry Corp. and its subsidiary, Berry LLC, together, the successor company, as applicable.
Our Company
We are a California-based independent upstream energy company engaged primarily in the development and production of conventional oil reserves located onshore in the western United States. Our long-lived, predictable and high margin asset base is uniquely positioned to support our objectives of generating top-tier corporate-level returns and positive free cash flow through commodity price cycles. We believe that executing our strategy across our low-declining production base and extensive inventory of identified drilling locations will result in long-term, capital efficient production growth as well as the ability to return excess free cash flow to stockholders.

We target onshore, low-cost, low-risk, oil-rich reservoirs in the San Joaquin basin of California and the Uinta basin of Utah, and, to a lesser extent, the low geologic risk natural gas resource play in the Piceance basin in Colorado. In the aggregate, the Company’s assets are characterized by:

• high oil content, which makes up more than 80% of our production;
• favorable Brent-influenced crude oil pricing dynamics;
• long-lived reserves with low and predictable production decline rates;
• stable and predictable development and production cost structures;
• a large inventory of low-risk identified development drilling opportunities with attractive full-cycle
economics; and
• potential in-basin organic and strategic opportunities to expand our existing inventory with new
locations of substantially similar geology and economics.

California is and has been one of the most productive oil and natural gas regions in the world. Our asset base is concentrated in the oil-rich San Joaquin basin in California, which has more than 100 years of production history and substantial remaining oil in place. As a result of these attributes, we have a strong understanding of many of the basin’s geologic and reservoir characteristics, leading to predictable, repeatable, low-risk development opportunities.

In California, we focus on conventional, shallow reservoirs, the drilling and completion of which are relatively low-cost in contrast to modern unconventional resource plays. Our decades-old proven completion techniques in these reservoirs include steamflood and low-volume fracture stimulation.

We own additional assets in the Uinta basin in Utah, a stacked, multi-bench, light-oil-prone play with significant undeveloped resources where we have high operational control and additional behind pipe potential, as well as in the Piceance basin in Colorado, a prolific low geologic risk natural gas play where we produce from a conventional, tight sandstone reservoir using proven slick water fracture stimulation techniques to increase recoveries.

Using SEC Pricing as of December 31, 2017, we had estimated total proved reserves of 141,384 MBoe. For the three months ended June 30, 2018, we had average production of approximately 26.5 MBoe/d, of which approximately 80% was oil. In California, our average production for the three months ended June 30, 2018 was 18.8 MBoe/d, of which approximately 100% was oil.






26




Chapter 11 Bankruptcy and Our Emergence

In 2013, the Linn Entities acquired our predecessor company in exchange for LinnCo shares and the assumption of debt with an aggregate value of $4.6 billion. A severe industry downturn, coupled with high leverage and significant fixed charges, led the Linn Entities and, consequently, our predecessor company to initiate the Chapter 11 Proceedings on May 11, 2016.

On February 28, 2017, Berry LLC emerged from bankruptcy as a stand-alone company and wholly-owned subsidiary of Berry Corp. with new management, a new board of directors and new ownership. Through the Chapter 11 Proceedings, the Company significantly improved its financial position from that of Berry LLC while it was owned by the Linn Entities. These improvements included:

• the elimination of approximately $1.3 billion of debt and more than $76 million of annualized interest expense;
• the termination of, or renegotiation of more favorable terms for, several firm transportation and oil sales contracts;
• the anticipated reduction in recurring general and administrative costs as a stand-alone company by following a lean operating model.

On the Effective Date, Berry LLC consummated the following reorganization transactions in accordance with the Plan:

• Linn Acquisition Company, LLC transferred 100% of the outstanding membership interests in Berry LLC to Berry Corp. pursuant to the Assignment Agreement. Under the Assignment Agreement, Berry LLC became a wholly-owned operating subsidiary of Berry Corp.

• The holders of claims under the Pre-Emergence Credit Facility, received (i) their pro rata share of a cash paydown and (ii) pro rata participation in the Emergence Credit Facility. As a result, all outstanding obligations under the Pre-Emergence Credit Facility were canceled and the agreements governing these obligations were terminated.

• Berry LLC, as borrower, entered into the Emergence Credit Facility with the holders of claims under the Pre-Emergence Credit Facility, as lenders, and Wells Fargo Bank, N.A., as administrative agent, providing for a new reserve-based revolving loan with up to $550 million in borrowing commitments.

