form10qq22009.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 June 30, 2009
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from _______________ to _______________
Commission File Number: 000-51719
LINN ENERGY, LLC
(Exact name of registrant as specified in its charter)
|
|
Delaware |
65-1177591 |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer
Identification No.) |
600 Travis, Suite 5100
Houston, Texas |
77002 |
(Address of principal executive offices) |
(Zip Code) |
|
(281) 840-4000
(Registrant’s telephone number, including area code)
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one).
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller
reporting company ¨ |
(Do not check if a smaller reporting company)
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2009, there were 121,284,576 units outstanding.
As commonly used in the oil and gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:
Bbl. One stock tank barrel or 42 United States gallons liquid volume.
Bcf. One billion cubic feet.
Bcfe. One billion cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.
Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
MBbls/d. MBbls per day.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.
MMBbls. One million barrels of oil or other liquid hydrocarbons.
MMBtu. One million British thermal units.
MMcf. One million cubic feet.
MMcf/d. MMcf per day.
MMcfe. One million cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.
MMcfe/d. MMcfe per day.
MMMBtu. One billion British thermal units.
Tcfe. One trillion cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
(in thousands,
except unit amounts) |
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
27,100 |
|
|
$ |
28,668 |
|
Accounts receivable – trade, net |
|
|
102,521 |
|
|
|
138,983 |
|
Derivative instruments |
|
|
314,806 |
|
|
|
368,951 |
|
Other current assets |
|
|
21,585 |
|
|
|
27,329 |
|
Total current assets |
|
|
466,012 |
|
|
|
563,931 |
|
|
|
|
|
|
|
|
|
|
Noncurrent assets: |
|
|
|
|
|
|
|
|
Oil and gas properties (successful efforts method) |
|
|
3,928,302 |
|
|
|
3,831,183 |
|
Less accumulated depletion and amortization |
|
|
(376,608 |
) |
|
|
(278,805 |
) |
|
|
|
3,551,694 |
|
|
|
3,552,378 |
|
|
|
|
|
|
|
|
|
|
Other property and equipment |
|
|
115,896 |
|
|
|
111,459 |
|
Less accumulated depreciation |
|
|
(18,333 |
) |
|
|
(13,171 |
) |
|
|
|
97,563 |
|
|
|
98,288 |
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
|
248,248 |
|
|
|
493,705 |
|
Other noncurrent assets |
|
|
69,189 |
|
|
|
13,718 |
|
|
|
|
317,437 |
|
|
|
507,423 |
|
Total noncurrent assets |
|
|
3,966,694 |
|
|
|
4,158,089 |
|
Total assets |
|
$ |
4,432,706 |
|
|
$ |
4,722,020 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Unitholders’ Capital |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
120,360 |
|
|
$ |
163,662 |
|
Derivative instruments |
|
|
42,671 |
|
|
|
47,005 |
|
Other accrued liabilities |
|
|
27,103 |
|
|
|
27,163 |
|
Total current liabilities |
|
|
190,134 |
|
|
|
237,830 |
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
Credit facility |
|
|
1,118,000 |
|
|
|
1,403,393 |
|
Senior notes, net |
|
|
488,167 |
|
|
|
250,175 |
|
Derivative instruments |
|
|
32,387 |
|
|
|
39,350 |
|
Other noncurrent liabilities |
|
|
33,831 |
|
|
|
30,586 |
|
Total noncurrent liabilities |
|
|
1,672,385 |
|
|
|
1,723,504 |
|
|
|
|
|
|
|
|
|
|
Unitholders’ capital: |
|
|
|
|
|
|
|
|
121,288,461 units and 114,079,533 units issued and outstanding at June 30, 2009, and December 31, 2008, respectively |
|
|
2,067,661 |
|
|
|
2,109,089 |
|
Accumulated income |
|
|
502,526 |
|
|
|
651,597 |
|
|
|
|
2,570,187 |
|
|
|
2,760,686 |
|
Total liabilities and unitholders’ capital |
|
$ |
4,432,706 |
|
|
$ |
4,722,020 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
June 30, |
|
Six Months Ended
June 30, |
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per unit amounts) |
Revenues and other: |
|
|
|
|
|
|
|
|
|
|
|
|
Oil, gas and natural gas liquid sales |
|
$ |
91,906 |
|
|
$ |
255,586 |
|
|
$ |
171,770 |
|
|
$ |
431,458 |
|
Loss on oil and gas derivatives |
|
|
(232,775 |
) |
|
|
(870,804 |
) |
|
|
(71,460 |
) |
|
|
(1,139,598 |
) |
Gas marketing revenues |
|
|
1,183 |
|
|
|
3,593 |
|
|
|
1,699 |
|
|
|
6,409 |
|
Other revenues |
|
|
641 |
|
|
|
642 |
|
|
|
1,607 |
|
|
|
1,121 |
|
|
|
|
(139,045 |
) |
|
|
(610,983 |
) |
|
|
103,616 |
|
|
|
(700,610 |
) |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
|
33,137 |
|
|
|
25,161 |
|
|
|
66,869 |
|
|
|
44,651 |
|
Transportation expenses |
|
|
2,516 |
|
|
|
3,663 |
|
|
|
5,483 |
|
|
|
6,991 |
|
Gas marketing expenses |
|
|
880 |
|
|
|
3,103 |
|
|
|
1,220 |
|
|
|
5,520 |
|
General and administrative expenses |
|
|
20,291 |
|
|
|
18,020 |
|
|
|
43,592 |
|
|
|
37,096 |
|
Exploration costs |
|
|
2,199 |
|
|
|
61 |
|
|
|
3,764 |
|
|
|
2,681 |
|
Depreciation, depletion and amortization |
|
|
50,390 |
|
|
|
50,885 |
|
|
|
102,494 |
|
|
|
95,255 |
|
Taxes, other than income taxes |
|
|
7,882 |
|
|
|
17,628 |
|
|
|
15,449 |
|
|
|
30,601 |
|
(Gain) loss on sale of assets and other, net |
|
|
(5 |
) |
|
|
― |
|
|
|
(26,716 |
) |
|
|
― |
|
|
|
|
117,290 |
|
|
|
118,521 |
|
|
|
212,155 |
|
|
|
222,795 |
|
Other income and (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of amounts capitalized |
|
|
(23,262 |
) |
|
|
(23,332 |
) |
|
|
(37,671 |
) |
|
|
(48,625 |
) |
Gain (loss) on interest rate swaps |
|
|
11,918 |
|
|
|
31,604 |
|
|
|
347 |
|
|
|
(7,789 |
) |
Other, net |
|
|
(837 |
) |
|
|
(4,313 |
) |
|
|
(1,230 |
) |
|
|
(4,476 |
) |
|
|
|
(12,181 |
) |
|
|
3,959 |
|
|
|
(38,554 |
) |
|
|
(60,890 |
) |
Loss from continuing operations before income taxes |
|
|
(268,516 |
) |
|
|
(725,545 |
) |
|
|
(147,093 |
) |
|
|
(984,295 |
) |
Income tax benefit (expense) |
|
|
(185 |
) |
|
|
164 |
|
|
|
(321 |
) |
|
|
(45 |
) |
Loss from continuing operations |
|
|
(268,701 |
) |
|
|
(725,381 |
) |
|
|
(147,414 |
) |
|
|
(984,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of assets, net of taxes |
|
|
330 |
|
|
|
(1,028 |
) |
|
|
(718 |
) |
|
|
(1,322 |
) |
Income (loss) from discontinued operations, net of taxes |
|
|
(101 |
) |
|
|
14,267 |
|
|
|
(939 |
) |
|
|
14,161 |
|
|
|
|
229 |
|
|
|
13,239 |
|
|
|
(1,657 |
) |
|
|
12,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(268,472 |
) |
|
$ |
(712,142 |
) |
|
$ |
(149,071 |
) |
|
$ |
(971,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per unit – continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units – basic |
|
$ |
(2.31 |
) |
|
$ |
(6.35 |
) |
|
$ |
(1.28 |
) |
|
$ |
(8.63 |
) |
Units – diluted |
|
$ |
(2.31 |
) |
|
$ |
(6.35 |
) |
|
$ |
(1.28 |
) |
|
$ |
(8.63 |
) |
Income (loss) per unit – discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units – basic |
|
$ |
0.01 |
|
|
$ |
0.12 |
|
|
$ |
(0.02 |
) |
|
$ |
0.11 |
|
Units – diluted |
|
$ |
0.01 |
|
|
$ |
0.12 |
|
|
$ |
(0.02 |
) |
|
$ |
0.11 |
|
Net loss per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units – basic |
|
$ |
(2.30 |
) |
|
$ |
(6.23 |
) |
|
$ |
(1.30 |
) |
|
$ |
(8.52 |
) |
Units – diluted |
|
$ |
(2.30 |
) |
|
$ |
(6.23 |
) |
|
$ |
(1.30 |
) |
|
$ |
(8.52 |
) |
Weighted average units outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units – basic |
