News Column

LINNCO, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 2, 2014

The following discussion contains forward-looking statements that reflect the Company's future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside the Company's control. The Company's actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors set forth in "Cautionary Statement" below and in Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2013, and elsewhere in the Annual Report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. The following discussion and analysis should be read in conjunction with the financial statements and related notes included in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. A reference to a "Note" herein refers to the accompanying Notes to Financial Statements contained in Item 1. "Financial Statements." General LinnCo, LLC ("LinnCo" or the "Company") is a Delaware limited liability company formed on April 30, 2012, under the Delaware Limited Liability Company Act, that has elected to be treated as a corporation for U.S. federal income tax purposes. Linn Energy, LLC ("LINN Energy"), an independent oil and natural gas company that trades on the NASDAQ Global Select Market under the symbol "LINE," owns LinnCo's sole voting share. LinnCo's success is dependent upon the operation and management of LINN Energy and its resulting performance. Therefore, LINN Energy's Quarterly Report on Form 10-Q for the three months ended March 31, 2014, has been included in this filing as Exhibit 99.1 and incorporated herein by reference. Business At no time after LinnCo's formation and prior to the initial public offering ("IPO") did LinnCo have any operations or own any interest in LINN Energy. After the IPO, LinnCo's initial sole purpose was to own units representing limited liability company interests ("units") in its affiliate, LINN Energy. In connection with the acquisition of Berry Petroleum Company ("Berry") (see Note 2), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of March 31, 2014, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy. Berry Acquisition On December 16, 2013, the Company completed the transactions contemplated by the merger agreement between the Company, LINN Energy and Berry under which LinnCo acquired all of the outstanding common shares of Berry and the contribution agreement between the Company and LINN Energy, under which the Company transferred Berry to LINN Energy in exchange for LINN Energy units. Under the merger agreement, as amended, Berry's shareholders received 1.68 LinnCo common shares for each Berry common share they owned, totaling 93,756,674 LinnCo common shares valued at approximately $2.7 billion. Under the contribution agreement, LinnCo transferred Berry to LINN Energy after which Berry became an indirect wholly owned subsidiary of LINN Energy. As consideration for the transfer of Berry to LINN Energy, the Company acquired 93,756,674 newly issued LINN Energy units, valued at approximately $2.8 billion and equal to the number of LinnCo shares issued as consideration for Berry. Results of Operations Equity Income from Investment in Linn Energy, LLC The Company's equity income (loss) primarily consists of its share of earnings of LINN Energy attributed to the units the Company owns. As a result of acquiring additional LINN Energy units in exchange for the transfer of Berry, the Company increased its ownership of LINN Energy's outstanding units from approximately 15% to approximately 39% (see Berry Acquisition above). The percentage ownership of LINN Energy could continue to change due to the Company's ownership of additional units or other issuances or repurchases of units by LINN Energy. The Company uses the equity method of accounting for its investment in LINN Energy. 12



--------------------------------------------------------------------------------

Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Following is summarized statements of operations information for LINN Energy. Additional information on LINN Energy's results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the three months ended March 31, 2014, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.

Linn Energy, LLC Three Months Ended March 31, 2014 2013 (in thousands) Revenues and other $ 733,587$ 369,060 Expenses (677,154 ) (481,407 )



Other income and (expenses) (136,116 ) (102,002 ) Income tax expense

(5,654 ) (7,536 ) Net loss $ (85,337 )$ (221,885 ) General and Administrative Expenses The Company's general and administrative expenses are associated with managing the business and affairs of LinnCo. For the three months ended March 31, 2014, LinnCo incurred total general and administrative expenses of approximately $734,000, of which approximately $83,000 had been paid by LINN Energy on LinnCo's behalf as of March 31, 2014. The expenses for the three months ended March 31, 2014, include approximately $470,000 related to services provided by LINN Energy necessary for the conduct of LinnCo's business, such as accounting, legal, tax, information technology and other expenses. In addition, during the three months ended March 31, 2014, LINN Energy paid approximately $11 million on LinnCo's behalf for general and administrative expenses incurred by LinnCo in 2013. For the three months ended March 31, 2013, LinnCo incurred total general and administrative expenses of approximately $12 million, of which approximately $2 million had been paid by LINN Energy on LinnCo's behalf as of March 31, 2013. Because all general and administrative expenses are actually paid by LINN Energy on LinnCo's behalf, no cash is disbursed by LinnCo. Income Tax Benefit Income tax benefit of approximately $12 million and income tax benefit of approximately $15 million for the three months ended March 31, 2014, and March 31, 2013, respectively, are based on the Company's net income (loss) for the periods, primarily associated with equity income (loss) from its investment in LINN Energy. Liquidity and Capital Resources The Company's authorized capital structure consists of two classes of interests: (1) shares with limited voting rights, which were issued in the IPO and (2) voting shares, 100% of which are held by LINN Energy. At March 31, 2014, LinnCo's issued capitalization consisted of $3.9 billion in common shares representing limited liability company interests ("shares") and $1,000 contributed by LINN Energy in connection with LinnCo's formation and in exchange for its voting share. Additional classes of equity interests may be created upon approval by the Board and the holders of a majority of the outstanding shares and voting shares, voting as separate classes. LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo's behalf, any legal, accounting, tax advisory, financial advisory and engineering fees, printing costs or other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of LinnCo shares or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses and registrar and transfer agent fees. The Company expects neither to generate nor to require significant cash in its ongoing business. Any cash received from the sale of additional shares will be immediately used to purchase additional LINN Energy units. Accordingly, the Company does not anticipate any other sources or needs for additional liquidity. Distributions and Dividends Within five (5) business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income tax liability ("tax reserve"), if any, as dividends to its shareholders. The following provides a summary of dividends paid by the Company during the three months ended March 31, 2014:



