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EX-2.1 - PURCHASE AND SALE AGREEMENT FOREST OIL - LINN ENERGY, LLCexhibit2-1.htm
EX-32.1 - CERTIFICATION OF CEO SECTION 906 - LINN ENERGY, LLCexhibit32-1.htm
EX-32.2 - CERTIFICATION OF CFO SECTION 906 - LINN ENERGY, LLCexhibit32-2.htm
EX-31.2 - CERTIFICATION OF CFO SECTION 302 - LINN ENERGY, LLCexhibit31-2.htm
EX-31.1 - CERTIFICATION OF CEO SECTION 302 - LINN ENERGY, LLCexhibit31-1.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, 2009
 
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 Logo
 
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  x    No  ¨

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, 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  ¨    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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer  x      Accelerated filer   ¨     Non-accelerated filer  ¨    Smaller reporting company  ¨
(Do not check if a 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 October 30, 2009, there were 129,916,563 units outstanding.



 
 

 


   
Page
       
   
       
     
   
   
   
   
   
   
 
 
 
     
 
 
 
 
 
 
 
       
   
As commonly used in the oil and 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 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 gas to one Bbl of oil, condensate or natural gas liquids.
 
MMBbls.  One million barrels of oil or other liquid hydrocarbons.
 
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 gas to one Bbl of oil, condensate or natural gas liquids.
 
MMcfe/d. MMcfe per day.
 
MMMBtu.  One billion British thermal units.
 
Tcfe.  One trillion cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.

   
September 30,
 
December 31,
   
2009
 
2008
   
(Unaudited)
     
   
(in thousands,
except unit amounts)
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 10,595     $ 28,668  
Accounts receivable – trade, net
    98,150       138,983  
Derivative instruments
    290,784       368,951  
Other current assets
    22,748       27,329  
Total current assets
    422,277       563,931  
                 
Noncurrent assets:
               
Oil and gas properties (successful efforts method)
    4,060,403       3,831,183  
Less accumulated depletion and amortization
    (416,766 )     (278,805 )
      3,643,637       3,552,378  
                 
Other property and equipment
    116,373       111,459  
Less accumulated depreciation
    (20,933 )     (13,171 )
      95,440       98,288  
                 
Derivative instruments
    213,130       493,705  
Other noncurrent assets
    64,679       13,718  
      277,809       507,423  
Total noncurrent assets
    4,016,886       4,158,089  
Total assets
  $ 4,439,163     $ 4,722,020  
                 
Liabilities and Unitholders’ Capital
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 125,731     $ 163,662  
Derivative instruments
    48,042       47,005  
Other accrued liabilities
    31,839       27,163  
Total current liabilities
    205,612       237,830  
                 
Noncurrent liabilities:
               
Credit facility
    1,251,000       1,403,393  
Senior notes, net
    488,492       250,175  
Derivative instruments
    44,945       39,350  
Other noncurrent liabilities
    35,613       30,586  
Total noncurrent liabilities
    1,820,050       1,723,504  
                 
Unitholders’ capital:
               
121,276,006 units and 114,079,533 units issued and outstanding at September 30, 2009, and December 31, 2008, respectively
    1,994,684       2,109,089  
Accumulated income
    418,817       651,597  
      2,413,501       2,760,686  
Total liabilities and unitholders’ capital
  $ 4,439,163     $ 4,722,020  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   
2009
 
2008
 
2009
 
2008
   
(in thousands, except per unit amounts)
Revenues and other:
                       
Oil, gas and natural gas liquid sales
  $ 102,989     $ 240,634     $ 274,759     $ 672,092  
Gain (loss) on oil and gas derivatives
    (14,065 )     845,818       (85,525 )     (293,780 )
Gas marketing revenues
    1,351       4,647       3,050       11,056  
Other revenues
    150       561       1,757       1,682  
      90,425       1,091,660       194,041       391,050  
Expenses:
                               
Lease operating expenses
    33,453       33,503       100,322       78,154  
Transportation expenses
    6,367       5,683       11,850       12,674  
Gas marketing expenses
    98       4,061       1,318       9,581  
General and administrative expenses
    19,655       18,692       63,247       55,788  
Exploration costs
    861       268       4,625       2,949  
Bad debt expenses
    500       1,436       500       1,436  
Depreciation, depletion and amortization
    49,440       52,004       151,934       147,259  
Taxes, other than income taxes
    5,965       17,242       21,414       47,843  
(Gain) loss on sale of assets and other, net
    1,999             (24,717 )      
      118,338       132,889       330,493       355,684  
Other income and (expenses):
                               
Interest expense, net of amounts capitalized
    (28,025 )     (22,574 )     (65,696 )     (71,199 )
Loss on interest rate swaps
    (25,709 )     (9,694 )     (25,362 )     (17,483 )
Other, net
    (757 )     (3,558 )     (1,987 )     (8,034 )
      (54,491 )     (35,826 )     (93,045 )     (96,716 )
Income (loss) from continuing operations before income taxes
    (82,404 )     922,945       (229,497 )     (61,350 )
Income tax expense
    (58 )     (1,002 )     (379 )     (1,047 )
Income (loss) from continuing operations
    (82,462 )     921,943       (229,876 )     (62,397 )
                                 
Discontinued operations:
                               
Gain (loss) on sale of assets, net of taxes
          162,442       (718 )     161,120  
Income (loss) from discontinued operations, net of taxes
    (1,247 )     (1,774 )     (2,186 )     12,387  
      (1,247 )     160,668       (2,904 )     173,507  
Net income (loss)
  $ (83,709 )   $  1,082,611     $ (232,780 )   $  111,110  
                                 
Income (loss) per unit – continuing operations:
                               
Units – basic
  $ (0.69 )   $ 8.01     $ (1.97 )   $ (0.55 )
Units – diluted
  $ (0.69 )   $ 8.01     $ (1.97 )   $ (0.55 )
Income (loss) per unit – discontinued operations:
                               
Units – basic
  $ (0.01 )   $ 1.39     $ (0.03 )   $ 1.52  
Units – diluted
  $ (0.01 )   $ 1.39     $ (0.03 )   $ 1.52  
Net income (loss) per unit:
                               
Units – basic
  $ (0.70 )   $ 9.40     $ (2.00 )   $ 0.97  
Units – diluted
  $ (0.70 )   $ 9.40     $ (2.00 )   $ 0.97  
Weighted average units outstanding:
                               
Units – basic
    119,792       114,321       116,610       114,111  
Units – diluted
    119,792       114,345       116,610       114,111  
                                 
Distributions declared per unit
  $ 0.63     $ 0.63     $ 1.89     $ 1.89  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2

CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS’ CAPITAL
(Unaudited)
 

   
Units
 
Unitholders’
Capital
 
Accumulated
Income
 
Treasury
Units
(at Cost)
 
Total
Unitholders’
Capital
   
(in thousands)
                               