|
|
116,497 |
|
|
|
114,252 |
|
|
|
114,993 |
|
|
|
114,005 |
|
Units – diluted |
|
|
116,497 |
|
|
|
114,252 |
|
|
|
114,993 |
|
|
|
114,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per unit |
|
$ |
0.63 |
|
|
$ |
0.63 |
|
|
$ |
1.26 |
|
|
$ |
1.26 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS’ CAPITAL
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Total Unitholders’
Capital |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
114,080 |
|
|
$ |
2,109,089 |
|
|
$ |
651,597 |
|
|
$ |
― |
|
|
$ |
2,760,686 |
|
Sale of units, net of underwriting discounts and expenses of $4,473 |
|
|
6,325 |
|
|
|
98,308 |
|
|
|
― |
|
|
|
― |
|
|
|
98,308 |
|
Issuance of units |
|
|
1,070 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
Cancellation of units |
|
|
(187 |
) |
|
|
(2,696 |
) |
|
|
― |
|
|
|
2,696 |
|
|
|
― |
|
Purchase of units |
|
|
|
|
|
|
― |
|
|
|
― |
|
|
|
(2,696 |
) |
|
|
(2,696 |
) |
Distributions to unitholders |
|
|
|
|
|
|
(144,994 |
) |
|
|
― |
|
|
|
― |
|
|
|
(144,994 |
) |
Unit-based compensation expenses |
|
|
|
|
|
|
7,954 |
|
|
|
― |
|
|
|
― |
|
|
|
7,954 |
|
Net loss |
|
|
|
|
|
|
― |
|
|
|
(149,071 |
) |
|
|
― |
|
|
|
(149,071 |
) |
June 30, 2009 |
|
|
121,288 |
|
|
$ |
2,067,661 |
|
|
$ |
502,526 |
|
|
$ |
― |
|
|
$ |
2,570,187 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
LINN ENERGY, LLC
(Unaudited)
|
|
Six Months Ended
June 30, |
|
|
|
|
|
|
|
(in thousands) |
Cash flow from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(149,071 |
) |
|
$ |
(971,501 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
102,494 |
|
|
|
101,469 |
|
Unit-based compensation expenses |
|
|
7,954 |
|
|
|
7,852 |
|
Amortization and write-off of deferred financing fees and other |
|
|
8,323 |
|
|
|
7,001 |
|
(Gain) loss on sale of assets, net |
|
|
(24,933 |
) |
|
|
1,326 |
|
Mark-to-market on derivatives: |
|
|
|
|
|
|
|
|
Total losses |
|
|
71,113 |
|
|
|
1,147,387 |
|
Cash settlements |
|
|
212,993 |
|
|
|
(28,550 |
) |
Cash settlements on canceled derivatives |
|
|
4,197 |
|
|
|
(68,197 |
) |
Premiums paid for derivatives |
|
|
― |
|
|
|
(1,278 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable – trade, net |
|
|
35,809 |
|
|
|
(125,286 |
) |
(Increase) decrease in other assets |
|
|
3,639 |
|
|
|
(4,967 |
) |
Decrease in accounts payable and accrued expenses |
|
|
(15,536 |
) |
|
|
(5,647 |
) |
Increase in other liabilities |
|
|
1,292 |
|
|
|
974 |
|
Net cash provided by operating activities |
|
|
258,274 |
|
|
|
60,583 |
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of oil and gas properties |
|
|
― |
|
|
|
(570,504 |
) |
Development of oil and gas properties |
|
|
(125,107 |
) |
|
|
(172,994 |
) |
Purchases of other property and equipment |
|
|
(4,952 |
) |
|
|
(5,945 |
) |
Proceeds from sales of oil and gas properties and other property and equipment |
|
|
26,649 |
|
|
|
76,560 |
|
Net cash used in investing activities |
|
|
(103,410 |
) |
|
|
(672,883 |
) |
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of units |
|
|
102,781 |
|
|
|
― |
|
Purchase of units |
|
|
(2,696 |
) |
|
|
(1,642 |
) |
Proceeds from issuance of debt |
|
|
406,703 |
|
|
|
1,173,000 |
|
Principal payments on debt |
|
|
(454,393 |
) |
|
|
(384,916 |
) |
Distributions to unitholders |
|
|
(144,994 |
) |
|
|
(144,755 |
) |
Financing fees, offering expenses and other, net |
|
|
(63,833 |
) |
|
|
(21,216 |
) |
Net cash provided by (used in) financing activities |
|
|
(156,432 |
) |
|
|
620,471 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,568 |
) |
|
|
8,171 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning |
|
|
28,668 |
|
|
|
1,441 |
|
Ending |
|
$ |
27,100 |
|
|
$ |
9,612 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) |
Basis of Presentation |
Nature of Business
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and gas company focused on the development and acquisition of long-life properties which complement its asset profile in producing basins within the United States.
Principles of Consolidation and Reporting
The condensed consolidated financial statements at June 30, 2009, and for the three months and six months ended June 30, 2009, and June 30, 2008, are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim
periods. Subsequent events were evaluated through the issuance date of the financial statements, August 6, 2009. Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations, and as such this report should be read in conjunction with the financial
statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Presentation Change
Certain amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the 2009 financial statement presentation. In particular, the condensed consolidated statements of operations include categories of expense titled “lease operating expenses,” “transportation
expenses,” “exploration costs,” “taxes, other than income taxes” and “(gain) loss on sale of assets and other, net” which were not reported in prior period presentations. The new categories present expenses in greater detail than was previously reported and all comparative periods presented have been reclassified to conform to the 2009 financial statement presentation. There was no impact to net income (loss) for prior periods.
Discontinued Operations
The Company’s Appalachian Basin and Mid Atlantic Well Service, Inc. (“Mid Atlantic”) operations have been classified as discontinued operations on the condensed consolidated statements of operations for all periods presented. Unless otherwise indicated, information about the statements of operations that is presented
in the notes to condensed consolidated financial statements relates only to LINN Energy’s continuing operations. See Note 2 for additional details.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets
and liabilities, and reported amounts of revenues and expenses. The estimates that are particularly significant to the financial statements include estimates of the Company’s
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
reserves of oil, gas and natural gas liquids (“NGL”), future cash flows from oil and gas properties, depreciation, depletion and amortization, asset retirement obligations, the fair value of commodity and interest rate derivatives and unit-based compensation 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. Illiquid credit markets and volatile equity and energy markets have combined to increase the uncertainty inherent in such estimates and assumptions. As
future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
(2) |
Acquisitions, Divestitures and Discontinued Operations |
Acquisitions
On July 14, 2009, and August 5, 2009, the Company entered into agreements to purchase certain oil and gas properties located in the Permian Basin in Texas and New Mexico for contract prices of $22.6 million and $95.0 million, respectively. The Company anticipates closing the transactions in the third quarter of 2009,
subject to closing conditions.
On January 31, 2008, the Company completed the acquisition of certain oil and gas properties located primarily in the Mid-Continent Shallow region from Lamamco Drilling Company for a purchase price of $542.2 million.