Date Paid Dividends Per Share Total Dividends

(in millions) March 2014 $ 0.2416 $ 31 February 2014 $ 0.2416 $ 31 January 2014 $ 0.2416 $ 31 On April 1, 2014, LINN Energy's Board declared a cash distribution of $0.725 per unit with respect to the first quarter of 2014, to be paid in three equal monthly installments of $0.2416 per unit. The first monthly distribution with respect to the first quarter of 2014, totaling approximately $31 million, was paid to LinnCo on April 16, 2014. On April 1, 2014, the Company's Board declared a cash dividend of $0.725 per common share with respect to the first quarter of 2014, to be paid in three equal monthly installments of $0.2416 per common share pending the receipt of the applicable cash distribution from LINN Energy. Company management has determined that no income tax reserve is required to be deducted from the cash dividend declared on April 1, 2014. The first monthly dividend with respect to the first quarter of 2014, totaling approximately $31 million, was paid on April 17, 2014, to shareholders of record as of the close of business on April 11, 2014. Contingencies See Part II. Item 1. "Legal Proceedings" for information regarding legal proceedings that the Company is party to and any contingencies related to these legal proceedings. Critical Accounting Policies and Estimates The discussion and analysis of the Company's financial condition and results of operations is based upon the financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities. 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 that are believed to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates and assumptions used in the preparation of the financial statements. Accounting for Investment in Linn Energy, LLC The Company uses the equity method of accounting related to its ownership interest in LINN Energy's net income (losses). The Company records its share of LINN Energy's net income (losses) in the period in which it is earned. At March 31, 2014, the Company owned approximately 39% of LINN Energy's outstanding units. The Company's ownership percentage could change as LINN Energy issues or repurchases additional units. Changes in the Company's ownership percentage affect its net income (losses). At March 31, 2014, the carrying amount of the Company's investment in LINN Energy exceeded the Company's ownership interest in LINN Energy's underlying net assets by approximately $1.3 billion. The difference is attributable to proved and unproved oil and natural gas properties, senior notes and equity method goodwill. These amounts are included in "investment in Linn Energy, LLC" on the balance sheet and are amortized over the lives of the related assets and liabilities. Such 13



--------------------------------------------------------------------------------

Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

amortization is included in the equity income from the Company's investment in LINN Energy. Equity method goodwill is not amortized; however, the investment is reviewed for impairment. Impairment testing is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of an investment that is other than temporary. As of March 31, 2014, no impairment had occurred with respect to the Company's investment in LINN Energy. Cautionary Statement This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond the Company's control. Because substantially all of LinnCo's assets consist of its interests in LINN Energy's units, these risks and uncertainties primarily relate to LINN Energy's business which include the following: • business strategy; • acquisition strategy; • financial strategy;



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

• ability to maintain or grow distributions;

• drilling locations;

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

• realized oil, natural gas and NGL prices;

• production volumes; • capital expenditures;



• economic and competitive advantages;

• credit and capital market conditions;

• regulatory changes;

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



• future operating results, including results of acquired properties;

• plans, objectives, expectations and intentions;

• taxes;

• cost to integrate Berry, which may be more expensive than anticipated as a result of unexpected factors or events; and • integration of the business and operations acquired in the Berry acquisition, which may take longer than anticipated, may be more costly than anticipated and may have an unanticipated adverse effect on LINN Energy's business.



All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 2. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expect," "plan," "project," "intend," "anticipate," "believe," "estimate," "predict," "potential," "pursue," "target," "continue," the negative of such terms or other comparable terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on LINN Energy and Company expectations, which reflect estimates and assumptions made by LINN Energy and Company management. These estimates and assumptions reflect management's best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management's assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the forward-looking statements or events will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors set forth in Item 1A. "Risk Factors" in the Annual Report on Form 10-K for the year ended December 31, 2013, and elsewhere in the Annual Report. The forward-looking statements speak only as of the date made and, other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk The nature of the Company's business and operations is such that no activities or transactions are conducted or entered into by the Company that would require it to have a discussion under this item.

14



--------------------------------------------------------------------------------

Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk - Continued For a discussion of these matters as they pertain to LINN Energy, please read Item 3. "Quantitative and Qualitative Disclosures About Market Risk" of LINN Energy's Quarterly Report on Form 10-Q for the three months ended March 31, 2014, which is included in this filing as Exhibit 99.1 and incorporated herein by reference as activities of LINN Energy have an impact on the Company's results of operations and financial position. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, and the Company's Audit Committee of the Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2014. Changes in the Company's Internal Control Over Financial Reporting The Company's management is also responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company's internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. There were no changes in the Company's internal controls over financial reporting during the first quarter of 2014 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting. 15



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters