XML 60 R24.htm IDEA: XBRL DOCUMENT v2.4.1.9
Basis of Presentation and Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Business Description and Basis of Presentation
Nature of Business
Berry Petroleum Company, LLC (“Berry” or the “Company”) was formed as a Delaware limited liability company on December 16, 2013, and is an indirect wholly owned subsidiary of Linn Energy, LLC (“LINN Energy”) engaged in the production and development of oil and natural gas. The Company’s predecessor, Berry Petroleum Company, was publicly traded from 1987 until December 2013. On December 16, 2013, the Company completed the transactions contemplated by the merger agreement between LINN Energy, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, and Berry under which LinnCo acquired all of the outstanding common shares of Berry and the contribution agreement between LinnCo and LINN Energy, under which LinnCo contributed Berry to LINN Energy in exchange for LINN Energy units (see Note 2). Linn Acquisition Company, LLC, a direct subsidiary of LINN Energy, is currently the Company’s sole member.
The Company’s properties are located in the United States (“U.S.”), in California (San Joaquin Valley and Los Angeles basins), Kansas and the Oklahoma Panhandle (Hugoton Basin), Utah (Uinta Basin), east Texas and Colorado (Piceance Basin). The Company previously had properties in the Permian Basin that were divested during 2014.
The operations of the Company are governed by the provisions of a limited liability company agreement executed by its member. Pursuant to applicable provisions of the Delaware Limited Liability Company Act (the “Delaware Act”) and the Limited Liability Company Agreement of Berry Petroleum Company, LLC (the “Agreement”), the member has no liability for the debts, obligations and liabilities of the Company, except as expressly required in the Agreement or the Delaware Act. The Company will remain in existence unless and until dissolved in accordance with the terms of the Agreement.
Basis of Presentation
The Company presents its financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.
The financial statements for previous periods include certain reclassifications that were made to conform to current presentation. Such reclassifications have no impact on previously reported net income (loss), shareholders’ or member’s equity or cash flows.
Predecessor and Successor Reporting
Predecessor and Successor Reporting
The LINN Energy transaction was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, LinnCo initially, and LINN Energy upon the contribution was treated as the accounting acquirer and the Company was treated as the acquired company for financial reporting purposes. As such, the assets and liabilities of the Company were provisionally recorded at their respective fair values as of the acquisition date. Fair value adjustments related to the transaction have been pushed down to the Company, resulting in assets and liabilities of the Company being recorded at their fair values at December 16, 2013. See Note 2 for additional information.
The Company’s statements of operations subsequent to the transaction include depreciation, depletion and amortization expense on the Company’s oil and natural gas properties, and other property and equipment balances resulting from the fair value adjustments made under the new basis of accounting. Certain other items of income and expense were also impacted. Therefore, the Company’s financial information prior to the transaction is not comparable to its financial information subsequent to the transaction.
As a result of the impact of pushdown accounting, the financial statements and certain note presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the transaction (labeled predecessor) and the period after that date (labeled successor), to indicate the application of a different basis of accounting between the periods presented.
Use of Estimates
Use of Estimates
The preparation of the accompanying financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. The estimates that are particularly significant to the financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, fair values of commodity derivatives and fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Issued Accounting Standards
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to improve and converge the financial reporting requirements for revenue from contracts with customers. This ASU will be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption and is effective for fiscal years beginning after December 15, 2016, and interim periods within those years (early adoption prohibited). The Company is currently evaluating the impact, if any, of the adoption of this ASU on its financial statements and related disclosures.
In April 2014, the FASB issued an ASU that changes the criteria for reporting discontinued operations and enhances disclosures in this area. This ASU is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted for disposals or for assets classified as held for sale that have not been reported in previously issued financial statements. The Company early adopted this ASU on a prospective basis beginning with the third quarter of 2014. The adoption had no effect on the Company’s financial statements.
Cash Equivalents
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Outstanding checks in excess of funds on deposit are included in “accounts payable and accrued expenses.”
