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 March 31, 2020
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 Corporation (bry)
(Exact name of registrant as specified in its charter)

Delaware
(State of incorporation or organization)
 
81-5410470
(I.R.S. Employer Identification Number)
16000 Dallas Parkway, Suite 500
Dallas, Texas 75248
(661) 616-3900
(Address of principal executive offices, including zip code
Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol
BRY
Name of each exchange on which registered
Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 ý
 
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 April 30, 2020              79,758,415



Table of Contents

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

The financial information and certain other information presented in this report have been rounded to the nearest whole number or the nearest decimal. Therefore, the sum of the numbers in a column may not conform exactly to the total figure given for that column in certain tables in this report. In addition, certain percentages presented in this report reflect calculations based upon the underlying information prior to rounding and, accordingly, may not conform exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers, or may not sum due to rounding.





Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, 2020
 
December 31, 2019
 
(in thousands, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1

 
$

Accounts receivable, net of allowance for doubtful accounts of $2,303 at March 31, 2020 and $1,103 at December 31, 2019
48,602

 
71,867

Derivative instruments
169,859

 
9,166

Other current assets
19,730

 
19,399

Total current assets
238,192

 
100,432

Noncurrent assets:
 
 
 
Oil and natural gas properties
1,357,496

 
1,675,717

Accumulated depletion and amortization
(146,158
)
 
(209,105
)
Total oil and natural gas properties, net
1,211,338

 
1,466,612

Other property and equipment
109,094

 
135,117

Accumulated depreciation
(24,819
)
 
(25,462
)
Total other property and equipment, net
84,275

 
109,655

Derivative instruments
15,245

 
525

Other noncurrent assets
10,480

 
12,974

Total assets
$
1,559,530

 
$
1,690,198

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
108,720

 
$
151,811

Derivative instruments

 
4,817

Total current liabilities
108,720

 
156,628

Noncurrent liabilities:
 
 
 
Long-term debt
403,663

 
394,319

Derivative instruments
283

 
141

Deferred income taxes
35,404

 
9,057

Asset retirement obligation
134,877

 
124,019

Other noncurrent liabilities
26,757

 
33,586

Commitments and Contingencies - Note 4

 


Equity:
 
 
 
Common stock ($.001 par value; 750,000,000 shares authorized; 84,863,263 and 84,655,222 shares issued; and 79,751,017 and 79,542,976 shares outstanding, at March 31, 2020 and December 31, 2019, respectively)
85

 
85

Additional paid-in-capital
904,072

 
901,830

Treasury stock, at cost, (5,112,246 shares at March 31, 2020 and at December 31, 2019)
(49,995
)
 
(49,995
)
Retained earnings (deficit)
(4,336
)
 
120,528

Total equity
849,826

 
972,448

Total liabilities and equity
$
1,559,530

 
$
1,690,198

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

1

Table of Contents

BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands, except per share amounts)
Revenues and other:
 
 
 
Oil, natural gas and natural gas liquids sales
$
122,098

 
$
131,102

Electricity sales
5,461

 
9,729

Gains (losses) on oil derivatives
211,229

 
(65,239
)
Marketing revenues
453

 
830

Other revenues
24

 
117

Total revenues and other
339,265

 
76,539

Expenses and other:
 
 
 
Lease operating expenses
50,752

 
57,928

Electricity generation expenses
3,946

 
7,760

Transportation expenses
1,822

 
2,173

Marketing expenses
430

 
851

General and administrative expenses
19,337

 
14,340

Depreciation, depletion, and amortization
35,329

 
24,585

Impairment of oil and gas properties
289,085

 

Taxes, other than income taxes
4,352

 
8,086

Losses (gains) on natural gas derivatives
12,035

 
(2,115
)
Other operating expenses
2,202

 
1,245

Total expenses and other
419,290

 
114,853

Other (expenses) income:
 
 
 
Interest expense
(8,920
)
 
(8,805
)
Other, net
(6
)
 
154

Total other (expenses) income
(8,926
)
 
(8,651
)
Reorganization items, net

 
(231
)
Loss before income taxes
(88,951
)
 
(47,196
)
Income tax expense (benefit)
26,349

 
(13,098
)
Net loss
$
(115,300
)
 
$
(34,098
)
 
 
 
 
Net loss per share:
 
 
 
Basic
$
(1.45
)
 
$
(0.42
)
Diluted
$
(1.45
)
 
$
(0.42
)


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

2

Table of Contents

BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)

 
Three-Month Period Ended March 31, 2019
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained Earnings
 
Total Equity
 
(in thousands)
December 31, 2018
$
82

 
$
914,540

 
$
(24,218
)
 
$
116,042

 
$
1,006,446

Shares withheld for payment of taxes on equity awards and other

 
(270
)
 

 

 
(270
)
Stock based compensation

 
1,498

 

 

 
1,498

Purchases of treasury stock

 

 
(24,375
)
 

 
(24,375
)
Purchase of rights to common stock(1)

 
(20,265
)
 
20,265

 

 

Common stock issued to settle unsecured claims
3

 
(3
)
 

 

 

Dividends declared on common stock, $0.12/share

 

 

 
(10,072
)
 
(10,072
)
Net loss

 

 

 
(34,098
)
 
(34,098
)
March 31, 2019
$
85

 
$
895,500

 
$
(28,328
)
 
$
71,872

 
$
939,129


 
Three-Month Period Ended March 31, 2020
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained Earnings (Deficit)
 
Total Equity
 
(in thousands)
December 31, 2019
$
85

 
$
901,830

 
$
(49,995
)
 
$
120,528

 
$
972,448

Shares withheld for payment of taxes on equity awards and other

 
(794
)
 

 

 
(794
)
Stock based compensation

 
3,036

 

 

 
3,036

Dividends declared on common stock, $0.12/share

 

 

 
(9,564
)
 
(9,564
)
Net loss

 

 

 
(115,300
)
 
(115,300
)
March 31, 2020
$
85

 
$
904,072

 
$
(49,995
)
 
$
(4,336
)
 
$
849,826

__________
(1) In 2018, we entered into several settlement agreements with general unsecured creditors from our bankruptcy process. We paid approximately $20 million to purchase their claims to our common stock. These claims were settled in February 2019 with no shares issued.

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



3

Table of Contents

BERRY CORPORATION (bry)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(115,300
)
 
$
(34,098
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation, depletion and amortization
35,329

 
24,585

Amortization of debt issuance costs
1,338

 
1,255

Impairment of oil and gas properties
289,085

 

Stock-based compensation expense
2,922

 
1,474

Deferred income taxes
26,347

 
(13,098
)
Increase in allowance for doubtful accounts
1,200

 
427

Other operating expenses
1,575

 
1,245

Derivative activities:
 
 
 
Total (gains) losses
(199,194
)
 
63,124

Cash settlements on derivatives
19,625

 
14,904

Changes in assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
22,074

 
(6,084
)
Increase in other assets
(331
)
 
(717
)
Decrease in accounts payable and accrued expenses
(29,179
)
 
(29,854
)
Decrease in other liabilities
(11,008
)
 
(2,066
)
Net cash provided by operating activities
44,483

 
21,097

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
Development of oil and natural gas properties
(45,542
)
 
(47,679
)
Purchases of other property and equipment
(1,227
)
 
(1,419
)
Changes in capital investment accruals
3,533

 
(3,693
)
Other
198

 

Net cash used in investing activities
(43,038
)
 
(52,791
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings under RBL credit facility
124,100

 
15,350

Repayments on RBL credit facility
(115,000
)
 
(15,350
)
Dividends paid on common stock
(9,750
)
 
(9,813
)
Purchase of treasury stock

 
(25,241
)
Shares withheld for payment of taxes on equity awards and other
(794
)
 
(270
)
Net cash used in financing activities
(1,444
)
 
(35,324
)
Net increase (decrease) in cash and cash equivalents
1

 
(67,018
)
Cash and cash equivalents:
 
 
 
Beginning

 
68,680

Ending
$
1

 
$
1,662



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

4

Table of Contents
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)







Note 1 - Basis of Presentation
Effective February 18, 2020, Berry Petroleum Corporation changed its name to Berry Corporation (bry) and introduced a new logo. We believe that the name Berry Corporation (bry) is a name that better represents our progressive approach to evolving and growing the business in today’s dynamic oil and gas industry.
“Berry Corp.” refers to Berry Corporation (bry), a Delaware corporation, which is the sole member of Berry Petroleum Company, LLC ("Berry LLC").

As the context may require, the “Company”, “we”, “our” or similar words refer to (i) Berry Corp. and Berry LLC, its consolidated subsidiary, as a whole or (ii) either Berry Corp. or Berry LLC.
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 (the “U.S.”), in California (in the San Joaquin and Ventura basins), Utah (in the Uinta basin), and Colorado (in the Piceance basin).
Principles of Consolidation and Reporting
The condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In management’s opinion, the accompanying financial statements contain all normal, recurring adjustments that are necessary to fairly present our interim unaudited condensed consolidated financial statements. We eliminated all significant intercompany transactions and balances 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.

