LinnCo, LLC - FORM 10-Q - November 5, 2014

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - LinnCo, LLC	Financial_Report.xls
EX-32.2 - CERTIFICATION OF CFO SECTION 906 - LinnCo, LLC	q314exhibit322lnco.htm
EX-31.2 - CERTIFICATION OF CFO SECTION 302 - LinnCo, LLC	q314exhibit312lnco.htm
EX-99.1 - LINN ENERGY, LLC'S FORM 10-Q Q3 2014 - LinnCo, LLC	exhibit991line930201410q.htm
EX-31.1 - CERTIFICATION OF CEO SECTION 302 - LinnCo, LLC	q314exhibit311lnco.htm
EX-32.1 - CERTIFICATION OF CEO SECTION 906 - LinnCo, LLC	q314exhibit321lnco.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, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from _______________ to _______________

Commission File Number: 001-35695

LinnCo, LLC

(Exact name of registrant as specified in its charter)



Delaware	45-5166623
(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 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 October 31, 2014, there were 128,544,174 common shares outstanding.

TABLE OF CONTENTS



		Page

	Part I – Financial Information

Item 1.	Financial Statements
	Balance Sheets as of September 30, 2014, and December 31, 2013	1
	Statements of Operations for the three months and nine months ended September 30, 2014, and September 30, 2013	2
	Statement of Shareholders’ Equity for the nine months ended September 30, 2014	3
	Statements of Cash Flows for the nine months ended September 30, 2014, and September 30, 2013	4
	Notes to Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15

	Part II – Other Information

Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 6.	Exhibits	18

	Signature	19

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINNCO, LLC

BALANCE SHEETS

(Unaudited)



	September 30, 2014			December 31, 2013
	(in thousands, except share amounts)
ASSETS
Current assets:
Cash	$	570		$	1,045
Accounts receivable – related party	156			11,218
Income taxes receivable	17,329			12,849
Deferred offering costs	15			—
Deferred income tax	368			639
Total current assets	18,438			25,751

Noncurrent assets:
Investment in Linn Energy, LLC	3,434,992			3,639,768
Total noncurrent assets	3,434,992			3,639,768
Total assets	$	3,453,430		$	3,665,519

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	236		$	11,298
Total current liabilities	236			11,298

Noncurrent liabilities:
Income taxes liability	7,716			8,983
Deferred income tax	780,086			757,444
Total noncurrent liabilities	787,802			766,427

Contingencies (Note 7)

Shareholders’ equity:
Voting shares; unlimited shares authorized; 1 share issued and outstanding at September 30, 2014, and December 31, 2013	1			1
Common shares; unlimited shares authorized, 128,544,174 shares and 128,503,236 shares issued and outstanding at September 30, 2014, and December 31, 2013, respectively	3,868,322			3,868,387
Additional paid-in capital	38,522			36,247
Accumulated deficit	(1,241,453		)	(1,016,841		)
	2,665,392			2,887,794
Total liabilities and shareholders’ equity	$	3,453,430		$	3,665,519

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

Table of Contents

LINNCO, LLC

STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in thousands, except per share amounts)

Equity income (loss) from investment in Linn Energy, LLC	$	172,200		$	(667	)	$	74,672		$	36,024
General and administrative expenses	(644		)	(635		)	(2,046		)	(14,933		)
Gain on transfer of Berry	9,830			—			8,499			—
Income (loss) before income taxes	181,386			(1,302		)	81,125			21,091
Income tax (expense) benefit	(63,776		)	3,908			(26,141		)	(6,572		)
Net income	$	117,610		$	2,606		$	54,984		$	14,519

Net income per share, basic and diluted	$	0.91		$	0.07		$	0.43		$	0.42

Weighted average shares outstanding	128,544			34,788			128,519			34,788

Dividends declared per share	$	0.725		$	0.725		$	2.175		$	2.16

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

Table of Contents

LINNCO, LLC

STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)



