Berry Petroleum 10-K 12-31-2003


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

FORM 10-K

x  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
Commission file number 1-9735

BERRY PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE
77-0079387
(State of incorporation or organization)
(I.R.S. Employer Identification Number)
5201 Truxtun Avenue, Suite 300
Bakersfield, California 93309
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (661) 616-3900

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
 
Name of each exchange
Title of each class
on which registered

Class A Common Stock, $.01 par value

New York Stock Exchange
(including associated stock purchase rights)
 

Securities registered pursuant to Section 12(g) of the Act: None

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 x    NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES x    NO o

As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates was $285,032,394. As of February 9, 2004, the registrant had 20,915,746 shares of Class A Common Stock outstanding. The registrant also had 898,892 shares of Class B Stock outstanding on February 9, 2004, all of which is held by an affiliate of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Part III is incorporated by reference from the registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be filed, pursuant to Regulation 14A, no later than 120 days after the close of the registrant's fiscal year.

 
     

 
 
BERRY PETROLEUM COMPANY
TABLE OF CONTENTS

PART I
 
 
Page

Items 1 and 2.
Business and Properties
3
 
General
3
 
Crude Oil and Natural Gas Marketing
4
 
Steaming Operations
6
 
Electricity Generation
7
 
Electricity Sales Contracts
7
 
Environmental and Other Regulations
8
 
Competition
9
 
Employees
9
 
Oil and Gas Properties
9
 
Enhanced Oil Recovery Tax Credits
12
 
Oil and Gas Reserves
12
 
Production
12
 
Acreage and Wells
13
 
Drilling Activity
13
 
Title and Insurance
13
 
 
 
Item 3.
Legal Proceedings
14
Item 4.
Submission of Matters to a Vote of Security Holders
14
 
Executive Officers
14
 
 
 
PART II
 
 
 
Item 5.
Market for the Registrant's Common Equity and Related Shareholder Matters
15
Item 6.
Selected Financial Data
16
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
21
Item 8.
Financial Statements and Supplementary Data
23
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
43
Item 9A
Controls and Procedures
43
 
 
 
PART III
 
 
 
Item 10.
Directors and Executive Officers of the Registrant
43
Item 11.
Executive Compensation
43
Item 12.
Security Ownership of Certain Beneficial Owners and Management
43
Item 13.
Certain Relationships and Related Transactions
43
Item 14.
Principal Accounting Fees and Services
43
 
 
 
PART IV
 
 
 
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
44

 
   

 
 
PART I
Items 1 and 2. Business and Properties

Company Website

The Company has a website located at http:\\www.bry.com. The website can be used to access recent news releases and Securities and Exchange Commission filings, crude oil price postings, the Company’s Annual Report, Proxy Statement, Board committee charters, the code of ethics for senior financial officers  and other items of interest.

General

Berry Petroleum Company, (Berry or Company), is an independent energy company engaged in the production, development, acquisition, exploitation and exploration of crude oil and natural gas. While the Company was incorporated in Delaware in 1985 and has been a publicly traded company since 1987, it can trace its roots in California oil production back to 1909. Currently, Berry's principal reserves and producing properties are located in the San Joaquin Valley, Los Angeles and Ventura basins in California and the Uinta Basin in northeastern Utah. The Company’s corporate headquarters are located in Bakersfield, California. The Company also opened an office in Denver, Colorado in 2003 to pursue opportunities in the Rocky Mountain region. Management believes that these facilities are adequate for its current operations and anticipated growth. Information contained in this report on Form 10-K reflects the business of the Company during the year ended December 31, 2003.

The Company's mission is to increase shareholder returns, primarily through maximizing the value and cash flow of the Company's assets. To achieve this, Berry's corporate strategy is to, at a minimum, increase its net proved reserves annually, grow production annually and, in the process, increase both net income and cash flow in total and per share. To increase proved reserves and production, the Company will compete to acquire oil and gas properties with principally proved reserves and exploitation potential or sizeable acreage positions that the Company believes can ultimately contain substantial reserves which can be developed at reasonable costs. Additionally, the Company will continue to focus on the further development of its properties through developmental drilling, well completions, remedial work and by application of enhanced oil recovery (EOR) methods, as applicable. In conjunction with the goals of maximizing profitability and the exploitation and development of its substantial heavy crude oil base, the Company owns three cogeneration facilities which are intended to provide an efficient and secure long-term supply of steam which is necessary for the economic production of heavy oil. Berry views these assets as a key part of its long-term success. Berry believes that its primary strengths are its ability to maintain a cost-efficient operation, its flexibility in acquiring attractive producing properties which have significant exploitation and enhancement potential, its strong financial position and its experienced management team and staff. While the Company continues to seek investment opportunities in California, the Company has identified the Rocky Mountain region as a primary area of interest for growth. The Company believes that it can be successful in growing its reserve base and production in a profitable manner by investing in certain assets in the region. Additio nally, it provides substantial opportunity for the Company to diversify its existing predominantly heavy crude oil base into light oil and natural gas. Strategically, the Company desires to increase its natural gas reserves and production as the Company consumes approximately 37,000 MMBtu daily as fuel for steam generation which is utilized in its California heavy oil operations. During the year, the Company opened an office in Denver and completed the purchase of the Brundage Canyon properties in the Uinta Basin in northeastern Utah. This acquisition and its ongoing development and operations are assisting Berry in achieving its strategies in the near term. The Company has an unsecured credit facility with a current borrowing base of $200 million (at year-end 2003, $150 million is available) which may be utilized in adding reserves and production through acquisitions.

Proved Reserves

As of December 31, 2003, the Company's estimated proved reserves were 110 million barrels of oil equivalent, (BOE), of which 91% are heavy crude oil, 6% light crude oil and 3% natural gas. A significant portion of these proved reserves are owned in fee. Geographically, 91% of the Company’s reserves are located in California and 9% in the Rocky Mountain region. Production in 2003 was 6 million BOE, up 15% from 2002 production of 5.3 million BOE. For the five years 1999 through 2003, the Company's average annual reserve replacement rate was 163% and the acquisition, finding and development cost was $4.13 per BOE. Based on average daily fourth quarter production for each year, the Company’s reserves-to-production ratio was 16.2 years at year-end 2003, reduced from 18.3 years at year-end 2002.

Acquisitions

The Company actively pursued its growth strategy, completing two acquisitions during the year. In August 2003, the Company completed the acquisition of the Brundage Canyon properties, in the Uinta Basin of Utah, for approximately $45 million. Brundage Canyon is Berry’s first acquisition of a Company operated core asset outside of California, and is consistent with the Company’s goal of building a strong asset portfolio in the Rocky Mountain region. This acquisition was financed utilizing the Company’s revolving credit facility. At year-end, proved reserves for this property were approximately 9.2 million BOE or 8% of total reserves. In addition, the Company added to its California assets through the purchase of certain properties in the Poso Creek field in March, 2003 for $2.6 million. This acquisition added approximately 2.5 million BOE of proved reserves.

 
   3  

 
 
Operations

Berry operates all of its principal oil producing properties. In California, the Midway-Sunset and Placerita fields contain predominantly heavy crude oil which requires heat, supplied in the form of steam, injected into the oil producing formations to reduce the oil viscosity which allows the oil to flow to the well-bore for production. Berry utilizes cyclic steam and steam flood recovery methods in the Midway-Sunset and Placerita fields and primary recovery methods at its Montalvo field. Berry is able to produce its heavy oil at its Montalvo field without steam since the majority of the producing reservoir is at a depth in excess of 11,000 feet and thus the reservoir temperature is high enough to produce the oil without the assistance of additional heat from steam. In Utah, the Brundage Canyon field consists of light gravity crude and associated natural gas produced from a depth o f approximately 6,000 feet. Company-wide field operations include the initial recovery of the crude oil and its transport through treating facilities into storage tanks. After the treating process is completed, which includes removal of water and solids by mechanical, thermal and chemical processes, the crude oil is metered through lease automatic custody transfer units or gauged before sale and subsequently transferred into crude oil pipelines owned by other companies or transported via truck. Crude oil produced from the Brundage Canyon field is transported by truck, while its gas production, net of field usage, is transported by feeder pipelines to two main shipper pipelines.

Revenues

Total revenues for 2003 increased by $50 million or 38% over 2002. Total revenues and the percentage of revenues by source for the prior three years are as follows:

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Total revenues (in millions)
 
$
181
 
$
131
 
$
138
 
Sales of oil and gas
   
75
%
 
78
%
 
72
%
Sales of electricity
   
24
%
 
21
%
 
26
%
Other
   
1
%
 
1
%
 
2
%
 
Crude Oil and Natural Gas Marketing

The global and California crude oil markets continue to remain strong. The Organization of Petroleum Exporting Countries (OPEC) has successfully managed crude oil prices despite petroleum product demand weakness due to worldwide economic slowdowns and political instability during 2001 and 2002. Product prices began to rise in 2002 and continued to exhibit an overall-strengthening trend during 2003. The NYMEX settlement price for West Texas Intermediate (WTI), the U.S. benchmark crude oil, averaged $30.99 for 2003 compared to $26.15 for 2002 and $25.95 in 2001. The range for the year 2003 was a low of $25.24 and a high of $37.83. The average posted price for the Company’s 13º API heavy crude oil was $25.27 for 2003 compared to $20.67 for 2002 and $18.70 for 2001. The range of posted prices for the Company’s heavy crude oil in 2003 included a low of $18.81 and a high o f $32.44.

While crude oil price differentials between WTI and California’s heavy crude widened during 2001, the trend reversed in 2002 and continued to stay below $6 per barrel during 2003. The crude price differential between WTI and California’s heavy crude oil has averaged $5.73, $5.48 and $7.25 for 2003, 2002 and 2001, respectively. A price-sensitive royalty burdens one of the Company’s California properties which produces approximately 4,000 barrels per day. This royalty is 75% of the amount of the heavy oil posted price above a base price which was $14.59 in 2003. This base price escalates at 2% annually, thus the threshold price is $14.88 per barrel in 2004.

Berry markets its crude oil production to competing buyers including independent marketers but primarily to major oil refining companies. Because of the Company’s ability to deliver significant volumes of crude oil over a multi-year period, the Company was able to secure a three-year sales agreement, beginning in April 2000, with a major California refiner whereby the Company sold in excess of 80% of its California production under a negotiated pricing mechanism. This contract was renegotiated during 2002 and extended through 2005. Over 90% of the Company’s current California production is subject to this new contract. Pricing in the new agreement is based upon the higher of the average of the local field posted prices plus a fixed premium, or WTI minus a fixed differential. Both methods are calculated using a monthly determination. In addition to providing a premium abov e field postings, the agreement effectively eliminates the Company’s exposure to the risk of widening WTI to California heavy crude price differentials and allows the Company to effectively hedge its production based on WTI pricing. The Brundage Canyon crude oil, which is approximately 40 degree API gravity, is priced at WTI less a fixed differential.
 
 
   4  

 
 
Berry markets produced natural gas from Utah, Wyoming and California. In October 2003, the Company began marketing produced gas from the Brundage Canyon field. The majority of the natural gas from Brundage Canyon is sold in the Salt Lake City market at a Questar monthly index related price with an adjustment for transportation. Brundage Canyon volume in excess of Berry’s firm pipeline transportation volume is sold at the field at a Questar daily spot related price. The Company owns a non-operated working interest in the South Joe Creek field in the Powder River Basin in Wyoming. Berry started marketing its working interest share of production in-kind from South Joe Creek in December 2002, at Glenrock, Wyoming at monthly Colorado Interstate Gas (CIG) index related prices. Additionally, produced gas from the West Montalvo field near Oxnard, CA is exchanged and valued at a daily SoCal Border spot related price.

For 2003, SoCal Border first-of-month indices averaged $5.05 per MMBtu and the Rockies CIG indices averaged $4.19 per MMBtu. The average monthly index price for the Questar price point was $4.07 per MMBtu in the fourth quarter of 2003. The closing price for the NYMEX prompt month natural gas contract averaged $5.84, $3.37 and $4.05 for years 2003, 2002 and 2001 respectively. The weighted average price the Company received per Mcf during these years was $5.03, $2.31 and $4.06 respectively.
 
The Company has physical access to interstate gas pipelines, such as the Kern River Pipeline and the Questar Pipeline, as well as California intrastate systems owned by Southern California Gas Company and Pacific Gas & Electric (PG&E), to move gas to or from market.  To avoid negative financial impacts to the Company should California pipeline capacity become constrained, the Company entered into a long-term gas transportation contract with Kern River Gas Transmission Company for 12,000 MMBtu/D. This is a ten year contract which began in May 2003. The Company also holds two firm transportation contracts on the Questar Pipeline system in Utah.
 
From time to time, the Company enters into crude oil and natural gas hedge contracts, the terms of which depend on various factors, including Management’s view of future crude oil prices and the Company’s future financial commitments. This price protection program is designed to moderate the effects of a severe price downturn while allowing Berry to participate in the upside after a maximum per barrel payment. Currently, the hedges are in the form of swaps or options; however, the Company is considering using a variety of hedge instruments for use in the future. The Company has utilized bracketed zero-cost collars as they meet the Company’s objectives of retaining significant upside while being adequately protected on a significant downside price movement. These price protection activities resulted in a net cost or (benefit)/BOE to the Company of $1.96 in 2003, $.72 in 2002 and ($.16) in 2001.

 
   

 
 
The following table summarizes the hedge position of the Company as of February 9, 2004:

Crude Oil and Natural Gas Hedges
 
 
 
 
 
 
(Based on NYMEX Pricing)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 

 

 

Floor

 

 

Ceiling

 

 

 

   Barrels

 


 


 

Term

 

 

Per Day

 

 

Sell Put

 

 

Buy Put

 

 

Sell Call

 

 

Buy Call
 

 
 
 
 
 
 
Crude Oil Hedges
   
 
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
 
   
 
 
01/01/2004 – 03/31/2004
   
2,500
 
$
18.25
 
$
22.10
 
$
25.40
 
$
30.10
 
 
   
 
   
 
   
 
   
 
   
 
 
01/01/2004 – 03/31/2004
   
2,500
 
$
18.25
 
$
22.10
 
$
25.45
 
$
30.10
 
 
   
 
   
 
   
 
   
 
   
 
 
04/01/2004 – 12/31/2004
   
1,000
 
$
19.00
 
$
22.00
 
$
25.50
 
$
29.40
 
 
   
 
   
 
   
 
   
 
   
 
 
04/01/2004 – 12/31/2004
   
1,000
 
$
19.50
 
$
23.00
 
$
26.00
 
$
29.75
 
 
   
 
   
 
   
 
   
 
   
 
 
04/01/2004 – 12/31/2004
   
1,000
 
$
19.50
 
$
23.00
 
$
26.00
 
$
29.50
 
 
   
 
   
 
   
 
   
 
   
 
 
04/01/2004 – 12/31/2004
   
1,000
 
$
19.50
 
$
23.00
 
$
26.25
 
$
29.85
 
 
   
 
   
 
   
 
   
 
   
 
 
01/01/2004 – 04/30/2004
   
1,000
 
$
-
 
$
25.00
 
$
25.00
 
$
-
 
 
   
 
   
 
   
 
   
 
   
 
 
01/01/2004 – 12/31/2004
   
1,500
 
$
-
 
$
29.25
 
$
29.25
 
$
-
 
 
   
 
   
 
   
 
   
 
   
 
 
01/01/2004 – 12/31/2004
   
1,500
 
$
-
 
$
29.00
 
$
29.00
 
$
-
 
 
   
 
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Natural Gas Hedges
   
MMBtu
   
 
   
 
   
 
   
 
 
 
   
Per Day
   
 
   
 
   
 
   
 
 
   
                         
01/01/2004 – 06/30/2006
   
2,500
 
$
-
 
$
4.85
 
$
4.85
 
$
-
 
 
   
 
   
 
   
 
   
 
   
 
 
01/01/2004 – 06/30/2006
   
2,500
 
$
-
 
$
4.85
 
$
4.85
 
$
-
 
 
Payments to our counterparties are triggered when NYMEX monthly average prices are between the Ceiling Sell Call and Buy Call prices. Conversely, payments from our counterparties are received when the NYMEX monthly average prices are between the Floor Sell Put and Buy Put prices. Management regularly monitors the crude oil markets and the Company’s financial commitments to determine if, when, and at what level some form of crude oil hedging or other price protection is appropriate.

Steaming Operations

Cogeneration Steam Supply

As of December 31, 2003, approximately 86% of the Company's proved reserves, or 94 million barrels, consisted of heavy crude oil produced from depths shallower than 2,000 feet. The Company, in pursuing its goal of being a cost-efficient heavy oil producer, has remained focused on minimizing its steam cost. One of the main methods of keeping steam costs low is through the ownership and efficient operation of cogeneration facilities. Two of these cogeneration facilities, a 38 megawatt (MW) and an 18 MW facility are located in the Company’s South Midway-Sunset field. The Company also owns a 42 MW rated cogeneration facility located at the Company’s Placerita field. Steam generation from these facilities, with a total steam capacity of approximately 38,000 barrels of steam per day (BSPD), is more efficient than conventional steam generation as both steam and electricity are c oncurrently produced from a common fuel stream. The Company purchases approximately 2,000 BSPD under contract on favorable terms from a non-Company owned cogeneration facility
 
 
   6  

 
 
Conventional Steam Generation

In addition to these cogeneration plants, the Company owns sixteen conventional boilers. The number which are operated at any one time is dependent on the quantity needed to meet peak steam demands. The total rated capacity of the conventional boilers is also approximately 38,000 BSPD.

Blending Sources for an Advantage

The Company believes it has a distinct advantage over other operators by the ownership of these varied steam generation facilities and sources, allowing for maximum control over the steam supply, location, and to some extent the aggregated cost. The Company’s steam supply and flexibility are crucial for the maximization of oil production, cost control and ultimate reserve recovery.

High natural gas prices have persisted throughout 2003. The cost of natural gas purchased per MMBtu averaged $4.88, $3.13, and $5.76 for 2003, 2002 and 2001, respectively. Many of the Company’s conventional steam generators were run in 2003 to achieve the Company’s goal of increasing heavy oil production to record levels.

The Company believes that it may become necessary to add additional steam capacity for its future development projects at South Midway-Sunset and Placerita to allow for full development of its properties. While the Company vigorously pursued the possibility of constructing additional cogeneration facilities in 2001 and tested the market in 2002, the regulatory environment and operating and financial conditions for new cogeneration facilities in California remain uncertain. The Company regularly reviews its most economical source for obtaining additional steam to achieve its growth objectives.

Electricity Generation

The total annual average electrical generation of the Company’s three cogeneration facilities is approximately 93 MW, of which the Company consumes approximately 8 MW for use in its operations. The three facilities can also supply approximately 38,000 BSPD. Each facility is centrally located on an oil producing property such that the steam generated by the facility is capable of being delivered to the wells that require steam for the enhanced oil recovery process. The Company’s investment in its cogeneration facilities have been for the express purpose of lowering the steam costs in its heavy oil operations and securing operating control of the respective steam generation. Expenses of operating the cogeneration plants are analyzed monthly on a Company-wide basis. Any profits from cogeneration operations are considered profits from electricity generation. If expenses excee d electricity revenues, the excess expenses are recorded as oil and gas operating costs.

Electricity Sales Contracts

Historically, the Company has sold electricity produced by its cogeneration facilities to Southern California Edison Company (Edison) and PG&E under long-term contracts. These contracts are referred to as Standard Offer (SO) contracts under which the Company is paid an energy payment that reflects the utility’s avoided short-term variable cost to produce electricity (SRAC) plus a capacity payment that reflects a recovery of capital expenditures that would otherwise have been made by the utility. The capacity payments are either fixed throughout the term of the agreement or can be adjusted from time to time by the California Public Utilities Commission (CPUC). The SRAC energy price is determined by a formula that reflects the utility’s marginal fuel cost and a conversion efficiency that represents a hypothetical utility resource to generate electricity in the absence o f the cogenerator. Natural gas is now the marginal fuel for California Investor Owned Utilities (IOUs) so this formula provides a hedge against the Company’s cost of gas to produce electricity and steam in its cogeneration facilities.

As the California energy crisis worsened in 2000, neither utility paid the Company for electricity delivered under the contracts from late 2000 through March 2001. PG&E filed for bankruptcy on April 6, 2001 and Edison operated on the brink of bankruptcy for an extended period. The Company was forced to shut down its cogeneration facilities and to terminate its SO contracts with PG&E in order to seek a creditworthy buyer for its electricity. Berry sold electricity from its Cogen 18 and Cogen 38 facilities to a creditworthy, non-utility buyer from June 2001 through December 2002. In June 2001, the CPUC approved an agreement under which Berry resumed operation of its Placerita cogeneration facilities, Edison agreed to amend the SRAC payment terms and resume payments to Berry under its original SO contracts, and Edison agreed to pay all past due amounts owed Berry since Novembe r 2000. The original SO contract for Placerita Unit 1 continues in effect through March 2009. The modified SRAC pricing terms reflect a fixed energy price of 5.37 cents/kilowatt per hour (KWh) until June 2006, at which time the energy price reverts to the SRAC pricing methodology then approved by the CPUC. Edison continued to purchase electricity under the SO contract for Placerita Unit 2 until its scheduled expiration in May 2002. From June 2002 through January 2003, the Company sold electricity from that facility to a creditworthy, non-utility buyer. On August 22, 2002, the CPUC ordered the California IOUs to offer SO contracts to certain cogeneration facilities with expired SO contracts (Qualifying Facilities or QFs) for a maximum term of one year. The Company met these requirements and entered into new SO contracts with Edison for its Placerita Unit 2 and with PG&E for its Cogen 38 and Cogen 18 facilities effective January 2003. These three new SO contracts resulted in improved electrical pricing, wh ich in turn contributed to lower operating costs for the Company’s crude oil production operations during 2003. All three SO contracts terminated on December 31, 2003, as originally ordered by the CPUC.

 
   

 
 
On December 18, 2003, the CPUC ordered the California IOUs to continue to offer SO contracts to certain QFs with expired SO contracts, such as Berry, for a one year term beginning January 1, 2004. In the same decision, the CPUC also directed its staff to initiate a comprehensive review and revision of the SRAC pricing methodology. Edison has appealed the legality of the December 18, 2003 CPUC decision that ordered the additional one-year extension of SO contracts. They also contend the term of the agreement could be less than one year. The Company disputes Edison’s claims and opposes Edison’s appeal of the decision. The Company executed a one year extension of its SO contract with Edison for the Placerita Unit 2 facility, that is subject to early termination if Edison is successful in their appeal. The Company also executed one year extensions of its SO contracts with PG& amp;E.

