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EX-31.1 - CERTIFICATION OF CEO SECTION 302 - LinnCo, LLCq313exhibit311lnco.htm
10-Q - FORM 10-Q Q3 2013 - LinnCo, LLClinnco930201310q.htm
EX-31.2 - CERTIFICATION OF CFO SECTION 302 - LinnCo, LLCq313exhibit312lnco.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______________ to _______________

Commission File Number: 000-51719


LINN ENERGY, LLC
(Exact name of registrant as specified in its charter)

Delaware
65-1177591
(State or other jurisdiction of incorporation or organization)
(IRS Employer
Identification No.)
600 Travis, Suite 5100
Houston, Texas
77002
(Address of principal executive offices)
(Zip Code)
(281) 840-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x      Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of September 30, 2013, there were 235,178,498 units outstanding.
 




TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


GLOSSARY OF TERMS
As commonly used in the oil and natural gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:
Bbl. One stock tank barrel or 42 United States gallons liquid volume.
Bcf. One billion cubic feet.
Bcfe. One billion cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
MBbls/d. MBbls per day.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMBbls. One million barrels of oil or other liquid hydrocarbons.
MMBoe. One million barrels of oil equivalent, determined using a ratio of one Bbl of oil, condensate or natural gas liquids to six Mcf.
MMBtu. One million British thermal units.
MMcf. One million cubic feet.
MMcf/d. MMcf per day.
MMcfe. One million cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMcfe/d. MMcfe per day.
MMMBtu. One billion British thermal units.

ii


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
LINN ENERGY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
 
(in thousands,
except unit amounts)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,480

 
$
1,243

Accounts receivable – trade, net
349,426

 
371,333

Derivative instruments
217,853

 
350,695

Other current assets
54,547

 
88,157

Total current assets
649,306

 
811,428

 
 
 
 
Noncurrent assets:
 
 
 
Oil and natural gas properties (successful efforts method)
12,211,608

 
11,611,330

Less accumulated depletion and amortization
(2,545,182
)
 
(2,025,656
)
 
9,666,426

 
9,585,674

 
 
 
 
Other property and equipment
548,725

 
469,188

Less accumulated depreciation
(100,812
)
 
(73,721
)
 
447,913

 
395,467

 
 
 
 
Derivative instruments
635,446

 
530,216

Other noncurrent assets
173,667

 
128,453

 
809,113

 
658,669

Total noncurrent assets
10,923,452

 
10,639,810

Total assets
$
11,572,758

 
$
11,451,238

 
 
 
 
LIABILITIES AND UNITHOLDERS’ CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
659,170

 
$
707,861

Derivative instruments
12,464

 
26

Other accrued liabilities
156,138

 
115,245

Total current liabilities
827,772

 
823,132

 
 
 
 
Noncurrent liabilities:
 
 
 
Credit facility
1,705,000

 
1,180,000

Senior notes, net
4,807,873

 
4,857,817

Derivative instruments

 
4,114

Other noncurrent liabilities
191,955

 
158,995

Total noncurrent liabilities
6,704,828

 
6,200,926

 
 
 
 
Commitments and contingencies (Note 10)


 


 
 
 
 
Unitholders’ capital:
 
 
 
235,178,498 units and 234,513,243 units issued and outstanding at September 30, 2013, and December 31, 2012, respectively
3,656,006

 
4,136,240

Accumulated income
384,152

 
290,940

 
4,040,158

 
4,427,180

Total liabilities and unitholders’ capital
$
11,572,758

 
$
11,451,238


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

1


LINN ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per unit amounts)
Revenues and other:
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
537,671

 
$
444,082

 
$
1,488,610

 
$
1,140,204

Gains (losses) on oil and natural gas derivatives
(63,931
)
 
(411,405
)
 
154,432

 
30,273

Marketing revenues
13,484

 
12,323

 
40,558

 
24,454

Other revenues
7,338

 
3,328

 
18,847

 
8,084

 
494,562

 
48,328

 
1,702,447

 
1,203,015

Expenses:
 
 
 
 
 
 
 
Lease operating expenses
87,076

 
91,990

 
259,381

 
233,755

Transportation expenses
35,637

 
18,274

 
92,118

 
50,651

Marketing expenses
9,962

 
14,923

 
26,696

 
22,073

General and administrative expenses
45,431

 
45,166

 
150,302

 
129,672

Exploration costs
1,588

 
390

 
4,632

 
1,207

Depreciation, depletion and amortization
208,892

 
167,695

 
604,962

 
428,477

Impairment of long-lived assets
(4,240
)
 

 
37,962

 
146,499

Taxes, other than income taxes
36,457

 
37,885

 
108,525

 
93,736

Losses on sale of assets and other, net
827

 
16

 
3,040

 
1,508

 
421,630

 
376,339

 
1,287,618

 
1,107,578

Other income and (expenses):
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(103,806
)
 
(105,697
)
 
(308,012
)
 
(277,606
)
Loss on extinguishment of debt
(1,117
)
 

 
(5,304
)
 

Other, net
(2,475
)
 
(1,247
)
 
(6,300
)
 
(12,472
)
 
(107,398
)
 
(106,944
)
 
(319,616
)
 
(290,078
)
Income (loss) before income taxes
(34,466
)
 
(434,955
)
 
95,213

 
(194,641
)
Income tax expense (benefit)
(4,406
)
 
(4,950
)
 
2,001

 
4,480

Net income (loss)
$
(30,060
)
 
$
(430,005
)
 
$
93,212

 
$
(199,121
)
 
 
 
 
 
 
 
 
Net income (loss) per unit:
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
(2.18
)
 
$
0.38

 
$
(1.04
)
Diluted
$
(0.13
)
 
$
(2.18
)
 
$
0.38

 
$
(1.04
)
Weighted average units outstanding:
 
 
 
 
 
 
 
Basic
233,552

 
197,675

 
233,393

 
196,152

Diluted
233,552

 
197,675

 
233,765

 
196,152

 
 
 
 
 
 
 
 
Distributions declared per unit
$
0.725

 
$
0.725

 
$
2.175

 
$
2.14


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

2


LINN ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS’ CAPITAL
(Unaudited)
 
Units
 
Unitholders’ Capital
 
Accumulated Income
 
Total Unitholders’ Capital
 
(in thousands)
 
 
 
 
 
 
 
 
December 31, 2012
234,513

 
$
4,136,240

 
$
290,940

 
$
4,427,180

Issuance of units
665

 
2,031

 

 
2,031

Distributions to unitholders
 
 
(511,686
)
 

 
(511,686
)
Unit-based compensation expenses
 
 
29,261

 

 
29,261

Excess tax benefit from unit-based compensation
 
 
160

 

 
160

Net income
 
 

 
93,212

 
93,212

September 30, 2013
235,178

 
$
3,656,006

 
$
384,152

 
$
4,040,158


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


3


LINN ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
September 30,
 
2013
 
2012
 
(in thousands)
Cash flow from operating activities:
 
 
 
Net income (loss)
$
93,212

 
$
(199,121
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
604,962

 
428,477

Impairment of long-lived assets
37,962

 
146,499

Unit-based compensation expenses
29,261

 
21,735

Loss on extinguishment of debt
5,304

 

Amortization and write-off of deferred financing fees
16,392

 
20,265

Losses on sale of assets and other, net
18,744

 
703

Deferred income tax
731

 
965

Derivatives activities:
 
 
 
Total gains
(154,432
)
 
(30,273
)
Cash settlements
190,368

 
294,446

Premiums paid for derivatives

 
(583,434
)
Changes in assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable – trade, net
22,877

 
(138,171
)
(Increase) decrease in other assets
9,177

 
(2,242
)
Increase in accounts payable and accrued expenses
29,445

 
94,762

Increase in other liabilities
36,508

 
89,820

Net cash provided by operating activities
940,511

 
144,431

 
 
 
 
Cash flow from investing activities:
 
 
 
Acquisition of oil and natural gas properties and joint-venture funding
(192,871
)
 
(2,487,767
)
Development of oil and natural gas properties
(767,604
)
 
(710,360
)
Purchases of other property and equipment
(76,987
)
 
(38,090
)
Proceeds from sale of properties and equipment and other
210,297

 
1,438

Net cash used in investing activities
(827,165
)
 
(3,234,779
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Proceeds from sale of units

 
761,362

Proceeds from borrowings
1,260,000

 
4,929,802

Repayments of debt
(789,898
)
 
(2,085,000
)
Distributions to unitholders
(511,686
)
 
(426,918
)
Financing fees, offering expenses and other, net
(45,685
)
 
(92,184
)
Excess tax benefit from unit-based compensation
160

 
3,326

Net cash provided by (used in) financing activities
(87,109
)
 
3,090,388

 
 
 
 
Net increase in cash and cash equivalents
26,237

 
40

Cash and cash equivalents:
 
 
 
Beginning
1,243

 
1,114

Ending
$
27,480

 
$
1,154

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

4


LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
Nature of Business
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and natural gas company. LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. The Company’s properties are located in the United States (“U.S.”), in the Mid-Continent, the Hugoton Basin, the Green River Basin, the Permian Basin, the Williston/Powder River Basin, Michigan, Illinois, California and east Texas.
Principles of Consolidation and Reporting
The condensed consolidated financial statements at September 30, 2013, and for the three months and nine months ended September 30, 2013, and September 30, 2012, are unaudited, but in the opinion of management include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations; as such, this report should be read in conjunction with the financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation. Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method. The Company’s other investment is accounted for at cost.
The condensed consolidated 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), unitholders’ capital or cash flows.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires Company management 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
In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU requires disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The ASU is to be applied retrospectively and is effective for periods beginning on or after January 1, 2013. The Company adopted the ASU effective January 1, 2013. The adoption of the requirements of the ASU, which expanded disclosures, had no effect on the Company’s financial position.