We prepared this report pursuant to the rules and regulations of the U.S. Security and Exchange Commission (“SEC”) applicable to interim financial information, which permit the omission of certain disclosures to the extent they have not changed materially since the latest annual financial statements. We believe our disclosures are adequate to make the disclosed information not misleading. The results reported in these unaudited condensed consolidated financial statements may not accurately forecast results for future periods. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2019.
Reclassification
We reclassified certain prior year amounts in the cash flow statements to conform to the current year presentation. These reclassifications had no material impact on the financial statements.
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, 2020, including interim periods within those fiscal years. The FASB has issued a proposal to further delay implementation, which has not been finalized yet. We are currently identifying our lease population in accordance with the new lease standard. We expect the adoption of these rules to

5

Table of Contents
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

increase other assets and other liabilities on our balance sheet and we are currently evaluating the impact on our consolidated results of operations.
In December 2019, the FASB issued rules which simplify the accounting for income taxes. 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, 2021, including interim periods within those fiscal years. We are currently evaluating the impact of these rules on our consolidated financial statements.
In March 2020, the FASB issued rules providing optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the reference rate reform, if certain criteria are met. The optional expedient for contract modifications applies to contract modifications that replace a reference rate affected by the reference rate reform, such as the London Interbank Offered Rate (“LIBOR”). Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. We are currently evaluating the impact of these rules on our consolidated financial statements.
Note 2 - Debt
The following table summarizes our outstanding debt:
 
March 31, 2020
 
December 31, 2019
 
Interest Rate
 
Maturity
 
Security
 
(in thousands)
 
 
 
 
 
 
RBL Facility
$
10,950

 
$
1,850

 
variable rates
4.0% (2020) and 5.5% (2019), respectively
 
July 29, 2022
 
Mortgage on 85% of Present Value of proven oil and gas reserves and lien on other assets
2026 Notes
400,000

 
400,000

 
7.0%
 
February 15, 2026
 
Unsecured
Long-Term Debt - Principal Amount
410,950

 
401,850

 
 
 
 
 
 
Less: Debt Issuance Costs
(7,287
)
 
(7,531
)
 
 
 
 
 
 
Long-Term Debt, net
$
403,663

 
$
394,319

 
 
 
 
 
 

Deferred Financing Costs

We incurred legal and bank fees related to the issuance of debt. At March 31, 2020 and December 31, 2019, debt issuance costs for the RBL Facility (as defined below) reported in “other noncurrent assets” on the balance sheet were approximately $10 million and $11 million net of amortization, respectively. At March 31, 2020 and December 31, 2019, debt issuance costs, net of amortization, for the unsecured notes due February 2026 (the “2026 Notes”) reported in Long-Term Debt, net were approximately $7 million and $8 million, respectively.
For the three months ended March 31, 2020 and March 31, 2019, the amortization expense for the RBL Facility and 2026 Notes were both approximately $1 million and was included in “interest expense” in 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 Notes was approximately $164 million and $376 million at March 31, 2020 and December 31, 2019, respectively.

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Table of Contents
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The RBL Facility
On July 31, 2017, we entered into a credit agreement (“RBL Facility”). The RBL Facility provides for a revolving loan with up to $1.5 billion of commitments, subject to a reserve borrowing base. In late 2019, we completed a borrowing base redetermination under our RBL Facility that set our borrowing base to $500 million and reaffirmed our elected commitment amount at $400 million. The RBL Facility matures on July 29, 2022, unless terminated earlier in accordance with the RBL Facility terms. Borrowing base redeterminations generally become effective each May and November, although each of us and the administrative agent may make one interim redetermination between scheduled redeterminations. While we have submitted our most recent borrowing base redetermination, we have not yet received the results.
The RBL Facility contains customary events of default and remedies for credit facilities of a similar nature. If we do not comply with the financial and other covenants in the RBL Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the RBL Facility and exercise all of their other rights and remedies, including foreclosure on all of the collateral.
The RBL Facility requires us to maintain on a consolidated basis as of each quarter-end (i) a Leverage Ratio of no more than 4.0 to 1.0 and (ii) a Current Ratio of at least 1.0 to 1.0. The RBL Facility also contains customary restrictions. As of March 31, 2020, our Leverage Ratio and Current Ratio were 1.4 to 1.0 and 4.2 to 1.0, 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 under the RBL Facility as of March 31, 2020.
As of March 31, 2020, we had approximately $11 million in borrowings outstanding, $7 million in letters of credit outstanding, and approximately $382 million of available borrowings capacity under the RBL Facility.
Bond Repurchase Program
In February 2020, our Board of Directors adopted a program to spend up to $75 million for the opportunistic repurchase of our 2026 Notes. The manner, timing and amount of any purchases will be determined based on our evaluation of market conditions, compliance with outstanding agreements and other factors, may be commenced or suspended at any time without notice and does not obligate Berry Corp. to purchase the 2026 Notes during any period or at all.
Corporate Organization

Berry Corp., as Berry LLC’s parent company, has no independent assets or operations. Any guarantees of potential future registered debt securities by Berry Corp. or Berry LLC would be full and unconditional. Berry Corp. and Berry LLC currently do not have any other subsidiaries. In addition, there are no significant restrictions upon the ability of Berry LLC to distribute funds to Berry Corp. by distribution or loan other than under the RBL Facility. None of the assets of Berry Corp. or Berry LLC represent restricted net assets.

The RBL Facility permits Berry LLC to make distributions to Berry Corp. so long as both before and after giving pro forma effect to such distribution no default or borrowing base deficiency exists, availability equals or exceeds 15% of the then effective borrowing base, and Berry Corp. demonstrates a pro forma leverage ratio less than or equal to 2.75 to 1.00. The conditions are currently met with significant margin.

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Table of Contents
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 3 - Derivatives
We utilize derivatives, such as swaps, puts and calls, to hedge a portion of our forecasted oil production and gas purchases to reduce exposure to fluctuations in oil and natural gas prices, which addresses our market risk. We target covering our operating expenses and a majority of our fixed charges, including capital for sustained production levels, interest and dividends, with the oil hedges for a period of up to two years out. Additionally, we target fixing the price for a large portion of our natural gas purchases used in our steam operations for up to two years. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations, which we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions.
For fixed-price oil swaps, we make settlement payments for prices above the indicated weighted-average price per barrel of Brent or WTI and receive settlement payments for prices below the indicated weighted‑average price per barrel of Brent or WTI.
For our purchased oil calls, we would receive settlement payments for prices above the indicated weighted-average price per barrel of Brent.
For fixed-price gas purchase swaps, we are the buyer so we make settlement payments for prices below the weighted-average price per MMBtu and receive settlement payments for prices above the weighted-average price per MMBtu.
We use oil swaps and puts to protect against decreases in the oil price and natural gas swaps to protect against increases in natural gas prices. We do not enter into derivative contracts for speculative trading purposes and have not accounted for our derivatives as cash-flow or fair-value hedges. The changes in fair value of these instruments are recorded in current earnings. (Gains) losses on oil hedges are classified in the revenues and other section of the statement.
As of March 31, 2020, we had the following crude oil production and gas purchases hedges.
 
Q2 2020
 
Q3 2020
 
Q4 2020
 
FY 2021
 
 
 
 
 
 
 
 
Fixed Price Oil Swaps (Brent):
 
 
 
 
 
 
 
  Hedged volume (MBbls)
2,184

 
2,208

 
2,208

 
3,282

  Weighted-average price ($/Bbl)
$
59.91

 
$
59.85

 
$
59.85

 
$
47.19

Fixed Price Oil Swaps (WTI):
 
 
 
 
 
 
 
  Hedged volume (MBbls)
30

 

 

 

  Weighted-average price ($/Bbl)
$
61.75

 
$

 
$

 
$

Purchased Oil Calls Options (Brent):
 
 
 
 
 
 
 
Hedged volume (MBbls)
273

 
276

 
276

 

Weighted-average price ($/Bbl)
$
65.00

 
$
65.00

 
$
65.00

 
$

Fixed Price Gas Purchase Swaps (Kern, Delivered):
 
 
 
 
 
 
 
  Hedged volume (MMBtu)
5,005,000

 
5,060,000

 
3,840,000

 
8,500,000

  Weighted-average price ($/MMBtu)
$
2.89

 
$
2.89

 
$
2.73

 
$
2.62

Fixed Price Gas Purchase Swaps (SoCal Citygate):
 
 
 
 
 
 
 
  Hedged volume (MMBtu)
455,000

 
460,000

 
155,000

 

  Weighted-average price ($/MMBtu)
$
3.80

 
$
3.80

 
$
3.80

 
$

In April 2020 we added fixed price gas purchase swaps (Kern, Delivered) of 10,000 MMbtu/d at $2.79 beginning November 2020 through October 2021.


8

Table of Contents
BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Our commodity derivatives are measured at fair value using industry-standard models with various inputs including publicly available underlying commodity prices and forward curves, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. These commodity derivatives are subject to counterparty netting. The following tables present the fair values (gross and net) of our outstanding derivatives as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
Balance Sheet
Classification
 
Gross Amounts
Recognized at Fair Value
 
Gross Amounts Offset
in the Balance Sheet
 
Net Fair Value Presented 
on the Balance Sheet
 
(in thousands)
Assets:
 
 
 
 
 
 
 
  Commodity Contracts
Current assets
 
$
181,696

 
$
(11,837
)
 
$
169,859

  Commodity Contracts
Non-current assets
 
16,033

 
(788
)
 
15,245

Liabilities:
 
 
 
 
 
 
 
  Commodity Contracts
Current liabilities
 
(11,837
)
 
11,837

 

  Commodity Contracts
Non-current liabilities
 
(1,071
)
 
788

 
(283
)
Total derivatives
 
 
$
184,821

 
$

 
$
184,821


 
December 31, 2019
 
Balance Sheet
Classification
 
Gross Amounts
Recognized at Fair Value
 
Gross Amounts Offset
in the Balance Sheet
 
Net Fair Value Presented 
on the Balance Sheet
 
(in thousands)
Assets:
 
 
 
 
 
 
 
  Commodity Contracts
Current assets
 
$
17,799

 
$
(8,633
)
 
$
9,166

  Commodity Contracts
Non-current assets
 
773

 
(248
)
 
525

Liabilities:
 
 
 
 
 
 
 
  Commodity Contracts
Current liabilities
 
(13,450
)
 
