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Linn Energy, LLC 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
form10qq32011.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, 2011
 
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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
 
 

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x      Accelerated filer   ¨     Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of September 30, 2011, there were 176,708,225 units outstanding.
 


 
 

 

     
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As commonly used in the oil and natural gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:
 
Bbl.  One stock tank barrel or 42 United States gallons liquid volume.
 
Bcf.  One billion cubic feet.
 
Bcfe.  One billion cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
 
Btu.  One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.
 
MBbls.  One thousand barrels of oil or other liquid hydrocarbons.
 
MBbls/d. MBbls per day.
 
Mcf.  One thousand cubic feet.
 
Mcfe.  One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
 
MMBbls.  One million barrels of oil or other liquid hydrocarbons.
 
MMBoe.  One million barrels of oil equivalent, determined using a ratio of one Bbl of oil, condensate or natural gas liquids to six Mcf.
 
MMBtu.  One million British thermal units.
 
MMcf.  One million cubic feet.
 
MMcf/d. MMcf per day.
 
MMcfe.  One million cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
 
MMcfe/d. MMcfe per day.
 
MMMBtu.  One billion British thermal units.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
2011
 
December 31,
2010
   
(Unaudited)
     
   
(in thousands,
except unit amounts)
ASSETS
     
Current assets:
           
Cash and cash equivalents
  $ 10,075     $ 236,001  
Accounts receivable – trade, net
    246,677       184,624  
Derivative instruments
    322,872       234,675  
Other current assets
    56,506       55,609  
Total current assets
    636,130       710,909  
                 
Noncurrent assets:
               
Oil and natural gas properties (successful efforts method)
    6,940,778       5,664,503  
Less accumulated depletion and amortization
    (939,264 )     (719,035 )
      6,001,514       4,945,468  
                 
Other property and equipment
    178,044       139,903  
Less accumulated depreciation
    (44,295 )     (35,151 )
      133,749       104,752  
                 
Derivative instruments
    453,541       56,895  
Other noncurrent assets
    109,295       115,124  
      562,836       172,019  
Total noncurrent assets
    6,698,099       5,222,239  
Total assets
  $ 7,334,229     $ 5,933,148  
                 
LIABILITIES AND UNITHOLDERS’ CAPITAL
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 344,241     $ 219,830  
Derivative instruments
    3,667       12,839  
Other accrued liabilities
    91,823       82,439  
Total current liabilities
    439,731       315,108  
                 
Noncurrent liabilities:
               
Credit facility
    65,000        
Senior notes, net
    3,053,924       2,742,902  
Derivative instruments
    3,213       39,797  
Other noncurrent liabilities
    61,683       47,125  
Total noncurrent liabilities
    3,183,820       2,829,824  
                 
Commitments and contingencies (Note 10)
               
                 
Unitholders’ capital:
               
176,708,225 units and 159,009,795 units issued and outstanding at September 30, 2011, and December 31, 2010, respectively
    2,843,507       2,549,099  
Accumulated income
    867,171       239,117  
      3,710,678       2,788,216  
Total liabilities and unitholders’ capital
  $ 7,334,229     $ 5,933,148  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   
2011
 
2010
 
2011
 
2010
   
(in thousands, except per unit amounts)
Revenues and other:
                       
Oil, natural gas and natural gas liquids sales
  $ 292,482     $ 177,306     $ 835,579     $ 479,887  
Gains on oil and natural gas derivatives
    824,240       43,505       660,279       263,299  
Marketing revenues
    1,477       635       4,159       3,252  
Other revenues
    1,284       915       3,564       1,363  
      1,119,483       222,361       1,503,581       747,801  
Expenses:
                               
Lease operating expenses
    62,907       41,901       165,171       111,490  
Transportation expenses
    7,821       5,154       20,152       15,030  
Marketing expenses
    850       468       2,703       2,209  
General and administrative expenses
    29,891       23,751       91,994       71,545  
Exploration costs
    503       281       1,498       4,297  
Bad debt expenses
    79       (70 )     74       (89 )
Depreciation, depletion and amortization
    88,328       62,482       234,039       169,614  
Taxes, other than income taxes
    20,875       12,011       56,920       32,602  
Losses on sale of assets and other, net
    279       6,073       1,870       5,699  
      211,533       152,051       574,421       412,397  
Other income and (expenses):
                               
Loss on extinguishment of debt
                (94,372 )      
Interest expense, net of amounts capitalized
    (65,848 )     (53,497 )     (191,673 )     (127,119 )
Losses on interest rate swaps
          (11,501 )           (67,908 )
Other, net
    (1,613 )     (1,136 )     (6,331 )     (5,428 )
      (67,461 )     (66,134 )     (292,376 )     (200,455 )
Income before income taxes
    840,489       4,176       636,784       134,949  
Income tax expense
    (2,862 )     (33 )     (8,730 )     (5,710 )
Net income
  $ 837,627     $ 4,143     $ 628,054     $ 129,239  
                                 
Net income per unit:
                               
Basic
  $ 4.74     $ 0.03     $ 3.63     $ 0.91  
Diluted
  $ 4.72     $ 0.03     $ 3.62     $ 0.91  
Weighted average units outstanding:
                               
Basic
    174,956       145,956       171,076       140,598  
Diluted
    175,644       146,458       171,825       141,006  
                                 
Distributions declared per unit
  $ 0.69     $ 0.63     $ 2.01     $ 1.89  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS’ CAPITAL
(Unaudited)
 
   
Units
 
Unitholders’
Capital
 
Accumulated
Income
 
Treasury
Units
(at Cost)
 
Total
Unitholders’
Capital
   
(in thousands)
                               