5

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Note 2 – Acquisitions, Joint-Venture Funding and Divestiture
For the nine months ended September 30, 2013, the Company paid approximately $114 million, including interest, towards the future funding commitment related to the joint-venture agreement it entered into with an affiliate of Anadarko Petroleum Corporation (“Anadarko”) in April 2012. From inception of the agreement through September 30, 2013, the Company has funded approximately $315 million towards the total commitment of $400 million.
During the nine months ended September 30, 2013, the Company completed small acquisitions of oil and natural gas properties located in its various operating regions. The Company, in the aggregate, paid approximately $32 million in total consideration for these properties.
Acquisitions – Pending
On September 11, 2013, the Company entered into a definitive purchase and sale agreement to acquire certain oil and natural gas properties located in the Permian Basin for a contract price of approximately $525 million. The Company paid a deposit of approximately $53 million in September 2013, which is reported in “other noncurrent assets” on the condensed consolidated balance sheet at September 30, 2013. The Company anticipates the acquisition will close on or before October 31, 2013, subject to closing conditions, and will be financed with proceeds from a committed term loan to be entered into at closing and borrowings under the Company’s Credit Facility, as defined in Note 6.
On February 20, 2013, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, and Berry Petroleum Company (“Berry”) entered into a definitive merger agreement under which LinnCo would acquire all of the outstanding common shares of Berry. Under the terms of the agreement, Berry’s shareholders will receive 1.25 LinnCo common shares for each Berry common share they own. This transaction, which is expected to be a tax-free exchange to Berry’s shareholders, represents value of $46.2375 per common share, based on the closing price of LinnCo common shares on February 20, 2013, the last trading day before the public announcement.
In connection with the proposed transaction described above, LinnCo will contribute Berry to LINN Energy in exchange for newly issued LINN Energy units, after which Berry will be an indirect wholly owned subsidiary of LINN Energy. At February 21, 2013, the date of the public announcement, the transaction had a preliminary value of approximately $4.4 billion, including the assumption of approximately $1.7 billion of Berry’s debt. The transaction is subject to approvals by Berry and LinnCo shareholders, LINN Energy unitholders and regulatory agencies. Due to the pending SEC inquiry (see Note 16), the timing of closing this proposed transaction is uncertain.
Acquisitions – 2012
On July 31, 2012, the Company completed the acquisition of certain oil and natural gas properties in the Jonah Field located in the Green River Basin of southwest Wyoming from BP America Production Company (“BP”). The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date. The Company paid approximately $990 million in total consideration for these properties. The transaction was financed with borrowings under the Company’s Credit Facility.
On May 1, 2012, the Company completed the acquisition of certain oil and natural gas properties located in east Texas. The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date. The Company paid approximately $168 million in total consideration for these properties. The transaction was financed primarily with borrowings under the Company’s Credit Facility.
On April 3, 2012, the Company entered into a joint-venture agreement (“Agreement”) with Anadarko whereby the Company will participate as a partner in the CO2 enhanced oil recovery development of the Salt Creek field, located in the Powder River Basin of Wyoming. Anadarko assigned the Company 23% of its interest in the field in exchange for future funding of $400 million of Anadarko’s development costs. The results of operations of these properties have been included in the condensed consolidated financial statements since the Agreement date.
On March 30, 2012, the Company completed the acquisition of certain oil and natural gas properties and the Jayhawk natural gas processing plant located in the Hugoton Basin in Kansas from BP. The results of operations of these properties have been

6

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

included in the condensed consolidated financial statements since the acquisition date. The Company paid approximately $1.16 billion in total consideration for these properties. The transaction was financed primarily with proceeds from the March 2012 debt offering (see Note 6).
Divestiture – 2013
On May 31, 2013, the Company, through one of its wholly owned subsidiaries, together with the Company’s partners, Panther Energy, LLC and Red Willow Mid-Continent, LLC, completed the sale of its interests in certain oil and natural gas properties located in the Mid-Continent region (“Panther Properties”) to Midstates Petroleum Company, Inc. At March 31, 2013, the carrying value of the Panther Properties was reduced to fair value less costs to sell resulting in an impairment charge of approximately $57 million and the properties were classified as “assets held for sale.” During the three months ended June 30, 2013, and September 30, 2013, the Company recorded adjustments of approximately $15 million and $4 million, respectively, to reduce the initial impairment charge recorded in March 2013 resulting in a total impairment charge of approximately $38 million for the nine months ended September 30, 2013. Proceeds received for the Company’s portion of its interests in the properties were approximately $219 million, net of costs to sell of approximately $2 million. The Company used the net proceeds from the sale to repay borrowings under its Credit Facility.
Note 3 – Unitholders’ Capital
Public Offering of Units
In January 2012, the Company sold 19,550,000 units representing limited liability company interests at $35.95 per unit ($34.512 per unit, net of underwriting discount) for net proceeds of approximately $674 million (after underwriting discount and offering expenses of approximately $28 million). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under its Credit Facility.
Equity Distribution Agreement
The Company has an equity distribution agreement pursuant to which it may from time to time issue and sell units representing limited liability company interests having an aggregate offering price of up to $500 million. Sales of units, if any, will be made through a sales agent by means of ordinary brokers’ transactions, in block transactions, or as otherwise agreed with the agent. The Company expects to use the net proceeds from any sale of the units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
In January 2012, the Company, under its equity distribution agreement, issued and sold 1,539,651 units representing limited liability company interests at an average unit price of $38.02 for proceeds of approximately $57 million (net of approximately $2 million in commissions and professional service expenses). The Company used the net proceeds for general corporate purposes, including the repayment of a portion of the indebtedness outstanding under its Credit Facility. At September 30, 2013, units equaling approximately $411 million in aggregate offering price remained available to be issued and sold under the agreement.
Distributions
Under the Company’s limited liability company agreement, unitholders are entitled to receive a distribution of available cash, which includes cash on hand plus borrowings less any reserves established by the Company’s Board of Directors to provide for the proper conduct of the Company’s business (including reserves for future capital expenditures, including drilling, acquisitions and anticipated future credit needs) or to fund distributions over the next four quarters. Distributions paid by the Company are presented on the condensed consolidated statement of unitholders’ capital and the condensed consolidated statements of cash flows. In April 2013, the Company’s Board of Directors approved a change in its distribution policy that provides a distribution with respect to any quarter may be made, at the discretion of the Board of Directors, (i) within 45 days following the end of each quarter or (ii) in three equal installments within 15, 45 and 75 days following the end of each quarter. On October 1, 2013, the Company’s Board of Directors declared a cash distribution of $0.725 per unit with respect to the third quarter of 2013, to be paid in three equal monthly installments of $0.2416 per unit. The first monthly distribution with respect to the third quarter of 2013, totaling approximately $57 million, was paid on October 17, 2013, to unitholders of record as of the close of business on October 11, 2013.

7

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Note 4 – Oil and Natural Gas Properties
Oil and Natural Gas Capitalized Costs
Aggregate capitalized costs related to oil, natural gas and NGL production activities with applicable accumulated depletion and amortization are presented below:
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Proved properties:
 
 
 
Leasehold acquisition
$
8,505,622

 
$
8,603,888

Development
3,316,007

 
2,553,127

Unproved properties
389,979

 
454,315

 
12,211,608

 
11,611,330

Less accumulated depletion and amortization
(2,545,182
)
 
(2,025,656
)
 
$
9,666,426

 
$
9,585,674


Note 5 – Unit-Based Compensation
During the nine months ended September 30, 2013, the Company granted 659,590 restricted units and 105,530 phantom units to employees, primarily as part of its annual review of its nonexecutive employees’ compensation, with an aggregate fair value of approximately $29 million. The restricted units and phantom units vest over three years. A summary of unit-based compensation expenses included on the condensed consolidated statements of operations is presented below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
 
 
 
 
 
 
 
General and administrative expenses
$
8,407

 
$
6,505

 
$
25,408

 
$
20,416

Lease operating expenses
1,279

 
396

 
3,853

 
1,319

Total unit-based compensation expenses
$
9,686

 
$
6,901

 
$
29,261

 
$
21,735

Income tax benefit
$
3,579

 
$
2,550

 
$
10,812

 
$
8,031


8

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Note 6 – Debt
The following summarizes debt outstanding:
 
September 30, 2013
 
December 31, 2012
 
Carrying Value
 
Fair Value (1)
 
Carrying Value
 
Fair Value (1)
 
(in millions, except percentages)
 
 
 
 
 
 
 
 
Credit facility (2)
$
1,705

 
$
1,705

 
$
1,180

 
$
1,180

11.75% senior notes due 2017

 

 
41

 
44

9.875% senior notes due 2018

 