	Shares	Share Amount			Additional Paid-In Capital		Accumulated Deficit			Total Shareholders’ Equity
	(in thousands)

December 31, 2013	128,503	$	3,868,388		$	36,247	$	(1,016,841	)	$	2,887,794
Issuance of common shares	41	(65		)	—		—			(65		)
Capital contributions from Linn Energy, LLC		—			2,275		—			2,275
Dividends to shareholders		—			—		(279,596		)	(279,596		)
Net income		—			—		54,984			54,984
September 30, 2014	128,544	$	3,868,323		$	38,522	$	(1,241,453	)	$	2,665,392

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

Table of Contents

LINNCO, LLC

STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
	2014			2013
	(in thousands)

Cash flow from operating activities:
Net income	$	54,984		$	14,519
Adjustments to reconcile net income to net cash provided by operating activities:
Equity income from investment in Linn Energy, LLC	(74,672		)	(36,024		)
Noncash general and administrative expenses paid by Linn Energy, LLC	2,046			14,933
Gain on transfer of Berry	(8,499		)	—
Deferred income taxes	26,141			6,572
Decrease in accounts payable	(475		)	—
Cash distributions received	279,537			75,656
Net cash provided by operating activities	279,062			75,656

Cash flow from financing activities:
Dividends paid to shareholders	(279,537		)	(75,134		)
Net cash used in financing activities	(279,537		)	(75,134		)

Net increase (decrease) in cash and cash equivalents	(475		)	522
Cash and cash equivalents:
Beginning	1,045			523
Ending	$	570		$	1,045

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

Table of Contents

LINNCO, LLC

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

Nature of Business

LinnCo, LLC (“LinnCo” or the “Company”) is a Delaware limited liability company formed on April 30, 2012, that completed its initial public offering (“IPO”) in October 2012. After the IPO, LinnCo’s initial sole purpose was to own units representing limited liability company interests (“units”) in its affiliate, Linn Energy, LLC (“LINN Energy”). In connection with the acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”) (see Note 2), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of September 30, 2014, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy. LINN Energy is an independent oil and natural gas company that trades on the NASDAQ Global Select Market under the symbol “LINE.” At September 30, 2014, LINN Energy’s last reported sales price per unit, as reported by NASDAQ, was $30.14 and the Company owned approximately 39% of LINN Energy’s outstanding units.

Principles of Reporting

The information reported herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States (“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, 2013. The results reported in these unaudited financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.

Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.

Reimbursement of LinnCo’s Costs and Expenses

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 common shares representing limited liability company interests (“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, LINN Energy 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. Because all general and administrative expenses and certain offering costs are actually paid by LINN Energy on LinnCo’s behalf, no cash is disbursed by LinnCo.

For the three months and nine months ended September 30, 2014, LinnCo incurred total general and administrative expenses and certain offering costs of approximately $644,000 and $2.1 million, respectively, of which approximately $1.9 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2014. The expenses for the three months and nine months ended September 30, 2014, include approximately $470,000 and $1.4 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. In addition, during the nine months ended September 30, 2014, LINN Energy paid approximately $11 million on LinnCo’s behalf for general and administrative expenses incurred by LinnCo in 2013.

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, included approximately $125,000 and $13 million, respectively, of transaction costs related to

Table of Contents

LINNCO, LLC

NOTES TO FINANCIAL STATEMENTS - Continued

(Unaudited)

professional services rendered by third parties in connection with the Berry acquisition. The expenses for the three months and nine months ended September 30, 2013, also included 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.

Dividends

Within five business days after receiving a cash distribution related to its interests in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income tax liability (“tax reserve”), if any, as dividends to its shareholders. The amount of the tax reserve is calculated on a quarterly basis and is determined based on the estimated tax liability for the entire year. The current tax reserve can be increased or reduced, at Company management’s discretion, to account for the over/(under) tax reserve previously recorded. Because the tax reserve is an estimate, upon filing the annual tax returns, if the actual amount of tax due is greater or less than the total amount of tax reserved, the subsequent tax reserve, at Company management’s discretion, could be adjusted accordingly. Any such adjustments are subject to approval by the Company’s Board of Directors (“Board”).