December 31, 2010
    159,010     $ 2,549,099     $ 239,117     $     $ 2,788,216  
Sale of units, net of underwriting discounts and expenses of $26,685
    16,742       622,900                   622,900  
Issuance of units
    1,356       7,156                   7,156  
Cancellation of units
    (400 )     (13,191 )           13,191        
Purchase of units
                        (13,191 )     (13,191 )
Distributions to unitholders
            (344,612 )                 (344,612 )
Unit-based compensation expenses
            16,759                   16,759  
Excess tax benefit from unit-based compensation
            5,396                   5,396  
Net income
                  628,054             628,054  
September 30, 2011
    176,708     $ 2,843,507     $ 867,171     $     $ 3,710,678  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
September 30,
   
2011
 
2010
   
(in thousands)
Cash flow from operating activities:
           
Net income
  $ 628,054     $ 129,239  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    234,039       169,614  
Unit-based compensation expenses
    16,759       10,546  
Loss on extinguishment of debt
    94,372        
Amortization and write-off of deferred financing fees and other
    17,910       20,729  
Gains on sale of assets and other, net
    (135 )     (619 )
Bad debt expenses
    74       (89 )
Deferred income tax
    4,832       2,956  
Mark-to-market on derivatives:
               
Total gains
    (660,279 )     (195,391 )
Cash settlements
    162,876       218,559  
Cash settlements on canceled derivatives
    26,752       (123,865 )
Premiums paid for derivatives
    (59,948 )     (91,027 )
Changes in assets and liabilities:
               
Increase in accounts receivable – trade, net
    (70,476 )     (43,173 )
Decrease in other assets
    4,968       15,894  
Increase in accounts payable and accrued expenses
    78,870       15,483  
Increase in other liabilities
    7,761       54,563  
Net cash provided by operating activities
    486,429       183,419  
                 
Cash flow from investing activities:
               
Acquisition of oil and natural gas properties
    (846,976 )     (894,521 )
Development of oil and natural gas properties
    (383,655 )     (104,694 )
Purchases of other property and equipment
    (37,419 )     (15,030 )
Proceeds from sale of properties and equipment and other
    10,776       696  
Net cash used in investing activities
    (1,257,274 )     (1,013,549 )
                 
Cash flow from financing activities:
               
Proceeds from sale of units
    649,586       431,250  
Proceeds from borrowings
    1,514,240       3,170,816  
Repayments of debt
    (1,154,679 )     (2,020,000 )
Distributions to unitholders
    (344,612 )     (268,343 )
Financing fees, offering expenses and other, net
    (109,751 )     (77,751 )
Excess tax benefit from unit-based compensation
    3,326       1,819  
Purchase of units
    (13,191 )     (11,832 )
Net cash provided by financing activities
    544,919       1,225,959  
                 
Net increase (decrease) in cash and cash equivalents
    (225,926 )     395,829  
Cash and cash equivalents:
               
Beginning
    236,001       22,231  
Ending
  $ 10,075     $ 418,060  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 – Basis of Presentation
 
Nature of Business
 
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and natural gas company.  LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets.  The Company’s properties are located in the United States (“U.S.”), primarily in the Mid-Continent, the Permian Basin, the Williston Basin, Michigan and California.
 
Principles of Consolidation and Reporting
 
The condensed consolidated financial statements at September 30, 2011, and for the three months and nine months ended September 30, 2011, and September 30, 2010, are unaudited, but in the opinion of management include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations, 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, 2010.  The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
 
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All significant intercompany transactions and balances have been eliminated upon consolidation.  Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.
 
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 reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, fair values of commodity derivatives and, when applicable, interest rate derivatives, and fair values of assets acquired and liabilities assumed.  As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use.  These estimates and assumptions are based on management’s best estimates and judgment.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.  Such estimates and assumptions are adjusted when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ from these estimates.  Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
 
Recently Issued Accounting Standards Not Yet Adopted
 
The Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that further addresses fair value measurement accounting and related disclosure requirements.  The ASU clarifies the FASB’s intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements.  The ASU will be applied prospectively and is effective for periods beginning
 
5

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
after December 15, 2011.  The Company is currently evaluating the impact, if any, of the adoption of this ASU on its consolidated financial statements and related disclosures.
 
Note 2 – Acquisitions and Divestitures
 
Acquisitions – 2011
 
On June 1, 2011, the Company completed the acquisition of certain oil and natural gas properties in the Cleveland play, located in the Texas Panhandle, from Panther Energy Company, LLC and Red Willow Mid-Continent, LLC (collectively referred to as “Panther”).  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date.  The Company paid approximately $222 million in total consideration for these properties.  The transaction was financed primarily with proceeds from the Company’s May 2011 debt offering, as described below.
 
On May 2, 2011, and May 11, 2011, the Company completed two acquisitions of certain oil and natural gas properties located in the Williston Basin.  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition dates.  The Company paid $154 million in cash and recorded a payable of $2 million, resulting in total consideration for the acquisitions of approximately $156 million.  The transactions were financed initially with borrowings under the Company’s Credit Facility, as defined in Note 6.
 
On April 1, 2011, and April 5, 2011, the Company completed two acquisitions of certain oil and natural gas properties located in the Permian Basin, including properties from SandRidge Exploration and Production, LLC (“SandRidge”).  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition dates.  The Company paid $239 million in cash and recorded a payable of $1 million, resulting in total consideration for the acquisitions of approximately $240 million.  The transactions were financed initially with borrowings under the Company’s Credit Facility.
 
On March 31, 2011, the Company completed the acquisition of certain oil and natural gas properties in the Williston Basin from an affiliate of Concho Resources Inc. (“Concho”).  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date.  The Company paid $196 million in cash and recorded a receivable from Concho of $2 million, resulting in total consideration for the acquisition of approximately $194 million.  The transaction was financed primarily with proceeds from the Company’s March 2011 public offering of units, as described below.
 