Divestitures
On December 4, 2008, the Company completed the sale of its deep rights in certain central Oklahoma acreage, which includes the Woodford Shale interval, to Devon Energy Production Company, LP (“Devon”). During 2008, the Company received net proceeds of $153.2 million and the carrying value of net assets sold was
$54.2 million. In the first quarter of 2009, certain post-closing matters were resolved and the Company recorded a gain of $25.4 million, which is recorded in “(gain) loss on sale of assets and other, net” on the condensed consolidated statements of operations for the six months ended June 30, 2009.
On August 15, 2008, the Company completed the sale of certain properties in the Verden area in Oklahoma to Laredo Petroleum, Inc. During 2008, the Company received net proceeds equal to the carrying value of net assets sold of $169.4 million.
On July 1, 2008, the Company completed the sale of its interests in oil and gas properties located in the Appalachian Basin to XTO Energy, Inc. During 2008, the Company received net proceeds of $566.5 million and the carrying value of net assets sold was $405.8 million. In addition, in March 2008, the Company
exited the drilling and service business in the Appalachian Basin provided by its wholly owned subsidiary Mid Atlantic. The Company used the net proceeds from all divestitures to reduce indebtedness.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Discontinued Operations
The Company’s Appalachian Basin and Mid Atlantic operations have been classified as discontinued operations on the condensed consolidated statements of operations for all periods presented. The following summarizes the Appalachian Basin and Mid Atlantic amounts included in “income (loss) from discontinued operations,
net of taxes” on the condensed consolidated statements of operations:
|
|
Three Months Ended
June 30, |
|
Six Months Ended
June 30, |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues and other |
|
$ |
(5 |
) |
|
$ |
28,824 |
|
|
$ |
(1,216 |
) |
|
$ |
49,985 |
|
Total operating expenses |
|
|
(96 |
) |
|
|
(8,054 |
) |
|
|
277 |
|
|
|
(22,230 |
) |
Interest expense |
|
|
— |
|
|
|
(6,503 |
) |
|
|
— |
|
|
|
(13,594 |
) |
Income (loss) from discontinued operations, net of taxes |
|
$ |
(101 |
) |
|
$ |
14,267 |
|
|
$ |
(939 |
) |
|
$ |
14,161 |
|
Discontinued operations activity in the three months and six months ended June 30, 2009, primarily represents activity related to post-closing adjustments. The Company computed interest expense related to discontinued operations for the three months and six months ended June 30, 2008, in accordance with Emerging Issues
Task Force Issue (“EITF”) No. 87-24, “Allocation of Interest to Discontinued Operations,” based on debt required to be repaid as a result of the disposal transaction.
Public Offering of Units
In May 2009, the Company sold 6,325,000 units representing limited liability company interests at $16.25 per unit ($15.60 per unit, net of underwriting discount), for net proceeds (after underwriting discount of $4.1 million and offering expenses of $0.4 million), of approximately $98.3 million, which was used to reduce indebtedness. The
units were registered under the Securities Act of 1933, as amended (“Securities Act”) on a Registration Statement on Form S-3 filed May 11, 2009.
Unit Repurchase Plan
In October 2008, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases. During the six months ended June 30, 2009, 123,800 units were repurchased at an average unit price of $12.99, for
a total cost of approximately $1.6 million. All units were subsequently canceled. At June 30, 2009, approximately $85.4 million was available for unit repurchase under the program. The timing and amounts of any such repurchases will be at the discretion of management, subject to market conditions and other factors, and in accordance with applicable securities laws and other legal requirements. The repurchase plan does not obligate the Company to acquire any specific
number of units and may be discontinued at any time. Units are repurchased at fair market value on the date of repurchase.
Cancellation of Units
During the six months ended June 30, 2009, the Company purchased 63,031 units for approximately $1.0 million, in conjunction with units received by the Company for the payment of minimum withholding taxes
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
due on units issued under its equity compensation plan (see Note 12). All units were subsequently canceled.
Distributions
Under the limited liability company agreement, Company unitholders are entitled to receive a quarterly distribution of available cash to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses. Distributions paid by the Company during the six months ended June 30,
2009, are presented on the condensed consolidated statement of unitholders’ capital. On July 23, 2009, the Company’s Board of Directors declared a cash distribution of $0.63 per unit with respect to the second quarter of 2009. The distribution totaling approximately $76.4 million will be paid August 14, 2009, to unitholders of record as of the close of business August 7, 2009.
(4) |
Oil and Gas Capitalized Costs |
Aggregate capitalized costs related to oil and gas production activities with applicable accumulated depletion and amortization are presented below:
|
|
|
|
|
|
|
(in thousands) |
Proved properties: |
|
|
|
|
|
|
Leasehold acquisition |
|
$ |
3,279,858 |
|
|
$ |
3,278,155 |
|
Development |
|
|
559,328 |
|
|
|
460,730 |
|
Unproved properties |
|
|
89,116 |
|
|
|
92,298 |
|
|
|
|
3,928,302 |
|
|
|
3,831,183 |
|
Less accumulated depletion and amortization |
|
|
(376,608 |
) |
|
|
(278,805 |
) |
|
|
$ |
3,551,694 |
|
|
$ |
3,552,378 |
|
(5) |
Business and Credit Concentrations |
For the three months ended June 30, 2009, the Company’s four largest customers represented approximately 24%, 17%, 14% and 10% of the Company’s sales. For the six months ended June 30, 2009, the Company’s three largest customers represented approximately 21%, 18% and 15% of the Company’s sales. For
the three months and six months ended June 30, 2008, the Company’s four largest customers represented 20%, 11%, 10% and 10%, and 19%, 11%, 11% and 10%, respectively, of the Company’s sales.
At June 30, 2009, trade accounts receivable from three customers were more than 10% of the Company’s total trade accounts receivable. At June 30, 2009, trade accounts receivable from the Company’s three largest customers represented approximately 20%, 18% and 13% of the Company’s receivables. At
December 31, 2008, trade accounts receivable from two customers were more than 10% of the Company’s total trade accounts receivable. At December 31, 2008, trade accounts receivable from the Company’s two largest customers represented approximately 20% and 16% of the Company’s receivables.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
At June 30, 2009, and December 31, 2008, the Company had the following debt outstanding:
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Credit facility (1) |
|
$ |
1,118,000 |
|
|
$ |
1,403,393 |
|
Senior notes due 2017, net (2) |
|
|
237,808 |
|
|
|
― |
|
Senior notes due 2018, net (3) |
|
|
250,359 |
|
|
|
250,175 |
|
Less current maturities |
|
|
― |
|
|
|
― |
|
|
|
$ |
1,606,167 |
|
|
$ |
1,653,568 |
|
|
(1) |
Variable interest rate of 3.07% at June 30, 2009, and 2.47% at December 31, 2008. |
|
(2) |
Fixed interest rate of 11.75% and effective interest rate of 12.73%. Amount is net of unamortized discount of approximately $12.2 million at June 30, 2009. |
|
(3) |
Fixed interest rate of 9.875% and effective interest rate of 10.25%. Amount is net of unamortized discount of approximately $5.6 million and $5.8 million at June 30, 2009, and December 31, 2008, respectively. |
Credit Facility
On April 28, 2009, the Company entered into a Fourth Amended and Restated Credit Agreement (“Credit Facility”), with an initial borrowing base of $1.75 billion and a maturity of August 2012, which amended and restated the Company’s existing credit facility, which had a maturity of August 2010. The terms of
the Credit Facility required that, upon issuance of the senior notes in May 2009, (see below), the borrowing base be decreased by $62.5 million, to $1.69 billion. At June 30, 2009, available borrowing capacity was $563.9 million, which includes a $5.6 million reduction in availability for outstanding letters of credit. In connection with the amended and restated Credit Facility, the Company paid approximately $52.7 million in financing fees and expenses, which were deferred and will
be amortized over the life of the Credit Facility.