 
14

 
15

6.50% senior notes due May 2019
750

 
717

 
750

 
755

6.25% senior notes due November 2019
1,800

 
1,692

 
1,800

 
1,802

8.625% senior notes due 2020
1,300

 
1,347

 
1,300

 
1,414

7.75% senior notes due 2021
1,000

 
1,001

 
1,000

 
1,061

Less current maturities

 

 

 

 
6,555

 
$
6,462

 
6,085

 
$
6,271

Unamortized discount
(42
)
 
 
 
(47
)
 
 
Total debt, net of discount
$
6,513

 
 
 
$
6,038

 
 
(1) 
The carrying value of the Credit Facility is estimated to be substantially the same as its fair value. Fair values of the senior notes were estimated based on prices quoted from third-party financial institutions.
(2) 
Variable interest rates of 1.93% and 1.97% at September 30, 2013, and December 31, 2012, respectively.
Credit Facility
In April 2013, the Company entered into a Sixth Amended and Restated Credit Agreement (“Credit Facility”), which provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount of $4.0 billion. The borrowing base remained unchanged at $4.5 billion and does not include any assets to be acquired in the pending transaction with Berry (see Note 2). The maturity date is April 2018. The amended and restated agreement is substantially similar to the previous Credit Facility with revisions to permit the transactions related to the acquisition of Berry and to designate Berry as an unrestricted subsidiary under the agreement. At September 30, 2013, the borrowing capacity under the Credit Facility was approximately $2.3 billion, which includes a $5 million reduction in availability for outstanding letters of credit.
Redetermination of the borrowing base under the Credit Facility, based primarily on reserve reports that reflect commodity prices at such time, occurs semi-annually, in April and October, as well as once annually upon requested interim redetermination by the lenders at their sole discretion. The Company also has the right to request one additional borrowing base redetermination per year at its discretion, as well as the right to an additional redetermination each year in connection with certain acquisitions. Significant declines in commodity prices may result in a decrease in the borrowing base. The Company’s obligations under the Credit Facility are secured by mortgages on its and certain of its material subsidiaries’ oil and natural gas properties and other personal property as well as a pledge of all ownership interests in its direct and indirect material subsidiaries. The Company is required to maintain either: 1) mortgages on properties representing at least 80% of the total value of oil and natural gas properties included on the most recent reserve report, or 2) a Collateral Coverage Ratio of at least 2.5 to 1. Collateral Coverage Ratio is defined as the ratio of the present value of future cash flows from proved reserves from the currently mortgaged properties to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount. Additionally, the obligations under the Credit Facility are guaranteed by all of the Company’s material subsidiaries and are required to be guaranteed by any future material subsidiaries.
At the Company’s election, interest on borrowings under the Credit Facility is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.5% and 2.5% per annum (depending on the then-current level of borrowings under the Credit Facility) or the alternate base rate (“ABR”) plus an applicable margin between 0.5% and 1.5% per annum (depending on the then-current level of borrowings under the Credit Facility). Interest is generally

9

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at LIBOR. The Company is required to pay a commitment fee to the lenders under the Credit Facility, which accrues at a rate per annum between 0.375% and 0.5% on the average daily unused amount of the lesser of: (i) the maximum commitment amount of the lenders and (ii) the then-effective borrowing base. The Company is in compliance with all financial and other covenants of the Credit Facility.
Senior Notes Due November 2019
On March 2, 2012, the Company issued $1.8 billion in aggregate principal amount of 6.25% senior notes due November 2019 (“November 2019 Senior Notes”) at a price of 99.989%. The November 2019 Senior Notes were sold to a group of initial purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company received net proceeds of approximately $1.77 billion (after deducting the initial purchasers’ discount of $198,000 and offering expenses of approximately $29 million). The Company used the net proceeds to fund the BP acquisition (see Note 2). The remaining proceeds were used to repay indebtedness under the Company’s Credit Facility and for general corporate purposes. The financing fees and expenses of approximately $29 million incurred in connection with the November 2019 Senior Notes will be amortized over the life of the notes. Such amortized financing fees and expenses are recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.
The November 2019 Senior Notes were issued under an indenture dated March 2, 2012 (“November 2019 Indenture”), mature November 1, 2019, and bear interest at 6.25%. Interest is payable semi-annually on May 1 and November 1, beginning November 1, 2012. The November 2019 Senior Notes are general unsecured senior obligations of the Company and are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the collateral securing such indebtedness. Each of the Company’s material subsidiaries has guaranteed the November 2019 Senior Notes on a senior unsecured basis. The November 2019 Indenture provides that the Company may redeem: (i) on or prior to November 1, 2015, up to 35% of the aggregate principal amount of the November 2019 Senior Notes at a redemption price of 106.25% of the principal amount redeemed, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings; (ii) prior to November 1, 2015, all or part of the November 2019 Senior Notes at a redemption price equal to the principal amount redeemed, plus a make-whole premium (as defined in the November 2019 Indenture) and accrued and unpaid interest; and (iii) on or after November 1, 2015, all or part of the November 2019 Senior Notes at a redemption price equal to 103.125%, and decreasing percentages thereafter, of the principal amount redeemed, plus accrued and unpaid interest. The November 2019 Indenture also provides that, if a change of control (as defined in the November 2019 Indenture) occurs, the holders have a right to require the Company to repurchase all or part of the November 2019 Senior Notes at a redemption price equal to 101%, plus accrued and unpaid interest.
The November 2019 Indenture contains covenants substantially similar to those under the Company’s May 2019 Senior Notes, 2010 Issued Senior Notes and 2018 Senior Notes, as defined below, that, among other things, limit the Company’s ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. The Company is in compliance with all financial and other covenants of the November 2019 Senior Notes.
In connection with the issuance and sale of the November 2019 Senior Notes, the Company entered into a Registration Rights Agreement (“November 2019 Registration Rights Agreement”) with the initial purchasers. Under the November 2019 Registration Rights Agreement, the Company agreed to use its reasonable efforts to file with the SEC and cause to become effective a registration statement relating to an offer to issue new notes having terms substantially identical to the November 2019 Senior Notes in exchange for outstanding November 2019 Senior Notes within 400 days after the notes were issued. On March 22, 2013, the Company filed a registration statement on Form S-4 to register exchange notes that are substantially similar to the November 2019 Senior Notes. As of October 28, 2013, the registration statement has not been declared effective and due to the pending SEC inquiry (see Note 16), the timing for the registration statement to be declared effective is uncertain. Accordingly, beginning on April 8, 2013, interest accruing on the November 2019 Senior Notes increased by 0.25%, and will increase by an additional 0.25% on the 90th, 180th and 270th day after such date until such registration statement is declared effective and the Company completes an offer to exchange the November 2019 Senior Notes for registered notes. Such

10

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

additional interest is expected to be approximately $7 million through December 2013 and will continue to increase until the registration statement is declared effective.
Senior Notes Due May 2019
The Company has $750 million in aggregate principal amount of 6.50% senior notes due 2019 (the “May 2019 Senior Notes”). The indentures related to the May 2019 Senior Notes contain redemption provisions and covenants that are substantially similar to those of the November 2019 Senior Notes. In an exchange offer that expired in October 2012, the Company exchanged all of its $750 million outstanding principal amount of May 2019 Senior Notes for an equal amount of new May 2019 Senior Notes. The terms of the new May 2019 Senior Notes are identical in all material respects to those of the outstanding May 2019 Senior Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding May 2019 Senior Notes do not apply to the new May 2019 Senior Notes.
Senior Notes Due 2020 and Senior Notes Due 2021
The Company has $1.3 billion in aggregate principal amount of 8.625% senior notes due 2020 (the “2020 Senior Notes”) and $1.0 billion in aggregate principal amount of 7.75% senior notes due 2021 (the “2021 Senior Notes,” and together with the 2020 Senior Notes, the “2010 Issued Senior Notes”). The indentures related to the 2010 Issued Senior Notes contain redemption provisions and covenants that are substantially similar to those of the November 2019 Senior Notes. However, the restrictive legends from each of the 2010 Issued Senior Notes have been removed making them freely tradable (other than with respect to persons that are affiliates of the Company), thereby terminating the Company’s obligations under each of the registration rights agreements entered into in connection with the issuance of the 2010 Issued Senior Notes.
Redemptions of Senior Notes Due 2017 and Senior Notes Due 2018
In accordance with the provisions of the indentures related to the Company’s 11.75% senior notes due 2017 (the “2017 Senior Notes”) and 9.875% senior notes due 2018 (the “2018 Senior Notes” and together with the 2017 Senior Notes, the “Original Senior Notes”), in June 2013 and July 2013, the Company redeemed the remaining outstanding principal amounts of approximately $41 million and $14 million, respectively. In connection with the redemptions of the Original Senior Notes, the Company recorded a loss on extinguishment of debt of approximately $5 million for the nine months ended September 30, 2013.
Note 7 – Derivatives
Commodity Derivatives
The Company utilizes derivative instruments to minimize the variability in cash flow due to commodity price movements. The Company has historically entered into derivative instruments such as swap contracts, put options and collars to economically hedge its forecasted oil, natural gas and NGL sales. The Company did not designate any of these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.