During the nine months ended September 30, 2011, the Company completed other smaller acquisitions of oil and natural gas properties located in its various operating regions.  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition dates.  The Company, in the aggregate, paid approximately $39 million in total consideration for these properties.
 
These acquisitions were accounted for under the acquisition method of accounting.  Accordingly, the Company conducted assessments of net assets acquired and recognized 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 values assigned to the net assets acquired as of the acquisition dates (in thousands):
 
Assets:
     
Current
  $ (665 )
Noncurrent
    54  
Oil and natural gas properties
    854,835  
Total assets acquired
  $ 854,224  
         
Liabilities:
       
Current
  $ (3,718 )
Asset retirement obligations
    6,966  
Total liabilities assumed
  $ 3,248  
Net assets acquired
  $ 850,976  
 
Current assets include receivables, prepaids and inventory and noncurrent assets include other property and equipment.  Current liabilities include payables, ad valorem taxes payable and other liabilities.
 
The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount.  Significant inputs to the valuation of oil and natural gas properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; (iv) estimated future cash flows; and (v) a market-based weighted average cost of capital rate.
 
The revenues and expenses related to the properties acquired from Panther, SandRidge and Concho are included in the condensed consolidated results of operations of the Company as of June 1, 2011, April 1, 2011, and March 31, 2011, respectively.  The following unaudited pro forma financial information presents a summary of the Company’s condensed consolidated results of operations for the nine months ended September 30, 2011, and three months and nine months ended September 30, 2010, assuming the acquisitions of Panther, SandRidge and Concho had been completed as of January 1, 2010, including adjustments to reflect the values assigned to the net assets acquired.  The pro forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of this date.
 
   
Three Months Ended September 30,
 
Nine Months Ended
September 30,
   
2010
 
2011
 
2010
   
(in thousands, except per unit amounts)
                   
Total revenues and other
  $ 249,211     $ 1,542,797     $ 823,718  
Total operating expenses
  $ 168,114     $ 594,942     $ 460,805  
Net income
  $ 10,803     $ 639,871     $ 144,367  
                         
Net income per unit:
                       
Basic
  $ 0.07     $ 3.65     $ 0.95  
Diluted
  $ 0.07     $ 3.64     $ 0.94  
 
Other
 
In July 2010, the Company entered into a definitive purchase and sale agreement (“PSA”) to acquire certain oil and natural gas properties for a contract price of $95 million.  Upon the execution of the PSA, the Company paid a
 
7

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
deposit of approximately $9 million.  In September 2010, in accordance with the terms of the PSA, the Company terminated the PSA as a result of certain conditions to closing not being met.  On March 28, 2011, an arbitration panel granted a favorable final ruling to the Company with regard to the termination of the PSA and the return of the deposit.  On April 27, 2011, the deposit plus interest was received by the Company.
 
Acquisitions – Pending
 
On September 20, 2011, the Company entered into a definitive purchase and sale agreement to acquire certain oil and natural gas properties located in the Permian Basin for a contract price of approximately $17 million.  The Company anticipates the acquisition will close in November 2011, subject to closing conditions, and will be financed with borrowings under its Credit Facility.
 
On September 8, 2011, the Company entered into a definitive purchase and sale agreement to acquire certain oil and natural gas properties located in the Permian Basin for a contract price of approximately $88 million.  The Company anticipates the acquisition will close November 1, 2011, subject to closing conditions, and will be financed with borrowings under its Credit Facility.
 
Acquisitions – 2010
 
On August 16, 2010, the Company completed the acquisition of certain oil and natural gas properties located in the Permian Basin from Crownrock, LP and Element Petroleum, LP (collectively referred to as “CrownQuest/Element”).  The results of operations of these properties have been included in the consolidated financial statements since the acquisition date.  The Company paid $95 million in cash.  The transaction was financed with borrowings under the Company’s Credit Facility.
 
On May 27, 2010, the Company completed the acquisition of interests in Henry Savings LP and Henry Savings Management LLC (collectively referred to as “Henry”) that primarily hold oil and natural gas properties located in the Permian Basin.  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date.  The Company paid $330 million in cash and recorded a receivable from Henry of $7 million, resulting in total consideration for the acquisition of approximately $323 million.  The transaction was financed with borrowings under the Company’s Credit Facility.
 
On April 30, 2010, the Company completed the acquisition of interests in two wholly owned subsidiaries of HighMount Exploration & Production LLC (“HighMount”) that hold oil and natural gas properties in the Antrim Shale located in northern Michigan.  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date.  The Company paid $327 million in cash.  The transaction was financed with a portion of the net proceeds from the Company’s March 2010 public offering of units.
 
On January 29, 2010, the Company completed the acquisition of certain oil and natural gas properties located in the Anadarko Basin in Oklahoma and Kansas and the Permian Basin in Texas and New Mexico from certain affiliates of Merit Energy Company (“Merit”).  The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition date.  The Company paid $152 million in cash and recorded a receivable from Merit of $1 million, resulting in total consideration for the acquisition of approximately $151 million.  The transaction was financed with borrowings under the Company’s Credit Facility.
 
8

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
Note 3 – Unitholders’ Capital
 
Equity Distribution Agreement
 
On August 23, 2011, the Company entered into an equity distribution agreement, pursuant to which it may from time to time issue and sell units representing limited liability company interests having an aggregate offering price of up to $500 million.  In connection with entering into the agreement, the Company incurred expenses of approximately $400,000.  Sales of units, if any, will be made through a sales agent by means of ordinary brokers’ transactions, in block transactions, or as otherwise agreed with the agent.  The Company expects to use the net proceeds from any sale of the units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.  In September 2011, the Company issued and sold 16,060 units representing limited liability company interests at an average unit price of $38.25 for proceeds of approximately $602,000 (net of approximately $12,000 in commissions).  The net proceeds were used for general corporate purposes.  At September 30, 2011, units equaling approximately $499 million in aggregate offering price remained available to be issued and sold under the agreement.
 