Accounts Receivable - Trade, Net
Accounts Receivable Trade, Net
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivables aging, and existing industry and national economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is remote. The Company had no allowance for doubtful accounts at December 31, 2014. The balance in the Company’s allowance for doubtful accounts related to trade accounts receivable was approximately $473,000 at December 31, 2013.
Inventories
Inventories
Materials, supplies and commodity inventories are valued at the lower of average cost or market. Inventories also include California carbon allowance instruments.
Oil and Natural Gas Properties
Oil and Natural Gas Properties
Proved Properties
The Company accounts for oil and natural gas properties in accordance with the successful efforts method. In accordance with this method, all leasehold and development costs of proved properties are capitalized and amortized on a unit-of-production basis over the remaining life of the proved reserves and proved developed reserves, respectively.
The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows of proved and risk-adjusted probable and possible reserves are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with New York Mercantile Exchange (“NYMEX”) forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Company management believes will impact realizable prices. Costs of retired, sold or abandoned properties that constitute a part of an amortization base are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized currently. Gains or losses from the disposal of other properties are recognized currently. Expenditures for maintenance and repairs necessary to maintain properties in operating condition are expensed as incurred. Estimated dismantlement and abandonment costs are capitalized, net of salvage, at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves. The Company capitalizes interest on borrowed funds related to its share of costs associated with the drilling and completion of new oil and natural gas wells. Interest is capitalized only during the periods in which these assets are brought to their intended use. The Company capitalized interest costs of approximately $6 million, $41,000, $6 million and $18 million for the year ended December 31, 2014, the periods from December 17, 2013 through December 31, 2013, and January 1, 2013 through December 16, 2013, and for the year ended December 31, 2012, respectively.
Impairment of Proved Properties
Based on the analysis described above, for the year ended December 31, 2014, the Company recorded noncash impairment charges, before and after tax, of approximately $253 million associated with proved oil and natural gas properties related to the Uinta Basin operating area. The impairment was due to a steep decline in commodity prices. From September 30, 2014 to December 31, 2014, NYMEX oil and natural gas forward price curves decreased approximately 24% and 12%, respectively. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. The impairment charges are included in “impairment of long-lived assets” on the statement of operations. The Company recorded no impairment charges for the periods from December 17, 2013 through December 31, 2013, and January 1, 2013 through December 16, 2013, or for the year ended December 31, 2012.
Subsequent to December 31, 2014, the prices of oil, natural gas and NGL have continued to be volatile. In the future, if forward price curves continue to decline, the Company may have additional impairments which could have a material impact on its results of operations.
Unproved Properties
Costs related to unproved properties include costs incurred to acquire unproved reserves. Because these reserves do not meet the definition of proved reserves, the related costs are not classified as proved properties. Unproved leasehold costs are capitalized and amortized on a composite basis if individually insignificant, based on past success, experience and average lease-term lives. Individually significant leases are reclassified to proved properties if successful and expensed on a lease by lease basis if unsuccessful or the lease term expires. Unamortized leasehold costs related to successful exploratory drilling are reclassified to proved properties and depleted on a unit-of-production basis. The Company assesses unproved properties for impairment quarterly on the basis of its experience in similar situations and other factors such as the primary lease terms of the properties, the average holding period of unproved properties and the relative proportion of such properties on which proved reserves have been found in the past.
Exploration Costs
Geological and geophysical costs, delay rentals, amortization and impairment of unproved leasehold costs and costs to drill exploratory wells that do not find proved reserves are expensed as exploration costs. The costs of any exploratory wells are carried as an asset if the well finds a sufficient quantity of reserves to justify its capitalization as a producing well and as long as the Company is making sufficient progress towards assessing the reserves and the economic and operating viability of the project. The Company recorded no exploration costs during the year ended December 31, 2014, or for the period from December 17, 2013 through December 31, 2013. The Company recorded noncash leasehold impairment expenses related to unproved properties of approximately $16 million and $79,000 for the period from January 1, 2013 through December 16, 2013, and for the year ended December 31, 2012, respectively. For the year ended December 31, 2012, the Company also recorded dry hole expense and plugging and abandonment activities of approximately $15 million and $4 million, respectively. All of these expenses are included in “exploration costs” on the statements of operations.