December 31, 2008
    114,080     $ 2,109,089     $ 651,597     $     $ 2,760,686  
Sale of units, net of underwriting discounts and expenses of $4,533
    6,325       98,248                   98,248  
Issuance of units
    1,058                          
Cancellation of units
    (187 )     (2,696 )           2,696        
Purchase of units
                        (2,696 )     (2,696 )
Distributions to unitholders
            (221,430 )                 (221,430 )
Unit-based compensation expenses
            11,473                   11,473  
Net loss
                  (232,780 )           (232,780 )
September 30, 2009
    121,276     $ 1,994,684     $ 418,817     $     $ 2,413,501  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 

   
Nine Months Ended
September 30,
   
2009
 
2008
   
(in thousands)
Cash flow from operating activities:
           
Net income (loss)
  $ (232,780 )   $ 111,110  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    151,934       152,017  
Unit-based compensation expenses
    11,473       12,376  
Bad debt expenses
    500       1,436  
Amortization and write-off of deferred financing fees and other
    14,231       12,853  
(Gain) loss on sale of assets, net
    (22,572 )     (161,120 )
Mark-to-market on derivatives:
               
Total losses
    110,887       311,263  
Cash settlements
    299,114       (72,416 )
Cash settlements on canceled derivatives
    48,977       (81,358 )
Premiums paid for derivatives
    (93,606 )     (129,520 )
Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable – trade, net
    39,260       (99,448 )
(Increase) decrease in other assets
    365       (3,821 )
Decrease in accounts payable and accrued expenses
    (3,232 )     (15,810 )
Increase in other liabilities
    5,573       5,226  
Net cash provided by operating activities
    330,124       42,788  
Cash flow from investing activities:
               
Acquisition of oil and gas properties
    (116,694 )     (573,096 )
Development of oil and gas properties
    (152,149 )     (249,833 )
Purchases of other property and equipment
    (5,832 )     (5,309 )
Proceeds from sale of properties and equipment
    26,682       744,133  
Net cash used in investing activities
    (247,993 )     (84,105 )
Cash flow from financing activities:
               
Proceeds from sale of units
    102,781        
Purchase of units
    (2,696 )     (1,981 )
Proceeds from borrowings
    599,203       1,422,000  
Repayments of debt
    (513,893 )     (1,095,116 )
Distributions to unitholders
    (221,430 )     (217,331 )
Financing fees, offering expenses and other, net
    (64,169 )     (20,427 )
Net cash provided by (used in) financing activities
    (100,204 )     87,145  
Net increase (decrease) in cash and cash equivalents
    (18,073 )     45,828  
Cash and cash equivalents:
               
Beginning
    28,668       1,441  
Ending
  $ 10,595     $ 47,269  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1)
Basis of Presentation
 
Nature of Business
 
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and gas company focused on the development and acquisition of long-life properties which complement its asset profile in producing basins within the United States.
 
Principles of Consolidation and Reporting
 
The condensed consolidated financial statements at September 30, 2009, and for the three months and nine months ended September 30, 2009, and September 30, 2008, are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods.  Subsequent events were evaluated through the issuance date of the financial statements, November 4, 2009.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations, and 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, 2008.  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.
 
Presentation Change
 
Certain amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the 2009 financial statement presentation.  In particular, the condensed consolidated statements of operations include categories of expense titled “lease operating expenses,” “transportation expenses,” “exploration costs,” “taxes, other than income taxes” and “(gain) loss on sale of assets and other, net” which were not reported in prior period presentations.  The new categories present expenses in greater detail than was previously reported and all comparative periods presented have been reclassified to conform to the 2009 financial statement presentation.  There was no impact to net income (loss) for prior periods.
 
Discontinued Operations
 
The Company’s Appalachian Basin and Mid Atlantic Well Service, Inc. (“Mid Atlantic”) operations have been classified as discontinued operations on the condensed consolidated statements of operations for all periods presented.  Unless otherwise indicated, information about the statements of operations that is presented in the notes to condensed consolidated financial statements relates only to LINN Energy’s continuing operations.  See Note 2 for additional details.
 
Use of Estimates
 
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events.  These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.  The estimates that are particularly significant to the financial statements include estimates of the Company’s
5

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
reserves of oil, gas and natural gas liquids (“NGL”), future cash flows from oil and gas properties, depreciation, depletion and amortization, asset retirement obligations, fair values of commodity and interest rate derivatives, and fair values of assets acquired and liabilities assumed.  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.  Illiquid credit markets and volatile equity and energy markets have combined to increase the uncertainty inherent in such estimates and assumptions.  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.
 
(2)
Acquisitions, Divestitures and Discontinued Operations
 
Acquisitions – 2009
 
On August 31, 2009, and September 30, 2009, the Company completed the acquisitions of certain oil and gas properties located in the Permian Basin in Texas and New Mexico from Forest Oil Corporation and Forest Oil Permian Corporation, (collectively referred to as “Forest”) for an aggregate contract price of $117.6 million.  The Company paid $116.5 million in cash and recorded a receivable from Forest of approximately $2.7 million, resulting in total consideration for the acquisitions of approximately $113.8 million.  The transactions were financed with borrowings from the Company’s Credit Facility (as defined in Note 6).  The acquisitions represent a strategic entry into the Permian Basin for the Company.
 
The acquisitions were accounted for under the acquisition method of accounting in accordance with an accounting standard adopted by the Company effective January 1, 2009, (see Note 16).  Accordingly, the Company conducted a preliminary assessment of net assets acquired and recognized provisional amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions were expensed as incurred.  The initial accounting for the business combinations is not complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates.
6

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
The following presents the preliminary values assigned to the net assets acquired as of the acquisition dates (in thousands):
 
Assets:
     
Current assets
  $ 800  
Oil and gas properties
    115,952  
Total assets acquired
  $ 116,752  
         
Liabilities:
       
Current liabilities
  $ 1,567  
Asset retirement obligations
    1,350  
Total liabilities assumed
  $ 2,917  
         
Net assets acquired
  $ 113,835  
 
Current assets include gas imbalance receivables, prepaid ad valorem taxes, and inventory of oil produced but not yet sold.  Current liabilities include gas imbalance payables, ad valorem taxes payable and environmental liabilities.
 
The preliminary fair values of oil and gas properties and asset retirement obligation liabilities were measured using valuation techniques that convert future cash flows to a single discounted amount.  Significant inputs to the valuation of oil and gas properties include estimates of: (i) oil and gas reserves; (ii) future operating and development costs; (iii) future oil and gas prices; and (iv) a market-based weighted average cost of capital rate.  Significant inputs to the valuation of asset retirement obligation liabilities include estimates of: (i) plug and abandon costs per well; (ii) remaining life per well; and (iii) a credit-adjusted risk-free interest rate.
 
Acquisition – 2008
 
On January 31, 2008, the Company completed the acquisition of certain oil and gas properties located primarily in the Mid-Continent Shallow region from Lamamco Drilling Company for $542.2 million.
 