11

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

The following table summarizes derivative positions for the periods indicated as of September 30, 2013:
 
October 1 - December 31, 2013
 
2014
 
2015
 
2016
 
2017
 
2018
Natural gas positions:
 
 
 
 
 
 
 
 
 
 
 
Fixed price swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
22,002

 
97,401

 
118,041

 
121,841

 
120,122

 
36,500

Average price ($/MMBtu)
$
5.22

 
$
5.25

 
$
5.19

 
$
4.20

 
$
4.26

 
$
5.00

Put options: (1)
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
21,727

 
79,628

 
71,854

 
76,269

 
66,886

 

Average price ($/MMBtu)
$
5.37

 
$
5.00

 
$
5.00

 
$
5.00

 
$
4.88

 
$

Total:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
43,729

 
177,029

 
189,895

 
198,110

 
187,008

 
36,500

Average price ($/MMBtu)
$
5.29

 
$
5.14

 
$
5.12

 
$
4.51

 
$
4.48

 
$
5.00

Oil positions:
 
 
 
 
 
 
 
 
 
 
 
Fixed price swaps: (2)
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
2,992

 
11,903

 
11,599

 
11,464

 
4,755

 

Average price ($/Bbl)
$
94.97

 
$
92.92

 
$
96.23

 
$
90.56

 
$
89.02

 
$

Put options:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
783

 
3,960

 
3,426

 
3,271

 
384

 

Average price ($/Bbl)
$
97.86

 
$
91.30

 
$
90.00

 
$
90.00

 
$
90.00

 
$

Total:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
3,775

 
15,863

 
15,025

 
14,735

 
5,139

 

Average price ($/Bbl)
$
95.57

 
$
92.52

 
$
94.81

 
$
90.44

 
$
89.10

 
$

Natural gas basis differential positions: (3)
 
 
 
 
 
 
 
 
 
 
 
Panhandle basis swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
19,545

 
79,388

 
87,162

 
59,954

 
59,138

 
16,425

Hedged differential ($/MMBtu)
$
(0.56
)
 
$
(0.33
)
 
$
(0.33
)
 
$
(0.32
)
 
$
(0.33
)
 
$
(0.33
)
NWPL Rockies basis swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
9,010

 
39,718

 
43,292

 
46,294

 
38,880

 
10,804

Hedged differential ($/MMBtu)
$
(0.20
)
 
$
(0.20
)
 
$
(0.20
)
 
$
0.20

 
$
(0.19
)
 
$
(0.19
)
MichCon basis swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
2,420

 
9,490

 
9,344

 
7,768

 
7,437

 
2,044

Hedged differential ($/MMBtu)
$
0.10

 
$
0.08

 
$
0.06

 
$
0.05

 
$
0.05

 
$
0.05

Houston Ship Channel basis swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
1,444

 
5,256

 
4,891

 
4,575

 
3,604

 
986

Hedged differential ($/MMBtu)
$
(0.10
)
 
$
(0.10
)
 
$
(0.10
)
 
$
(0.10
)
 
$
(0.08
)
 
$
(0.08
)
Permian basis swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
1,168

 
4,891

 
5,074

 
4,219

 
4,819

 
1,314

Hedged differential ($/MMBtu)
$
(0.20
)
 
$
(0.21
)
 
$
(0.21
)
 
$
(0.20
)
 
$
(0.20
)
 
$
(0.20
)
Oil basis differential positions: (3)
 
 
 
 
 
 
 
 
 
 
 
Midland - Cushing basis swaps:
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
506

 

 

 

 

 

Hedged differential ($/Bbl)
$
(0.95
)
 
$

 
$

 
$

 
$

 
$

Oil timing differential positions:
 
 
 
 
 
 
 
 
 
 
 
Trade month roll swaps: (4)
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
1,750

 
7,254

 
7,251

 
7,446

 
6,486

 

Hedged differential ($/Bbl)
$
0.22

 
$
0.22

 
$
0.24

 
$
0.25

 
$
0.25

 
$



12

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

(1) 
Includes certain outstanding natural gas put options of approximately 2,664 MMMBtu for the period October 1, 2013, through December 31, 2013, 10,570 MMMBtu for each of the years ending December 31, 2014, and December 31, 2015, and 10,599 MMMBtu for the year ending December 31, 2016, used to indirectly hedge revenues associated with NGL production.
(2) 
Includes certain outstanding fixed price oil swaps of approximately 5,384 MBbls which may be extended annually at a price of $100.00 per Bbl for each of the years ending December 31, 2017, and December 31, 2018, and $90.00 per Bbl for the year ending December 31, 2019, if the counterparties determine that the strike prices are in-the-money on a designated date in each respective preceding year. The extension for each year is exercisable without respect to the other years.
(3) 
Settle on the respective pricing index to hedge basis differential associated with natural gas and oil production.
(4) 
The Company hedges the timing risk associated with the sales price of oil in the Mid-Continent, Hugoton Basin and Permian Basin regions. In these regions, the Company generally sells oil for the delivery month at a sales price based on the average NYMEX price of light crude oil during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is prompt (the “trade month roll”).
During the nine months ended September 30, 2013, the Company entered into commodity derivative contracts consisting of oil basis swaps for April 2013 through December 2013 and natural gas basis swaps for October 2013 through 2018.
Settled derivatives on natural gas production for the three months and nine months ended September 30, 2013, included volumes of 43,729 MMMBtu and 129,760 MMMBtu, respectively, at an average contract price of $5.29 per MMBtu. Settled derivatives on oil production for the three months and nine months ended September 30, 2013, included volumes of 3,775 MBbls and 11,201 MBbls, respectively, at an average contract price of $95.57 per Bbl. Settled derivatives on natural gas production for the three months and nine months ended September 30, 2012, included volumes of 40,202 MMMBtu and 98,282 MMMBtu, respectively, at average contract prices of $5.31 per MMBtu and $5.49 per MMBtu. Settled derivatives on oil production for the three months and nine months ended September 30, 2012, included volumes of 2,951 MBbls and 8,259 MBbls, respectively, at average contract prices of $97.44 per Bbl and $97.80 per Bbl. The natural gas derivatives are settled based on the closing price of NYMEX natural gas on the last trading day for the delivery month, which occurs on the third business day preceding the delivery month, or the relevant index prices of natural gas published in Inside FERC’s Gas Market Report on the first business day of the delivery month. The oil derivatives are settled based on the average closing price of NYMEX light crude oil for each day of the delivery month.
Balance Sheet Presentation
The Company’s commodity derivatives are presented on a net basis in “derivative instruments” on the condensed consolidated balance sheets. The following summarizes the fair value of derivatives outstanding on a gross basis:
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Assets:
 
 
 
Commodity derivatives
$
1,073,942

 
$
1,282,390

Liabilities:
 
 
 
Commodity derivatives
$
233,107

 
$
405,619

By using derivative instruments to economically hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are current participants or affiliates of participants in its Credit Facility or were participants or affiliates of participants in its Credit Facility at the time it originally entered into the derivatives. The Credit Facility is secured by the Company’s oil and natural gas reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $1.1 billion at September 30, 2013. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an

13

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss is somewhat mitigated.
Gains (Losses) on Derivatives
Gains and losses on derivatives were net losses of approximately $64 million for the three months ended September 30, 2013, and net gains of approximately $154 million for the nine months ended September 30, 2013. Gains and losses on derivatives were net losses of approximately $411 million for the three months ended September 30, 2012, and net gains of approximately $30 million for the nine months ended September 30, 2012. Gains and losses are reported on the condensed consolidated statements of operations in “gains (losses) on oil and natural gas derivatives.”
Note 8 – Fair Value Measurements on a Recurring Basis
The Company accounts for its commodity derivatives at fair value (see Note 7) on a recurring basis. The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. 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 securities trade in active markets. Assumed credit risk adjustments, based on published credit ratings, public bond yield spreads and credit default swap spreads, are applied to the Company’s commodity derivatives.
The following presents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
 
September 30, 2013
 
Level 2
 
Netting (1)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
Commodity derivatives
$
1,073,942

 
$
(220,643
)
 
$
853,299

Liabilities:
 
 
 
 
 
Commodity derivatives
$
233,107

 
$
(220,643
)
 
$
12,464

 
December 31, 2012
 
Level 2
 
Netting (1)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
Commodity derivatives
$
1,282,390

 
$
(401,479
)
 
$
880,911

Liabilities:
 
 
 
 
 
Commodity derivatives
$
405,619

 
$
(401,479
)
 
$
4,140

(1) 
Represents counterparty netting under agreements governing such derivatives.
Note 9 – Asset Retirement Obligations
Asset retirement obligations associated with retiring tangible long-lived assets are recognized as a liability in the period in which a legal obligation is incurred and becomes determinable and are included in “other accrued liabilities” and “other noncurrent liabilities” on the condensed consolidated balance sheets. Accretion expense is included in “depreciation, depletion and amortization” on the condensed consolidated statements of operations. The fair value of additions to the asset retirement obligations is estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors (2.0% for the nine months ended September 30, 2013); and (iv) a credit-adjusted risk-free interest rate (average of 6.4% for the nine months ended September 30, 2013). These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.

