UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended SeptemberJune 30, 20152016
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
forFor the transition period from _______________ to _______________
Commission File Number: 000-51719
LINN ENERGY, LLC
(Exact name of registrant as specified in its charter)
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| |
Delaware (State or other jurisdiction of incorporation or organization) | 65-1177591 (IRSI.R.S. Employer Identification No.) |
600 Travis, Suite 5100 Houston, Texas (Address of principal executive offices) | 77002 (Zip Code) |
(281) 840-4000 (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,”filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of OctoberJuly 31, 2015,2016, there were 355,039,816355,154,941 units outstanding.
GLOSSARY OF TERMS
As commonly used in the oil and natural gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:
Bbl. One stock tank barrel or 42 United States gallons liquid volume.
Bcf. One billion cubic feet.
Bcfe. One billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
MBbls/d. MBbls per day.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMBbls. One million barrels of oil or other liquid hydrocarbons.
MMBtu. One million British thermal units.
MMcf. One million cubic feet.
MMcf/d. MMcf per day.
MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMcfe/d. MMcfe per day.
MMMBtu. One billion British thermal units.
NGL. Natural gas liquids, which are the hydrocarbon liquids contained within natural gas.
PART I – FINANCIAL INFORMATION
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Item 1. | Financial Statements |
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | September 30, 2015 | | December 31, 2014 | June 30, 2016 | | December 31, 2015 |
| (in thousands, except unit amounts) | (in thousands, except unit amounts) |
ASSETS | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 344,806 |
| | $ | 1,809 |
| $ | 774,645 |
| | $ | 2,168 |
|
Accounts receivable – trade, net | 271,156 |
| | 471,684 |
| 202,597 |
| | 216,556 |
|
Derivative instruments | 1,132,164 |
| | 1,077,142 |
| 185 |
| | 1,220,230 |
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Other current assets | 112,222 |
| | 155,955 |
| 108,894 |
| | 95,593 |
|
Total current assets | 1,860,348 |
| | 1,706,590 |
| 1,086,321 |
| | 1,534,547 |
|
| | | | | | |
Noncurrent assets: | | | | | | |
Oil and natural gas properties (successful efforts method) | 18,061,991 |
| | 18,068,900 |
| 18,164,650 |
| | 18,121,155 |
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Less accumulated depletion and amortization | (7,953,397 | ) | | (4,867,682 | ) | (12,514,642 | ) | | (11,097,492 | ) |
| 10,108,594 |
| | 13,201,218 |
| 5,650,008 |
| | 7,023,663 |
|
| | | | | | |
Other property and equipment | 713,783 |
| | 669,149 |
| 726,821 |
| | 708,711 |
|
Less accumulated depreciation | (187,383 | ) | | (144,282 | ) | (222,192 | ) | | (195,661 | ) |
| 526,400 |
| | 524,867 |
| 504,629 |
| | 513,050 |
|
| | | | | | |
Derivative instruments | 721,733 |
| | 848,097 |
| — |
| | 566,401 |
|
Restricted cash | 257,043 |
| | 6,225 |
| 204,828 |
| | 257,363 |
|
Other noncurrent assets | 104,351 |
| | 136,512 |
| 31,388 |
| | 33,234 |
|
| 1,083,127 |
| | 990,834 |
| 236,216 |
| | 856,998 |
|
Total noncurrent assets | 11,718,121 |
| | 14,716,919 |
| 6,390,853 |
| | 8,393,711 |
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Total assets | $ | 13,578,469 |
| | $ | 16,423,509 |
| $ | 7,477,174 |
| | $ | 9,928,258 |
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| | | | | | |
LIABILITIES AND UNITHOLDERS’ CAPITAL | | | | |
LIABILITIES AND UNITHOLDERS’ DEFICIT | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued expenses | $ | 568,349 |
| | $ | 814,809 |
| $ | 347,920 |
| | $ | 455,374 |
|
Derivative instruments | 1,462 |
| | — |
| 1,694 |
| | 2,241 |
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Current portion of long-term debt, net | | 2,812,409 |
| | 3,714,693 |
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Other accrued liabilities | 182,178 |
| | 167,736 |
| 47,692 |
| | 119,593 |
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Total current liabilities | 751,989 |
| | 982,545 |
| 3,209,715 |
| | 4,291,901 |
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| | | | | | |
Noncurrent liabilities: | | | | |
Credit facilities | 3,478,175 |
| | 2,968,175 |
| |
Term loan | 500,000 |
| | 500,000 |
| |
Senior notes, net | 6,050,101 |
| | 6,827,634 |
| |
Derivative instruments | 743 |
| | 684 |
| — |
| | 857 |
|
Long-term debt, net | | — |
| | 5,292,676 |
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Other noncurrent liabilities | 603,156 |
| | 600,866 |
| 588,172 |
| | 611,725 |
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Total noncurrent liabilities | 10,632,175 |
| | 10,897,359 |
| |
Liabilities subject to compromise | | 5,069,158 |
| | — |
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| | | | | | |
Commitments and contingencies (Note 10) |
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Unitholders’ capital: | | | | |
355,050,314 units and 331,974,913 units issued and outstanding at September 30, 2015, and December 31, 2014, respectively | 5,334,115 |
| | 5,395,811 |
| |
Unitholders’ deficit: | | | | |
355,173,890 units and 355,017,428 units issued and outstanding at June 30, 2016, and December 31, 2015, respectively | | 5,361,400 |
| | 5,343,116 |
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Accumulated deficit | (3,139,810 | ) | | (852,206 | ) | (6,751,271 | ) | | (5,612,017 | ) |
| 2,194,305 |
| | 4,543,605 |
| (1,389,871 | ) | | (268,901 | ) |
Total liabilities and unitholders’ capital | $ | 13,578,469 |
| | $ | 16,423,509 |
| |
Total liabilities and unitholders’ deficit | | $ | 7,477,174 |
| | $ | 9,928,258 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands, except per unit amounts) | (in thousands, except per unit amounts) |
Revenues and other: | | | | | | | | | | | | | | |
Oil, natural gas and natural gas liquids sales | $ | 427,245 |
| | $ | 937,458 |
| | $ | 1,374,233 |
| | $ | 2,844,185 |
| $ | 316,257 |
| | $ | 496,419 |
| | $ | 599,572 |
| | $ | 946,988 |
|
Gains (losses) on oil and natural gas derivatives | 549,029 |
| | 451,702 |
| | 782,622 |
| | (198,579 | ) | (182,768 | ) | | (191,188 | ) | | (72,807 | ) | | 233,593 |
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Marketing revenues | 15,723 |
| | 39,836 |
| | 60,200 |
| | 100,655 |
| 14,520 |
| | 10,733 |
| | 28,825 |
| | 44,477 |
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Other revenues | 6,307 |
| | 6,119 |
| | 19,624 |
| | 19,392 |
| 7,386 |
| | 5,864 |
| | 14,572 |
| | 13,317 |
|
| 998,304 |
| | 1,435,115 |
| | 2,236,679 |
| | 2,765,653 |
| 155,395 |
| | 321,828 |
| | 570,162 |
| | 1,238,375 |
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Expenses: | | | | | | | | | | | | | | |
Lease operating expenses | 154,086 |
| | 191,630 |
| | 467,759 |
| | 570,564 |
| 115,543 |
| | 140,652 |
| | 253,188 |
| | 313,673 |
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Transportation expenses | 54,915 |
| | 53,412 |
| | 164,250 |
| | 143,896 |
| 52,037 |
| | 55,795 |
| | 106,960 |
| | 109,335 |
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Marketing expenses | 9,359 |
| | 31,574 |
| | 47,359 |
| | 75,920 |
| 11,305 |
| | 9,159 |
| | 23,593 |
| | 38,000 |
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General and administrative expenses | 60,113 |
| | 75,384 |
| | 237,731 |
| | 221,518 |
| 59,646 |
| | 98,650 |
| | 146,175 |
| | 177,618 |
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Exploration costs | 3,072 |
| | 7,850 |
| | 4,032 |
| | 10,492 |
| 48 |
| | 564 |
| | 2,741 |
| | 960 |
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Depreciation, depletion and amortization | 207,218 |
| | 290,287 |
| | 637,964 |
| | 832,523 |
| 143,171 |
| | 215,732 |
| | 307,229 |
| | 430,746 |
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Impairment of long-lived assets | 2,255,080 |
| | 603,250 |
| | 2,787,697 |
| | 603,250 |
| — |
| | — |
| | 1,153,904 |
| | 532,617 |
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Taxes, other than income taxes | 46,238 |
| | 66,770 |
| | 158,317 |
| | 201,014 |
| 30,847 |
| | 58,034 |
| | 64,914 |
| | 112,079 |
|
Gains on sale of assets and other, net | (166,980 | ) | | (35,803 | ) | | (197,263 | ) | | (27,750 | ) | |
(Gains) losses on sale of assets and other, net | | 2,942 |
| | (17,996 | ) | | 4,019 |
| | (30,283 | ) |
| 2,623,101 |
| | 1,284,354 |
| | 4,307,846 |
| | 2,631,427 |
| 415,539 |
| | 560,590 |
| | 2,062,723 |
| | 1,684,745 |
|
Other income and (expenses): | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | (138,383 | ) | | (154,047 | ) | | (427,584 | ) | | (422,160 | ) | (68,434 | ) | | (146,100 | ) | | (173,653 | ) | | (289,201 | ) |
Gain on extinguishment of debt | 197,741 |
| | — |
| | 213,527 |
| | — |
| — |
| | 9,151 |
| | — |
| | 15,786 |
|
Other, net | (1,701 | ) | | (1,847 | ) | | (10,060 | ) | | (6,699 | ) | (1,302 | ) | | (6,146 | ) | | (1,168 | ) | | (8,359 | ) |
| 57,657 |
| | (155,894 | ) | | (224,117 | ) | | (428,859 | ) | (69,736 | ) | | (143,095 | ) | | (174,821 | ) | | (281,774 | ) |
Loss before income taxes | (1,567,140 | ) | | (5,133 | ) | | (2,295,284 | ) | | (294,633 | ) | |
Reorganization items, net | | 534,884 |
| | — |
| | 534,884 |
| | — |
|
Income (loss) before income taxes | | 205,004 |
| | (381,857 | ) | | (1,132,498 | ) | | (728,144 | ) |
Income tax expense (benefit) | 2,177 |
| | (1,033 | ) | | (7,680 | ) | | 2,674 |
| (3,488 | ) | | (2,730 | ) | | 6,756 |
| | (9,857 | ) |
Net loss | $ | (1,569,317 | ) | | $ | (4,100 | ) | | $ | (2,287,604 | ) | | $ | (297,307 | ) | |
Net income (loss) | | $ | 208,492 |
| | $ | (379,127 | ) | | $ | (1,139,254 | ) | | $ | (718,287 | ) |
| | | | | | | | | | | | | | |
Net loss per unit: | | | | | | | | |
Net income (loss) per unit: | | | | | | | | |
Basic | $ | (4.47 | ) | | $ | (0.02 | ) | | $ | (6.72 | ) | | $ | (0.92 | ) | $ | 0.59 |
| | $ | (1.12 | ) | | $ | (3.23 | ) | | $ | (2.15 | ) |
Diluted | $ | (4.47 | ) | | $ | (0.02 | ) | | $ | (6.72 | ) | | $ | (0.92 | ) | $ | 0.59 |
| | $ | (1.12 | ) | | $ | (3.23 | ) | | $ | (2.15 | ) |
Weighted average units outstanding: | | | | | | | | | | | | | | |
Basic | 350,695 |
| | 329,168 |
| | 340,831 |
| | 328,783 |
| 352,789 |
| | 340,934 |
| | 352,511 |
| | 335,817 |
|
Diluted | 350,695 |
| | 329,168 |
| | 340,831 |
| | 328,783 |
| 352,789 |
| | 340,934 |
| | 352,511 |
| | 335,817 |
|
| | | | | | | | | | | | | | |
Distributions declared per unit | $ | 0.313 |
| | $ | 0.725 |
| | $ | 0.938 |
| | $ | 2.175 |
| $ | — |
| | $ | 0.313 |
| | $ | — |
| | $ | 0.625 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS’ CAPITALDEFICIT
(Unaudited)
|
| | | | | | | | | | | | | | | | | | |
| Units | | Unitholders’ Capital | | Accumulated Deficit | | Treasury Units (at Cost) | | Total Unitholders’ Capital |
| (in thousands) |
| | | | | | | | | |
December 31, 2014 | 331,975 |
| | $ | 5,395,811 |
| | $ | (852,206 | ) | | $ | — |
| | $ | 4,543,605 |
|
Sale of units, net of offering costs of $8,762 | 19,622 |
| | 224,665 |
| | — |
| | — |
| | 224,665 |
|
Issuance of units | 3,644 |
| | — |
| | — |
| | — |
| | — |
|
Cancellation of units | (191 | ) | | (672 | ) | | — |
| | 672 |
| | — |
|
Purchase of units | | | — |
| | — |
| | (672 | ) | | (672 | ) |
Distributions to unitholders | | | (323,878 | ) | | — |
| | — |
| | (323,878 | ) |
Unit-based compensation expenses | | | 47,918 |
| | — |
| | — |
| | 47,918 |
|
Excess tax benefit from unit-based compensation and other | | | (9,729 | ) | | — |
| | — |
| | (9,729 | ) |
Net loss | | | — |
| | (2,287,604 | ) | | — |
| | (2,287,604 | ) |
September 30, 2015 | 355,050 |
| | $ | 5,334,115 |
| | $ | (3,139,810 | ) | | $ | — |
| | $ | 2,194,305 |
|
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| | | | | | | | | | | | | | |
| Units | | Unitholders’ Capital | | Accumulated Deficit | | Total Unitholders’ Deficit |
| (in thousands) |
| | | | | | | |
December 31, 2015 | 355,017 |
| | $ | 5,343,116 |
| | $ | (5,612,017 | ) | | $ | (268,901 | ) |
Issuance of units | 157 |
| | — |
| | — |
| | — |
|
Unit-based compensation expenses | | | 18,553 |
| | — |
| | 18,553 |
|
Excess tax benefit from unit-based compensation and other | | | (269 | ) | | — |
| | (269 | ) |
Net loss | | | — |
| | (1,139,254 | ) | | (1,139,254 | ) |
June 30, 2016 | 355,174 |
| | $ | 5,361,400 |
| | $ | (6,751,271 | ) | | $ | (1,389,871 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in thousands) | (in thousands) |
Cash flow from operating activities: | | | | | | |
Net loss | $ | (2,287,604 | ) | | $ | (297,307 | ) | $ | (1,139,254 | ) | | $ | (718,287 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation, depletion and amortization | 637,964 |
| | 832,523 |
| 307,229 |
| | 430,746 |
|
Impairment of long-lived assets | 2,787,697 |
| | 603,250 |
| 1,153,904 |
| | 532,617 |
|
Unit-based compensation expenses | 47,918 |
| | 43,692 |
| 18,553 |
| | 33,711 |
|
Gain on extinguishment of debt | (213,527 | ) | | — |
| — |
| | (15,786 | ) |
Amortization and write-off of deferred financing fees | 23,798 |
| | 29,236 |
| 9,829 |
| | 17,546 |
|
Gains on sale of assets and other, net | (193,768 | ) | | (33,135 | ) | |
(Gains) losses on sale of assets and other, net | | 3,287 |
| | (25,894 | ) |
Deferred income taxes | (8,263 | ) | | 2,619 |
| 3,921 |
| | (9,857 | ) |
Reorganization items, net | | (555,922 | ) | | — |
|
Derivatives activities: | | | | | | |
Total (gains) losses | (785,520 | ) | | 198,579 |
| 77,212 |
| | (236,653 | ) |
Cash settlements | 858,368 |
| | (12,507 | ) | 508,097 |
| | 566,343 |
|
Cash settlements on canceled derivatives | | 358,428 |
| | — |
|
Changes in assets and liabilities: | | | | | | |
(Increase) decrease in accounts receivable – trade, net | 207,062 |
| | (56,014 | ) | |
Decrease in other assets | 2,683 |
| | 3,284 |
| |
Decrease in accounts receivable – trade, net | | 9,697 |
| | 169,978 |
|
(Increase) decrease in other assets | | (20,074 | ) | | 3,523 |
|
Increase (decrease) in accounts payable and accrued expenses | (36,626 | ) | | 112,235 |
| 42,700 |
| | (47,474 | ) |
Increase (decrease) in other liabilities | (5,413 | ) | | 9,355 |
| 23,594 |
| | (27,031 | ) |
Net cash provided by operating activities | 1,034,769 |
| | 1,435,810 |
| 801,201 |
| | 673,482 |
|
| | | | | | |
Cash flow from investing activities: | | | | | | |
Acquisition of oil and natural gas properties and joint-venture funding | — |
| | (2,601,932 | ) | |
Development of oil and natural gas properties | (503,206 | ) | | (1,176,478 | ) | (100,565 | ) | | (416,347 | ) |
Purchases of other property and equipment | (51,529 | ) | | (50,138 | ) | (21,393 | ) | | (29,287 | ) |
Decrease in restricted cash | | 53,418 |
| | — |
|
Proceeds from sale of properties and equipment and other | 364,195 |
| | (7,485 | ) | (2,571 | ) | | 58,714 |
|
Net cash used in investing activities | (190,540 | ) | | (3,836,033 | ) | (71,111 | ) | | (386,920 | ) |
| | | | | | |
Cash flow from financing activities: | | | | | | |
Proceeds from sale of units | 233,427 |
| | — |
| — |
| | 233,427 |
|
Proceeds from borrowings | 1,405,000 |
| | 5,300,024 |
| 978,500 |
| | 645,000 |
|
Repayments of debt | (1,701,909 | ) | | (2,156,124 | ) | (914,803 | ) | | (850,051 | ) |
Distributions to unitholders | (323,878 | ) | | (721,235 | ) | — |
| | (212,631 | ) |
Financing fees and offering costs | (8,774 | ) | | (68,614 | ) | (623 | ) | | (8,649 | ) |
Excess tax benefit from unit-based compensation | (9,467 | ) | | 4,031 |
| — |
| | (9,467 | ) |
Other | (95,631 | ) | | 49,131 |
| (20,687 | ) | | (82,057 | ) |
Net cash provided by (used in) financing activities | (501,232 | ) | | 2,407,213 |
| 42,387 |
| | (284,428 | ) |
| | | | | | |
Net increase in cash and cash equivalents | 342,997 |
| | 6,990 |
| 772,477 |
| | 2,134 |
|
Cash and cash equivalents: | | | | | | |
Beginning | 1,809 |
| | 52,171 |
| 2,168 |
| | 1,809 |
|
Ending | $ | 344,806 |
| | $ | 59,161 |
| $ | 774,645 |
| | $ | 3,943 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
Nature of Business
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and natural gas company. LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. The Company’s properties are located in eight operating regions in the United States (“U.S.”), in the Rockies, the Hugoton Basin, California, the Mid-Continent, east Texas and north Louisiana (“TexLa”), the Permian Basin, TexLa, South TexasMichigan/Illinois and Michigan/Illinois.south Texas.