Divestitures – 2008
 
On December 4, 2008, the Company completed the sale of its deep rights in certain central Oklahoma acreage, which includes the Woodford Shale interval, to Devon Energy Production Company, LP (“Devon”).  During 2008, the Company received net proceeds of $153.2 million and the carrying value of net assets sold was $54.2 million.  In the first quarter of 2009, certain post-closing matters were resolved and the Company recorded a gain of $25.4 million, which is recorded in “(gain) loss on sale of assets and other, net” on the condensed consolidated statements of operations for the nine months ended September 30, 2009.
 
On August 15, 2008, the Company completed the sale of certain properties in the Verden area in Oklahoma to Laredo Petroleum, Inc.  During 2008, the Company received net proceeds equal to the carrying value of net assets sold of $169.4 million.
 
On July 1, 2008, the Company completed the sale of its interests in oil and gas properties located in the Appalachian Basin to XTO Energy, Inc.  During 2008, the Company received net proceeds of $566.5 million and the carrying value of net assets sold was $405.8 million.  In addition, in March 2008, the
7

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
Company exited the drilling and service business in the Appalachian Basin provided by its wholly owned subsidiary Mid Atlantic.  The Company used the net proceeds from all divestitures to reduce indebtedness.
 
Discontinued Operations
 
The Company’s Appalachian Basin and Mid Atlantic operations have been classified as discontinued operations on the condensed consolidated statements of operations for all periods presented.  The following summarizes the Appalachian Basin and Mid Atlantic amounts included in “income (loss) from discontinued operations, net of taxes” on the condensed consolidated statements of operations:
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   
2009
 
2008
 
2009
 
2008
   
(in thousands)
                         
Total revenues and other
  $     $ (421 )   $ (1,216 )   $ 49,564  
Total operating expenses
    (1,247 )     (1,549 )     (970 )     (23,779 )
Interest expense
          196             (13,398 )
Income (loss) from discontinued operations, net of taxes
  $ (1,247 )   $ (1,774 )   $ (2,186 )   $ 12,387  
 
Discontinued operations activity for 2009 primarily represents activity related to post-closing adjustments.  The Company computed interest expense related to discontinued operations for 2008 based on debt required to be repaid as a result of the disposal transaction.
 
(3)
Unitholders’ Capital
 
Public Offering of Units
 
In October 2009, the Company sold 8,625,000 units, representing limited liability company interests at $21.90 per unit ($21.024 per unit, net of underwriting discount), for net proceeds (after underwriting discount of $7.6 million and estimated offering expenses of $0.7 million) of approximately $180.6 million, which was used to reduce indebtedness under the Company’s Credit Facility.
 
In May 2009, the Company sold 6,325,000 units, representing limited liability company interests at $16.25 per unit ($15.60 per unit, net of underwriting discount), for net proceeds (after underwriting discount of $4.1 million and offering expenses of $0.4 million) of approximately $98.2 million, which was used to reduce indebtedness under the Company’s Credit Facility.
 
Unit Repurchase Plan
 
In October 2008, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases.  During the nine months ended September 30, 2009, 123,800 units were repurchased at an average unit price of $12.99, for a total cost of approximately $1.6 million.  All units were subsequently canceled.  At September 30, 2009, approximately $85.4 million was available for unit repurchase under the program.  The timing and amounts of any such repurchases will be at the discretion of management, subject to market conditions and other factors, and in accordance with applicable securities laws and other legal requirements.  The repurchase plan does not obligate the Company to acquire any specific number of units and may be discontinued at any time.  Units are repurchased at fair market value on the date of repurchase.
8

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
Cancellation of Units
 
During the nine months ended September 30, 2009, the Company purchased 63,031 units for approximately $1.1 million, in conjunction with units received by the Company for the payment of minimum withholding taxes due on units issued under its equity compensation plan (see Note 12).  All units were subsequently canceled.
 
Distributions
 
Under the limited liability company agreement, Company unitholders are entitled to receive a quarterly distribution of available cash to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses.  Distributions paid by the Company during the nine months ended September 30, 2009, are presented on the condensed consolidated statement of unitholders’ capital.  On October 21, 2009, the Company’s Board of Directors declared a cash distribution of $0.63 per unit with respect to the third quarter of 2009.  The distribution, totaling approximately $81.9 million, will be paid November 13, 2009, to unitholders of record as of the close of business November 6, 2009.
 
(4)
Oil and Gas Capitalized Costs
 
Aggregate capitalized costs related to oil and gas production activities with applicable accumulated depletion and amortization are presented below:
 
   
September 30,
2009
 
December 31,
2008
   
(in thousands)
Proved properties:
           
Leasehold acquisition
  $ 3,396,033     $ 3,278,155  
Development
    581,976       460,730  
Unproved properties
    82,394       92,298  
      4,060,403       3,831,183  
Less accumulated depletion and amortization
    (416,766 )     (278,805 )
    $ 3,643,637     $ 3,552,378  
 
(5)
Business and Credit Concentrations
 
For the three months and nine months ended September 30, 2009, the Company’s three largest customers represented approximately 26%, 19% and 15%, and 23%, 18% and 15%, respectively, of the Company’s sales.  For the three months and nine months ended September 30, 2008, the Company’s four largest customers represented approximately 17%, 12%, 11% and 10%, and 19%, 11%, 11% and 10%, respectively, of the Company’s sales.
 
At September 30, 2009, trade accounts receivable from three customers were more than 10% of the Company’s total trade accounts receivable.  At September 30, 2009, trade accounts receivable from the Company’s three largest customers represented approximately 24%, 18% and 13%, respectively, of the Company’s receivables.  At December 31, 2008, trade accounts receivable from two customers were more than 10% of the Company’s total trade accounts receivable.  At December 31, 2008, trade accounts receivable from the Company’s two largest customers represented approximately 20% and 16%, respectively, of the Company’s receivables.
9

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
(6)
Debt
 
At September 30, 2009, and December 31, 2008, the Company had the following debt outstanding:
 
   
September 30,
2009
 
December 31,
2008
   
(in thousands)
             
Credit facility (1)
  $ 1,251,000     $ 1,403,393  
Senior notes due 2017, net (2)
    238,038        
Senior notes due 2018, net (3)
    250,454       250,175  
Less current maturities
           
    $ 1,739,492     $ 1,653,568  
 
 
(1)
Variable interest rate of 3.0% at September 30, 2009, and 2.47% at December 31, 2008.
 
 
(2)
Fixed interest rate of 11.75% and effective interest rate of 12.73%.  Amount is net of unamortized discount of approximately $12.0 million at September 30, 2009.
 
 
(3)
Fixed interest rate of 9.875% and effective interest rate of 10.25%.  Amount is net of unamortized discount of approximately $5.5 million and $5.8 million at September 30, 2009, and December 31, 2008, respectively.
 