On January 22, 2004, the CPUC issued a decision that establishes the rules under which the California IOUs will produce or procure energy for their customers for at least the next 5-10 years. Among other things, this decision ordered the California IOUs to offer SO contracts to certain QFs whose SO contracts will terminate prior to December 31, 2005, such as Berry, for a term of 5 years. The SRAC price paid under these SO contracts is subject to the same prospective adjustments that were required in the prior CPUC decision that ordered the one-year extension. The Company is carefully reviewing the options available in the recent CPUC order.

Facility and Contract Summary

Location and Facility
   
Type of Contract

 

 

Purchaser

 

 

Contract Expiration

 

 

Approximate Megawatts Available for Sale

 

 

Approximate Megawatts Consumed in Operations

 

 

Approximate Barrels of Steam Per Day
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Placerita
   
 
   
 
   
 
   
 
   
 
   
 
 
    Placerita Unit 1
   
SO2
   
Edison
   
Mar-09
   
20
   
-
   
6,600
 
    Placerita Unit 2
   
SO1
   
Edison
   
Dec-04
   
16
   
4
   
6,700
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
South Midway-Sunset
   
 
   
 
   
 
   
 
   
 
   
 
 
    Cogen 18
   
SO1
   
PG&E
   
Dec-04
   
12
   
4
   
6,600
 
    Cogen 38
   
SO1
   
PG&E
   
Dec-04
   
37
   
-
   
18,000
 
 
Environmental and Other Regulations

Berry Petroleum Company is committed to responsible management of the environment, health and safety, as these areas relate to the Company’s operations. The Company strives to achieve the long-term goal of sustainable development within the framework of sound environmental, health and safety practices and standards. Berry makes environmental, health and safety protection an integral part of all business activities, from the acquisition and management of its resources through the decommissioning and reclamation of its wells and facilities.

The oil and gas production business in which Berry participates is complex. All facets of the Company's operations are affected by a myriad of federal, state, regional and local laws, rules and regulations. Berry is further affected by changes in such laws and by constantly changing administrative regulations. Furthermore, government agencies may impose substantial liabilities if the Company fails to comply with such regulations or for any contamination resulting from the Company's operations.

Therefore, Berry has programs in place to identify and manage known risks, to train employees in the proper performance of their duties and to incorporate viable new technologies into its operations. The costs incurred to ensure compliance with environmental, health and safety laws and other regulations are inextricably connected to normal operating expenses such that the Company is unable to separate the expenses related to these matters.

 
   8  

 
 
Currently, California environmental laws and regulations are being revised to lower emissions from stationary sources. Although these requirements do have a substantial impact upon the energy industry, generally these requirements do not appear to affect the Company any differently, or to any greater or lesser extent, than other companies in California. Berry believes that compliance with environmental laws and regulations will not have a material adverse effect on the Company's operations or financial condition. There can be no assurances, however, that changes in, or additions to, laws and regulations regarding the protection of the environment will not have such an impact in the future.

Berry maintains insurance coverage that it believes is customary in the industry although it is not fully insured against all environmental or other risks. The Company is not aware of any environmental claims existing as of December 31, 2003 that would have a material impact upon the Company's financial position, results of operations, or liquidity.

Competition

The oil and gas industry is highly competitive. As an independent producer, the Company does not own any refining or retail outlets and, therefore, it has little control over the price it receives for its crude oil. As such, higher costs, fees and taxes assessed at the producer level cannot necessarily be passed on to the Company's customers. In acquisition activities, significant competition exists as integrated and independent companies and individual producers and operators are active bidders for desirable oil and gas properties. Although many of these competitors have greater financial and other resources than the Company, Management believes that Berry is in a position to compete effectively due to its low cost structure, transaction flexibility, strong financial position, experience and determination.

Employees

On December 31, 2003, the Company had 129 full-time employees, up from 113 full-time employees on December 31, 2002.

Oil and Gas Properties

Development

Unless otherwise noted, gross acreage, net wells, fourth quarter production, and year-end reserves are used in the property descriptions below.

California

Midway-Sunset - Berry owns and operates working interests in 38 properties consisting of 4,559 acres located in the Midway-Sunset field. The Company estimates these properties account for approximately 67% of the Company's proved oil and gas reserves and approximately 64% of its current daily production. Of these properties, 18 are owned in fee. The wells produce from an average depth of approximately 1,200 feet, and rely on thermal EOR methods, primarily cyclic steaming.

During 2003, the primary focus at Midway-Sunset was on the Formax properties. Of the 83 wells drilled in the Midway-Sunset field in 2003, 13 were horizontal wells, and 31 were on the Formax properties. The objectives of using horizontal drilling are to improve ultimate recovery of original oil-in-place, reduce the development and operating costs of the properties and to accelerate production. In 2004, the Company plans to drill an additional 42 wells in the Midway-Sunset field, including 2 horizontals.

Placerita – The Company’s assets in the Placerita field consist of six leases and three fee properties totaling approximately 1,030 acres. The average depth of these wells is 1,800 feet and the properties rely extensively on thermal recovery methods, primarily steam flooding. The property accounts for approximately 17% of proved reserves and 19% of current daily production.

During 2003, the Company drilled eleven development wells at Placerita in continuation of a major development campaign at the north end of the field. Included in the Company's 2004 development plan is the drilling of three new wells to begin the redevelopment of the Castruccio property the Company acquired several years ago.

Montalvo – Berry owns a 100% working interest in six leases totaling 8,563 acres in the Ventura Basin comprising the entire Montalvo field. The State of California is the lessor for two of the six leases. The Company estimates current proved reserves from Montalvo account for approximately 5% of Berry’s proved oil and gas reserves and approximately 4% of Berry's current daily production. The wells produce from an average depth of approximately 11,500 feet. No new wells were drilled in 2003, however several wells were remediated and returned to production. There are no plans at this time to drill any new wells in 2004, however two idle wells are scheduled to be returned to production and one major workover will be completed.

 
   9  

 
 
McVan – In March 2003, the Company purchased a 100% working interest in the McVan property located in the Poso Creek field. The property consists of 560 acres with a total of 71 wells. Year-end 2003 proved reserves comprise 2% of Berry’s proved oil and gas reserves while production is minimal. Plans for 2004 include drilling one well, working over 10 wells and reinitiating steam injection on the property.

Rockies and Mid-Continent

Brundage Canyon, Utah - On August 28, 2003, Berry closed the acquisition of and assumed operations of the Brundage Canyon field, Duchesne County, Utah. The Brundage Canyon leasehold consists of federal, tribal and private leases totaling 45,380 gross acres. The Company estimates that the Brundage Canyon properties account for approximately 8% of proved oil and gas reserves and approximately 12% of current daily production. There are 110 wells in the Brundage Canyon field, producing oil and associated natural gas with an average well depth of 6,000 feet.

Berry initiated a twenty-six well, two rig drilling program in early September, 2003, immediately following the closing of the acquisition, and twenty-two of the new wells were producing by year-end. The field is currently being developed on eighty-acre spacing with substantial undeveloped acreage. The Company’s objectives for 2004 include the drilling of 44 additional wells and the recompletion of twenty existing wells.

South Joe Creek, Wyoming - The Company holds a 15.83% non-operated working interest in the South Joe Creek coalbed methane gas field which represents interests in federal, state and private leases totaling 5,266 acres in the northeastern portion of the Powder River Basin in Wyoming. The property has 84 wells (13 net). At year-end, the net production rate was 1,200 Mcf per day, or approximately 1% of daily production and net reserves were less than 1%. We anticipate the drilling of 15 wells (2.4 net) in 2004.

Mickelson Creek, Wyoming – In June 2003, the Company purchased three federal leases located in the Mickelson Creek field in Sublette County, Wyoming. There are currently five wells on the 2,800 acre property. While production and reserves are minimal at this time, the Company plans to drill two wells and recomplete two wells in 2004.

Kansas and Illinois Coalbed Methane (CBM) Projects – In mid-2002, the Company began to build a significant acreage position in both Eastern Kansas (208,000 acres) and Central Illinois (54,000 acres) to develop natural gas production and reserves from known coalbeds. The Company drilled a five-spot production pilot in each state in late 2002. In 2003, the Company determined both these pilots were non-commercial. As such, the Company has no reserves in either state as of December 31, 2003. The Company sold its interest in 43,000 acres in Kansas in mid-2003 while retaining an overriding royalty interest. The Company’s objectives in 2004 include the continued evaluation of CBM activities in Illinois and further delineation of our CBM acreage in Kansas.

 
  10   

 
 
The following is a summary of the Company's capital expenditures incurred during 2003 and 2002 and budgeted capital expenditures for 2004.
 
CAPITAL EXPENDITURES SUMMARY
(in thousands)

 
   
2004

 

 

2003

 

 

2002

 

 

 


 


 


 

 

 

 

(Budgeted) (1)
   
 
   
 
 
CALIFORNIA
   
 
   
 
   
 
 
Midway-Sunset Field
   
 
   
 
   
 
 
New wells
 
$
6,885
 
$
10,710
 
$
10,224
 
Remedials/workovers
   
2,045
   
1,718
   
1,981
 
Facilities - oil & gas
   
2,385
   
3,136
   
1,340
 
Facilities - cogeneration (2)
   
150
   
231
   
898
 
General
   
1,682
   
187
   
-
 
   
 
 
 
 
   
13,147
   
15,982
   
14,443
 
   
 
 
 
Placerita
   
 
   
 
   
 
 
New wells
   
322
   
6,509
   
5,278
 
Remedials/workovers
   
1,233
   
154
   
174
 
Facilities - oil & gas
   
1,590
   
916
   
2,480
 
Facilities - cogeneration (2)
   
150
   
370
   
4,382
 
   
 
 
 
 
   
3,295
   
7,949
   
12,314
 
   
 
 
 
Montalvo
   
 
   
 
   
 
 
Remedials/workovers
   
1,180
   
928
   
909
 
Facilities
   
425
   
94
   
179
 
   
 
 
 
 
   
1,605
   
1,022
   
1,088
 
   
 
 
 
McVan
   
 
   
 
   
 
 
New Wells
   
150
   
-
   
-
 
Remedials/workovers
   
650
   
2
   
-
 
Facilities
   
540
   
666
   
-
 
   
 
 
 
 
   
1,340
   
668
   
-
 
   
 
 
 
 
   
 
   
 
   
 
 
Total California
   
19,387
   
25,621
   
27,845
 
   
 
 
 
 
   
 
   
 
   
 
 
ROCKIES AND MID-CONTINENT
   
 
   
 
   
 
 
Brundage Canyon
   
 
   
 
   
 
 
New Wells
   
26,203
   
14,298
   
-
 
Remedials/workovers
   
2,332
   
234
   
-
 
Facilities
   
1,930
   
146
   
-
 
   
 
 
 
 
   
30,465
   
14,678
   
-
 
   
 
 
 
Mickelson Creek
   
 
   
 
   
 
 
New Wells
   
1,500
   
-
   
-
 
Remedials/workovers
   
300
   
-
   
-
 
Facilities
   
175
   
-
   
-
 
   
 
 
 
 
   
1,975
   
-
   
-
 
   
 
 
 
Kansas and Illinois (CBM) (3)
   
 
   
 
   
 
 
New wells
   
300
   
392
   
1,185
 
Facilities
   
-
   
346
   
47
 
Remedials/workovers
   
-
   
3
   
-
 
   
 
 
 
 
   
300
   
741
   
1,232
 
   
 
 
 
South Joe Creek  (3) (4)
   
 
   
 
   
 
 
New wells
   
332
   
8
   
355
 
Facilities
   
-
   
5
   
216
 
   
 
 
 
 
   
332
   
13
   
571
 
   
 
 
 
Total Rocky Mountain and
   
 
   
 
   
 
 
Mid-Continent
   
33,072
   
15,432
   
1,803
 
   
 
 
 
 
   
 
   
 
   
 
 
Other
   
450
   
502
   
984
 
   
 
 
 
 
   
 
   
 
   
 
 
Totals
 
$
52,909
 
$
41,555
 
$
30,632
 
   
 
 
 
 
(1)   Budgeted capital expenditures may be adjusted for numerous reasons including, but not limited to, oil, natural gas and electricity price levels. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(2)   Cogeneration facility costs are excluded in the Company’s calculation of its finding and development costs.
(3)   Represents coalbed methane (CBM) development activity.
(4)   Represents Berry's net share, or 15.83%, of the total expenditures.
 
 
   11  

 
 
Exploration

The Company considered its pilot wells in both Kansas and Illinois to be exploratory in nature as there was no proven production near those areas; however, these were relatively inexpensive shallow wells. In recent years, the Company has concentrated on growth through development of existing assets and strategic acquisitions. The Company is pursuing an acquisition strategy which may include some exploratory drilling in the future.

Enhanced Oil Recovery Tax Credits

The Revenue Reconciliation Act of 1990 included a tax credit for certain costs associated with extracting high-cost, capital-intensive marginal oil or gas and which utilizes at least one of nine designated "enhanced" or tertiary recovery methods. Cyclic steam and steam flood recovery methods for heavy oil, which Berry utilizes extensively, are qualifying EOR methods. In 1996, California conformed to the federal law, thus, on a combined basis, the Company is able to achieve credits approximating 12% of its qualifying costs. The credit is earned only for qualified EOR projects by investing in one of three types of expenditures: 1) drilling development wells, 2) adding facilities that are integrally related to qualified EOR production, or 3) utilizing a tertiary injectant, such as steam, to produce oil. The credit may be utilized to reduce the Company's tax liability down to, but not below, its alternative minimum tax liability. This credit is significant in reducing the Company's income tax liabilities and effective tax rate.

Oil and Gas Reserves

The Company continued to engage DeGolyer and MacNaughton (D&M) to appraise the extent and value of its proved oil and gas reserves and the future net revenues to be derived from properties of the Company for the year ended December 31, 2003. D&M is an independent oil and gas consulting firm located in Dallas, Texas. In preparing their reports, D&M reviewed and examined geologic, economic, engineering and other data considered applicable to properly determine the reserves of the Company. They also examined the reasonableness of certain economic assumptions regarding forecasted operating and development costs and recovery rates in light of the economic environment on December 31, 2003. For the Company's operated properties, such reserve estimates are filed annually with the U.S. Department of Energy. See the Supplemental Information About Oil & Gas Producing Activitie s (Unaudited) for the Company's oil and gas reserve disclosures.

Production

The following table sets forth certain information regarding production for the years ended December 31, as indicated:

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Net annual production: (1)
   
 
   
 
   
 
 
Oil (Mbbls)
   
5,827
   
5,123
   
4,996
 
Gas (Mmcf)
   
1,277
   
769
   
288
 
Total equivalent barrels (2)
   
6,040
   
5,251
   
5,044
 
 
   
 
   
 
   
 
 
Average sales price:
   
 
   
 
   
 
 
Oil (per Bbl) before hedging
 
$
24.41
 
$
20.27
 
$
19.53
 
Oil (per Bbl) after hedging
   
22.37
   
19.54
   
19.70
 
Gas (per mcf) before hedging
   
4.40
   
2.22
   
5.09
 
Gas (per mcf) after hedging
   
4.43
   
2.22
   
5.09
 
Per BOE before hedging
   
24.48
   
20.11
   
19.63
 
Per BOE after hedging
   
22.52
   
19.39
   
19.79
 
Average operating cost – oil and gas production (per BOE) (3)
   
10.05
   
8.49
   
7.99
 
 
Mbbls – Thousands of Barrels
Mmcf – Million Cubic Feet
BOE – Barrels of Oil Equivalent
(1)   Net production represents that owned by Berry and produced to its interest, less royalty and other similar interests.
(2)   Equivalent oil and gas information is at a ratio of 6 thousand cubic feet (mcf) of natural gas to 1 barrel (Bbl) of oil. A barrel of oil (Bbl) is equivalent to 42 U.S. gallons.
(3)   Includes monthly expenses in excess of monthly revenues from cogeneration operations (per BOE) of $2.08, $1.72 and $1.31 for 2003, 2002 and 2001, respectively. See Note 2 to the financial statements.
 
 
   12  

 
 
Acreage and Wells

As of December 31, 2003, the Company's properties accounted for the following developed and undeveloped acres:

 
   
Developed Acres   

 

 

Undeveloped Acres

 

 

Total   

 

 

 


 


 


 


 


 


 

 

 

 

Gross

 

 

Net

 

 

Gross

 

 

Net

 

 

Gross

 

 

Net
 
   
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
California
   
7,786
   
7,786
   
7,404
   
7,404
   
15,190
   
15,190
 
Utah
   
9,520
   
9,360
   
35,860
   
34,140
   
45,380
   
43,500
 
Wyoming
   
3,800
   
750
   
4,266
   
2,250
   
8,066
   
3,000
 
Illinois
   
-
   
-
   
54,306
   
54,306
   
54,306
   
54,306
 
Kansas
   
-
   
-
   
163,993
   
163,993
   
163,993
   
163,993
 
Other
   
80
   
17
   
-
   
-
   
80
   
17
 
   
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
   
21,186
   
17,913
   
265,829
   
262,093
   
287,015
   
280,006
 
   
 
 
 
 
 
 
 
Gross acres represent acres in which Berry has a working interest; net acres represent Berry's aggregate working interests in the gross acres.

Berry currently has 2,757 gross oil wells (2,752 net) and 84 gross gas wells (13 net). Gross wells represent the total number of wells in which Berry has a working interest. Net wells represent the number of gross wells multiplied by the percentages of the working interests owned by Berry. One or more completions in the same bore hole are counted as one well. Any well in which one of the multiple completions is an oil completion is classified as an oil well.

Drilling Activity

The following table sets forth certain information regarding Berry's drilling activities for the periods indicated:

 
   
2003

 

 

2002

 

 

2001

 

 

 

 

Gross

 

 

Net

 

 

Gross

 

 

Net

 

 

Gross

 

 

Net
 
   
 
 
 
 
 
 
Exploratory wells drilled:
   
 
   
 
   
 
   
 
   
 
   
 
 
Productive
   
-
   
-
   
-
   
-
   
-
   
-
 
Dry (1)
   
-
   
-
   
11
   
11
   
-
   
-
 
Development wells drilled: (2)
   
 
   
 
   
 
   
 
   
 
   
 
 
Productive
   
121
   
119
   
81
   
76
   
103
   
47
 
Dry (1)
   
1
   
1
   
-
   
-
   
1
   
-
 
Total wells drilled:
   
 
   
 
   
 
   
 
   
 
   
 
 
Productive
   
121
   
119
   
81
   
76
   
103
   
47
 
Dry (1)
   
1
   
1
   
11
   
11
   
1
   
-
 
 
(1)    A dry well is a well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well. The 11 wells drilled in 2002 were determined to be dry holes in 2003.

(2)    Wells drilled include 2 wells gross, .3 wells net for 2003, 6 wells gross, 1 well net for 2002 and 67 wells gross, 11 wells net for 2001 at South Joe Creek where the Company holds a 15.83% working interest.
 
As of December 31, 2003, one well was being drilled on the Brundage Canyon property.

Title and Insurance

To the best of the Company's knowledge, there are no defects in the title to any of its principal properties including related facilities. Notwithstanding the absence of a recent title opinion or title insurance policy on all of its properties, the Company believes it has satisfactory title to its properties, subject to such exceptions as the Company believes are customary and usual in the oil and gas industry and which the Company believes will not materially impair its ability to recover the proved oil and gas reserves or to obtain the resulting economic benefits.

 
  13   

 
 
The oil and gas business can be hazardous, involving unforeseen circumstances such as blowouts or environmental damage. Although it is not insured against all risks, the Company maintains a comprehensive insurance program to address the hazards inherent in operating its oil and gas business.

Item 3.  Legal Proceedings

While the Company is, from time to time, a party to certain lawsuits in the ordinary course of business, the Company does not believe any of such existing lawsuits will have a material adverse effect on the Company's operations, financial condition, or liquidity.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Executive Officers

Listed below are the names, ages (as of December 31, 2003) and positions of the executive officers of Berry and their business experience during at least the past five years. All officers of the Company are appointed in May of each year at an organizational meeting of the Board of Directors. There are no family relationships between any of the executive officers and members of the Board of Directors.

JERRY V. HOFFMAN, 54, Chairman of the Board, President and Chief Executive Officer. Mr. Hoffman has been President and Chief Executive Officer since May 1994 and President and Chief Operating Officer from March 1992 until May 1994. Mr. Hoffman was added to the Board of Directors in March 1992 and named Chairman in March 1997. Mr. Hoffman held the Senior Vice President and Chief Financial Officer positions from January 1988 until March 1992 and was Chief Financial Officer from December 1985 until January 1988.

RALPH J. GOEHRING, 47, Senior Vice President and Chief Financial Officer. Mr. Goehring has been Senior Vice President since April 1997, Chief Financial Officer since March 1992 and was Manager of Taxation from September 1987 until March 1992. Mr. Goehring is also an Assistant Secretary for the Company.

GEORGE T. CRAWFORD, 43, has been Vice President of Production since December 2000 and was Manager of Production, from January 1999 to December 2000. Mr. Crawford, a petroleum engineer, was previously the Production Engineering Supervisor for ARCO Western Energy, a subsidiary of Atlantic Richfield Corp. (ARCO). Mr. Crawford was employed by ARCO from 1989 to 1998 in numerous engineering and operational assignments including Production Engineering Supervisor, Planning and Evaluation Consultant and Operations Superintendent.

MICHAEL DUGINSKI, 37, has been Vice President of Corporate Development since February 2002. Mr. Duginski, a mechanical engineer, was previously with Texaco, Inc. from 1988 to 2002 where his positions included Director of New Business Development, Production Manager and Gas and Power Operations Manager. Mr. Duginski is also an Assistant Secretary for the Company.

LOGAN MAGRUDER, 47, has been Vice President of Rocky Mountain and Mid-Continent Region since August 2003 and was a consultant for the Company from February until August 2003. Mr. Magruder was previously Vice President of U.S. Operations for Calpine Natural Gas Company during 2001. Prior to Calpine, Mr. Magruder was employed by Barrett Resources as Vice President of Engineering and Operations from 1996 to 2001.