8,633

 
(4,817
)
  Commodity Contracts
Non-current liabilities
 
(389
)
 
248

 
(141
)
Total derivatives
 
 
$
4,733

 
$

 
$
4,733

By using derivative instruments to economically hedge exposure to changes in commodity prices, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk. We do not receive collateral from our counterparties.
We minimize the credit risk in derivative instruments by limiting our exposure to any single counterparty. In addition, our RBL Facility prevents us from entering into hedging arrangements that are secured, except with our lenders and their affiliates that have margin call requirements, that otherwise require us to provide collateral or with a non-lender counterparty that does not have an A- or A3 credit rating or better from Standards & Poor’s or Moody’s, respectively. In accordance with our standard practice, our commodity derivatives are subject to counterparty netting under agreements governing such derivatives which partially mitigates the counterparty nonperformance risk.
Note 4 - 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.
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 March 31,

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BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2020 and December 31, 2019. 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, 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 March 31, 2020, we are not aware of material indemnity claims pending or threatened against us.
We have certain commitments under contracts, including purchase commitments for goods and services. We previously had an obligation to a counterparty in connection with our Piceance assets to either build a road or secure a license for alternative access, in lieu of paying a $6 million penalty. As of December 31, 2019, we fulfilled the obligation by delivering the access license pursuant to the agreement. The counterparty has since filed a claim challenging the sufficiency of such access which we dispute. We intend to defend the matter vigorously, however, given the uncertainty of litigation and the preliminary stage of the case, among other things, at this time we cannot estimate the reasonable possible loss, if any, that may result from this action.
Note 5 - Equity
Cash Dividends
Our board of directors approved a $0.12 per share quarterly cash dividend on our common stock for the first quarter of 2020, which we paid in April 2020. However, in April 2020, in connection with the current low oil price environment, we temporarily suspended our quarterly dividend until oil prices recover.
Stock Repurchase Program
In December 2018, our Board of Directors adopted a program for the opportunistic repurchase of up to $100 million of our common stock. Based on the Board’s evaluation of market conditions for our common stock at that time, they authorized initial repurchases of up to $50 million under the program. In February 2020, the Board of Directors authorized the repurchase of the remaining $50 million of our $100 million repurchase program. We are not required or otherwise obligated to repurchase any additional shares any repurchases may be commenced or suspended at any time without notice. Repurchases may be made from time to time in the open market, in privately negotiated transactions or by other means, as determined in the Company's sole discretion. The manner, timing and amount of any purchases will be determined based on our evaluation of market conditions, stock price, compliance with outstanding agreements and other factors, may be commenced or suspended at any time without notice and does not obligate Berry Corp. to purchase shares during any period or at all. Any shares acquired will be available for general corporate purposes. The Company had repurchased a total of 5,057,682 shares under the stock repurchase program for approximately $50 million as of December 31, 2019. For the three months ended March 31, 2020, we did not repurchase any shares under the stock repurchase program.

Stock-Based Compensation

In March 2020, the Company granted awards of 1,817,656 shares of restricted stock units (“RSUs”), which will vest annually in equal amounts over three years and 1,278,877 performance-based restricted stock units (“PSUs”), which will cliff vest at three years. The fair value of these awards was approximately $32 million.

The RSUs awarded are service-based awards. The PSUs awarded include a market objective measured against both absolute total stockholder return (“Absolute TSR”) and total stockholder return relative (“Relative TSR”) to the Vanguard World Fund - Vanguard Energy ETF index (the “Index”) over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the three-year performance period, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the Target Shares granted.


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BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The fair value of the PSUs was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company, including a comparison against the Index over the performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on blended historical average volatility rates for the Company and selected guideline public companies. The dividend yield assumption was based on the current annualized declared dividend. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
Note 6 - Supplemental Disclosures to the Financial Statements
Other current assets reported on the condensed consolidated balance sheets included the following:  
 
March 31, 2020
 
December 31, 2019
 
(in thousands)
Prepaid expenses
$
4,768

 
$
4,577

Materials and supplies
10,972

 
10,544

Oil inventories
3,144

 
3,432

Other
846

 
846

Total other current assets
$
19,730

 
$
19,399

Other non-current assets at March 31, 2020 and December 31, 2019, included approximately $10 million and $11 million of deferred financing costs, net of amortization, respectively.
Accounts payable and accrued expenses on the condensed consolidated balance sheets included the following:
 
March 31, 2020
 
December 31, 2019
 
(in thousands)
Accounts payable-trade
$
10,796

 
$
13,986

Accrued expenses
48,877

 
57,078

Royalties payable
9,897

 
25,385

Taxes other than income tax liability
11,656

 
9,150

Accrued interest
3,500

 
10,500

Dividends payable
9,703

 
9,888

Asset retirement obligation - current portion
13,700

 
25,208

Other
591

 
616

Total accounts payable and accrued expenses
$
108,720

 
$
151,811


We reclassified certain accrued expenses to accounts payable trade accounts for the prior period to conform to the current year presentation. These reclassifications had no impact on the financial statements.
The increase in the long-term portion of the asset retirement obligation from $124 million at December 31, 2019 to $135 million at March 31, 2020 was due to $2 million of accretion and reclassification of $12 million from the current portion due to changes in budgeted spending and minimum state requirements. These increases were partially offset by $3 million of liabilities settled during the period.

Other non-current liabilities at March 31, 2020 and December 31, 2019 included approximately $27 million and $33 million of greenhouse gas liability, respectively.

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BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Supplemental Information on the Statement of Operations
Other operating expenses were $2.2 million and $1.2 million for the three months ended March 31, 2020 and March 31, 2019. These expenses mainly consist of excess abandonment costs and drilling rig standby charges in 2020 and excess abandonment costs in 2019.
Supplemental Cash Flow Information
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands)
Supplemental Disclosures of Significant Non-Cash Investing Activities:
 
 
Material inventory transfers to oil and natural gas properties
$
696

 
$
1,986

Supplemental Disclosures of Cash Payments (Receipts):
 
 
 
  Interest, net of amounts capitalized
$
14,879

 
$
14,000

  Income taxes
$
2

 
$


Cash and cash equivalents consist primarily of highly liquid investments with original maturities of three months or less and are stated at cost, which approximates fair value. As part of our cash management system, we use a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances, which amounts are immaterial for these periods, for accounting purposes in the accounts payable and accrued expenses account.
Note 7 - Earnings Per Share
We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the three months ended March 31, 2020 and 2019 which is approximately 80 million shares and 82 million shares, respectively. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement, are considered common shares outstanding and are included in the computation of net income (loss) per share.
The RSUs and PSUs are not a participating security as the dividends are forfeitable. For the three months ended March 31, 2020 and March 31, 2019, no incremental RSUs or PSUs were included in the diluted EPS calculation as their effect was anti-dilutive under the “if converted” method.

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BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands except per share amounts)
Basic EPS calculation

 

Net loss
$
(115,300
)
 
$
(34,098
)
Weighted-average shares of common stock outstanding
79,608

 
81,765

Basic loss per share
$
(1.45
)
 
$
(0.42
)
Diluted EPS calculation

 

Net loss
$
(115,300
)
 
$
(34,098
)
Weighted-average shares of common stock outstanding
79,608

 
81,765

Dilutive effect of potentially dilutive securities(1)

 

Weighted-average common shares outstanding - diluted
79,608

 
81,765

Diluted loss per share
$
(1.45
)
 
$
(0.42
)
__________
(1)
No potentially dilutive securities were included in computing earnings (loss) per share for the three months ended March 31, 2020 and March 31, 2019, because the effect of inclusion would have been anti-dilutive.
Note 8 - Revenue Recognition
We account for revenue in accordance with the Accounting Standards Codification 606, Revenue from Contracts with Customers, which we adopted on January 1, 2019, using the modified retrospective method, which was applied to all contracts that were not completed as of that date. Prior period results were not adjusted and continue to be reported under the accounting standards in effect for the prior period. The new standard did not affect the timing of our revenue recognition and did not impact net income; accordingly, we did not record an adjustment to the opening balance of retained earnings.

We adopted the practical expedient related to disclosing the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied at the end of the reporting period. The performance obligations that are unsatisfied at the end of a reporting period relate solely to future volumes that we have yet to sell. As such, these are wholly unsatisfied performance obligations as each unit of product represents a separate performance obligation as well as a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation.

We derive substantially all of our revenue from sales of oil, natural gas and natural gas liquids (“NGL”), with the remaining revenue generated from sales of electricity and marketing activities.

The following is a description of our principal activities from which we generate revenue. Revenues are recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration we expect to receive in exchange for those goods or services.

Oil, Natural Gas and NGLs

We recognize revenue from the sale of our oil, natural gas and NGLs production when delivery has occurred and control passes to the customer. Our oil and natural gas contracts are short term, typically less than a year and our NGL contracts are both short and long term. We consider our performance obligations to be satisfied upon transfer of control of the commodity. Our commodity sales contracts are indexed to a market price or an average index price. We recognize revenue in the amount that we expect to receive once we are able to adequately estimate the consideration (i.e., when market prices are known). Our contracts with customers typically require payment within 30 days following invoicing.


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BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Electricity Sales

The electrical output of our cogeneration facilities that is not used in our operations is sold to the California market based on market pricing, which includes capacity payments. The majority of the portion sold from three of our cogeneration facilities is sold under long-term contracts to two California utility companies, based on market pricing. Revenue is recognized over time when obligations under the terms of a contract with our customer are satisfied; generally, this occurs upon delivery of the electricity. Revenue is measured as the amount of consideration we expect to receive based on average index pricing with payment due the month following delivery. Capacity payments are based on a fixed annual amount per kilowatt hour and monthly rates vary based on seasonality, which is consistent with how we earn the capacity payment. Capacity payments are settled monthly. We consider our performance obligations to be satisfied upon delivery of electricity or as the contracted amount of energy is made available to the customer in the case of capacity payments. We report electricity revenue as electricity sales on our consolidated statements of operations.