• The holders of Berry LLC’s Unsecured Notes received a right to their pro rata share of either (i) 32,920,000 shares of common stock in Berry Corp. or, for those non-accredited investors that irrevocably elected to receive a cash recovery, cash distributions from the Cash Distribution Pool and (ii) specified rights to participate the Berry Rights Offerings. As a result, all outstanding obligations under the Unsecured Notes were canceled and the indentures and related agreements governing these obligations were terminated.

• The holders of the Unsecured Claims received a right to their pro rata share of either (i) 7,080,000 shares of common stock in Berry Corp. or (ii) in the event that such holder irrevocably elected to receive a cash recovery, cash distributions from the Cash Distribution Pool. The obligations arising from the Unsecured Claims were extinguished.

• Berry LLC settled all intercompany claims against LINN Energy and its affiliates pursuant to a settlement agreement approved as part of the Plan and the Confirmation Order. The settlement agreement provided Berry LLC with a $25 million general unsecured claim against LINN Energy which Berry LLC has fully reserved.

How We Evaluate Operations

Our management team uses the following metrics to manage and assess the performance of our operations: (a) Adjusted EBITDA; (b) operating expenses; (c) environmental, health & safety (“EH&S”) results; (d) taxes, other than income taxes; (e) general and administrative expenses; (f) production; and (g) levered free cash flow.

Adjusted EBITDA

Adjusted EBITDA is the primary financial and operating measurement that our management uses to analyze and monitor the operating performance of our business. We define Adjusted EBITDA as earnings before interest expense; income taxes; depreciation, depletion, amortization and accretion; exploration expense; derivative gains or losses net of cash received or paid

27


for scheduled derivative settlements; impairments; stock compensation expense; and other unusual, out-of-period and infrequent items, including restructuring and reorganization costs.

Operating expenses

We define operating expenses as lease operating expenses, electricity expenses, transportation expenses, and marketing expenses, offset by the third-party revenues generated by electricity, transportation and marketing activities. The electricity, transportation and marketing activity related revenues are viewed and treated internally as a reduction to operating costs when tracking and analyzing the economics of development projects and the efficiency of our hydrocarbon recovery. Overall, operating expense is used by management as a measure of the efficiency with which operations are performing.

Environmental, health & safety

We are committed to good corporate citizenship in our communities, operating safely and protecting the environment and our employees. We monitor our EH&S performance through various measures, holding our employees and contractors to high standards. Meeting corporate EH&S metrics is a part of our incentive programs for all employees.

Taxes, other than income taxes

Taxes, other than income taxes includes severance taxes, ad valorem and property taxes, greenhouse gas (GHG) allowances, and other taxes. We include these taxes when analyzing the economics of development projects and the efficiency of our hydrocarbon recovery; however, we do not include these taxes in our operating expenses.

General and administrative expenses

We monitor our cash general and administrative expenses as a measure of the efficiency of our overhead activities. Such expenses are a key component of the appropriate level of support our corporate and professional team provides to the development of our assets and our day-to-day operations.

Production

Oil and gas production is a key driver of our operating performance, an important factor to the success of our business, and used in forecasting future development economics. We measure and closely monitor production on a continuous basis, adjusting our property development efforts in accordance with the results. We track production by commodity type and compare it to prior periods and expected results.

Levered free cash flow

Levered free cash flow reflects our financial flexibility; and we use it to plan our internal growth capital expenditures. We define levered free cash flow as Adjusted EBITDA less capital expenditures, interest expense and dividends. Levered free cash flow is our primary metric used in planning capital allocation for maintenance and internal growth opportunities as well as hedging needs and serves as a measure for assessing our financial performance and measuring our ability to generate excess cash from our operations after servicing indebtedness.

Non-GAAP Financial Measures

Adjusted EBITDA, Levered Free Cash Flow and Adjusted Net Income (Loss)

Adjusted EBITDA and Adjusted Net Income (Loss) are not measures of net income (loss) and Levered Free Cash Flow is not a measure of cash flow, in all cases, as determined by GAAP. Adjusted EBITDA and Levered Free Cash Flow are supplemental non-GAAP financial measures used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies.

Adjusted Net Income (Loss) excludes the impact of unusual, out-of-period and infrequent items affecting earnings that vary widely and unpredictably, including non-cash items such as derivative gains and losses. This measure is used by management when comparing results period over period. We define Adjusted Net Income (Loss) as net income (loss) attributable to common stockholders adjusted for derivative gains or losses net of cash received or paid for scheduled derivative settlements, other unusual, out-of-period and infrequent items, including restructuring and reorganization costs and the income tax expense or benefit of these adjustments using our effective tax rate.