Credit Facility
 
On April 28, 2009, the Company entered into a Fourth Amended and Restated Credit Agreement (“Credit Facility”), with an initial borrowing base of $1.75 billion and a maturity of August 2012, which amended and restated the Company’s existing credit facility, which had a maturity of August 2010.  The terms of the Credit Facility required that, upon the issuance of the senior notes due 2017 in May 2009 (see below) and cancelation of certain commodity derivatives in July 2009 (see Note 7), the borrowing base be decreased by approximately $62.5 million and $45.0 million, respectively, to $1.64 billion at September 30, 2009.  At September 30, 2009, available borrowing capacity was $386.0 million, which reflects borrowings used to finance the recent acquisitions in the Permian Basin (see Note 2) and a $5.5 million reduction in availability for outstanding letters of credit.  In October 2009, the Company used net proceeds from its public offering of units (see Note 3) to reduce indebtedness under its Credit Facility.  At October 30, 2009, available borrowing capacity was $535.0 million, which includes a $5.5 million reduction in availability for outstanding letters of credit.  In connection with the amended and restated Credit Facility, during the nine months ended September 30, 2009, the Company paid approximately $52.7 million in financing fees and expenses, which were deferred and will be amortized over the life of the Credit Facility.
 
Redetermination of the borrowing base under the Credit Facility occurs semi-annually, in April and October, as well as upon the occurrence of certain events, by the lenders in their sole discretion, based primarily on reserve reports that reflect oil and gas prices at such time.  Significant declines in oil, gas or NGL prices may result in a decrease in the borrowing base.  The Company’s obligations under the Credit Facility are secured by mortgages on its oil and gas properties as well as a pledge of all ownership interests in its operating subsidiaries.  The Company is required to maintain the mortgages on properties representing at least 80% of its oil and gas properties.  Additionally, the obligations under the Credit Facility are guaranteed by all of the Company’s material operating subsidiaries and may be guaranteed by any future 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 2.50% and 3.25% per annum or the alternate base rate (“ABR”) plus an applicable margin between 1.00% and 1.75% per
10

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
annum.  Interest is generally payable quarterly for ABR loans and at the applicable maturity date for LIBOR loans.  The Company is required to pay a fee of 0.5% per annum on the unused portion of the borrowing base under the Credit Facility.
 
The Credit Facility contains various covenants, substantially similar to those included prior to the amendment and restatement, which limit the Company’s ability to: (i) incur indebtedness; (ii) enter into commodity and interest rate swaps; (iii) grant certain liens; (iv) make certain loans, acquisitions, capital expenditures and investments; (v) make distributions other than from available cash; and (vi) merge or consolidate, or engage in certain asset dispositions, including a sale of all or substantially all of its assets.  The Credit Facility also contains covenants, substantially similar to those included prior to the amendment and restatement, which require the Company to maintain adjusted earnings to interest expense and current liquidity financial ratios.  The Company is in compliance with all financial and other covenants of its Credit Facility.
 
Senior Notes Due 2017
 
On May 12, 2009, the Company entered into a purchase agreement with a group of initial purchasers (“Initial Purchasers”), pursuant to which the Company agreed to issue $250.0 million in aggregate principal amount of the Company’s senior notes due 2017 (“2017 Notes”).  The 2017 Notes were offered and sold to the Initial Purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements of the Securities Act.  The Company used the net proceeds (after deducting the Initial Purchasers’ discounts and offering expenses) of approximately $230.8 million to reduce indebtedness under its Credit Facility.  In connection with the 2017 Notes, the Company incurred financing fees and expenses of approximately $6.9 million, which will be amortized over the life of the 2017 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.  The $12.3 million discount on the 2017 Notes will be amortized over the life of the 2017 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.
 
The 2017 Notes were issued under an Indenture dated May 18, 2009, (“Indenture”), mature May 15, 2017, and bear interest at 11.75%.  Interest is payable semi-annually beginning November 15, 2009.  The 2017 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 guaranteed the 2017 Notes on a senior unsecured basis.  The Indenture provides that the Company may redeem: (i) on or prior to May 15, 2011, up to 35% of the aggregate principal amount of the 2017 Notes at a redemption price of 111.75% of the principal amount, plus accrued and unpaid interest; (ii) prior to May 15, 2013, all or part of the 2017 Notes at a redemption price equal to the principal amount, plus a make-whole premium (as defined in the Indenture) and accrued and unpaid interest; and (iii) on or after May 15, 2013, all or part of the 2017 Notes at redemption prices equal to 105.875% in 2013, 102.938% in 2014 and 100% in 2015 and thereafter.  The Indenture also provides that, if a change of control (as defined in the Indenture) occurs, the holders have a right to require the Company to repurchase all or part of the 2017 Notes at a redemption price equal to 101%, plus accrued and unpaid interest.
 
The 2017 Notes’ Indenture contains covenants 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.
11

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
In connection with the issuance and sale of the 2017 Notes, the Company entered into a Registration Rights Agreement (“Registration Rights Agreement”) with the Initial Purchasers.  Under the Registration Rights Agreement, the Company agreed to use its reasonable best 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 2017 Notes in exchange for outstanding 2017 Notes.  In certain circumstances, the Company may be required to file a shelf registration statement to cover resales of the 2017 Notes.  The Company will not be obligated to file the registration statements described above if the restrictive legend on the 2017 Notes has been removed and the 2017 Notes are freely tradable (in each case, other than with respect to persons that are affiliates of the Company) pursuant to Rule 144 of the Securities Act, as of the 366th day after the 2017 Notes were issued.  If the Company fails to satisfy its obligations under the Registration Rights Agreement, the Company may be required to pay additional interest to holders of the 2017 Notes under certain circumstances.
 
Senior Notes Due 2018
 
On June 24, 2008, the Company entered into a purchase agreement with a group of initial purchasers (“Initial Purchasers”), pursuant to which the Company agreed to issue $255.9 million in aggregate principal amount of the Company’s senior notes due 2018 (“2018 Notes”).  The 2018 Notes were offered and sold to the Initial Purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements of the Securities Act.  The Company used the net proceeds (after deducting the Initial Purchasers’ discounts and offering expenses) of approximately $243.6 million to repay an outstanding term loan.  In connection with the 2018 Notes, the Company incurred financing fees and expenses of approximately $7.8 million, which will be amortized over the life of the 2018 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.  The $5.9 million discount on the 2018 Notes will be amortized over the life of the 2018 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.
 
The 2018 Notes were issued under an Indenture dated June 27, 2008, (“Indenture”), mature July 1, 2018, and bear interest at 9.875%.  Interest is payable semi-annually beginning January 1, 2009.  The 2018 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 guaranteed the 2018 Notes on a senior unsecured basis.  The Indenture provides that the Company may redeem: (i) on or prior to July 1, 2011, up to 35% of the aggregate principal amount of the 2018 Notes at a redemption price of 109.875% of the principal amount, plus accrued and unpaid interest; (ii) prior to July 1, 2013, all or part of the 2018 Notes at a redemption price equal to the principal amount, plus a make-whole premium (as defined in the Indenture) and accrued and unpaid interest; and (iii) on or after July 1, 2013, all or part of the 2018 Notes at redemption prices equal to 104.938% in 2013, 103.292% in 2014, 101.646% in 2015 and 100% in 2016 and thereafter.  The Indenture also provides that, if a change of control (as defined in the Indenture) occurs, the holders have a right to require the Company to repurchase all or part of the 2018 Notes at a redemption price equal to 101%, plus accrued and unpaid interest.
 