Use of Estimates

The preparation of the accompanying financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of income and expenses. 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 continuous changes in the economic environment will be reflected in the financial statements in future periods.

Accounting for Investment in Linn Energy, LLC

The Company uses the equity method of accounting related to its ownership interest in LINN Energy’s net income (losses). The Company records its share of LINN Energy’s net income (losses) in the period in which it is earned. At September 30, 2014, the Company owned approximately 39% of LINN Energy’s outstanding units. The Company’s ownership percentage could change as LINN Energy issues or repurchases additional units. Changes in the Company’s ownership percentage affect its net income (losses).

At September 30, 2014, the carrying amount of the Company’s investment in LINN Energy exceeded the Company’s ownership interest in LINN Energy’s underlying net assets by approximately $1.5 billion. The difference is attributable to proved and unproved oil and natural gas properties, senior notes and equity method goodwill. These amounts are included in “investment in Linn Energy, LLC” on the balance sheet and are amortized over the lives of the related assets and liabilities. Such amortization is included in the equity income from the Company’s investment in LINN Energy. Equity method goodwill is not amortized; however, the investment is reviewed for impairment. Impairment testing is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of an investment that is other than temporary. As of September 30, 2014, no impairment had occurred with respect to the Company’s investment in LINN Energy.

Note 2 – Capitalization

LinnCo’s authorized capital structure consists of two classes of interests: (1) shares with limited voting rights and (2) voting shares, 100% of which are currently held by LINN Energy. At September 30, 2014, LinnCo’s issued capitalization consisted of $3.9 billion in shares and $1,000 contributed by LINN Energy in connection with LinnCo’s formation and in exchange for its voting share. LinnCo is authorized to issue an unlimited number of shares and voting shares. Additional classes of equity interests may be created upon approval by the Board and the holders of a majority of the outstanding shares and voting shares, voting as separate classes.

Table of Contents

LINNCO, LLC

NOTES TO FINANCIAL STATEMENTS - Continued

(Unaudited)

Berry Acquisition

On December 16, 2013, the Company completed the transactions contemplated by the merger agreement between the Company, LINN Energy and Berry under which LinnCo acquired all of the outstanding common shares of Berry and the contribution agreement between the Company and LINN Energy, under which the Company transferred Berry to LINN Energy in exchange for LINN Energy units. Under the merger agreement, as amended, Berry’s shareholders received 1.68 LinnCo common shares for each Berry common share they owned, totaling 93,756,674 LinnCo common shares valued at approximately $2.7 billion. Under the contribution agreement, LinnCo transferred Berry to LINN Energy after which Berry became an indirect wholly owned subsidiary of LINN Energy. As consideration for the transfer of Berry to LINN Energy, the Company acquired 93,756,674 newly issued LINN Energy units, valued at approximately $2.8 billion and equal to the number of LinnCo shares issued as consideration for Berry.

On the Berry acquisition date, the Company transferred Berry to its affiliate, LINN Energy. Accordingly, the assets, liabilities and results of operations of Berry are not included in the Company’s financial statements. The acquisition of 93,756,674 LINN Energy units, which are equal to the number of LinnCo shares issued as consideration for Berry, increased the Company’s ownership of LINN Energy’s outstanding units from approximately 15% to approximately 39%.

The gain on transfer of Berry of approximately $10 million and $8 million for the three months and nine months ended September 30, 2014, respectively, reflects acquisition accounting adjustments to the fair value of the assets acquired and liabilities assumed from Berry that were subsequently transferred to LINN Energy. The adjustments impacted the deferred income taxes assumed by LinnCo in the Berry acquisition that were not transferred to LINN Energy.

The following unaudited pro forma financial information presents a summary of the Company’s results of operations for the three months and nine months ended September 30, 2013, assuming the transactions had been completed as of January 1, 2013:



	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
	(in thousands, except per share amounts)

Equity income (loss) from investment in Linn Energy, LLC	$	(2,404	)	$	99,412
Net income	$	1,607		$	62,028
Net income per share, basic and diluted	$	0.01		$	0.48

The pro forma condensed combined statements of operations include adjustments to:


•	Reflect the impact of the transactions on the equity income (loss) from investment in LINN Energy. The Company uses the equity method of accounting related to its ownership interest in LINN Energy’s net income (losses).


•	Reflect the impact of the transactions on taxes.


•	Exclude transaction costs as they reflect nonrecurring charges not expected to have a continuing impact on the combined results.


•	Reflect approximately 93.8 million LinnCo common shares assumed to be issued in conjunction with the transaction on January 1, 2013.

Note 3 – Summarized Financial Information for Linn Energy, LLC

Following is summarized statements of operations and balance sheet information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.

Table of Contents

LINNCO, LLC

NOTES TO FINANCIAL STATEMENTS - Continued

(Unaudited)

Summarized Linn Energy, LLC Statements of Operations Information



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in thousands)

Revenues and other	$	1,435,115		$	494,562		$	2,765,653		$	1,702,447
Expenses	(1,284,354		)	(421,630		)	(2,631,427		)	(1,287,618		)
Other income and (expenses)	(155,894		)	(107,398		)	(428,859		)	(319,616		)
Income tax (expense) benefit	1,033			4,406			(2,674		)	(2,001		)
Net income (loss)	$	(4,100	)	$	(30,060	)	$	(297,307	)	$	93,212

Summarized Linn Energy, LLC Balance Sheets Information



	September 30, 2014		December 31, 2013
	(in thousands)

Current assets	$	2,949,590	$	815,940
Noncurrent assets	15,977,404		15,689,024
	18,926,994		16,504,964
Current liabilities	2,457,022		1,252,733
Noncurrent liabilities	11,537,839		9,360,804
Unitholders’ capital	$	4,932,133	$	5,891,427

Note 4 – Income Taxes

LinnCo is a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of the Company’s assets and liabilities for financial and tax reporting purposes. At September 30, 2014, and December 31, 2013, the majority of the Company’s temporary difference and associated deferred tax expense resulted from its investment in LINN Energy.

Table of Contents

LINNCO, LLC

NOTES TO FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 5 – Distributions and Dividends

The following provides a summary of distributions paid by LINN Energy to LinnCo and dividends paid by LinnCo to its shareholders during the nine months ended September 30, 2014:

LINN Energy Distributions to LinnCo



Date Paid	Distributions Per Unit		Total Distributions
			(in millions)

September 2014	$	0.2416	32
August 2014	$	0.2416	31
July 2014	$	0.2416	31
June 2014	$	0.2416	31
May 2014	$	0.2416	31
April 2014	$	0.2416	31
March 2014	$	0.2416	31
February 2014	$	0.2416	31
January 2014	$	0.2416	31

LinnCo Dividends to its Shareholders



Date Paid	Dividends Per Share		Total Dividends
			(in millions)

September 2014	$	0.2416	32
August 2014	$	0.2416	31
July 2014	$	0.2416	31
June 2014	$	0.2416	31
May 2014	$	0.2416	31
April 2014	$	0.2416	31
March 2014	$	0.2416	31
February 2014	$	0.2416	31
January 2014	$	0.2416	31

On October 1, 2014, LINN Energy’s Board declared a cash distribution of $0.725 per unit with respect to the third quarter of 2014, to be paid in three equal monthly installments of $0.2416 per unit. The first monthly distribution with respect to the third quarter of 2014, totaling approximately $31 million, was paid to LinnCo on October 16, 2014.