28



We define Adjusted EBITDA as earnings before interest expense; income taxes; depreciation, depletion, amortization and accretion; exploration expense; derivative gains or losses net of cash received or paid for scheduled derivative settlements; impairments; stock compensation expense; and other unusual, out-of-period and infrequent items, including restructuring and reorganization costs. We define Levered Free Cash Flow as Adjusted EBITDA less capital expenditures, interest expense and dividends.

Our management believes Adjusted EBITDA provides useful information in assessing our financial condition, results of operations and cash flows and is widely used by the industry and the investment community. The measure also allows our management to more effectively evaluate our operating performance and compare the results between periods without regard to our financing methods or capital structure. Levered Free Cash Flow is used by management as a primary metric to plan capital allocation for maintenance and internal growth opportunities, as well as hedging needs. It also serves as a measure for assessing our financial performance and our ability to generate excess cash from operations to service debt and pay dividends.

While Adjusted EBITDA, Adjusted Net Income (Loss) and Levered Free Cash Flow are non-GAAP measures, the amounts included in the calculation of Adjusted EBITDA, Adjusted Net Income (Loss) and Levered Free Cash Flow were computed in accordance with GAAP. These measures are provided in addition to, and not as an alternative for, income and liquidity measures calculated in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance, such as our cost of capital and tax structure, as well as the historic cost of depreciable and depletable assets. Our computations of Adjusted EBITDA, Adjusted Net Income (Loss) and Levered Free Cash Flow may not be comparable to other similarly titled measures used by other companies. Adjusted EBITDA, Adjusted Net Income (Loss) and Levered Free Cash Flow should be read in conjunction with the information contained in our financial statements prepared in accordance with GAAP.

Adjusted General and Administrative Expenses

Adjusted General and Administrative Expenses is a supplemental non-GAAP financial measure that is used by management. We define Adjusted General and Administrative Expenses as general and administrative expenses adjusted for non-recurring restructuring and other costs and non-cash stock compensation expense. Management believes Adjusted General and Administrative Expenses is useful because it allows us to more effectively compare our performance from period to period. We exclude the items listed above from general and administrative expenses in arriving at Adjusted General and Administrative
Expenses because these amounts can vary widely and unpredictably in nature, timing, amount and frequency and stock compensation expense is non-cash in nature. Adjusted General and Administrative Expenses should not be considered as an alternative to, or more meaningful than, general and administrative expenses as determined in accordance with GAAP. Our computations of Adjusted General and Administrative Expenses may not be comparable to other similarly titled measures of other companies.
























29










The following tables present reconciliations of the non-GAAP financial measure Adjusted EBITDA and Levered Free Cash Flow to the GAAP financial measures of net income (loss) and net cash provided or used by operating activities for each of the periods indicated.
 
Berry Corp. (Successor)
Berry LLC (Predecessor)
 
Three Months Ended
Three Months Ended
Three Months Ended
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
March 31, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
February 28, 2017
 
(in thousands)
Adjusted EBITDA reconciliation to net income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(28,061
)
$
6,410

$
12,120

 
$
(21,651
)
$
23,497

$
(502,964
)
Add (Subtract):
 
 
 
 
 
 
 
Depreciation, depletion, amortization and accretion
21,859

18,429

20,549

 
40,288

27,571

28,149

Interest expense
9,155

7,796

4,885

 
16,951

6,600

8,245

Income tax expense (benefit)
(5,476
)
939

7,961

 
(4,537
)
15,435

230

Derivative (gain) loss
78,143

34,644

(23,962
)
 
112,787

(48,085
)
(12,886
)
Net cash received (paid) for scheduled derivative settlements
(28,261
)
(17,849
)
4,725

 
(46,110
)
5,856

534

(Gain) loss on sale of assets and other
123


5

 
123

5

(183
)
Stock compensation expense
1,278

1,042


 
2,320



Non-recurring restructuring and other costs
1,714

2,047

16,846

 
3,761

24,442


Reorganization items, net
(456
)
(8,955
)
(713
)
 
(9,411
)
593

507,720

Adjusted EBITDA
50,018

44,503

42,416

 
94,521

55,914

28,845

Net cash (received) paid for scheduled derivative settlements
28,261

17,849

(4,725
)
 
46,110

(5,856
)
(534
)
Adjusted EBITDA unhedged
$
78,279

$
62,352

$
37,691

 
$
140,631

$
50,058

$
28,311










30






 
Berry Corp. (Successor)
Berry LLC (Predecessor)
 
Three Months Ended
Three Months Ended
Three Months Ended
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
March 31, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
February 28, 2017
 
(in thousands)
Adjusted EBITDA and Levered Free Cash Flow reconciliation to net cash provided (used) by operating activities:
 
 
 
 
 
 
 
Net cash provided (used) by operating activities
$
(77,394
)
$
27,846

$
20,703

 
$
(49,548
)
$
44,937

$
22,431

Add (Subtract):
 
 
 
 
 
 
 
Cash interest payments
644

2,654

4,860

 
3,298

5,261

8,057

Cash income tax payments


1,168

 

1,168


Cash reorganization item (receipts) payments
1,047

305

(1,384
)
 
1,352

(792
)
11,838

Non-recurring restructuring and other costs
1,714

2,047

16,846

 
3,761

24,442


Derivative early termination payment
126,949



 
126,949



Other changes in operating assets and liabilities
(2,942
)
11,651

223

 
8,709

(19,102
)
(13,323
)
Other, net



 


(158
)
Adjusted EBITDA
50,018

44,503

42,416

 
94,521

55,914

28,845

Subtract:
 
 
 
 
 
 
 
Capital expenditures
(39,196
)
(15,732
)
(24,697
)
 
(54,928
)
(34,050
)
(5,407
)
Interest expense
(9,155
)
(7,796
)
(4,885
)
 
(16,951
)
(6,600
)
(8,245
)
Dividends
(5,650
)
(5,650
)
(5,404
)
 
(11,301
)
(7,196
)

Levered Free Cash Flow
(3,983
)
15,325

7,430

 
11,341

8,068

15,193

Net cash (received) paid for scheduled derivative settlements
28,261

17,849

(4,725
)
 
46,110

(5,856
)
(534
)
Levered Free Cash Flow unhedged
$
24,278

$
33,174

$
2,705

 
$
57,451

$
2,212

$
14,659















31







The following table presents a reconciliation of the non-GAAP financial measure Adjusted Net Income (Loss) to the GAAP financial measure of Net income (loss) attributable to common stockholders.
 
Berry Corp. (Successor)
Berry LLC (Predecessor)
 
Three Months Ended
Three Months Ended
Three Months Ended
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
March 31, 2018
June 30, 2017
June 30, 2018
June 30, 2017
February 28, 2017
Adjusted Net Income (Loss) reconciliation to Net income (loss) attributable to common stockholders
(in thousands)
Net income (loss) attributable to common stockholders
$
(33,711
)
$
760

$
6,716

$
(32,952
)
$
16,301

$
(502,964
)
 
 
 
 
 
 
 
Add (Subtract):
 
 
 
 
 
 
Losses (gains) on oil and natural gas derivatives
78,143

34,644

(23,962
)
112,787

(48,085
)
(12,886
)
Net cash received (paid) for scheduled derivative settlements
(28,261
)
(17,849
)
4,725

(46,110
)
5,856

534

Losses (gains) on sale of assets and other, net
123


5

123

5

(183
)
Non-recurring restructuring and other costs
1,714

2,047

16,846

3,761

24,442


Reorganization items, net
(456
)
(8,955
)
(713
)
(9,411
)
593

507,720

 
51,263

9,887

(3,099
)
61,150

(17,189
)
495,185

Income tax (expense) benefit of adjustments at effective tax rate
(8,370
)
(1,263
)
1,229

(10,594
)
6,815

 n/a

Adjusted Net Income (Loss)
$
9,182

$
9,384

$
4,846

$
17,604

$
5,927

$
(7,779
)

32


The following table presents a reconciliation of the non-GAAP financial measure Adjusted General and Administrative Expenses to the GAAP financial measure of general and administrative expenses for each of the periods indicated.
 
Berry Corp. (Successor)
Berry LLC (Predecessor)
 
Three Months Ended
Three Months Ended
Three Months Ended
 
Six Months Ended
Four Months Ended
Two Months Ended
 
June 30, 2018
March 31, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
February 28, 2017
 
(in thousands)
Adjusted General and Administrative Expense reconciliation to general and administrative expenses:
 
 
 
 
 
 
 
General and administrative expenses
$
12,482

$
11,985

$
22,257

 
$
24,466

$
31,800

$
7,964

Subtract:
 
 
 
 
 
 
 
Non-recurring restructuring and other costs
(1,714
)
(2,047
)
(16,846
)
 
(3,761
)
(24,442
)

Non-cash stock compensation expense
(1,260
)
(1,019
)

 
(2,279
)


Adjusted General and Administrative Expenses
$
9,508

$
8,919

$
5,411

 
$
18,426

$
7,358

$
7,964

 
 
 
 
 
 
 
 

Factors Affecting the Comparability of Our Financial Condition and Results of Operations

Basis of Presentation and Fresh-Start Accounting

Upon Berry LLC’s emergence from bankruptcy, we adopted fresh-start accounting, which, with the recapitalization upon emergence from bankruptcy, resulted in Berry Corp. becoming the financial reporting entity in our corporate group.

Unless otherwise noted or suggested by context, all financial information and data and accompanying financial statements and corresponding notes, as contained in this Quarterly Report on Form 10-Q, on or prior to the Effective Date, reflect the actual historical results of operations and financial condition of our predecessor company for the periods presented and do not give effect to the Plan or any of the transactions contemplated thereby or the adoption of fresh-start accounting. Following the Effective Date, they reflect the actual historical results of operations and financial condition of Berry Corp. on a consolidated basis and give effect to the Plan and any of the transactions contemplated thereby and the adoption of fresh-start accounting. Thus, the financial information presented herein on or prior to the Effective Date is not comparable to Berry Corp.’s performance or financial condition after the Effective Date. As a result, “black-line” financial statements are presented to distinguish between Berry LLC as the predecessor and Berry Corp. as the successor.

Berry Corp.’s financial statements reflect the application of fresh-start accounting under GAAP. GAAP requires that the financial statements, for periods subsequent to the Chapter 11 Proceeding, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on Berry Corp.’s as well as Berry LLC’s statements of operations. In addition, Berry Corp.’s balance sheet classifies the cash distributions from the Cash Distribution Pool as “liabilities subject to compromise.” Prepetition unsecured and under-secured obligations that were impacted by the bankruptcy reorganization process have been classified as “liabilities subject to compromise” on our balance sheet.

The main actions we took affecting comparability between periods presented include the reorganization of Berry LLC through bankruptcy, entry into the RBL Facility, issuance of the 2026 Notes, dividends on and conversion of Series A Preferred Stock and completion of the IPO. These actions are described above under "-Chapter 11 Bankruptcy and our Emergence" and below in "Liquidity and Capital Resources."
 

33


Capital Expenditures and Capital Budget

For the three and six months ended June 30, 2018, our capital expenditures were approximately $39 million and $54 million respectively, on an accrual basis excluding acquisitions.

Following Berry LLC’s emergence from bankruptcy and separation from the Linn Entities, we increased our pace of development and have continued to do so in 2018. Our 2018 anticipated capital expenditure budget of approximately $140 to $160 million represents an increase of approximately 107% over our 2017 capital expenditures, including the successor and predecessor periods, of approximately $73 million. Based on current commodity prices and a drilling success rate comparable to our historical performance, we believe we will be able to fund our 2018 capital program exclusively with our levered free cash flow. We expect to:
• employ:
• three drilling rigs in California for the remainder of 2018;
• one additional drilling rig assigned to drilling opportunities in Utah in the second half of 2018;
• drill approximately 180 to 190 gross development wells in 2018, of which we expect at least
175 will be in California.
The table below sets forth the expected allocation of our 2018 capital expenditure budget by area as compared to the allocation of our 2017 capital expenditures.
 
Capital Expenditure by Area
 
2018 Budget
2017 Actual
 
(in millions)
California
$122-136


$71

Uinta
12-16

1

Piceance
1-2

1

East Texas


Corporate
5-6


Total
$140-160


$73

The amount and timing of these capital expenditures is within our control and subject to our management’s discretion. We retain the flexibility to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, natural gas and NGLs, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. Any postponement or elimination of our development drilling program could result in a reduction of proved reserve volumes and materially affect our business, financial condition and results of operations.
Chevron North Midway-Sunset Acquisition
In April 2018, we completed the Chevron North Midway-Sunset Acquisition. We assumed a drilling commitment for the 214 acres of approximately $34.5 million to drill 115 wells, of which none have been drilled, on or before April 1, 2020, which has been extended to April 1, 2022, and would assume an additional 40 well drilling commitment if we exercise our option on the 490 acres. We paid no other consideration for the acquisition. Our drilling commitment will be tolled for a month for each consecutive 30-day period for which the posted price of WTI is less than $45 per barrel. Our 2018 anticipated capital expenditure budget does not currently include funding for drilling wells against the assumed drilling commitment, but we have designated funds for drilling appraisal wells to determine whether to exercise the option. This transaction is consistent with
our business strategy to investigate areas beyond our known productive areas.

Commodity Derivatives
Recently, we have utilized swap