The 2018 Notes’ Indenture contains covenants 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.  In June 2009, the Company instructed the trustee to remove the restrictive legend from the 2018 Notes making them freely tradable (other than with respect to persons that
12

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
are affiliates of the Company).  This terminated the Company’s obligations under a registration rights agreement entered into in connection with issuance of the 2018 Notes.
 
Fair Value Measurements
 
At September 30, 2009, the estimated fair values of the 2017 Notes and the 2018 Notes were approximately $268.8 million and $254.3 million, respectively.  The fair values were estimated based on prices quoted from third-party financial institutions.
 
(7)
Derivatives
 
Commodity Derivatives
 
The Company sells oil, gas and NGL in the normal course of its business and utilizes derivative instruments to minimize the variability in cash flows due to price movements in oil, gas and NGL.  The Company enters into derivative instruments such as swap contracts, collars and put options to economically hedge a portion of its forecasted oil, gas and NGL sales.  Oil puts are also used to economically hedge NGL sales.  The Company did not designate 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 gas commodity derivatives.
13

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
The following table summarizes open positions as of September 30, 2009, and represents, as of such date, derivatives in place through December 31, 2013, on annual production volumes:
 
   
Year
2009
 
Year
2010
 
Year
2011
 
Year
2012
 
Year
2013
Gas Positions:
                             
Fixed Price Swaps:
                             
Hedged Volume (MMMBtu)
    9,896       39,566       31,901              
Average Price ($/MMBtu)
  $ 8.53     $ 8.90     $ 9.50     $     $  
Puts:
                                       
Hedged Volume (MMMBtu)
    1,740       6,960       6,960              
Average Price ($/MMBtu)
  $ 7.50     $ 8.50     $ 9.50     $     $  
PEPL Puts: (1)
                                       
Hedged Volume (MMMBtu)
    1,334       10,634       13,259              
Average Price ($/MMBtu)
  $ 7.85     $ 7.85     $ 8.50     $     $  
Total:
                                       
Hedged Volume (MMMBtu)
    12,970       57,160       52,120              
Average Price ($/MMBtu)
  $ 8.32     $ 8.66     $ 9.25     $     $  
                                         
Oil Positions:
                                       
Fixed Price Swaps:
                                       
Hedged Volume (MBbls)
    609       2,150       2,073              
Average Price ($/Bbl)
  $ 90.00     $ 90.00     $ 90.00     $     $  
Puts: (2)
                                       
Hedged Volume (MBbls)
    461       2,250       2,352              
Average Price ($/Bbl)
  $ 120.00     $ 110.00     $ 75.00     $     $  
Collars:
                                       
Hedged Volume (MBbls)
    62       250       276              
Average Floor Price ($/Bbl)
  $ 90.00     $ 90.00     $ 90.00     $     $  
Average Ceiling Price ($/Bbl)
  $ 114.25     $ 112.00     $ 112.25     $     $  
Total:
                                       
Hedged Volume (MBbls)
    1,132       4,650       4,701              
Average Price ($/Bbl)
  $ 102.21     $ 99.68     $ 82.50     $     $  
                                         
Gas Basis Differential Positions:
                                       
PEPL Basis Swaps:
                                       
Hedged Volume (MMMBtu)
    11,729       43,166       35,541       34,066       31,700  
Hedged Differential ($/MMBtu)
  $ (0.97 )   $ (0.97 )   $ (0.96 )   $ (0.95 )   $ (1.01 )
 
 
(1)
Settle on the Panhandle Eastern Pipeline (“PEPL”) spot price of gas to hedge basis differential associated with gas production in the Mid-Continent Deep and Mid-Continent Shallow regions.
 
 
(2)
The Company utilizes oil puts to hedge revenues associated with its NGL production.
 
Settled derivatives on gas production for the three months and nine months ended September 30, 2009, included a volume of 12,970 MMMBtu and 38,910 MMMBtu at average contract prices of $8.32.  Settled derivatives on oil and NGL production for the three months and nine months ended September 30, 2009, included a volume of 1,132 MBbls and 3,397 MBbls at average contract prices of $102.21.  The gas derivatives are settled based on the closing New York Mercantile Exchange (“NYMEX”) future price of gas or on the published PEPL spot price of gas on the settlement date, which occurs on the third day
14

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
preceding the production month.  The oil derivatives are settled based on the month’s average daily NYMEX price of light oil and settlement occurs on the final day of the production month.
 
Interest Rate Swaps
 
The Company has entered into interest rate swap agreements based on LIBOR to minimize the effect of fluctuations in interest rates.  If LIBOR is lower than the fixed rate in the contract, the Company is required to pay the counterparties the difference, and conversely, the counterparties are required to pay the Company if LIBOR is higher than the fixed rate in the contract.  The Company did not designate the interest rate swap agreements 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 interest rate swaps.
 
The following presents the settlement terms of the interest rate swaps at September 30, 2009:
 
   
Year
2009
 
Year
2010
 
Year
2011
 
Year
2012
 
 Year
     2013 (1)
   
(dollars in thousands)
                               
Notional amount
  $ 1,212,000     $ 1,212,000     $ 1,212,000     $ 1,212,000     $ 1,212,000  
Fixed rate
    3.85 %     3.85 %     3.85 %     3.85 %     3.85 %
 
 
(1)
Actual settlement term is through January 6, 2014.
 
Outstanding Notional Amounts
 
The following presents the outstanding notional amounts and maximum number of months outstanding of derivative instruments:
 
   
September 30,
2009
 
December 31,
2008
             
Outstanding notional amounts of gas contracts (MMMBtu)
    122,250       196,756  
Maximum number of months gas contracts outstanding
    27       48  
Outstanding notional amounts of oil contracts (MBbls)
    10,483       21,229  
Maximum number of months oil contracts outstanding
    27       72  
Outstanding notional amount of interest rate swaps (in thousands)
  $ 1,212,000     $ 1,212,000  
Maximum number of months interest rate swaps outstanding
    51       24  
15

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
Balance Sheet Presentation
 
The Company’s commodity and interest rate 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,
2009
 
December 31,
2008
   
(in thousands)
Assets:
           
Commodity derivatives
  $ 636,933     $ 977,847  
Interest rate swaps
    179        
    $ 637,112     $ 977,847  
Liabilities:
               
Commodity derivatives
  $ 149,036     $ 119,124  
Interest rate swaps
    77,149       82,422  
    $ 226,185     $ 201,546  
 
By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, 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 participants or affiliates of participants in its Credit Facility (see Note 6), which is secured by the Company’s oil and gas reserves; therefore, the Company is not required to post any collateral.  The Company does not require 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 $637.1 million at September 30, 2009.  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 ongoing basis.  In accordance with the Company’s standard practice, its commodity and interest rate derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of such loss is somewhat mitigated.
 