Public Offering of Units
 
In March 2011, the Company sold 16,726,067 units representing limited liability company interests at $38.80 per unit ($37.248 per unit, net of underwriting discount) for net proceeds of approximately $623 million (after underwriting discount and offering expenses of approximately $26 million).  The Company used the net proceeds from the sale of these units to fund the March 2011 redemptions of a portion of the outstanding 2017 Senior Notes and 2018 Senior Notes and to fund the cash tender offers and related expenses for a portion of the remaining 2017 Senior Notes and 2018 Senior Notes (see Note 6).  The Company used the remaining net proceeds from the sale of units to finance a portion of the March 31, 2011, acquisition in the Williston Basin.
 
Unit Repurchase Plan
 
In October 2008, the Board of Directors of the Company authorized the repurchase of up to $100 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases.  In August 2011, the Company repurchased 400,000 units at an average unit price of $32.98 for a total cost of approximately $13 million.  All units were subsequently canceled.  At September 30, 2011, approximately $61 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 acquired at fair market value on the date of repurchase.
 
In October 2011, the Company repurchased 129,734 units at an average unit price of $32.08 for a total cost of approximately $4 million.
 
Distributions
 
Under the Company’s limited liability company agreement, the Company’s 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, 2011, are presented on the condensed consolidated statement of unitholders’ capital.  On October 24, 2011, the Company’s Board of Directors declared a cash distribution of $0.69 per unit with respect to the third quarter of 2011.  The distribution, totaling approximately $122 million, will be paid on November 14, 2011, to unitholders of record as of the close of business on November 4, 2011.
 
9

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
Note 4 – Oil and Natural Gas Capitalized Costs
 
Aggregate capitalized costs related to oil, natural gas and NGL production activities with applicable accumulated depletion and amortization are presented below:
 
   
September 30,
2011
 
December 31,
2010
   
(in thousands)
Proved properties:
           
Leasehold acquisition
  $ 5,483,984     $ 4,695,704  
Development
    1,262,251       840,175  
Unproved properties
    194,543       128,624  
      6,940,778       5,664,503  
Less accumulated depletion and amortization
    (939,264 )     (719,035 )
    $ 6,001,514     $ 4,945,468  
 
Note 5 – Unit-Based Compensation
 
During the nine months ended September 30, 2011, the Company granted an aggregate 1,089,502 restricted units to employees, primarily in January 2011 as part of its annual review of employee compensation, with an aggregate fair value of approximately $42 million.  The restricted units vest over three years.  A summary of unit-based compensation expenses included on the condensed consolidated statements of operations is presented below:
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   
2011
 
2010
 
2011
 
2010
   
(in thousands)
                         
General and administrative expenses
  $ 5,320     $ 3,070     $ 16,014     $ 10,280  
Lease operating expenses
    258       76       745       266  
Total unit-based compensation expenses
  $ 5,578     $ 3,146     $ 16,759     $ 10,546  
Income tax benefit
  $ 2,061     $ 1,162     $ 6,192     $ 3,897  
 
10

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
Note 6 – Debt
 
The following summarizes debt outstanding:
 
   
September 30, 2011
 
December 31, 2010
   
Carrying
Value
 
Fair
Value (1)
 
Interest
Rate (2)
 
Carrying
Value
 
Fair
Value (1)
 
Interest
Rate (2)
   
(in millions, except percentages)
 
                                     
Credit facility
  $ 65     $ 65       2.92 %   $     $        
11.75% senior notes due 2017
    41       47       12.73 %     250       288       12.73 %
9.875% senior notes due 2018
    16       18       10.25 %     256       279       10.25 %
6.50% senior notes due 2019
    750       687       6.62 %                  
8.625% senior notes due 2020
    1,300       1,334       9.00 %     1,300       1,396       9.00 %
7.75% senior notes due 2021
    1,000       996       8.00 %     1,000       1,021       8.00 %
Less current maturities
                                       
      3,172     $ 3,147               2,806     $ 2,984          
Unamortized discount
    (53 )                     (63 )                
Total debt, net of discount
  $ 3,119                     $ 2,743                  
 
(1)
The carrying value of the Credit Facility is estimated to be substantially the same as its fair value.  Fair values of the senior notes were estimated based on prices quoted from third-party financial institutions.
 
(2)
Represents variable interest rate for the Credit Facility and effective interest rates for the senior notes.
 
Credit Facility
 
On May 2, 2011, the Company entered into a Fifth Amended and Restated Credit Agreement (“Credit Facility”), which provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount of $1.5 billion.  In October 2011, as part of the semi-annual redetermination, a borrowing base of $3.0 billion was approved by the lenders with the maximum commitment amount remaining unchanged at $1.5 billion.  The maturity date is April 2016.
 
During 2011, in connection with amendments to its Credit Facility, the Company incurred financing fees and expenses of approximately $4 million, which will be amortized over the life of the Credit Facility.  Such amortized expenses are recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.  At September 30, 2011, available borrowing capacity under the Credit Facility was $1.43 billion, which includes a $4 million reduction in availability for outstanding letters of credit.
 