Marketing Revenue

Marketing revenue primarily includes our activities associated with transporting and marketing third-party volumes. These sales are made under the same agreements with the same purchaser as our natural gas sales discussed above. We consider our performance obligations to be satisfied upon transfer of control of the commodity. Revenues are presented excluding costs incurred prior to transferring control of these volumes to the customer, or the costs to purchase these volumes when we are acting as the principal. The revenues and expenses related to the sale and purchase of third-party volumes are presented separately as marketing revenue and marketing expenses on the condensed consolidated statements of operations.

Disaggregated Revenue

As a result of adoption of this standard, we are now required to disclose the following information regarding revenue from contracts with customers on a disaggregated basis.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands)
Oil sales
$
118,310

 
$
123,450

Natural gas sales
3,368

 
6,715

Natural gas liquids sales
420

 
937

Electricity sales
5,461

 
9,729

Marketing revenues
453

 
830

Other revenues
24

 
117

Revenues from contracts with customers
128,036

 
141,778

Gains (losses) on oil derivatives
211,229

 
(65,239
)
Total revenues and other
$
339,265

 
$
76,539

Note 9—Oil and Natural Gas Properties
We evaluate the impairment of our proved and unproved oil and natural gas properties whenever events or changes in circumstance indicate that a property’s carrying value may not be recoverable. If the carrying amount of the proved properties exceeds the estimated undiscounted future cash flows, we record an impairment charge to reduce the carrying values of proved properties to their estimated fair value. We estimate the fair values of proved properties using valuation techniques that consider the market approach for values from the recent sale of similar properties, if applicable, and the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii)

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BERRY CORPORATION (bry)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

future commodity prices; and (iv) a risk-adjusted discount rate. These inputs require significant judgments and estimates by our management at the time of the valuation which can change significantly over time. The underlying commodity prices are embedded in our estimated cash flows and are the product of a process that begins with the relevant forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors our management believes will impact realizable prices. The fair value was estimated using inputs characteristic of a Level 3 fair value measurement.

We evaluate the impairment of our unproved oil and gas properties whenever events or changes in circumstances indicate the carrying value may not be recoverable. If exploration and development work were to be unsuccessful, or management decided not to pursue development of these properties as a result of lower commodity prices, higher development and operating costs, contractual conditions or other factors, the capitalized costs of such properties would be expensed. The timing of any write-downs of unproved properties, if warranted, depends upon management’s plans, the nature, timing and extent of future exploration and development activities and their results.

At March 31, 2020, we performed impairment tests with respect to our proved and unproved oil and gas properties as a result of significant declines in oil prices during the latter part of the first quarter. These declines were driven by the uncertainty surrounding the outbreak of novel strain of coronavirus (SARS-Cov-2), which causes COVID-19 (“COVID-19”) and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. The COVID-19 pandemic and related economic repercussions, coupled with OPEC+ actions, created significant volatility, uncertainty, and turmoil in the oil and gas industry, which have negatively affected and are expected to continue to negatively affect our business. Low oil prices are expected to continue for some period as reflected by current futures forward curves for crude.

Consequently, we recorded a non-cash pre-tax asset impairment charge of $289 million on properties in Utah and certain California locations. We evaluate our proved properties in accordance with accounting guidance and fair value techniques utilizing the period-end forward price curve, as well as assessing projects we determine we would not pursue in the foreseeable future given the current environment. We believe our current plans and exploration and development efforts will allow us to realize the carrying value of our unproved property balance at March 31, 2020.

Note 10—Income Taxes

The COVID-19 pandemic and related economic repercussions, coupled with OPEC+ actions, created significant volatility, uncertainty, and turmoil in the oil and gas industry, which have negatively affected and are expected to continue to negatively affect our business. As a result, after evaluating the positive and negative evidence, we determined that it was more likely than not that a large portion of our interest deduction carryforwards and tax credits would not be realized. Accordingly, we recognized a valuation allowance on our deferred tax assets during the quarter in the amount of $51 million. This was the key contributor in the decrease in our effective tax rate from 28% for the three months ended March 31, 2019 to (30)% for the three months ended March 31, 2020.

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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 our interim unaudited consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2019 (the Annual Report) filed with the Securities and Exchange Commission (SEC). When we use the terms “we,” “us,” “our,” the “Company” or similar words in this report, we are referring to Berry Corporation (bry) (formerly known as Berry Petroleum Corporation, and referred to herein as Berry Corp.”) and its wholly owned subsidiary, Berry Petroleum, LLC (Berry LLC”).
Our Company
We are a western United States independent upstream energy company with a focus on onshore, low geologic risk, long-lived, oil reserves in conventional reservoirs.
In the aggregate, our assets are characterized by high oil content. Most of our assets are located in the oil-rich reservoirs in the San Joaquin basin of California, which has more than 150 years of production history and substantial remaining oil in place. As a result of the substantial data produced over the basin’s long history, its reservoir characteristics are well understood, leading to predictable, repeatable, low geological risk and low-cost development opportunities. In California, we focus on conventional, shallow oil reservoirs, the drilling and completion of which are relatively low-cost in contrast to unconventional resource plays. We also have assets in the low-cost, oil-rich reservoirs in the Uinta basin of Utah and low geologic risk natural gas resource plays in the Piceance basin in Colorado. We believe that successful execution of our strategy across our low-declining production base and extensive inventory of identified drilling locations should result in our ability, in appropriate oil price environments, to return capital to our stockholders and demonstrate long-term, capital efficient, consistent, and predictable production growth while living within “Levered Free Cash Flow” (a non-GAAP financial measure discussed under “How We Plan and Evaluate Our Operations” in this report).
Effective February 18, 2020, Berry Petroleum Corporation changed its name to “Berry Corporation (bry)” and introduced a new logo, to illustrate our progressive approach to evolving and growing the business in today's dynamic oil and gas industry. Our strategy includes proactively engaging the many forces driving our industry to maximize our assets, create value for shareholders, and support environmental goals that align with a more positive future. One of the more visible elements of our brand is our publicly traded stock, and our new logo echoes the public value of the company by using our ticker symbol as an identifiable element of our brand.
Business Environment, Market Conditions and Outlook
In December 2019, a novel strain of coronavirus (SARS-Cov-2), which causes COVID-19, was reported to have surfaced in China. The spread of this virus has caused increasing disruption globally since January 2020. In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, and the U.S. economy began to experience pronounced effects. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of the financial and commodity markets.  In particular, the oil and gas industry continues to be significantly impacted by the rapid, substantial and prolonged deterioration in the price of oil caused by the significant decrease in oil demand because of the COVID-19 pandemic and corresponding preventative measures taken around the world to mitigate the spread of the virus, compounded by a supply surge from Saudi Arabia and Russia.
In the midst of the ongoing COVID-19 pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”) failed to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia aggressively increased oil production and exports. The convergence of these events - the unprecedented dual impact of a severe global oil demand decline due to the COVID-19 pandemic repercussions coupled with a substantial increase in supply from Saudi Arabia and Russia - drove oil prices to extremely low levels and created significant volatility, uncertainty, and turmoil in the oil and gas industry. While in April 2020, OPEC+ agreed to cut production, the production cuts have yet to offset the significant decrease in demand resulting from the COVID-19

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pandemic. As a result, the price of oil has remained extremely depressed and even reached historic lows. Additionally, the effects of demand destruction with a supply surge globally have been amplified as available storage for crude oil and refined products is increasingly limited and may be completely unavailable in the near future. With the storage and transportation constraints further adding to the pressure on commodities prices, refiners have started to curtail output and producers all over the world - including in the United States - have started to shut-in production.
Although our financial and operating results for the first quarter of 2020 were not significantly impacted by the convergence of these events, our business, like other oil has producers, has been and is expected to continue to be negatively affected by the global crisis described above. The broad economic repercussions and the impact on the oil and gas industry is anticipated currently to adversely affect our business well into 2021. We are unable to reasonably predict when, or to what extent, commodity prices and the overall markets and global economy will stabilize, and the pace of any subsequent recovery for the oil and gas industry. Further, to what extent these events do ultimately impact our business, liquidity, financial condition, and results of operations is highly uncertain and dependent on numerous factors that are not within our control and cannot be predicted, including the duration of the pandemic and speculation as to future actions by Saudi Arabia, Russia and other members of OPEC+. We have taken steps and continue to actively work to mitigate the evolving challenges and mounting repercussions from both the COVID-19 pandemic and the industry downturn on our operations, our financial condition and our people, however, given the tremendous uncertainty and turmoil, there is no certainty that the measures we take will be ultimately sufficient.
As we focus on managing our business and operations in response to this crisis, the safety and well-being of our employees and the communities in which we operate is our top priority. For the protection of our employees and to help contain the spread of COVID-19, we modified our business practices, including temporary closing of offices not required to maintain critical operations and instead allowing a large portion of our workforce to work from home, and we adopted recommended practices with respect to social distancing, quarantines and travel bans and restrictions. Although we managed the transition to remote work arrangements without a loss in business continuity, we incurred additional costs and experienced some inefficiencies; importantly, none of which had an impact on financial reporting systems, internal control over financial reporting or disclosure controls and procedures. We have not had layoffs or furloughs year to date, in part due to the “essential” nature of our business. We remain committed to being a good corporate citizen by focusing on the well-being of our employees and communities, including maintaining our strong environmental standards and investing in community impact initiatives.
As a result of the industry downturn, commodity price outlook, and increasing uncertainty, on April 1, 2020, we provided updated guidance for the 2020 fiscal year, reflecting a heightened focus on preserving cash and reducing costs, including through reducing planned 2020 capital expenditures and non-employee general and administrative expenses and improving operational efficiencies. We also temporarily suspended our quarterly cash dividend, starting with the second quarter of 2020, and year-to-date we have not repurchased any common stock under our authorized share repurchase program. We enhanced our hedge positions for 2020, and to a lesser extent for 2021. Low oil prices are expected to continue for some period as reflected by the current futures forward curve for Brent crude and we are focused on increasing our hedge positions for 2021 to protect against the anticipated prolonged weakness in commodity prices. If we are unable to successfully do so, our financial results for that time may be adversely impacted.
We are actively working to obtain sufficient storage capacity to support our planned production; however, there is significant near-term risk that storage for oil may be insufficient for producers in our areas of operation to continue full production rates in the second quarter of 2020 and potentially beyond. If we are unable to obtain sufficient storage capacity, or if existing capacity become unavailable to us, in either instance on commercially reasonable terms or at all, we could be forced to shut-in some or all of our production or delay or temporarily discontinue our drilling plans. Based on our current storage commitments, and assuming we are unable to obtain sufficient additional storage in the near term, we could be forced to shut-in a significant amount of our California production, as well as curtail some of our Utah and Colorado production, beginning in the second quarter of 2020, which could have a material, adverse effect on our financial condition, liquidity and results of operations. Whether and when we will have to reduce or shut-in production, and the extent and duration to which we may have to do so, cannot be reasonably predicted at this time. The significance of the impact of any production disruptions, including the extent of the adverse impact on our short- and long-term financial condition, liquidity and results of operations, will be dictated by the extent and duration of such disruption, which is unknowable and will, in turn, depend on the how long storage remains filled and unavailable to us, which is also unknowable. Among other consequences, should we significantly curtail or shut-in production, our

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expectations regarding our 2020 production, capital spend and capital development program will be affected and our previously issued guidance would not likely be achieved. For a discussion of certain potential risks, costs and other considerations related to shutting-in production, please see Part II, Item 1A. Risk Factors in this report - “The marketability of our production is dependent upon transportation and storage facilities and other facilities, most of which we do not control, and the availability of such transportation and storage capabilities, which have been severely limited by recent market conditions related to the COVID-19 pandemic and the current oversupply of oil and natural gas. If additional facilities do not become available, or, even if such facilities are available, but we are unable to access such facilities on commercially reasonable terms, our operations will likely be interrupted, our production could be curtailed, and our revenues reduced, among other consequences.
Our revenue, costs, profitability and future growth are highly dependent on the prices we receive for our oil and natural gas production, as well as the prices we pay for our natural gas purchases, which are affected by a variety of factors, including those discussed in Part II, Item 1A. “Risk Factors” in this Quarterly Report, as well as in Part I, Item 1A. “Risk Factors” in our Annual Report. Average oil prices were significantly lower for the three months ended March 31, 2020 compared to the three months ended December 31, 2019 and the three months ended March 31, 2019. Brent crude oil contract prices ranged from $68.91 per Bbl to $22.74 per Bbl during the first quarter of 2020. Though the California market generally receives Brent-influenced pricing, California oil prices are determined ultimately by local supply and demand dynamics. We have recently experienced an adverse widening in the price differential between Brent and California crude due to the lack of local demand and storage capacity. As described above, if storage availability does not increase in the near-term, oil prices may go materially lower and Brent and/or California pricing could potentially even become negative as WTI oil prices did on April 20, 2020. In California, the price we pay for fuel gas purchases is generally based on the Kern, Delivered Index, which was as high as $3.00 per MMBtu and as low as $1.29 per MMBtu during the first quarter of 2020, while we paid an average of $1.97 in this period.
The following table presents the average Brent, WTI, Kern, Delivered, and Henry Hub prices for the three months ended March 31, 2020, December 31, 2019 and March 31, 2019:
 
Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Brent oil ($/Bbl)
$
50.82

 
$
62.42

 
$
63.83

WTI oil ($/Bbl)
$
46.35

 
$
57.02

 
$
54.87

Kern, Delivered natural gas ($/MMBtu)
$
1.97

 
$
2.99

 
$
5.03

Henry Hub natural gas ($MMBtu)
$
1.91

 
$
2.40

 
$
2.92

California oil prices are Brent-influenced as California refiners import approximately 70% of the state’s demand from OPEC+ countries and other waterborne sources, primarily in the Middle East and South America. Without the higher costs associated with importing crude via rail or supertanker, we believe our in-state production and low-cost crude transportation options, coupled with Brent-influenced pricing, in appropriate oil price environments, should continue to allow us to realize positive cash margins in California over the cycle. However, even as Brent pricing has fallen due to demand destruction caused by the COVID-19 pandemic coupled with the OPEC+ supply surge, we have also experienced a widening in the price differential between Brent and the California benchmark, caused primarily by the lack of local demand and storage capacity. If California pricing remains weak, or declines further, our financial and operating results will be adversely affected.
Utah oil prices have historically traded at a discount to WTI as the local refineries are designed for Utah's unique oil characteristics and the remoteness of the assets makes access to other markets logistically challenging.
Prices and differentials for NGLs are related to the supply and demand for the products making up these liquids. Some of them more typically correlate to the price of oil while others are affected by natural gas prices as well as the demand for certain chemical products which are used as feedstock. In addition, infrastructure constraints magnify pricing volatility.

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Natural gas prices and differentials are strongly affected by local market fundamentals, availability of transportation capacity from producing areas and seasonal impacts. We purchase substantially more natural gas for our steamfloods and cogeneration facilities than we produce and sell. Consequently, higher gas prices have a negative impact on our operating costs. However, we mitigate a portion of this exposure by selling excess electricity from our cogeneration operations to third parties at prices linked to the price of natural gas. We also strive to minimize the variability of our fuel gas costs for our steam operations by hedging a significant portion of such gas purchases. The negative impact of higher gas prices is partially offset by higher gas sales for the gas we produce.
Our earnings are also affected by the performance of our cogeneration facilities. These cogeneration facilities generate both electricity and steam for our properties and electricity for off-lease sales. While a portion of the electric output of our cogeneration facilities is utilized within our production facilities to reduce operating expenses, we also sell electricity produced by three of our cogeneration facilities under long-term contracts with terms ending in July 1, 2021 through December 1, 2026. The most significant input and cost of the cogeneration facilities is natural gas. We generally receive significantly more revenue from these cogeneration facilities in the summer months, June through September, due to negotiated capacity payments we receive.
Seasonal weather conditions can impact our drilling and production activities. These seasonal conditions can occasionally pose challenges in our operations for meeting well-drilling objectives and increase competition for equipment, supplies and personnel, which could lead to shortages and increase costs or delay operations. For example, our operations may have been and in the future may be impacted by ice and snow in the winter and by electrical storms and high temperatures in the spring and summer, as well as by wild-fires and rain.
Additionally, like other companies in the oil and gas industry, our operations are subject to complex and stringent federal, state and local laws and regulations relating to drilling, completion, well stimulation, operation, maintenance or abandonment of wells or facilities, managing energy, water, land, greenhouse gases or other emissions, protection of health, safety and the environment, or transportation, marketing, and sale of our products. Federal, state and local agencies may assert overlapping authority to regulate in these areas. For example, the jurisdiction, duties and enforcement authority of various state agencies have significantly increased with respect to oil and natural gas activities in recent years, and these state agencies as well as certain cities and counties have significantly revised their regulations, regulatory interpretations and data collection and reporting requirements and plan to issue additional regulations of certain oil and natural gas activities in 2020. In addition, certain of these laws and regulations may apply retroactively and may impose strict or joint and several liability on us for events or conditions over which we and our predecessors had no control, without regard to fault, legality of the original activities, or ownership or control by third parties. For additional information, please see Part I, Item 1 “Regulation of Health, Safety and Environmental Matters”, as well as Part I, Item 1.A. “Risk Factors” in our Annual Report.
How We Plan and Evaluate Operations
We use “Levered Free Cash Flow” in planning our capital allocation to sustain production levels and fund internal growth opportunities, as well as determine hedging needs. Levered Free Cash Flow is a non-GAAP financial measure that we define as Adjusted EBITDA less capital expenditures, interest expense, and dividends. Adjusted EBITDA is also a non- GAAP financial measure that is discussed and defined below.
We use 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) general and administrative expenses; and (e) production.
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. Adjusted EBITDA is a non-GAAP financial measure that we defined as earnings before interest expense; income taxes; depreciation, depletion, and amortization (“DD&A”); 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 costs and reorganization items.

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Operating expenses
Overall, operating expense is used by management as a measure of the efficiency with which operations are performing.We define operating expenses as lease operating expenses, electricity generation expenses, transportation expenses, and marketing expenses, offset by the third-party revenues generated by electricity, transportation and marketing activities, as well as the effect of derivative settlements (received or paid) for gas purchases. Lease operating expenses include fuel, labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Taxes other than income taxes are excluded from operating expenses. 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. Additionally, we strive to minimize the variability of our fuel gas costs for our steam operations with gas hedges.
Environmental, health & safety
Like other companies in the oil and gas industry, our operations are subject to stringent and complex federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Current and future laws and regulations, as well as legislative and regulatory changes and other government activities, can materially impact our exploration, development and production plans.
As part of our commitment to creating long-term stockholder value, we strive to conduct our operations in an ethical, safe and responsible manner, to protect the environment and to take care of our people and the communities in which we live and operate. We also seek proactive and transparent engagement with regulatory agencies, the communities in which we operate and our other stakeholders in order to realize the full potential of our resources in a timely fashion that safeguards people and the environment and complies with existing laws and regulations. We monitor our EH&S performance through various measures, holding our employees and contractors to high standards.
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.
Capital Expenditures
For the three months ended March 31, 2020, our capital expenditures were approximately $39 million, on an accrual basis including capitalized labor but excluding capitalized interest, acquisitions and asset retirement spending. Approximately 97% of this total was directed to California oil operations.

Toward the end of the first quarter we reduced our planned 2020 capital expenditures by approximately 50% from our original 2020 guidance in response to the sudden and significant oil and gas price deterioration caused by the COVID-19 pandemic and related economic repercussions, coupled with OPEC+ actions, which created significant volatility, uncertainty, and turmoil in the oil and gas industry. The updated capital expenditure guidance for 2020 is now approximately $65 million (inclusive of the $39 million spent in the first quarter), with approximately 65% of the capital spend weighted toward the first half of 2020. Our focus will be on the capital needed to sustain annual production levels for our California operations while continuing our permitting and proactive maintenance activities to support ongoing activity and safe operations. We proactively initiated an intense permitting program during the first quarter to ensure adequate inventory once we decide to begin our next drilling program. The updated capital budget assumes

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restarting one drilling rig no earlier than September 2020, primarily for sandstone development, if market conditions support the increase in activity. However, if we are unable to obtain sufficient storage and transportation capacity, or if these systems become unavailable to us on commercially reasonable terms or at all, we could be forced to shut in a significant amount of our California production, as well as potentially curtail some of our Utah and Colorado production beginning in the second quarter, which would eliminate a portion of our expected capital expenditures for the remainder of the year, including with respect to the drilling rig.

As discussed under “Business Environment, Market Conditions and Outlook” in this report, the U.S. is experiencing significant storage and transportation constraints, as a result of which refiners have started to curtail output and producers all over the world – including in the United States – have started to shut-in production. We are actively working to obtain sufficient storage and transportation capacity to support our planned production; however, if we are unable to do so, or if these systems become unavailable to us on commercially reasonable terms or at all, we could be forced to shut-in some or all of our production or delay or temporarily discontinue our drilling plans. Based on our current storage commitments, and assuming we are unable to obtain sufficient additional storage in the near term, we could be forced to shut-in a significant amount of our California production, as well as curtail some of our Utah and Colorado production, beginning in the second quarter, which could have a material, adverse effect on our financial and operational results. Whether and when we will have to reduce or shut-in production, and the extent to which we may have to do so, cannot be reasonably predicted at this time. However, should we significantly curtail or shut-in production, our expectations regarding our 2020 production, capital spend and capital development program will be affected and our previously issued guidance would not likely be achieved.

We currently expect year-over-year oil production growth in California to be flat to down 2% from 2019, which is consistent with our low corporate decline rates. We currently also anticipate oil production will be approximately 90% of total production in 2020, compared to 87% in 2019. Based on our current capital plan we expect to be able to fund our 2020 capital development programs with cash flow from operations. Even in this low price environment we plan to live within Levered Free Cash Flow through 2021 and beyond.

The amount and timing of capital expenditures are within our control and subject to our management’s discretion, and may be adjusted during the year depending on commodity prices, storage constraints, supply/demand considerations and other factors. We retain the flexibility to defer 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 receipt and timing of required regulatory permits and approvals, the availability of necessary equipment, infrastructure and capital, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners, as well as general market conditions. Additionally, for the full year 2020, we plan to spend approximately $15 million on plugging and abandonment activities, satisfying our obligations under the California-mandated Idle Well Management Plan.


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Summary By Area
The following table shows a summary by area of our selected historical financial information and operating data for the periods indicated.
 
California
(San Joaquin and Ventura basins)
 
Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
($ in thousands, except prices)
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
109,519

 
$
140,972

 
$
111,896

Operating (loss) income(1)
$
(113,203
)
 
$
66,977

 
$
48,572

Depreciation, depletion, and amortization (DD&A)
$
30,918

 
$
26,950

 
$
21,342

Impairment of oil and gas properties
$
163,879

 
$

 
$

Average daily production (MBoe/d)
24.9

 
25.5

 
21.0

Production (oil % of total)
100
%
 
100
%
 
100
%
Realized sales prices:
 
 
 
 
 
Oil (per Bbl)
$
48.38

 
$
60.20

 
$
59.16

NGLs (per Bbl)
$

 
$

 
$

Gas (per Mcf)
$

 
$

 
$

Capital expenditures(2)
$
38,072

 
$
34,983

 
$
42,509

 
Utah
(Uinta basin)
 
Colorado
(Piceance basin)
 
Three Months Ended
 
Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
($ in thousands, except prices)
 
 
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
11,278

 
$
13,618

 
$
16,666

 
$
1,299

 
$
1,746

 
$
2,540

Operating (loss) income(1)
$
(127,700
)
 
$
784

 
$
4,268

 
$
384

 
$
(51,356
)
 
$
593

Depreciation, depletion, and amortization (DD&A)
$
4,311

 
$
2,846

 
$
2,930

 
$
55

 
$
262

 
$
314

Impairment of oil and gas properties
$
125,206

 
$

 
$

 
$

 
$
51,081

 
$

Average daily production (MBoe/d)
4.5

 
4.4

 
5.2

 
1.4

 
1.4

 
1.6

Production (oil % of total)
53
%
 
51
%
 
59
%
 
1
%
 
1
%
 
1
%
Realized sales prices:
 
 
 
 
 
 
 
 
 
 
 
Oil (per Bbl)
$
39.64

 
$
49.01

 
$
41.37

 
$
42.54

 
$
51.87

 
$
43.40

NGLs (per Bbl)
$
13.16

 
$
14.60

 
$
24.56

 
$

 
$

 
$

Gas (per Mcf)
$
2.22

 
$
2.89

 
$
4.59

 
$
1.70

 
$
2.23

 
$
2.84

Capital expenditures(2)
$
857

 
$
4,282

 
$
5,273

 
$
6

 
$
295

 
$
40

__________
(1)
Operating (loss) income includes oil, natural gas and NGL sales, marketing revenues, other revenues, and scheduled oil derivative settlements, offset by operating expenses, general and administrative expenses, DD&A, impairment of oil and gas properties, and taxes, other than income taxes.
(2)
Excludes corporate capital expenditures.

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Production and Prices
The following table sets forth information regarding average daily production, total production and average prices for each of the periods indicated.
 
Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Average daily production:(1)
 
 
 
 
 
Oil (MBbl/d)
27.3

 
27.7

 
24.1

Natural Gas (MMcf/d)
18.5

 
18.9

 
19.5

NGL (MBbl/d)
0.4

 
0.4

 
0.4

Total (MBoe/d)(2)
30.8

 
31.3

 
27.8

Total Production:
 
 
 
 
 
Oil (MBbl)
2,485

 
2,553

 
2,170

Natural gas (MMcf)
1,684

 
1,737

 
1,752

NGLs (MBbl)
32

 
35

 
38

Total (MBoe)(2)
2,798

 
2,877

 
2,501

Weighted-average realized sales prices:
 
 
 
 
 
Oil without hedges ($/Bbl)
$
47.61

 
$
59.28

 
$
56.88

Oil with hedges ($/Bbl)
$
57.28

 
$
64.98

 
$
62.03

Natural gas ($/Mcf)
$
2.00

 
$
2.60

 
$
3.83

NGL ($/Bbl)
$
13.16

 
$
14.60

 
$
24.35

Average Benchmark prices:
 
 
 
 
 
Oil (Bbl) – Brent
$
50.82

 
$
62.42

 
$
63.83

Oil (Bbl) – WTI
$
46.35

 
$
57.02

 
$
54.87

Gas (MMBtu) – Kern, Delivered(3)
$
1.97

 
$
2.99

 
$
5.03

Natural gas (MMBtu) – Henry Hub(4)
$
1.91

 
$
2.40

 
$
2.92

__________
(1)
Production represents volumes sold during the period. We also consume a portion of the natural gas we produce on lease to extract oil and gas.
(2)
Natural gas volumes have been converted to Boe based on energy content of six Mcf of gas to one Bbl of oil. Barrels of oil equivalence does not necessarily result in price equivalence. The price of natural gas on a barrel of oil equivalent basis is currently substantially lower than the corresponding price for oil and has been similarly lower for a number of years. For example, in the three months ended March 31, 2020, the average prices of Brent oil and Henry Hub natural gas were $50.82 per Bbl and $1.91 per MMBtu respectively, resulting in an oil-to-gas ratio of approximately 4 to 1 on an energy equivalent basis.
(3)
Kern, Delivered Index is the relevant index used for gas purchases in California.
(4)
Henry Hub is the relevant index used for gas sales in the Rockies.
The following table sets forth average daily production by operating area for the periods indicated:
 
Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Average daily production (MBoe/d):(1)
 
 
 
 
 
California
24.9

 
25.5

 
21.0

Utah
4.5

 
4.4

 
5.2

Colorado
1.4

 
1.4

 
1.6

Total average daily production
30.8

 
31.3

 
27.8

__________
(1)
Production represents volumes sold during the period.

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Average daily production, including sales of inventory, decreased 2% for the three months ended March 31, 2020, compared to the three months ended December 31, 2019, largely due to natural decline, partially offset by the impact of our development program in late December and into the first quarter of this year. Our California production of 24.9 MBoe/d for the first quarter of 2020 decreased 2% from the fourth quarter of 2019.
In the first quarter of 2020 a significant portion of our capital expenditures was used for activities which have no impact on current production, including approximately 50% of such costs for facilities, equipping and permitting for future development. Of the 19 wells drilled in the first quarter, nine were delineation and two were injector wells, while eight were producing wells. We also expended approximately $4 million for plugging and abandonment activities.
Average daily production volumes increased 11% for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 due to production response from development capital spending throughout 2018 and 2019, which offset the natural decline of our properties. Production increased 18% in California, where the substantial majority of our development capital was deployed, for the three months ended March 31, 2020 compared to the same period in 2019. This increase strongly demonstrated the ability of our California properties to respond to capital and perform as expected. The production in Utah and Colorado decreased 13% for the three months ended March 31, 2020 compared to the same period in 2019. The overall decrease was primarily due to a lack of capital expenditures and natural decline.