BRIAN L. REHKOPF, 56, has been Vice President of Engineering since March 2000 and was Manager of Engineering from September 1997 to March 2000. Mr. Rehkopf, a registered petroleum engineer, joined the Company’s engineering department in June 1997 and was previously a Vice President and Asset Manager with ARCO Western Energy since 1992 and an Operations Engineering Supervisor with ARCO from 1988 to 1992. Mr. Rehkopf is also an Assistant Secretary for the Company.

DONALD A. DALE, 57, has been Controller since December 1985.

KENNETH A. OLSON, 48, has been Corporate Secretary since December 1985 and Treasurer since August 1988.
 
 
   14  

 

PART II

Item 5.  Market for the Registrant’s Common Equity and Related Shareholder Matters

Shares of Class A Common Stock (Common Stock) and Class B Stock, referred to collectively as the "Capital Stock," are each entitled to one vote and 95% of one vote, respectively. Each share of Class B Stock is entitled to a $1.00 per share preference in the event of liquidation or dissolution. Further, each share of Class B Stock is convertible into one share of Common Stock at the option of the holder.

In November 1999, the Company adopted a Shareholder Rights Agreement and declared a dividend distribution of one such Right for each outstanding share of Capital Stock on December 8, 1999. Each share of Capital Stock issued after December 8, 1999 includes one Right. The Rights expire on December 8, 2009. See Note 7 of Notes to the Financial Statements.

Berry's Class A Common Stock is listed on the New York Stock Exchange under the symbol (NYSE:BRY). The Class B Stock is not publicly traded. The market data and dividends for 2003 and 2002 are shown below:
 
   
2003

 

 

2002

 

 

 


 


 

 

 

 

Price Range

 

 

Dividends

 

 

Price Range

 

 

Dividends

 

 

 

 

High

 

 

Low

 

 

Per Share

 

 

High

 

 

Low

 

 

Per Share
 
   
 
 
 
 
 
 
First Quarter
 
$
17.01
 
$
14.65
 
$
0.10
 
$
16.90
 
$
13.25
 
$
0.10
 
Second Quarter
   
18.38
   
14.40
   
0.15
   
17.58
   
15.45
   
0.10
 
Third Quarter
   
19.17
   
16.96
   
0.11
   
18.25
   
14.52
   
0.10
 
Fourth Quarter
   
20.95
   
17.90
   
0.11
   
17.50
   
15.60
   
0.10
 

The closing price per share of Berry's Common Stock, as reported on the New York Stock Exchange Composite Transaction Reporting System for February 9, 2004, December 31, 2003 and December 31, 2002 was $19.07, $20.25 and $17.05, respectively.
The number of holders of record of the Company's Common Stock was 705 as of February 9, 2004. There was one Class B Shareholder of record as of February 9, 2004.

In August 2001, the Board of Directors authorized the Company to repurchase $20 million of Common Stock in the open market. As of December 31, 2001, the Company had repurchased 308,075 shares for approximately $5.1 million. All shares repurchased were retired. No additional shares were repurchased in 2002 or 2003.

The Company paid a special dividend of $.04 per share on May 2, 2003 and increased its regular quarterly dividend by 10%, from $.10 to $.11 per share beginning with the June 2003 dividend.

Since Berry Petroleum Company's formation in 1985 through December 31, 2003, the Company has paid dividends on its Common Stock for 57 consecutive quarters and previous to that for eight consecutive semi-annual periods. The Company intends to continue the payment of dividends, although future dividend payments will depend upon the Company's level of earnings, operating cash flow, capital commitments, financial covenants and other relevant factors.
 
As of December 31, 2003, dividends declared on 4,000,894 shares of certain Common Stock are restricted, whereby 37.5% of the dividends declared on these shares are paid by the Company to the surviving member of a group of individuals, the B group, for as long as this remaining member shall live.
 
 
   15  

 
 
Item 6.  Selected Financial Data

The following table sets forth certain financial information with respect to the Company and is qualified in its entirety by reference to the historical financial statements and notes thereto of the Company included in Item 8, “Financial Statements and Supplementary Data.” The statement of operations and balance sheet data included in this table for each of the five years in the period ended December 31, 2003 were derived from the audited financial statements and the accompanying notes to those financial statements (in thousands, except per share, per BOE and % data):

 
   
2003

 

 

2002

 

 

2001

 

 

2000

 

 

1999
 
   
 
 
 
 
 
Statement of Operations Data :
   
 
   
 
   
 
   
 
   
 
 
Sales of oil and gas
 
$
135,848
 
$
102,026
 
$
100,146
 
$
118,801
 
$
66,615
 
Sales of electricity
   
44,200
   
27,691
   
35,133
   
51,420
   
33,011
 
Operating costs – oil and gas production
   
60,705
   
44,604
   
40,281
   
44,837
   
27,829
 
Operating costs – electricity generation
   
44,200
   
27,360
   
34,722
   
49,221
   
27,210
 
General and administrative expenses (G&A)
   
9,586
   
7,928
   
7,174
   
7,754
   
6,269
 
Depreciation, depletion & amortization
   
 
   
 
   
 
   
 
   
 
 
(DD&A)
   
20,514
   
16,452
   
16,520
   
14,030
   
12,294
 
Net income
   
34,332
   
30,024
   
21,938
   
37,183
   
18,006
 
Basic net income per share
   
1.58
   
1.38
   
1.00
   
1.69
   
0.82
 
Diluted net income per share
   
1.56
   
1.37
   
0.99
   
1.67
   
0.82
 
Weighted average number of shares outstanding (basic)
   
21,772
   
21,741
   
21,973
   
22,029
   
22,010
 
Weighted average number of shares outstanding (diluted)
   
22,020
   
21,939
   
22,110
   
22,240
   
22,049
 
Balance Sheet Data :
   
 
   
 
   
 
   
 
   
 
 
Working capital
 
$
(5,366
)
$
(3,689
)
$
5,837
 
$
(1,154
)
$
8,435
 
Total assets
   
338,192
   
258,073
   
237,973
   
238,359
   
207,649
 
Long-term debt
   
50,000
   
15,000
   
25,000
   
25,000
   
52,000
 
Shareholders' equity
   
195,718
   
172,058
   
153,153
   
145,224
   
116,213
 
Cash dividends per share
   
0.47
   
0.40
   
0.40
   
0.40
   
0.40
 
Operating Data :
   
 
   
 
   
 
   
 
   
 
 
Cash flow from operations
   
64,825
   
57,895
   
35,433
   
65,934
   
24,809
 
Capital expenditures (excluding acquisitions)
   
41,545
   
30,632
   
14,895
   
25,253
   
9,122
 
Property/facility acquisitions
   
48,626
   
5,880
   
2,273
   
3,182
   
33,605
 
Oil and gas producing operations (per BOE):
   
 
   
 
   
 
   
 
   
 
 
Average sales price before hedging
 
$
24.48
 
$
20.11
 
$
19.63
 
$
23.01
 
$
14.15
 
Average sales price after hedging
   
22.52
   
19.39
   
19.79
   
21.72
   
13.07
 
Average operating costs (1)
   
10.05
   
8.49
   
7.99
   
8.20
   
5.47
 
G&A
   
1.59
   
1.51
   
1.42
   
1.42
   
1.23
 
DD&A
   
3.40
   
3.13
   
3.28
   
2.57
   
2.42
 
 
   
 
   
 
   
 
   
 
   
 
 
Production (BOE)
   
6,040
   
5,251
   
5,044
   
5,467
   
5,090
 
Production (MWh)
   
767
   
748
   
483
   
764
   
728
 
Proved Reserves Information:
   
 
   
 
   
 
   
 
   
 
 
Total BOE
   
109,920
   
101,719
   
102,855
   
107,361
   
112,541
 
Standardized measure (2)
 
$
528,220
 
$
449,857
 
$
278,453
 
$
501,694
 
$
494,952
 
Present value (PV10) of estimated future net
   
 
   
 
   
 
   
 
   
 
 
cash flow before income taxes
   
683,124
   
599,826
   
358,653
   
719,882
   
712,856
 
Year-end average BOE price for PV10 purposes
   
25.89
   
24.91
   
14.13
   
21.13
   
19.37
 
Other:
   
 
   
 
   
 
   
 
   
 
 
Return on average shareholders' equity
   
18.70
%
 
18.50
%
 
14.70
%
 
28.50
%
 
16.50
%
Return on average total assets
   
11.90
%
 
12.50
%
 
8.70
%
 
16.80
%
 
9.00
%
Total debt/total debt plus equity
   
20.3
%
 
8.0
%
 
14.0
%
 
14.7
%
 
30.9
%
Year-end stock price
 
$
20.25
 
$
17.05
 
$
15.70
 
$
13.38
 
$
15.13
 
Year-end market capitalization
 
$
441,516
 
$
370,865
 
$
341,192
 
$
294,699
 
$
332,920
 
 
(1)    Including monthly expenses in excess of monthly revenues from cogeneration operations of $2.08, $1.72, $1.31, $.53, and $0 for the years 2003, 2002, 2001, 2000, and 1999, respectively.
(2)   See Supplemental Information About Oil & Gas Producing Activities.
 
 
   16  

 
 
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information on the results of operations for each of the three years ended December 31, 2003, 2002 and 2001 and the financial condition, liquidity and capital resources as of December 31, 2003 and 2002. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.

The profitability of the Company's operations in any particular accounting period will be directly related to the average realized prices of oil, gas and electricity sold, the type and volume of oil and gas produced and electricity generated and the results of acquisition, development, exploitation and exploration activities. The average realized prices for natural gas and electricity will fluctuate from one period to another due to regional market conditions and other factors, while oil prices will be predominantly influenced by world supply and demand. The aggregate amount of oil and gas produced may fluctuate based on the success of development and exploitation of oil and gas reserves pursuant to current reservoir management. The cost of natural gas used in the Company's steaming operations and electrical generation, production rates, labor, maintenance expenses and production t axes are expected to be the principal influences on operating costs. Accordingly, the results of operations of the Company may fluctuate from period to period based on the foregoing principal factors, among others.

Results of Operations

In 2003, the Company achieved a record year for revenues and its second highest net income. The Company earned $34 million, or $1.56 per share (diluted), in 2003 on revenues of $181 million, up 13% from $30 million, or $1.37 per share (diluted), on revenues of $131 million in 2002, and up from $22 million, or $.99 per share (diluted), on revenues of $138 million earned in 2001.

The following table presents certain operating data for the years ended December 31:

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
 
   
 
   
 
   
 
 
Oil and Gas
   
 
   
 
   
 
 
Net production – BOE/D
   
16,549
   
14,387
   
13,820
 
Per BOE:
   
 
   
 
   
 
 
Average sales price before hedging
 
$
24.48
 
$
20.11
 
$
19.63
 
Average sales price after hedging
 
 
22.52
 
 
19.39
 
 
19.79
 
Operating costs (1)
   
9.41
   
7.94
   
7.50
 
Production taxes
   
0.64
   
0.55
   
0.49
 
   
 
 
 
Total operating costs
 
$
10.05
 
$
8.49
 
$
7.99
 
   
 
 
 
 
   
 
   
 
   
 
 
DD&A
 
$
3.40
 
$
3.13
 
$
3.28
 
G&A
   
1.59
   
1.51
   
1.42
 
Interest expense
   
0.23
   
0.20
   
0.74
 
 
   
 
   
 
   
 
 
Electricity
   
 
   
 
   
 
 
Electric power produced - MWh/D
   
2,100
   
2,050
   
1,325
 
Electric power sold – MWh/D
   
1,925
   
1,848
   
1,245
 
Average sales price/MWh before hedging
 
$
62.91
 
$
40.06
 
$
79.14
 
Average sales price/MWh after hedging
 
$
61.95
 
$
39.64
 
$
79.14
 
Fuel gas cost/MMBtu
 
$
4.88
 
$
3.13
 
$
5.76
 
 
(1)   Including monthly expenses in excess of monthly revenues from cogeneration operations of $2.08, $1.72 and $1.31 in 2003, 2002 and 2001 respectively.
 
 
 
 
 
 
BOE/D = Barrels of oil equivalent per day
 
 
 
 
 
MWh/D = Megawatt hours per day
 
 
 
 
 
MMBtu = Million British Thermal Units
 
 
 
 
 
 
In August 2003, the Company completed the acquisition of the Brundage Canyon properties, for approximately $45 million. The Company believes that this property presents a significant opportunity for growth due to the considerable amount of underexploited acreage. At year-end, proved reserves for this property were approximately 9.2 million BOE, or 8% of total reserves. Subsequent to the acquisition, the Company pursued a drilling program which included the drilling of 26 wells, 22 of which were producing at year end. As a result, current production has increased to nearly 3,000 barrels per day for Brundage Canyon.

 
   17  

 
 
The Company’s oil and gas production reached record levels in 2003 due primarily to the success of the Company’s development activities on its California properties, the acquisition of leases in the Brundage Canyon field in Utah in August 2003 and the drilling activities on these Utah properties in the last four months of 2003. Oil and gas production (BOE/D) for 2003 was 16,549, up 15% and 20%, respectively, from 14,387 in 2002 and 13,820 in 2001.

The Company primarily is at risk to reductions in operating income as a result of declines in crude oil and electricity prices and increases in natural gas prices. To assist in mitigating these risks, the Company periodically enters into various types of commodity hedges. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”.

The 2003 average sales price per BOE of the Company’s oil and gas, net of hedging, was $22.52, up 16% and 14.7% from $19.39 and $19.79 received in 2002 and 2001, respectively. Approximately 96% of the Company’s sales volumes in 2003 were crude oil, with 86% of the crude oil being heavy oil produced in California which is sold under a long-term contract based on the higher of WTI minus a fixed differential or the Company’s average posted price plus a premium. The Brundage Canyon crude oil is priced at WTI less a fixed differential. During 2003, WTI prices per barrel reached a high of $37.83, a low of $25.24 and averaged $30.99 for the year compared to an average of $26.15 and $25.95 in 2002 and 2001, respectively.

The Company produced 2,100 MWh/D of electricity in 2003, comparable to 2,050 MWh/D in 2002, but up 58% from 1,325 MWh/D produced in 2001. The Company’s cogeneration facilities were shut in for a number of months in 2001 due to non-payment by the utilities that were contractually obligated to purchase the Company’s electricity.

During 2003, the Company received an average sales price for its electricity per MWh of $62.91 compared to $40.06 in 2002 and $79.14 in 2001. During 2003, electricity prices were, relative to the cost of natural gas to generate electricity, improved from 2002. In January 2003, three Standard Offer contract terms were reinstated on certain generating capacity of which the output had been sold by the Company on the open market during all of 2002 and the majority of 2001. This volume represented approximately 76% of the Company’s electricity sales output. Under the terms of the Standard Offer contracts, the price received for the electricity is based on the cost of natural gas. The Company consumes approximately 37,000 MMBtu of natural gas per day for use in generating steam and of this total, approximately 72% is consumed in the Company’s cogeneration operations. By maintai ning a correlation between electricity and natural gas prices, the Company is able to better control its cost of producing steam.

Three of the Standard Offer 1 contracts expired on December 31, 2003. However, by order of the California Public Utilities Commission (CPUC), in December 2003 the respective utilities offered extensions of the Standard Offer 1 contracts for up to one year. The CPUC issued a decision in January 2004 that establishes rules under which the California utilities are required to offer Standard Offer 1 contracts to certain qualifying facilities (QF), such as Berry, for a term of five years. In January 2004, the Company accepted one-year extensions of these contracts and is evaluating its options beyond the revised termination dates.

Operating costs from oil and gas operations were $60.7 million in 2003, up 36% and 51% from $44.6 million and $40.3 million in 2002 and 2001, respectively. On a per barrel basis, operating costs cost were $10.05 in 2003 compared to $8.49 and $7.99 in 2002 and 2001, respectively. Steam costs were higher in 2003 as the cost for natural gas per MMBtu increased to $4.88 from $3.13 in 2002. Although natural gas prices in 2001 of $5.76 were higher than the 2003 prices, the Company had shut-in its cogeneration operations for a portion of 2001 due to the California electricity crisis resulting in reduced steam injection volumes and lower total operating costs in 2001. The Company also injected an average of 63,300 BSPD in 2003, up 5% from 60,060 BSPD in 2002 and 33,574 BSPD in 2001. This increase in injected steam volumes also contributed to higher operating costs in 2003. The Company anti cipates operating costs to average between $9.50 and $10.50 per BOE in 2004.

DD&A in 2003 was $20.5 million, or $3.40 per BOE, up from $16.5 million, or $3.13 per BOE, in 2002 and $16.5 million, or $3.28 per BOE, in 2001. DD&A in 2003 was higher due to the acquisition of the Brundage Canyon properties in Utah and the cumulative effect of development activities in recent years. The Company anticipates its total DD&A charges for 2004 will approximate $28 million or range from $3.75 to $4.00 per BOE.

G&A expenses in 2003 were $9.6 million, or $1.59 per BOE, up 22% from $7.9 million, or $1.51 per BOE in 2002 and up 33% from $7.2 million, or $1.42 per BOE in 2001. Contributing to the increase in 2003 was higher compensation expenses, the expansion into the Rocky Mountain region, and a higher level of acquisition activity. For 2004, the Company anticipates that its G&A expenses will approximate $10.5 million or range from $1.35 to $1.45 per BOE.

 
  18   

 
 
Interest expense in 2003 was $1.4 million, or $.23 per BOE, up from $1.0 million, or $.20 per BOE, in 2002 but down from $3.7 million, or $.74 per BOE, in 2001. The Company’s borrowings at year-end 2003 were $50 million, up from $15 million in 2002 due to the acquisition of its Brundage Canyon properties in August 2003.

In 2002, the Company recorded income of $3.6 million, which represented the recovery of a portion of the $6.6 million of the receivables from electricity sales that were written off in 2001 due to non-payment by utilities contractually obligated to purchase the Company’s electricity.

The Company experienced an effective tax rate of 15% in 2003, down from the 20% and 19% reported in 2002 and 2001, respectively. The low effective tax rate is primarily a result of significant EOR tax credits earned by the Company’s continued investment in the development of its thermal EOR projects, both through capital expenditures and continued steam injection. This is the sixth consecutive year that the Company has achieved an effective tax rate below 30% versus the combined federal and state statutory rate of 40%. The Company believes it will continue to earn significant EOR tax credits and have an effective tax rate in the 20% to 30% range in 2004, based on WTI prices averaging between $26.50 and $35.50.

During 2002 and early 2003, the Company leased a total of approximately 208,000 acres in Kansas and 54,000 acres in Illinois to explore for economic concentrations of coalbed methane gas at a total lease cost of approximately $6 million. A five-well pilot was drilled in the Wabaunsee County portion of the Kansas acreage in the fourth quarter of 2002. Initial water production was less than expected with no resulting gas pressure buildup and the gas content of the coals was later determined to be significantly lower than anticipated. The Company concluded that this pilot will not produce commercial quantities of natural gas and, therefore, wrote off the cost to drill these wells and the associated acreage in 2003 for a pre-tax charge to operations of $2.6 million.

In August 2003, the Company completed the sale of approximately 43,000 leased acres in Jackson County, Kansas for approximately $1.7 million, while retaining an overriding royalty interest in the property. The Company recovered its cost in the property.

The Company also drilled a second five-well pilot in Jasper County, Illinois in the fourth quarter of 2002. The wells were subsequently re-fractured in the third quarter of 2003 in an attempt to more efficiently dewater the coal seam and reduce the reservoir pressure to increase eventual gas production. Although reservoir pressure decreased over time, it was determined near year-end 2003 that gas volumes are not likely to be sufficient to realize commercial production; therefore, the costs to drill these wells and an impairment of the acreage was recorded in the fourth quarter of 2003, which resulted in a pre-tax charge of $1.7 million. The Company‘s objectives in 2004 include the continued evaluation of CBM activities in Illinois and further delineation of our CBM acreage in Kansas.

Financial Condition, Liquidity and Capital Resources

Working capital as of December 31, 2003 was negative ($5.4) million, greater than a negative ($3.7) million at December 31, 2002 and $5.8 million at December 31, 2001. Net cash provided by operating activities increased to $64.8 million, up 12% from $57.9 million in 2002 and up 83% from $35.4 million in 2001. The Company’s net increase in borrowings on its credit line was $35 million in 2003. Cash was used to fund $48.6 million in property acquisitions, for capital expenditures of $41.5 million and to pay dividends of $10.2 million.

Total capital expenditures in 2003, excluding acquisitions, were $41.5 million and included the drilling of 94 new wells and completing 30 workovers on its California properties and the drilling of 27 new wells and completion of one workover on its Brundage Canyon properties in Utah.

Excluding any future acquisitions in 2004, the Company plans to spend approximately $50 million on capital projects including $17 million to drill 44 new wells and perform 63 workovers in California and $33 million to drill 51 new wells and perform 22 workovers in the Rocky Mountain and Mid-Continent regions. With this increased development and a full year of production from Brundage Canyon, the Company anticipates that production will average between 20,000 and 21,000 BOE per day in 2004, up over 20% from an average 16,549 BOE per day in 2003.

The Company successfully completed a new $200 million unsecured three-year credit facility in July 2003. The facility replaced the previous $150 million unsecured facility which was due to mature in January 2004. The new facility recognizes the Company’s strong financial position and should provide significant low-cost capital for the Company to meet its growth objectives. In August 2003, the Company drew upon this facility to finance the $45 million purchase of the Brundage Canyon, Utah assets. As of December 31, 2003, the Company had $150 million available under the facility.

At year-end, the Company had no subsidiaries, no special purpose entities and no off-balance sheet debt. The Company did not enter into any significant related party transactions in 2003.

 
  19   

 
 
Contractual Obligations

The Company's contractual obligations as of December 31, 2003 are as follows (in thousands):
 
 
 
 
 
 
 
 
 
Contractual Obligations
   
2004

 

 

2005

 

 

2006

 

 

2007

 

 

2008

 

 

Thereafter

 

 

Total
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Long-term debt
 
$
-
 
$
-
 
$
50,000
 
$
-
 
$
-
 
$
-
 
$
50,000
 
Operating lease obligations
   
528
   
562
   
487
   
107
   
107
   
90
   
1,881
 
Firm natural gas
transportation contract
   
3,066
   
3,066
   
3,066
   
3,066
   
3,066
   
13,280
   
28,610
 
   
 
 
 
 
 
 
 
Total
 
$
3,594
 
$
3,628
 
$
53,553
 
$
3,173
 
$
3,173
 
$
13,370
 
$
80,491
 
   
 
 
 
 
 
 
 
 
Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those amounts.