On October 1, 2014, the Company’s Board declared a cash dividend of $0.725 per common share with respect to the third quarter of 2014, to be paid in three equal monthly installments of $0.2416 per common share pending the receipt of the applicable cash distribution from LINN Energy. Company management has determined that no income tax reserve is required to be deducted from the cash dividend declared on October 1, 2014. The first monthly dividend with respect to the third quarter of 2014, totaling approximately $31 million, was paid on October 17, 2014, to shareholders of record as of the close of business on October 13, 2014.

Table of Contents

LINNCO, LLC

NOTES TO FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 6 – Supplemental Disclosures to the Statements of Cash Flows

For the nine months ended September 30, 2014, LinnCo incurred and recorded approximately $2.1 million of general and administrative expenses and certain offering costs, of which approximately $1.9 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2014. For the nine months ended September 30, 2013, LinnCo incurred and recorded approximately $15 million of general and administrative expenses and certain offering costs, of which approximately $9 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2013. In addition, during the nine months ended September 30, 2014, LINN Energy paid approximately $11 million on LinnCo’s behalf for general and administrative expenses incurred by LinnCo in 2013. All of these expenses and costs are paid by LINN Energy on LinnCo’s behalf, and therefore, are accounted for as capital contributions and reflected as noncash transactions by LinnCo.

Note 7 – Contingencies

In 2013, several class action complaints were filed and ultimately consolidated in the United States District Court, Southern District of New York (the “Federal Actions”) against LINN Energy, LinnCo, certain of their officers and directors and the various underwriters for LinnCo’s initial public offering. These cases collectively asserted claims based on allegations that LINN Energy made false or misleading statements relating to its (i) hedging strategy, (ii) the cash flow available for distribution to unitholders, and (iii) LINN Energy’s energy production in its Exchange Act filings; and additional claims based on alleged misstatements relating to these issues in the prospectus and registration statement for LinnCo’s initial public offering. Several derivative actions were also filed in federal and state court in Texas, and in the Delaware Court of Chancery (the “Derivative Actions”) asserting derivative claims on behalf of LINN Energy against the individual officers and directors 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 Federal Actions.

In July 2014, the Court dismissed the claims of the plaintiffs in the Federal Actions with prejudice, concluding that the plaintiffs failed to demonstrate any material misstatement or omission by LINN Energy or LinnCo, or their officers and directors. The plaintiffs in the Federal Action did not appeal the Court’s dismissal, and the appeals deadline has now passed. The plaintiffs in the Derivative Actions subsequently have dismissed their claims without prejudice.

Note 8 – SEC Inquiry

As disclosed on July 1, 2013, the Company and its affiliate, LINN Energy, 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 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. 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.

Table of Contents

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, 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, 2013, 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, 2013. A reference to a “Note” herein refers to the accompanying Notes to Financial Statements contained in Item 1. “Financial Statements.”

General

LinnCo, LLC (“LinnCo” or the “Company”) is a Delaware limited liability company formed on April 30, 2012, under the Delaware Limited Liability Company Act, that has elected to be treated as a corporation for U.S. federal income tax purposes. Linn Energy, LLC (“LINN Energy”), an independent oil and natural gas company that trades on the NASDAQ Global Select Market under the symbol “LINE,” owns LinnCo’s sole voting share.

LinnCo’s success is dependent upon the operation and management of LINN Energy and its resulting performance. Therefore, LINN Energy’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, has been included in this filing as Exhibit 99.1 and incorporated herein by reference.

Business

At no time after LinnCo’s formation and prior to the initial public offering (“IPO”) did LinnCo have any operations or own any interest in LINN Energy. After the IPO, LinnCo’s initial sole purpose was to own units representing limited liability company interests (“units”) in its affiliate, LINN Energy. In connection with the acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”) (see Note 2), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of September 30, 2014, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy.