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Results of Operations
Three Months Ended March 31, 2020 compared to Three Months Ended December 31, 2019.
 
Three Months Ended
 
 
 
 
 
March 31, 2020
 
December 31, 2019
 
$ Change
 
% Change
 
(in thousands)
 
 
Revenues and other:
 
 
 
 
 
 
 
Oil, natural gas and NGL sales
$
122,098

 
$
156,336

 
$
(34,238
)
 
(22
)%
Electricity sales
5,461

 
6,844

 
(1,383
)
 
(20
)%
Gain (losses) on oil derivatives
211,229

 
(45,544
)
 
256,773

 
n/a

Marketing and other revenues
477

 
492

 
(15
)
 
(3
)%
Total revenues and other
$
339,265

 
$
118,128

 
$
221,137

 
187
 %
Revenues and Other
Oil, natural gas and NGL sales decreased by $34 million, or 22%, to approximately $122 million for the three months ended March 31, 2020, compared to the three months ended December 31, 2019. The decrease was driven by $29 million of lower oil prices, $4 million of lower oil volume, and $1 million of lower gas prices.
Electricity sales represent sales to utilities, and decreased $1 million, or 20%, to approximately $5 million for the three months ended March 31, 2020 compared to the three months ended December 31, 2019. The decrease was mostly due to lower unit sales prices that were driven by lower natural gas pricing, and partially offset by higher unit sales resulting from lower downtime.
Gains on oil derivatives were approximately $211 million, including settlement gains of $24 million, for the three months ended March 31, 2020, compared to a loss of approximately $46 million that included $15 million of settlement gains for the three months ended December 31, 2019. Settlement gains reflect the positions that expired during the period with hedge strike prices above the respective index prices. The quarter-over-quarter increase in the settled gains was predominantly due to the larger spread between the average hedge strike prices and the index prices in the quarter ended March 31, 2020 than in the prior quarter. During 2020, the decrease in index prices relative to our remaining hedge positions at period-end resulted in increased value, resulting in mark-to-market gains in 2020, while the opposite effect occurred in the fourth quarter of 2019.
Marketing and other revenues were comparable for the three months ended March 31, 2020 and the three months ended December 31, 2019. Marketing revenues in these periods represented sales of natural gas purchased from third parties.

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Table of Contents

 
Three Months Ended
 
$ Change
 
% Change
 
March 31, 2020
 
December 31, 2019
 
 
(in thousands, except expenses per Boe)
 
 
 
Expenses and other:
 
 
 
 
 
 
 
Lease operating expenses
$
50,752

 
$
59,529

 
$
(8,777
)
 
(15
)%
Electricity generation expenses
3,946

 
4,785

 
(839
)
 
(18
)%
Transportation expenses
1,822

 
2,124

 
(302
)
 
(14
)%
Marketing expenses
430

 
403

 
27

 
7
 %
General and administrative expenses
19,337

 
15,710

 
3,627

 
23
 %
Depreciation, depletion and amortization
35,329

 
30,102

 
5,227

 
17
 %
Impairment of oil and gas properties
289,085

 
51,081

 
238,004

 
466
 %
Taxes, other than income taxes
4,352

 
11,962

 
(7,610
)
 
(64
)%
Losses (gains) on natural gas derivatives
12,035

 
(3,385
)
 
15,420

 
n/a

Other operating expenses
2,202

 
774

 
1,428

 
184
 %
Total expenses and other
419,290

 
173,085

 
246,205

 
142
 %
Other (expenses) income:
 
 
 
 
 
 
 
Interest expense
(8,920
)
 
(7,871
)
 
(1,049
)
 
13
 %
Other, net
(6
)
 

 
(6
)
 
100
 %
Loss before income taxes
(88,951
)
 
(62,828
)
 
(26,123
)
 
(42
)%
Income tax expense (benefit)
26,349

 
(55,844
)
 
82,193

 
147
 %
Net loss
$
(115,300
)
 
$
(6,984
)
 
$
(108,316
)
 
(1,551
)%
 
 
 
 
 
 
 
 
Expenses per Boe:(1)
 
 
 
 
 
 
 
Lease operating expenses
$
18.14

 
$
20.69

 
$
(2.55
)
 
(12
)%
Electricity generation expenses
1.41

 
1.66

 
(0.25
)
 
(15
)%
Electricity sales(1)
(1.95
)
 
(2.38
)
 
0.43

 
(18
)%
Transportation expenses
0.65

 
0.74

 
(0.09
)
 
(12
)%
Transportation sales(1)
(0.01
)
 
(0.02
)
 
0.01

 
(50
)%
Marketing expenses
0.15

 
0.14

 
0.01

 
7
 %
Marketing revenues(1)
(0.16
)
 
(0.15
)
 
(0.01
)
 
7
 %
Derivatives settlements paid (received) for gas purchases(1)
1.58

 
(0.31
)
 
1.89

 
(610
)%
Total operating expenses
$
19.81

 
$
20.37

 
$
(0.56
)
 
(3
)%
Total unhedged operating expenses(2)
$
18.23


$
20.68

 
$
(2.45
)
 
(12
)%
 
 
 
 
 
 
 
 
Total non-energy operating expenses(4)
$
14.03

 
$
14.96

 
$
(0.93
)
 
(6
)%
Total energy operating expenses(5)
$
5.78

 
$
5.41

 
$
0.37

 
7
 %
 
 
 
 
 
 
 
 
General and administrative expenses(3)
$
6.91

 
$
5.46

 
$
1.45

 
27
 %
Depreciation, depletion and amortization
$
12.63

 
$
10.46

 
$
2.17

 
21
 %
Taxes, other than income taxes
$
1.56

 
$
4.16

 
$
(2.60
)
 
(63
)%
__________

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Table of Contents

(1)
We report electricity, transportation and marketing sales separately in our financial statements as revenues in accordance with GAAP. However, these revenues are viewed and used internally in calculating operating expenses which is used to track and analyze the economics of development projects and the efficiency of our hydrocarbon recovery. We purchase third-party gas to generate electricity through our cogeneration facilities to be used in our field operations activities and view the added benefit of any excess electricity sold externally as a cost reduction/benefit to generating steam for our thermal recovery operations. Marketing revenues and expenses mainly relate to natural gas purchased from third parties that moves through our gathering and processing systems and then is sold to third parties. Transportation sales relate to water and other liquids that we transport on our systems on behalf of third parties and have not been significant to date. Operating expenses also include the effect of derivative settlements (received or paid) for gas purchases.
(2)
Total unhedged operating expenses equals total operating expenses, excluding the derivative settlements paid (received) for gas purchases.
(3)
Includes non-recurring costs and non-cash stock compensation expense, in aggregate, of approximately $1.71 per Boe and $0.80 per Boe for the three months ended March 31, 2020 and December 31, 2019, respectively.
(4)
Total non-energy operating expenses equals total operating expenses, excluding fuel, electricity sales and gas purchase derivative settlement (gains) losses.
(5)
Total energy operating expenses equals fuel and gas purchase derivative settlement (gains) losses less electricity sales.
Expenses and Other
In accordance with GAAP, we report sales of electricity, marketing and transportation activities (as applicable) separately in our financial statements as revenues. However, these revenues are viewed and used internally in calculating operating expenses, which are used to track and analyze the economics of development projects and the efficiency of our hydrocarbon recovery.
Operating expenses are defined above in “How We Plan and Evaluate Operations”. On an unhedged basis, operating expenses decreased by $2.45 per Boe to $18.23 for the first quarter 2020, compared to $20.68 for the fourth quarter 2019. The decrease was driven by $2.55 per Boe lower lease operating expenses. Additionally, operating expenses, including hedge effects, decreased to $19.81 per Boe in the first quarter 2020 from $20.37 in the fourth quarter 2019 due to the same factors and $1.89 per Boe higher settlement gas hedge losses period-over-period.
Lease operating expenses per Boe decreased to $18.14 for the three months ended March 31, 2020, compared to $20.69 per Boe for the three months ended December 31, 2019 driven by lower unhedged fuel costs related to our California steam operations. Unhedged fuel cost decreased $1.96 per Boe, or 24% in the first quarter 2020 from $8.11 for the three months ended December 31, 2019. Additionally, certain non-energy lease operating expenses decreased by approximately $1.00 per Boe, including well, lease and facility repair and maintenance activity, power costs and chemicals. These decreases were partially offset by approximately $0.50 per Boe of higher expenses related to company labor and inventory sales. Lease operating expenses includes fuel, maintenance, labor including supervision, vehicles, workover expenses, field office, and tools and supplies. Fuel costs exclude the effects of natural gas derivative settlements mentioned elsewhere.
Electricity generation expenses decreased approximately 15% to $1.41 per Boe for the three months ended March 31, 2020, compared to $1.66 per Boe for the three months ended December 31, 2019 mostly due to lower natural gas costs described above. These fuel costs exclude the effects of natural gas derivative settlements mentioned elsewhere.
Losses on natural gas derivatives of $12 million for the three months ended March 31, 2020, consisted of $8 million of mark-to-market valuation losses and $4 million of settlement derivative contract losses, due to low gas prices. The $3 million gain on natural gas derivatives for the three months ended December 31, 2019 consisted of $2 million of mark-to-market valuation gains and $1 million of settlement contract gains. Quarter-over-quarter losses and gains were the result of changes between gas prices relative to the fixed prices of our derivative contracts.
Transportation expenses decreased 12% to $0.65 per Boe for the three months ended March 31, 2020 from $0.74 per Boe for the three months ended December 31, 2019 mostly due to lower volumes shipped.
Marketing expenses were flat for the three months ended March 31, 2020 and December 31, 2019. Marketing expenses in these periods, which exclude the effects of hedging, represented the cost of natural gas purchased from third parties.
General and administrative expenses increased by $3.6 million, or 23%, to approximately $19 million for the three months ended March 31, 2020, compared to the three months ended December 31, 2019. For the three months ended