Principles of Consolidation and Reporting
The information reported herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations; as such, this report should be read in conjunction with the financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation. Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.
The reference to “Berry” herein refers to Berry Petroleum Company, LLC, which is an indirect 100% wholly owned subsidiary of LINN Energy. The reference to “LinnCo” herein refers to LinnCo, LLC, which is an affiliate of LINN Energy.
The condensed consolidated financial statements for previous periods include certain reclassifications that were made to conform to current presentation. Such reclassifications have no impact on previously reported net income (loss), unitholders’ capitaldeficit or cash flows.
Bankruptcy Accounting
As discussed further in Note 2, on May 11, 2016 (the “Petition Date”), the Company and certain of its direct and indirect subsidiaries (collectively with the Company, the “LINN Debtors”), LinnCo and Berry (collectively with the LINN Debtors and LinnCo, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for relief under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). During the pendency of the Chapter 11 proceedings, the Debtors will operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
The condensed consolidated financial statements have been prepared as if the Company is a going concern and reflect the application of Accounting Standards Codification 852 “Reorganizations” (“ASC 852”). ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on the Company’s condensed consolidated statements of operations. In addition, prepetition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as “liabilities subject to compromise” on the Company’s condensed consolidated balance sheet at June 30, 2016. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, although they may be settled for less.
The accompanying condensed consolidated financial statements do not purport to reflect or provide for the consequences of the Chapter 11 proceedings. In particular, the condensed consolidated financial statements do not purport to show: (i) the realizable
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on unitholders’ deficit accounts of any changes that may be made to the Company’s capitalization; or (iv) the effect on operations of any changes that may be made to the Company’s business. While operating as debtor-in-possession under Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities in amounts other than those reflected on its condensed consolidated financial statements, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. Further, a plan of reorganization could materially change the amounts and classifications on the Company’s historical condensed consolidated financial statements.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. The estimates that are particularly significant to the financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, fair values of commodity derivatives and fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Issued Accounting Standards
In April 2015,March 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Components of this ASU will be applied either prospectively, retrospectively or under a modified retrospective basis (as applicable for the respective provision) as of the date of adoption and is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued an ASU that is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. This ASU will be applied retrospectively as of the date of adoption and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years (early adoption permitted). The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements and related disclosures.
In November 2015, the FASB issued an ASU that is intended to simplify the presentation of deferred taxes by requiring that all deferred taxes be classified as noncurrent, presented as a single noncurrent amount for each tax-paying component of an entity. The ASU is effective for fiscal years beginning after December 15, 2016; however, the Company early adopted it on January 1, 2016, on a retrospective basis. The adoption of this ASU resulted in the reclassification of previously-classified net current deferred taxes of approximately $22 million from “other current assets,” as well as previously-classified net noncurrent deferred tax liabilities of approximately $11 million from “other noncurrent liabilities,” to “other noncurrent assets” resulting in net noncurrent deferred taxes of approximately $11 million on the Company’s consolidated balance sheet at December 31, 2015. There was no impact to the consolidated statements of operations.
In April 2015, the FASB issued an ASU that is intended to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented inon the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU will be applied retrospectively as of the date of adoption and is effective for fiscal years beginning after December 15, 2015, and interim periods within those years (early adoption permitted). Adoption of this ASU is expected
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
to resultcarrying amount of that debt liability, consistent with debt discounts. The Company adopted this ASU on January 1, 2016, on a retrospective basis. The adoption of this ASU resulted in a decrease tothe reclassification of approximately $37 million of unamortized deferred financing fees (which excludes deferred financing fees associated with the Company’s assets and liabilitiesCredit Facilities, as defined in itsNote 6, which were not reclassified) from an asset to a direct deduction from the carrying amount of the associated debt liability on the consolidated balance sheets, withsheet at December 31, 2015. There was no impact to the consolidated statements of operations.
In August 2014, the FASB issued an ASU that provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter (early adoption permitted). The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements or related disclosures.
In May 2014, the FASB issued an ASU that is intended to improve and converge the financial reporting requirements for revenue from contracts with customers. This ASU will be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years (early adoption permitted for fiscal years beginning after December 15, 2016, including interim periods within that year). The Company is currently evaluating the impact, if any, of the adoption of this ASU on its consolidated financial statements and related disclosures.
Note 2 – Divestiture, Acquisitions, Exchange of PropertiesChapter 11 Proceedings, Ability to Continue as a Going Concern and Joint-Venture FundingCovenant Violations
Divestiture – 2015Chapter 11 Proceedings
On August 31, 2015,the Petition Date, the Debtors filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors’ Chapter 11 cases are being administered jointly under the caption In re Linn Energy, LLC., et al., Case No. 16‑60040.
The Debtors are operating their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted certain relief requested by the Debtors, allowing the Company through certain ofto use its wholly owned subsidiaries, completed the sale of its remaining position in Howard County in the Permian Basin. Cash proceeds received from the sale of these properties were approximately $276 million, net of costs to sell of approximately $1 million, and the Company recognized a net gain of approximately $174 million. The gain is included in “gains on sale of assets and other, net” on the condensed consolidated statements of operations. The Company used the net proceeds from the sale to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurredcash to fund the repurchase of a portion of its senior notes during 2015 (see Note 6).
Acquisitions – 2014
On SeptemberChapter 11 2014,proceedings, pursuant to an agreement with the first lien lenders, and giving the Company completed the acquisition of certain oilauthority to, among other things, continue to pay employee wages and natural gas properties located in the Hugoton Basin from Pioneer Natural Resources Company (“Pioneer”benefits without interruption, to utilize its current cash management system and the acquisition, the “Pioneer Assets Acquisition”) for total consideration of approximately $328 million, which was initially financed with borrowings under the LINN Credit Facility.
On August 29, 2014, the Company completed the acquisition of certain oil and natural gas properties located in five operating regions in the U.S. from subsidiaries of Devon Energy Corporation (“Devon” and the acquisition, the “Devon Assets Acquisition”) for total consideration of approximately $2.1 billion, which was initially financed with proceeds from a bridge loan and borrowings under a short-period term loan.
to make royalty payments. During the third quarterpendency of 2014, the Company usedChapter 11 proceedings, all transactions outside the net proceeds from the issuance of its 6.50% senior notes due May 2019 and 6.50% senior notes due September 2021 to repay the bridge loan in full, and during the fourth quarter of 2014, the Company used the net proceeds from the sales of its Granite Wash properties as well as certain of its Wolfberry properties to repay the short-period term loan in full.
The revenues and expenses related to the Devon Assets Acquisition are included on the Company’s condensed consolidated statements of operations as of August 29, 2014. The following unaudited pro forma financial information presents a summaryordinary course of the Company’s condensed combined resultsbusiness require prior approval of operations for the three monthsBankruptcy Court. For goods and nine months ended September 30, 2014, assumingservices provided following the Devon Assets Acquisition had been completed as of January 1, 2014, including adjustmentsPetition Date, the Company intends to reflect the values assignedpay vendors in full under normal terms.
Restructuring Support Agreement
Prior to the net assets acquired. Petition Date, on May 10, 2016, the Debtors entered into a restructuring support agreement (“Restructuring Support Agreement”) with certain holders (“Consenting Creditors”) collectively holding or controlling at least 66.67% by aggregate outstanding principal amounts under (i) the Company’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) and (ii) Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”).
The pro forma financial information has been prepared for informational purposes only and does not purportRestructuring Support Agreement sets forth, subject to represent whatcertain conditions, the actual results of operations would have been had the transaction been completed ascommitment of the date assumed, nor is this information necessarily indicativeConsenting Creditors to support a comprehensive restructuring of future consolidated resultsthe Debtors’ long-term debt (“Restructuring Transactions”). The Restructuring Transactions will be effectuated through one or more plans of operations. reorganization (“Plan”) to be filed in the Chapter 11 proceedings.
The pro forma financial information doesRestructuring Support Agreement provides that the Consenting Creditors will support the use of the LINN Debtors’ and Berry’s cash collateral under specified terms and conditions, including adequate protection terms. The Restructuring Support Agreement obligates the Debtors and the Consenting Creditors to, among other things, support and not give effectinterfere with consummation of the Restructuring Transactions and, as to the costsConsenting Creditors, vote their claims in favor of any integration activities or benefits thatthe Plan. The Restructuring Support Agreement may result frombe terminated upon the realizationoccurrence of future cost savings from operating efficiencies, or anycertain events, including the failure to meet specified milestones relating to, among other synergies that may result fromrequirements, the transaction.filing, confirmation and consummation of the Plan, and in the
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
event of breaches by the parties of certain provisions of the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 250 days of the Petition Date. There can be no assurance that the Restructuring Transactions will be consummated.
Magnitude of Potential Claims
On July 11, 2016, the Debtors filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. The schedules and statements may be subject to further amendment or modification after filing. Holders of prepetition claims will be required to file proofs of claims by the applicable deadline for filing certain proofs of claims in the Debtors’ Chapter 11 cases. The court has not yet confirmed the claims deadlines. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process.
Liabilities Subject to Compromise
The Company’s condensed consolidated balance sheet includes amounts classified as “liabilities subject to compromise,” which represent prepetition liabilities that have been allowed, or that the Company anticipates will be allowed, as claims in its Chapter 11 cases. The amounts represent the Company’s current estimate of known or potential obligations to be resolved in connection with the Chapter 11 proceedings. The differences between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.
The following table summarizes the components of liabilities subject to compromise included on the condensed consolidated balance sheet:
|
| | | | | | | |
| Three Months Ended September 30, 2014 | | Nine Months Ended September 30, 2014 |
| (in thousands, except per unit amounts) |
| | | |
Total revenues and other | $ | 1,509,498 |
| | $ | 3,117,792 |
|
Total operating expenses | $ | (1,330,384 | ) | | $ | (2,846,361 | ) |
Net income (loss) | $ | 1,480 |
| | $ | (251,192 | ) |
| | | |
Net income (loss) per unit: | | | |
Basic | $ | — |
| | $ | (0.78 | ) |
Diluted | $ | — |
| | $ | (0.78 | ) |
|
| | | |
| June 30, 2016 |
| (in thousands) |
| |
Accounts payable and accrued expenses | $ | 52,807 |
|
Accrued interest payable | 159,422 |
|
Debt | 4,856,929 |
|
Liabilities subject to compromise | $ | 5,069,158 |
|
Reorganization Items, Net
The pro forma condensed combinedCompany has incurred and is expected to continue to incur significant costs associated with the reorganization. These costs, which are expensed as incurred, are expected to significantly affect the Company’s results of operations includes adjustments to:
Reflect the results of the Devon Assets Acquisition.
Reflect incremental depreciation, depletionoperations. Reorganization items represent costs and amortization expense, using the unit-of-production method related to oil and natural gas properties acquired and an estimated useful life of 10 years for other property and equipment.
Reflect incremental accretion expense related to asset retirement obligations on oil and natural gas properties acquired.
Reflect an increase in interest expense related to incremental debt of $2.3 billion incurred to fund the purchase price.
Reflect incremental amortization of deferred financing feesincome directly associated with debt incurredthe Chapter 11 proceedings since the Petition Date, and also include adjustments to fund the purchase price.
Exclude transaction costs related to the Devon Assets Acquisition included in the historical statements of operations as they reflect nonrecurring charges not expected to have a continuing impact on the combined results.
Exchange of Properties – 2014
On August 15, 2014, the Company, through two of its wholly owned subsidiaries, completed the trade of a portion of its Permian Basin properties to Exxon Mobil Corporation and its affiliates, including its wholly owned subsidiary XTO Energy Inc., in exchange for properties in the Hugoton Basin. The noncash exchange was accounted for at fair value and the Company recognized a net gain of approximately $45 million, including costs to sell of approximately $3 million. The gain is equal to the difference between the carrying value andof certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are determined.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The following table summarizes the fair valuecomponents of the assets exchanged less costs to sell, and isreorganization items included in “gains on sale of assets and other, net” on the condensed consolidated statements of operations. The fair value measurements were basedoperations:
|
| | | |
| Three Months and Six Months Ended June 30, 2016 |
| (in thousands) |
| |
Legal and other professional advisory fees | $ | (20,510 | ) |
Unamortized deferred financing fees, discounts and premiums | (41,122 | ) |
Gain related to interest payable on the 12.00% senior secured second lien notes due December 2020 (1) | 551,000 |
|
Terminated contracts | 45,109 |
|
Other | 407 |
|
Reorganization items, net | $ | 534,884 |
|
| |
(1) | Represents a noncash gain on the write-off of postpetition contractual interest through maturity, recorded to reflect the carrying value of the liability subject to compromise at its estimated allowed claim amount. |
Effect of Filing on inputs that are not observableCreditors and therefore represent Level 3 inputsUnitholders
Subject to certain exceptions, under the fair value hierarchy.Bankruptcy Code, the filing of Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ prepetition liabilities are subject to settlement under the Bankruptcy Code. Although the filing of Bankruptcy Petitions triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. The Company did not record interest expense on its 12.00% senior secured second lien notes (“Second Lien Notes”) or senior notes for the period from May 12, 2016, through June 30, 2016. For that period, contractual interest on the Second Lien Notes and senior notes was approximately $54 million.
Joint-Venture FundingUnder the Bankruptcy Code, unless creditors agree otherwise, prepetition liabilities and postpetition liabilities must be satisfied in full before the holders of the Company’s existing common units representing limited liability company interests (“units”) are entitled to receive any settlement or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or unitholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 proceedings to each of these constituencies or what types or amounts of settlements, if any, they will receive. A plan of reorganization could result in holders of the Debtors’ liabilities and/or units receiving no settlement on account of their interests and cancellation of their holdings.
Appointment of Creditors Committee
On May 23, 2016, the Bankruptcy Court appointed the official committee for unsecured creditors (the “Creditors Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors.
Rejection of Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and satisfaction of certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for damages. Generally, the assumption of an executory contract or
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – 2014Continued
During(Unaudited)
unexpired lease requires the first quarterDebtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of 2014,future performance. Accordingly, any description of an executory contract or unexpired lease with any of the Debtors in this Quarterly Report on Form 10-Q, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the applicable Debtor, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto.
Process for Plan of Reorganization
In order to successfully exit bankruptcy, the Debtors will need to propose, and obtain confirmation by the Bankruptcy Court of, a Plan that satisfies the requirements of the Bankruptcy Code. A Plan would, among other things, resolve the Debtors’ prepetition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to exit from bankruptcy.
The Debtors have an exclusive right to file a Plan within 120 days from the Petition Date, subject to an extension for cause. If the Debtors’ exclusive filing period lapses, any party in interest may file a Plan for any of the Debtors.
In addition to being voted on by holders of impaired claims and equity interests, a Plan must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective. A Plan would be accepted by holders of claims against and equity interests in the Debtors if (i) at least one-half in number and two-thirds in dollar amount of claims actually voting in each class of claims impaired by the Plan have voted to accept the Plan and (ii) at least two-thirds in amount of equity interests impaired by the Plan actually voting has voted to accept the Plan. A class of claims or equity interests that does not receive or retain any property under the Plan on account of such claims or interests is deemed to have voted to reject the Plan.
Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a Plan even if such Plan has not been accepted by all impaired classes of claims and equity interests. The precise requirements and evidentiary showing for confirming a Plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., unsecured or secured claims, subordinated or senior claims). Generally, with respect to units, a Plan may be “crammed down” even if the unitholders receive no recovery if the proponent of the Plan demonstrates that (1) no class junior to the units are receiving or retaining property under the Plan and (2) no class of claims or interests senior to the units are being paid approximately $25 million,more than in full.
The timing of filing a Plan by the Debtors will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 proceedings. Although the Debtors expect to file a Plan that provides for emergence from bankruptcy as a going concern, there can be no assurance at this time that the Debtors will be able to successfully develop, confirm and consummate one or more plans of reorganization or other alternative restructuring transactions, including interest,a sale of all or substantially all of the Debtors’ assets, that satisfies the conditions of the Bankruptcy Code and is confirmed by the Bankruptcy Court, or that any such Plan will be implemented successfully.
As of August 4, 2016, the Debtors have not yet filed a Plan.
Ability to completeContinue as a Going Concern
Continued low commodity prices have resulted in significantly lower levels of cash flow from operating activities and have limited the total funding commitmentCompany’s ability to access the capital markets. In addition, each of $400 millionthe Company’s Credit Facilities is subject to scheduled redeterminations of its borrowing base, semi-annually in April and October, based primarily on reserve reports using lender commodity price expectations at such time. The lenders under the Credit Facilities agreed to defer the April 2016 borrowing base redeterminations to May 11, 2016. Continued low commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the termination of the Company’s hedges, were expected to adversely impact upcoming redeterminations and have a significant negative impact on the Company’s liquidity. The Company’s filing of
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under its Credit Facilities, its Second Lien Notes and its senior notes.
The significant risks and uncertainties related to the joint-venture agreement itCompany’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
In order to decrease the Company’s level of indebtedness and maintain the Company’s liquidity at levels sufficient to meet its commitments, the Company undertook a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. Despite taking these actions, the Company did not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code.
Covenant Violations
The Company’s filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under its Credit Facilities, its Second Lien Notes and its senior notes. Additionally, other events of default, including cross-defaults, are present, including the failure to make interest payments on the Company’s Second Lien Notes and certain of its senior notes, as well as the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2015. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 6 for additional details about the Company’s debt.
Credit Facilities
The Company’s Credit Facilities contain a requirement to deliver audited consolidated financial statements without a going concern or like qualification or exception. Consequently, the filing of the Company’s 2015 Annual Report on Form 10-K which included such explanatory paragraph resulted in a default under the LINN Credit Facility as of the filing date, March 15, 2016, subject to a 30 day grace period.