Redetermination of the borrowing base under the Credit Facility occurs semi-annually, in April and October, as well as upon the occurrence of certain events, by the lenders in their sole discretion, based primarily on reserve reports that reflect oil and gas prices at such time. Significant declines in oil, gas or NGL prices may
result in a decrease in the borrowing base. The Company’s obligations under the Credit Facility are secured by mortgages on its oil and gas properties as well as a pledge of all ownership interests in its operating subsidiaries. The Company is required to maintain the mortgages on properties representing at least 80% of its oil and gas properties. Additionally, the obligations under the Credit Facility are guaranteed by all of the Company’s material operating subsidiaries
and may be guaranteed by any future subsidiaries.
At the Company’s election, interest on borrowings under the Credit Facility is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 2.50% and 3.25% per annum or the alternate base rate (“ABR”) plus an applicable margin between 1.00% and 1.75% per annum. Interest
is generally payable quarterly for ABR loans and at the applicable maturity date for LIBOR loans. The Company is required to pay a fee of 0.5% per annum on the unused portion of the borrowing base under the Credit Facility.
The Credit Facility contains various covenants, substantially similar to those included prior to the amendment and restatement, which limit the Company’s ability to: (i) incur indebtedness; (ii) enter into
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
commodity and interest rate swaps; (iii) grant certain liens; (iv) make certain loans, acquisitions, capital expenditures and investments; (v) make distributions other than from available cash; and (vi) merge or consolidate, or engage in certain asset dispositions, including a sale of all or substantially all of its
assets. The Credit Facility also contains covenants, substantially similar to those included prior to the amendment and restatement, which require the Company to maintain adjusted earnings to interest expense and current liquidity financial ratios. The Company is in compliance with all financial and other covenants of its Credit Facility.
Senior Notes Due 2017
On May 12, 2009, the Company entered into a purchase agreement with a group of initial purchasers (“Initial Purchasers”), pursuant to which the Company agreed to issue $250.0 million in aggregate principal amount of the Company’s senior notes due 2017 (“2017 Notes”). The 2017 Notes were offered
and sold to the Initial Purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements under the Securities Act. The Company used the net proceeds (after deducting the Initial Purchasers’ discounts and offering expenses) of approximately $230.8 million to reduce indebtedness under its Credit Facility. In connection with the 2017 Notes, the Company incurred financing fees and expenses of approximately $6.9 million, which
will be amortized over the life of the 2017 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations. The $12.3 million discount on the 2017 Notes will be amortized over the life of the 2017 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations. See Note 8 for fair value disclosures related
to the 2017 Notes.
The 2017 Notes were issued under an Indenture dated May 18, 2009, (“Indenture”), mature May 15, 2017, and bear interest at 11.75%. Interest is payable semi-annually beginning November 15, 2009. The 2017 Notes are general unsecured senior obligations of the Company and are effectively junior
in right of payment to any secured indebtedness of the Company to the extent of the collateral securing such indebtedness. Each of the Company’s material subsidiaries guaranteed the 2017 Notes on a senior unsecured basis. The Indenture provides that the Company may redeem: (i) on or prior to May 15, 2011, up to 35% of the aggregate principal amount of the 2017 Notes at a redemption price of 111.75% of the principal amount, plus accrued and unpaid interest; (ii) prior
to May 15, 2013, all or part of the 2017 Notes at a redemption price equal to the principal amount, plus a make-whole premium (as defined in the Indenture) and accrued and unpaid interest; and (iii) on or after May 15, 2013, all or part of the 2017 Notes at redemption prices equal to 105.875% in 2013, 102.938% in 2014 and 100% in 2015 and thereafter. The Indenture also provides that, if a change of control (as defined in the Indenture) occurs, the holders have a right to require the
Company to repurchase all or part of the 2017 Notes at a redemption price equal to 101%, plus accrued and unpaid interest.
The 2017 Notes’ Indenture contains covenants that, among other things, limit the Company’s ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities;
(iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries.
In connection with the issuance and sale of the 2017 Notes, the Company entered into a Registration Rights Agreement (“Registration Rights Agreement”) with the Initial Purchasers. Under the Registration Rights Agreement, the Company agreed to use its reasonable best efforts to file with the SEC and cause to become effective
a registration statement relating to an offer to issue new notes having terms substantially identical to the 2017 Notes in exchange for outstanding 2017 Notes. In certain circumstances, the Company may be required to file a shelf registration statement to cover resales of the 2017 Notes. The Company will not be
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
obligated to file the registration statements described above if the restrictive legend on the 2017 Notes has been removed and the 2017 Notes are freely tradable (in each case, other than with respect to persons that are affiliates of the Company) pursuant to Rule 144 under the Securities Act, as of the 366th day
after the 2017 Notes were issued. If the Company fails to satisfy its obligations under the Registration Rights Agreement, the Company may be required to pay additional interest to holders of the 2017 Notes under certain circumstances.
Senior Notes Due 2018
On June 24, 2008, the Company entered into a purchase agreement with a group of initial purchasers (“Initial Purchasers”), pursuant to which the Company agreed to issue $255.9 million in aggregate principal amount of the Company’s senior notes due 2018 (“2018 Notes”). The 2018 Notes were offered
and sold to the Initial Purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements under the Securities Act. The Company used the net proceeds (after deducting the Initial Purchasers’ discounts and offering expenses) of approximately $243.6 million to repay an outstanding term loan. In connection with the 2018 Notes, the Company incurred financing fees and expenses of approximately $7.8 million, which will be amortized
over the life of the 2018 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations. The $5.9 million discount on the 2018 Notes will be amortized over the life of the 2018 Notes; the expense is recorded in “interest expense, net of amounts capitalized” on the condensed consolidated statements of operations. See Note 8 for fair value disclosures related to the 2018 Notes.
The 2018 Notes were issued under an Indenture dated June 27, 2008, (“Indenture”), mature July 1, 2018, and bear interest at 9.875%. Interest is payable semi-annually beginning January 1, 2009. The 2018 Notes are general unsecured senior obligations of the Company and are effectively junior
in right of payment to any secured indebtedness of the Company to the extent of the collateral securing such indebtedness. Each of the Company’s material subsidiaries guaranteed the 2018 Notes on a senior unsecured basis. The Indenture provides that the Company may redeem: (i) on or prior to July 1, 2011, up to 35% of the aggregate principal amount of the 2018 Notes at a redemption price of 109.875% of the principal amount, plus accrued and unpaid interest; (ii) prior
to July 1, 2013, all or part of the 2018 Notes at a redemption price equal to the principal amount, plus a make-whole premium (as defined in the Indenture) and accrued and unpaid interest; and (iii) on or after July 1, 2013, all or part of the 2018 Notes at redemption prices equal to 104.938% in 2013, 103.292% in 2014, 101.646% in 2015 and 100% in 2016 and thereafter. The Indenture also provides that, if a change of control (as defined in the Indenture) occurs, the holders have a right
to require the Company to repurchase all or part of the 2018 Notes at a redemption price equal to 101%, plus accrued and unpaid interest.
The 2018 Notes’ Indenture contains covenants that, among other things, limit the Company’s ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities;
(iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries.
Commodity Derivatives
The Company sells oil, gas and NGL in the normal course of its business and utilizes derivative instruments to minimize the variability in cash flows due to price movements in oil, gas and NGL. The Company enters into derivative instruments such as swap contracts, collars and put options to economically
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
hedge a portion of its forecasted oil, gas and NGL sales. Oil puts are also used to economically hedge NGL sales. The Company did not designate these contracts as cash flow hedges under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended, (“SFAS 133”); therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for additional disclosures about oil and gas commodity derivatives required by SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).