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March 31, 2020 and December 31, 2019, general and administrative expenses included certain non-recurring costs of approximately $1.9 million and $0, respectively, and non-cash stock compensation costs of approximately $2.9 million and $2.3 million, respectively. The first quarter 2020 non-recurring costs mainly consisted of credit-related charges in connection with the significantly deteriorated price environment. Further differences in general and administrative expenses between these periods are noted below.
Adjusted general and administrative expenses, which exclude non-recurring costs and non-cash stock compensation costs, were $15 million or $5.20 per Boe for the first quarter 2020 compared to $13 million or $4.66 per Boe for the fourth quarter 2019. Please see “-Non-GAAP Financial Measures” for a reconciliation of adjusted general and administrative expense to general and administrative expenses, the most directly comparable financial measures calculated and presented in accordance with GAAP. The increase in adjusted general and administrative expenses was primarily due to higher accrued annual performance incentive costs in 2020 compared to the fourth quarter 2019 as prior year performance targets were not fully met. The first quarter 2020 does not incorporate any of our general and administrative expense reduction previously announced.
DD&A increased by $5 million or 17% to approximately $35 million for the three months ended March 31, 2020 compared to the three months ended December 31, 2019. On a per Boe basis, period-over-period DD&A increased $2.17 or 21% due to higher 2020 depreciation and depletion rates resulting from the significant capital development program in 2019.
Impairment of oil and gas properties
At March 31, 2020, we performed impairment tests with respect to our proved and unproved oil and gas properties as a result of significant declines in oil prices during the latter part of the first quarter. These declines were driven by the uncertainty surrounding the outbreak of novel strain of coronavirus (SARS-Cov-2), which causes COVID-19 (“COVID-19”) and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. The COVID-19 pandemic and related economic repercussions, coupled with OPEC+ actions, created significant volatility, uncertainty, and turmoil in the oil and gas industry, which have negatively affected and are expected to continue to negatively affect our business. Low oil prices are expected to continue for some period as reflected by current futures forward curves for crude.

Consequently, we recorded a non-cash pre-tax asset impairment charge of $289 million on properties in Utah and certain California locations. We evaluate our proved properties in accordance with accounting guidance and fair value techniques utilizing the period-end forward price curve, as well as assessing projects we determine we would not pursue in the foreseeable future given the current environment. We believe our current plans and exploration and development efforts will allow us to realize the carrying value of our unproved property balance at March 31, 2020.

For the fourth quarter of 2019, we evaluated our proved and unproved natural gas properties in regards to the decline in our expectations of future gas prices. As a result, we recorded a non-cash pre-tax asset impairment charge of $51 million for our Piceance gas properties in Colorado, of which $23 million was for proved properties and $28 million for unproved properties.
Taxes, Other Than Income Taxes
 
Three Months Ended
 
$ Change
 
% Change
 
March 31, 2020
 
December 31, 2019
 
 
(in thousands)
 
 
Severance taxes
$
0.72

 
$
0.78

 
$
(0.06
)
 
(8
)%
Ad valorem and property taxes
1.38

 
1.55

 
(0.17
)
 
(11
)%
Greenhouse gas allowances
(0.54
)
 
1.83

 
(2.37
)
 
(130
)%
Total taxes other than income taxes
$
1.56

 
$
4.16

 
$
(2.60
)
 
(63
)%


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Taxes, other than income taxes, decreased in the three months ended March 31, 2020 by $2.60 per Boe, or 63%, to $1.56 due to lower greenhouse gas allowance spot prices resulting in reductions to cumulative emission costs to date which are scheduled for payment in future periods.
Other operating expenses
Other operating expenses increased approximately $1 million to $2 million in the three months ended March 31, 2020 from $1 million in the three months ended December 31, 2019. The increase mostly included excess abandonment costs in the first quarter and drilling rig standby costs due to deferred drilling activity.
Interest Expense
Interest expense increased in the three months ended March 31, 2020 by $1 million, or 13%, due to higher borrowings during the first quarter of 2020 compared to the fourth quarter of 2019.
Income Tax Expense (Benefit)
Our effective tax rate was approximately (30%) and 89% for the three months ended March 31, 2020 and December 31, 2019, respectively. The rate in 2020 was negatively impacted as we have recorded a valuation allowance on a large portion of our interest deduction carryforwards and tax credits due to changes during the quarter related to future realizability. The rate in the fourth quarter 2019 reflects the recognition of US federal general business credits which were related to 2017 and 2018 tax periods. These credits are available to offset future federal income tax liabilities.

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019.
 
Three Months Ended
March 31,
 
$ Change
 
% Change
 
2020
 
2019
 
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
 
Oil, natural gas and NGL sales
$
122,098

 
$
131,102

 
$
(9,004
)
 
(7
)%
Electricity sales
5,461

 
9,729

 
(4,268
)
 
(44
)%
Gain (losses) on oil derivatives
211,229

 
(65,239
)
 
276,468

 
n/a

Marketing and other revenues
477

 
947

 
(470
)
 
(50
)%
Total revenues and other
$
339,265

 
$
76,539

 
$
262,726

 
343
 %
Revenues and Other
Oil, natural gas and NGL sales decreased by $9 million, or 7% to approximately $122 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019. The decrease was mostly driven by $23 million of lower oil prices and $3 million lower gas prices. These decreases were partially offset by $18 million of higher oil volumes.
Electricity sales represent sales to utilities which decreased by $4 million, or 44%, to approximately $5 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019. The decrease was due to lower unit sales prices that were impacted by lower natural gas prices described above.
Gains on oil derivatives were approximately $211 million, including settlement gains of $24 million for the three months ended March 31, 2020, compared to a loss of approximately $65 million for the three months ended March 31, 2019, that consisted of $76 million mark-to-market valuation loss and $11 million settlement gains. During 2020, the change in Brent prices relative to our remaining positions at quarter end resulted in increased value.

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Marketing and other revenues were lower for the three months ended March 31, 2020, compared to the three months ended March 31, 2019 due to lower average gas prices. Marketing revenues in these periods represented sales of natural gas purchased from third parties.

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Three Months Ended
March 31,
 
$ Change
 
% Change
 
2020
 
2019
 
 
(in thousands, except expenses per Boe)
 
 
Expenses and other:
 
 
 
 
 
 
 
Lease operating expenses
$
50,752

 
$
57,928

 
$
(7,176
)
 
(12
)%
Electricity generation expenses
3,946

 
7,760

 
(3,814
)
 
(49
)%
Transportation expenses
1,822

 
2,173

 
(351
)
 
(16
)%
Marketing expenses
430

 
851

 
(421
)
 
(49
)%
General and administrative expenses
19,337

 
14,340

 
4,997

 
35
 %
Depreciation, depletion and amortization
35,329

 
24,585

 
10,744

 
44
 %
Impairment of oil and gas properties
289,085

 

 
289,085

 
100
 %
Taxes, other than income taxes
4,352

 
8,086

 
(3,734
)
 
(46
)%
Losses (gains) on natural gas derivatives
12,035

 
(2,115
)
 
14,150

 
n/a

Other operating expenses
2,202

 
1,245

 
957

 
77
 %
Total expenses and other
419,290

 
114,853

 
304,437

 
265
 %
Other (expenses) income:
 
 
 
 
 
 
 
Interest expense
(8,920
)
 
(8,805
)
 
(115
)
 
1
 %
Other, net
(6
)
 
154

 
(160
)
 
(104
)%
Reorganization items, net

 
(231
)
 
231

 
(100
)%
Loss before income taxes
(88,951
)
 
(47,196
)
 
(41,755
)
 
(88
)%
Income tax expense (benefit)
26,349

 
(13,098
)
 
39,447

 
301
 %
Net loss
$
(115,300
)
 
$
(34,098
)
 
$
(81,202
)
 
(238
)%
 
 
 
 
 
 
 
 
Expenses per Boe:(1)
 
 
 
 
 
 
 
Lease operating expenses
$
18.14

 
$
23.16

 
$
(5.02
)
 
(22
)%
Electricity generation expenses
1.41

 
3.10

 
(1.69
)
 
(55
)%
Electricity sales(1)
(1.95
)
 
(3.89
)
 
1.94

 
(50
)%
Transportation expenses
0.65

 
0.87

 
(0.22
)
 
(25
)%
Transportation sales(1)
(0.01
)
 
(0.05
)
 
0.04

 
(80
)%
Marketing expenses
0.15

 
0.34

 
(0.19
)
 
(56
)%
Marketing revenues(1)
(0.16
)
 
(0.33
)
 
0.17

 
(52
)%
Derivatives settlements paid (received) for gas purchases(1)
1.58

 
(1.49
)
 
3.07

 
206
 %
Total operating expenses
$
19.81

 
$
21.71

 
$
(1.90
)
 
(9
)%
Total unhedged operating expenses(2)
$
18.23


$
23.20

 
$
(4.97
)
 
(21
)%
 
 
 
 
 
 
 
 
Total non-energy operating expenses(4)
$
14.03

 
$
14.68

 
$
(0.65
)
 
(4
)%
Total energy operating expenses(5)
$
5.78

 
$
7.04

 
$
(1.26
)
 
(18
)%