14

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

The following presents a reconciliation of the asset retirement obligations (in thousands):
Asset retirement obligations at December 31, 2012
$
151,974

Liabilities added from acquisitions
639

Liabilities added from drilling
2,803

Liabilities associated with assets sold
(1,092
)
Current year accretion expense
8,463

Settlements
(3,758
)
Revision of estimates
20,287

Asset retirement obligations at September 30, 2013
$
179,316


Note 10 – Commitments and Contingencies
The Company has been named as a defendant in a number of lawsuits, including claims from royalty owners related to disputed royalty payments and royalty valuations. The Company has established reserves that management currently believes are adequate to provide for potential liabilities based upon its evaluation of these matters. With respect to a certain statewide class action royalty payment dispute, the parties in this case are currently engaged in settlement negotiations and based on the current status of those negotiations, the Company estimates a range of possible loss of $1 million to $4.5 million, for which an appropriate reserve has been established. For a certain statewide class action royalty payment dispute where a reserve has not yet been established, the Company has denied that it has any liability on the claims and has raised arguments and defenses that, if accepted by the court, will result in no loss to the Company. Discovery related to class certification has concluded. Briefing and the hearing on class certification have been deferred by court order pending the Tenth Circuit Court of Appeals’ resolution of interlocutory appeals of two unrelated class certification orders. As a result, the Company is unable to estimate a possible loss, or range of possible loss, if any. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
On March 21, 2013, a purported stockholder class action captioned Nancy P. Assad Trust v. Berry Petroleum Co., et al. was filed in the District Court for the City and County of Denver, Colorado, No. 13-CV-31365. The action names as defendants Berry, the members of its board of directors, Bacchus HoldCo, Inc., a direct wholly owned subsidiary of Berry (“HoldCo”), Bacchus Merger Sub, Inc., a direct wholly owned subsidiary of HoldCo (“Bacchus Merger Sub”), LinnCo, LINN Energy and Linn Acquisition Company, LLC, a direct wholly owned subsidiary of LinnCo (“LinnCo Merger Sub”). On April 5, 2013, an amended complaint was filed, which alleges that the individual defendants breached their fiduciary duties in connection with the transactions by engaging in an unfair sales process that resulted in an unfair price for Berry, by failing to disclose all material information regarding the transactions, and that the entity defendants aided and abetted those breaches of fiduciary duty. The amended complaint seeks a declaration that the transactions are unlawful and unenforceable, an order directing the individual defendants to comply with their fiduciary duties, an injunction against consummation of the transactions, or, in the event they are completed, rescission of the transactions, an award of fees and costs, including attorneys’ and experts’ fees and expenses, and other relief. On May 21, 2013, the Colorado District Court stayed and administratively closed the Nancy P. Assad Trust action in favor of the Hall action described below that is pending in the Delaware Court of Chancery.
On April 12, 2013, a purported stockholder class action captioned David Hall v. Berry Petroleum Co., et al. was filed in the Delaware Court of Chancery, C.A. No. 8476-VCG. The complaint names as defendants Berry, the members of its board of directors, HoldCo, Bacchus Merger Sub, LinnCo, LINN Energy and LinnCo Merger Sub. The complaint alleges that the individual defendants breached their fiduciary duties in connection with the transactions by engaging in an unfair sales process that resulted in an unfair price for Berry, by failing to disclose all material information regarding the transactions, and that the entity defendants aided and abetted those breaches of fiduciary duty. The complaint seeks a declaration that the transactions are unlawful and unenforceable, an order directing the individual defendants to comply with their fiduciary duties, an injunction against consummation of the transactions, or, in the event they are completed, rescission of the transactions, an award of fees and costs, including attorneys’ and experts’ fees and expenses, and other relief. The Company is unable to estimate a possible loss, or range of possible loss, if any, at this time.

15

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

On July 9, 2013, Anthony Booth, individually and on behalf of all other persons similarly situated, filed a class action complaint in the United States District Court, Southern District of Texas, against LINN Energy, Mark E. Ellis, Kolja Rockov, and David B. Rottino (the “Booth Action”). On July 18, 2013, the Catherine A. Fisher Trust, individually and on behalf of all other persons similarly situated, filed a class action complaint in the United States District Court, Southern District of Texas, against the same defendants (the “Fisher Action”). On July 17, 2013, Don Gentry, individually and on behalf of all other persons similarly situated, filed a class action complaint in the United States District Court, Southern District of Texas, against LINN Energy, LinnCo, Mark E. Ellis, Kolja Rockov, David B. Rottino, George A. Alcorn, David D. Dunlap, Terrence S. Jacobs, Michael C. Linn, Joseph P. McCoy, Jeffrey C. Swoveland, and the various underwriters for LinnCo’s initial public offering (the “Gentry Action”) (the Booth Action, Fisher Action, and Gentry Action together, the “Texas Federal Actions”). The Texas Federal Actions each assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) based on allegations that LINN Energy made false or misleading statements relating to its hedging strategy, the cash flow available for distribution to unitholders, and LINN Energy’s energy production. The Gentry Action asserts additional claims under Sections 11 and 15 of the Securities Act of 1933 based on alleged misstatements relating to these issues in the prospectus and registration statement for LinnCo’s initial public offering. On September 23, 2013, the Southern District of Texas entered an order transferring the Texas Federal Actions to the Southern District of New York so that they could be consolidated with the New York Federal Actions, which are described below.
On July 10, 2013, David Adrian Luciano, individually and on behalf of all other persons similarly situated, filed a class action complaint in the United States District Court, Southern District of New York, against LINN Energy, LinnCo, Mark E. Ellis, Kolja Rockov, David B. Rottino, George A. Alcorn, David D. Dunlap, Terrence S. Jacobs, Michael C. Linn, Joseph P. McCoy, Jeffrey C. Swoveland, and the various underwriters for LinnCo’s initial public offering (the “Luciano Action”). The Luciano Action asserts claims under Sections 11 and 15 of the Securities Act of 1933 based on alleged misstatements relating to LINN Energy’s hedging strategy, the cash flow available for distribution to unitholders, and LINN Energy’s energy production in the prospectus and registration statement for LinnCo’s initial public offering. On July 12, 2013, Frank Donio, individually and on behalf of all other persons similarly situated, filed a class action complaint in the United States District Court, Southern District of New York, against LINN Energy, Mark E. Ellis, Kolja Rockov, and David B. Rottino (the “Donio Action”). The Donio Action asserts claims under Sections 10(b) and 20(a) of the Exchange Act based on allegations that LINN Energy made false or misleading statements relating to its hedging strategy, the cash flow available for distribution to unitholders, and LINN Energy’s energy production. Several additional class action cases substantially similar to the Luciano Action and the Donio Action were subsequently filed in the Southern District of New York and assigned to the same judge (the Luciano Action, Donio Action, and all similar subsequently filed New York federal class actions together, the “New York Federal Actions”). The Texas Federal Actions and the New York Federal Actions have now been consolidated in the United States District Court for the Southern District of New York. The cases are in their preliminary stages and it is possible that additional similar actions could be filed. As a result, the Company is unable to estimate a possible loss, or range of possible loss, if any.
On July 10, 2013, Judy Mesirov, derivatively on behalf of nominal defendant LINN Energy, filed a shareholder derivative petition against Mark E. Ellis, Kolja Rockov, David B. Rottino, Arden L. Walker, Jr., Charlene A. Ripley, Michael C. Linn, Joseph P. McCoy, George A. Alcorn, Terrence S. Jacobs, David D. Dunlap, Jeffrey C. Swoveland, and Linda M. Stephens in the District Court of Harris County, Texas (the “Mesirov Action”). On July 12, 2013, John Peters, derivatively on behalf of nominal defendant LINN Energy, filed a shareholder derivative petition against many of the same defendants in the District Court of Harris County, Texas (the “Peters Action”). On August 26, 2013, Joseph Abdalla, derivatively on behalf of nominal defendant LINN Energy, filed a shareholder derivative petition against many of the same defendants in the District Court of Harris County, Texas (the “Abdalla Action”) (the Mesirov Action, Peters Action, and Abdalla Actions together, the “Texas State Court Derivative Actions”). On August 19, 2013, the Charlote J. Lombardo Trust of 2004, derivatively on behalf of nominal defendant LINN Energy, filed a shareholder derivative petition against many of the same defendants in the United States District Court for the Southern District of Texas (the “Lombardo Action”). On September 30, 2013, the Thelma Feldman Rev. Trust, derivatively on behalf of nominal defendant LINN Energy, filed a shareholder derivative petition against many of the same defendants (the “Feldman Rev. Trust Action”). On October 21, 2013, the Parker Family Trust of 2012, derivatively on behalf of nominal defendant LINN Energy, filed a shareholder derivative petition against many of the same defendants (the “Parker Family Trust Action”) (the Lombardo Action, Feldman Rev. Trust Action, and Parker Family Trust Action together, the “Texas Federal Court Derivative Actions”) (the Texas State Court Derivative Action and Texas Federal Court Derivative Actions together, the “Texas Derivative Actions”). The Texas Derivative Actions assert derivative claims on behalf of LINN Energy against the individual defendants for alleged breaches of fiduciary duty, waste of corporate assets, mismanagement, abuse of control, and unjust enrichment based on factual allegations similar to those in the Texas Federal Actions and the New York Federal Actions. The cases are in their preliminary stages and it is possible that additional similar actions could be filed in

16

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

the District Court of Harris County, Texas, or in other jurisdictions. As a result, the Company is unable to estimate a possible loss, or range of possible loss, if any.
In 2008, Lehman Brothers Holdings Inc. and Lehman Brothers Commodity Services Inc. (together “Lehman”), filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. In March 2011, the Company and Lehman entered into Termination Agreements under which the Company was granted general unsecured claims against Lehman in the amount of $51 million (the “Company Claim”). In December 2011, a Chapter 11 Plan (“Lehman Plan”) was approved by the Bankruptcy Court. Based on the recovery estimates described in the approved disclosure statement relating to the Lehman Plan, the Company expects to ultimately receive a substantial portion of the Company Claim. In April 2012, an initial distribution under the Lehman Plan of approximately $25 million was received by the Company resulting in a gain of approximately $18 million, and in April 2013, the Company received approximately $5 million of the Company Claim, both of which are included in “gains (losses) on oil and natural gas derivatives” on the condensed consolidated statements of operations. In the aggregate, the Company has received approximately $33 million, including approximately $3 million received in October 2012, of the Company Claim and additional distributions are expected to occur in the future.
Note 11 – Earnings Per Unit
Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. Diluted earnings per unit is computed by adjusting the average number of units outstanding for the dilutive effect, if any, of unit equivalents. The Company uses the treasury stock method to determine the dilutive effect.