Impairment of Proved Properties
Impairment of Proved Properties
Based on the analysis described above, for the year ended December 31, 2014, the Company recorded noncash impairment charges, before and after tax, of approximately $253 million associated with proved oil and natural gas properties related to the Uinta Basin operating area. The impairment was due to a steep decline in commodity prices. From September 30, 2014 to December 31, 2014, NYMEX oil and natural gas forward price curves decreased approximately 24% and 12%, respectively. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. The impairment charges are included in “impairment of long-lived assets” on the statement of operations. The Company recorded no impairment charges for the periods from December 17, 2013 through December 31, 2013, and January 1, 2013 through December 16, 2013, or for the year ended December 31, 2012.
Subsequent to December 31, 2014, the prices of oil, natural gas and NGL have continued to be volatile. In the future, if forward price curves continue to decline, the Company may have additional impairments which could have a material impact on its results of operations.
Other Property and Equipment
Other Property and Equipment
Other property and equipment includes natural gas gathering systems, pipelines, buildings, software, data processing and telecommunications equipment, office furniture and equipment, and other fixed assets. These assets are recorded at cost and are depreciated using the straight-line method based on expected lives ranging from ten to 39 years for buildings and leasehold improvements and two to 30 years for plant and pipeline, drilling and other equipment.
Income Taxes and Uncertain Tax Positions
Income Taxes and Uncertain Tax Positions
The successor Company is a limited liability company treated as a disregarded entity for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its members. As such, with the exception of the state of Texas, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company.
Prior to the LINN Energy transaction on December 16, 2013, the Company was a Subchapter C-corporation. For predecessor periods prior to December 16, 2013, income taxes were recorded for the income tax effects of transactions reported in the financial statements and consist of income taxes payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income taxes were also recognized for income tax credits that were available to offset future income taxes. Deferred income taxes were measured by applying currently enacted income tax rates to the differences between the financial statements and income tax reporting. The Company routinely assessed the realizability of its deferred income tax assets, and a valuation allowance was recognized if it was determined that deferred income tax assets may not be fully utilized in future periods. The Company considered future taxable income in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and natural gas prices). The predecessor Company was subject to taxation in many jurisdictions, and the calculation of its income tax liabilities involved dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. The Company recognized certain income tax positions that met a more-likely-than not recognition threshold. If the Company ultimately determined that the payment of these liabilities would be unnecessary, the Company reversed the liability and recognized an income tax benefit during the period in which the Company determined the liability no longer applied.
Derivative Instruments
Derivative Instruments
The Company uses derivative financial instruments to reduce exposure to fluctuations in the prices of oil and, from time to time, natural gas. By removing a portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in net cash provided by operating activities due to fluctuations in commodity prices.
In prior years, the Company entered into commodity hedging transactions primarily in the form of swap contracts, collars and three-way collars. A swap contract specifies a fixed price that the Company will receive from the counterparty as compared to floating market prices, and on the settlement date the Company will receive or pay the difference between the swap price and the market price. Collar contracts specify floor and ceiling prices to be received as compared to floating market prices. Three-way collar contracts combine a short put (the lower price), a long put (the middle price) and a short call (the higher price) to provide a higher ceiling price as compared to a regular collar and limit downside risk to the market price plus the difference between the middle price and the lower price if the market price drops below the lower price.