Redetermination of the borrowing base under the Credit Facility, based primarily on reserve reports that reflect commodity prices at such time, occurs semi-annually, in April and October, as well as upon requested interim redeterminations, by the lenders at their sole discretion.  The Company also has the right to request one additional borrowing base redetermination per year at its discretion, as well as the right to an additional redetermination each year in connection with certain acquisitions.  Significant declines in commodity prices may result in a decrease in the borrowing base.  The Company’s obligations under the Credit Facility are secured by mortgages on its and certain of its material subsidiaries’ oil and natural gas properties and other personal property as well as a pledge of all ownership interests in its direct and indirect material subsidiaries.  The Company and its subsidiaries are required to maintain the mortgages on properties representing at least 80% of the total value of its and its subsidiaries’ oil and natural gas properties.  Additionally, the obligations under the Credit Facility are guaranteed by all of the Company’s material subsidiaries and are required to be guaranteed by any future material subsidiaries.
 
11

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
At the Company’s election, interest on borrowings under the Credit Facility is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.75% and 2.75% per annum (depending on the then-current level of borrowings under the Credit Facility) or the alternate base rate (“ABR”) plus an applicable margin between 0.75% and 1.75% per annum (depending on the then-current level of borrowings under the Credit Facility).  Interest is generally payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at LIBOR.  The Company is required to pay a commitment fee to the lenders under the Credit Facility, which accrues at a rate per annum equal to 0.5% on the average daily unused amount of the lesser of: (i) the maximum commitment amount of the lenders and (ii) the then-effective borrowing base.  The Company is in compliance with all financial and other covenants of the Credit Facility.
 
Senior Notes Due 2019
 
On May 13, 2011, the Company issued $750 million in aggregate principal amount of 6.50% senior notes due 2019 (“2019 Senior Notes”) at a price of 99.232%.  The 2019 Senior Notes were sold to a group of initial purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).  The Company received net proceeds of approximately $729 million (after deducting the initial purchasers’ discount and offering expenses).  The Company used a portion of the net proceeds to repay all of the outstanding indebtedness under its Credit Facility and to fund the Panther acquisition (see Note 2).  The remaining proceeds were used for general corporate purposes.  In connection with the 2019 Senior Notes, the Company incurred financing fees and expenses of approximately $15 million, which will be amortized over the life of the 2019 Senior Notes.  The discount on the 2019 Senior Notes, which totaled approximately $6 million, will also be amortized over the life of the 2019 Senior Notes.  Such amortized expenses are recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations.
 
The 2019 Senior Notes were issued under an indenture dated May 13, 2011 (“2019 Indenture”), mature May 15, 2019, and bear interest at 6.50%.  Interest is payable semi-annually on May 15 and November 15, beginning November 15, 2011.  The 2019 Senior Notes are general unsecured senior obligations of the Company and are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the collateral securing such indebtedness.  Each of the Company’s material subsidiaries has guaranteed the 2019 Senior Notes on a senior unsecured basis.  The 2019 Indenture provides that the Company may redeem: (i) on or prior to May 15, 2014, up to 35% of the aggregate principal amount of the 2019 Senior Notes at a redemption price of 106.50% of the principal amount redeemed, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings; (ii) prior to May 15, 2015, all or part of the 2019 Senior Notes at a redemption price equal to the principal amount redeemed, plus a make-whole premium (as defined in the 2019 Indenture) and accrued and unpaid interest; and (iii) on or after May 15, 2015, all or part of the 2019 Senior Notes at a redemption price equal to 103.250%, and decreasing percentages thereafter, of the principal amount redeemed, plus accrued and unpaid interest.  The 2019 Indenture also provides that, if a change of control (as defined in the 2019 Indenture) occurs, the holders have a right to require the Company to repurchase all or part of the 2019 Senior Notes at a redemption price equal to 101%, plus accrued and unpaid interest.
 
The 2019 Indenture contains covenants substantially similar to those under the Company’s 2010 Issued Senior Notes and Original Senior Notes, as defined below, that, among other things, limit the Company’s ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries.  The Company is in compliance with all financial and other covenants of the 2019 Senior Notes.
 
12

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
In connection with the issuance and sale of the 2019 Senior Notes, the Company entered into a Registration Rights Agreement (“2019 Registration Rights Agreement”) with the initial purchasers.  Under the 2019 Registration Rights Agreement, the Company agreed to use its reasonable efforts to file with the SEC and cause to become effective a registration statement relating to an offer to issue new notes having terms substantially identical to the 2019 Senior Notes in exchange for outstanding 2019 Senior Notes within 400 days after the notes were issued.  In certain circumstances, the Company may be required to file a shelf registration statement to cover resales of the 2019 Senior Notes.  If the Company fails to satisfy these obligations, the Company may be required to pay additional interest to holders of the 2019 Senior Notes under certain circumstances.
 
Senior Notes Due 2020 and Senior Notes Due 2021
 
On April 6, 2010, the Company issued $1.30 billion in aggregate principal amount of 8.625% senior notes due 2020 (the “2020 Senior Notes”).  On September 13, 2010, the Company issued $1.0 billion in aggregate principal amount of 7.75% senior notes due 2021 (the “2021 Senior Notes,” and together with the 2020 Senior Notes, the “2010 Issued Senior Notes”).  The indentures related to the 2010 Issued Senior Notes contain redemption provisions and covenants that are substantially similar to those of the 2019 Senior Notes.
 
Senior Notes Due 2017 and Senior Notes Due 2018
 
The Company also has $41 million (originally $250 million) in aggregate principal amount of 11.75% senior notes due 2017 (the “2017 Senior Notes”) and $16 million (originally $256 million) in aggregate principal amount of 9.875% senior notes due 2018 (the “2018 Senior Notes” and together with the 2017 Senior Notes, the “Original Senior Notes”).  The indentures related to the Original Senior Notes originally contained redemption provisions and covenants that were substantially similar to those of the 2010 Issued Senior Notes; however, in connection with the tender offers described below, the indentures were amended and most of the covenants and certain default provisions were eliminated.
 