A critical accounting policy is one that is important to the portrayal of the Company's financial condition and results, and requires Management to make difficult subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The Company believes the following accounting policies are critical policies; accounting for oil and gas reserves, environmental liabilities, income taxes and asset retirement obligations.

Oil and gas reserves include proved reserves that represent estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. The oil and gas reserves are based on estimates prepared by independent engineering consultants and are used to calculate DD&A and determine if any potential impairment exists related to the recorded value of the Company's oil and gas properties.

The Company reviews, on a quarterly basis, its estimates of costs of the cleanup of various sites including sites in which governmental agencies have designated the Company as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the cost of remediation can be determined, the applicable amount is accrued. Actual costs can differ from estimates due to changes in laws and regulations, discovery and analysis of site conditions and changes in technology.

The Company makes certain estimates in determining its provision for income taxes. These estimates in determining taxable income, among other things, may include various tax planning strategies, the timing of deductions and the utilization of tax attributes.

Management is required to make judgments based on historical experience and future expectations on the future abandonment cost of its oil and gas properties and equipment. The Company reviews its estimate of the future obligation quarterly and accrues the estimated obligation monthly based on SFAS No. 143, “Accounting for Asset Retirement Obligations”.

Recent Accounting Developments

In the fourth quarter of 2002, the Company adopted the supplemental disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amended SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company continues to record compensation related to employee stock options based on the intrinsic value method per APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 148 encourages companies to voluntarily elect to record the compensation based on market value either prospectively, as defined in SFAS No. 123, or retroactively or in a modified prospective method. The Company uses the Black-Scholes model to calculate and disclose the market value of its options granted. The Company does not advocate nor does it believe that the Black-Scholes model can properly determine the val ue of a stock option, like Berry’s, that vest over a period of time and is not freely tradable upon grant. Therefore, the Company has delayed the potential transition to recording stock compensation based on fair market value until required by accounting standards in 2005.

 
  20   

 
 
In November 2002 the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45")." This Interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. In addition, the Interpretation clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations that the guarantor has undertaken in issuing the guarantee. The Company adopted the disclosure requirements of FIN 45 for the fiscal year ended December 31, 2002, and the recognition provisions on January 1, 2003. Adoption of this Interpretation did not have a material impact on the Company's Financial Statements.

In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The Company has adopted, effective January 1, 2003, the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. SFAS No. 146 did not have a material impact on the Company's financial statements.

In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively, with the exception of certain SFAS No. 133 implementation issues that were effective for all fiscal quarters prior to June 15, 2003. Any such implementation issues should continue to be applied in accordance with their respective effective dates. The adoption of SFAS No. 149 did not have a material impact on the Company's financial statements.

During January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which requires the consolidation of certain entities that are determined to be variable interest entities (“VIE’s”). An entity is considered to be a VIE when either (i) the entity lacks sufficient equity to carry on its principal operations, (ii) the equity owners of the entity cannot make decisions about the entity’s activities or (iii) the entity’s equity neither absorbs losses or benefits from gains. The Company has reviewed its financial arrangements and has not identified any material VIE’s that should be consolidated by the Company in accordance with FIN 46.

Impact of Inflation

The impact of inflation on the Company has not been significant in recent years because of the relatively low rates of inflation experienced in the United States.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company enters into various financial contracts to hedge its exposure to commodity price risk associated with its crude oil production, electricity production and net natural gas volumes purchased for its steaming operations. These contracts related to crude oil and natural gas have historically been in the form of zero-cost collars and swaps, however, the Company is considering a variety of hedge instruments going forward. The Company generally attempts to hedge between 25% and 50% of its anticipated crude oil production and up to 30% of its anticipated net natural gas purchased each year. All of these hedges have historically been deemed to be cash flow hedges with the mark-to-market valuations of the collars provided by external sources, based on prices that are actually quoted.

 
  21   

 
 
Based on NYMEX futures prices at December 31, 2003, (WTI $30.64; Henry Hub (HH) $5.21) the Company would expect to make pre-tax future cash payments over the remaining term of its crude oil and natural gas hedges in place as follows:

 
   
 
   
Impact of percent change in futures prices
 
 
   
12/31/03
 

 on earnings (in thousands)

 
     

NYMEX

 


 

 

 

 

 Futures

 

 

-20%
 

 

-10%
 

 

+10%
 

 

+20%
 
   
 
 
 
 
 
Average WTI Price
 
$
30.64
 
$
24.51
 
$
27.57
 
$
33.70
 
$
36.77
 
 
   
 
   
 
   
 
   
 
   
 
 
Crude Oil gain/(loss)
   
(8,400
)
 
4,730
   
(1,710
)
 
(12,420
)
 
(16,160
)
 
   
 
   
 
   
 
   
 
   
 
 
Average HH Price
   
5.21
   
4.17
   
4.69
   
5.73
   
6.25
 
 
   
 
   
 
   
 
   
 
   
 
 
Natural Gas gain/(loss)
   
410
   
(3,720
)
 
(1,650
)
 
2,470
   
4,530
 
 
The Company sells 100% of its electricity production, net of electricity used in its oil and gas operations, under SO contracts to major utilities. Three of the four SO contracts representing approximately 77% of the Company’s electricity for sale originally expired on December 31, 2003. However, as ordered by CPUC, the utilities offered and the Company accepted one-year extensions on these contracts in January 2004 and is evaluating its options beyond the revised termination dates. Among other things, the CPUC issued a decision in January 2004 that establishes rules whereby the California utilities are required to offer Standard Offer contracts to certain qualified facilities, such as Berry, for a term of 5 years. However, the sales price under this contract may not be linked to natural gas prices. The Company sells the remaining 20 MWh to a utility at $53.70 per MWh plus cap acity through a long-term sales contract.

The Company attempts to minimize credit exposure to counter parties through monitoring procedures and diversification.

The Company’s exposure to changes in interest rates results primarily from long-term debt. Total debt outstanding at December 31, 2003 and 2002 was $50 million and $15 million, respectively. Interest on amounts borrowed is charged at LIBOR plus 1.25% to 2.0%. Based on year-end 2003 borrowings, a 1% change in interest rates would not have a material impact on the Company’s financial statements.


Forward Looking Statements 
 
“Safe harbor under the Private Securities Litigation Reform Act of 1995:” With the exception of historical information, the matters discussed in this Form 10-K are forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, the timing and extent of changes in commodity prices for oil, gas and electricity, a limited marketplace for electricity sales within California, counterparty risk, competition, environmental and weather risks, litigation uncertainties, drilling, development and operating risks, uncertainties about the estimates of reserves, th e availability of drilling rigs and other support services, legislative and/or judicial decisions and other government regulations.

 
   22  

 
 
Item 8.  Financial Statements and Supplementary Data


BERRY PETROLEUM COMPANY
Index to Financial Statements and
Supplementary Data

 
Page

 
 
Report of PricewaterhouseCoopers LLP, Independent Auditors
24
 
 
Balance Sheets at December 31, 2003 and 2002
25
 
 
Statements of Income for the
 
Years Ended December 31, 2003, 2002 and 2001
26
 
 
Statements of Comprehensive Income for the
 
Years Ended December 31, 2003, 2002 and 2001
26
 
 
Statements of Shareholders' Equity for the
 
Years Ended December 31, 2003, 2002 and 2001
27
 
 
Statements of Cash Flows for the
 
Years Ended December 31, 2003, 2002 and 2001
28
 
 
Notes to the Financial Statements
29
 
 
Supplemental Information About Oil & Gas Producing Activities (unaudited)
41
 
 
Financial statement schedules have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements and related notes.
 
 
   23  

 

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Berry Petroleum Company

In our opinion, the accompanying balance sheets and the related statements of income, comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Berry Petroleum Company at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about wheth er the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP

Los Angeles, California
February 20, 2004

 
  24   

 
 
BERRY PETROLEUM COMPANY
Balance Sheets
December 31, 2003 and 2002
(In Thousands, Except Share Information)

 
   
2003

 

 

2002
 
   
 
 
ASSETS
   
 
   
 
 
Current assets:
   
 
   
 
 
Cash and cash equivalents
 
$
10,658
 
$
9,866
 
Short-term investments available for sale
   
663
   
660
 
Accounts receivable
   
23,506
   
15,582
 
Deferred income taxes
   
4,410
   
844
 
Prepaid expenses and other
   
2,049
   
1,753
 
   
 
 
Total current assets
   
41,286
   
28,705
 
 
   
 
   
 
 
Oil and gas properties (successful efforts basis),
   
 
   
 
 
buildings and equipment, net
   
295,151
   
228,475
 
Other assets
   
1,755
   
893
 
   
 
 
 
 
$
338,192
 
$
258,073
 
   
 
 
 
   
 
   
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
   
 
   
 
 
Current liabilities:
   
 
   
 
 
Accounts payable
 
$
32,490
 
$
19,189
 
Accrued liabilities
   
4,214
   
6,470
 
Income taxes payable
   
4,238
   
2,612
 
Fair value of derivatives
   
5,710
   
4,123
 
   
 
 
Total current liabilities
   
46,652
   
32,394
 
 
   
 
   
 
 
    Long-term liabilities:
   
 
   
 
 
Deferred income taxes
   
38,168
   
33,866
 
Long-term debt
   
50,000
   
15,000
 
Abandonment obligation
   
7,311
   
4,596
 
Fair value of derivatives
   
343
   
159
 
   
 
 
 
   
95,822
   
53,621
 
Commitments and contingencies (Notes 10 and 11)
   
 
   
 
 
 
   
 
   
 
 
Shareholders' equity:
   
 
   
 
 
Preferred stock, $.01 par value, 2,000,000 shares authorized;
   
 
   
 
 
no shares outstanding
   
-
   
-
 
Capital stock, $.01 par value:
   
 
   
 
 
Class A Common Stock, 50,000,000 shares authorized;
   
 
   
 
 
20,904,372 shares issued and outstanding (20,852,695 in 2002)
   
209
   
209
 
Class B Stock, 1,500,000 shares authorized;
   
 
   
 
 
898,892 shares issued and outstanding (liquidation preference of $899)
   
9
   
9
 
Capital in excess of par value
   
49,798
   
49,052
 
Deferred stock option compensation
   
(120
)
 
-
 
Accumulated other comprehensive loss
   
(3,632
)
 
(2,569
)
Retained earnings
   
149,454
   
125,357
 
   
 
 
Total shareholders' equity
   
195,718
   
172,058
 
   
 
 
 
   
 
   
 
 
 
 
$
338,192
 
$
258,073
 
   
 
 

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

 
   25  

 
 
BERRY PETROLEUM COMPANY
Statements of Income
Years ended December 31, 2003, 2002 and 2001
(In Thousands, Except Per Share Data)

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Revenues:
   
 
   
 
   
 
 
Sales of oil and gas
 
$
135,848
 
$
102,026
 
$
100,146
 
Sales of electricity
   
44,200
   
27,691
   
35,133
 
Interest and dividend income
   
236
   
536
   
2,150
 
Other income
   
580
   
1,116
   
328
 
   
 
 
 
 
   
180,864
   
131,369
   
137,757
 
Expenses:
   
 
   
 
   
 
 
Operating costs – oil and gas production
   
60,705
   
44,604
   
40,281
 
Operating costs – electricity generation
   
44,200
   
27,360
   
34,722
 
Depreciation, depletion & amortization
   
20,514
   
16,452
   
16,520
 
General and administrative
   
9,586
   
7,928
   
7,174
 
Interest
   
1,414
   
1,042
   
3,719
 
Dry hole, abandonment and impairment
   
4,195
   
-
   
-
 
(Recovery) write-off of electricity receivable
   
-
   
(3,631
)
 
6,645
 
Loss on termination of derivative contracts
   
-
   
-
   
1,458
 
   
 
 
 
 
   
 
   
 
   
 
 
 
   
140,614
   
93,755
   
110,519
 
   
 
 
 
 
   
 
   
 
   
 
 
Income before income taxes
   
40,250
   
37,614
   
27,238
 
Provision for income taxes
   
5,918
   
7,590
   
5,300
 
   
 
 
 
 
   
 
   
 
   
 
 
Net income
 
$
34,332
 
$
30,024
 
$
21,938
 
 
 

 

 

 
Basic net income per share
 
$
1.58
 
$
1.38
 
$
1.00
 
 
 

 

 

 
Diluted net income per share
 
$
1.56
 
$
1.37
 
$
0.99
 
 
 

 

 

 
 
   
 
   
 
   
 
 
Weighted average number of shares of capital stock outstanding (used to calculate basic net income per share)
   
21,772
   
21,741
   
21,973
 
 
   
 
   
 
   
 
 
Effect of dilutive securities:
   
 
   
 
   
 
 
Stock options
   
204
   
156
   
113
 
Other
   
44
   
42
   
24
 
   
 
 
 
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
 
Weighted average number of shares of capital stock used to calculate diluted net income per share
   
22,020
   
21,939
   
22,110
 
   
 
 
 
 
Statements of Comprehensive Income
Years Ended December 31, 2003, 2002 and 2001  
(In Thousands)
 
 
 
 
 
Net income
 
$
34,332
 
$
30,024
 
$
21,938
 
Unrealized gains (losses) on derivatives, net of income taxes
   
(3,632
)  
(2,569
)  
-
Reclassification of unrealized gains included in net income
   
2,569
   
-
   
(441
)
   
 
 
 
Comprehensive income
 
$
33,269
 
$
27,455
 
$
21,497
 
   
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
   26  

 
 
BERRY PETROLEUM COMPANY
Statements of Shareholders’ Equity
Years Ended December 31, 2003, 2002 and 2001
(In Thousands, Except Per Share Data)

 
   
Class A

 

 

Class B

 

 

Capital in Excess of Par Value

 

 

Deferred Stock Based Compen-sation

 

 

Retained Earnings

 

 

Accum-ulated Other Compre-hensive Income (Loss)
 

 

Share-holders’ Equity

 

   
 
 
 
 
 
 
 
Balances at January 1, 2001
 
$
211
 
$
9
 
$
53,686
 
$
-
 
$
90,877
 
$
441
 
$
145,224
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Stock options exercised
   
-
   
-
   
172
   
-
   
-
   
-
   
172
 
Deferred director fees – stock
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
compensation
   
-
   
-
   
156
   
-
   
-
   
-
   
156
 
Common stock repurchases
   
(3
)
 
-
   
(5,109
)
 
-
   
-
   
-
   
(5,112
)
Cash dividends declared -
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
$.40 per share
   
-
   
-
   
-
   
-
   
(8,784
)
 
-
   
(8,784
)
Unrealized losses on derivatives
   
-
   
-
   
-
   
-
   
-
   
(441
)
 
(441
)
Net income
   
-
   
-
   
-
   
-
   
21,938
   
-
   
21,938
 
   
 
 
 
 
 
 
 
Balances at December 31, 2001
   
208
   
9
   
48,905
   
-
   
104,031
   
-
   
153,153
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Stock options exercised
   
1
   
-
   
57
   
-
   
-
   
-
   
58
 
Deferred director fees – stock
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
compensation
   
-
   
-
   
190
   
-
   
-
   
-
   
190
 
Retirement of warrants
   
-
   
-
   
(100
)
 
-
   
-
   
-
   
(100
)
Cash dividends declared -
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
$.40 per share
   
-
   
-
   
-
   
-
   
(8,698
)
 
-
   
(8,698
)
Unrealized losses on derivatives
   
-
   
-
   
-
   
-
   
-
   
(2,569
)
 
(2,569
)
Net income
   
-
   
-
   
-
   
-
   
30,024
   
-
   
30,024
 
   
 
 
 
 
 
 
 
Balances at December 31, 2002
   
209
   
9
   
49,052
   
-
   
125,357
   
(2,569
)
 
172,058
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Stock options exercised
   
-
   
-
   
446
   
-
   
-
   
-
   
446
 
Deferred director fees – stock
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
compensation
   
-
   
-
   
169
   
-
   
-
   
-
   
169
 
Deferred stock option compensation
   
-
   
-
   
131
   
(131
)
 
-
   
-
   
-
 
Amortization of deferred stock option compensation
   
-
   
-
   
-
   
11
   
-
   
-
   
11
 
Cash dividends declared -
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
$.47 per share
   
-
   
-
   
-
   
-
   
(10,235
)
 
-
   
(10,235
)
Unrealized losses on derivatives
   
-
   
-
   
-
   
-
   
-
   
(1,063
)
 
(1,063
)
Net income
   
-
   
-
   
-
   
-
   
34,332
   
-
   
34,332
 
   
 
 
 
 
 
 
 
Balances at December 31, 2003
 
$
209
 
$
9
 
$
49,798
 
$
(120
)
$
149,454
 
$
(3,632
)
$
195,718
 
   
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
   27  

 
 
BERRY PETROLEUM COMPANY
Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(In Thousands)

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Cash flows from operating activities:
   
 
   
 
   
 
 
Net income
 
$
34,332
 
$
30,024
 
$
21,938
 
Depreciation, depletion and amortization
   
20,514
   
16,452
   
16,520
 
Dry hole, abandonment and impairment
   
3,756
   
-
   
-
 
Deferred income taxes
   
1,371
   
3,842
   
(50
)
Other, net
   
400
   
(184
)
 
(505
)
Decrease (increase) in current assets other than cash,
   
 
   
 
   
 
 
cash equivalents and short-term investments
   
(8,220
)
 
1,854
   
11,241
 
Increase (decrease) in current liabilities other than notes payable
   
12,672
   
5,907
   
(13,711
)
   
 
 
 
 
   
 
   
 
   
 
 
Net cash provided by operating activities
   
64,825
   
57,895
   
35,433
 
   
 
 
 
 
   
 
   
 
   
 
 
Cash flows from investing activities:
   
 
   
 
   
 
 
Capital expenditures, excluding property acquisitions
   
(41,555
)
 
(30,632
)
 
(14,895
)
Property acquisitions
   
(48,579
)
 
(5,880
)
 
(2,273
)
Proceeds from sale of assets
   
1,890
   
-
   
-
 
Purchase of short-term investments
   
(3
)
 
(660
)
 
(1,183
)
Maturities of short-term investments
   
-
   
594
   
1,171
 
Other, net
   
524
   
52
   
151
 
   
 
 
 
 
   
 
   
 
   
 
 
Net cash used in investing activities
   
(87,723
)
 
(36,526
)
 
(17,029
)
 
   
 
   
 
   
 
 
Cash flows from financing activities:
   
 
   
 
   
 
 
Proceeds from issuance of long-term debt
   
40,000
   
5,000
   
45,000
 
Payment of long-term debt
   
(5,000
)
 
(15,000
)
 
(45,000
)
Dividends paid
   
(10,235
)
 
(8,698
)
 
(8,784
)
Share repurchase program
   
-
   
-
   
(5,112
)
Other, net
   
(1,075
)
 
(43
)
 
(1
)
   
 
 
 
 
   
 
   
 
   
 
 
Net cash provided by (used in) financing activities
   
23,690
   
(18,741
)
 
(13,897
)
 
   
 
   
 
   
 
 
Net increase in cash and cash equivalents
   
792
   
2,628
   
4,507
 
Cash and cash equivalents at beginning of year
   
9,866
   
7,238
   
2,731
 
   
 
 
 
 
   
 
   
 
   
 
 
Cash and cash equivalents at end of year
 
$
10,658
 
$
9,866
 
$
7,238
 
   
 
 
 
 
   
 
   
 
   
 
 
Supplemental disclosures of cash flow information:
   
 
   
 
   
 
 
Interest paid
 
$
2,125
 
$
1,321
 
$
3,532
 
   
 
 
 
Income taxes paid
 
$
2,510
 
$
5,420
 
$
5,635
 
   
 
 
 
 
   
 
   
 
   
 
 
Supplemental non-cash activity:
   
 
   
 
   
 
 
 
   
 
   
 
   
 
 
Decrease in fair value of derivatives:
   
 
   
 
   
 
 
Current (net of income taxes of $635 and $1,649)
 
$
952
 
$
2,474
 
$
-
 
Non-current (net of income taxes of $74 and $63)
   
111
   
95
   
-
 
   
 
 
 
Net decrease to accumulated other comprehensive income
 
$
1,063
 
$
2,569
 
$
-
 
   
 
 
 

The accompanying notes are an integral part of these financial statements.
 
 
  28   

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements

1.  General

The Company is an independent energy company engaged in the production, development, acquisition, exploitation and exploration of crude oil and natural gas. The Company has 91% of its oil and gas reserves in California and 9% in the Rocky Mountain Region. Approximately 87% of the Company's production is in California, most of which is heavy crude oil, which is principally sold to a refiner. The Company has invested in cogeneration facilities which provide steam required for the extraction of heavy oil and which generates electricity for sale. Production of light crude oil and natural gas in the Rocky Mountain region accounts for approximately 13% of the Company’s production.

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

2.  Summary of Significant Accounting Policies

Cash and cash equivalents

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.

Short-term investments

All short-term investments are classified as available for sale. Short-term investments consist principally of United States treasury notes and corporate notes with remaining maturities of more than three months at date of acquisition and are carried at fair value. The Company utilizes specific identification in computing realized gains and losses on investments sold.

Oil and gas properties, buildings and equipment

The Company accounts for its oil and gas exploration and development costs using the successful efforts method. Under this method, costs to acquire and develop proved reserves and to drill and complete exploratory wells that find proved reserves are capitalized and depleted over the remaining life of the reserves using the units-of-production method. Exploratory dry hole costs and other exploratory costs, including geological and geophysical costs, are charged to expense when incurred. In certain cases, such as coalbed methane gas exploration plays, the drilling costs may be capitalized until it is known whether proved economic reserves have been discovered. At that point, if unsuccessful, the costs will be expensed as exploratory dry hole costs.

The FASB is currently evaluating the application of certain provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” to companies in the extractive industries, including oil and gas companies. The FASB is considering whether the provisions of SFAS No. 141 and SFAS No. 142 require registrants to classify costs associated with mineral rights, including both proved and unproved lease acquisition costs, as intangible assets in the balance sheet, apart from other oil and gas property costs, and provide specific footnote disclosures. At the present time, the Company continues to include these intangible assets in its oil and gas properties.