The following table summarizes open positions as of June 30, 2009, and represents, as of such date, derivatives in place through December 31, 2014, on annual production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
19,793 |
|
|
|
39,566 |
|
|
|
31,901 |
|
|
|
14,676 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
8.53 |
|
|
$ |
8.50 |
|
|
$ |
8.50 |
|
|
$ |
8.57 |
|
|
$ |
— |
|
|
$ |
— |
|
Puts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
3,480 |
|
|
|
6,960 |
|
|
|
6,960 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
7.50 |
|
|
$ |
7.50 |
|
|
$ |
7.50 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
PEPL Puts: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
2,667 |
|
|
|
10,634 |
|
|
|
13,259 |
|
|
|
5,934 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
7.85 |
|
|
$ |
7.85 |
|
|
$ |
7.85 |
|
|
$ |
7.85 |
|
|
$ |
— |
|
|
$ |
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
25,940 |
|
|
|
57,160 |
|
|
|
52,120 |
|
|
|
20,610 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
8.32 |
|
|
$ |
8.26 |
|
|
$ |
8.20 |
|
|
$ |
8.37 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil Positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
1,218 |
|
|
|
2,150 |
|
|
|
2,073 |
|
|
|
2,025 |
|
|
|
2,275 |
|
|
|
2,200 |
|
Average Price ($/Bbl) |
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
84.22 |
|
|
$ |
84.22 |
|
|
$ |
84.22 |
|
|
$ |
84.22 |
|
Puts: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
922 |
|
|
|
2,250 |
|
|
|
2,352 |
|
|
|
500 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/Bbl) |
|
$ |
120.00 |
|
|
$ |
110.00 |
|
|
$ |
69.11 |
|
|
$ |
77.73 |
|
|
$ |
— |
|
|
$ |
— |
|
Collars: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
125 |
|
|
|
250 |
|
|
|
276 |
|
|
|
348 |
|
|
|
— |
|
|
|
— |
|
Average Floor Price ($/Bbl) |
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
— |
|
|
$ |
— |
|
Average Ceiling Price ($/Bbl) |
|
$ |
114.25 |
|
|
$ |
112.00 |
|
|
$ |
112.25 |
|
|
$ |
112.35 |
|
|
$ |
— |
|
|
$ |
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
2,265 |
|
|
|
4,650 |
|
|
|
4,701 |
|
|
|
2,873 |
|
|
|
2,275 |
|
|
|
2,200 |
|
Average Price ($/Bbl) |
|
$ |
102.21 |
|
|
$ |
99.68 |
|
|
$ |
77.00 |
|
|
$ |
83.79 |
|
|
$ |
84.22 |
|
|
$ |
84.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Basis Differential Positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEPL Basis Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
23,458 |
|
|
|
43,166 |
|
|
|
35,541 |
|
|
|
34,066 |
|
|
|
31,700 |
|
|
|
— |
|
Hedged Differential ($/MMBtu) |
|
$ |
(0.97 |
) |
|
$ |
(0.97 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.95 |
) |
|
$ |
(1.01 |
) |
|
$ |
— |
|
|
(1) |
Settle on the Panhandle Eastern Pipeline (“PEPL”) spot price of gas to hedge basis differential associated with gas production in the Mid-Continent Deep and Mid-Continent Shallow regions. |
|
(2) |
The Company utilizes oil puts to hedge revenues associated with its NGL production. |
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Settled derivatives on gas production for the three months and six months ended June 30, 2009, included a volume of 12,970 MMMBtu and 25,940 MMMBtu at average contract prices of $8.32. Settled derivatives on oil and NGL production for the three months and six months ended June 30, 2009, included a volume of 1,132 MBbls
and 2,265 MBbls at average contract prices of $102.21. The gas derivatives are settled based on the closing New York Mercantile Exchange (“NYMEX”) future price of gas or on the published PEPL spot price of gas on the settlement date, which occurs on the third day 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.
In the third quarter of 2009, the Company repositioned its commodity derivative portfolio to help protect against sustained weakness in commodity prices. The Company canceled oil and gas derivative contracts for years 2012 through 2014 and realized a net gain of approximately $44.8 million, which, along with an incremental premium
payment of approximately $48.8 million, was used to raise prices for its oil and gas derivative contracts in years 2010 and 2011.
Interest Rate Swaps
The Company has entered into interest rate swap agreements based on LIBOR to minimize the effect of fluctuations in interest rates. If LIBOR is lower than the fixed rate in the contract, the Company is required to pay the counterparties the difference, and conversely, the counterparties are required to pay the Company if LIBOR
is higher than the fixed rate in the contract. The Company did not designate the interest rate swap agreements as cash flow hedges under SFAS 133; therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for additional disclosures about interest rate swaps required by SFAS 157.
The following presents the settlement terms of the interest rate swaps at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
$ |
1,212,000 |
|
|
$ |
1,212,000 |
|
|
$ |
1,212,000 |
|
|
$ |
1,212,000 |
|
|
$ |
1,212,000 |
|
Fixed Rate |
|
|
3.85 |
% |
|
|
3.85 |
% |
|
|
3.85 |
% |
|
|
3.85 |
% |
|
|
3.85 |
% |
|
(1) |
Actual settlement term is through January 6, 2014. |
Outstanding Notional Amounts
The following presents the outstanding notional amounts and maximum number of months outstanding of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding notional amounts of gas contracts (MMMBtu) |
|
|
155,830 |
|
|
|
196,756 |
|
Maximum number of months gas contracts outstanding |
|
|
42 |
|
|
|
48 |
|
Outstanding notional amounts of oil contracts (MBbls) |
|
|
18,964 |
|
|
|
21,229 |
|
Maximum number of months oil contracts outstanding |
|
|
66 |
|
|
|
72 |
|
Outstanding notional amount of interest rate swaps (in thousands) |
|
$ |
1,212,000 |
|
|
$ |
1,212,000 |
|
Maximum number of months interest rate swaps outstanding |
|
|
54 |
|
|
|
24 |
|
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Balance Sheet Presentation
The Company’s commodity derivatives and 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:
|
|
|
|
|
|
|
(in thousands) |
Assets: |
|
|
|
|
|
|
Commodity derivatives |
|
$ |
729,816 |
|
|
$ |
977,847 |
|
Interest rate swaps |
|
|
3,460 |
|
|
|
― |
|
|
|
$ |
733,276 |
|
|
$ |
977,847 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Commodity derivatives |
|
$ |
179,556 |
|
|
$ |
119,124 |
|
Interest rate swaps |
|
|
65,724 |
|
|
|
82,422 |
|
|
|
$ |
245,280 |
|
|
$ |
201,546 |
|
By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract
is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are participants in its Credit Facility (see Note 6), which is secured by the Company’s oil and gas reserves; therefore, the Company is not required to post any collateral. The Company does not require collateral from the 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 $733.3 million at June 30, 2009. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality
standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity and interest rate swap derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of such loss is somewhat mitigated.
Gain (Loss) on Derivatives
Gains and losses on derivatives are reported on the condensed consolidated statements of operations in “gain (loss) on oil and gas derivatives” and “gain (loss) on interest rate swaps” and include realized and unrealized gains (losses). Realized gains (losses), excluding canceled commodity derivatives, represent
amounts related to the settlement of derivative instruments, and for commodity derivatives, are aligned with the underlying production. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.
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
June 30, |
|
Six Months Ended
June 30, |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Realized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
$ |
111,144 |
|
|
$ |
(29,210 |
) |
|
$ |
230,956 |
|
|
$ |
(34,019 |
) |
Interest rate swaps |
|
|
(10,557 |
) |
|
|
(4,221 |
) |
|
|
(20,671 |
) |
|
|
(5,662 |
) |
Canceled derivatives |
|
|
(60 |
) |
|
|
(68,197 |
) |
|
|
4,197 |
|
|
|
(68,197 |
) |
|
|
$ |
100,527 |
|
|
$ |
(101,628 |
) |
|
$ |
214,482 |
|
|
$ |
(107,878 |
) |
Unrealized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
$ |
(343,919 |
) |
|
$ |
(773,397 |
) |
|
$ |
(306,673 |
) |
|
$ |
(1,037,382 |
) |
Interest rate swaps |
|
|
22,535 |
|
|
|
35,825 |
|
|
|
21,078 |
|
|
|
(2,127 |
) |
|
|
$ |
(321,384 |
) |
|
$ |
(737,572 |
) |
|
$ |
(285,595 |
) |
|
$ |
(1,039,509 |
) |
Total gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
$ |
(232,775 |
) |
|
$ |
(870,804 |
) |
|
$ |
(71,460 |
) |
|
$ |
(1,139,598 |
) |
Interest rate swaps |
|
|
11,918 |
|
|
|
31,604 |
|
|
|
347 |
|
|
|
(7,789 |
) |
|
|
$ |
(220,857 |
) |
|
$ |
(839,200 |
) |
|
$ |
(71,113 |
) |
|
$ |
(1,147,387 |
) |
During the six months ended June 30, 2009, the Company canceled (before the contract settlement date) derivative contracts on estimated future gas production, resulting in realized gains of $4.3 million. During the three months and six months ended June 30, 2008, the Company canceled (before the contract settlement date)
derivative contracts on estimated future gas production primarily associated with properties in the Appalachian Basin (see Note 2), resulting in realized losses of approximately $68.2 million.