Redemptions of Original Senior Notes
 
In March 2011, in accordance with the provisions of the indentures related to the 2017 Senior Notes and the 2018 Senior Notes, the Company redeemed 35%, or $87 million and $90 million, respectively, of each of the original aggregate principal amount of the 2017 Senior Notes and 2018 Senior Notes.  After the redemptions, $163 million and $166 million, respectively, of the 2017 Senior Notes and 2018 Senior Notes remained outstanding.
 
Tender Offers for and Repurchase of Original Senior Notes
 
On February 28, 2011, the Company commenced cash tender offers (“Offers”) and related consent solicitations to purchase any and all of its outstanding 2017 Senior Notes and 2018 Senior Notes.  The Offers expired on March 25, 2011.  Holders who validly tendered 2017 Senior Notes and 2018 Senior Notes on or before March 14, 2011, received the total consideration of $1,212.50 and $1,172.50, respectively, for each $1,000 principal amount of such notes accepted for purchase.  Total consideration included a consent payment of $30.00 per $1,000 principal amount of notes accepted for purchase.  Holders who validly tendered 2017 Senior Notes and 2018 Senior Notes after March 14, 2011, but before March 25, 2011, received $1,182.50 and $1,142.50, respectively, for each $1,000 principal amount of such notes accepted for purchase.
 
13

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
During March 2011, the Company accepted and purchased: 1) $105 million of the aggregate principal amount of the outstanding 2017 Senior Notes (or 65% of the remaining outstanding principal amount of the 2017 Senior Notes), and 2) $126 million of the aggregate principal amount of the outstanding 2018 Senior Notes (or 76% of the remaining outstanding principal amount of the 2018 Senior Notes).
 
In conjunction with each tender offer, the Company received consents to amendments to the indentures of the 2017 Senior Notes and 2018 Senior Notes, which eliminated most of the covenants and certain default provisions applicable to the series of notes issued under such indentures.  The amendments became effective upon the execution of the supplemental indentures to the indentures governing each of the 2017 Senior Notes and the 2018 Senior Notes.
 
In June 2011, the Company repurchased an additional portion of its remaining outstanding 2017 Senior Notes and 2018 Senior Notes for $17 million (or 29% of the remaining outstanding principal amount of the 2017 Senior Notes) and $24 million (or 61% of the remaining outstanding principal amount of the 2018 Senior Notes), respectively.  After giving effect to the tender offers and subsequent repurchases of the 2017 Senior Notes and the 2018 Senior Notes, aggregate principal amounts of $41 million and $16 million, respectively, remain outstanding at September 30, 2011.
 
In connection with the redemptions, cash tender offers and additional repurchases of a portion of the Original Senior Notes, the Company recorded a loss on extinguishment of debt of approximately $94 million for the nine months ended September 30, 2011.
 
Note 7 – Derivatives
 
Commodity Derivatives
 
The Company utilizes derivative instruments to minimize the variability in cash flow due to commodity price movements.  The Company enters into derivative instruments such as swap contracts, put options and collars to economically hedge its forecasted oil, natural gas and NGL sales.  The Company did not designate any of these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings.  See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.
 
14

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
The following table summarizes open positions as of September 30, 2011, and represents, as of such date, derivatives in place through December 31, 2015, on annual production volumes:
 
   
October 1 –
December 31,
2011
 
2012
 
2013
 
2014
 
2015
Natural gas positions:
                             
Fixed price swaps:
                             
Hedged volume (MMMBtu)
    7,975       49,410       57,067       66,156       75,190  
Average price ($/MMBtu)
  $ 9.50     $ 6.10     $ 5.88     $ 5.86     $ 5.90  
Puts:
                                       
Hedged volume (MMMBtu)
    4,850       25,364       25,295       23,178       23,178  
Average price ($/MMBtu)
  $ 5.97     $ 6.25     $ 6.25     $ 5.00     $ 5.00  
PEPL puts: (1)
                                       
Hedged volume (MMMBtu)
    3,315                          
Average price ($/MMBtu)
  $ 8.50     $     $     $     $  
Total:
                                       
Hedged volume (MMMBtu)
    16,140       74,774       82,362       89,334       98,368  
Average price ($/MMBtu)
  $ 8.24     $ 6.15     $ 6.00     $ 5.64     $ 5.69  
                                         
Oil positions:
                                       
Fixed price swaps: (2)
                                       
Hedged volume (MBbls)
    1,466       7,741       8,413       9,034       9,581  
Average price ($/Bbl)
  $ 91.82     $ 97.34     $ 98.27     $ 95.39     $ 98.25  
Puts:
                                       
Hedged volume (MBbls)
    588       2,196       2,190              
Average price ($/Bbl)
  $ 75.00     $ 90.00     $ 90.00     $     $  
Collars:
                                       
Hedged volume (MBbls)
    69                          
Average floor price ($/Bbl)
  $ 90.00     $     $     $     $  
Average ceiling price ($/Bbl)
  $ 112.25     $     $     $     $  
Total:
                                       
Hedged volume (MBbls)
    2,123       9,937       10,603       9,034       9,581  
Average price ($/Bbl)
  $ 87.10     $ 95.72     $ 96.56     $ 95.39     $ 98.25  
                                         
Natural gas basis differential positions:
                                       
PEPL basis swaps: (1)
                                       
Hedged volume (MMMBtu)
    8,885       37,735       38,854       42,194       42,194  
Hedged differential ($/MMBtu)
  $ (0.96 )   $ (0.89 )   $ (0.89 )   $ (0.39 )   $ (0.39 )
                                         
Oil timing differential positions:
                                       
Trade month roll swaps: (3)
                                       
Hedged volume (MBbls)
    1,380       5,490       5,475       5,475        
Hedged differential ($/Bbl)
  $ 0.22     $ 0.22     $ 0.22     $ 0.22     $  
 
(1)
Settle on the Panhandle Eastern Pipeline (“PEPL”) spot price of natural gas to hedge basis differential associated with natural gas production in the Mid-Continent Deep and Mid-Continent Shallow regions.
 