Berry Acquisition

Results of Operations

Equity Income (Loss) from Investment in Linn Energy, LLC

The Company uses the equity method of accounting for its investment in LINN Energy. The Company’s equity income (loss) consists of its share of LINN Energy’s earnings attributed to the units the Company owns as well as the amortization of the excess of the Company’s investment in LINN Energy over LINN Energy’s underlying net assets attributable to certain assets and liabilities. As a result of acquiring additional LINN Energy units in exchange for the transfer of Berry, the Company increased its ownership of LINN Energy’s outstanding units from approximately 15% to approximately 39% (see Berry Acquisition above). The percentage ownership of LINN Energy could continue to change due to the Company’s ownership of additional units or other issuances or repurchases of units by LINN Energy.

Table of Contents

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

Following is summarized statements of operations information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.

Linn Energy, LLC



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in thousands)

Revenues and other	$	1,435,115		$	494,562		$	2,765,653		$	1,702,447
Expenses	(1,284,354		)	(421,630		)	(2,631,427		)	(1,287,618		)
Other income and (expenses)	(155,894		)	(107,398		)	(428,859		)	(319,616		)
Income tax (expense) benefit	1,033			4,406			(2,674		)	(2,001		)
Net income (loss)	$	(4,100	)	$	(30,060	)	$	(297,307	)	$	93,212

General and Administrative Expenses

The Company’s general and administrative expenses are associated with managing the business and affairs of LinnCo. For the three months and nine months ended September 30, 2014, LinnCo incurred total general and administrative expenses of approximately $644,000 and $2 million, respectively, of which approximately $1.9 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2014. The expenses for the three months and nine months ended September 30, 2014, include approximately $470,000 and $1.4 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. In addition, during the nine months ended September 30, 2014, LINN Energy paid approximately $11 million on LinnCo’s behalf for general and administrative expenses incurred by LinnCo in 2013. For the three months and nine months ended September 30, 2013, LinnCo incurred total general and administrative expenses of approximately $635,000 and $15 million, respectively, of which approximately $9 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2013. Because all general and administrative expenses are actually paid by LINN Energy on LinnCo’s behalf, no cash is disbursed by LinnCo.

Gain on Transfer of Berry

Income Tax (Expense) Benefit

Income tax expense of approximately $64 million and $26 million for the three months and nine months ended September 30, 2014, respectively, and income tax benefit of approximately $4 million and income tax expense of approximately $7 million for the three months and nine months ended September 30, 2013, respectively, are based on the Company’s net income (loss) for the periods, primarily associated with equity income (loss) from its investment in LINN Energy.

Liquidity and Capital Resources

The Company’s authorized capital structure consists of two classes of interests: (1) shares with limited voting rights, which were issued in the IPO and (2) voting shares, 100% of which are held by LINN Energy. At September 30, 2014, LinnCo’s issued capitalization consisted of $3.9 billion in common shares representing limited liability company interests (“shares”) and $1,000 contributed by LINN Energy in connection with LinnCo’s formation and in exchange for its voting share. Additional classes of equity interests may be created upon approval by the Board and the holders of a majority of the outstanding shares and voting shares, voting as separate classes.

Table of Contents

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

The Company expects neither to generate nor to require significant cash in its ongoing business. Any cash received from the sale of additional shares will be immediately used to purchase additional LINN Energy units. Accordingly, the Company does not anticipate any other sources or needs for additional liquidity.

Distributions and Dividends

Within five business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income tax liability (“tax reserve”), if any, as dividends to its shareholders. The following provides a summary of dividends paid by the Company during the nine months ended September 30, 2014:



Date Paid	Dividends Per Share		Total Dividends
			(in millions)

September 2014	$	0.2416	$	32
August 2014	$	0.2416	$	31
July 2014	$	0.2416	$	31
June 2014	$	0.2416	$	31
May 2014	$	0.2416	$	31
April 2014	$	0.2416	$	31
March 2014	$	0.2416	$	31
February 2014	$	0.2416	$	31
January 2014	$	0.2416	$	31

Contingencies

See Part II. Item 1. “Legal Proceedings” for information regarding legal proceedings that the Company is party to and any contingencies related to these legal proceedings.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and related disclosures of contingent assets and liabilities. These estimates and assumptions are based on

Table of Contents

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

management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that are believed to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates and assumptions used in the preparation of the financial statements.