17

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

The following table provides a reconciliation of the numerators and denominators of the basic and diluted per unit computations for net income:
 
Net Income (Loss)
(Numerator)
 
Units
(Denominator)
 
Per Unit
Amount
 
(in thousands)
 
 
Three months ended September 30, 2013:
 
 
 
 
 
Net loss:
 
 
 
 
 
Allocated to units
$
(30,060
)
 
 
 
 
Allocated to participating securities
(1,266
)
 
 
 
 
 
$
(31,326
)
 
 
 
 
Net loss per unit:
 
 
 
 
 
Basic net loss per unit
 
 
233,552

 
$
(0.13
)
Dilutive effect of unit equivalents
 
 

 

Diluted net loss per unit
 
 
233,552

 
$
(0.13
)
 
 
 
 
 
 
Three months ended September 30, 2012:
 
 
 
 
 
Net loss:
 
 
 
 
 
Allocated to units
$
(430,005
)
 
 
 
 
Allocated to participating securities
(1,398
)
 
 
 
 
 
$
(431,403
)
 
 
 
 
Net loss per unit:
 
 
 
 
 
Basic net loss per unit
 
 
197,675

 
$
(2.18
)
Dilutive effect of unit equivalents
 
 

 

Diluted net loss per unit
 
 
197,675

 
$
(2.18
)
 
 
 
 
 
 
Nine months ended September 30, 2013:
 
 
 
 
 
Net income:
 
 
 
 
 
Allocated to units
$
93,212

 
 
 
 
Allocated to participating securities
(3,796
)
 
 
 
 
 
$
89,416

 
 
 
 
Net income per unit:
 
 
 
 
 
Basic net income per unit
 
 
233,393

 
$
0.38

Dilutive effect of unit equivalents
 
 
372

 

Diluted net income per unit
 
 
233,765

 
$
0.38

 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
Net loss:
 
 
 
 
 
Allocated to units
$
(199,121
)
 
 
 
 
Allocated to participating securities
(4,165
)
 
 
 
 
 
$
(203,286
)
 
 
 
 
Net loss per unit:
 
 
 
 
 
Basic net loss per unit
 
 
196,152

 
$
(1.04
)
Dilutive effect of unit equivalents
 
 

 

Diluted net loss per unit
 
 
196,152

 
$
(1.04
)

Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to approximately 4 million and 3 million unit options and warrants for the three months and nine months ended September 30, 2013, respectively. Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to approximately 1 million unit options and warrants for the three months and nine months ended September 30, 2012. All equivalent units were antidilutive for the three months ended September 30, 2013, and for the three months and nine months ended September 30, 2012.

18

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Note 12 – Income Taxes
The Company is a limited liability company treated as a partnership 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 unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. As such, with the exception of the state of Texas and certain subsidiaries, 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. Amounts recognized for income taxes are reported in “income tax expense (benefit)” on the condensed consolidated statements of operations.
Note 13 – Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows
“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
 
 
 
 
Accrued compensation
$
24,931

 
$
35,431

Accrued interest
124,029

 
72,668

Other
7,178

 
7,146

 
$
156,138

 
$
115,245

Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
Nine Months Ended
September 30,
 
2013
 
2012
 
(in thousands)
 
 
 
 
Cash payments for interest, net of amounts capitalized
$
240,261

 
$
178,194

Cash payments for income taxes
$
14

 
$
306

 
 
 
 
Noncash investing activities:
 
 
 
In connection with the acquisition of oil and natural gas properties and joint-venture funding, assets were acquired and liabilities were assumed as follows:
 
 
 
Fair value of assets acquired
$
47,901

 
$
2,854,410

Cash paid
(28,524
)
 
(2,487,767
)
Receivables from sellers
3,654

 
772

Payables to sellers
(6,854
)
 
(422
)
Liabilities assumed
$
16,177

 
$
366,993

Included in “acquisition of oil and natural gas properties and joint-venture funding” on the condensed consolidated statements of cash flows for the nine months ended September 30, 2013, is approximately $112 million paid by the Company towards the future funding commitment related to the joint-venture agreement entered into with Anadarko and a deposit of approximately $53 million paid by the Company for the acquisition in the Permian Basin region that is pending at September 30, 2013 (see Note 2).
For purposes of the condensed consolidated 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. Restricted cash of approximately $5 million is included in “other noncurrent assets” on the condensed consolidated balance sheets at September 30, 2013, and

19

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

December 31, 2012, and represents cash deposited by the Company into a separate account and designated for asset retirement obligations in accordance with contractual agreements.
The Company manages its working capital and cash requirements to borrow only as needed from its Credit Facility. At December 31, 2012, net outstanding checks of approximately $35 million were reclassified and included in “accounts payable and accrued expenses” on the condensed consolidated balance sheet. There was no such balance at September 30, 2013. The Company presents net outstanding checks as cash flows from financing activities on the condensed consolidated statements of cash flows.
Note 14 – Related Party Transactions
LinnCo
LinnCo, an affiliate of LINN Energy, was formed on April 30, 2012, for the sole purpose of owning units in LINN Energy. In October 2012, LinnCo completed its IPO and used the net proceeds of approximately $1.2 billion from the offering to acquire 34,787,500 of LINN Energy’s units which represent approximately 15% of LINN Energy’s outstanding units at September 30, 2013. All of LinnCo’s common shares are held by the public. As of September 30, 2013, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy. In connection with the pending acquisition of Berry (see Note 2), LinnCo intends to amend its limited liability company agreement to permit the acquisition and subsequent contribution of assets to LINN Energy.
LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo’s behalf, any legal, accounting, tax advisory, financial advisory and engineering fees, printing costs or other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of shares in LinnCo or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses and registrar and transfer agent fees. In addition, the Company has agreed to indemnify LinnCo and its officers and directors for damages suffered or costs incurred (other than income taxes payable by LinnCo) in connection with carrying out LinnCo’s activities.
For the three months and nine months ended September 30, 2013, LinnCo incurred total general and administrative expenses and certain offering costs of approximately $1 million and $15 million, respectively, of which approximately $9 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2013. The expenses for the three months and nine months ended September 30, 2013, include approximately $125,000 and $13 million, respectively, of transaction costs related to professional services rendered by third parties in connection with the pending acquisition of Berry (see Note 2). The expenses for the three months and nine months ended September 30, 2013, also include approximately $403,000 and $1 million, respectively, related to services provided by LINN Energy necessary for the conduct of LinnCo’s business, such as accounting, legal, tax, information technology and other expenses. The offering costs of approximately $361,000 were incurred in connection with LinnCo’s registration statement on Form S-4 also related to the pending acquisition of Berry. All expenses and costs paid by LINN Energy on LinnCo’s behalf are accounted for as investment at cost.
During the nine months ended September 30, 2013, the Company paid approximately $76 million in distributions to LinnCo attributable to LinnCo’s interest in LINN Energy.
Other
One of the Company’s directors is the President and Chief Executive Officer of Superior Energy Services, Inc. (“Superior”), which provides oilfield services to the Company. For the three months and nine months ended September 30, 2013, the Company paid approximately $7 million and $20 million, respectively, to Superior and its subsidiaries for services rendered to the Company. The transactions associated with these payments were consummated on terms equivalent to those that prevail in arm’s-length transactions.

20

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Note 15 – Subsidiary Guarantors
The November 2019 Senior Notes, the May 2019 Senior Notes and the 2010 Issued Notes are guaranteed by all of the Company’s material subsidiaries. The Company is a holding company and has no independent assets or operations of its own, the guarantees under each series of notes are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries.
Note 16 – SEC Inquiry
As disclosed on July 1, 2013, the Company and its affiliate, LinnCo, have been notified by the staff of the SEC that its Fort Worth Regional Office has commenced an inquiry regarding LINN Energy and LinnCo (the “SEC inquiry”). The SEC staff is investigating whether any violations of federal securities laws have occurred. The SEC staff has requested the production of documents and communications that are potentially relevant to, among other things, LINN Energy and LinnCo’s use of non-GAAP financial measures and disclosures related to LINN Energy’s hedging strategy. The SEC staff has stated that the fact of the inquiry should not be construed as an indication that the SEC or its staff has a negative view of any entity, individual or security. Both LINN Energy and LinnCo are cooperating fully with the SEC in this matter. Due to the pending SEC inquiry, the timing of closing of the merger with Berry is uncertain. LINN Energy and LinnCo are unable to predict the timing or outcome of the SEC inquiry or estimate the nature or amount of any possible sanction the SEC could seek to impose, which could include a fine, penalty, or court or administrative order prohibiting specific conduct, or a potential restatement of LINN Energy’s or LinnCo’s financial statements, any of which could be material. No provision for losses has been recorded for this exposure.

21


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that reflect the Company’s future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside the Company’s control. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, natural gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors set forth in “Cautionary Statement” below and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2012, and elsewhere in the Annual Report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
The following discussion and analysis should be read in conjunction with the financial statements and related notes included in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. A reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. “Financial Statements.”
Executive Overview
LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. LINN Energy is an independent oil and natural gas company that began operations in March 2003 and completed its initial public offering in January 2006. The Company’s properties are located in eight operating regions in the United States (“U.S.”):
Mid-Continent, which includes properties in Oklahoma, Louisiana and the eastern portion of the Texas Panhandle (including the Granite Wash and Cleveland horizontal plays);
Hugoton Basin, which includes properties located primarily in Kansas and the Shallow Texas Panhandle;
Green River Basin, which includes properties located in southwest Wyoming;
Permian Basin, which includes areas in west Texas and southeast New Mexico;
Williston/Powder River Basin, which includes the Bakken and Three Forks formations in North Dakota and the Powder River Basin in Wyoming;
Michigan/Illinois, which includes the Antrim Shale formation in the northern part of Michigan and oil properties in southern Illinois;
California, which includes the Brea Olinda Field of the Los Angeles Basin; and
East Texas, which includes properties located in east Texas.
Results for the three months ended September 30, 2013, included the following:
oil, natural gas and NGL sales of approximately $538 million compared to $444 million for the third quarter of 2012;
average daily production of 823 MMcfe/d compared to 782 MMcfe/d for the third quarter of 2012;
net loss of approximately $30 million compared to $430 million for the third quarter of 2012;
capital expenditures, excluding acquisitions, of approximately $306 million compared to $258 million for the third quarter of 2012; and
118 wells drilled (all successful) compared to 95 wells drilled (94 successful) for the third quarter of 2012.
Results for the nine months ended September 30, 2013, included the following:
oil, natural gas and NGL sales of approximately $1.5 billion compared to $1.1 billion for the nine months ended September 30, 2012;
average daily production of 800 MMcfe/d compared to 628 MMcfe/d for the nine months ended September 30, 2012;
net income of approximately $93 million compared to a net loss of $199 million for the nine months ended September 30, 2012;
net cash provided by operating activities of approximately $941 million compared to $144 million for the nine months ended September 30, 2012;
capital expenditures, excluding acquisitions, of approximately $912 million compared to $815 million for the nine months ended September 30, 2012; and
376 wells drilled (all successful) compared to 276 wells drilled (272 successful) for the nine months ended September 30, 2012.


22

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Acquisitions – Pending
On September 11, 2013, the Company entered into a definitive purchase and sale agreement to acquire certain oil and natural gas properties located in the Permian Basin for a contract price of approximately $525 million. The Company paid a deposit of approximately $53 million in September 2013, which is reported in “other noncurrent assets” on the condensed consolidated balance sheet at September 30, 2013. The Company anticipates the acquisition will close on or before October 31, 2013, subject to closing conditions, and will be financed with proceeds from a committed term loan to be entered into at closing and borrowings under the Company’s Credit Facility, as defined in Note 6.
On February 20, 2013, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, and Berry Petroleum Company (“Berry”) entered into a definitive merger agreement under which LinnCo would acquire all of the outstanding common shares of Berry. Under the terms of the agreement, Berry’s shareholders will receive 1.25 LinnCo common shares for each Berry common share they own. This transaction, which is expected to be a tax-free exchange to Berry’s shareholders, represents value of $46.2375 per common share, based on the closing price of LinnCo common shares on February 20, 2013, the last trading day before the public announcement.
In connection with the proposed transaction described above, LinnCo will contribute Berry to LINN Energy in exchange for newly issued LINN Energy units, after which Berry will be an indirect wholly owned subsidiary of LINN Energy. At February 21, 2013, the date of the public announcement, the transaction had a preliminary value of approximately $4.4 billion, including the assumption of approximately $1.7 billion of Berry’s debt. The transaction is subject to approvals by Berry and LinnCo shareholders, LINN Energy unitholders and regulatory agencies. Due to the pending SEC inquiry (see Note 16), the timing of closing this proposed transaction is uncertain.
Divestiture – 2013
On May 31, 2013, the Company, through one of its wholly owned subsidiaries, together with the Company’s partners, Panther Energy, LLC and Red Willow Mid-Continent, LLC, completed the sale of its interests in certain oil and natural gas properties located in the Mid-Continent region (“Panther Properties”) to Midstates Petroleum Company, Inc. Proceeds received for the Company’s portion of its interests in the properties were approximately $219 million, net of costs to sell of approximately $2 million. The Company used the net proceeds from the sale to repay borrowings under its Credit Facility.
Financing and Liquidity
In April 2013, the Company entered into a Sixth Amended and Restated Credit Agreement (“Credit Facility”), which provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount of $4.0 billion. The borrowing base remained unchanged at $4.5 billion and does not include any assets to be acquired in the pending transaction with Berry. The maturity date is April 2018. The amended and restated agreement is substantially similar to the previous Credit Facility with revisions to permit the transactions related to the acquisition of Berry and to designate Berry as an unrestricted subsidiary under the agreement.
In accordance with the provisions of the indenture related to the 2017 Senior Notes, in June 2013, the Company redeemed the remaining outstanding principal amount of approximately $41 million. In accordance with the provisions of the indenture related to the 2018 Senior Notes, in July 2013, the Company redeemed the remaining outstanding principal amount of approximately $14 million.


23

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Results of Operations
Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012
 
Three Months Ended
September 30,
 
 
 
2013
 
2012
 
Variance
 
(in thousands)
Revenues and other:
 
 
 
 
 
Natural gas sales
$
148,614

 
$
101,984

 
$
46,630

Oil sales
307,209

 
247,354

 
59,855

NGL sales
81,848

 
94,744

 
(12,896
)
Total oil, natural gas and NGL sales
537,671

 
444,082

 
93,589

Losses on oil and natural gas derivatives
(63,931
)
 
(411,405
)
 
347,474

Marketing and other revenues
20,822

 
15,651

 
5,171

 
494,562

 
48,328

 
446,234

Expenses:
 
 
 
 
 
Lease operating expenses
87,076

 
91,990

 
(4,914
)
Transportation expenses
35,637

 
18,274

 
17,363

Marketing expenses
9,962

 
14,923

 
(4,961
)
General and administrative expenses (1)
45,431

 
45,166

 
265

Exploration costs
1,588

 
390

 
1,198

Depreciation, depletion and amortization
208,892

 
167,695

 
41,197

Impairment of long-lived assets
(4,240
)
 

 
(4,240
)
Taxes, other than income taxes
36,457

 
37,885

 
(1,428
)
Losses on sale of assets and other, net
827

 
16

 
811

 
421,630

 
376,339

 
45,291

Other income and (expenses)
(107,398
)
 
(106,944
)
 
(454
)
Loss before income taxes
(34,466
)
 
(434,955
)
 
400,489

Income tax benefit
(4,406
)
 
(4,950
)
 
544

Net loss
$
(30,060
)
 
$
(430,005
)
 
$
399,945


(1) 
General and administrative expenses for the three months ended September 30, 2013, and September 30, 2012, include approximately $8 million and $7 million, respectively, of noncash unit-based compensation expenses.


24

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 
Three Months Ended
September 30,
 
 
 
2013
 
2012
 
Variance
Average daily production:
 
 
 
 
 
Natural gas (MMcf/d)
458

 
409

 
12
 %
Oil (MBbls/d)
32.4

 
30.8

 
5
 %
NGL (MBbls/d)
28.4

 
31.4

 
(10
)%
Total (MMcfe/d)
823

 
782

 
5
 %
 
 
 
 
 
 
Weighted average prices (unhedged): (1)
 
 
 
 
 
Natural gas (Mcf)
$
3.53

 
$
2.71

 
30
 %
Oil (Bbl)
$
103.07

 
$
87.22

 
18
 %
NGL (Bbl)
$
31.35

 
$
32.83

 
(5
)%
 
 
 
 
 
 
Average NYMEX prices:
 
 
 
 
 
Natural gas (MMBtu)
$
3.58

 
$
2.80

 
28
 %
Oil (Bbl)
$
105.82

 
$
92.22

 
15
 %
 
 
 
 
 
 
Costs per Mcfe of production:
 
 
 
 
 
Lease operating expenses
$
1.15

 
$
1.28

 
(10
)%
Transportation expenses
$
0.47

 
$
0.25

 
88
 %
General and administrative expenses (2)
$
0.60

 
$
0.63

 
(5
)%
Depreciation, depletion and amortization
$
2.76

 
$
2.33

 
18
 %
Taxes, other than income taxes
$
0.48

 
$
0.53

 
(9
)%

(1) 
Does not include the effect of gains (losses) on derivatives.
(2) 
General and administrative expenses for the three months ended September 30, 2013, and September 30, 2012, include approximately $8 million and $7 million, respectively, of noncash unit-based compensation expenses.


25

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales increased approximately $94 million or 21% to approximately $538 million for the three months ended September 30, 2013, from approximately $444 million for the three months ended September 30, 2012, due to higher production volumes and higher oil and natural gas prices partially offset by lower NGL prices. Higher oil and natural gas prices resulted in an increase in revenues of approximately $48 million and $34 million, respectively. Lower NGL prices resulted in a decrease in revenues of approximately $4 million.
Average daily production volumes increased to 823 MMcfe/d during the three months ended September 30, 2013, from 782 MMcfe/d during the three months ended September 30, 2012. Higher oil and natural gas production volumes resulted in an increase in revenues of approximately $13 million and $12 million, respectively. Lower NGL production volumes resulted in a decrease in revenues of approximately $9 million.
The following sets forth average daily production by region:
 
Three Months Ended
September 30,
 
 
 
 
 
2013
 
2012
 
Variance
Average daily production (MMcfe/d):
 
 
 
 
 
 
 
Mid-Continent
344

 
351

 
(7
)
 
(2
)%
Hugoton Basin
146

 
150

 
(4
)
 
(3
)%
Green River Basin
136

 
98

 
38

 
38
 %
Permian Basin
78

 
82

 
(4
)
 
(5
)%
Williston/Powder River Basin
50

 
28

 
22

 
79
 %
Michigan/Illinois
34

 
35

 
(1
)
 
(4
)%
East Texas
22

 
25

 
(3
)
 
(9
)%
California
13

 
13

 

 
1
 %
 
823

 
782

 
41

 
5
 %
The decrease in average daily production volumes in the Mid-Continent region primarily reflects a reduction of approximately 23 MMcfe/d of production volumes related to production of the Panther Properties sold on May 31, 2013, partially offset by the Company’s 2012 and 2013 capital drilling programs in the Granite Wash formation. The decrease in average daily production volumes in the Hugoton Basin region reflects downtime related to weather and plant maintenance, and the effects of natural declines, partially offset by the results of the Company’s development capital spending. Average daily production volumes in the Green River Basin region reflect the impact of the acquisition from BP America Production Company (“BP”) on July 31, 2012, partially offset by a reduction caused by ethane rejection in the region. The decrease in average daily production volumes in the Permian Basin region primarily reflects downtime from third parties’ infrastructure, partially offset by development capital spending. The increase in average daily production volumes in the Williston/Powder River Basin region reflects development capital spending in the Williston and Powder River Basins. The Michigan/Illinois and California regions consist of low-decline asset bases and continue to produce at consistent levels. The decrease in average daily production volumes in the East Texas region primarily reflects the effects of natural declines.
Gains (Losses) on Oil and Natural Gas Derivatives
Losses on oil and natural gas derivatives decreased by approximately $347 million to approximately $64 million for the three months ended September 30, 2013, from approximately $411 million for the three months ended September 30, 2012. Losses on oil and natural gas derivatives decreased primarily due to changes in fair value on unsettled derivatives contracts, partially offset by decreased cash settlements during the period. The fair value on unsettled derivatives contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.
During the three months ended September 30, 2013, the Company had commodity derivative contracts for approximately 104% of its natural gas production, including natural gas put options used to indirectly hedge NGL revenues, and 127% of its oil production. During the three months ended September 30, 2012, the Company had commodity derivative contracts for approximately 107% of its natural gas production, including natural gas put options used to indirectly hedge NGL revenues, and 104% of its oil production.

26

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional information about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” in “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems and plants. Marketing and other revenues increased by approximately $5 million or 33% to approximately $21 million for the three months ended September 30, 2013, from approximately $16 million for the three months ended September 30, 2012, primarily due to higher revenues generated from the Jayhawk natural gas processing plant.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies and workover expenses. Lease operating expenses decreased by approximately $5 million or 5% to approximately $87 million for the three months ended September 30, 2013, from approximately $92 million for the three months ended September 30, 2012. Lease operating expenses per Mcfe also decreased to $1.15 per Mcfe for the three months ended September 30, 2013, from $1.28 per Mcfe for the three months ended September 30, 2012. Lease operating expenses decreased primarily due to lower rates on newly acquired properties and cost saving initiatives.
Transportation Expenses
Transportation expenses increased by approximately $18 million or 95% to approximately $36 million for the three months ended September 30, 2013, from approximately $18 million for the three months ended September 30, 2012, primarily due to the BP acquisitions in 2012.
Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems and plants. Marketing expenses decreased by approximately $5 million or 33% to approximately $10 million for the three months ended September 30, 2013, from approximately $15 million for the three months ended September 30, 2012, primarily due to lower expenses associated with the Jayhawk natural gas processing plant.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses were approximately $45 million for both the three months ended September 30, 2013, and September 30, 2012. Higher salaries and benefits related expenses of approximately $2 million, driven primarily by increased employee headcount, higher professional services expenses of approximately $1 million and higher various other expenses of approximately $3 million were offset by lower acquisition related expenses of approximately $6 million. General and administrative expenses per Mcfe decreased to $0.60 per Mcfe for the three months ended September 30, 2013, from $0.63 per Mcfe for the three months ended September 30, 2012, as a result of efficiencies gained from being a larger, more scalable organization.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased by approximately $41 million or 25% to approximately $209 million for the three months ended September 30, 2013, from approximately $168 million for the three months ended September 30, 2012. Higher depletion rates and higher total production volumes were the primary reasons for the increased expense. Depreciation, depletion and amortization per Mcfe also increased to $2.76 per Mcfe for the three months ended September 30, 2013, from $2.33 per Mcfe for the three months ended September 30, 2012, primarily due to negative reserve revisions from the prior year, partially offset by lower rates on properties acquired in 2012.
Impairment of Long-Lived Assets
During the three months ended September 30, 2013, the Company recorded an adjustment of approximately $4 million to reflect the fair value less costs to sell the Panther Properties sold in May 2013 (see Note 2). An initial adjustment of approximately $15 million was recorded during the second quarter of 2013. The Company recorded no impairment charge for the three months ended September 30, 2012.

27

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Taxes, Other Than Income Taxes
Taxes, other than income taxes, which consist primarily of severance and ad valorem taxes, decreased by approximately $2 million or 4% to approximately $36 million for the three months ended September 30, 2013, from approximately $38 million for the three months ended September 30, 2012. Severance taxes, which are a function of revenues generated from production, increased by approximately $3 million compared to the three months ended September 30, 2012, primarily due to higher production volumes and higher oil and natural gas prices partially offset by lower NGL prices. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, decreased by approximately $5 million compared to the three months ended September 30, 2012, primarily due to lower assessed values on the Company’s base properties.
Other Income and (Expenses)
 
Three Months Ended
September 30,
 
 
 
2013
 
2012
 
Variance
 
(in thousands)
 
 
 
 
 
 
Interest expense, net of amounts capitalized
$
(103,806
)
 
$
(105,697
)
 
$
1,891

Loss on extinguishment of debt
(1,117
)
 

 
(1,117
)
Other, net
(2,475
)
 
(1,247
)
 
(1,228
)
 
$
(107,398
)
 
$
(106,944
)
 
$
(454
)
Other income and (expenses) increased by approximately $454,000 for the three months ended September 30, 2013, compared to the three months ended September 30, 2012. Interest expense decreased primarily due to the Company’s redemptions of its highest interest rate debt, the Original Senior Notes (see Note 6). In addition, for the three months ended September 30, 2013, the Company recorded a loss on extinguishment of debt as a result of the redemption of the remaining outstanding 2018 Senior Notes. See “Debt” in “Liquidity and Capital Resources” below for additional details.
Income Tax Expense (Benefit)
The Company is a limited liability company treated as a partnership 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 unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized an income tax benefit of approximately $4 million for the three months ended September 30, 2013, compared to an income tax benefit of approximately $5 million for the three months ended September 30, 2012. Income tax benefit decreased primarily due to higher income subject to Texas margin tax during the three months ended September 30, 2013, compared to the same period in 2012.
Net Income (Loss)
Net loss decreased by approximately $400 million to approximately $30 million for the three months ended September 30, 2013, from approximately $430 million for the three months ended September 30, 2012. The decrease was primarily due to higher production revenues and lower losses on oil and natural gas derivatives, partially offset by higher expenses. See discussions above for explanations of variances.


28

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Results of Operations

Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
Variance
 
(in thousands)
Revenues and other:
 
 
 
 
 
Natural gas sales
$
444,124

 
$
227,027

 
$
217,097

Oil sales
810,919

 
702,863

 
108,056

NGL sales
233,567

 
210,314

 
23,253

Total oil, natural gas and NGL sales
1,488,610

 
1,140,204

 
348,406

Gains on oil and natural gas derivatives
154,432

 
30,273

 
124,159

Marketing and other revenues
59,405

 
32,538

 
26,867

 
1,702,447

 
1,203,015

 
499,432

Expenses:
 
 
 
 
 
Lease operating expenses
259,381