(8) |
Fair Value Measurements |
Fair Value Measurements on a Recurring Basis
The Company accounts for its oil and gas commodity derivatives and interest rate swaps at fair value (see Note 7) on a recurring basis in accordance with the provisions of SFAS 157. The fair value of derivative instruments is determined utilizing pricing models for significantly similar instruments. The models
use a variety of techniques to arrive at fair value, including quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward curves generated from a compilation of data gathered from third parties. Assumed credit risk adjustments, based on published credit ratings, public bond yield spreads and credit default swap spreads, are applied to the Company’s commodity derivatives and interest rate swaps.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at June 30, 2009. These items are included in “derivative instruments” on the condensed consolidated balance sheets.
|
|
Fair Value Measurements on a Recurring Basis
June 30, 2009 |
|
|
|
|
|
|
|
|
|
(in thousands) |
Assets: |
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
$ |
729,816 |
|
|
$ |
(166,762 |
) |
|
$ |
563,054 |
|
Interest rate swaps |
|
$ |
3,460 |
|
|
$ |
(3,460 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
$ |
179,556 |
|
|
$ |
(166,762 |
) |
|
$ |
12,794 |
|
Interest rate swaps |
|
$ |
65,724 |
|
|
$ |
(3,460 |
) |
|
$ |
62,264 |
|
|
(1) |
Represents counterparty netting under derivative netting agreements. |
Fair Value Measurements on a Nonrecurring Basis
Effective January 1, 2009, the Company adopted SFAS 157 for nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The Company accounts for additions to its asset retirement obligation liability (see Note 9) and impairment of long-lived assets, if any, at fair value on a nonrecurring
basis in accordance with the provisions of SFAS 157.
The following presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2009. This item is included in “other noncurrent liabilities” on the condensed consolidated balance sheets.
|
|
|
|
|
(in thousands) |
Liabilities: |
|
|
|
Asset retirement obligations – liabilities added related to drilling |
|
$ |
42 |
|
The fair value of additions to the asset retirement obligation liability is measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs to the valuation include: (i) estimated plug and abandon cost per well based on Company experience;
(ii) estimated remaining life per well based on average reserve life per field; and (iii) the Company’s credit-adjusted risk-free interest rate (average of 10.5% for the six months ended June 30, 2009). There was no impact to the Company’s results of operations for the three months and six months ended June 30, 2009, from the adoption of SFAS 157 for nonfinancial assets and liabilities.
At June 30, 2009, the Company also had 2017 Notes with a net carrying value of $237.8 million and a fair value of $242.8 million, and 2018 Notes with a net carrying value of $250.4 million and a fair value of $225.5 million (see Note 6). The fair values of the 2017 Notes and the 2018 Notes were estimated based on prices
quoted from third-party financial institutions.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
(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. See Note 8 for additional disclosures about asset retirement obligations required by SFAS 157.
The following presents a reconciliation of the asset retirement obligation liability (in thousands):
Asset retirement obligations at December 31, 2008 |
|
$ |
28,922 |
|
Liabilities added related to drilling |
|
|
42 |
|
Current year accretion expense |
|
|
1,229 |
|
Settlements |
|
|
(386 |
) |
Revision of estimates |
|
|
1,007 |
|
Asset retirement obligations at June 30, 2009 |
|
$ |
30,814 |
|
(10) |
Commitments and Contingencies |
On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman Holdings”) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) with the United States Bankruptcy Court for the Southern District of New York (the “Court”). On
October 3, 2008, Lehman Brothers Commodity Services Inc. (“Lehman Commodity Services”) also filed a voluntary petition for reorganization under Chapter 11 with the Court. As of June 30, 2009, and December 31, 2008, the Company had a receivable of approximately $67.6 million from Lehman Commodity Services for canceled derivative contracts. The Company is pursuing various legal remedies to protect its interests. At June 30, 2009, and December 31,
2008, the Company estimated approximately $6.7 million of the receivable balance to be collectible. The net receivable of approximately $6.7 million is included in “other current assets” on the condensed consolidated balance sheets at June 30, 2009, and December 31, 2008. The Company believes that the ultimate disposition of this matter will not have a material adverse effect on its business, financial position, results of operations or liquidity.
From time to time, the Company is a party to various legal proceedings or is subject to industry rulings that could bring rise to claims in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its business, financial position,
results of operations or liquidity.
Effective January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF 03-6-1”), which requires that the Company’s unvested restricted units be included in the computation of earnings per unit under the two-class method. This FSP requires retrospective adjustment of all prior period earnings per unit data. There was no impact to the Company from the adoption of this FSP for the three months or six months ended June 30, 2008, as it reported a loss from continuing operations for these periods.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following table provides a reconciliation of the numerators and denominators of the basic and diluted per unit computations for income (loss) from continuing operations:
|
|
Income (Loss) (Numerator) |
|
|
|
|
|
|
(in thousands) |
|
|
Three months ended June 30, 2009: |
|
|
|
|
|
|
Loss from continuing operations: |
|
|
|
|
|
|
Allocated to units |
|
$ |
(268,701 |
) |
|
|
|
Allocated to unvested restricted units |
|
|
― |
|
|
|
|
|
|
$ |
(268,701 |
) |
|
|
|
Loss per unit: |
|
|
|
|
|
|
|
Basic loss per unit |
|
|
|
|
|
|
116,497 |
|
|
$ |
(2.31 |
) |
Dilutive effect of unit equivalents |
|
|
|
|
|
|
― |
|
|
|
― |
|
Diluted loss per unit |
|
|
|
|
|
|
116,497 |
|
|
$ |
(2.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to units |
|
$ |
(725,381 |
) |
|
|
|
|
|
|
|
|
Allocated to unvested restricted units |
|
|
― |
|
|
|
|
|
|
|
|
|
|
|
$ |
(725,381 |
) |
|
|
|
|
|
|
|
|
Loss per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per unit |
|
|
|
|
|
|
114,252 |
|
|
$ |
(6.35 |
) |
Dilutive effect of unit equivalents |
|
|
|
|
|
|
― |
|
|
|
― |
|
Diluted loss per unit |
|
|
|
|
|
|
114,252 |
|
|
$ |
(6.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to units |
|
$ |
(147,414 |
) |
|
|
|
|
|
|
|
|
Allocated to unvested restricted units |
|
|
― |
|
|
|
|
|
|
|
|
|
|
|
$ |
(147,414 |
) |
|
|
|
|
|
|
|
|
Loss per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per unit |
|
|
|
|
|
|
114,993 |
|
|
$ |
(1.28 |
) |
Dilutive effect of unit equivalents |
|
|
|
|
|
|
― |
|
|
|
― |
|
Diluted loss per unit |
|
|
|
|
|
|
114,993 |
|
|
$ |
(1.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to units |
|
$ |
(984,340 |
) |
|
|
|
|
|
|
|
|
Allocated to unvested restricted units |
|
|
― |
|
|
|
|
|
|
|
|
|
|
|
$ |
(984,340 |
) |
|
|
|
|
|
|
|
|
Loss per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per unit |
|
|
|
|
|
|
114,005 |
|
|
$ |
(8.63 |
) |
Dilutive effect of unit equivalents |
|
|
|
|
|
|
― |
|
|
|
― |
|
Diluted loss per unit |
|
|
|
|
|
|
114,005 |
|
|
$ |
(8.63 |
) |
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to 2.2 million and 2.1 million unit options and warrants for the three months and six months ended June 30, 2009, respectively. Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents
related to 1.8 million and 1.7 million unit options and warrants for the three months and six months ended June 30, 2008, respectively. All equivalent units were anti-dilutive for the three months and six months ended June 30, 2009, and June 30, 2008, as the Company reported a loss from continuing operations.