Depletion of oil and gas producing properties is computed using the units-of-production method. Depreciation of lease and well equipment, including cogeneration facilities and other steam generation equipment and facilities, is computed using the units-of-production method or on a straight-line basis over estimated useful lives ranging from 10 to 20 years. Buildings and equipment are recorded at cost. Depreciation is provided on a straight-line basis over estimated useful lives ranging from 5 to 30 years for buildings and improvements and 3 to 10 years for machinery and equipment. Prior to 2002, the estimated costs of plugging and abandoning wells and related facilities were accrued using the units-of-production method and were considered in determining DD&A expense. However, in 2002 the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” Unde r this standard, the Company records the fair value of the future abandonment as capitalized abandonment costs in Oil and Gas Properties with an offsetting abandonment liability. The capitalized abandonment costs are amortized with other property costs using the units-of-production method. The Company increases the liability monthly by recording accretion expense using the Company’s credit adjusted interest rate. Accretion expense is included in depreciation, depletion and amortization (DD&A) in the Company’s financial statements.

 
  29   

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements
 
2.    Summary of Significant Accounting Policies (cont'd)

Assets are grouped at the field level and if it is determined that the book value of long-lived assets cannot be recovered by estimated future undiscounted cash flows, they are written down to fair value. When assets are sold, the applicable costs and accumulated depreciation and depletion are removed from the accounts and any gain or loss is included in income. Expenditures for maintenance and repairs are expensed as incurred.

Environmental Expenditures

The Company reviews, on a quarterly basis, its estimates of costs of the cleanup of various sites, including sites in which governmental agencies have designated the Company as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the cost of compliance or remediation can be determined, the applicable amount is accrued. For other potential liabilities, the timing of accruals coincides with the related ongoing site assessments. Any liabilities arising hereunder are not discounted.

Hedging

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires that all derivative instruments subject to the requirements of the statement be measured at fair value and recognized as assets or liabilities in the balance sheet. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation is generally established at the inception of a derivative. For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of SFAS No. 133, changes in fair value, to the extent effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time, or in the case of o ptions based on the change in intrinsic value. Any change in fair value of a derivative resulting from ineffectiveness or an excluded component of the gain/loss, such as time value for option contracts, is recognized immediately as operating costs in the statement of operations. See Note 3 - Fair Value of Financial Instruments.

Cogeneration Operations

The Company operates cogeneration facilities to help minimize the cost of producing steam, which is a necessity in its thermal oil and gas producing operations. Such cogeneration operations produce electricity as a by-product from the production of steam. In each monthly accounting period, the cost of operating the cogeneration facilities, up to the amount of the electricity sales, is considered operating costs from electricity generation. Costs in excess of electricity revenue during each period, if any, are considered cost of producing steam and are reported in operating costs – oil and gas production. Also, electricity revenue represents sales to customers only. It does not include the value of the electricity utilized as power to run the Company’s field operations.

Conventional Steam Costs

The costs of producing conventional steam are included in “Operating costs – oil and gas production.”

Revenue Recognition

Revenues associated with sales of crude oil, natural gas, and electricity are recognized when title passes to the customer, net of royalties, discounts and allowances, as applicable. Electricity and natural gas produced by the Company and used in the Company’s operations are not included in revenues. Revenues from crude oil and natural gas production from properties in which the Company has an interest with other producers are recognized on the basis of the Company's net working interest (entitlement method).

Shipping and Handling Costs

Shipping and handling costs, which consist primarily of natural gas transportation costs, are included in both "Operating costs - oil and gas production" or "Operating costs - electricity generation,” as applicable. Natural gas transportation costs included in these categories were $4.0 million, $1.4 million, and $1.2 million for 2003, 2002 and 2001, respectively.

 
   30  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements
 
2.    Summary of Significant Accounting Policies (cont'd)

Stock-Based Compensation

As allowed in SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company continues to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees,” and related interpretations in recording compensation related to its plan. Under SFAS 123, compensation is determined at the date of grant based on an estimated fair value using an economic model, such as the Black-Scholes method. Under APB 25, compensation expense is based upon the difference between the market price at date of grant and the grant price.

Under SFAS No. 123, compensation cost would be recognized for the fair value of the employee's option rights. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Yield
   
2.87
%
 
2.55
%
 
2.72
%
Expected option life – years
   
7.0
   
7.5
   
7.5
 
Volatility
   
27.87
%
 
33.45
%
 
38.71
%
Risk-free interest rate
   
3.86
%
 
4.09
%
 
4.65
%
 
Had compensation cost for the Company’s stock based compensation plan (see Note 12) been based upon the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company’s compensation cost, net of related tax effects, net income and earnings per share would have been recorded as the pro forma amounts indicated below (in thousands, except per share data):

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Compensation cost, net of income taxes:
   
 
   
 
   
 
 
As reported
 
$
366
 
$
33
 
$
92
 
Pro forma
   
975
   
726
   
678
 
 
   
 
   
 
   
 
 
Net income:
   
 
   
 
   
 
 
As reported
   
34,332
   
30,024
   
21,938
 
Pro forma
   
33,723
   
29,331
   
21,352
 
 
   
 
   
 
   
 
 
Basic net income per share:
   
 
   
 
   
 
 
As reported
   
1.58
   
1.38
   
1.00
 
Pro forma
   
1.55
   
1.35
   
0.97
 
 
   
 
   
 
   
 
 
Diluted net income per share:
   
 
   
 
   
 
 
As reported
   
1.56
   
1.37
   
0.99
 
Pro forma
   
1.53
   
1.34
   
0.97
 
 
Income Taxes

Income taxes are provided based on the liability method of accounting. The provision for income taxes is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the future expected tax consequences of temporary differences between income tax and financial reporting, and principally relate to differences in the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which differences are expected to reverse. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

 
   31  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements
 
2.    Summary of Significant Accounting Policies (cont’d)

Net Income Per Share

Basic net income per share is computed by dividing income available to common shareholders (the numerator) by the weighted average number of shares of capital stock outstanding (the denominator). The Company’s Class B stock is included in the denominator of basic and diluted net income. The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the dilutive effect of the additional common shares that would have been outstanding if all convertible securities had been converted to common shares during the period.

Recent Accounting Developments

In the fourth quarter of 2002, the Company adopted the supplemental disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amended SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company continues to record compensation related to employee stock options based on the intrinsic value method per APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 148 encourages companies to voluntarily elect to record the compensation based on market value either prospectively, as defined in SFAS No. 123, or retroactively or in a modified prospective method. The Company uses the Black-Scholes model to calculate and disclose the market value of its options granted. The Company does not advocate nor does it believe that the Black-Scholes model can properly determine the val ue of a stock option, like Berry’s, that vest over a period of time and is not freely tradable upon grant. Therefore, the Company has delayed the potential transition to recording stock compensation based on fair market value until required by accounting standards in 2005.

In November 2002 the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”).” This Interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. In addition, the Interpretation clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations that the guarantor has undertaken in issuing the guarantee. The Company adopted the disclosure requirements of FIN 45 for the fiscal year ended December 31, 2002, and the recognition provisions on January 1, 2003. Adoption of this Interpretation did not have a material impact on the Company’s Financial Statements.

In June 2002 the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” The Company has adopted, effective January 1, 2003, the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of commitment to an exit plan. SFAS No. 146 also establishes that the liability should in itially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. SFAS No. 146 did not have a material impact on the Company’s Financial Statements.

In April 2003 the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively, with the exception of certain SFAS No. 133 implementation issues that were effective for all fiscal quarters prior to June 15, 2003. Any such implementation issues should continue to be applied in accordance with their respective effective dates. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial statements.

 
   32  

 

BERRY PETROLEUM COMPANY
Notes to the Financial Statements
 
2.    Summary of Significant Accounting Policies (cont’d)

During January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which requires the consolidation of certain entities that are determined to be variable interest entities (“VIE’s”). An entity is considered to be a VIE when either (i) the entity lacks sufficient equity to carry on its principal operations, (ii) the equity owners of the entity cannot make decisions about the entity’s activities or (iii) the entity’s equity neither absorbs losses or benefits from gains. The Company has reviewed its financial arrangements and has not identified any material VIE’s that should be consolidated by the Company in accordance with FIN 46.

Reclassifications

Certain reclassifications have been made to the 2002 and 2001 financial statements to conform with the 2003 presentation.
 
3.    Fair Value of Financial Instruments

Cash equivalents consist principally of commercial paper investments. Cash equivalents of $10.6 million and $9.8 million at December 31, 2003 and 2002, respectively, are stated at cost, which approximates market.

The Company’s short-term investments available for sale at December 31, 2003 and 2002 consist of United States treasury notes that mature in less than one year and are carried at fair value. For the three years ended December 31, 2003, realized and unrealized gains and losses were insignificant to the financial statements. A United States treasury note with a market value of $.6 million is pledged as collateral to the California State Lands Commission as a performance bond on the Company’s Montalvo properties. The carrying value of the Company’s long-term debt approximates its fair value since it is carried at current interest rates.

In 2001, the Company established an oil price hedge on 3,000 barrels per day for a one-year period beginning on June 1; and a natural gas price hedge on 5,000 MMBtu/D for a three-year period beginning on August 1. Both of these hedges were with Enron as the counterparty. On December 10, 2001, after Enron filed for bankruptcy, the Company elected to terminate all contracts with Enron and agreed with Enron as to the value of the contracts as of the termination date. Based on this agreed value, the Company recorded a pre-tax charge of $1.5 million in the fourth quarter of 2001 and recorded a liability of $1.3 million, which was remitted upon the approval of the termination agreement in the Enron bankruptcy proceedings. The Company had a signed International Swap Dealer’s Association master agreement with Enron, which allowed for the netting of any receivables and liabilities aris ing thereunder.

To protect the Company’s revenues from potential price declines, the Company periodically enters into hedge contracts covering up to 50% of production. As a result of hedging activities, the Company’s revenue was reduced by $11.8 million, $3.8 million, and $0 in 2003, 2002 and 2001, respectively, which was reported in “Sales of oil and gas” in the Company’s financial statements.
 
4.   Concentration of Credit Risks

The Company sells oil, gas and natural gas liquids to pipelines, refineries and major oil companies and electricity to major utility companies. Credit is extended based on an evaluation of the customer’s financial condition and historical payment record. Primarily due to the Company’s ability to deliver significant volumes of crude oil over a multi-year period, the Company was able to secure a three-year sales agreement, beginning in April 2000, whereby the Company sold in excess of 80% of its production under a negotiated pricing mechanism. This contract was renegotiated during 2002 and extended through December 31, 2005. Over 90% of the Company’s current California production is subject to this new contract. Pricing in the new agreement is based upon the higher of the average of the local field posted prices plus a premium, or WTI minus a fixed differential. Both m ethods are calculated using a monthly determination. In addition to providing a premium above field postings, the agreement effectively eliminates the Company’s exposure to the risk of widening WTI-heavy crude price differentials.

 
  33   

 

BERRY PETROLEUM COMPANY
Notes to the Financial Statements

4.    Concentration of Credit Risks (Cont’d)

For the three years ended December 31, 2003, the Company has experienced no credit losses on the sale of oil, gas and natural gas liquids. However, the Company did experience a loss on its electricity sales in 2001. The Company assigned all of its rights, title and interest in its $12.1 million past due receivables from Pacific Gas and Electric Company to an unrelated party for $9.3 million, resulting in a pre-tax loss of $2.8 million. In addition, at December 31, 2001, the Company was owed $13.5 million from Southern California Edison (Edison) for past due electricity sales. The Company wrote off $3.6 million of this balance in March 2001. In March 2002, the Company was paid the total amount due from Edison plus interest resulting in pre-tax income of $4.2 million recorded in the first quarter of 2002.

The Company places its temporary cash investments with high quality financial institutions and limits the amount of credit exposure to any one financial institution. For the three years ended December 31, 2003, the Company has not incurred losses related to these investments. With respect to the Company’s hedging activities, the Company utilizes more than one counterparty on its hedges and monitors each counterparty’s credit rating.
 
The following summarizes the accounts receivable balances at December 31, 2003 and 2002 and sales activity with significant customers for each of the years ended December 31, 2003, 2002 and 2001 (in thousands). The Company does not believe that the loss of any one customer would impact the marketability of its oil, gas, natural gas liquids or electricity sold. However, the Company can make no assurances regarding the pricing of any new sales agreement.

       

Sales

 
   

Accounts Receivable

 

For the Year Ended December 31,

 

 

 


 


 

Customer

 

 

December 31, 2003

 

 

December 31, 2002

 

 

2003

 

 

2002    

 

 

2001
 

 
 
 
 
 
 
Oil & Gas Sales:
   
 
   
 
   
 
   
 
   
 
 
A
 
$
12,887
 
$
10,714
 
$
142,422
 
$
94,870
 
$
83,336
 
B
   
-
   
621
   
680
   
5,463
   
4,858
 
C
   
-
   
-
   
-
   
10,188
   
14,962
 
D
   
2,256
   
-
   
5,566
   
-
   
-
 
E
   
625
   
-
   
6,524
   
-
   
-
 
   
 
 
 
 
 
 
 
$
15,768
 
$
11,335
 
$
155,192
 
$
110,521
 
$
103,156
 
 
 
 
 
 
 
 
Electricity Sales:
   
 
   
 
   
 
   
 
   
 
 
F
 
$
2,970
 
$
-
 
$
24,616
 
$
-
 
$
6,859
 
G
   
2,156
   
1,795
   
20,334
   
15,199
   
21,257
 
H
   
-
   
1,573
   
265
   
12,317
   
6,279
 
   
 
 
 
 
 
 
 
$
5,126
 
$
3,368
 
$
45,215
 
$
27,516
 
$
34,395
 
   
 
 
 
 
 
 
Sales amounts will not agree to the Statements of Income due primarily to the effects of hedging and a revenue sharing royalty paid on a portion of the Company’s Midway-Sunset crude oil sales, which is netted in “Sales of oil and gas” on the Statements of Income.
 
 
   34  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements

5.   Oil and Gas Properties, Buildings and Equipment

Oil and gas properties, buildings and equipment consist of the following at December 31 (in thousands):

 
   
2003

 

 

2002
 
   
 
 
Oil and gas:
   
 
   
 
 
Proved properties:
   
 
   
 
 
Producing properties, including intangible drilling costs
 
$
238,303
 
$
180,942
 
Lease and well equipment (1)
   
191,664
   
160,264
 
   
 
 
 
   
429,967
   
341,206
 
Unproved properties
   
 
   
 
 
Properties, including intangible drilling costs
   
2,925
   
6,725
 
Lease and well equipment
   
10
   
653
 
   
 
 
 
   
2,935
   
7,378
 
   
 
 
 
   
432,902
   
348,584
 
Less accumulated depreciation, depletion and amortization
   
139,514
   
121,695
 
   
 
 
 
   
293,388
   
226,889
 
   
 
 
Commercial and other:
   
 
   
 
 
Land
   
333
   
173
 
Buildings and improvements
   
3,703
   
3,838
 
Machinery and equipment
   
4,266
   
3,922
 
   
 
 
 
   
8,302
   
7,933
 
Less accumulated depreciation
   
6,539
   
6,347
 
   
 
 
 
   
1,763
   
1,586
 
   
 
 
 
 
$
295,151
 
$
228,475
 
   
 
 
(1) Includes cogeneration facility costs.
 
The following sets forth costs incurred for oil and gas property acquisition, development and exploration activities, whether capitalized or expensed (in thousands):

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Property acquisitions
   
 
   
 
   
 
 
Proved properties
 
$
50,822
 
$
186
 
$
2,273
 
Unproved properties
   
379
   
5,694
   
-
 
Development (1)
   
41,369
   
29,133
   
15,875
 
Exploration
   
788
   
1,684
   
-
 
   
 
 
 
 
 
$
93,358
 
$
36,697
 
$
18,148
 
   
 
 
 
(1)  Development costs include $.9 million, $.5 million and $1.0 million that were charged to expense during 2003, 2002 and 2001, respectively.

In 2003, the Company purchased leases totaling 45,380 acres in the Brundage Canyon field in Utah for approximately $45 million and the McVan property totaling 560 acres in the Poso Creek field in Kern County, California for approximately $2.6 million. Approximately 14 million equivalent barrels of proved reserves were added by 2003 acquisitions and property development. The Company capitalized approximately $2.6 million in future abandonment obligations related to the 2003 acquisitions.

In 2002, the Company acquired approximately 262,000 acres for the potential development of CBM natural gas production in Kansas and Illinois for approximately $6 million. The Company has written off two pilot projects and impaired the acreage for a total pre-tax write off of $4.2 million in 2003 and recovered part of the cost through the sale of approximately 43,000 acres in Kansas in 2003 for $1.7 million at minimal gain to the Company. No reserves were recorded at year-end associated with the CBM related acreage. However, the Company added 4.2 MMBOE of proved reserves through its 2002 development expenditures, principally on its California properties.
 
 
   35  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements

5.  Oil and Gas Properties, Buildings and Equipment (Cont’d)

In 2001, the Company acquired a 15.8% non-operated working interest in CBM natural gas properties in Wyoming for $2.2 million and a producing property adjacent to Berry's core Midway-Sunset properties for $.1 million. In 2001, approximately 1.1 million equivalent barrels of proved reserves were added by these acquisitions and property development.

Results of operations from oil and gas producing
and exploration activities (in thousands):
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
 
   
 
   
 
   
 
 
Sales to unaffiliated parties
 
$
135,848
 
$
102,026
 
$
100,146
 
Production costs
   
(60,705
)
 
(44,604
)
 
(40,281
)
Depreciation, depletion and amortization
   
(20,215
)
 
(16,124
)
 
(16,175
)
Dry hole, abandonment and impairment
   
(4,195
)
 
-
   
-
 
   
 
 
 
 
   
50,733
   
41,298
   
43,690
 
Income tax expenses
   
(8,246
)
 
(7,933
)
 
(10,740
)
   
 
 
 
Results of operations from producing and
   
 
   
 
   
 
 
exploration activities
 
$
42,487
 
$
33,365
 
$
32,950
 
   
 
 
 
 
6.    Debt Obligations

 
   
2003

 

 

2002
 
   
 
 
Long-term debt for the years ended December 31 (in thousands):
   
 
   
 
 
 
   
 
   
 
 
Revolving bank facility
 
$
50,000
 
$
15,000
 
   
 
 
 
On July 10, 2003, the Company entered into a new Credit Agreement (the Agreement) with a banking syndicate, replacing an existing credit agreement which was due to expire in January 2004. The Agreement is a revolving credit facility for up to $200 million with ten banks. At December 31, 2003 and 2002, the Company had $50 and $15 million, respectively, outstanding under the Agreement and the predecessor agreement. In addition to the $50 million in borrowings under the Agreement, the Company has $.3 million of outstanding Letters of Credit and the remaining credit available under the Agreement is therefore, $149.7 million at December 31, 2003. The maximum amount available is subject to an annual redetermination of the borrowing base in accordance with the lender's customary procedures and practices. Both the Company and the banks have bilateral rights to one additional redeterminatio n each year. The agreement matures on July 10, 2006. Interest on amounts borrowed is charged at LIBOR plus a margin of 1.25% to 2.00%, or the higher of the lead bank’s prime rate or the federal funds rate plus 50 basis points plus a margin of 0.0% to 0.75%, with margins on the various rate options based on the ratio of credit outstanding to the borrowing base. The Company pays a commitment fee of 30 to 50 basis points on the unused portion, which is also based on the ratio of credit outstanding to the borrowing base.

The weighted average interest rate on outstanding borrowings at December 31, 2003 was 2.58%. The Agreement contains restrictive covenants which, among other things, requires the Company to maintain a certain tangible net worth and minimum EBITDA, as defined. The Company was in compliance with all such covenants as of December 31, 2003.

7.  Shareholders' Equity

Shares of Class A Common Stock (Common Stock) and Class B Stock, referred to collectively as the “Capital Stock,” are each entitled to one vote and 95% of one vote, respectively. Each share of Class B Stock is entitled to a $1.00 per share preference in the event of liquidation or dissolution. Further, each share of Class B Stock is convertible into one share of Common Stock at the option of the holder.

In November 1999, the Company adopted a Shareholder Rights Agreement and declared a dividend distribution of one Right for each outstanding share of Capital Stock on December 8, 1999. Each Right, when exercisable, entitles the holder to purchase one one-hundredth of a share of a Series B Junior Participating Preferred Stock, or in certain cases other securities, for $38.00. The exercise price and number of shares issuable are subject to adjustment to prevent dilution. The Rights would become exercisable, unless earlier redeemed by the Company, 10 days following a public announcement that a person or group has acquired, or obtained the right to acquire, 20% or more of the outstanding shares of Common Stock or 10 business days following the commencement of a tender or exchange offer for such outstanding shares which would result in such person or group acquiring 20% or more of the ou tstanding shares of Common Stock, either event occurring without the prior consent of the Company.
 
 
   36  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements

7.    Shareholders' Equity (Cont’d)

The Rights will expire on December 8, 2009 or may be redeemed by the Company at $.01 per Right prior to that date unless they have theretofore become exercisable. The Rights do not have voting or dividend rights, and until they become exercisable, have no diluting effect on the earnings of the Company. A total of 250,000 shares of the Company’s Preferred Stock has been designated Series B Junior Participating Preferred Stock and reserved for issuance upon exercise of the Rights. This Shareholder Rights Agreement replaced the previous Shareholder Rights Agreement approved in December 1989 which expired on December 8, 1999.

In August 2001, the Board of Directors authorized the Company to repurchase $20 million of Common Stock in the open market. As of December 31, 2001, the Company had repurchased 308,075 shares for approximately $5.1 million. All shares repurchased were retired. No additional shares were repurchased in 2002 or 2003.

The Company issued 51,683, 19,717, and 6,529 shares in 2003, 2002, and 2001, respectively, through its stock option plan.

The Company paid a special dividend of $.04 per share on May 2, 2003 and increased its regular quarterly dividend by 10%, from $.10 to $.11 per share beginning with the June 2003 dividend.

As of December 31, 2003, dividends declared on 4,000,894 shares of certain Common Stock are restricted, whereby 37.5% of the dividends declared on these shares are paid by the Company to the surviving member of a group of individuals, the B Group, as long as this remaining member shall live.