Derivative instruments (including certain derivative instruments embedded in other contracts that require bifurcation) are recorded at fair value and included on the balance sheets as assets and/or liabilities. In January 2010, the Company elected to prospectively discontinue hedge accounting, under which changes in derivative fair values were deferred in accumulated other comprehensive loss (“AOCL”). After January 2010, the Company no longer designated these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those instruments trade in active markets. See Note 7 and Note 8 for additional details about the Company’s derivative financial instruments.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
The carrying values of the Company’s receivables, payables and Credit Facility (as defined in Note 3) are estimated to be substantially the same as their fair values at December 31, 2014, and December 31, 2013. See Note 3 for fair value disclosures related to the Company’s other outstanding debt. As noted above, the Company carries its derivative financial instruments at fair value. See Note 8 for details about the fair value of the Company’s derivative financial instruments.
Deferred Financing Fees
Deferred Financing Fees
The Company incurred legal and bank fees related to the issuance of debt. At December 31, 2014, and December 31, 2013, net deferred financing fees of approximately $12 million and $5 million, respectively, are included in “other noncurrent assets” on the balance sheets. These debt issuance costs are amortized over the life of the debt agreement. Upon early retirement or amendment to the debt agreement, certain fees are written off to expense. For the year ended December 31, 2014, the periods from December 17, 2013 through December 31, 2013, and January 1, 2013 through December 16, 2013, and for the year ended December 31, 2012, amortization expense of approximately $3 million, $83,000, $5 million and $5 million, respectively, is included in “interest expense, net of amounts capitalized” on the statements of operations.
Revenue Recognition
Revenue Recognition
Revenues representative of the Company’s ownership interest in its properties are presented on a gross basis on the statements of operations. Sales of oil, natural gas and NGL are recognized when the product has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured and the sales price is fixed or determinable. The electricity and natural gas the Company produces and uses in its operations are not included in revenues. In addition, the Company engages in the purchase, gathering and transportation of third-party natural gas and subsequently markets such natural gas to independent purchasers under separate arrangements. As such, the Company separately reports third-party marketing revenues and marketing expenses.
Business and Credit Concentrations
Business and Credit Concentrations
The Company maintains its cash in bank deposit accounts which at times may exceed federally insured amounts. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash.
The Company sells oil and natural gas to various types of customers, including pipelines, refineries and other oil and natural gas companies, and electricity to utility companies. Based on the current demand for oil and natural gas and the availability of other purchasers, the Company believes that the loss of any one of its major purchasers would not have a material adverse effect on its financial condition, results of operations or net cash provided by operating activities.
For the year ended December 31, 2014, the Company’s two largest customers represented approximately 49% and 12% of the Company’s oil, natural gas and NGL sales. For the period from December 17, 2013 through December 31, 2013, the Company’s two largest customers represented approximately 50% and 10% of the Company’s oil, natural gas and NGL sales. For the period from January 1, 2013 through December 16, 2013, the Company’s two largest customers represented approximately 45% and 10% of the Company’s oil, natural gas and NGL sales. For the year ended December 31, 2012, the Company’s two largest customers represented approximately 43% and 13% of the Company’s oil, natural gas and NGL sales. For the years ended December 31, 2014, December 31, 2013, and December 31, 2012, 100% of electricity sales were attributable to two customers.
At December 31, 2014, trade accounts receivable from two customers represented approximately 36% and 10% of the Company’s receivables. At December 31, 2013, trade accounts receivable from one customer represented approximately 48% of the Company’s receivables.
Electricity Cost Allocation
Electricity Cost Allocation
The Company owns three cogeneration facilities. Its investment in cogeneration facilities has been for the express purpose of lowering steam costs in its heavy oil operations in California and securing operating control of the respective steam generation. Cogeneration, also called combined heat and power, extracts energy from the exhaust of a turbine, which would otherwise be wasted, to produce steam. Such cogeneration operations also produce electricity. The Company allocates steam costs to lease operating expenses based on the conversion efficiency of the cogeneration facilities plus certain direct costs of producing steam. A portion of the costs of operating the cogeneration facilities is also allocated to depreciation, depletion and amortization.