(12) |
Unit-Based Compensation |
During the six months ended June 30, 2009, the Company granted an aggregate 1,083,755 restricted units and 382,405 unit options to employees, primarily as part of its annual review of employee compensation, with an aggregate fair value of approximately $17.5 million. The unit options and restricted units vest over three years. For
the three months and six months ended June 30, 2009, the Company recorded unit-based compensation expenses in continuing operations of approximately $3.7 million and $8.0 million, respectively. For the three months and six months ended June 30, 2008, the Company recorded unit-based compensation expenses in continuing operations of approximately $3.9 million and $7.5 million, respectively. These amounts are included in “lease operating expenses” or “general and
administrative expenses” on the condensed consolidated statements of operations.
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, with income tax liabilities and/or benefits of the Company passed through to unitholders. As such, it is not a taxable entity, it does not directly pay federal and state income
tax and recognition has not been given to federal and state income taxes for the operations of the Company. Limited liability companies are subject to state income taxes in Texas. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes.
(14) |
Related Party Transactions |
At June 30, 2008, and during the six months ended June 30, 2008, on an aggregate basis, a group of certain direct or indirect wholly owned subsidiaries of Lehman Holdings owned more than 10% of the Company’s outstanding units. A reference to “Lehman” hereafter in this footnote refers to Lehman Holdings
or one or more of its subsidiaries, as applicable. Lehman was considered a related party under the provisions of SFAS No. 57, “Related Party Disclosures,” during the period in which its unit ownership exceeded 10%. Lehman’s subsidiaries provided certain services to the Company, including participation in the Company’s Third Amended and Restated Credit Agreement, offering of 2018 Notes (see Note 6)
and sale of commodity derivative instruments (see Note 7), which were all consummated on terms equivalent to those that prevail in arm’s-length transactions. During the three months and six months ended June 30, 2008, the Company paid distributions on units to Lehman of approximately $9.3 million and $18.5 million, respectively, interest on borrowings of approximately $1.0 million and $2.2 million, respectively, and financing fees of approximately $1.3 million and $1.8 million, respectively. In
addition, during the three months and six months ended June 30, 2008, the Company paid Lehman approximately $0.5 million and $1.0 million, respectively, on settled derivative contracts, and during the six months ended June 30, 2008, the Company purchased approximately $1.3 million of oil swap contracts from Lehman.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
(15) |
Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Statements of Cash Flows |
“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Accrued compensation |
|
$ |
7,761 |
|
|
$ |
11,366 |
|
Accrued interest |
|
|
18,465 |
|
|
|
14,232 |
|
Other |
|
|
877 |
|
|
|
1,565 |
|
|
|
$ |
27,103 |
|
|
$ |
27,163 |
|
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
|
|
Six Months Ended
June 30, |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
29,012 |
|
|
$ |
60,662 |
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes |
|
$ |
853 |
|
|
$ |
274 |
|
|
|
|
|
|
|
|
|
|
Noncash investing activities: |
|
|
|
|
|
|
|
|
In connection with the purchase of oil and gas properties, liabilities were assumed as follows: |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
― |
|
|
$ |
579,254 |
|
Cash paid |
|
|
― |
|
|
|
(570,504 |
) |
Liabilities assumed, net |
|
$ |
― |
|
|
$ |
8,750 |
|
Noncash financing activities: |
|
|
|
|
|
|
|
|
Units issued in connection with the purchase of oil and gas properties |
|
$ |
― |
|
|
$ |
23,455 |
|
For purposes of the statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Restricted cash of $1.7 million and $1.3 million is included in “other noncurrent assets” on the condensed consolidated balance sheets
at June 30, 2009, and December 31, 2008, respectively, and represents cash the Company has deposited into a separate account and designated for asset retirement obligations in accordance with contractual agreements.
(16) |
Recently Issued Pronouncements |
Accounting Standards
In July 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”), effective for financial statements for interim or annual reporting periods ending after September 15,
2009. SFAS 168 establishes the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative nongovernmental
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
GAAP, superseding existing FASB, American Institute of Certified Public Accountants, EITF and related literature. Beginning with the Form 10-Q for the quarter ended September 30, 2009, references to prior GAAP standards that were used to create the Codification will be replaced or supplemented with references to the relevant
section of the Codification.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued and requires disclosure of the date through which an entity has evaluated subsequent events. SFAS 165 is effective for interim and annual periods ending after June 15, 2009, and the Company adopted it effective June 30, 2009. The adoption did not have a material impact on the Company’s results of operations or financial position.
In April 2009, the FASB issued three related FSPs to clarify the application of SFAS 157 to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods. The
final FSPs are effective for interim and annual periods ending after June 15, 2009, and the Company adopted the new FSPs effective June 30, 2009. The adoption did not have a material impact on the Company’s results of operations or financial position. The three related FSPs are as follows:
FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance on how to determine the fair value of assets and liabilities under
SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It
also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.
FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures of the fair value of financial instruments within the scope of SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments,” as amended, in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements. It also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period.
In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). Under this FSP, assets acquired and liabilities assumed
in a business combination that arise from contingencies are recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability is generally recognized in accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation
of the Amount of a Loss.” FSP FAS 141(R)-1 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. The Company will implement FSP FAS 141(R)-1 for acquisitions that occur after January 1, 2009.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141(R)”). Under SFAS 141(R), an acquiring entity is required to recognize all the assets acquired
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
and liabilities assumed at fair value with limited exceptions. SFAS 141(R) changes the accounting treatment for certain specific items, including acquisition costs, which are expensed as incurred and also includes new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. The Company will implement SFAS 141(R) for acquisitions that occur after January 1, 2009.
In September 2006, the FASB issued SFAS 157, which provides guidance for using fair value to measure assets and liabilities. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and clarifies that for items that are not actively traded, such as certain kinds
of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the mark-to-market value. The Company adopted the provisions of SFAS 157 related to financial assets and liabilities and nonfinancial assets and liabilities measured on a recurring basis effective January 1, 2008, and related to nonfinancial assets and liabilities measured on a nonrecurring basis effective January 1, 2009, (see Note 8). There
was no impact from the adoption related to items measured on a nonrecurring basis.
SEC Rule-Making Activity
In December 2008, the SEC announced that it had approved revisions designed to modernize the oil and gas company reserve reporting requirements. The most significant amendments to the requirements include the following:
|
· |
commodity prices – economic producibility of reserves and discounted cash flows will be based on a 12-month average commodity price unless contractual arrangements designate the price to be used; |
|
· |
disclosure of unproved reserves – probable and possible reserves may be disclosed separately on a voluntary basis; |
|
· |
proved undeveloped reserve guidelines – reserves may be classified as proved undeveloped if there is a high degree of confidence that the quantities will be recovered; |
|
· |
reserve estimation using new technologies – reserves may be estimated through the use of reliable technology in addition to flow tests and production history; and |
|
· |
nontraditional resources – the definition of oil and gas producing activities will expand and focus on the marketable product rather than the method of extraction. |
The rules are effective for fiscal years ending on or after December 31, 2009, and early adoption is not permitted. The Company is currently evaluating the new rules and assessing the impact they will have on its reported oil and gas reserves. The SEC is coordinating with the FASB to obtain the revisions necessary to
SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,” and SFAS No. 69, “Disclosures about Oil and Gas Producing Activities,” to provide consistency with the new rules. In the event that consistency is not achieved in time for companies to comply with the new rules, the SEC will consider delaying the compliance date.
The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The following discussion contains
forward-looking statements that reflect the Company’s future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside the Company’s control. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil,
gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed in “Cautionary Statement” below and in the Annual Report on Form 10-K, particularly in Part I. Item 1A. “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
A reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. “Financial Statements.”