8.    Asset Retirement Obligations

In 2002, the Company implemented SFAS No. 143, “Accounting for Asset Retirement Obligations” for recording future site restoration costs related to its oil and gas properties. Prior to its implementation, the Company had recorded the future obligation per SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies.” Under SFAS No. 143, the following table summarizes the change in our abandonment obligation for the year ended December 31, 2003 (in thousands):

 
   
2003
 
   
 
 
   
 
 
Beginning abandonment obligation December 31, 2002
 
$
4,596
 
Liabilities incurred
   
2,623
 
Liabilities settled
   
(439
)
Accretion expense
   
531
 
   
 
 
   
 
 
Ending abandonment obligation December 31, 2003
 
$
7,311
 
   
 
 
9.   Income Taxes
The Provision for income taxes consists of the following (in thousands):

 
   
2003  

 

 

2002  

 

 

2001  
 
   
 
 
 
Current:
   
 
   
 
   
 
 
Federal
 
$
3,652
 
$
2,700
 
$
3,108
 
State
   
907
   
1,032
   
1,119
 
   
 
 
 
 
   
4,559
   
3,732
   
4,227
 
   
 
 
 
Deferred:
   
 
   
 
   
 
 
Federal
   
1,841
   
4,258
   
1,755
 
State
   
(482
)
 
(400
)
 
(682
)
   
 
 
 
 
   
1,359
   
3,858
   
1,073
 
   
 
 
 
Total
 
$
5,918
 
$
7,590
 
$
5,300
 
   
 
 
 

 
   37  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements

9.   Income Taxes (cont’d)

The current deferred tax assets and liabilities are offset and presented as a single amount in the financial statements. Similarly, the non-current deferred tax assets and liabilities are presented in the same manner. The following table summarizes the components of the total deferred tax assets and liabilities before such financial statement offsets. The components of the net deferred tax liability consist of the following at December 31 (in thousands):

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Deferred tax asset:
   
 
   
 
   
 
 
Federal benefit of state taxes
 
$
318
 
$
350
 
$
392
 
Credit/deduction carryforwards
   
23,440
   
15,454
   
11,599
 
Derivatives
   
2,421
   
1,712
   
-
 
Other, net
   
1,488
   
(1,187
)
 
579
 
   
 
 
 
 
   
27,667
   
16,329
   
12,570
 
   
 
 
 
Deferred tax liability:
   
 
   
 
   
 
 
Depreciation and depletion
   
(61,425
)
 
(49,458
)
 
(43,608
)
Other, net
   
138
   
173
   
210
 
   
 
 
 
 
   
(61,287
)
 
(49,285
)
 
(43,398
)
   
 
 
 
Net deferred tax liability
 
$
(33,620
)
$
(32,956
)
$
(30,828
)
   
 
 
 
 
Reconciliation of the statutory federal income tax rate to the effective income tax rate follows.

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
 
   
 
   
 
   
 
 
Tax computed at statutory federal rate
   
35
%
 
35
%
 
35
%
 
   
 
   
 
   
 
 
State income taxes, net of federal benefit
   
1
   
1
   
1
 
Tax credits
   
(21
)
 
(15
)
 
(16
)
Other
   
-
   
(1
)
 
(1
)
   
 
 
 
Effective tax rate
   
15
%
 
20
%
 
19
%
 
 
 
 
 
 
The Company has approximately $20 million of federal and $11 million of state (California) EOR tax credit carryforwards available to reduce future income taxes. The EOR credits will begin to expire in 2020 and 2014 for federal and California, respectively.

10.   Commitments
 
Operating Leases – Office Space

The Company leases corporate and field offices in California and the Rocky Mountain region. The total minimum rental payments, on a combined basis, for these leases are as follows (in thousands):

Year ending December 31,
 
 

   
2004
 
$
528
 
2005
   
562
 
2006
   
487
 
2007
   
107
 
2008
   
107
 
2009
   
90
 
   
 
Total
 
$
1,881
 
   
 
 
 
   38  

 
 
BERRY PETROLEUM COMPANY
Notes to the Financial Statements

10.  Commitments (Cont’d)

Firm Transportation-Natural Gas Purchases

The Company entered into a 12,000 MMBtu/D ten-year firm transportation agreement on the Kern River pipeline with gas deliveries commencing in May 2003. This firm transportation provides the Company additional flexibility in securing its natural gas supply and allows the Company to potentially benefit from discounted natural gas prices in the Rockies. As of December 31, 2003, this take-or-pay commitment was approximately $29 million over the remaining term of the contract.

11.  Contingencies

The Company has accrued environmental liabilities for all sites, including sites in which governmental agencies have designated the Company as a potentially responsible party, where it is probable that a loss will be incurred and the minimum cost or amount of loss can be reasonably estimated. However, because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate the currently identified sites, and sites identified in the future, if any, could be higher than the liability currently accrued. Amounts currently accrued are not significant to the consolidated financial position of the Company and Management believes, based upon current site assessments, that the ultimate resolution of these matters will not require substantial additional accruals. The Company is involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of its business. In the opinion of Management, the resolution of these matters will not have a material effect on the Company’s financial position, results of operations or liquidity.

12.  Stock Option Plan

On December 2, 1994, the Board of Directors of the Company adopted the Berry Petroleum Company 1994 Stock Option Plan which was restated and amended in December 1997 and December 2001 (the 1994 Plan) and approved by the shareholders in May 1998 and May 2002, respectively. The 1994 Plan provides for the granting of stock options to purchase up to an aggregate of 3,000,000 shares of Common Stock. All options, with the exception of the formula grants to non-employee Directors, will be granted at the discretion of the Compensation Committee of the Board of Directors. The term of each option may not exceed ten years from the date the option is granted.

The options vest 25% per year for four years. The 1994 Plan also allows for option grants to the Board of Directors under a formula plan whereby all non-employee Directors receive 5,000 options annually on December 2 nd at the fair value on the date of grant. The options granted to the non-employee Directors vest immediately.

The following is a summary of stock-based compensation activity for the years 2003, 2002 and 2001.

 
   
2003

 

 

2002

 

 

2001

 

 

 

 

Options

 

 

Options

 

 

Options
 
   
 
 
 
Balance outstanding, January 1
   
1,604,575
   
1,474,962
   
1,407,837
 
Granted
   
411,500
   
241,200
   
239,500
 
Exercised
   
(294,150
)
 
(95,837
)
 
(65,125
)
Canceled/expired
   
(20,000
)
 
(15,750
)
 
(107,250
)
   
 
 
 
Balance outstanding, December 31
   
1,701,925
   
1,604,575
   
1,474,962
 
   
 
 
 
 
   
 
   
 
   
 
 
Balance exercisable at December 31
   
1,037,275
   
1,153,000
   
1,010,712
 
   
 
 
 
 
   
 
   
 
   
 
 
Available for future grant
   
615,600
   
1,007,100
   
232,550
 
   
 
 
 
 
   
 
   
 
   
 
 
Exercise price-range
 
$
15.10
 
$
16.56
 
$
14.40
 
 
    to 20.30    
to 18.05
   
to 16.96
 
Weighted average remaining contractual life (years)
   
7
   
7
   
7
 
Weighted average fair value per option granted during the year based on the Black-Scholes pricing model
 
$
5.11
 
$
5.25
 
$
5.87
 
 
 
   39  

 

BERRY PETROLEUM COMPANY
Notes to the Financial Statements
12.  Stock Option Plan (Cont’d)

Weighted average option exercise price information for the years 2003, 2002 and 2001 as follows.

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
Outstanding at January 1
 
$
15.17
 
$
14.80
 
$
14.58
 
Granted during the year
   
19.31
   
16.14
   
16.16
 
Exercised during the year
   
13.15
   
11.87
   
13.12
 
Cancelled/expired during the year
   
16.55
   
15.92
   
16.01
 
Outstanding at December 31
   
16.50
   
15.17
   
14.80
 
Exercisable at December 31
   
15.62
   
14.81
   
14.55
 
 
13.  Retirement Plan

The Company sponsors a 401(k) defined contribution thrift plan to assist all eligible employees in providing for retirement or other future financial needs. Employee contributions (up to 6% of earnings) are matched by the Company dollar for dollar. Effective November 1, 1992, the 401(k) Plan was modified to provide for increased Company matching of employee contributions whereby the monthly Company matching contributions will range from 6% to 9% of eligible participating employee earnings, if certain financial targets are achieved. The Company's contributions to the 401(k) Plan were $.5 million in 2003, $.4 million in 2002, and $.4 million in 2001. On average, approximately 96% of eligible employees participate in the plan.

14.  Quarterly Financial Data (unaudited)

The following is a tabulation of unaudited quarterly operating results for 2003 and 2002 (in thousands, except per share data):

2003
   
Operating Revenues

 

 

Gross
Profit

 

 

Net Income

 

 

Basic Net Income Per Share

 

 

Diluted Net Income Per Share
 
 
 
 
 
 
 
First Quarter
 
$
46,766
 
$
16,790
 
$
9,177
 
$
0.42
 
$
0.42
 
Second Quarter
   
39,372
   
9,187
   
6,510
   
0.30
   
0.30
 
Third Quarter
   
44,108
   
11,842
   
8,035
   
0.37
   
0.36
 
Fourth Quarter
   
49,802
   
17,110
   
10,610
   
0.49
   
0.48
 
   
 
 
 
 
 
 
 
$
180,048
 
$
54,929
 
$
34,332
 
$
1.58
 
$
1.56
 
   
 
 
 
 
 
2002
   
 
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
 
   
 
 
First Quarter
 
$
26,807
 
$
8,014
 
$
8,620
 
$
0.40
 
$
0.40
 
Second Quarter
   
31,765
   
10,482
   
6,827
   
0.31
   
0.31
 
Third Quarter
   
34,933
   
12,599
   
7,587
   
0.35
   
0.35
 
Fourth Quarter
   
36,212
   
10,534
   
6,990
   
0.32
   
0.32
 
   
 
 
 
 
 
 
 
$
129,717
 
$
41,629
 
$
30,024
 
$
1.38
 
$
1.37
 
   
 
 
 
 
 
 
 
  40   

 
 
BERRY PETROLEUM COMPANY

Supplemental Information About Oil & Gas Producing Activities (Unaudited)

The following estimates of proved oil and gas reserves, both developed and undeveloped, represent interests owned by the Company located solely within the United States. Proved reserves represent estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which relatively major expenditures are required for completion.

Disclosures of oil and gas reserves which follow are based on estimates prepared by independent engineering consultants as of December 31, 2003, 2002 and 2001. Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. These estimates do not include probable or possible reserves. The information provided does not represent Management's estimate of the Company's expected future cash flows or value of proved oil and gas reserves.

Changes in estimated reserve quantities

The net interest in estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas at December 31, 2003, 2002 and 2001, and changes in such quantities during each of the years then ended were as follows (in thousands):

 
   
2003

 

 

2002

 

 

2001

 

 

 


 


 


 

 

 

 

Oil

 

 

Gas

 

 

 

 

 

Oil

 

 

Gas

 

 

 

 

 

Oil

 

 

Gas

 

 

 

 

 

 

 

Mbbls

 

 

Mmcf

 

 

BOE

 

 

Mbbls

 

 

Mmcf

 

 

BOE

 

 

Mbbls

 

 

Mmcf

 

 

BOE

 

   
 
 
 
 
 
 
 
 
 
Proved developed and
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Undeveloped reserves:
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Beginning of year
   
100,744
   
5,850
   
101,719
   
101,701
   
6,926
   
102,855
   
106,664
   
4,184
   
107,361
 
Revision of previous estimates
   
(82
)
 
293
   
(33
)
 
(30
)
 
(307
)
 
(81
)
 
33
   
153
   
58
 
Improved recovery
   
1,271
   
-
   
1,271
   
752
   
-
   
752
   
-
   
-
   
-
 
Extensions and discoveries
   
1,853
   
2,005
   
2,187
   
3,444
   
-
   
3,444
   
-
   
-
   
-
 
Production
   
(5,827
)
 
(1,277
)
 
(6,040
)
 
(5,123
)
 
(769
)
 
(5,251
)
 
(4,996
)
 
(288
)
 
(5,044
)
Purchase of reserves in place
   
8,681
   
12,809
   
10,816
   
-
   
-
   
-
   
-
   
2,877
   
480
 
   
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
End of year
   
106,640
   
19,680
   
109,920
   
100,744
   
5,850
   
101,719
   
101,701
   
6,926
   
102,855
 
   
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Proved developed reserves:
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Beginning of year
   
72,889
   
3,252
   
73,431
   
79,317
   
3,518
   
79,903
   
81,132
   
1,635
   
81,405
 
   
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
End of year
   
78,145
   
12,207
   
80,180
   
72,889
   
3,252
   
73,431
   
79,317
   
3,518
   
79,903
 
   
 
 
 
 
 
 
 
 
 
 
 
   41  

 

BERRY PETROLEUM COMPANY

Supplemental Information About Oil & Gas Producing Activities (Unaudited)(Cont'd)

The standardized measure has been prepared assuming year end sales prices adjusted for fixed and determinable contractual price changes, current costs and statutory tax rates (adjusted for tax credits and other items), and a ten percent annual discount rate. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense. Cash outflows for future production and development costs include cash flows associated with the ultimate settlement of the asset retirement obligation.

Standardized measure of discounted future net cash flows from estimated production of proved oil and gas reserves (in thousands):

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
 
   
 
   
 
   
 
 
Future cash inflows
 
$
2,845,767
 
$
2,533,410
 
$
1,452,946
 
Future production and development costs
   
(1,444,619
)
 
(1,313,866
)
 
(730,311
)
Future income tax expenses
   
(324,097
)
 
(305,485
)
 
(171,741
)
   
 
 
 
Future net cash flows
   
1,077,051
   
914,059
   
550,894
 
 
   
 
   
 
   
 
 
10% annual discount for estimated timing of cash flows
   
(548,831
)
 
(464,202
)
 
(272,441
)
   
 
 
 
 
   
 
   
 
   
 
 
Standardized measure of discounted future net cash flows
 
$
528,220
 
$
449,857
 
$
278,453
 
   
 
 
 
 
   
 
   
 
   
 
 
Average sales prices at December 31 (net of the effect of hedges):
   
 
   
 
   
 
 
 
   
 
   
 
   
 
 
Oil ($/Bbl)
 
$
25.77
 
$
24.92
 
$
14.16
 
Gas ($/Mcf)
 
$
4.94
 
$
3.94
 
$
1.87
 
BOE Price
 
$
25.89
 
$
24.91
 
$
14.13
 
 
Changes in standardized measure of discounted future net cash flows from proved oil and gas reserves (in thousands):

 
   
2003

 

 

2002

 

 

2001
 
   
 
 
 
 
   
 
   
 
   
 
 
Standardized measure - beginning of year
 
$
449,857
 
$
278,453
 
$
501,694
 
   
 
 
 
 
   
 
   
 
   
 
 
Sales of oil and gas produced, net of production costs
   
(75,143
)
 
(57,422
)
 
(59,865
)
Revisions to estimates of proved reserves:
   
 
   
 
   
 
 
Net changes in sales prices and production costs
   
45,292
   
276,417
   
(422,515
)
Revisions of previous quantity estimates
   
(229
)
 
(550
)
 
222
 
Improved recovery
   
9,400
   
5,063
   
-
 
Extensions and discoveries
   
16,171
   
23,189
   
-
 
Change in estimated future development costs
   
(75,841
)
 
(74,566
)
 
48,689
 
Purchases of reserves in place
   
47,700
   
-
   
2,606
 
Development costs incurred during the period
   
41,461
   
30,632
   
14,895
 
Accretion of discount
   
59,983
   
35,865
   
72,177
 
Income taxes
   
(8,896
)
 
(62,531
)
 
136,303
 
Other
   
18,465
   
(4,693
)
 
(15,753
)
   
 
 
 
Net increase (decrease)
   
78,363
   
171,404
   
(223,241
)
   
 
 
 
Standardized measure - end of year
 
$
528,220
 
$
449,857
 
$
278,453
 
   
 
 
 
 
 
   42  

 
 
BERRY PETROLEUM COMPANY

Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.         Controls and Procedures
 
The Company’s Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No change in the Company’s internal control over financial reporting occurred during the Company& #146;s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Item 10.         Directors and Executive Officers of the Registrant

The information called for by Item 10 is incorporated by reference from information under the captions “Corporate Governance and Board Matters” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year. Information regarding Executive Officers is contained in this report in Part I, Item 1 titled “Business and Properties”.

Item 11.         Executive Compensation

The information called for by Item 11 is incorporated by reference from information under the caption "Executive Compensation" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.

Item 12.         Security Ownership of Certain Beneficial Owners and Management

The information called for by Item 12 is incorporated by reference from information under the captions "Security Ownership of Directors and Management" and "Principal Shareholders" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.

Item 13.         Certain Relationships and Related Transactions

The information called for by Item 13 is incorporated by reference from information under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.

Item 14.         Principal Accounting Fees and Services

The information called for by Item 14 is incorporated by reference from the information under the caption “Fees to Independent Accountants for 2003 and 2002” in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.

 
  43   

 
 
BERRY PETROLEUM COMPANY

Item 15         Exhibits, Financial Statement Schedules and Reports on Form 8-K

A.   Financial Statements and Schedules

See Index to Financial Statements and Supplementary Data in Item 8.

B.   Reports on Form 8-K

During the three months ended December 31, 2003, the Company filed one Current Report on Form 8-K dated November 6, 2003. The Company’s November 6, 2003 Form 8-K provided, under Items 7 and 12, including the Company’s news release and attached schedules dated November 6, 2003 that announced the Company’s financial and operating results for the three and nine month periods ended September 30, 2003.

C. Exhibits
 
 
Exhibit No.
Description of Exhibit
 
 
3.1*
Registrant's Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 filed on June 7, 1989, File No. 33-29165)
3.2*
Registrant's Restated Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 on June 7, 1989, File No. 33-29165)
3.3*
Registrant's Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock (filed as Exhibit A to the Registrant's Registration Statement on Form 8-A12B on December 7, 1999, File No. 778438-99-000016)
3.4*
Registrant's First Amendment to Restated Bylaws dated August 31, 1999 (filed as Exhibit 3.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-9735)
4.1*
Rights Agreement between Registrant and ChaseMellon Shareholder Services, L.L.C. dated as of December 8, 1999 (filed by the Registrant on Form 8-A12B on December 7, 1999, File No. 778438-99-000016)
10.1*
Description of Cash Bonus Plan of Berry Petroleum Company (filed as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-9735).
10.2*
Salary Continuation Agreement dated as of December 5, 1997, by and between Registrant and Jerry V. Hoffman (filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, File No.1-9735)
10.3*
Form of Salary Continuation Agreement dated as of December 5, 1997, by and between Registrant and Ralph J. Goehring (filed as Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-9735)
10.4*
Form of Salary Continuation Agreements dated as of March 20, 1987, as amended August 28, 1987, by and between Registrant and selected employees of the Company (filed as Exhibit 10.12 to the Registration Statement on Form S-1 filed on June 7, 1989, File No. 33-29165)
10.5*
Instrument for Settlement of Claims and Mutual Release by and among Registrant, Victory Oil Company, the Crail Fund and Victory Holding Company effective October 31, 1986 (filed as Exhibit 10.13 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 filed on May 22, 1987, File No. 33-13240)
10.7
Credit Agreement, dated as of July 10, 2003, by and between the Registrant and Wells Fargo Bank, N.A. and other financial institutions.
10.8*
Amended and Restated 1994 Stock Option Plan (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 filed on August 20, 2002, File No. 333-98379)
10.9**
Crude oil purchase contract, dated as of August 1, 2002, by and between the Registrant and Equiva Trading Company (filed as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-9735).
 
 
  44   

 

Exhibits (cont'd)
 
 
Exhibit No.
Description of Exhibit
 
 
10.10*
Amended and Restated Non-Employee Director Deferred Stock and Compensation Plan (filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-9735).
10.11
Purchase and sale agreement between the Registrant and Willliams Production Company
23.1
Consent of PricewaterhouseCoopers LLP
23.2
Consent of DeGolyer and MacNaughton
31.1
Certification of Chief Executive Officer pursuant to SEC Rule 13(a)-14(a)
31.2
Certification of Chief Financial Officer pursuant to SEC Rule 13(a)-14(a)
32.1
Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
32.2
Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
99.1
Undertaking for Form S-8 Registration Statements
99.2*
Form of Indemnity Agreement of Registrant (filed as Exhibit 28.2 in Registrant's Registration Statement on Form S-4 filed on April 7, 1987, File No. 33-13240)
99.3*
Form of "B" Group Trust (filed as Exhibit 28.3 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 filed on May 22, 1987, File No. 33-13240)
*      Incorporated by reference
**   Pursuant to 17CFR240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission, pursuant to a Confidential Treatment Request filed with the Commission.
 
 
  45   

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on March 5, 2004.

BERRY PETROLEUM COMPANY

JERRY V. HOFFMAN
RALPH J. GOEHRING
DONALD A. DALE
Chairman of the Board, Director,
Senior Vice President and
Controller
President and Chief
Chief Financial Officer
(Principal Accounting Officer)
Executive Officer
(Principal Financial Officer)
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates so indicated.

Name
Office
Date
 
 
 
/s/ Jerry V. Hoffman
Chairman of the Board, Director, President and
March 5, 2004
Jerry V. Hoffman
Chief Executive Officer
 
 
 
 
/s/ William F. Berry
Director
March 5, 2004
William F. Berry
 
 
 
 
 
/s/ Ralph B. Busch, III
Director
March 5, 2004
Ralph B. Busch, III
 
 
 
 
 
/s/ William E. Bush, Jr.
Director
March 5, 2004
William E. Bush, Jr.
 
 
 
 
 
/s/ Stephen L. Cropper
Director
March 5, 2004
Stephen L. Cropper
 
 
 
 
 
/s/ J. Herbert Gaul, Jr.
Director
March 5, 2004
J. Herbert Gaul, Jr.
 
 
 
 
 
/s/ John A. Hagg
Director
March 5, 2004
John A. Hagg
 
 
 
 
 
/s/ Robert F. Heinemann
Director
March 5, 2004
Robert F. Heinemann
 
 
 
 
 
/s/ Thomas J. Jamieson
Director
March 5, 2004
Thomas J. Jamieson
 
 
 
 
 
/s/ Martin H. Young, Jr.
Director
March 5, 2004
Martin H. Young, Jr.
 