On April 12, 2016, the Company entered into amendments to both the LINN Credit Facility and Berry Credit Facility. The amendments provided for, among other things, an agreement that (i) certain events (the “Specified Events”) would not become defaults or events of default until May 11, 2016, (ii) the borrowing bases would remain constant until May 11, 2016, unless reduced as a result of swap agreement terminations or collateral sales and (iii) the Company, the administrative agent and the lenders would negotiate in good faith the terms of a restructuring support agreement in furtherance of a restructuring of the capital structure of the Company and its subsidiaries. In addition, the amendment to the Berry Credit Facility provided Berry with an affiliateaccess to previously restricted cash of Anadarko Petroleum Corporation$45 million in order to fund ordinary course operations.
Pursuant to the amendments, the Specified Events consisted of:
The receipt of a going concern qualification or explanatory statement in the auditors’ report on the Company’s consolidated financial statements for the year ended December 31, 2015;
The receipt of a going concern qualification or explanatory statement in the auditors’ report on Berry’s financial statements for the year ended December 31, 2015;
The failure of the Company or Berry to make certain interest payments on their unsecured notes;
Any cross-defaults that may arise on account of any of the foregoing, provided that no event of default is continuing under any document giving rise to such cross default; and
Any failure to provide notice of any of the events described above.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The Specified Events listed in the amendment to the Berry Credit Facility also included the failure to maintain the ratio of Adjusted EBITDAX to Interest Expense (as each term is defined in the Berry Credit Facility) (“Anadarko”Interest Coverage Ratio”).
As a condition to closing the amendments, in April 2012.2016, (a) the Company made a $100 million permanent repayment of a portion of the borrowings outstanding under the LINN Credit Facility and (b) the Company and certain of its subsidiaries provided control agreements over certain deposit accounts.
Pursuant to the terms of the amendment to the LINN Credit Facility and as a result of the execution of the Restructuring Support Agreement, in May 2016, the Company made a $350 million permanent repayment of a portion of the borrowings outstanding under the LINN Credit Facility.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Credit Facilities. However, under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of the default.
Second Lien Notes
The indenture governing the Second Lien Notes (“Second Lien Indenture”) required the Company to deliver mortgages by February 18, 2016, subject to a 45 day grace period. The Company elected to exercise its right to the grace period, which resulted in the Company being in default under the Second Lien Indenture.
On April 4, 2016, the Company entered into a settlement agreement with certain holders of the Second Lien Notes and agreed to deliver, and make arrangements for recordation of, the mortgages. The Company has since delivered and made arrangements for recordation of the mortgages.
The settlement agreement required the parties to commence good faith negotiations with each other regarding the terms of a potential comprehensive and consensual restructuring, including a potential restructuring under a Chapter 11 plan of reorganization. The settlement agreement provided that in the event the parties were unable to reach agreement on the terms of a consensual restructuring on or before the commencement of such Chapter 11 proceedings (or such later date as mutually agreed to by the parties), the parties would support entry by the Bankruptcy Court of a settlement order that, among other things, (i) approves the issuance of additional notes, in the principal amount of $1.0 billion plus certain accrued interest, on a proportionate basis to existing holders of the Second Lien Notes and (ii) releases the mortgages and other collateral upon the issuance of the additional notes (the “Settlement Order”).
The settlement agreement will terminate upon, among other events, entry by the Bankruptcy Court of a final, non-appealable order denying the Company’s motion seeking entry of the Settlement Order.
The Company failed to make an interest payment of approximately $68 million due June 15, 2016, on the Second Lien Notes.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Second Lien Indenture. However, under the Bankruptcy Code, holders of the Second Lien Notes are stayed from taking any action against the Company as a result of the default.
Senior Notes
The Company deferred making interest payments totaling approximately $60 million due March 15, 2016, including approximately $30 million on LINN Energy’s 7.75% senior notes due February 2021, approximately $12 million on LINN Energy’s 6.50% senior notes due September 2021 and approximately $18 million on Berry’s 6.375% senior notes due September 2022, which resulted in the Company being in default under these senior notes. The indentures governing each of the applicable series of notes provided the Company a 30 day grace period to make the interest payments.
On April 14, 2016, within the 30 day interest payment grace period provided for in the indentures governing the notes, the Company and Berry made interest payments of approximately $60 million in satisfaction of their respective obligations.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The Company failed to make an interest payment of approximately $31 million due April 15, 2016, on LINN Energy’s 8.625% senior notes due April 2020, interest payments due May 1, 2016, of approximately $18 million on LINN Energy’s 6.25% senior notes due November 2019 and approximately $9 million on Berry’s 6.75% senior notes due November 2020, and an interest payment of approximately $18 million due May 15, 2016, on LINN Energy’s 6.50% senior notes due May 2019.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the indentures governing the senior notes. However, under the Bankruptcy Code, holders of the senior notes are stayed from taking any action against the Company as a result of the default.
Note 3 – Unitholders’ CapitalDeficit
Delisting from Stock Exchange
As a result of the Company’s failure to comply with the NASDAQ Global Select Market (“NASDAQ”) continued listing requirements, on May 24, 2016, the Company’s units began trading over the counter on the OTC Markets Group Inc.’s Pink marketplace under the trading symbol “LINEQ.”
At-the-Market Offering Program
The Company’s Board of Directors has authorized the sale of up to $500 million of units under an at-the-market offering program. SalesSubject to approval by the Bankruptcy Court, sales of units, if any, will be made under an equity distribution agreement by means of ordinary brokers’ transactions, through the facilities of the NASDAQ Global Select Market, any othera national securities exchange or facility thereof, a trading facility of a national securities association or an alternate trading system, to or through a market maker or directly on or through an electronic communication network, a “dark pool” or any similar market venue, at market prices, in block transactions, or as
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
otherwise agreed with a sales agent. The Company expects to use the net proceeds from any sale of units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
No sales were made under the equity distribution agreement during the six months ended June 30, 2016. During the ninesix months ended SeptemberJune 30, 2015, the Company, under its equity distribution agreement, sold 3,621,983 units representing limited liability company interests at an average unit price of $12.37 per unit for net proceeds of approximately $44 million (net of approximately $448,000 in commissions). In connection with the issuance and sale of these units, the Company also incurred professional services expenses of approximately $459,000. The Company used the net proceeds for general corporate purposes, including the open market repurchases of a portion of its senior notes (see Note 6). At SeptemberJune 30, 2015,2016, units totaling approximately $455 million in aggregate offering price remained available to be sold under the agreement.
Public Offering of Units
In May 2015, the Company sold 16,000,000 units representing limited liability company interests in an underwritten public offering at $11.79 per unit ($11.32 per unit, net of underwriting discount) for net proceeds of approximately $181 million (after underwriting discount and offering costs of approximately $8 million). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurred to fund the open market repurchases of a portion of its senior notes during 2015 (see Note 6).
Forfeiture of Units in Exchange for Cash
In August 2015, in accordance with terms of the separation agreement between the Company and Kolja Rockov dated August 31, 2015, Mr. Rockov agreed to forfeit 191,446 units issued to him under the Company’s equity compensation plan (see Note 5) in exchange for payment of approximately $672,000. These units will remain available for issuance under the Company’s equity compensation plan.
Distributions
Under the Company’s limited liability company agreement, unitholders are entitled to receive a distribution of available cash, which includes cash on hand plus borrowings less any reserves established by the Company’s Board of Directors to provide for the proper conduct of the Company’s business (including reserves for future capital expenditures, including drilling, acquisitions and anticipated future credit needs) or to fund distributions, if any, over the next four quarters. Distributions paid by the Company are presented on the condensed consolidated statement of unitholders’ capital and the condensed consolidated statements of cash flows. Monthly distributions were paid by the Company through September 2015. In October 2015, the Company’s Board of Directors determined to suspend payment of the Company’s distribution. The Company’s Board of Directors will continue to evaluate the Company’s ability to reinstate the distribution.distribution; however, as a result of the Chapter 11 proceedings, the Company cannot pay any distributions without the prior approval of the Bankruptcy Court. Distributions paid by the Company during 2015 are presented on the condensed consolidated statement of cash flows.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Note 4 – Oil and Natural Gas Properties
Oil and Natural Gas Capitalized Costs
Aggregate capitalized costs related to oil, natural gas and NGL production activities with applicable accumulated depletion and amortization are presented below:
| | | September 30, 2015 | | December 31, 2014 | June 30, 2016 | | December 31, 2015 |
| (in thousands) | (in thousands) |
Proved properties: | | | | | | |
Leasehold acquisition | $ | 13,296,925 |
| | $ | 13,362,642 |
| $ | 13,372,326 |
| | $ | 13,361,171 |
|
Development | 2,909,071 |
| | 2,830,841 |
| 3,015,885 |
| | 2,976,643 |
|
Unproved properties | 1,855,995 |
| | 1,875,417 |
| 1,776,439 |
| | 1,783,341 |
|
| 18,061,991 |
| | 18,068,900 |
| 18,164,650 |
| | 18,121,155 |
|
Less accumulated depletion and amortization | (7,953,397 | ) | | (4,867,682 | ) | (12,514,642 | ) | | (11,097,492 | ) |
| $ | 10,108,594 |
| | $ | 13,201,218 |
| $ | 5,650,008 |
| | $ | 7,023,663 |
|
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Impairment of Proved Properties
The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows of proved and risk-adjusted probable and possible reserves are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.
Based on the analysis described above, the Company recorded the following noncash impairment charges (before and after tax) associated with proved oil and natural gas properties:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| (in thousands) | (in thousands) |
| | | | | | | | | | |
California region | | $ | 984,288 |
| | $ | 207,200 |
|
Mid-Continent region | | 129,703 |
| | 5,703 |
|
Rockies region | $ | 1,182,337 |
| | $ | — |
| | $ | 1,182,337 |
| | $ | — |
| 26,677 |
| | — |
|
California region | 330,311 |
| | — |
| | 537,511 |
| | — |
| |
Hugoton Basin region | | — |
| | 277,914 |
|
TexLa region | 375,567 |
| | — |
| | 408,667 |
| | — |
| — |
| | 33,100 |
|
Mid-Continent region | 366,865 |
| | — |
| | 372,568 |
| | — |
| |
Shallow Texas Panhandle Brown Dolomite formation | — |
| | — |
| | 277,914 |
| | — |
| |
South Texas region | — |
| | — |
| | 8,700 |
| | — |
| — |
| | 8,700 |
|
Permian Basin region | — |
| | 603,250 |
| | — |
| | 603,250 |
| |
| $ | 2,255,080 |
| | $ | 603,250 |
| | $ | 2,787,697 |
| | $ | 603,250 |
| $ | 1,140,668 |
| | $ | 532,617 |
|
The Company recorded no impairment charges for proved properties for the three months ended June 30, 2016, or June 30, 2015. The impairment charges in 2016 were due to a decline in commodity prices, changes in expected capital development and a decline in the Company’s estimates of proved reserves. The impairment charges in 2015 were due to a decline in commodity prices and the Company’s estimates of proved reserves, and the impairment in 2014 was due to the divestiture of certain high valued unproved properties in the Midland Basin in which the expected cash flows were previously included in the impairment assessment for proved oil and natural gas properties.
prices. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. The impairment charges are included in “impairment of long-lived assets” on the condensed consolidated statements of operations.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Impairment of Unproved Properties
The Company evaluates the impairment of its unproved oil and natural gas properties whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of unproved properties are reduced to fair value based on management’s experience in similar situations and other factors such as the lease terms of the properties and the relative proportion of such properties on which proved reserves have been found in the past. For the six months ended June 30, 2016, the Company recorded noncash impairment charges (before and after tax) of approximately $13 million associated with unproved oil and natural gas properties in California. The Company recorded no impairment charges for unproved properties for the three months ended June 30, 2016, or the six months ended June 30, 2015.
The impairment charges in 2016 were due to a decline in commodity prices and changes in expected capital development. The carrying values of the impaired unproved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. The impairment charges are included in “impairment of long-lived assets” on the condensed consolidated statement of operations.
Note 5 – Unit-Based Compensation
DuringThe Company granted no unit-based awards during the ninesix months ended SeptemberJune 30, 2015, the Company granted 3,478,595 restricted units and 697,120 phantom units to employees, primarily as part of its annual review of its employees’ compensation, including executives, with an aggregate fair value of approximately $42 million. The restricted units and phantom units vest over three years. In addition, during the nine months ended September 30, 2015, the Company granted 400,502 unrestricted units, primarily as part of severance arrangements, with an aggregate fair value of approximately $4 million.2016. A summary of unit-based compensation expenses included on the condensed consolidated statements of operations is presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in thousands) |
| | | | | | | |
General and administrative expenses | $ | 13,040 |
| | $ | 9,445 |
| | $ | 40,717 |
| | $ | 37,164 |
|
Lease operating expenses | 1,167 |
| | 1,664 |
| | 7,201 |
| | 6,528 |
|
Total unit-based compensation expenses | $ | 14,207 |
| | $ | 11,109 |
| | $ | 47,918 |
| | $ | 43,692 |
|
Income tax benefit | $ | 5,250 |
| | $ | 4,105 |
| | $ | 17,706 |
| | $ | 16,144 |
|
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands) |
| | | | | | | |
General and administrative expenses | $ | 4,946 |
| | $ | 11,044 |
| | $ | 14,406 |
| | $ | 27,677 |
|
Lease operating expenses | 1,182 |
| | 2,157 |
| | 4,147 |
| | 6,034 |
|
Total unit-based compensation expenses | $ | 6,128 |
| | $ | 13,201 |
| | $ | 18,553 |
| | $ | 33,711 |
|
Income tax benefit | $ | 2,264 |
| | $ | 4,877 |
| | $ | 6,855 |
| | $ | 12,456 |
|
Cash-Based Performance Unit Awards
In January 2015, the Company also granted 567,320 performance units (the maximum number of units available to be earned) to certain executive officers. The 2015 performance unit awards vest three years from the award date. The vesting of these units is determined based on the Company’s performance compared to the performance of a predetermined group of peer companies over a specified performance period, and the value of vested units is to be paid in cash. To date, no performance units have vested and no amounts have been paid to settle any such awards. Performance unit awards that are settled in cash are recorded as a liability with the changes in fair value recognized over the vesting period. Based on the performance criteria, there was no liability recorded for these performance unit awards at SeptemberJune 30, 2015.2016.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Note 6 – Debt
The following summarizes the Company’s outstanding debt:
| | | September 30, 2015 | | December 31, 2014 | June 30, 2016 | | December 31, 2015 |
| (in thousands, except percentages) | (in thousands, except percentages) |
| | | | | | |
LINN credit facility (1) | $ | 2,305,000 |
| | $ | 1,795,000 |
| $ | 1,654,745 |
| | $ | 2,215,000 |
|
Berry credit facility (2) | 1,173,175 |
| | 1,173,175 |
| 874,959 |
| | 873,175 |
|
Term loan (3)(2) | 500,000 |
| | 500,000 |
| 284,241 |
| | 500,000 |
|
6.50% senior notes due May 2019 | 1,159,215 |
| | 1,200,000 |
| 562,234 |
| | 562,234 |
|
6.25% senior notes due November 2019 | 1,483,928 |
| | 1,800,000 |
| 581,402 |
| | 581,402 |
|
8.625% senior notes due April 2020 | 1,123,483 |
| | 1,300,000 |
| 718,596 |
| | 718,596 |
|
6.75% Berry senior notes due November 2020 | 261,100 |
| | 299,970 |
| 261,100 |
| | 261,100 |
|
12.00% senior secured second lien notes due December 2020 (3) | | 1,000,000 |
| | 1,000,000 |
|
Interest payable on senior secured second lien notes due December 2020 (3) | | — |
| | 608,333 |
|
7.75% senior notes due February 2021 | 963,774 |
| | 1,000,000 |
| 779,474 |
| | 779,474 |
|
6.50% senior notes due September 2021 | 502,010 |
| | 650,000 |
| 381,423 |
| | 381,423 |
|
6.375% Berry senior notes due September 2022 | 572,700 |
| | 599,163 |
| 572,700 |
| | 572,700 |
|
Net unamortized discounts and premiums | (16,109 | ) | | (21,499 | ) | |
Net unamortized discounts and premiums (4) | | — |
| | (8,694 | ) |
Net unamortized deferred financing fees (4) | | (1,536 | ) | | (37,374 | ) |
Total debt, net | 10,028,276 |
| | 10,295,809 |
| 7,669,338 |
| | 9,007,369 |
|
Less current maturities | — |
| | — |
| |
Total long-term debt, net | $ | 10,028,276 |
| | $ | 10,295,809 |
| |
Less current portion, net (5) | | (2,812,409 | ) | | (3,714,693 | ) |
Less liabilities subject to compromise (6) | | (4,856,929 | ) | | — |
|
Long-term debt, net | | $ | — |
| | $ | 5,292,676 |
|
| |
(1) | Variable interest rates of 2.39%5.25% and 1.92%2.66% at SeptemberJune 30, 2015,2016, and December 31, 2014,2015, respectively. |
| |
(2) | Variable interest rates of 2.71%5.25% and 2.67%3.17% at SeptemberJune 30, 2015,2016, and December 31, 2014,2015, respectively. |
| |
(3) | The issuance of the Second Lien Notes was accounted for as a troubled debt restructuring, which requires that interest payments on the Second Lien Notes reduce the carrying value of the debt with no interest expense recognized. During the three months ended June 30, 2016, $551 million was written off to reorganization items in connection with the filing of the Bankruptcy Petitions. The remaining amount of approximately $57 million was classified as liabilities subject to compromise at June 30, 2016. |
| |
Variable interest rates(4)
| Approximately $41 million in net discounts, premiums and deferred financing fees were written off to reorganization items in connection with the filing of 2.72%the Bankruptcy Petitions. |
| |
(5) | Due to existing and 2.66%anticipated covenant violations, the Company’s Credit Facilities and term loan were classified as current at SeptemberJune 30, 2015,2016, and December 31, 2014, respectively.2015. The current portion as of December 31, 2015, also includes approximately $128 million of interest payable on the Second Lien Notes due within one year. |
| |
(6) | The Company’s senior notes and Second Lien Notes were classified as liabilities subject to compromise at June 30, 2016. |
Fair Value
The Company’s debt is recorded at the carrying amount on the condensed consolidated balance sheets. The carrying amounts of the Company’s credit facilities and term loan approximate fair value because the interest rates are variable and reflective of market rates. The Company uses a market approach to determine the fair value of its senior secured second lien notes and senior notes using estimates based on prices quoted from third-party financial institutions, which is a Level 2 fair value measurement.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
|
| | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| (in thousands) |
| | | | | | | |
Credit facilities | $ | 3,478,175 |
| | $ | 3,478,175 |
| | $ | 2,968,175 |
| | $ | 2,968,175 |
|
Term loan | 500,000 |
| | 500,000 |
| | 500,000 |
| | 500,000 |
|
Senior notes, net | 6,050,101 |
| | 1,610,642 |
| | 6,827,634 |
| | 5,703,649 |
|
Total debt, net | $ | 10,028,276 |
| | $ | 5,588,817 |
| | $ | 10,295,809 |
| | $ | 9,171,824 |
|
|
| | | | | | | | | | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| (in thousands) |
| | | | | | | |
Senior secured second lien notes | $ | 1,000,000 |
| | $ | 338,750 |
| | $ | 1,000,000 |
| | $ | 501,250 |
|
Senior notes, net | 3,856,929 |
| | 775,403 |
| | 3,812,676 |
| | 662,179 |
|
Credit Facilities
LINN Credit Facility
The Company’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) provides for (1) a senior secured revolving credit facility and (2) a $500 million senior secured term loan, in aggregate subject to the then-effective borrowing base. Borrowing capacity under the revolving credit facility is limited to the lesser of: (i) the then-effective borrowing base reduced by the $500 million term loan and (ii) the maximum commitment amount of $4.0 billion, and was $3.55 billion as of September 30, 2015. The maturity date is April 2019. At September 30, 2015, the borrowing base under the LINN Credit Facility was $4.05 billion (which was reaffirmed in October 2015,2019, subject to conditions described below) and availability under the revolving credit facility was approximately $1.2 billion, which includes reductions for the $500 million term loan and $6 million of outstanding letters of credit.
In October 2015, the Company entered into an amendment to the LINN Credit Facility to provide for, among other things: (i) a “springing maturity” based on the maturity of any outstanding LINN Energy junior lien debt; (ii) the ability to incur up to $4.0 billion of junior lien debt to accommodate exchanges of the Company’s outstanding unsecured senior notes and Berry Petroleum Company, LLC (“Berry”) senior notes or as additional indebtedness, but such additional indebtedness may not exceed $1.0 billion; (iii) if the Berry Consolidation (defined below) happens on or before January 1,debt. At June 30, 2016, the ability to issue up toCompany had approximately $1.7 billion in total borrowings outstanding (including outstanding letters of credit) under the $1.0 billion ofrevolving credit facility and approximately $284 million under the term loan, and there was no remaining availability.
See Note 2 for additional junior lien debt described in the previous clause (ii) without a corresponding reduction in our borrowing base before the next scheduled redetermination; (iv) a minimum liquidity requirement equal to the greater of $500 million and 15% of the then effective available borrowing base after giving effect to certain redemptions or repurchases of certain debt; (v) a decrease in the covenant requiring the maintenance of an EBITDA to Interest Expense ratio of 2.5 to 1.0, such that the minimum required ratio is decreased to 2.0 to 1.0 from December 31, 2015 through December 31, 2016, to 2.25 to 1.0 from March 31, 2017 through June 30, 2017 and returning to 2.5 to 1.0 thereafter; (vi) the ability to make necessary tax-related distributions or contributions to LinnCo, LLC; (vii) an increase in the mortgage requirementdetails on the total value of the oil and natural gas properties included on our most recent reserve report from 80%amendment to 90%; and (viii) an increase to the applicable margin charged on borrowings under the LINN Credit Facility by 0.25% and an increase in the commitment fee under the LINN Credit Facilityentered into on the average daily unused amount of the maximum commitment amount of the lenders to 0.5% per annum.April 12, 2016.
Redetermination of the borrowing base under the LINN Credit Facility, based primarily on reserve reports using lender commodity price expectations at such time, occurs semi-annually, in April and October. The administrative agent, at the direction of a super-majority of certain of the lenders has the right to request one interim borrowing base redetermination per year. The Company also has the right to request one interim borrowing base redetermination per year, as well as the right to an additional interim redetermination each year in connection with certain acquisitions. Continued low commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the maturity schedule of the Company’s hedges, may impact future redeterminations.
The spring 2015 semi-annual borrowing base redetermination was completed in May 2015, and, as a result of lower commodity prices, the borrowing base under the LINN Credit Facility decreased from $4.5 billionagreed to $4.05 billion. The fall 2015 semi-annual redetermination was completed in October 2015 anddefer the April 2016 borrowing base under the LINN Credit Facility was reaffirmed at $4.05 billion. The borrowing base will automatically decreaseredetermination to $3.6 billion on January 1, 2016, subject to any additional reductions for additional junior lien debt issued since this redetermination, if the following conditions are not met on or before
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
January 1, 2016: (i) the issuance by the Company of at least $250 million of additional junior lien debt; (ii) repayment and extinguishment of the Berry Credit Facility (as defined below); and (iii) the guarantee by Berry of the LINN Credit Facility or the merger or consolidation of Berry with a guarantor under the LINN Credit Facility (collectively, the “Berry Consolidation”). Notwithstanding this, borrowing availability under the LINN Credit Facility will be limited to $3.6 billion (which amount includes the outstanding $500 million term loan) until the earlier of a) January 1, 2016 or b) the date of the Berry Consolidation. 2016.
The Company’s obligations under the LINN Credit Facility as amended, are secured by mortgages on certain of its material subsidiaries’ oil and natural gas properties and other personal property as well as a pledge of all ownership interests in the Company’s direct and indirect material subsidiaries. The Company is required to maintainmaintain: 1) mortgages on properties representing at least 90% of the total value of oil and natural gas properties included on its most recent reserve report.report; 2) a minimum liquidity requirement equal to the greater of $500 million and 15% of the then effective available borrowing base after giving effect to certain redemptions or repurchases of certain debt; and 3) an EBITDA to Interest Expense ratio of at least 2.0 to 1.0 currently, 2.25 to 1.0 from March 31, 2017 through June 30, 2017 and 2.5 to 1.0 thereafter. Additionally, the obligations under the LINN Credit Facility are guaranteed by all of the Company’s material subsidiaries, other than Berry, and are required to be guaranteed by any future material subsidiaries. The Company is in compliance with all financial and other covenants of the LINN Credit Facility.
At the Company’s election, interest on borrowings under the LINN Credit Facility as amended, is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.75% and 2.75% per annum (depending on the then-current level of borrowings under the LINN Credit Facility) or the alternate base rate (“ABR”) plus an applicable margin between 0.75% and 1.75% per annum (depending on the then-current level of borrowings under the LINN Credit Facility). Interest is generally payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR. The Company is required to pay a commitment fee to the lenders under the LINN Credit Facility, which accrues at a rate per annum of 0.50% on the average daily unused amount of the maximum commitment amount of the lenders.
The $500 million term loan has a maturity date of April 2019, subject to a “springing maturity” based on the maturity of any outstanding LINN Energy junior lien debt, and incurs interest based on either the LIBOR plus a margin of 2.75% per annum or the ABR plus a margin of 1.75% per annum, at the Company’s election. Interest is generally payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR. The term loan may be repaid at the option of the Company without premium or penalty, subject to breakage costs. While the term loan is outstanding, the Company is required to maintain either: 1) mortgages on properties representing at least 80% of the total value of oil and natural gas properties included on its most recent reserve report, or 2) a Term Loan Collateral Coverage Ratio of at least 2.5 to 1.0. The Term Loan Collateral Coverage Ratio is defined as the ratio of the present value of future cash flows from proved reserves from the currently mortgaged properties to the lesser of: (i) the then-effective borrowing base and (ii) the
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
maximum commitment amount and the aggregate amount of the term loan outstanding. The other terms and conditions of the LINN Credit Facility, including the financial and other restrictive covenants set forth therein, are applicable to the term loan.
Berry Credit Facility
Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”) hadprovides for a borrowing base of $1.2 billion,senior secured revolving credit facility, subject to lender commitments, as of September 30, 2015.the then-effective borrowing base. The maturity date is April 2019. At SeptemberJune 30, 2015, lender commitments under2016, the facility were $1.2 billion but there was less than $1Company had approximately $898 million of available borrowing capacity, includingin total borrowings outstanding (including outstanding letters of credit.credit) under the Berry Credit Facility and there was no remaining availability.
In October 2015, Berry entered into anSee Note 2 for additional details on the amendment to the Berry Credit Facility to provide for, among other things: (i) a springing maturity basedentered into on the maturity of any outstanding Berry junior lien debt; (ii) the ability of Berry to incur junior lien debt to refinance its senior notes or as additional indebtedness, but such additional indebtedness issued may not exceed $500 million outstanding at any one time and is subject to a borrowing base reduction; (iii) a decrease in Berry’s covenant requiring the maintenance of an EBITDA to Interest Expense ratio of 2.5 to 1.0, such that the permissible ratio is decreased to 2.0 to 1.0 from December 31, 2015 through December 31, 2016, to 2.25 to 1.0 from March 31, 2017 through June 30, 2017 and returning to 2.5 to 1.0 thereafter; (iv) an increase in the mortgage requirement on the total value of the oil and natural gas properties included in Berry’s most recent reserve report from 80% to 90%; (v) an increase to the applicable margin charged on borrowings under the Berry Credit Facility by 0.25% and increase the commitment fee under the Berry Credit Facility to 0.5% per annum; and (vi) permission to prepay or exchange Berry’s senior notes with notes issued by LINN Energy.April 12, 2016.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Redetermination of the borrowing base under the Berry Credit Facility, based primarily on reserve reports using lender commodity price expectations at such time, occurs semi-annually, in April and October. A super-majority of theThe lenders under the Berry Credit Facility and Berry also haveagreed to defer the right to request interim borrowing base redeterminations once between scheduled redeterminations. The spring 2015 semi-annualApril 2016 borrowing base redetermination was completed into May 2015, and, as a result of lower commodity prices, the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion. The fall 2015 semi-annual redetermination was completed in October 2015 and the borrowing base under the Berry Credit Facility decreased from $1.2 billion to $900 million. Continued low commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs may impact future redeterminations.
In connection with the reduction in Berry’s borrowing base in October 2015, Berry repaid $300 million of borrowings outstanding under the Berry Credit Facility. In connection with the reduction in Berry’s borrowing base in May 2015, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders. As directed by LINN Energy, the $250 million was deposited on Berry’s behalf in a security account with the administrative agent subject to a security control agreement. Berry’s ability to withdraw funds from this account is subject to a concurrent reduction of the borrowing base under the Berry Credit Facility or lender’s consent in connection with a redetermination of such borrowing base. The $250 million may be used to satisfy obligations under the Berry Credit Facility or, subject to restrictions in the indentures governing Berry’s senior notes, may be returned to LINN Energy in the future. The amount is included in “restricted cash” on the condensed consolidated balance sheet.11, 2016.
Berry’s obligations under the Berry Credit Facility as amended, are secured by mortgages on its oil and natural gas properties and other personal property. Berry is required to maintainmaintain: 1) mortgages on properties representing at least 90% of the present value of its oil and natural gas proved reserves. Berry isproperties included on its most recent reserve report, and 2) an EBITDAX to Interest Expense ratio of at least 2.0 to 1.0 currently, 2.25 to 1.0 from March 31, 2017 through June 30, 2017 and 2.5 to 1.0 thereafter. In accordance with the amendment described in compliance with all financial and other covenantsNote 2, the lenders had agreed that the failure to maintain the EBITDAX to Interest Expense ratio would not result in a default or event of the Berry Credit Facility.default until May 11, 2016.
At Berry’s election, interest on borrowings under the Berry Credit Facility as amended, is determined by reference to either the LIBOR plus an applicable margin between 1.75% and 2.75% per annum (depending on the then-current level of borrowings under the Berry Credit Facility) or a Base Rate (as defined in the Berry Credit Facility) plus an applicable margin between 0.75% and 1.75% per annum (depending on the then-current level of borrowings under the Berry Credit Facility). Interest is generally payable quarterly for loans bearing interest based on the Base Rate and at the end of the applicable interest period for loans bearing interest at the LIBOR. Berry is required to pay a commitment fee to the lenders under the Berry Credit Facility, which accrues at a rate per annum of 0.5%0.50% on the average daily unused amount of the maximum commitment amount of the lenders.
The Company refers to the LINN Credit Facility and the Berry Credit Facility, collectively, as the “Credit Facilities.”
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Credit Facilities. However, under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of the default. The automatic stay under the Bankruptcy Code does not apply to letters of credit issued under the prepetition Credit Facilities and third parties may draw on their letters of credit if the terms of a particular letter of credit so provide. During the three months and six months ended June 30, 2016, approximately $3 million in letters of credit draws were made from the Berry Credit Facility.
Senior Secured Second Lien Notes Due December 2020
On November 20, 2015, the Company issued $1.0 billion in aggregate principal amount of 12.00% senior secured second lien notes due December 2020 (“Second Lien Notes”) in exchange for approximately $2.0 billion in aggregate principal amount of certain of its outstanding senior notes. The exchanges were accounted for as a troubled debt restructuring (“TDR”). TDR accounting requires that interest payments on the Second Lien Notes reduce the carrying value of the debt with no interest expense recognized.
In connection with the issuance of the Second Lien Notes, the Company entered into a Registration Rights Agreement with each of the holders (collectively, the “Registration Rights Agreements”). Under the Registration Rights Agreements, the Company agreed to use its reasonable efforts to file with the SEC and cause to become effective a registration statement relating to an offer to issue new notes having terms substantially identical to the Second Lien Notes in exchange for outstanding Second Lien Notes within 370 days following the issuance of the Second Lien Notes. In certain circumstances, the Company may be required to file a shelf registration statement to cover resales of the Second Lien Notes. The Company will be obligated
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
to file one or more registration statements as described above only if the restrictive legend on the Second Lien Notes has not been removed and the Second Lien Notes are not freely tradable pursuant to Rule 144 under the Securities Act of 1933, as amended, as of the 370th day following the issuance of the Second Lien Notes. If the Company fails to satisfy these obligations, the Company may be required to pay additional interest to holders of the Second Lien Notes under certain circumstances.
Repurchases of Senior Notes
The Company made no repurchases of its senior notes during the six months ended June 30, 2016. During the ninesix months ended SeptemberJune 30, 2015, the Company repurchased through privately negotiated transactions and on the open market approximately $783$184 million of its outstanding senior notes as follows:
6.50% senior notes due May 2019 – $41 million;
6.25% senior notes due November 2019 – $316 million;
8.625% senior notes due April 2020 – $177$127 million;
6.75% Berry senior notes due November 2020 – $39$25 million;
7.75% senior notes due February 2021 – $36 million;
6.50% senior notes due September 2021 – $148$6 million; and
6.375% Berry senior notes due September 2022 – $26 million.
In connection with the repurchases, the Company paid approximately $557 million in cash and recorded a gain on extinguishment of debt of approximately $214$16 million for the ninesix months ended SeptemberJune 30, 2015.
Notes Covenants
13
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Seniorthe Company’s restricted subsidiaries to: (i) declare or pay distributions on, purchase or redeem the Company’s units or purchase or redeem the Company’s or its restricted subsidiaries’ indebtedness secured by liens junior in priority to liens securing the Second Lien Notes, Covenantsunsecured indebtedness or subordinated indebtedness; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries.
The Company’s senior notes contain covenants that, among other things, may limit its ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. The Company is in compliance with all financial and other covenants of its senior notes.
Berry’s senior notes contain covenants that, among other things, may limit its ability to: (i) incur or guarantee additional indebtedness; (ii) pay distributions or dividends on Berry’s equity or redeem its subordinated debt; (iii) create certain liens; (iv) enter into agreements that restrict distributions or other payments from Berry’s restricted subsidiaries to Berry; (v) sell assets; (vi) engage in transactions with affiliates; and (vii) consolidate, merge or transfer all or substantially all of Berry’s assets. Berry is in compliance with all financial and other covenants of its senior notes.
In addition, any cash generated by Berry is currently being used by Berry to fund its activities. To the extent that Berry generates cash in excess of its needs and determines to distribute such amounts to LINN Energy, the indentures governing Berry’s senior notes limit the amount it may distribute to LINN Energy to the amount available under a “restricted payments basket,” and Berry may not distribute any such amounts unless it is permitted by the indentures to incur additional debt pursuant to the consolidated coverage ratio test set forth in the Berry indentures. Berry’s restricted payments basket may be increased in accordance with the terms of the Berry indentures by, among other things, 50% of Berry’s future net income, reductions in its indebtedness and restricted investments, and future capital contributions.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Second Lien Indenture and the senior notes. However, under the Bankruptcy Code, holders of the Second Lien Notes and the senior notes are stayed from taking any action against the Company as a result of the default.
Covenant Violations
The Company’s filing of the Bankruptcy Petitions described in Note 2 constituted an event of default that accelerated the Company’s obligations under its Credit Facilities, its Second Lien Notes and its senior notes. Additionally, other events of default, including cross-defaults, are present, including the failure to make interest payments on the Company’s Second Lien Notes and certain of its senior notes, as well as the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2015. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default.
Note 7 – Derivatives
Commodity Derivatives
TheHistorically, the Company seeks to hedgehas hedged a significant portion of its forecasted production to reduce exposure to fluctuations in the prices of oil and natural gas prices and provide long-term cash flow predictability to manage its business, service debt and, if and when resumed, pay distributions. The current direct NGL hedging market is constrained in terms of price, volume, duration and number of counterparties, which limits the Company’s ability to effectively hedge its NGL production. The Company has also hedgeshedged its exposure to natural gas differentials in certain operating areas but does not currently hedge exposure to oil differentials.
The Company entershas historically entered into commodity hedging transactions primarily in the form of swap contracts that are designed to provide a fixed price and, from time to time, put options that are designed to provide a fixed price floor with the opportunity for upside. The Company enters into these transactions with respect to a portion of its projected production or consumption to provide an economic hedge of the risk related to the future commodity prices received or paid. The Company does not enter into derivative contracts for trading purposes. In connection with the 2013 acquisition of Berry, the Company assumed certain derivative contracts that Berry had entered into prior to the acquisition date, including swap contracts, collars and three-way collars. The Company did not designate any of its contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The following table summarizespresents derivative positions for the periodsperiod indicated as of SeptemberJune 30, 20152016: |
| | | | | | | | | | | | | | | |
| October 1 - December 31, 2015 | | 2016 | | 2017 | | 2018 |
Natural gas positions: | | | | | | | |
Fixed price swaps (NYMEX Henry Hub): | | | | | | | |
Hedged volume (MMMBtu) | 29,753 |
| | 121,841 |
| | 120,122 |
| | 36,500 |
|
Average price ($/MMBtu) | $ | 5.19 |
| | $ | 4.20 |
| | $ | 4.26 |
| | $ | 5.00 |
|
Put options (NYMEX Henry Hub): | | | | | | | |
Hedged volume (MMMBtu) | 18,111 |
| | 76,269 |
| | 66,886 |
| | — |
|
Average price ($/MMBtu) | $ | 5.00 |
| | $ | 5.00 |
| | $ | 4.88 |
| | $ | — |
|
Oil positions: | | | | | | | |
Fixed price swaps (NYMEX WTI): (1) | | | | | | | |
Hedged volume (MBbls) | 3,890 |
| | 11,465 |
| | 4,755 |
| | — |
|
Average price ($/Bbl) | $ | 87.22 |
| | $ | 90.56 |
| | $ | 89.02 |
| | $ | — |
|
Three-way collars (NYMEX WTI): | | | | | | | |
Hedged volume (MBbls) | 276 |
| | — |
| | — |
| | — |
|
Short put ($/Bbl) | $ | 70.00 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Long put ($/Bbl) | $ | 90.00 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Short call ($/Bbl) | $ | 101.62 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Put options (NYMEX WTI): | | | | | | | |
Hedged volume (MBbls) | 864 |
| | 3,271 |
| | 384 |
| | — |
|
Average price ($/Bbl) | $ | 90.00 |
| | $ | 90.00 |
| | $ | 90.00 |
| | $ | — |
|
Natural gas basis differential positions: (2) | | | | | | | |
Panhandle basis swaps: (3) | | | | | | | |
Hedged volume (MMMBtu) | 21,970 |
| | 59,954 |
| | 59,138 |
| | 16,425 |
|
Hedged differential ($/MMBtu) | $ | (0.33 | ) | | $ | (0.32 | ) | | $ | (0.33 | ) | | $ | (0.33 | ) |
NWPL Rockies basis swaps: (3) | | | | | | | |
Hedged volume (MMMBtu) | 14,479 |
| | 65,794 |
| | 38,880 |
| | 10,804 |
|
Hedged differential ($/MMBtu) | $ | (0.23 | ) | | $ | (0.24 | ) | | $ | (0.19 | ) | | $ | (0.19 | ) |
MichCon basis swaps: (3) | | | | | | | |
Hedged volume (MMMBtu) | 2,355 |
| | 7,768 |
| | 7,437 |
| | 2,044 |
|
Hedged differential ($/MMBtu) | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.05 |
| | $ | 0.05 |
|
Houston Ship Channel basis swaps: (3) | | | | | | | |
Hedged volume (MMMBtu) | 7,443 |
| | 34,364 |
| | 36,730 |
| | 986 |
|
Hedged differential ($/MMBtu) | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.08 | ) |
Permian basis swaps: (3) | | | | | | | |
Hedged volume (MMMBtu) | 1,279 |
| | 4,219 |
| | 4,819 |
| | 1,314 |
|
Hedged differential ($/MMBtu) | $ | (0.21 | ) | | $ | (0.20 | ) | | $ | (0.20 | ) | | $ | (0.20 | ) |
SoCal basis swaps: (4) | | | | | | | |
Hedged volume (MMMBtu) | 8,280 |
| | 32,940 |
| | — |
| | — |
|
Hedged differential ($/MMBtu) | $ | (0.03 | ) | | $ | (0.03 | ) | | $ | — |
| | $ | — |
|
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
|
| | | | | | | | | | | | | | | |
| October 1 - December 31, 2015 | | 2016 | | 2017 | | 2018 |
Oil timing differential positions: | | | | | | | |
Trade month roll swaps (NYMEX WTI): (5) | | | | | | | |
Hedged volume (MBbls) | 1,828 |
| | 7,446 |
| | 6,486 |
| | — |
|
Hedged differential ($/Bbl) | $ | 0.24 |
| | $ | 0.25 |
| | $ | 0.25 |
| | $ | — |
|
|
| | | |
| July 1 - December 31, 2016 |
Natural gas basis differential positions: (1) | |
SoCal basis swaps: (2) | |
Hedged volume (MMMBtu) | 1,840 |
|
Hedged differential ($/MMBtu) | $ | (0.03 | ) |
| |
(1) | Includes certain outstanding fixed price oil swaps of approximately 5,384 MBbls which may be extended annually at a price of $100.00 per Bbl for each of the years ending December 31, 2017, and December 31, 2018, and $90.00 per Bbl for the year ending December 31, 2019, at counterparty election on a designated date in each respective preceding year. The extension for each year is exercisable without respect to the other years. |
| |
(2)
| Settle on the respective pricing index to hedge basis differential to the NYMEX Henry Hub natural gas price. |
| |
(3)
| For positions which hedge exposure to differentials in producing areas, the Company receives the NYMEX Henry Hub natural gas price plus the respective spread and pays the specified index price. Cash settlements are made on a net basis. |
| |
(4)(2)
| For positions which hedge exposure to differentials in consuming areas, the Company pays the NYMEX Henry Hub natural gas price plus the respective spread and receives the specified index price. Cash settlements are made on a net basis. |
| |
(5)
| The Company hedges the timing risk associated with the sales price of oil in the Mid-Continent, Hugoton Basin and Permian Basin regions. In these regions, the Company generally sells oil for the delivery month at a sales price based on the average NYMEX WTI price during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is prompt (the “trade month roll”). |
The Company did not enter into any commodity derivative contracts during the six months ended June 30, 2016. During the ninesix months ended SeptemberJune 30, 2015, the Company entered into commodity derivative contracts consisting of natural gas basis swaps for May 2015 through December 2017 to hedge exposure to differentials in certain producing areas and oil swaps for April 2015 through December 2015. In addition, the Company entered into natural gas basis swaps for May 2015 through December 2016 to hedge exposure to the differential in California, where it consumes natural gas in its heavy oil development operations.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
In April 2016 and May 2016, in connection with the Company’s restructuring efforts, LINN Energy canceled (prior to the contract settlement dates) all of its derivative contracts for net proceeds of approximately $1.2 billion. The net proceeds were used to make permanent repayments of a portion of the borrowings outstanding under the LINN Credit Facility. Also, in May 2016, as a result of the Chapter 11 proceedings, Berry’s counterparties canceled (prior to the contract settlement dates) all of Berry’s derivative contracts (with the exception of a contract consisting of 1,840 MMMBtu of natural gas basis swaps for 2016) for net proceeds of approximately $2 million. The net proceeds were used to make permanent repayments of a portion of the borrowings outstanding under the Berry Credit Facility. In July 2016, Berry’s remaining derivative contract was canceled by the counterparty.
Settled derivatives on natural gas production for the three months and ninesix months ended SeptemberJune 30, 2016, included volumes of 28,477 MMMBtu and 77,734 MMMBtu, respectively, at average contract prices of $4.49 per MMBtu and $4.50 per MMBtu. Settled derivatives on oil production for the three months and six months ended June 30, 2016, included volumes of 667 MBbls and 4,331 MBbls, respectively, at average contract prices of $90.48 per Bbl and $90.44 per Bbl. Settled derivatives on natural gas production for the three months and six months ended June 30, 2015, included volumes of 47,86447,344 MMMBtu and 142,03194,167 MMMBtu, respectively, at an average contract price of $5.12 per MMBtu. Settled derivatives on oil production for the three months and ninesix months ended SeptemberJune 30, 2015, included volumes of 5,0604,820 MBbls and 13,8558,795 MBbls, respectively, at average contract prices of $87.53$88.60 per Bbl and $89.86 per Bbl. Settled derivatives on natural gas production for the three months and nine months ended September 30, 2014, included volumes of 44,621 MMMBtu and 132,408 MMMBtu, respectively, at an average contract price of $5.14 per MMBtu. Settled derivatives on oil production for the three months and nine months ended September 30, 2014, included volumes of 6,299 MBbls and 18,690 MBbls, respectively, at an average contract price of $92.39$91.20 per Bbl.
The natural gas derivatives are settled based on the closing price of NYMEX Henry Hub natural gas on the last trading day for the delivery month, which occurs on the third business day preceding the delivery month, or the relevant index prices of natural gas published in Inside FERC’s Gas Market Report on the first business day of the delivery month. The oil derivatives are settled based on the average closing price of NYMEX WTI crude oil for each day of the delivery month.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Balance Sheet Presentation
The Company’s commodity derivatives are presented on a net basis in “derivative instruments” on the condensed consolidated balance sheets. The following summarizes the fair value of derivatives outstanding on a gross basis:
| | | September 30, 2015 | | December 31, 2014 | June 30, 2016 | | December 31, 2015 |
| (in thousands) | (in thousands) |
Assets: | | | | | | |
Commodity derivatives | $ | 1,887,082 |
| | $ | 2,014,815 |
| $ | 200 |
| | $ | 1,812,375 |
|
Liabilities: | | | | | | |
Commodity derivatives | $ | 35,390 |
| | $ | 90,260 |
| $ | 1,709 |
| | $ | 28,842 |
|
By using derivative instruments to economically hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are current participants or affiliates of participants in its Credit Facilities or were participants or affiliates of participants in its Credit Facilities at the time it originally entered into the derivatives. The Credit Facilities are secured by the Company’s oil, natural gas and NGL reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $1.9 billion at September 30, 2015. The Company minimizesminimized the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Gains (Losses) on Derivatives
A summary of gains and losses on derivatives included on the condensed consolidated statements of operations is presented below:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands) | (in thousands) |
| | | | | | | | | | | | | | |
Gains (losses) on oil and natural gas derivatives | $ | 549,029 |
| | $ | 451,702 |
| | $ | 782,622 |
| | $ | (198,579 | ) | $ | (182,768 | ) | | $ | (191,188 | ) | | $ | (72,807 | ) | | $ | 233,593 |
|
Lease operating expenses (1) | (162 | ) | | — |
| | 2,898 |
| | — |
| (1,037 | ) | | 3,986 |
| | (4,405 | ) | | 3,060 |
|
Total gains (losses) on oil and natural gas derivatives | $ | 548,867 |
| | $ | 451,702 |
| | $ | 785,520 |
| | $ | (198,579 | ) | $ | (183,805 | ) | | $ | (187,202 | ) | | $ | (77,212 | ) | | $ | 236,653 |
|
| |
(1) | Consists of gains and (losses) on derivatives usedentered into in March 2015 to hedge exposure to differentials in consuming areas, which were entered into in March 2015.areas. |
For the three months and ninesix months ended SeptemberJune 30, 2016, the Company received net cash settlements of approximately $523 million and $867 million, respectively. In addition, for the three months and six months ended June 30, 2016, approximately $841 million in settlements (primarily in connection with the April 2016 and May 2016 commodity derivative cancellations) were sent directly from the counterparties to the lenders under the LINN Credit Facility as repayments of a portion of the borrowings outstanding. For the three months and six months ended June 30, 2015, the Company received net cash settlements of approximately $292$284 million and $858$566 million, respectively. For the three months and nine months ended September 30, 2014, the Company received net cash settlements of approximately $10 million and paid net cash settlements of approximately $13 million, respectively.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Note 8 – Fair Value Measurements on a Recurring Basis
The Company accounts for its commodity derivatives at fair value (see Note 7) on a recurring basis. The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those instruments trade in active markets. 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.
Fair Value Hierarchy
In accordance with applicable accounting standards, the Company has categorized its financial instruments, based on the priority of inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following presents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
| | | September 30, 2015 | June 30, 2016 |
| Level 2 | | Netting (1) | | Total | Level 2 | | Netting (1) | | Total |
| (in thousands) | (in thousands) |
Assets: | | | | | | | | | | |
Commodity derivatives | $ | 1,887,082 |
| | $ | (33,185 | ) | | $ | 1,853,897 |
| $ | 200 |
| | $ | (15 | ) | | $ | 185 |
|
Liabilities: | | | | | | | | | | |
Commodity derivatives | $ | 35,390 |
| | $ | (33,185 | ) | | $ | 2,205 |
| $ | 1,709 |
| | $ | (15 | ) | | $ | 1,694 |
|
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
| | | December 31, 2014 | December 31, 2015 |
| Level 2 | | Netting (1) | | Total | Level 2 | | Netting (1) | | Total |
| (in thousands) | (in thousands) |
Assets: | | | | | | | | | | |
Commodity derivatives | $ | 2,014,815 |
| | $ | (89,576 | ) | | $ | 1,925,239 |
| $ | 1,812,375 |
| | $ | (25,744 | ) | | $ | 1,786,631 |
|
Liabilities: | | | | | | | | | | |
Commodity derivatives | $ | 90,260 |
| | $ | (89,576 | ) | | $ | 684 |
| $ | 28,842 |
| | $ | (25,744 | ) | | $ | 3,098 |
|
| |
(1) | Represents counterparty netting under agreements governing such derivatives. |
Note 9 – Asset Retirement Obligations
The Company has the obligation to plug and abandon oil and natural gas wells and related equipment at the end of production operations. Estimated asset retirement costs are recognized as liabilities with an increase to the carrying amounts of the related long-lived assets when the obligation is incurred. The liabilities are included in “other accrued liabilities” and “other noncurrent liabilities” on the condensed consolidated balance sheets. Accretion expense is included in “depreciation, depletion and amortization” on the condensed consolidated statements of operations. The fair value of additions to the asset retirement obligations is estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors (2% for the nine months ended September 30, 2015);factors; and (iv) a credit-adjusted risk-free interest rate (average of 5.5% for the nine months ended September 30, 2015).rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The following table presents a reconciliation of the Company’s asset retirement obligations (in thousands):
|
| | | |
Asset retirement obligations at December 31, 2014 | $ | 497,570 |
|
Liabilities added from drilling | 2,857 |
|
Liabilities associated with assets sold | (2,594 | ) |
Current year accretion expense | 22,290 |
|
Settlements | (3,749 | ) |
Revision of estimates | 2,022 |
|
Asset retirement obligations at September 30, 2015 | $ | 518,396 |
|
|
| | | |
Asset retirement obligations at December 31, 2015 | $ | 523,541 |
|
Liabilities added from drilling | 352 |
|
Current year accretion expense | 15,369 |
|
Settlements | (5,542 | ) |
Asset retirement obligations at June 30, 2016 | $ | 533,720 |
|
Note 10 – Commitments and Contingencies
For certain statewide class action royalty payment disputes, where a reserve has not yet been established, the Company has deniedfiled notices advising that it has any liability on the claimshad filed for bankruptcy protection and has raised arguments and defenses that, if accepted by the courts, will result in no loss to the Company.seeking a stay, which was granted. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
During the ninesix months ended SeptemberJune 30, 2015,2016, and SeptemberJune 30, 2014,2015, the Company made no significant payments to settle any legal, environmental or tax proceedings. The Company regularly analyzes current information and accrues for probable liabilities on the disposition of certain matters as necessary. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.
In 2008, Lehman Brothers Holdings Inc. and Lehman Brothers Commodity Services Inc. (together “Lehman”), filed voluntary petitions for reorganization underThe commencement of the Chapter 11 proceedings automatically stayed certain actions against the Company, including actions to collect prepetition liabilities or to exercise control over the property of the U.S. Bankruptcy CodeCompany’s bankruptcy estates. The Company intends to seek authority to pay all general claims in the ordinary course of business notwithstanding the commencement of the Chapter 11 proceedings in a manner consistent with the U.S. Bankruptcy CourtRestructuring Support Agreement. The Plan in the Chapter 11 proceedings, if confirmed, will provide for the Southern Districttreatment of New York. In March 2011, the Company and Lehman entered into Termination Agreements under which the Company was granted general unsecured claims against Lehman in the amount of $51 million (the “Company Claim”). In December 2011, aCompany’s bankruptcy estates, including prepetition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 Plan was approved by the Bankruptcy Court. In both April 2015 and April 2014, the Company received approximately $3 millionproceedings. See Note 2 for additional information.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Note 11 – Earnings Per Unit
Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. Diluted earnings per unit is computed by adjusting the average number of units outstanding for the dilutive effect, if any, of unit equivalents. The Company uses the treasury stock method to determine the dilutive effect.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
The following table provides a reconciliation of the numerators and denominators of the basic and diluted per unit computations for net loss:income (loss):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands, except per unit data) | (in thousands, except per unit data) |
| | | | | | | | | | | | | | |
Net loss | $ | (1,569,317 | ) | | $ | (4,100 | ) | | $ | (2,287,604 | ) | | $ | (297,307 | ) | |
Net income (loss) | | $ | 208,492 |
| | $ | (379,127 | ) | | $ | (1,139,254 | ) | | $ | (718,287 | ) |
Allocated to participating securities | — |
| | (2,097 | ) | | (3,081 | ) | | (6,289 | ) | (1,617 | ) | | (1,662 | ) | | — |
| | (3,273 | ) |
| $ | (1,569,317 | ) | | $ | (6,197 | ) | | $ | (2,290,685 | ) | | $ | (303,596 | ) | $ | 206,875 |
| | $ | (380,789 | ) | | $ | (1,139,254 | ) | | $ | (721,560 | ) |
| | | | | | | | | | | | | | |
Basic net loss per unit | $ | (4.47 | ) | | $ | (0.02 | ) | | $ | (6.72 | ) | | $ | (0.92 | ) | |
Diluted net loss per unit | $ | (4.47 | ) | | $ | (0.02 | ) | | $ | (6.72 | ) | | $ | (0.92 | ) | |
Basic net income (loss) per unit | | $ | 0.59 |
| | $ | (1.12 | ) | | $ | (3.23 | ) | | $ | (2.15 | ) |
Diluted net income (loss) per unit | | $ | 0.59 |
| | $ | (1.12 | ) | | $ | (3.23 | ) | | $ | (2.15 | ) |
| | | | | | | | | | | | | | |
Basic weighted average units outstanding | 350,695 |
| | 329,168 |
| | 340,831 |
| | 328,783 |
| 352,789 |
| | 340,934 |
| | 352,511 |
| | 335,817 |
|
Dilutive effect of unit equivalents | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Diluted weighted average units outstanding | 350,695 |
| | 329,168 |
| | 340,831 |
| | 328,783 |
| 352,789 |
| | 340,934 |
| | 352,511 |
| | 335,817 |
|
Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to approximately 41 million unit options and warrants for both the three months and six months ended June 30, 2016, and approximately 5 million unit options and warrants for the three months and nine months ended September 30, 2015, respectively, and approximately 6 million for both the three months and ninesix months ended SeptemberJune 30, 2014.2015. All equivalent units were antidilutive for both the three months and ninesix months ended SeptemberJune 30, 2015,2016, and SeptemberJune 30, 2014.2015.
Note 12 – Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. As such, with the exception of the state of Texas and certain subsidiaries, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company. Amounts recognized for income taxes are reported in “income tax expense (benefit)” on the condensed consolidated statements of operations.
Note 13 – Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows
“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| (in thousands) |
| | | |
Accrued interest | $ | 126,966 |
| | $ | 105,310 |
|
Accrued compensation | 37,860 |
| | 44,875 |
|
Asset retirement obligations | 16,187 |
| | 16,187 |
|
Other | 1,165 |
| | 1,364 |
|
| $ | 182,178 |
| | $ | 167,736 |
|
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Note 13 – Supplemental Disclosures to the Condensed Consolidated Statements of Cash Flows
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in thousands) | (in thousands) |
| | | | | | |
Cash payments for interest, net of amounts capitalized | $ | 386,118 |
| | $ | 345,687 |
| $ | 126,499 |
| | $ | 280,018 |
|
Cash payments for income taxes | $ | 627 |
| | $ | — |
| $ | 3,033 |
| | $ | 601 |
|
| | | | | | |
Noncash investing activities: | | | | | | |
Accrued capital expenditures | $ | 98,404 |
| | $ | 273,220 |
| $ | 23,212 |
| | $ | 105,115 |
|
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. At SeptemberJune 30, 2016, and December 31, 2015, “restricted cash” on the condensed consolidated balance sheetsheets includes approximately $197 million and $250 million, whichrespectively, related to the $250 million that LINN Energy borrowed under the LINN Credit Facility and contributed to Berry in May 2015 to post with Berry’s lenders in connection with the reduction in the Berry Credit Facility’s borrowing base.base, as well as associated interest income. Restricted cash also includes approximately $8 million and $7 million and $6 million at SeptemberJune 30, 2015,2016, and December 31, 2014,2015, respectively, of cash deposited by the Company into a separate account designated for asset retirement obligations in accordance with contractual agreements.
The Company manages its working capitalDuring the three months and cash requirementssix months ended June 30, 2016, approximately $841 million in commodity derivative settlements (primarily in connection with the April 2016 and May 2016 commodity derivative cancellations) were paid directly by the counterparties to borrow onlythe lenders under the LINN Credit Facility as neededrepayments of a portion of the borrowings outstanding, and are reflected as noncash transactions by the Company. In addition, during the three months and six months ended June 30, 2016, approximately $3 million in letters of credit draws were made from itsthe Berry Credit Facilities. Facility as requested by certain vendors owed prepetition amounts from the Company.
At December 31, 2014,2015, net outstanding checks of approximately $95$21 million were reclassified and included in “accounts payable and accrued expenses” on the condensed consolidated balance sheet.sheets. At SeptemberJune 30, 2015,2016, no net outstanding checks were reclassified. Net outstanding checks are presented as cash flows from financing activities and included in “other” on the condensed consolidated statements of cash flows.
Note 14 – Related Party Transactions
LinnCo
LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, was formed on April 30, 2012. LinnCo’s initial sole purpose was to own units in LINN Energy. In connection with the 2013 acquisition of Berry, LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent contribution of assets to LINN Energy. All of LinnCo’s common shares are held by the public. As of SeptemberJune 30, 2015,2016, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy and owned approximately 37%69% of LINN Energy’s outstanding units.
In March 2016, LinnCo filed a Registration Statement on Form S-4 related to an offer to exchange each outstanding unit representing limited liability company interests of LINN Energy for one common share representing limited liability company interests of LinnCo. The initial offer expired on April 25, 2016, and on April 26, 2016, LinnCo commenced a subsequent offering period that expired on August 1, 2016. Through June 30, 2016, 115,702,524 LINN Energy units were exchanged for an equal number of LinnCo shares. As a result of the exchanges of LINN Energy units for LinnCo shares, LinnCo’s ownership
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
of LINN Energy’s outstanding units increased from approximately 36% at March 31, 2016, to approximately 69% at June 30, 2016.
LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo’s behalf, any financial, legal, accounting, tax advisory, financial advisory and engineering fees, and other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of shares in LinnCo or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses and registrar and transfer agent fees. In addition, the Company has agreed to indemnify LinnCo and its officers and directors for damages suffered or costs incurred (other than income taxes payable by LinnCo) in connection with carrying out LinnCo’s activities. All expenses and costs paid by LINN Energy on LinnCo’s behalf are expensed by LINN Energy.
For the three months and ninesix months ended SeptemberJune 30, 2015,2016, LinnCo incurred total general and administrative expenses, reorganization expenses and certain offering costs of approximately $965,000$2.5 million and $2.8$4.2 million, respectively, all of which had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2015. The expenses for the three monthsincluding approximately $603,000 and nine months ended September 30, 2015, include approximately $491,000 and $1.5$1.2 million, respectively, related to services provided by LINN Energy necessary forEnergy. Of the conduct of LinnCo’s business, such as accounting, legal, tax, information technologyexpenses and other expenses.
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
Forcosts incurred during the three months and ninesix months ended SeptemberJune 30, 2014, LinnCo incurred total general and administrative expenses and certain offering costs of2016, approximately $644,000 and $2.1 million, respectively, of which approximately $1.9$4.0 million had been paid by LINN Energy on LinnCo’s behalf as of SeptemberJune 30, 2014. The expenses for2016.
For the three months and ninesix months ended SeptemberJune 30, 2014, include2015, LinnCo incurred total general and administrative expenses and offering costs of approximately $470,000$1.1 million and $1.4$2.5 million, respectively, including approximately $492,000 and $983,000, respectively, related to services provided by LINN Energy necessary forEnergy. Of the conduct of LinnCo’s business, such as accounting, legal, tax, information technologyexpenses and other expenses. In addition,costs incurred during the ninesix months ended SeptemberJune 30, 2014,2015, approximately $2.2 million had been paid by LINN Energy paid approximately $11 million on LinnCo’s behalf for general and administrative expenses incurred byas of June 30, 2015.
The Company did not pay any distributions to LinnCo in 2013.
during the three months or six months ended June 30, 2016. During the three months and ninesix months ended SeptemberJune 30, 2015,, the Company paid approximately $41$40 million and $121$80 million, respectively, in distributions to LinnCo attributable to LinnCo’s interest in LINN Energy. During the three months and nine months ended September 30, 2014, the Company paid approximately $94 million and $280 million, respectively, in distributions to LinnCo attributable to LinnCo’s interest in LINN Energy.
Other
One of the Company’s directors is the President and Chief Executive Officer of Superior Energy Services, Inc. (“Superior”), which provides oilfield services to the Company. For the three months and ninesix months ended SeptemberJune 30, 2016, the Company incurred expenditures of approximately $1 million and $3 million, respectively, and for the three months and six months ended June 30, 2015,, the Company incurred expenditures of approximately $2 million and $7 million, respectively, and for the three months and nine months ended September 30, 2014, the Company incurred expenditures of approximately $5 million and $17 million, respectively, related to services rendered by Superior and its subsidiaries.
Note 15 – Subsidiary Guarantors
Linn Energy, LLC’s senior notes due May 2019, senior notes due November 2019, senior notes due April 2020, Second Lien Notes, senior notes due February 2021 and senior notes anddue September 2021 senior notes are guaranteed by all of the Company’s material subsidiaries, other than Berry Petroleum Company, LLC, which is an indirect 100% wholly owned subsidiary of the Company.
The following condensed consolidating financial information presents the financial information of Linn Energy, LLC, the guarantor subsidiaries and the non-guarantor subsidiary in accordance with SEC Regulation S-X Rule 3‑10. The condensed consolidating financial information for the co-issuer, Linn Energy Finance Corp., is not presented as it has no assets, operations or cash flows. The financial information may not necessarily be indicative of the financial position or results of operations had the guarantor subsidiaries or non-guarantor subsidiary operated as independent entities. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries.
In 2014, the Company had a consolidated variable interest entity (“VIE”) that was not considered a subsidiary and did not guarantee any of Linn Energy, LLC’s or Berry Petroleum Company, LLC’s indebtedness; therefore, it is presented separately. The VIE structure was terminated in December 2014.
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEETS
SeptemberJune 30, 20152016
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 32 |
| | $ | 61,969 |
| | $ | 282,805 |
| | $ | — |
| | $ | 344,806 |
| $ | 425,594 |
| | $ | 334,043 |
| | $ | 15,008 |
| | $ | — |
| | $ | 774,645 |
|
Accounts receivable – trade, net | — |
| | 215,626 |
| | 55,530 |
| | — |
| | 271,156 |
| — |
| | 151,293 |
| | 51,304 |
| | — |
| | 202,597 |
|
Accounts receivable – affiliates | 3,265,327 |
| | 6,329 |
| | — |
| | (3,271,656 | ) | | — |
| 1,664,128 |
| | 38,660 |
| | — |
| | (1,702,788 | ) | | — |
|
Derivative instruments | — |
| | 1,105,635 |
| | 26,529 |
| | — |
| | 1,132,164 |
| — |
| | — |
| | 185 |
| | — |
| | 185 |
|
Other current assets | — |
| | 68,813 |
| | 43,420 |
| | (11 | ) | | 112,222 |
| 20,545 |
| | 69,136 |
| | 19,213 |
| | — |
| | 108,894 |
|
Total current assets | 3,265,359 |
| | 1,458,372 |
| | 408,284 |
| | (3,271,667 | ) | | 1,860,348 |
| 2,110,267 |
| | 593,132 |
| | 85,710 |
| | (1,702,788 | ) | | 1,086,321 |
|
| | | | | | | | | | | | | | | | | | |
Noncurrent assets: | | | | | | | | | | | | | | | | | | |
Oil and natural gas properties (successful efforts method) | — |
| | 13,061,758 |
| | 5,000,233 |
| | — |
| | 18,061,991 |
| — |
| | 13,144,928 |
| | 5,019,722 |
| | — |
| | 18,164,650 |
|
Less accumulated depletion and amortization | — |
| | (6,517,088 | ) | | (1,493,749 | ) | | 57,440 |
| | (7,953,397 | ) | — |
| | (9,863,329 | ) | | (2,719,219 | ) | | 67,906 |
| | (12,514,642 | ) |
| — |
| | 6,544,670 |
| | 3,506,484 |
| | 57,440 |
| | 10,108,594 |
| — |
| | 3,281,599 |
| | 2,300,503 |
| | 67,906 |
| | 5,650,008 |
|
| | | | | | | | | | | | | | | | | | |
Other property and equipment | — |
| | 584,892 |
| | 128,891 |
| | — |
| | 713,783 |
| — |
| | 607,946 |
| | 118,875 |
| | — |
| | 726,821 |
|
Less accumulated depreciation | — |
| | (171,095 | ) | | (16,288 | ) | | — |
| | (187,383 | ) | — |
| | (205,621 | ) | | (16,571 | ) | | — |
| | (222,192 | ) |
| — |
| | 413,797 |
| | 112,603 |
| | — |
| | 526,400 |
| — |
| | 402,325 |
| | 102,304 |
| | — |
| | 504,629 |
|
| | | | | | | | | | | | | | | | | | |
Derivative instruments | — |
| | 721,397 |
| | 336 |
| | — |
| | 721,733 |
| |
Restricted cash | — |
| | 6,798 |
| | 250,245 |
| | — |
| | 257,043 |
| — |
| | 7,410 |
| | 197,418 |
| | — |
| | 204,828 |
|
Notes receivable – affiliates | 181,400 |
| | — |
| | — |
| | (181,400 | ) | | — |
| 161,100 |
| | — |
| | — |
| | (161,100 | ) | | — |
|
Investments in consolidated subsidiaries | 6,779,570 |
| | — |
| | — |
| | (6,779,570 | ) | | — |
| 2,434,999 |
| | — |
| | — |
| | (2,434,999 | ) | | — |
|
Other noncurrent assets, net | 88,217 |
| | 5,387 |
| | 10,747 |
| | — |
| | 104,351 |
| |
Other noncurrent assets | | — |
| | 13,912 |
| | 17,548 |
| | (72 | ) | | 31,388 |
|
| 7,049,187 |
| | 733,582 |
| | 261,328 |
| | (6,960,970 | ) | | 1,083,127 |
| 2,596,099 |
| | 21,322 |
| | 214,966 |
| | (2,596,171 | ) | | 236,216 |
|
Total noncurrent assets | 7,049,187 |
| | 7,692,049 |
| | 3,880,415 |
| | (6,903,530 | ) | | 11,718,121 |
| 2,596,099 |
| | 3,705,246 |
| | 2,617,773 |
| | (2,528,265 | ) | | 6,390,853 |
|
Total assets | $ | 10,314,546 |
| | $ | 9,150,421 |
| | $ | 4,288,699 |
| | $ | (10,175,197 | ) | | $ | 13,578,469 |
| $ | 4,706,366 |
| | $ | 4,298,378 |
| | $ | 2,703,483 |
| | $ | (4,231,053 | ) | | $ | 7,477,174 |
|
| | | | | | | | | | | | | | | | | | |
LIABILITIES AND UNITHOLDERS’ CAPITAL | | | | | | | |
LIABILITIES AND UNITHOLDERS’ CAPITAL (DEFICIT) | | LIABILITIES AND UNITHOLDERS’ CAPITAL (DEFICIT) | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | $ | 776 |
| | $ | 391,449 |
| | $ | 176,124 |
| | $ | — |
| | $ | 568,349 |
| $ | 15 |
| | $ | 263,673 |
| | $ | 84,232 |
| | $ | — |
| | $ | 347,920 |
|
Accounts payable – affiliates | — |
| | 3,265,327 |
| | 6,329 |
| | (3,271,656 | ) | | — |
| — |
| | 1,664,128 |
| | 38,660 |
| | (1,702,788 | ) | | — |
|
Derivative instruments | — |
| | — |
| | 1,462 |
| | — |
| | 1,462 |
| — |
| | — |
| | 1,694 |
| | — |
| | 1,694 |
|
Current portion of long-term debt, net | | 1,937,450 |
| | — |
| | 874,959 |
| | — |
| | 2,812,409 |
|
Other accrued liabilities | 116,969 |
| | 52,513 |
| | 12,707 |
| | (11 | ) | | 182,178 |
| 478 |
| | 44,404 |
| | 2,810 |
| | — |
| | 47,692 |
|
Total current liabilities | 117,745 |
| | 3,709,289 |
| | 196,622 |
| | (3,271,667 | ) | | 751,989 |
| 1,937,943 |
| | 1,972,205 |
| | 1,002,355 |
| | (1,702,788 | ) | | 3,209,715 |
|
| | | | | | | | | | | | | | | | | | |
Noncurrent liabilities: | |
| | |
| | |
| | |
| | |
| |
Credit facilities | 2,305,000 |
| | — |
| | 1,173,175 |
| | — |
| | 3,478,175 |
| |
Term loan | 500,000 |
| | — |
| | — |
| | — |
| | 500,000 |