Gain (Loss) on Derivatives
 
Gains and losses on derivatives are reported on the condensed consolidated statements of operations in “gain (loss) on oil and gas derivatives” and “gain (loss) on interest rate swaps” and include realized and unrealized gains (losses).  Realized gains (losses), excluding canceled commodity derivatives, represent amounts related to the settlement of derivative instruments, and for commodity derivatives, are aligned with the underlying production.  Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.
16

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
The following presents the Company’s reported gains and losses on derivative instruments:
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   
2009
 
2008
 
2009
 
2008
   
(in thousands)
Realized gains (losses):
                       
Commodity derivatives
  $ 97,209     $ (28,270 )   $ 328,165     $ (62,289 )
Interest rate swaps
    (10,958 )     (5,817 )     (31,629 )     (11,479 )
Canceled derivatives
    44,780       (13,161 )     48,977       (81,358 )
    $ 131,031     $ (47,248 )   $ 345,513     $ (155,126 )
Unrealized gains (losses):
                               
Commodity derivatives
  $ (156,054 )   $ 887,249     $ (462,727 )   $ (150,133 )
Interest rate swaps
    (14,751 )     (3,877 )     6,327       (6,004 )
    $ (170,805 )   $ 883,372     $ (456,400 )   $ (156,137 )
Total gains (losses):
                               
Commodity derivatives
  $ (14,065 )   $ 845,818     $ (85,525 )   $ (293,780 )
Interest rate swaps
    (25,709 )     (9,694 )     (25,362 )     (17,483 )
    $ (39,774 )   $ 836,124     $ (110,887 )   $ (311,263 )
 
During the three months and nine months ended September 30, 2009, the Company canceled (before the contract settlement date) derivative contracts on estimated future oil and gas production resulting in realized net gains of approximately $44.8 million and $49.0 million, respectively.  In July 2009, the Company repositioned its commodity derivative portfolio.  The Company canceled oil and gas derivative contracts for years 2012 through 2014 and used the realized net gains of approximately $44.8 million, along with an incremental premium payment of approximately $48.8 million, to raise prices for oil and gas derivative contracts in years 2010 and 2011.
 
During the three months and nine months ended September 30, 2008, the Company canceled (before the contract settlement date) derivative contracts on estimated future gas production resulting in realized losses of approximately $13.2 million and $81.4 million, respectively.  The future gas production under the canceled contracts primarily related to properties in the Verden area and the Appalachian Basin (see Note 2).
 
(8)
Fair Value Measurements on a Recurring Basis
 
The Company accounts for its commodity and interest rate derivatives at fair value (see Note 7) on a recurring basis.  The fair value of derivative instruments is determined utilizing pricing models for significantly similar instruments.  Inputs to the pricing models include publicly available prices and forward curves generated from a compilation of data gathered from third parties.  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 and interest rate derivatives.
17

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
The following presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at September 30, 2009:
 
   
Fair Value Measurements on a Recurring Basis
September 30, 2009
   
Level 2
 
Netting (1)
 
Total
   
(in thousands)
Assets:
                 
Commodity derivatives
  $ 636,933     $ (133,019 )   $ 503,914  
Interest rate swaps
  $ 179     $ (179 )   $  
                         
Liabilities:
                       
Commodity derivatives
  $ 149,036     $ (133,019 )   $ 16,017  
Interest rate swaps
  $ 77,149     $ (179 )   $ 76,970  
 
 
(1)
Represents counterparty netting under derivative netting agreements.
 
(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 noncurrent liabilities” on the condensed consolidated balance sheets.  The fair values of additions to the asset retirement obligation liability were 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; (ii) remaining life per well; and (iii) a credit-adjusted risk-free interest rate (average of 9.92% for the nine months ended September 30, 2009).
 
The following presents a reconciliation of the asset retirement obligation liability (in thousands):
 
Asset retirement obligations at December 31, 2008
  $ 28,922  
Liabilities added from acquisitions
    1,350  
Liabilities added from drilling
    50  
Current year accretion expense
    1,789  
Settlements
    (509 )
Revision of estimates
    1,037  
Asset retirement obligations at September 30, 2009
  $ 32,639  
18

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
 
(10)
Commitments and Contingencies
 
On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman Holdings”) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) with the United States Bankruptcy Court for the Southern District of New York (the “Court”).  On October 3, 2008, Lehman Brothers Commodity Services Inc. (“Lehman Commodity Services”) also filed a voluntary petition for reorganization under Chapter 11 with the Court.  As of September 30, 2009, and December 31, 2008, the Company had a receivable of approximately $67.6 million from Lehman Commodity Services for canceled derivative contracts.  The Company is pursuing various legal remedies to protect its interests.  At September 30, 2009, and December 31, 2008, the Company estimated approximately $6.7 million of the receivable balance to be collectible.  The net receivable of approximately $6.7 million is included in “other current assets” on the condensed consolidated balance sheets at September 30, 2009, and December 31, 2008.  The Company believes that the ultimate disposition of this matter will not have a material adverse effect on its business, financial position, results of operations or liquidity.
 
From time to time, the Company is a party to various legal proceedings or is subject to industry rulings that could bring rise to claims 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 business, financial position, results of operations or liquidity.
 
(11)
Earnings Per Unit
 
Effective January 1, 2009, the Company adopted an accounting standard requiring the Company’s unvested restricted units to be included in the computation of earnings per unit under the two-class method.  The adoption required retrospective adjustment of all prior period earnings per unit data.  The impact of the adoption was a reduction to income from continuing operations per unit – diluted and net income per unit – diluted, of $0.04 per unit and $0.06 per unit, respectively, for the three months ended September 30, 2008.  There was no impact to the Company from the adoption for the nine months ended September 30, 2008.
19

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 income (loss) from continuing operations:
 
   
Income (Loss) (Numerator)
 
Units (Denominator)
 
Per Unit Amount
     (in thousands)    
Three months ended September 30, 2009:
           
Loss from continuing operations:
           
Allocated to units
  $ (82,462 )      
Allocated to unvested restricted units
           
    $ (82,462 )      
Loss per unit:
             
Basic loss per unit
            119,792     $ (0.69 )
Dilutive effect of unit equivalents
                   
Diluted loss per unit
            119,792     $ (0.69 )
                         
Three months ended September 30, 2008:
                       
Income from continuing operations:
                       
Allocated to units
  $ 921,943                  
Allocated to unvested restricted units
    (6,747 )                
    $ 915,196                  
Income per unit:
                       
Basic income per unit
            114,321     $ 8.01  
Dilutive effect of unit equivalents
            24        
Diluted income per unit
            114,345     $ 8.01  
                         
Nine months ended September 30, 2009:
                       
Loss from continuing operations:
                       
Allocated to units
  $ (229,876 )                
Allocated to unvested restricted units
                     
    $ (229,876 )                
Loss per unit:
                       
Basic loss per unit
            116,610     $ (1.97 )
Dilutive effect of unit equivalents
                   
Diluted loss per unit
            116,610     $ (1.97 )
                         
Nine months ended September 30, 2008:
                       
Loss from continuing operations:
                       
Allocated to units
  $ (62,397 )                
Allocated to unvested restricted units
                     
    $ (62,397 )                
Loss per unit:
                       
Basic loss per unit
            114,111     $ (0.55 )
Dilutive effect of unit equivalents
                   
Diluted loss per unit
            114,111     $ (0.55 )
 
Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to 2.2 million and 2.1 million unit options and warrants for the three months and nine months ended September 30,
20

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
2009, respectively.  Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to 1.6 million and 1.8 million unit options and warrants for the three months and nine months ended September 30, 2008, respectively.  All equivalent units were anti-dilutive for the three months and nine months ended September 30, 2009, and the nine months ended September 30, 2008.
 