Accounting for Investment in Linn Energy, LLC

Cautionary Statement

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. Because substantially all of LinnCo’s assets consist of its interests in LINN Energy’s units, these risks and uncertainties primarily relate to LINN Energy’s business which include the following:


•	business strategy;


•	acquisition strategy;


•	financial strategy;


•	effects of the pending SEC inquiry and other legal proceedings;


•	ability to maintain or grow distributions;


•	drilling locations;


•	oil, natural gas and natural gas liquids (“NGL”) reserves;


•	realized oil, natural gas and NGL prices;


•	production volumes;


•	capital expenditures;


•	economic and competitive advantages;


•	credit and capital market conditions;


•	regulatory changes;


•	lease operating expenses, general and administrative expenses and development costs;


•	future operating results, including results of acquired properties;


•	plans, objectives, expectations and intentions;


•	taxes; and


•	integration of acquired businesses and operations, which may take longer than anticipated, may be more costly than anticipated as a result of unexpected factors or events and may have an unanticipated adverse effect on LINN Energy’s business.

All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 2. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.

Table of Contents

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

The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on LINN Energy and Company expectations, which reflect estimates and assumptions made by LINN Energy and Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management’s assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the forward-looking statements or events will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors set forth 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, 2013, and elsewhere in the Annual Report. The forward-looking statements speak only as of the date made and, other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The nature of the Company’s business and operations is such that no activities or transactions are conducted or entered into by the Company that would require it to have a discussion under this item.

For a discussion of these matters as they pertain to LINN Energy, please read Item 3. “Quantitative and Qualitative Disclosures About Market Risk” of LINN Energy’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which is included in this filing as Exhibit 99.1 and incorporated herein by reference as activities of LINN Energy have an impact on the Company’s results of operations and financial position.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Audit Committee of the Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.

Changes in the Company’s Internal Control Over Financial Reporting

The Company’s management is also responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There were no changes in the Company’s internal controls over financial reporting during the third quarter of 2014 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Our business has many risks. Factors that could materially adversely affect our business, financial condition, results of operations, liquidity or the trading price of our shares are described in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. Except as set forth below, as of the date of this report, these risk factors have not changed materially. This information should be considered carefully, together with other information in this report and other reports and materials we file with the United States Securities and Exchange Commission.

We will incur corporate income tax liabilities on income allocated to us by LINN Energy with respect to LINN Energy units we own, which may be substantial.

We are classified as a corporation for U.S. federal income tax purposes and, in most states in which LINN Energy does business, for state income tax purposes. Under current law, we will be subject to U.S. federal income tax at rates of up to 35% (and a 20% alternative minimum tax in certain cases), and to state income tax at rates that vary from state to state, on the net income allocated to us by LINN Energy with respect to the LINN Energy units we own. The amount of cash available for distribution to you will be reduced by the amount of any such income taxes payable by us for which we establish reserves.

The amount of income taxes payable by us depends on a number of factors including LINN Energy’s earnings from its operations, the amount of those earnings allocated to us and the amount of the distributions paid to us by LINN Energy. Our income tax liabilities could be substantial if any of the following occurs:


•	LINN Energy significantly decreases its drilling activity;


•	an issuance of significant additional units by LINN Energy without a corresponding increase in the aggregate tax deductions generated by LINN Energy;


•	tax carryforwards available become subject to further limitations on their annual usage;


•	proposed legislation is enacted that eliminates the current deduction of intangible drilling costs and other tax incentives to the oil and natural gas industry; or


•	there is a significant increase in oil and natural gas prices.

We entered into a contribution agreement with LINN Energy with respect to the issuance of LINN Energy units to us in connection with the transfer by us of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”) to LINN Energy. Under the contribution agreement, at the end of each calendar year 2014 and 2015, we and LINN Energy will work in good faith to evaluate whether, in addition to any distribution to which we are entitled with respect to LINN Energy units we own, LINN Energy will make one or more special distributions to us solely out of funds available to make “operating cash flow distributions” (as such term is defined in Treasury Regulations Section 1.707-4(b)(2)) to reasonably compensate us for the actual increase in tax liability to us, if any, resulting from the allocation of depreciation, depletion and amortization and other cost recovery deductions using the “remedial allocation method” pursuant to Treasury Regulations Section 1.704-3(d), with

Table of Contents

Item 1A. Risk Factors - Continued

respect to the assets acquired in the transfer. The transaction is not currently expected to give rise to any additional tax liability for us for the next two years over and above our current estimates.

The total tax liabilities generated from the remedial allocation will be recognized over the remaining life of the underlying assets, which could extend beyond 50 years. The total deferred income tax liabilities impact from the transactions is estimated to be approximately $853 million (included in the total approximate $780 million of net deferred income tax liabilities shown on the balance sheet). These tax liabilities will be partially deferred when considering the tax shield that we receive with respect to the LINN Energy units we currently own. If we were to sell or otherwise liquidate the LINN Energy units acquired, the deferred tax liabilities of approximately $853 million would be payable.

Further, as noted in LINN Energy’s risk factor related to unitholders’ potential tax obligations, we may be required to pay taxes on our allocated portion of LINN Energy’s taxable income if LINN Energy is unable to divest certain of its higher decline, capital intensive properties and acquire more mature, long-life oil and natural gas properties with lower decline rates in a tax efficient manner or it receives proceeds from the sale of these properties in excess of the purchase price for the acquisition portion of those transactions.

We are subject to statutory tax audits of our income tax returns and our income tax liabilities could be substantially higher than we project after such audits.

We and LINN Energy are subject to statutory tax audits pursuant to federal and state regulations, in particular for tax positions taken by Berry in prior fiscal years. After such audits, the tax authorities may disagree with and disallow certain tax positions that we and LINN Energy have inherited from Berry in the Berry acquisition in 2013. If we and LINN Energy are unable to prevail in an administrative or court proceeding to sustain some or all of the positions taken by Berry, we may be subject to substantial income tax liabilities and corresponding penalties and interest, which may be immediately due. Any adverse decision by the tax authorities or in an administrative or court proceeding may result in our reducing or eliminating our cash dividend for a period of time, which could be lengthy, to reserve cash to fund any such potential or actual income tax liabilities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In August 2014, the Board of Directors of the Company authorized the repurchase of up to $250 million of the Company’s outstanding shares from time to time on the open market or in negotiated purchases. The repurchase plan does not obligate the Company to acquire any specific number of shares and may be discontinued at any time. The Company did not repurchase any shares during the quarter ended September 30, 2014, and at September 30, 2014, the entire amount remained available for share repurchase under the program.

Table of Contents

Item 6. Exhibits



Exhibit Number		Description

31.1*	—	Section 302 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of LinnCo, LLC
31.2*	—	Section 302 Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of LinnCo, LLC
32.1*	—	Section 906 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of LinnCo, LLC
32.2*	—	Section 906 Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of LinnCo, LLC
99.1*	—	Linn Energy, LLC’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014
101.INS**	—	XBRL Instance Document
101.SCH**	—	XBRL Taxonomy Extension Schema Document
101.CAL**	—	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	—	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	—	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	—	XBRL Taxonomy Extension Presentation Linkbase Document


*	Filed herewith.


**	Furnished herewith.

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	LinnCo, LLC
	(Registrant)

Date: November 5, 2014	/s/ David B. Rottino
	David B. Rottino
	Executive Vice President and Chief Accounting Officer
	(As Duly Authorized Officer and Chief Accounting Officer)

LinnCo, LLC - FORM 10-Q - November 5, 2014

Attached files

LinnCo, LLC Reports