15

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
(2)
As presented in the table above, the Company has certain outstanding fixed price oil swaps on 14,750 Bbls of daily production which may be extended annually at a price of $100.00 per Bbl for each of the years ending December 31, 2016, December 31, 2017, and December 31, 2018, if the counterparties determine that the strike prices are in-the-money on a designated date in each respective preceding year.  The extension for each year is exercisable without respect to the other years.
 
(3)
The Company hedges the timing risk associated with the sales price of oil in the Mid-Continent Deep, Mid-Continent Shallow and Permian Basin regions.  In these regions, the Company generally sells oil for the delivery month at a sales price based on the average NYMEX price of light oil during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is prompt (the “trade month roll”).
 
During the nine months ended September 30, 2011, the Company entered into commodity derivative contracts consisting of oil and natural gas swaps for certain years through 2016 and oil trade month roll swaps for October 2011 through December 2014.  In September 2011, the Company canceled its oil and natural gas swaps for the year 2016 and used the realized gains of approximately $27 million to increase prices on its existing oil and natural gas swaps for the year 2012.  In addition, in September 2011, the Company paid premiums of approximately $33 million to increase prices on its existing oil puts for the years 2012 and 2013.
 
Settled derivatives on natural gas production for the three months and nine months ended September 30, 2011, included volumes of 16,140 MMMBtu and 48,317 MMMBtu, respectively, at an average contract price of $8.24 per MMBtu.  Settled derivatives on oil production for the three months and nine months ended September 30, 2011, included volumes of 2,123 MBbls and 5,794 MBbls, respectively, at average contract prices of $87.10 per Bbl and $85.19 per Bbl.  The natural gas derivatives are settled based on the closing NYMEX future price of natural gas or the published PEPL spot price of natural gas on the settlement date, which occurs on the third day 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 may from time to time enter 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 counterparty the difference, and conversely, the counterparty is required to pay the Company if LIBOR is higher than the fixed rate in the contract.  The Company does not designate interest rate swap agreements as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings.  At September 30, 2011, the Company had no outstanding interest rate swap agreements.
 
16

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
Balance Sheet Presentation
 
The Company’s commodity derivatives and, when applicable, its interest rate swap 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,
2011
 
December 31,
2010
   
(in thousands)
Assets:
           
Commodity derivatives
  $ 980,187     $ 637,836  
                 
Liabilities:
               
Commodity derivatives
  $ 210,654     $ 398,902  
 
By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, when applicable, the Company exposes itself to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk.  The Company’s counterparties are current participants or affiliates of participants in its Credit Facility or were participants or affiliates of participants in its Credit Facility at the time it originally entered into the derivatives.  The Credit Facility is secured by the Company’s oil and natural gas reserves; therefore, the Company is not required to post any collateral.  The Company does not receive collateral from its counterparties.  The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $980 million at September 30, 2011.  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 derivatives and, when applicable, its interest rate derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss is somewhat mitigated.
 
Gains (Losses) on Derivatives
 
Gains and losses on derivatives, including realized and unrealized gains and losses, are reported on the condensed consolidated statements of operations in “gains on oil and natural gas derivatives” and “losses on interest rate swaps.”  Realized gains (losses), excluding canceled 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.
 
17

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,
   
2011
 
2010
 
2011
 
2010
   
(in thousands)
Realized gains (losses):
                       
Commodity derivatives
  $ 65,036     $ 82,910     $ 162,926     $ 228,573  
Interest rate swaps
                      (8,021 )
Canceled derivatives
    26,752       (49,590 )     26,752       (123,865 )
    $ 91,788     $ 33,320     $ 189,678     $ 96,687  
Unrealized gains (losses):
                               
Commodity derivatives
  $ 732,452     $ (39,405 )   $ 470,601     $ 34,726  
Interest rate swaps
          38,089             63,978  
    $ 732,452     $ (1,316 )   $ 470,601     $ 98,704  
Total gains (losses):
                               
Commodity derivatives
  $ 824,240     $ 43,505     $ 660,279     $ 263,299  
Interest rate swaps
          (11,501 )           (67,908 )
    $ 824,240     $ 32,004     $ 660,279     $ 195,391  
 
In September 2011, the Company canceled (before the contract settlement date) its oil and natural gas swaps for the year 2016 and used the realized gains of approximately $27 million to increase prices on its existing oil and natural gas swaps for the year 2012.  During the three months and nine months ended September 30, 2010, the Company canceled (before the contract settlement date) all of its interest rate swap agreements resulting in realized losses of approximately $50 million and $124 million, respectively.
 
Note 8 – Fair Value Measurements on a Recurring Basis
 
The Company accounts for its commodity derivatives and, when applicable, its 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 price 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 derivatives and, when applicable, its interest rate derivatives.
 
The following presents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
 
   
September 30, 2011
   
Level 2
 
Netting (1)
 
Total
   
(in thousands)
 
Assets:
                 
Commodity derivatives
  $ 980,187     $ (203,774 )   $ 776,413  
                         
Liabilities:
                       
Commodity derivatives
  $ 210,654     $ (203,774 )   $ 6,880  
 
(1)
Represents counterparty netting under agreements governing such derivatives.
 