(12)
Unit-Based Compensation
 
During the nine months ended September 30, 2009, the Company granted an aggregate 1,088,755 restricted units and 382,405 unit options to employees, primarily as part of its annual review of employee compensation, with an aggregate fair value of approximately $17.6 million.  The unit options and restricted units vest over three years.  For the three months and nine months ended September 30, 2009, the Company recorded unit-based compensation expenses in continuing operations of approximately $3.5 million and $11.5 million, respectively.  For the three months and nine months ended September 30, 2008, the Company recorded unit-based compensation expenses in continuing operations of approximately $3.9 million and $11.4 million, respectively.  These amounts are included in “lease operating expenses” or “general and administrative expenses” on the condensed consolidated statements of operations.
 
(13)
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, with income tax liabilities and/or benefits of the Company passed through to unitholders.  Limited liability companies are subject to state income taxes in Texas.  As such, with the exception of the state of Texas, it is not a taxable entity, it does not directly pay federal and state income tax and recognition has not been given to federal and state income taxes for the operations of the Company.  In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes.
 
(14)
Related Party Transactions
 
During the nine months ended September 30, 2008, (through July 3), on an aggregate basis, a group of certain direct or indirect wholly owned subsidiaries of Lehman Holdings owned more than 10% of the Company’s outstanding units.  A reference to “Lehman” hereafter in this footnote refers to Lehman Holdings or one or more of its subsidiaries, as applicable.  Lehman was considered a related party under the provisions of GAAP during the period in which its unit ownership exceeded 10%.  Lehman’s subsidiaries provided certain services to the Company, including participation in the Company’s Third Amended and Restated Credit Agreement, offering of 2018 Notes (see Note 6) and sale of commodity derivative instruments (see Note 7), which were all consummated on terms equivalent to those that prevail in arm’s-length transactions.  During the nine months ended September 30, 2008, (through July 3), the Company paid distributions on units to Lehman of approximately $18.5 million, interest on borrowings of approximately $2.2 million, and financing fees of approximately $1.8 million.  In addition, during the nine months ended September 30, 2008, (through July 3), the Company paid Lehman approximately $18.8 million on settled derivative contracts, and the Company purchased approximately $1.3 million of oil swap contracts from Lehman.
21

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
(15)
Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Statements of Cash Flows
 
“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:
 
   
September 30,
2009
 
December 31,
2008
   
(in thousands)
             
Accrued compensation
  $ 11,340     $ 11,366  
Accrued interest
    19,512       14,232  
Other
    987       1,565  
    $ 31,839     $ 27,163  
 
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
   
Nine Months Ended
September 30,
   
2009
 
2008
   
(in thousands)
 
             
Cash payments for interest
  $ 50,990     $ 78,176  
                 
Cash payments for income taxes
  $ 922     $ 443  
                 
Noncash investing activities:
               
In connection with the acquisition of oil and gas properties, liabilities were assumed as follows:
               
Fair value of assets acquired
  $ 116,882     $ 581,712  
Cash paid
    (116,694 )     (573,096 )
Receivable from seller
    2,729        
Liabilities assumed
  $ 2,917     $ 8,616  
Noncash financing activities:
               
Units issued in connection with the acquisition of oil and gas properties
  $     $ 23,455  
 
For purposes of the statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents.  Restricted cash of $1.9 million and $1.3 million is included in “other noncurrent assets” on the condensed consolidated balance sheets at September 30, 2009, and December 31, 2008, respectively, and represents cash the Company has deposited into a separate account and designated for asset retirement obligations in accordance with contractual agreements.
 
(16)
Recently Issued Pronouncements
 
Codification
 
In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (“Codification”), effective for financial statements for interim or annual reporting
22

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
periods ending after September 15, 2009.  The Codification is the single source of authoritative nongovernmental GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature.  References herein to prior GAAP standards that were used to create the Codification have been replaced or supplemented with references to the relevant section of the Codification and are identified as “FASB ASC” or “ASC Update.”
 
Accounting Standards
 
In August 2009, the FASB issued ASC Update 2009-5, “Fair Value Measurements and Disclosures (Topic 820)  – Measuring Liabilities at Fair Value,” which includes amendments to Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” for the fair value measurement of liabilities and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using one or more of the techniques provided for in this update, including the quoted price of the liability when traded as an asset.  The guidance in this update is effective for interim and annual periods ending after September 30, 2009.  The Company does not expect the adoption to have a material impact on its results of operations or financial position.
 
In May 2009, the FASB issued FASB ASC 855, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and requires disclosure of the date through which an entity has evaluated subsequent events.  This standard is effective for interim and annual periods ending after June 15, 2009, and the Company adopted it effective June 30, 2009.  The adoption did not have a material impact on the Company’s results of operations or financial position.
 
In April 2009, the FASB issued three related standards to clarify the application of FASB ASC 820 “Fair Value Measurements and Disclosures,” to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods.  The final standards are effective for interim and annual periods ending after June 15, 2009, and the Company adopted the new standards effective June 30, 2009.  The adoption did not have a material impact on the Company’s results of operations or financial position.  The three related standards are as follows:
 
FASB ASC 820-10-65-4, “Transition Related to FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance on how to determine the fair value of assets and liabilities under FASB ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
 
FASB ASC 320-10-65-1, “Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,” modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities.  It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.
 
FASB ASC 825-10-65-1, “Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures of the fair value of financial instruments within the scope of FASB ASC 825, Financial Instruments,” in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements.  It also requires that companies disclose the method or methods and
23

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
 
significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period.
 
FASB ASC 805, “Business Combinations,” issued in December 2007, with additional guidance issued in April 2009, requires an acquiring entity to recognize all assets acquired and liabilities assumed at fair value with limited exceptions.  Assets acquired and liabilities assumed that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated.  If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability should generally be recognized in accordance with FASB ASC 450, “Contingencies.”  This standard changes the accounting treatment for certain specific items, including acquisition costs, which are expensed as incurred, and also includes new disclosure requirements.  This standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008.  The Company adopted this standard effective January 1, 2009, (see Note 2).
 