| |
Senior notes, net | 5,204,297 |
| | — |
| | 845,804 |
| | — |
| | 6,050,101 |
| |
Notes payable – affiliates | — |
| | 181,400 |
| | — |
| | (181,400 | ) | | — |
| — |
| | 161,100 |
| | — |
| | (161,100 | ) | | — |
|
Derivative instruments | — |
| | 320 |
| | 423 |
| | — |
| | 743 |
| |
Other noncurrent liabilities | — |
| | 402,225 |
| | 200,931 |
| | — |
| | 603,156 |
| — |
| | 407,722 |
| | 180,522 |
| | (72 | ) | | 588,172 |
|
Total noncurrent liabilities | 8,009,297 |
| | 583,945 |
| | 2,220,333 |
| | (181,400 | ) | | 10,632,175 |
| |
Liabilities subject to compromise | | 4,167,313 |
| | 49,419 |
| | 852,426 |
| | — |
| | 5,069,158 |
|
| | | | | | | | | | | | | | | | | | |
Unitholders’ capital: | | | | | | | | | | |
Unitholders’ capital (deficit): | | | | | | | | | | |
Units issued and outstanding | 5,327,314 |
| | 4,831,078 |
| | 2,757,836 |
| | (7,582,113 | ) | | 5,334,115 |
| 5,352,381 |
| | 4,831,495 |
| | 2,798,713 |
| | (7,621,189 | ) | | 5,361,400 |
|
Accumulated income (deficit) | (3,139,810 | ) | | 26,109 |
| | (886,092 | ) | | 859,983 |
| | (3,139,810 | ) | |
Accumulated deficit | | (6,751,271 | ) | | (3,123,563 | ) | | (2,130,533 | ) | | 5,254,096 |
| | (6,751,271 | ) |
| 2,187,504 |
| | 4,857,187 |
| | 1,871,744 |
| | (6,722,130 | ) | | 2,194,305 |
| (1,398,890 | ) | | 1,707,932 |
| | 668,180 |
| | (2,367,093 | ) | | (1,389,871 | ) |
Total liabilities and unitholders’ capital | $ | 10,314,546 |
| | $ | 9,150,421 |
| | $ | 4,288,699 |
| | $ | (10,175,197 | ) | | $ | 13,578,469 |
| |
Total liabilities and unitholders’ capital (deficit) | | $ | 4,706,366 |
| | $ | 4,298,378 |
| | $ | 2,703,483 |
| | $ | (4,231,053 | ) | | $ | 7,477,174 |
|
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 20142015
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 38 |
| | $ | 185 |
| | $ | 1,586 |
| | $ | — |
| | $ | 1,809 |
| $ | 1,073 |
| | $ | 72 |
| | $ | 1,023 |
| | $ | — |
| | $ | 2,168 |
|
Accounts receivable – trade, net | — |
| | 371,325 |
| | 100,359 |
| | — |
| | 471,684 |
| — |
| | 170,503 |
| | 46,053 |
| | — |
| | 216,556 |
|
Accounts receivable – affiliates | 4,028,890 |
| | 13,205 |
| | — |
| | (4,042,095 | ) | | — |
| 2,920,082 |
| | 8,621 |
| | — |
| | (2,928,703 | ) | | — |
|
Derivative instruments | — |
| | 1,033,448 |
| | 43,694 |
| | — |
| | 1,077,142 |
| — |
| | 1,207,012 |
| | 13,218 |
| | — |
| | 1,220,230 |
|
Other current assets | 18 |
| | 96,678 |
| | 59,259 |
| | — |
| | 155,955 |
| 25,090 |
| | 49,606 |
| | 20,897 |
| | — |
| | 95,593 |
|
Total current assets | 4,028,946 |
| | 1,514,841 |
| | 204,898 |
| | (4,042,095 | ) | | 1,706,590 |
| 2,946,245 |
| | 1,435,814 |
| | 81,191 |
| | (2,928,703 | ) | | 1,534,547 |
|
| | | | | | | | | | | | | | | | | | |
Noncurrent assets: | | | | | | | | | | | | | | | | | | |
Oil and natural gas properties (successful efforts method) | — |
| | 13,196,841 |
| | 4,872,059 |
| | — |
| | 18,068,900 |
| — |
| | 13,110,094 |
| | 5,011,061 |
| | — |
| | 18,121,155 |
|
Less accumulated depletion and amortization | — |
| | (4,342,675 | ) | | (525,007 | ) | | — |
| | (4,867,682 | ) | — |
| | (9,557,283 | ) | | (1,596,165 | ) | | 55,956 |
| | (11,097,492 | ) |
| — |
| | 8,854,166 |
| | 4,347,052 |
| | — |
| | 13,201,218 |
| — |
| | 3,552,811 |
| | 3,414,896 |
| | 55,956 |
| | 7,023,663 |
|
| | | | | | | | | | | | | | | | | | |
Other property and equipment | — |
| | 553,150 |
| | 115,999 |
| | — |
| | 669,149 |
| — |
| | 597,216 |
| | 111,495 |
| | — |
| | 708,711 |
|
Less accumulated depreciation | — |
| | (135,830 | ) | | (8,452 | ) | | — |
| | (144,282 | ) | — |
| | (183,139 | ) | | (12,522 | ) | | — |
| | (195,661 | ) |
| — |
| | 417,320 |
| | 107,547 |
| | — |
| | 524,867 |
| — |
| | 414,077 |
| | 98,973 |
| | — |
| | 513,050 |
|
| | | | | | | | | | | | | | | | | | |
Derivative instruments | — |
| | 848,097 |
| | — |
| | — |
| | 848,097 |
| — |
| | 566,401 |
| | — |
| | — |
| | 566,401 |
|
Restricted cash | — |
| | 6,100 |
| | 125 |
| | — |
| | 6,225 |
| — |
| | 7,004 |
| | 250,359 |
| | — |
| | 257,363 |
|
Notes receivable – affiliates | 130,500 |
| | — |
| | — |
| | (130,500 | ) | | — |
| 175,100 |
| | — |
| | — |
| | (175,100 | ) | | — |
|
Advance to affiliate | — |
| | — |
| | 293,627 |
| | (293,627 | ) | | — |
| |
Investments in consolidated subsidiaries | 8,562,608 |
| | — |
| | — |
| | (8,562,608 | ) | | — |
| 3,940,444 |
| | — |
| | — |
| | (3,940,444 | ) | | — |
|
Other noncurrent assets, net | 116,637 |
| | 5,716 |
| | 14,159 |
| | — |
| | 136,512 |
| |
Other noncurrent assets | | — |
| | 17,178 |
| | 16,057 |
| | (1 | ) | | 33,234 |
|
| 8,809,745 |
| | 859,913 |
| | 307,911 |
| | (8,986,735 | ) | | 990,834 |
| 4,115,544 |
| | 590,583 |
| | 266,416 |
| | (4,115,545 | ) | | 856,998 |
|
Total noncurrent assets | 8,809,745 |
| | 10,131,399 |
| | 4,762,510 |
| | (8,986,735 | ) | | 14,716,919 |
| 4,115,544 |
| | 4,557,471 |
| | 3,780,285 |
| | (4,059,589 | ) | | 8,393,711 |
|
Total assets | $ | 12,838,691 |
| | $ | 11,646,240 |
| | $ | 4,967,408 |
| | $ | (13,028,830 | ) | | $ | 16,423,509 |
| $ | 7,061,789 |
| | $ | 5,993,285 |
| | $ | 3,861,476 |
| | $ | (6,988,292 | ) | | $ | 9,928,258 |
|
| | | | | | | | | | | | | | | | | | |
LIABILITIES AND UNITHOLDERS’ CAPITAL | | | | | | | |
LIABILITIES AND UNITHOLDERS’ CAPITAL (DEFICIT) | | LIABILITIES AND UNITHOLDERS’ CAPITAL (DEFICIT) | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | $ | 3,784 |
| | $ | 581,880 |
| | $ | 229,145 |
| | $ | — |
| | $ | 814,809 |
| $ | 1,285 |
| | $ | 336,962 |
| | $ | 117,127 |
| | $ | — |
| | $ | 455,374 |
|
Accounts payable – affiliates | — |
| | 4,028,890 |
| | 13,205 |
| | (4,042,095 | ) | | — |
| — |
| | 2,920,082 |
| | 8,621 |
| | (2,928,703 | ) | | — |
|
Advance from affiliate | — |
| | 293,627 |
| | — |
| | (293,627 | ) | | — |
| |
Derivative instruments | | — |
| | — |
| | 2,241 |
| | — |
| | 2,241 |
|
Current portion of long-term debt, net | | 2,841,518 |
| | — |
| | 873,175 |
| | — |
| | 3,714,693 |
|
Other accrued liabilities | 89,507 |
| | 59,142 |
| | 19,087 |
| | — |
| | 167,736 |
| 49,861 |
| | 52,997 |
| | 16,735 |
| | — |
| | 119,593 |
|
Total current liabilities | 93,291 |
| | 4,963,539 |
| | 261,437 |
| | (4,335,722 | ) | | 982,545 |
| 2,892,664 |
| | 3,310,041 |
| | 1,017,899 |
| | (2,928,703 | ) | | 4,291,901 |
|
| | | | | | | | | | | | | | | | | | |
Noncurrent liabilities: | |
| | |
| | |
| | |
| | |
| |
Credit facilities | 1,795,000 |
| | — |
| | 1,173,175 |
| | — |
| | 2,968,175 |
| |
Term loan | 500,000 |
| | — |
| | — |
| | — |
| | 500,000 |
| |
Senior notes, net | 5,913,857 |
| | — |
| | 913,777 |
| | — |
| | 6,827,634 |
| |
Derivative instruments | | — |
| | 857 |
| | — |
| | — |
| | 857 |
|
Long-term debt, net | | 4,447,308 |
| | — |
| | 845,368 |
| | — |
| | 5,292,676 |
|
Notes payable – affiliates | — |
| | 130,500 |
| | — |
| | (130,500 | ) | | — |
| — |
| | 175,100 |
| | — |
| | (175,100 | ) | | — |
|
Derivative instruments | — |
| | 684 |
| | — |
| | — |
| | 684 |
| |
Other noncurrent liabilities | — |
| | 400,851 |
| | 200,015 |
| | — |
| | 600,866 |
| — |
| | 399,676 |
| | 212,050 |
| | (1 | ) | | 611,725 |
|
Total noncurrent liabilities | 8,208,857 |
| | 532,035 |
| | 2,286,967 |
| | (130,500 | ) | | 10,897,359 |
| |
| | | | | | | | | | | | | | | | | | |
Unitholders’ capital: | | | | | | | | | | |
Unitholders’ capital (deficit): | | | | | | | | | | |
Units issued and outstanding | 5,388,749 |
| | 4,831,339 |
| | 2,416,381 |
| | (7,240,658 | ) | | 5,395,811 |
| 5,333,834 |
| | 4,831,758 |
| | 2,798,713 |
| | (7,621,189 | ) | | 5,343,116 |
|
Accumulated income (deficit) | (852,206 | ) | | 1,319,327 |
| | 2,623 |
| | (1,321,950 | ) | | (852,206 | ) | |
Accumulated deficit | | (5,612,017 | ) | | (2,724,147 | ) | | (1,012,554 | ) | | 3,736,701 |
| | (5,612,017 | ) |
| 4,536,543 |
| | 6,150,666 |
| | 2,419,004 |
| | (8,562,608 | ) | | 4,543,605 |
| (278,183 | ) | | 2,107,611 |
| | 1,786,159 |
| | (3,884,488 | ) | | (268,901 | ) |
Total liabilities and unitholders’ capital | $ | 12,838,691 |
| | $ | 11,646,240 |
| | $ | 4,967,408 |
| | $ | (13,028,830 | ) | | $ | 16,423,509 |
| |
Total liabilities and unitholders’ capital (deficit) | | $ | 7,061,789 |
| | $ | 5,993,285 |
| | $ | 3,861,476 |
| | $ | (6,988,292 | ) | | $ | 9,928,258 |
|
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended SeptemberJune 30, 20152016
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| | (in thousands) |
Revenues and other: | | | | | | | | | | | | | | | | | | |
Oil, natural gas and natural gas liquids sales | $ | — |
| | $ | 286,993 |
| | $ | 140,252 |
| | $ | — |
| | $ | 427,245 |
| $ | — |
| | $ | 216,426 |
| | $ | 99,831 |
| | $ | — |
| | $ | 316,257 |
|
Gains on oil and natural gas derivatives | — |
| | 521,365 |
| | 27,664 |
| | — |
| | 549,029 |
| |
Gains (losses) on oil and natural gas derivatives | | — |
| | (183,794 | ) | | 1,026 |
| | — |
| | (182,768 | ) |
Marketing revenues | — |
| | 6,004 |
| | 9,719 |
| | — |
| | 15,723 |
| — |
| | 8,551 |
| | 5,969 |
| | — |
| | 14,520 |
|
Other revenues | — |
| | 4,635 |
| | 1,672 |
| | — |
| | 6,307 |
| — |
| | 5,573 |
| | 1,813 |
| | — |
| | 7,386 |
|
| — |
| | 818,997 |
| | 179,307 |
| | — |
| | 998,304 |
| — |
| | 46,756 |
| | 108,639 |
| | — |
| | 155,395 |
|
Expenses: | | | | | | | | | | | | | | | | | | |
Lease operating expenses | — |
| | 86,745 |
| | 67,341 |
| | — |
| | 154,086 |
| — |
| | 73,127 |
| | 42,416 |
| | — |
| | 115,543 |
|
Transportation expenses | — |
| | 41,121 |
| | 13,794 |
| | — |
| | 54,915 |
| — |
| | 41,092 |
| | 10,945 |
| | — |
| | 52,037 |
|
Marketing expenses | — |
| | 3,633 |
| | 5,726 |
| | — |
| | 9,359 |
| — |
| | 6,727 |
| | 4,578 |
| | — |
| | 11,305 |
|
General and administrative expenses | — |
| | 38,549 |
| | 21,564 |
| | — |
| | 60,113 |
| — |
| | 34,898 |
| | 24,748 |
| | — |
| | 59,646 |
|
Exploration costs | — |
| | 3,072 |
| | — |
| | — |
| | 3,072 |
| — |
| | 48 |
| | — |
| | — |
| | 48 |
|
Depreciation, depletion and amortization | — |
| | 142,211 |
| | 63,057 |
| | 1,950 |
| | 207,218 |
| — |
| | 104,718 |
| | 41,186 |
| | (2,733 | ) | | 143,171 |
|
Impairment of long-lived assets | — |
| | 1,744,449 |
| | 510,631 |
| | — |
| | 2,255,080 |
| |
Taxes, other than income taxes | — |
| | 31,718 |
| | 14,520 |
| | — |
| | 46,238 |
| — |
| | 20,852 |
| | 9,995 |
| | — |
| | 30,847 |
|
(Gains) losses on sale of assets and other, net | — |
| | (169,613 | ) | | 2,633 |
| | — |
| | (166,980 | ) | |
Losses on sale of assets and other, net | | — |
| | 2,517 |
| | 425 |
| | — |
| | 2,942 |
|
| — |
| | 1,921,885 |
| | 699,266 |
| | 1,950 |
| | 2,623,101 |
| — |
| | 283,979 |
| | 134,293 |
| | (2,733 | ) | | 415,539 |
|
Other income and (expenses): | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | (117,096 | ) | | 197 |
| | (21,484 | ) | | — |
| | (138,383 | ) | (52,118 | ) | | 36 |
| | (16,352 | ) | | — |
| | (68,434 | ) |
Interest expense – affiliates | — |
| | (2,207 | ) | | — |
| | 2,207 |
| | — |
| — |
| | (2,969 | ) | | — |
| | 2,969 |
| | — |
|
Interest income – affiliates | 2,207 |
| | — |
| | — |
| | (2,207 | ) | | — |
| 2,969 |
| | — |
| | — |
| | (2,969 | ) | | — |
|
Gain on extinguishment of debt | 193,363 |
| | — |
| | 4,378 |
| | — |
| | 197,741 |
| |
Equity in losses from consolidated subsidiaries | (1,646,256 | ) | | — |
| | — |
| | 1,646,256 |
| | — |
| (240,209 | ) | | — |
| | — |
| | 240,209 |
| | — |
|
Other, net | (1,535 | ) | | (76 | ) | | (90 | ) | | — |
| | (1,701 | ) | (1,237 | ) | | 11 |
| | (76 | ) | | — |
| | (1,302 | ) |
| (1,569,317 | ) | | (2,086 | ) | | (17,196 | ) | | 1,646,256 |
| | 57,657 |
| (290,595 | ) | | (2,922 | ) | | (16,428 | ) | | 240,209 |
| | (69,736 | ) |
Loss before income taxes | (1,569,317 | ) | | (1,104,974 | ) | | (537,155 | ) | | 1,644,306 |
| | (1,567,140 | ) | |
Income tax expense | — |
| | 2,174 |
| | 3 |
| | — |
| | 2,177 |
| |
Net loss | $ | (1,569,317 | ) | | $ | (1,107,148 | ) | | $ | (537,158 | ) | | $ | 1,644,306 |
| | $ | (1,569,317 | ) | |
Reorganization items, net | | 499,087 |
| | (13,289 | ) | | 49,086 |
| | — |
| | 534,884 |
|
Income (loss) before income taxes | | 208,492 |
| | (253,434 | ) | | 7,004 |
| | 242,942 |
| | 205,004 |
|
Income tax expense (benefit) | | — |
| | (3,652 | ) | | 164 |
| | — |
| | (3,488 | ) |
Net income (loss) | | $ | 208,492 |
| | $ | (249,782 | ) | | $ | 6,840 |
| | $ | 242,942 |
| | $ | 208,492 |
|
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended SeptemberJune 30, 20142015
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Non- Guarantor VIE | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
Revenues and other: | | | | | | | | | | | | | | | | | | | | |
Oil, natural gas and natural gas liquids sales | $ | — |
| | $ | 542,535 |
| | $ | 350,863 |
| | $ | 44,060 |
| | $ | — |
| | $ | 937,458 |
| $ | — |
| | $ | 323,038 |
| | $ | 173,381 |
| | $ | — |
| | $ | 496,419 |
|
Gains on oil and natural gas derivatives | — |
| | 406,712 |
| | 44,990 |
| | — |
| | — |
| | 451,702 |
| |
Losses on oil and natural gas derivatives | | — |
| | (186,714 | ) | | (4,474 | ) | | — |
| | (191,188 | ) |
Marketing revenues | — |
| | 26,518 |
| | 13,318 |
| | — |
| | — |
| | 39,836 |
| — |
| | 3,285 |
| | 7,448 |
| | — |
| | 10,733 |
|
Other revenues | — |
| | 5,874 |
| | 245 |
| | — |
| | — |
| | 6,119 |
| — |
| | 4,329 |
| | 1,535 |
| | — |
| | 5,864 |
|
| — |
| | 981,639 |
| | 409,416 |
| | 44,060 |
| | — |
| | 1,435,115 |
| — |
| | 143,938 |
| | 177,890 |
| | — |
| | 321,828 |
|
Expenses: | | | | | | | | | | | | | | | | | | | | |
Lease operating expenses | — |
| | 97,613 |
| | 83,684 |
| | 10,333 |
| | — |
| | 191,630 |
| — |
| | 90,756 |
| | 49,896 |
| | — |
| | 140,652 |
|
Transportation expenses | — |
| | 36,531 |
| | 13,326 |
| | 3,555 |
| | — |
| | 53,412 |
| — |
| | 42,817 |
| | 12,978 |
| | — |
| | 55,795 |
|
Marketing expenses | — |
| | 23,871 |
| | 7,703 |
| | — |
| | — |
| | 31,574 |
| — |
| | 3,161 |
| | 5,998 |
| | — |
| | 9,159 |
|
General and administrative expenses | — |
| | 52,580 |
| | 16,566 |
| | 6,238 |
| | — |
| | 75,384 |
| — |
| | 61,548 |
| | 37,102 |
| | — |
| | 98,650 |
|
Exploration costs | — |
| | 7,850 |
| | — |
| | — |
| | — |
| | 7,850 |
| — |
| | 564 |
| | — |
| | — |
| | 564 |
|
Depreciation, depletion and amortization | — |
| | 199,360 |
| | 79,725 |
| | 11,202 |
| | — |
| | 290,287 |
| — |
| | 150,739 |
| | 63,052 |
| | 1,941 |
| | 215,732 |
|
Impairment of long-lived assets | — |
| | 603,250 |
| | — |
| | — |
| |
|
| | 603,250 |
| |
Taxes, other than income taxes | 40 |
| | 38,598 |
| | 24,830 |