 

 
   46  

 
 
                                 CREDIT AGREEMENT
                              BERRY PETROLEUM COMPANY

                                      and

                      WELLS FARGO BANK, NATIONAL ASSOCIATION
         as Administrative Agent, Co-Lead Arranger and Sole Book Runner

                              BANK OF AMERICA, N.A.
                     as Co-Lead Arranger and Co-Syndication Agent

                         UNION BANK OF CALIFORNIA, N.A.
                             as Co-Syndication Agent

                              FLEET NATIONAL BANK
                            as Co-Documentation Agent

                                    BNP PARIBAS
                              as Co-Documentation Agent

                                        and

                         CERTAIN FINANCIAL INSTITUTIONS
                                    as Lenders

                                   $200,000,000

                                   July 10, 2003


TABLE OF CONTENTS
                                                            Page
CREDIT AGREEMENT.............................................1
ARTICLE I - Definitions and References.......................1
Section 1.1. Defined
Terms........................................................1
Section 1.2. Exhibits and Schedules; Additional Definitions.16
Section 1.3. Amendment of Defined Instruments...............16
Section 1.4. References and Titles..........................16
Section 1.5. Calculations and Determinations................17
Section 1.6. Joint Preparation; Construction of Indemnities
and Releases................................................17
ARTICLE II - The Loans and Letters of Credit............... 17
Section 2.1. Commitments to Lend; Notes.....................17
Section 2.2. Requests for New Loans.........................18
Section 2.3. Continuations and Conversions of Existing
Loans.......................................................19
Section 2.4. Use of Proceeds................................20
Section 2.5. Interest Rates and Fees........................20
Section 2.6. Optional Prepayments...........................21
Section 2.7. Mandatory Prepayments..........................21
Section 2.8. Initial Borrowing Base.........................21
Section 2.9. Subsequent Determinations of Borrowing Base....21
Section 2.10. Changes in Amount of Aggregate
Commitment..................................................22
Section 2.11. Letters of Credit.............................23
Section 2.12. Requesting Letters of Credit..................24
Section 2.13. Reimbursement and
Participations..............................................24
Section 2.14. Letter of Credit Fees.........................26
Section 2.15. No Duty to Inquire............................26
Section 2.16. LC Collateral.................................27
ARTICLE III - Payments to Lenders...........................28
Section 3.1. General Procedures.............................28
Section 3.2. Capital Reimbursement..........................29
Section 3.3. Increased Cost of Eurodollar Loans or Letters
of Credit ..................................................29
Section 3.4. Availability...................................30
Section 3.5. Funding Losses.................................30
Section 3.6. Reimbursable Taxes.............................31
Section 3.7. Change of Applicable Lending Office............32
Section 3.8. Replacement of Lenders.........................32
ARTICLE IV - Conditions Precedent to Lending................32
Section 4.1. Documents to be Delivered......................32
Section 4.2. Additional Conditions Precedent................33
ARTICLE V - Representations and Warranties..................34
Section 5.1. No Default.....................................34
Section 5.2. Organization and Good Standing.................34
Section 5.3. Authorization..................................35
Section 5.4. No Conflicts or Consents.......................35
Section 5.5. Enforceable Obligations........................35
Section 5.6. Initial Financial Statements...................35
Section 5.7. Other Obligations and Restrictions.............35
Section 5.8. Full Disclosure................................36
Section 5.9. Litigation.....................................36
Section 5.10. Labor Disputes and Acts of God................36
Section 5.11. ERISA Plans and Liabilities...................36
Section 5.12. Environmental and Other Laws..................37
Section 5.13. Names and Places of Business..................37
Section 5.14. Borrower's Subsidiaries.......................37
Section 5.15. Government Regulation.........................38
Section 5.16. Insider.......................................38
Section 5.17. Solvency......................................38
Section 5.18. Title to Properties; Licenses.................38
Section 5.19. Tax Shelter Regulations.......................38
ARTICLE VI - Affirmative Covenants of Borrower..............39
Section 6.1. Payment and Performance........................39
Section 6.2. Books, Financial Statements and Reports........39
Section 6.3. Other Information and Inspections..............41
Section 6.4. Notice of Material Events and Change of
Address.....................................................41
Section 6.5. Maintenance of Properties......................42
Section 6.6. Maintenance of Existence and Qualifications....42
Section 6.7. Payment of Trade Liabilities, Taxes, etc.......42
Section 6.8. Insurance......................................42
Section 6.9. Performance on Borrower's Behalf...............42
Section 6.10. Interest......................................43
Section 6.11. Compliance with Agreements and Law............43
Section 6.12. Environmental Matters; Environmental Reviews..43
Section 6.13. Evidence of Compliance........................43
Section 6.14. Bank Accounts; Offset.........................44
ARTICLE VII - Negative Covenants of Borrower................44
Section 7.1. Indebtedness...................................44
Section 7.2. Limitation on Liens............................45
Section 7.3. Hedging Contracts..............................45
Section 7.4. Limitation on Mergers, Issuances of Securities.46
Section 7.5. Limitation on Sales of Property................46
Section 7.6. Limitation on Dividends and Stock Repurchases..47
Section 7.7. Limitation on Acquisitions, Investments; and
New Businesses .............................................47
Section 7.8. Limitation on Credit Extensions................47
Section 7.9. Transactions with Affiliates...................47
Section 7.10. Prohibited Contracts..........................47
Section 7.11. Current Ratio.................................48
Section 7.12. EBITDA to Total Funded Debt Ratio.............48
ARTICLE VIII - Events of Default and Remedies...............48
Section 8.1. Events of Default..............................48
Section 8.2. Remedies.......................................50
ARTICLE IX - Administrative Agent...........................50
Section 9.1. Appointment and Authority......................50
Section 9.2. Exculpation, Administrative Agent's Reliance,
Etc. .......................................................51
Section 9.3. Credit Decisions...............................52
Section 9.4. Indemnification................................52
Section 9.5. Rights as Lender...............................52
Section 9.6. Sharing of Set-Offs and Other Payments.........53
Section 9.7. Investments....................................53
Section 9.8. Benefit of Article IX..........................53
Section 9.9. Resignation....................................54
ARTICLE X - Miscellaneous...................................54
Section 10.1. Waivers and Amendments; Acknowledgments.......54
Section 10.2. Survival of Agreements; Cumulative Nature.....55
Section 10.3. Notices.......................................56
Section 10.4. Payment of Expenses; Indemnity................56
Section 10.5. Parties in Interest; Assignments..............58
Section 10.6. Confidentiality...............................59
Section 10.7. Governing Law; Submission to Process..........60
Section 10.8. Limitation on Interest........................60
Section 10.9. Termination; Limited Survival.................60
Section 10.10. Severability.................................61
Section 10.11. Counterparts; Fax............................61
SECTION 10.12. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC..61

Schedules and Exhibits:

Schedule 1 - Lenders Schedule
Schedule 2 - Insurance Schedule

Exhibit A - Promissory Note
Exhibit B - Borrowing Notice
Exhibit C - Continuation/Conversion Notice
Exhibit D - Certificate Accompanying Financial Statements
Exhibit E - Opinion of Counsel for Restricted Persons
Exhibit F - Assignment and Assumption Agreement

CREDIT AGREEMENT

	THIS CREDIT AGREEMENT is made as of July 10, 2003, by and among BERRY
PETROLEUM COMPANY, a Delaware corporation (herein called "Borrower"), WELLS
FARGO BANK, NATIONAL ASSOCIATION, individually and as Administrative Agent
(herein called "Administrative Agent") and the Lenders referred to below. In
consideration of the mutual covenants and agreements contained herein the
parties hereto agree as follows:

				ARTICLE I - Definitions and References

	Section 1.1. Defined Terms. As used in this Agreement, each of the
following terms has the meaning given to such term in this Section 1.1 or in
the sections and subsections referred to below:

"Adjusted Base Rate" means the Base Rate plus the Base Rate Margin, provided
that the Adjusted Base Rate charged by any Person shall never exceed the
Highest Lawful Rate.

"Adjusted EBITDA" means, for any period, EBITDA for such period adjusted (a)
as permitted and in accordance with Article 11 of Regulation S-X promulgated
by the Securities and Exchange Commission, and (b) to give effect to any
acquisition or divestiture made by the Borrower or any of its Consolidated
subsidiaries during such period as if such transactions had occurred on the
first day of such period, regardless of whether the effect is positive or
negative.

"Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest
Period therefor, the rate per annum equal to the sum of (a) the Eurodollar
Margin plus (b) the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) determined by Administrative Agent to be equal to the
quotient obtained by dividing (i) the Eurodollar Rate for such Eurodollar
Loan for such Interest Period by (ii) 1 minus the Reserve Requirement for
such Eurodollar Loan for such Interest Period, provided that no Adjusted
Eurodollar Rate charged by any Person shall ever exceed the Highest Lawful
Rate. The Adjusted Eurodollar Rate for any Eurodollar Loan shall change
whenever the Eurodollar Margin or the Reserve Requirement changes.

"Affiliate" means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person. A Person shall
be deemed to be "controlled by" any other Person if such other Person
possesses, directly or indirectly, power (a) to vote 10% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
election of directors or managing general partners; or (b) to direct or cause
the direction of the management and policies of such Person whether by
contract or otherwise.

"Administrative Agent" means Wells Fargo, as Administrative Agent hereunder,
and its successors in such capacity.
"Aggregate Commitment" means the aggregate amount of the Commitments of the
Lenders; provided that in no event shall the Aggregate Commitment exceed the
Maximum Credit Amount.

"Agreement" means this Credit Agreement.

"Applicable Lending Office" means, with respect to each Lender, such Lender's
Domestic Lending Office in the case of Base Rate Loans and such Lender's
Eurodollar Lending Office in the case of Eurodollar Loans.

"Availability" means on any day during the Commitment Period, the unused
portion of the Aggregate Commitment, determined for such day by deducting
from the amount of the Aggregate Commitment at the end of such day the
Facility Usage.

"Base Rate" means, for any day, the rate per annum equal to the higher of (a)
the Federal Funds Rate for such day plus one-half of one percent (.5%) and
(b) the Prime Rate for such day. Any change in the Base Rate due to a change
in the Prime Rate or the Federal Funds Rate shall be effective on the
effective date of such change in the Prime Rate or Federal Funds Rate. As
used in this definition, "Prime Rate" means the per annum rate of interest
most recently announced within Wells Fargo as its "Prime Rate", with the
understanding that Wells Fargo's Prime Rate is one of its base rates and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording
thereof after its announcement in such internal publication or publications
as Wells Fargo may designate. Each change in the Prime Rate will be effective
on the day the change is announced within Wells Fargo.

"Base Rate Loan" means a Loan which does not bear interest at the Adjusted
Eurodollar Rate.

"Base Rate Margin" means, on any day, the following percentages per annum
based on the Utilization Percentage as set forth below:

			Utilization Percentage 	Base Rate Margin
	Level 1			 < 50% 			0.00%
	Level 2 		>= 50% 			0.25%
	Level 3 		>= 75% 			0.50%
	Level 4 		>= 90% 			0.75%

"Borrowing" means a borrowing of new Loans of a single Type pursuant to
Section 2.2 or a Continuation or Conversion of existing Loans into a single
Type (and, in the case of Eurodollar Loans, with the same Interest Period)
pursuant to Section 2.3.

"Borrowing Base" means, at the particular time in question, either the amount
provided for in Section 2.8 or the amount determined by Administrative Agent
and Majority Lenders in accordance with the provisions of Section 2.9;
provided, however, that in no event shall the Borrowing Base ever exceed the
Maximum Credit Amount.

"Borrowing Base Deficiency" has the meaning given to such term in Section
2.7(a).

"Borrowing Notice" means a written or telephonic request, or a written
confirmation, made by Borrower which meets the requirements of Section 2.2.

"Business Day" means a day, other than a Saturday or Sunday, on which
commercial banks are open for business with the public in Denver, Colorado.
Any Business Day in any way relating to Eurodollar Loans (such as the day on
which an Interest Period begins or ends) must also be a day on which, in the
judgment of Administrative Agent, significant transactions in dollars are
carried out in the interbank eurocurrency market.

"Cash Equivalents" means Investments in:
	(a) marketable obligations, maturing within twelve months
after acquisition thereof, issued or unconditionally guaranteed by the United
States of America or an instrumentality or agency thereof and entitled to the
full faith and credit of the United States of America;
	(b) demand deposits, and time deposits (including certificates of
deposit) maturing within twelve months from the date of deposit thereof, with
any office of any Lender or with a domestic office of any national or state
bank or trust company which is organized under the Laws of the United States
of America or any state therein, which has capital, surplus and undivided
profits of at least 500,000,000, and whose long term certificates of deposit
are rated at least A2 by Moody's or A by S & P;
	(c) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in subsection (a) above entered
into with any commercial bank meeting the specifications of subsection (b)
above;
	(d) open market commercial paper, maturing within 270 days after
acquisition thereof, which are rated at least P-1 by Moody's or A-1 by S& P;
and
	(e) money market or other mutual funds substantially all of whose
assets comprise securities of the types described in subsections (a) through
(d) above.

"Change of Control" means the occurrence of either of the following events:
(a) any Person or two or more Persons acting as a group shall acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Act of 1934, as amended, and
including holding proxies to vote for the election of directors other than
proxies held by Borrower's management or their designees to be voted in favor
of Persons nominated by Borrower's Board of Directors) of 30% or more of the
outstanding voting securities of Borrower, measured by voting power
(including both common stock and any preferred stock or other equity
securities entitling the holders thereof to vote with the holders of common
stock in elections for directors of Borrower) or (b)one-third or more of the
directors of Borrower shall consist of Persons not nominated by Borrower's
Board of Directors (not including as Board nominees any directors which the
Board is obligated to nominate pursuant to shareholders agreements, voting
trust arrangements or similar arrangements).

"Commitment" means for each Lender, the amount set forth as its Commitment in
the Lenders Schedule.

"Commitment Fee Rate" means, on any day, the following percentages per annum
based on the Utilization Percentage set forth below:

			Utilization Percentage 	Commitment Fee
	Level 1 	         < 50% 		  0.30%
	Level 2   		>=  50%	 	  0.375%
	Level 3 		>= 75%		  0.375%
	Level 4 		>= 90% 		  0.50%

"Commitment Period" means the period from and including the date hereof
untilMaturity Date (or, if earlier, the day on which the obligations of
Lenders to make Loans hereunder or the obligations of LC Issuer to issue
Letters of Credit hereunder have been terminated or the Notes first become
due and payable in full).

"Consolidated" refers to the consolidation of any Person, in accordance with
GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated subsidiaries.

"Continuation" shall refer to the continuation pursuant to Section 2.3 hereof
of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the
next Interest Period.

"Continuation/Conversion Notice" means a written or telephonic request, or a
written confirmation, made by Borrower which meets the requirements of
Section 2.3.

"Conversion" shall refer to a conversion pursuant to Section 2.3 or ARTICLE
III of one Type of Loan into another Type of Loan.

"Core Acquisitions and Investments" means (i) acquisitions of Mineral
Interests and (ii) acquisitions of or Investments in Persons engaged
primarily in the business of acquiring, developing and producing Mineral
Interests; provided that with respect to any acquisition or Investment
described in this clause (ii), either (A) immediately after making such
acquisition or Investment, Borrower shall own at least fifty-one percent
(51%) of the Equity Interests of such Person, measured by voting power, or
(B) such Person shall not be a publicly traded entity and such acquisition or
Investment shall be related to the business and operations of Borrower or one
of its Subsidiaries.

"Current Assets" means the sum of the current assets of Borrower and its
Consolidated Subsidiaries at such time, plus the Availability at such time in
an amount not to exceed $10,000,000, but excluding, for purposes of this
definition any non-cash gains for any Hedging Contract resulting from the
requirements of SFAS 133 at such time.

"Current Liabilities" means the current liabilities of Borrower and its
Consolidated Subsidiaries at such time, but excluding for purposes of this
definition, (i) any non-cash losses or charges on any Hedging Contract
resulting from the requirement of SFAS 133 at such time and (ii) current
maturities of the Obligations.

"Default" means any Event of Default and any default, event or condition
which would, with the giving of any requisite notices and the passage of any
requisite periods of time, constitute an Event of Default.

"Default Rate" means, at the time in question (a) with respect to any Base
Rate Loan, the rate per annum equal to three percent (3%) above the Adjusted
Base Rate then in effect and (b) with respect to any Eurodollar Loan, the
rate per annum equal to three percent (3%) above the Adjusted Eurodollar Rate
then in effect for such Loan, provided in each case that no Default Rate
charged by any Person shall ever exceed the Highest Lawful Rate.

"Determination Date" has the meaning given to such term in Section 2.9.
"Disclosure Report" means either a notice given by Borrower under Section 6.4
or a certificate given by Borrower's Chief Financial Officer under Section
6.2(a).

"Disclosure Letter" means the letter of even date with the Agreement from the
Borrower to the Agent.

"Dividend" means any dividend or other distribution made by a Restricted
Person on or in respect of any stock, partnership interest, or other equity
interest in such Restricted Person or any other Restricted Person (including
any option or warrant to buy such an equity interest), excluding Stock
Repurchases.

"Domestic Lending Office" means, with respect to any Lender, the office of
such Lender specified as its "Domestic Lending Office" below its name on the
Lenders Schedule, or such other office as such Lender may from time to time
specify to Borrower and Administrative Agent; with respect to LC Issuer, the
office, branch, or agency through which it issues Letters of Credit; and,
with respect to Administrative Agent, the office, branch, or agency through
which it administers this Agreement.

"EBITDA" means, for any period, the sum of (1) Net Income during such period,
plus (2) all interest paid or accrued during such period on Indebtedness
(including amortization of original issue discount and the interest component
of any deferred payment obligations and capital lease obligations) which was
deducted in determining such Net Income, plus (3) all income taxes which were
deducted in determining such Net Income, plus (4) all depreciation,
amortization (including mortization of good will and debt issue costs),
depletion, accretion and other non-cash charges (including any provision for
the reduction in the carrying value of assets recorded in accordance with
GAAP) which were deducted in determining such Net Income, minus (5) all non-
cash items of income which were included in determining such Net Income.

"Eligible Transferee" means a Person which either (a) is a Lender or an
Affiliate of a Lender, or (b) is consented to as an Eligible Transferee by
Administrative Agent and, so long as no Default is continuing, by Borrower,
which consents in each case will not be unreasonably withheld (provided that
no Person organized outside the United States may be an Eligible Transferee
if Borrower would be required to pay withholding taxes on interest or
principal owed to such Person).

"Engineering Report" means the Initial Engineering Report and each
engineering report delivered pursuant to Section 6.2.

"Environmental Laws" means any and all Laws relating to the environment or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or
wastes into the environment including ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.

"Equity Interest" means (i) with respect to any corporation, the capital
stock of such corporation, (ii) with respect to any limited liability
company, the membership interests in such limited liability company, (iii)
with respect to any partnership or joint venture, the partnership or joint
venture interests therein, and (iv) with respect to any other legal entity,
the ownership interests in such entity.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time, and any successor statutes or statute, together with all
rules and regulations promulgated with respect thereto.

"ERISA Affiliate" means Borrower and all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control that, together with Borrower, are treated as a single employer
under Section 414 of the Internal Revenue Code.

"ERISA Plan" means any employee pension benefit plan subject to Title IV of
ERISA maintained by any ERISA Affiliate with respect to which any Restricted
Person has a fixed or contingent liability.

"Eurodollar Lending Office" means, with respect to any Lender, the office of
such Lender specified as its "Eurodollar Lending Office" below its name on
the Lenders Schedule (or, if no such office is specified, its Domestic
Lending Office), or such other office of such Lender as such Lender may from
time to time specify to Borrower and Administrative Agent.

"Eurodollar Loan" means a Loan that bears interest at the Adjusted Eurodollar
Rate.

"Eurodollar Margin" means, on any day, the following percentages per annum
based on the Utilization Percentage as set forth below:

				Utilization Percentage 	Eurodollar Margin
	Level 1 			<  50% 		   1.25%
	Level 2 			>= 50% 		   1.50%
	Level 3 			>= 75% 	  	   1.75%
	Level 4 			>= 90% 	           2.00%

"Eurodollar Rate" means, for any Eurodollar Loan within a Borrowing and with
respect to the related Interest Period therefor, (a) the interest rate per
annum (carried out to the fifth decimal place) equal to the rate determined
by the Administrative Agent to be the offered rate that appears on the page
of the Telerate Screen that displays an average British Bankers Association
Interest Settlement Rate (such page currently being page number 3750) for
deposits in U.S. dollars (for delivery on the first day of such Interest
Period) with a term equivalent to such Interest Period, determined as of
approximately 11:00 a.m. (London time) two Business Days prior to the first
day of such Interest Period, or (b) in the event the rate referenced in the
preceding subsection (a) does not appear on such page or service or such page
or service shall cease to be available, the rate per annum (carried out to
the fifth decimal place) equal to the rate determined by the Administrative
Agent to be the offered rate on such other page or other service that
displays an average British Bankers Association Interest Settlement Rate for
deposits in U.S. dollars (for delivery on the first day of such Interest
Period) with a term equivalent to such Interest Period, determined as of
approximately 11:00 a.m. (London time) two Business Days prior to the first
day of such Interest Period, or (c) in the event the rates referenced in the
preceding subsections (a) and (b) are not available, the rate per annum
determined by the Administrative Agent as the rate of interest at which
deposits in U.S. dollars (for delivery on the first day of such Interest
Period) in same day funds in the approximate amount of the applicable
Eurodollar Loan and with a term equivalent to such Interest Period would be
offered by Wells Fargo or one of its Affiliate banks to major banks in the
offshore U.S. dollar market at their request at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest
Period.

"Event of Default" has the meaning given to such term in Section 8.1.

"Existing Credit Documents" means that certain Amended and Restated Credit
Agreement dated as of July 22, 1999 among Borrower and NationsBank of Texas,
N.A., now known as Bank of America, N.A., together with the promissory notes
made by Borrower thereunder.

"Facility Usage" means, at the time in question, the aggregate amount of
outstanding Loans and existing LC Obligations at such time.

"Federal Funds Rate" means, for any day, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100th of one percent) equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the  Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (a)if the day for which such rate is to be
determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (b) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the
average rate quoted to Administrative Agent on such day on such transactions
as determined by Administrative Agent.

"Fiscal Quarter" means a three-month period ending on March 31, June 30,
September 30 or December 31 of any year.

"Fiscal Year" means a twelve-month period ending on December 31 of any year.

"Four-Quarter Period" means any period of four consecutive Fiscal Quarters.

"GAAP" means those generally accepted accounting principles and practices
which are recognized as such by the Financial Accounting Standards Board (or
any generally recognized successor) and which, in the case of Borrower and
its Consolidated Subsidiaries, are applied for all periods after the date
hereof in a manner consistent with the manner in which such principles and
practices were applied to the audited Initial Financial Statements. If any
change in any
accounting principle or practice is required by the Financial Accounting
Standards Board (or any such successor) in order for such principle or
practice to continue as a generally accepted accounting principle or
practice, all reports and financial statements required hereunder with
respect to Borrower or with respect to Borrower and its Consolidated
Subsidiaries shall be prepared in accordance with such change, which change
shall be disclosed to Administrative Agent on the next date on which
financial statements are required to be delivered to Lenders pursuant to
Section 6.2(a); provided that, unless the Majority Lenders shall otherwise
agree in writing, no such change shall modify or affect the manner in which
compliance with the covenants contained in Article VII are computed such that
all such computations shall be conducted utilizing financial information
presented consistently with prior periods.

"Hazardous Materials" means any substances regulated under any Environmental
Law, whether as pollutants, contaminants, or chemicals, or as industrial,
toxic or hazardous substances or wastes, or otherwise.

"Hedging Contract" means (a) any agreement providing for options, swaps,
floors, caps, collars, forward sales or forward purchases involving interest
rates, commodities or commodity prices, equities, currencies, bonds, or
indexes based on any of the foregoing, (b) any option, futures or forward
contract traded on an exchange, and (c) any other derivative agreement or
other similar agreement or arrangement.

"Highest Lawful Rate" means, with respect to each Lender Party to whom
Obligations are owed, the maximum nonusurious rate of interest that such
Lender Party is permitted under applicable Law to contract for, take, charge,
or receive with respect to such Obligations. All determinations herein of the
Highest Lawful Rate, or of any interest rate determined by reference to the
Highest Lawful Rate, shall be made separately for each Lender Party as
appropriate to assure that the Loan Documents are not construed to obligate
any Person to pay interest to any Lender Party at a rate in excess of the
Highest Lawful Rate applicable to such Lender Party.

"Indebtedness" of any Person means Liabilities in any of the following
categories:
	(a) Liabilities for borrowed money,
	(b) Liabilities constituting an obligation to pay the deferred purchase
price of property or services,
	(c) Liabilities evidenced by a bond, debenture, note or similar
instrument,
	(d) Liabilities which (i) would under GAAP be shown on such Person's
balance sheet as a liability, and (ii) are payable more than one year from
the date of creation thereof (other than reserves for taxes and reserves for
contingent obligations),
	(e) Liabilities arising under Hedging Contracts,
	(f) Liabilities constituting principal under leases capitalized in
accordance with GAAP,
	(g) Liabilities arising under conditional sales or other title
retention agreements,
	(h) Liabilities owing under direct or indirect guaranties of
Liabilities of any other Person or otherwise constituting obligations to
purchase or acquire or to otherwise protect or insure a creditor against loss
in respect of Liabilities of any other Person (such as obligations under
working capital maintenance agreements, agreements to keep-well, or
agreements to purchase Liabilities, assets, goods, securities or services),
but excluding endorsements in the ordinary course of business of negotiable
instruments in the course of collection,
	(i) Liabilities (for example, repurchase agreements, mandatorily
redeemable preferred stock and sale/leaseback agreements) consisting of an
obligation to purchase or redeem securities or other property, if such
Liabilities arises out of or in connection with the sale or issuance of the
same or similar securities or property,
	(j) Liabilities with respect to letters of credit or applications or
reimbursement agreements therefor,
	(k) Liabilities with respect to payments received in consideration of
oil, gas, or other minerals yet to be acquired or produced at the time of
payment (including obligations under "take-or-pay" contracts to deliver gas
in return for payments already received and the undischarged balance of any
production payment created by such Person or for the creation of which such
Person directly or indirectly received payment), or
	(l) Liabilities with respect to other obligations to deliver goods or
services in consideration of advance payments therefor; provided, however,
that the "Indebtedness" of any Person shall not include Liabilities that were
incurred by such Person on ordinary trade terms to vendors, suppliers, or
other Persons providing goods and services for use by such Person in the
ordinary course of its business which are paid as required by Section 6.7.

"Initial Engineering Report" means the engineering report concerning oil and
gas properties of Restricted Persons dated February 14, 2003, prepared by
DeGolyer & MacNaughton as of December 31, 2002.

"Initial Financial Statements" means (a) the audited annual Consolidated
financial statements of Borrower dated as of December 31, 2002, and (b) the
unaudited quarterly Consolidated financial statements of Borrower dated as of
March 31, 2003.

"Insurance Schedule" means Schedule 3 attached hereto.

"Interest Payment Date" means (a) with respect to each Base Rate Loan, the
last day of each Fiscal Quarter, and (b) with respect to each Eurodollar
Loan, the last day of the Interest Period that is applicable thereto and, if
such Interest Period is six, nine or twelve months in length, each date
specified by Administrative Agent which is approximately three, six or nine
months after such Interest Period begins.

"Internal Revenue Code" means the United States Internal Revenue Code of
1986, as amended from time to time and any  successor statute or statutes,
together with all rules and regulations promulgated with respect thereto.
"Interest Period" means, with respect to each particular Eurodollar Loan in a
Borrowing, the period specified in the Borrowing Notice or
Continuation/Conversion Notice applicable thereto, beginning on and including
the date specified in such Borrowing Notice or Continuation/Conversion Notice
(which must be a Business Day), and ending one, two, three, or six months
and, if available, nine or twelve months thereafter, as Borrower may elect in
such notice; provided that: (a) any Interest Period which would otherwise end
on a day which is not a Business Day shall be extended to the next succeeding
Business Day unless such Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding Business Day;
(b) any Interest Period which beginson the last Business Day in a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the last
Business Day in a calendar month; and (c) notwithstanding the foregoing, any
Interest Period which would otherwise end after the last day of the
Commitment Period shall end on the last day of the Commitment Period (or, if
the last day of the Commitment Period is not a Business Day, onthe next
preceding Business Day).

"Investment" means any investment, made directly or indirectly, in any Person
or any property, whether by purchase, acquisition of shares of capital stock,
indebtedness or other obligations or securities or by loan, advance, capital
contribution or otherwise and whether made in cash, by the transfer of
property, or by any other means.

"Law" means any statute, law, regulation, ordinance, rule, treaty, judgment,
order, decree, permit, concession, franchise, license, agreement or other
governmental restriction of the United States or any state or political
subdivision thereof or of any foreign country or any department, province or
other political subdivision thereof. Any reference to a Law includes any
amendment or modification to such Law, and all regulations, rulings, and
other Laws promulgated under such Law.

"LC Application" means any application for a Letter of Credit hereafter made
by Borrower to LC Issuer.

"LC Collateral" has the meaning given to such term in Section 2.16(a).

"LC Issuer" means Wells Fargo in its capacity as the issuer of Letters of
Credit hereunder, and its successors in such capacity. Administrative Agent
may, with the consent of Borrower and the Lender in question, appoint any
Lender hereunder as an LC Issuer in place of or in addition to Wells Fargo.

"LC Obligations" means, at the time in question, the sum of all Matured LC
Obligations plus the maximum amounts which LC Issuer might then or thereafter
be called upon to advance under all Letters of Credit then outstanding.

"LC Sublimit" means $20,000,000.

"Lender Parties" means Administrative Agent, LC Issuer, and all Lenders.

"Lenders" means each signatory hereto (other than Borrower and any Restricted
Person that is a party hereto), including Wells Fargo in its capacity as a
Lender hereunder rather than as Administrative Agent or LC Issuer, and the
successors of each such party as holder of a Note.

"Lenders Schedule" means Schedule 1 hereto.

"Letter of Credit" means any standby letter of credit issued by LC Issuer
hereunder at the application of Borrower.

"Liabilities" means, as to any Person, all indebtedness, liabilities and
obligations of such Person, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent, and whether or not required to be considered pursuant to GAAP.

"Lien" means, with respect to any property or assets, any right or interest
therein of a creditor to secure Liabilities owed to it or any other
arrangement with such creditor which provides for the payment of such
Liabilities out of such property or assets or which allows such creditor to
have such Liabilities satisfied out of such property or assets prior to the
general creditors of any owner thereof, including any lien, mortgage,
security interest, pledge, deposit,
production payment, rights of a vendor under any title retention or
conditional sale agreement or lease substantially equivalent thereto, tax
lien, mechanic's or materialman's lien, or any other charge or encumbrance
for security purposes, whether arising by Law or agreement or otherwise, but
excluding any right of offset which arises without agreement in the ordinary
course of business. "Lien" also means any filed financing statement, any
registration of a pledge (such as
with an issuer of uncertificated securities), or any other arrangement or
action which would serve to perfect a Lien described in the preceding
sentence, regardless of whether such financing statement is filed, such
registration is made, or such arrangement or action is undertaken before or
after such Lien exists.

"Loan Documents" means this Agreement, the Notes, the Letters of Credit, the
LC Applications, and all other agreements, certificates, documents,
instruments and writings at any time delivered in connection herewith or
therewith (exclusive of term sheets and commitment letters).

"Loans" has the meaning given to such term in Section 2.1.

"Majority Lenders" means two or more Lenders whose aggregate Percentage
Shares equal or exceed sixty-six and two-thirds percent (66.%).

"Material Adverse Change" means a material and adverse change, from the state
of affairs presented in the Initial Financial Statements or as represented or
warranted in any Loan Document, to (a) Borrower's Consolidated financial
condition, (b) Borrower's Consolidated operations, properties or prospects,
considered as a whole, (c) Borrower's ability to timely pay the Obligations,
or (d) the enforceability of the material terms of any Loan Documents.

"Matured LC Obligations" means all amounts paid by LC Issuer on drafts or
demands for payment drawn or made under or purported to be under any Letter
of Credit and all other amounts due and owing to LC Issuer under any LC
Application for any Letter of Credit, to the extent the same have not been
repaid to LC Issuer (with the proceeds of Loans or  otherwise).

"Maturity Date" means three years after the date hereof.

"Maximum Drawing Amount" means at the time in question the sum of the maximum
amounts which LC Issuer might then or thereafter be called upon to advance
under all Letters of Credit which are then outstanding.

"Maximum Credit Amount" means $200,000,000.

"Mineral Interests" means rights, estates, titles, and interests in and to
oil, gas, sulphur, or other mineral leases and any mineral interests, royalty
and overriding royalty interest, production payment, net profits interests,
mineral fee interests, and other rights therein, including, without
limitation, any reversionary or carried interests relating to the foregoing,
together with rights, titles, and interests created by or arising under the
terms of any unitization, communization, and pooling agreements or
arrangements, and all properties, rights and interests covered thereby,
whether arising by contract, by order, or by operation of Law, which now or
hereafter include all or any part of the foregoing.

"Moody's" means Moody's Investors Service, Inc. or its successor.

"Net Income" means, for any period, the net income (or loss) of the Borrower
and its properly consolidated Subsidiaries for such period, calculated on a
consolidated basis.

"Non-Core Acquisitions and Investments" means (i) acquisitions of assets used
in the transportation, processing, refining or marketing of petroleum
products which are not used in connection with Borrower's producing Mineral
Interests, (ii) acquisitions of or Investments in Persons engaged primarily
in the transportation, processing, refining or marketing of petroleum
products which are not related to Borrower's producing Mineral Interests or
(iii) Investments in Persons engaged primarily in the business of acquiring,
developing and producing Mineral Interests that are not Core Acquisitions and
Investments.

"Note" has the meaning given to such term in Section 2.1.

"Obligations" means all Liabilities from time to time owing by any Restricted
Person to any Lender Party under or pursuant to any of the Loan Documents,
including all LC Obligations. "Obligation" means any part of the Obligations.

"Percentage Share" means, with respect to any Lender (a) when used in Section
2.1, Section 2.2 or Section 2.5(d) in any Borrowing Notice or when no Loans
are outstanding hereunder, the percentage set forth below such Lender's name
on Lenders Schedule, and (b) when used otherwise, the percentage obtained by
dividing (i) the sum of the unpaid principal balance of such Lender's Loans
at the time in question plus the Matured LC Obligations which such Lender has
funded pursuant to Section 2.13(c) plus the portion of the Maximum Drawing
Amount which such Lender might be obligated to fund under Section 2.13(c), by
(ii) the sum of the aggregate unpaid principal balance of all Loans at such
time plus the aggregate amount of LC Obligations outstanding at such time.

"Permitted Investments" means (a) Cash Equivalents, (b) property used in the
ordinary course of business of the Restricted Persons, (c) current assets
arising from the sale or lease of goods and services in the ordinary course
of business by the Restricted Persons or from sales permitted under Section
7.5.

"Permitted Liens" means: (a) statutory Liens for taxes, assessments or other
governmental charges or levies which are not yet delinquent or which are
being contested in good faith by appropriate action and for which adequate
reserves have been maintained in accordance with GAAP; (b) landlords',
operators', carriers', warehousemen's, repairmen's, mechanics',
materialmen's, or other like Liens which do not secure Indebtedness, in each
case only to the extent arising in the ordinary course of business and only
to the extent securing obligations which are not delinquent or which are
being contested in good faith by appropriate proceedings and for which
adequate reserves have been maintained in accordance with GAAP;(c) minor
defects and irregularities in title to any property, so long as such defects
and irregularities neither secure Indebtedness nor materially impair the
value of such property or the use of such property for the purposes for which
such property is held; and  (d) deposits of cash or securities to secure the
performance of bids, acquisition agreements, trade contracts, leases,
statutory obligations and other obligations of a like nature (excluding
appeal bonds) incurred in the ordinary course of business.

"Person" means an individual, corporation, partnership, limited liability
company, association, joint stock company, trust or trustee thereof, estate
or executor thereof, unincorporated organization or joint venture, Tribunal,
or any other legally recognizable entity.

"Prescribed Forms" means such duly executed forms or statements, and in such
number of copies, which may, from time to time, be prescribed by Law and
which, pursuant to applicable provisions of (a) an income tax treaty between
the United States and the country of residence of the Lender Party providing
the forms or statements, (b) the Internal Revenue Code, or (c) any applicable
rules or regulations thereunder, permit Borrower to make payments hereunder
for the account of such Lender Party free of such deduction or withholding of
income or similar taxes. "Rating Agency" means either S & P or Moody's.

"Redetermination" means a Scheduled Redetermination or a Special
Redetermination.

"Regulation D" means Regulation D of the Board of Governorsof the Federal
Reserve System as from time to time in effect.

"Reserve Requirement" means, at any time, the maximum rate at which reserves
(including any marginal, special, supplemental, or emergency reserves) are
required to be maintained under regulations issued from time to time by the
Board of Governors of the Federal Reserve System (or any successor) by member
banks of the Federal Reserve System against "Eurocurrency liabilities" (as
such term is used in Regulation D). Without limiting the effect of the
foregoing, the Reserve Requirement shall reflect any other reserves required
to be maintained by such member banks with respect to (a) any category of
liabilities which includes deposits by reference to which the Adjusted
Eurodollar Rate is to be determined, or (b) any category of extensions of
credit or other assets which include Eurodollar Loans.

"Restricted Person" means any of Borrower and each Subsidiary of Borrower.

"S & P" means Standard & Poor's Ratings Services (a division of The McGraw
Hill Companies), or its successor.

"Scheduled Redetermination" means any redetermination of the Borrowing Base
pursuant to Section 2.9(a).

"Special Redetermination" means any redetermination of the Borrowing Base
pursuant to Section 2.9(b) or Section 2.9(c).

"Stock Repurchase" means any payment made by a Restricted Person to purchase,
redeem, acquire or retire any Equity Interest in such Restricted Person or
any other Restricted Person (including any option or warrant to purchase such
an Equity Interest).

"Subsidiary" means, with respect to any Person, any corporation, association,
partnership, limited liability company, joint venture, or other business or
corporate entity, enterprise or organization which is directly or indirectly
(through one or more intermediaries) controlled by or owned fifty percent or
more by such Person, provided that associations, joint ventures or other
relationships (a) which are established pursuant to a standard form operating
agreement or similar agreement or which are partnerships for purposes of
federal income taxation only, (b) which are not corporations or partnerships
(or subject to the Uniform Partnership Act) under applicable state Law, and
(c) whose businesses are limited to the exploration, development and
operation of oil, gas or mineral properties and interests owned directly by
the parties in such associations, joint ventures or relationships, shall not
be deemed to be "Subsidiaries" of such Person.

"Termination Event" means (a) the occurrence with respect to any ERISA Plan
of (i) a reportable event described in Section 4043(b)(5) or (6) of ERISA or
(ii) any other reportable event described in Section 4043(b) of ERISA other
than a reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation
under Section 4043(a) of ERISA, or (b) the withdrawal of any ERISA Affiliate
from an ERISA Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a
notice of intent to terminate any ERISA Plan or the treatment of any ERISA
Plan amendment as a termination under Section 4041 of ERISA, or (d) the
institution of proceedings to terminate any ERISA Plan by the Pension Benefit
Guaranty Corporation under Section 4042 of ERISA, or (e) any other event or
condition which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any ERISA
Plan.

"Total Funded Debt" means all Liabilities of the Restricted Persons of the
types described in clauses (a), (b), (c), (d), (f), (h), (j) of the
definition of Indebtedness.

"Tribunal" means any government, any arbitration panel, any court or any
governmental department, commission, board, bureau, agency or instrumentality
of the United States of America or any state, province, commonwealth, nation,
territory, possession, county, parish, town, township, village or
municipality, whether now or hereafter constituted or existing.

"Type" means, with respect to any Loans, the characterization of such Loans
as either Base Rate Loans or Eurodollar Loans.

"Utilization Percentage" means, for any day, the Facility Usage for such day,
divided by the Borrowing Base in effect on such day expressed as a
percentage.

"Wells Fargo" means Wells Fargo Bank, National Association.

	Section 1.2. Exhibits and Schedules; Additional Definitions. All
Exhibits and Schedules attached to this Agreement are a part hereof for all
purposes. Reference is hereby made to the Security Schedule for the meaning
of certain terms defined therein and used but not defined herein, which
definitions are incorporated herein by reference.

	Section 1.3. Amendment of Defined Instruments. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in
this Agreement which refer to a particular agreement, instrument or document
also refer to and include all renewals, extensions, modifications, amendments
and restatements of such agreement, instrument or document, provided that
nothing contained in this section shall be construed to authorize any such
renewal, extension, modification, amendment or restatement.

	Section 1.4. References and Titles. All references in this Agreement to
Exhibits, Schedules, articles, sections, subsections and other subdivisions
refer to the Exhibits, Schedules, articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Exhibits
and Schedules to any Loan Document shall be  deemedincorporated by reference
in such Loan Document. References to any document, instrument, or agreement
(a) shall include all exhibits, schedules, and other attachments thereto, and
(b) shall include all documents, instruments, or agreements issued or
executed in replacement thereof. Titles appearing at the beginning of any
subdivisions are for convenience only and do not constitute any part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar importrefer to this
Agreement as a whole and not to any particular subdivision unless expressly
so limited. The phrases "this section" and "this subsection" and similar
phrases refer only to the sections or subsections hereof in which such
phrases occur. The word "or" is not exclusive, and the word "including" (in
its various forms) means "including without limitation". Pronouns in
masculine, feminine and neuter genders shall be construed to include any
other gender, and words in the singular form shall be construed to include
the plural and vice versa, unless the context otherwise requires. Accounting
terms have the meanings assigned to them by GAAP, as applied by the
accounting entity to which they refer. References to "days" shall mean
calendar days, unless the term "Business Day" is used. Unless otherwise
specified, references herein to any particular Person also refer to its
successors and permitted assigns.

	Section 1.5. Calculations and Determinations. All calculations under
the Loan Documents shall be made on the basis of actual days elapsed
(including the first day but excluding the last) and a year of 360 days. Each
determination by a Lender Party of amounts to be paid under Article III or
any other matters which are to be determined hereunder by a Lender Party
(such as any Eurodollar Rate, Adjusted Eurodollar Rate, Business Day,
Interest Period, or Reserve Requirement) shall, in the absence of manifest
error, be conclusive and binding. Unless otherwise expressly provided herein
or unless Majority
Lenders otherwise consent all financial statements and reports furnished to
any Lender Party hereunder shall be prepared and all financial computations
and determinations pursuant hereto shall be made in accordance with GAAP.

	Section 1.6. Joint Preparation; Construction of Indemnities and
Releases. This Agreement and the other Loan Documents have been reviewed and
negotiated by sophisticated parties with access to legal counsel and no rule
of construction shall apply hereto or thereto which would require or allow
any Loan Document to be construed against any party because of its role in
drafting such Loan Document. All indemnification and release provisions of
this Agreement shall be construed broadly (and not narrowly) in favor of the
Persons receiving indemnification or being released.

ARTICLE II - The Loans and Letters of Credit

	Section 2.1. Commitments to Lend; Notes. Subject to the terms and
conditions hereof, each Lender agrees to make loans to Borrower (herein
called such Lender's "Loans") upon Borrower's request from time to time
during the Commitment Period, provided that (a) subject to Section 3.3,
Section 3.4 and Section 3.6, all Lenders are requested to make Loans of the
same Type in accordance with their respective Percentage Shares and as part
of the same Borrowing, and (b) after giving effect to such Loans, the
Facility Usage does not exceed the Aggregate Commitment or the Borrowing Base
determined as of the date on which the requested Loans are to be made. The
aggregate amount of all Loans in any Borrowing of Base Rate Loans must be
greater than or equal to $500,000 or a higher integral multiple of $100,000
or must equal the remaining availability under the Borrowing Base, and the
aggregate amount of all Loans in any Borrowing of Eurodollar Loans must be
greater than or  equal to $3,000,000 or any higher integral multiple of
$1,000,000 or must equal the remaining availability under the Borrowing Base.
Borrower may have no more than ten Borrowings of Eurodollar Loans outstanding
at any time. The obligation of Borrower to repay to each Lender the aggregate
amount of all Loans made by such Lender, together with interest accruing in
connection therewith, shall be evidenced by a single promissory note (herein
called such Lender's "Note") made by Borrower payable to the order of such
Lender in the form of Exhibit A with appropriate insertions. The amount of
principal owing on any Lender's Note at any given time shall be the aggregate
amount of all Loans theretofore made by such Lender minus all payments of
principal theretofore received by such Lender on such Note. Interest on each
Note shall accrue and be due and payable as provided herein and therein. Each
Note shall be due and payable as provided herein and therein, and shall be
due and payable in full on the Maturity Date. Subject to the terms and
conditions hereof, Borrower may borrow, repay, and reborrow hereunder.

	Section 2.2. Requests for New Loans. Borrower must give to
Administrative Agent written or electronic notice (or telephonic notice
promptly confirmed in writing) of any requested Borrowing of new Loans to be
advanced by Lenders. Each