FASB ASC 820, “Fair Value Measurements and Disclosures,” issued in September 2006, provides guidance for using fair value to measure assets and liabilities.  This standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the mark-to-market value.  The Company adopted the provisions of this standard related to financial assets and liabilities and nonfinancial assets and liabilities measured on a recurring basis effective January 1, 2008, and related to nonfinancial assets and liabilities measured on a nonrecurring basis effective January 1, 2009, (see Note 2 and Note 9).  There was no impact from the adoption related to items measured on a nonrecurring basis.
 
SEC Rule-Making Activity
 
In December 2008, the SEC announced that it had approved revisions designed to modernize the oil and gas company reserve reporting requirements.  The most significant amendments to the requirements include the following:
 
 
·
commodity prices – economic producibility of reserves and discounted cash flows will be based on a 12-month average commodity price unless contractual arrangements designate the price to be used;
 
·
disclosure of unproved reserves – probable and possible reserves may be disclosed separately on a voluntary basis;
 
·
proved undeveloped reserve guidelines – reserves may be classified as proved undeveloped if there is a high degree of confidence that the quantities will be recovered;
 
·
reserve estimation using new technologies – reserves may be estimated through the use of reliable technology in addition to flow tests and production history; and
 
·
nontraditional resources the definition of oil and gas producing activities will expand and focus on the marketable product rather than the method of extraction.
 
The rules are effective for fiscal years ending on or after December 31, 2009, and early adoption is not permitted.  The SEC is coordinating with the FASB to obtain the revisions necessary to FASB ASC 932, “Extractive Industries – Oil and Gas,” to provide consistency with the new rules.  The Company is currently evaluating the new rules and assessing the impact they will have on its reported oil and gas reserves.
24

Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere 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, 2008.  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, gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed in “Cautionary Statement” below and in the Annual Report on Form 10-K, particularly in Part I. Item 1A. “Risk Factors.”  In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
 
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 is an independent oil and gas company focused on the development and acquisition of long-life properties which complement its asset profile in producing basins within the United States.  The Company’s properties are located in three regions in the United States:
 
 
·
Mid-Continent Deep, which includes the Texas Panhandle Deep Granite Wash formation and deep formations in Oklahoma;
 
·
Mid-Continent Shallow, which includes the Texas Panhandle Brown Dolomite formation, shallow formations in Oklahoma, and the Permian Basin in Texas and New Mexico; and
 
·
Western, which includes the Brea Olinda Field of the Los Angeles Basin in California.
 
The results of the Company’s Appalachian Basin and Mid Atlantic operations are classified as discontinued operations for all periods presented (see Note 2).  Unless otherwise indicated, results of operations information presented herein relates only to LINN Energy’s continuing operations.
 
Results from continuing operations for the three months ended September 30, 2009, included the following:
 
 
·
oil, gas and NGL sales of approximately $103.0 million, compared to $240.6 million in the third quarter of 2008;
 
·
average daily production of 217 MMcfe/d, compared to 227 MMcfe/d in the third quarter of 2008;
 
·
realized gains on commodity derivatives of approximately $142.0 million, compared to realized losses of $41.4 million in the third quarter of 2008;
 
·
capital expenditures, excluding acquisitions, of approximately $24.5 million, compared to $59.2 million in the third quarter of 2008; and
 
·
six wells drilled (all successful), compared to 63 wells drilled (all successful) in the third quarter of 2008.
 
Results from continuing operations for the nine months ended September 30, 2009, included the following:
 
 
·
oil, gas and NGL sales of approximately $274.8 million, compared to $672.1 million in the nine months ended September 30, 2008;
 
·
average daily production of 218 MMcfe/d, compared to 216 MMcfe/d in the nine months ended September 30, 2008;
 
·
realized gains on commodity derivatives of approximately $377.2 million, compared to realized losses of $143.6 million in the nine months ended September 30, 2008;
 
·
capital expenditures, excluding acquisitions, of approximately $128.0 million, compared to $222.4 million in the nine months ended September 30, 2008; and
 
·
66 wells drilled (65 successful), compared to 209 wells drilled (207 successful) in the nine months ended September 30, 2008.
25

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
 
Public Offering of Units
 
In October 2009, the Company sold 8,625,000 units, representing limited liability company interests at $21.90 per unit ($21.024 per unit, net of underwriting discount), for net proceeds (after underwriting discount of $7.6 million and estimated offering expenses of $0.7 million) of approximately $180.6 million, which was used to reduce indebtedness under the Company’s Credit Facility.
 
Acquisitions
 
On August 31, 2009, and September 30, 2009, the Company completed the acquisitions of certain oil and gas properties located in the Permian Basin in Texas and New Mexico from Forest for an aggregate contract price of $117.6 million.  The Company paid $116.5 million in cash and recorded a receivable from Forest of approximately $2.7 million, resulting in total consideration for the acquisitions of approximately $113.8 million.  See Note 2 for additional details.  The transactions were financed with borrowings from the Company’s Credit Facility.  The acquisitions represent a strategic entry into the Permian Basin for the Company, and include approximately 72 Bcfe of proved reserves, primarily oil.
 
Commodity Derivative Repositioning
 
In July 2009, the Company repositioned its commodity derivative portfolio to help protect against sustained weakness in commodity prices.  The Company canceled oil and gas derivative contracts for years 2012 through 2014 and realized net gains of approximately $44.8 million, which, along with an incremental premium payment of approximately $48.8 million, was used to raise prices for its oil and gas derivative contracts in years 2010 and 2011.
 
Credit and Capital Market Conditions
 
Multiple events involving numerous financial institutions have restricted current liquidity within the capital markets throughout the United States and around the world.  To the extent the Company accesses credit or capital markets in the near term, its ability to obtain terms and pricing similar to its existing terms and pricing may be limited.  In addition, the Company cannot be assured that counterparties to the Company’s derivative contracts or lenders in the Company’s Credit Facility will be able to perform under these agreements.  For additional information about the Company’s credit risk related to derivative contracts see “Counterparty Credit Risk” in “Liquidity and Capital Resources” below.
26

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
 
Results of Operations – Continuing Operations
 
Three Months Ended September 30, 2009, Compared to Three Months Ended September 30, 2008
 
   
Three Months Ended
September 30,
   
   
2009
 
2008
 
Variance
   
(in thousands)
Revenues and other:
                 
Gas sales
  $ 35,208     $ 100,558     $ (65,350 )
Oil sales
    50,135       95,888       (45,753 )
NGL sales
    17,646       44,188       (26,542 )
Total oil, gas and NGL sales
    102,989       240,634       (137,645 )
Gain (loss) on oil and gas derivatives (1)
    (14,065 )     845,818       (859,883 )
Gas marketing revenues
    1,351       4,647       (3,296 )
Other revenues
    150       561       (411 )
    $ 90,425     $ 1,091,660     $