18

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
Note 9 – Asset Retirement Obligations
 
Asset retirement obligations associated with retiring tangible long-lived assets are recognized as a liability in the period in which a legal obligation is incurred and becomes determinable and are included in “other noncurrent liabilities” on the condensed consolidated balance sheets.  Accretion expense is included in “depreciation, depletion and amortization” on the condensed consolidated statements of operations.  The fair value of additions to the asset retirement obligations is estimated using valuation techniques that convert future cash flows to a single discounted amount.  Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors (2.0% for the nine months ended September 30, 2011); and (iv) a credit-adjusted risk-free interest rate (average of 7.5% for the nine months ended September 30, 2011).
 
The following presents a reconciliation of the asset retirement obligations (in thousands):
 
Asset retirement obligations at December 31, 2010
  $ 42,945  
Liabilities added from acquisitions
    6,966  
Liabilities added from drilling
    917  
Current year accretion expense
    2,816  
Settlements
    (1,214 )
Revision of estimate
    787  
Asset retirement obligations at September 30, 2011
  $ 53,217  
 
Note 10 – Commitments and Contingencies
 
The Company has been named as a defendant in a number of lawsuits, including claims from royalty owners related to disputed royalty payments and royalty valuations.  The Company has established reserves that management currently believes are adequate to provide for potential liabilities based upon its evaluation of these matters.  For a certain statewide class action royalty payment dispute where a reserve has not yet been established, the Company has denied that it has any liability on the claims and has raised arguments and defenses that, if accepted by the court, will result in no loss to the Company.  Discovery in this dispute is ongoing and is not complete.  As a result, the Company is unable to estimate a possible loss, or range of possible loss, if any.  In addition, the Company is involved in various other disputes arising in the ordinary course of business.  The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
 
Note 11 – Earnings Per Unit
 
Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period.  Diluted earnings per unit is computed by adjusting the average number of units outstanding for the dilutive effect, if any, of unit equivalents.  The Company uses the treasury stock method to determine the dilutive effect.
 
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 net income:
 
   
Net Income
(Numerator)
 
Units
(Denominator)
 
Per Unit
Amount
     (in thousands)      
Three months ended September 30, 2011:
                 
Net income:
                 
Allocated to units
  $ 837,627              
Allocated to unvested restricted units
    (8,774 )            
    $ 828,853              
Net income per unit:
                   
Basic net income per unit
            174,956     $ 4.74  
Dilutive effect of unit equivalents
            688       (0.02 )
Diluted net income per unit
            175,644     $ 4.72  
                         
Three months ended September 30, 2010:
                       
Net income:
                       
Allocated to units
  $ 4,143                  
Allocated to unvested restricted units
    (46 )                
    $ 4,097                  
Net income per unit:
                       
Basic net income per unit
            145,956     $ 0.03  
Dilutive effect of unit equivalents
            502        
Diluted net income per unit
            146,458     $ 0.03  
                         
Nine months ended September 30, 2011:
                       
Net income:
                       
Allocated to units
  $ 628,054                  
Allocated to unvested restricted units
    (6,662 )                
    $ 621,392                  
Net income per unit:
                       
Basic net income per unit
            171,076     $ 3.63  
Dilutive effect of unit equivalents
            749       (0.01 )
Diluted net income per unit
            171,825     $ 3.62  
                         
Nine months ended September 30, 2010:
                       
Net income:
                       
Allocated to units
  $ 129,239                  
Allocated to unvested restricted units
    (1,361 )                
    $ 127,878                  
Net income per unit:
                       
Basic net income per unit
            140,598     $ 0.91  
Dilutive effect of unit equivalents
            408        
Diluted net income per unit
            141,006     $ 0.91  
 
There were no anti-dilutive unit equivalents for the three months or nine months ended September 30, 2011.  Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to approximately 300,000 and 600,000 unit options and warrants for the three months and nine months ended September 30, 2010, respectively.
 
20

LINN ENERGY, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
 
Note 12 – Income Taxes
 
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the states of Texas and Michigan, 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 and Michigan and certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes.  As such, with the exception of the states of Texas and Michigan and certain subsidiaries, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company.  Amounts recognized for these taxes are reported in “income tax expense” on the condensed consolidated statements of operations.
 
Note 13 –
Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows
 
“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:
 
   
September 30,
2011
 
December 31,
2010
   
(in thousands)
             
Accrued compensation
  $ 14,651     $ 18,931  
Accrued interest
    76,032       62,999  
Other
    1,140       509  
    $ 91,823     $ 82,439  
 
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
   
Nine Months Ended
September 30,
   
2011
 
2010
   
(in thousands)
             
Cash payments for interest, net of amounts capitalized
  $ 163,345     $ 55,404  
Cash payments for income taxes
  $ 487     $ 1,785  
Noncash investing activities:
               
In connection with the acquisition of oil and natural gas properties, liabilities were assumed as follows:
               
Fair value of assets acquired
  $ 854,224     $ 896,999  
Cash paid, net of cash acquired
    (846,976 )     (872,621 )
Receivables from sellers
    2,662       12,620  
Payables to sellers
    (6,662 )      
Liabilities assumed
  $ 3,248     $ 36,998  
 
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents.  Restricted cash of approximately $4 million and $3 million is included in “other noncurrent assets” on the condensed consolidated balance sheets at September 30, 2011, and December 31, 2010, respectively, and represents cash deposited by the Company into a separate account and designated for asset retirement obligations in accordance with contractual agreements.
 
21

Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion contains forward-looking statements that reflect the Company’s future plans, estimates, beliefs and expected performance.  The forward-looking statements are dependent upon events, risks and uncertainties that may be outside the Company’s control.  The Company’s actual results could differ materially from those discussed in these forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, natural gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors set forth in “Cautionary Statement” below and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2010, and elsewhere in the Annual Report.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.