Executive Overview
LINN Energy is an independent oil and gas company focused on the development and acquisition of long-life properties which complement its asset profile in producing basins within the United States. The Company’s oil, gas and NGL properties are located in three regions in the United States:
|
· |
Mid-Continent Deep, which includes the Texas Panhandle Deep Granite Wash formation and deep formations in Oklahoma; |
|
· |
Mid-Continent Shallow, which includes the Texas Panhandle Brown Dolomite formation and shallow formations in Oklahoma; and |
|
· |
Western, which includes the Brea Olinda Field of the Los Angeles Basin in California. |
The results of the Company’s Appalachian Basin and Mid Atlantic operations are classified as discontinued operations for all periods presented (see Note 2). Unless otherwise indicated, results of operations information presented herein relates only to LINN Energy’s continuing operations.
Results from continuing operations for the three months ended June 30, 2009, included the following:
|
· |
oil, gas and NGL sales of approximately $91.9 million, compared to $255.6 million in the second quarter of 2008; |
|
· |
average daily production of 219 MMcfe/d, compared to 224 MMcfe/d in the second quarter of 2008; |
|
· |
realized gains on commodity derivatives of approximately $111.1 million, compared to realized losses of $97.4 million in the second quarter of 2008; |
|
· |
capital expenditures of approximately $30.1 million, compared to $77.1 million in the second quarter of 2008; |
|
· |
19 wells drilled (all successful), compared to 70 wells drilled (all successful) in the second quarter of 2008; and |
|
· |
average of two operated drilling rigs. |
Results from continuing operations for the six months ended June 30, 2009, included the following:
|
· |
oil, gas and NGL sales of approximately $171.8 million, compared to $431.5 million in the six months ended June 30, 2008; |
|
· |
average daily production of 218 MMcfe/d, compared to 210 MMcfe/d in the six months ended June 30, 2008; |
|
· |
realized gains on commodity derivatives of approximately $235.2 million, compared to realized losses of $102.2 million in the six months ended June 30, 2008; |
|
· |
capital expenditures of approximately $103.5 million, compared to $163.2 million in the six months ended June 30, 2008; |
|
· |
60 wells drilled (59 successful), compared to 146 wells drilled (144 successful) in the six months ended June 30, 2008; and |
|
· |
average of three operated drilling rigs. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Commodity Derivative Repositioning
In the third quarter of 2009, the Company repositioned its commodity derivative portfolio to help protect against sustained weakness in commodity prices. The Company canceled oil and gas derivative contracts for years 2012 through 2014 and realized a net gain of approximately $44.8 million, which, along with an incremental premium
payment of approximately $48.8 million, was used to raise prices for its oil and gas derivative contracts in years 2010 and 2011. As a result of these transactions, the Company anticipates the borrowing base under its Credit Facility will be reduced to approximately $1.65 billion; however, the Company anticipates the borrowing base under its Credit Facility will be increased in October 2009 due to its pending acquisitions in the Permian Basin (see Note 2).
The following table summarizes open positions as of July 31, 2009, and represents, as of such date, derivatives in place through December 31, 2013, on annual production volumes:
|
|
|
|
|
|
|
|
|
|
|
Gas Positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
16,494 |
|
|
|
39,566 |
|
|
|
31,901 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
8.53 |
|
|
$ |
8.90 |
|
|
$ |
9.50 |
|
|
$ |
— |
|
|
$ |
— |
|
Puts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
2,900 |
|
|
|
6,960 |
|
|
|
6,960 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
7.50 |
|
|
$ |
8.50 |
|
|
$ |
9.50 |
|
|
$ |
— |
|
|
$ |
— |
|
PEPL Puts: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
2,223 |
|
|
|
10,634 |
|
|
|
13,259 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
7.85 |
|
|
$ |
7.85 |
|
|
$ |
8.50 |
|
|
$ |
— |
|
|
$ |
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
21,617 |
|
|
|
57,160 |
|
|
|
52,120 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/MMBtu) |
|
$ |
8.32 |
|
|
$ |
8.66 |
|
|
$ |
9.25 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil Positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
1,015 |
|
|
|
2,150 |
|
|
|
2,073 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/Bbl) |
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
— |
|
|
$ |
— |
|
Puts: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
768 |
|
|
|
2,250 |
|
|
|
2,352 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/Bbl) |
|
$ |
120.00 |
|
|
$ |
110.00 |
|
|
$ |
75.00 |
|
|
$ |
— |
|
|
$ |
— |
|
Collars: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
104 |
|
|
|
250 |
|
|
|
276 |
|
|
|
— |
|
|
|
— |
|
Average Floor Price ($/Bbl) |
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
90.00 |
|
|
$ |
— |
|
|
$ |
— |
|
Average Ceiling Price ($/Bbl) |
|
$ |
114.25 |
|
|
$ |
112.00 |
|
|
$ |
112.25 |
|
|
$ |
— |
|
|
$ |
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MBbls) |
|
|
1,887 |
|
|
|
4,650 |
|
|
|
4,701 |
|
|
|
— |
|
|
|
— |
|
Average Price ($/Bbl) |
|
$ |
102.21 |
|
|
$ |
99.68 |
|
|
$ |
82.50 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Basis Differential Positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEPL Basis Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Volume (MMMBtu) |
|
|
19,548 |
|
|
|
43,166 |
|
|
|
35,541 |
|
|
|
34,066 |
|
|
|
31,700 |
|
Hedged Differential ($/MMBtu) |
|
$ |
(0.97 |
) |
|
$ |
(0.97 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.95 |
) |
|
$ |
(1.01 |
) |
(1) |
Settle on the PEPL spot price of gas to hedge basis differential associated with gas production in the Mid-Continent Deep and Mid-Continent Shallow regions. |
(2) |
The Company utilizes oil puts to hedge revenues associated with its NGL production. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Acquisitions
On July 14, 2009, and August 5, 2009, the Company entered into agreements to purchase certain oil and gas properties located in the Permian Basin in Texas and New Mexico for contract prices of $22.6 million and $95.0 million, respectively. The Company anticipates closing the transactions in the third quarter of 2009, subject
to closing conditions.
Public Offering of Units
In May 2009, the Company sold 6,325,000 units representing limited liability company interests at $16.25 per unit ($15.60 per unit, net of underwriting discount), for net proceeds (after deducting underwriting discount and offering expenses), of approximately $98.3 million, which was used to reduce indebtedness under the Company’s Credit
Facility. The units were registered under the Securities Act on a Registration Statement on Form S-3 filed May 11, 2009.
Senior Notes Due 2017
In May 2009, the Company issued $250.0 million in aggregate principal amount of the Company’s senior notes due 2017. The 2017 Notes were offered and sold to the Initial Purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements under the Securities Act. The
Company used the net proceeds (after deducting the Initial Purchasers’ discounts and offering expenses) of approximately $230.8 million to reduce indebtedness under its Credit Facility. See “Senior Notes Due 2017” in “Liquidity and Capital Resources” below for additional details.
Credit Facility
In April 2009, the Company entered into an amended and restated Credit Facility, extending the maturity two years, from August 2010 to August 2012. In connection with the Credit Facility, the Company paid approximately $52.7 million in financing fees and expenses, which were deferred and will be amortized over the life of the Credit
Facility. The Credit Facility will result in increased interest expense due to higher interest rates compared to the prior credit facility and amortization of financing fees. See “Credit Facility” in “Liquidity and Capital Resources” below for additional details.
Credit and Capital Market Disruption
Multiple events during 2008 and 2009 involving numerous financial institutions have effectively restricted current liquidity within the capital markets throughout the United States and around the world. Despite efforts by treasury and banking regulators in the United States, Europe and other nations to provide liquidity to the financial
sector, capital markets currently remain constrained. To the extent the Company accesses credit or capital markets in the near term, its ability to obtain terms and pricing similar to its existing terms and pricing may be limited. In addition, the Company cannot be assured that counterparties to the Company’s derivative contracts or lenders in the Company’s Credit Facility will be able to perform under these agreements. For additional information about the Company’s
credit risk related to derivative contracts see “Counterparty Credit Risk” in “Liquidity and Capital Resources” below.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Results of Operations – Continuing Operations
Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008
|
|
Three Months Ended
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Revenues and other: |
|