| | 3,302 |
| | — |
| | 66,770 |
| — |
| | 35,838 |
| | 22,196 |
| | — |
| | 58,034 |
|
(Gains) losses on sale of assets and other, net | — |
| | (93,257 | ) | | 49,011 |
| | 8,443 |
| | — |
| | (35,803 | ) | |
Gains on sale of assets and other, net | | — |
| | (17,185 | ) | | (811 | ) | | — |
| | (17,996 | ) |
| 40 |
| | 966,396 |
| | 274,845 |
| | 43,073 |
| | — |
| | 1,284,354 |
| — |
| | 368,238 |
| | 190,411 |
| | 1,941 |
| | 560,590 |
|
Other income and (expenses): | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | (129,129 | ) | | 757 |
| | (19,068 | ) | | (6,607 | ) | | — |
| | (154,047 | ) | (123,555 | ) | | 145 |
| | (22,690 | ) | | — |
| | (146,100 | ) |
Interest expense – affiliates | — |
| | (2,218 | ) | | — |
| | — |
| | 2,218 |
| | — |
| — |
| | (3,235 | ) | | — |
| | 3,235 |
| | — |
|
Interest income – affiliates | 2,218 |
| | — |
| | — |
| | — |
| | (2,218 | ) | | — |
| 3,235 |
| | — |
| | — |
| | (3,235 | ) | | — |
|
Equity in earnings from consolidated subsidiaries | 124,435 |
| | — |
| | — |
| | — |
| | (124,435 | ) | | — |
| |
Gain on extinguishment of debt | | 2,320 |
| | — |
| | 6,831 |
| | — |
| | 9,151 |
|
Equity in losses from consolidated subsidiaries | | (255,426 | ) | | — |
| | — |
| | 255,426 |
| | — |
|
Other, net | (1,584 | ) | | (84 | ) | | (179 | ) | | — |
| | — |
| | (1,847 | ) | (5,701 | ) | | 18 |
| | (463 | ) | | — |
| | (6,146 | ) |
| (4,060 | ) | | (1,545 | ) | | (19,247 | ) | | (6,607 | ) | | (124,435 | ) | | (155,894 | ) | (379,127 | ) | | (3,072 | ) | | (16,322 | ) | | 255,426 |
| | (143,095 | ) |
Income (loss) before income taxes | (4,100 | ) | | 13,698 |
| | 115,324 |
| | (5,620 | ) | | (124,435 | ) | | (5,133 | ) | |
Income tax expense (benefit) | — |
| | (1,192 | ) | | 159 |
| | — |
| | — |
| | (1,033 | ) | |
Net income (loss) | $ | (4,100 | ) | | $ | 14,890 |
| | $ | 115,165 |
| | $ | (5,620 | ) | | $ | (124,435 | ) | | $ | (4,100 | ) | |
Loss before income taxes | | (379,127 | ) | | (227,372 | ) | | (28,843 | ) | | 253,485 |
| | (381,857 | ) |
Income tax benefit | | — |
| | (2,719 | ) | | (11 | ) | | — |
| | (2,730 | ) |
Net loss | | $ | (379,127 | ) | | $ | (224,653 | ) | | $ | (28,832 | ) | | $ | 253,485 |
| | $ | (379,127 | ) |
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the NineSix Months Ended SeptemberJune 30, 20152016
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
Revenues and other: | | | | | | | | | | | | | | | | | | |
Oil, natural gas and natural gas liquids sales | $ | — |
| | $ | 904,014 |
| | $ | 470,219 |
| | $ | — |
| | $ | 1,374,233 |
| $ | — |
| | $ | 416,275 |
| | $ | 183,297 |
| | $ | — |
| | $ | 599,572 |
|
Gains on oil and natural gas derivatives | — |
| | 756,165 |
| | 26,457 |
| | — |
| | 782,622 |
| |
Gains (losses) on oil and natural gas derivatives | | — |
| | (74,341 | ) | | 1,534 |
| | — |
| | (72,807 | ) |
Marketing revenues | — |
| | 35,501 |
| | 24,699 |
| | — |
| | 60,200 |
| — |
| | 17,612 |
| | 11,213 |
| | — |
| | 28,825 |
|
Other revenues | — |
| | 14,521 |
| | 5,103 |
| | — |
| | 19,624 |
| — |
| | 10,711 |
| | 3,861 |
| | — |
| | 14,572 |
|
| — |
| | 1,710,201 |
| | 526,478 |
| | — |
| | 2,236,679 |
| — |
| | 370,257 |
| | 199,905 |
| | — |
| | 570,162 |
|
Expenses: | | | | | | | | | | | | | | | | | | |
Lease operating expenses | — |
| | 283,333 |
| | 184,426 |
| | — |
| | 467,759 |
| — |
| | 160,679 |
| | 92,509 |
| | — |
| | 253,188 |
|
Transportation expenses | — |
| | 124,872 |
| | 39,378 |
| | — |
| | 164,250 |
| — |
| | 83,086 |
| | 23,874 |
| | — |
| | 106,960 |
|
Marketing expenses | — |
| | 29,990 |
| | 17,369 |
| | — |
| | 47,359 |
| — |
| | 14,560 |
| | 9,033 |
| | — |
| | 23,593 |
|
General and administrative expenses | — |
| | 157,878 |
| | 79,853 |
| | — |
| | 237,731 |
| — |
| | 96,255 |
| | 49,920 |
| | — |
| | 146,175 |
|
Exploration costs | — |
| | 4,032 |
| | — |
| | — |
| | 4,032 |
| — |
| | 2,741 |
| | — |
| | — |
| | 2,741 |
|
Depreciation, depletion and amortization | — |
| | 433,649 |
| | 199,088 |
| | 5,227 |
| | 637,964 |
| — |
| | 212,763 |
| | 100,029 |
| | (5,563 | ) | | 307,229 |
|
Impairment of long-lived assets | — |
| | 2,069,866 |
| | 782,631 |
| | (64,800 | ) | | 2,787,697 |
| — |
| | 129,703 |
| | 1,030,588 |
| | (6,387 | ) | | 1,153,904 |
|
Taxes, other than income taxes | 2 |
| | 98,267 |
| | 60,048 |
| | — |
| | 158,317 |
| 2 |
| | 40,604 |
| | 24,308 |
| | — |
| | 64,914 |
|
Gains on sale of assets and other, net | — |
| | (194,612 | ) | | (2,651 | ) | | — |
| | (197,263 | ) | |
Losses on sale of assets and other, net | | — |
| | 3,786 |
| | 233 |
| | — |
| | 4,019 |
|
| 2 |
| | 3,007,275 |
| | 1,360,142 |
| | (59,573 | ) | | 4,307,846 |
| 2 |
| | 744,177 |
| | 1,330,494 |
| | (11,950 | ) | | 2,062,723 |
|
Other income and (expenses): | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | (364,037 | ) | | 2,048 |
| | (65,595 | ) | | — |
| | (427,584 | ) | (137,590 | ) | | 241 |
| | (36,304 | ) | | — |
| | (173,653 | ) |
Interest expense – affiliates | — |
| | (7,824 | ) | | — |
| | 7,824 |
| | — |
| — |
| | (5,938 | ) | | — |
| | 5,938 |
| | — |
|
Interest income – affiliates | 7,824 |
| | — |
| | — |
| | (7,824 | ) | | — |
| 5,938 |
| | — |
| | — |
| | (5,938 | ) | | — |
|
Gain on extinguishment of debt | 202,318 |
| | — |
| | 11,209 |
| | — |
| | 213,527 |
| |
Equity in losses from consolidated subsidiaries | (2,124,493 | ) | | — |
| | — |
| | 2,124,493 |
| | — |
| (1,505,445 | ) | | — |
| | — |
| | 1,505,445 |
| | — |
|
Other, net | (9,214 | ) | | (123 | ) | | (723 | ) | | — |
| | (10,060 | ) | (1,242 | ) | | 84 |
| | (10 | ) | | — |
| | (1,168 | ) |
| (2,287,602 | ) | | (5,899 | ) | | (55,109 | ) | | 2,124,493 |
| | (224,117 | ) | (1,638,339 | ) | | (5,613 | ) | | (36,314 | ) | | 1,505,445 |
| | (174,821 | ) |
Reorganization items, net | | 499,087 |
| | (13,289 | ) | | 49,086 |
| | — |
| | 534,884 |
|
Loss before income taxes | (2,287,604 | ) | | (1,302,973 | ) | | (888,773 | ) | | 2,184,066 |
| | (2,295,284 | ) | (1,139,254 | ) | | (392,822 | ) | | (1,117,817 | ) | | 1,517,395 |
| | (1,132,498 | ) |
Income tax benefit | — |
| | (7,622 | ) | | (58 | ) | | — |
| | (7,680 | ) | |
Income tax expense | | — |
| | 6,594 |
| | 162 |
| | — |
| | 6,756 |
|
Net loss | $ | (2,287,604 | ) | | $ | (1,295,351 | ) | | $ | (888,715 | ) | | $ | 2,184,066 |
| | $ | (2,287,604 | ) | $ | (1,139,254 | ) | | $ | (399,416 | ) | | $ | (1,117,979 | ) | | $ | 1,517,395 |
| | $ | (1,139,254 | ) |
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the NineSix Months Ended SeptemberJune 30, 20142015
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Non- Guarantor VIE | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
Revenues and other: | | | | | | | | | | | | | | | | | | | | |
Oil, natural gas and natural gas liquids sales | $ | — |
| | $ | 1,755,766 |
| | $ | 1,044,359 |
| | $ | 44,060 |
| | $ | — |
| | $ | 2,844,185 |
| $ | — |
| | $ | 617,021 |
| | $ | 329,967 |
| | $ | — |
| | $ | 946,988 |
|
Gains (losses) on oil and natural gas derivatives | — |
| | (221,472 | ) | | 22,893 |
| | — |
| | — |
| | (198,579 | ) | — |
| | 234,800 |
| | (1,207 | ) | | — |
| | 233,593 |
|
Marketing revenues | — |
| | 60,088 |
| | 40,567 |
| | — |
| | — |
| | 100,655 |
| — |
| | 29,497 |
| | 14,980 |
| | — |
| | 44,477 |
|
Other revenues | — |
| | 19,154 |
| | 238 |
| | — |
| | — |
| | 19,392 |
| — |
| | 9,886 |
| | 3,431 |
| | — |
| | 13,317 |
|
| — |
| | 1,613,536 |
| | 1,108,057 |
| | 44,060 |
| | — |
| | 2,765,653 |
| — |
| | 891,204 |
| | 347,171 |
| | — |
| | 1,238,375 |
|
Expenses: | | | | | | | | | | | | | | | | | | | | |
Lease operating expenses | — |
| | 293,162 |
| | 267,069 |
| | 10,333 |
| | — |
| | 570,564 |
| — |
| | 196,588 |
| | 117,085 |
| | — |
| | 313,673 |
|
Transportation expenses | — |
| | 111,539 |
| | 28,802 |
| | 3,555 |
| | — |
| | 143,896 |
| — |
| | 83,751 |
| | 25,584 |
| | — |
| | 109,335 |
|
Marketing expenses | — |
| | 47,511 |
| | 28,409 |
| | — |
| | — |
| | 75,920 |
| — |
| | 26,357 |
| | 11,643 |
| | — |
| | 38,000 |
|
General and administrative expenses | — |
| | 126,901 |
| | 88,379 |
| | 6,238 |
| | — |
| | 221,518 |
| — |
| | 119,329 |
| | 58,289 |
| | — |
| | 177,618 |
|
Exploration costs | — |
| | 10,492 |
| | — |
| | — |
| | — |
| | 10,492 |
| — |
| | 960 |
| | — |
| | — |
| | 960 |
|
Depreciation, depletion and amortization | — |
| | 595,212 |
| | 226,109 |
| | 11,202 |
| | — |
| | 832,523 |
| — |
| | 291,438 |
| | 136,031 |
| | 3,277 |
| | 430,746 |
|
Impairment of long-lived assets | — |
| | 603,250 |
| | — |
| | — |
| | — |
| | 603,250 |
| — |
| | 325,417 |
| | 272,000 |
| | (64,800 | ) | | 532,617 |
|
Taxes, other than income taxes | 40 |
| | 126,334 |
| | 71,338 |
| | 3,302 |
| | — |
| | 201,014 |
| 2 |
| | 66,549 |
| | 45,528 |
| | — |
| | 112,079 |
|
(Gains) losses on sale of assets and other, net | — |
| | (92,828 | ) | | 56,635 |
| | 8,443 |
| | — |
| | (27,750 | ) | |
Gains on sale of assets and other, net | | — |
| | (24,999 | ) | | (5,284 | ) | | — |
| | (30,283 | ) |
| 40 |
| | 1,821,573 |
| | 766,741 |
| | 43,073 |
| | — |
| | 2,631,427 |
| 2 |
| | 1,085,390 |
| | 660,876 |
| | (61,523 | ) | | 1,684,745 |
|
Other income and (expenses): | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | (350,382 | ) | | 1,384 |
| | (66,555 | ) | | (6,607 | ) | | — |
| | (422,160 | ) | (246,941 | ) | | 1,851 |
| | (44,111 | ) | | — |
| | (289,201 | ) |
Interest expense – affiliates | — |
| | (5,627 | ) | | — |
| | — |
| | 5,627 |
| | — |
| — |
| | (5,617 | ) | | — |
| | 5,617 |
| | — |
|
Interest income – affiliates | 5,627 |
| | — |
| | — |
| | — |
| | (5,627 | ) | | — |
| 5,617 |
| | — |
| | — |
| | (5,617 | ) | | — |
|
Equity in earnings from consolidated subsidiaries | 53,244 |
| | — |
| | — |
| | — |
| | (53,244 | ) | | — |
| |
Gain on extinguishment of debt | | 8,955 |
| | — |
| | 6,831 |
| | — |
| | 15,786 |
|
Equity in losses from consolidated subsidiaries | | (478,237 | ) | | — |
| | — |
| | 478,237 |
| | — |
|
Other, net | (5,756 | ) | | (130 | ) | | (813 | ) | | — |
| | — |
| | (6,699 | ) | (7,679 | ) | | (47 | ) | | (633 | ) | | — |
| | (8,359 | ) |
| (297,267 | ) | | (4,373 | ) | | (67,368 | ) | | (6,607 | ) | | (53,244 | ) | | (428,859 | ) | (718,285 | ) | | (3,813 | ) | | (37,913 | ) | | 478,237 |
| | (281,774 | ) |
Income (loss) before income taxes | (297,307 | ) | | (212,410 | ) | | 273,948 |
| | (5,620 | ) | | (53,244 | ) | | (294,633 | ) | |
Income tax expense | — |
| | 2,597 |
| | 77 |
| | — |
| | — |
| | 2,674 |
| |
Net income (loss) | $ | (297,307 | ) | | $ | (215,007 | ) | | $ | 273,871 |
| | $ | (5,620 | ) | | $ | (53,244 | ) | | $ | (297,307 | ) | |
Loss before income taxes | | (718,287 | ) | | (197,999 | ) | | (351,618 | ) | | 539,760 |
| | (728,144 | ) |
Income tax benefit | | — |
| | (9,796 | ) | | (61 | ) | | — |
| | (9,857 | ) |
Net loss | | $ | (718,287 | ) | | $ | (188,203 | ) | | $ | (351,557 | ) | | $ | 539,760 |
| | $ | (718,287 | ) |
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the NineSix Months Ended SeptemberJune 30, 20152016
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
Cash flow from operating activities: | | | | | | | | | | | | | | | | | | |
Net loss | $ | (2,287,604 | ) | | $ | (1,295,351 | ) | | $ | (888,715 | ) | | $ | 2,184,066 |
| | $ | (2,287,604 | ) | $ | (1,139,254 | ) | | $ | (399,416 | ) | | $ | (1,117,979 | ) | | $ | 1,517,395 |
| | $ | (1,139,254 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | |
Depreciation, depletion and amortization | — |
| | 433,649 |
| | 199,088 |
| | 5,227 |
| | 637,964 |
| — |
| | 212,763 |
| | 100,029 |
| | (5,563 | ) | | 307,229 |
|
Impairment of long-lived assets | — |
| | 2,069,866 |
| | 782,631 |
| | (64,800 | ) | | 2,787,697 |
| — |
| | 129,703 |
| | 1,030,588 |
| | (6,387 | ) | | 1,153,904 |
|
Unit-based compensation expenses | — |
| | 47,918 |
| | — |
| | — |
| | 47,918 |
| — |
| | 18,553 |
| | — |
| | — |
| | 18,553 |
|
Gain on extinguishment of debt | (202,318 | ) | | — |
| | (11,209 | ) | | — |
| | (213,527 | ) | |
Amortization and write-off of deferred financing fees | 22,677 |
| | — |
| | 1,121 |
| | — |
| | 23,798 |
| 9,227 |
| | — |
| | 602 |
| | — |
| | 9,829 |
|
Gains on sale of assets and other, net | — |
| | (192,247 | ) | | (1,521 | ) | | — |
| | (193,768 | ) | |
(Gains) losses on sale of assets and other, net | | — |
| | 3,929 |
| | (642 | ) | | — |
| | 3,287 |
|
Equity in losses from consolidated subsidiaries | 2,124,493 |
| | — |
| | — |
| | (2,124,493 | ) | | — |
| 1,505,445 |
| | — |
| | — |
| | (1,505,445 | ) | | — |
|
Deferred income taxes | — |
| | (8,205 | ) | | (58 | ) | | — |
| | (8,263 | ) | — |
| | 3,850 |
| | 71 |
| | — |
| | 3,921 |
|
Reorganization items | | (498,954 | ) | | — |
| | (56,968 | ) | | — |
| | (555,922 | ) |
Derivatives activities: | | | | | | | | | | | | | | | | | | |
Total gains | — |
| | (756,165 | ) | | (29,355 | ) | | — |
| | (785,520 | ) | |
Total losses | | — |
| | 74,341 |
| | 2,871 |
| | — |
| | 77,212 |
|
Cash settlements | — |
| | 810,314 |
| | 48,054 |
| | — |
| | 858,368 |
| — |
| | 500,075 |
| | 8,022 |
| | — |
| | 508,097 |
|
Cash settlements on canceled derivatives | | — |
| | 356,835 |
| | 1,593 |
| | — |
| | 358,428 |
|
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | |
Decrease in accounts receivable – trade, net | — |
| | 163,353 |
| | 43,709 |
| | — |
| | 207,062 |
| |
Decrease in accounts receivable – affiliates | 813,653 |
| | 6,876 |
| | — |
| | (820,529 | ) | | — |
| |
Decrease in other assets | — |
| | 1,164 |
| | 1,519 |
| | — |
| | 2,683 |
| |
Decrease in accounts payable and accrued expenses | — |
| | (28,331 | ) | | (8,295 | ) | | — |
| | (36,626 | ) | |
Decrease in accounts payable and accrued expenses – affiliates | — |
| | (813,653 | ) | | (6,876 | ) | | 820,529 |
| | — |
| |
(Increase) decrease in accounts receivable – trade, net | | — |
| | 17,993 |
| | (8,296 | ) | | — |
| | 9,697 |
|
(Increase) decrease in accounts receivable – affiliates | | 437,406 |
| | (30,039 | ) | | — |
| | (407,367 | ) | | — |
|
Increase in other assets | | — |
| | (19,039 | ) | | (1,035 | ) | | — |
| | (20,074 | ) |
Increase (decrease) in accounts payable and accrued expenses | | (36 | ) | | 47,098 |
| | (4,362 | ) | | — |
| | 42,700 |
|
Increase (decrease) in accounts payable and accrued expenses – affiliates | | — |
| | (437,406 | ) | | 30,039 |
| | 407,367 |
| | — |
|
Increase (decrease) in other liabilities | 27,462 |
| | (12,086 | ) | | (20,789 | ) | | — |
| | (5,413 | ) | 37,278 |
| | (11,128 | ) | | (2,556 | ) | | — |
| | 23,594 |
|
Net cash provided by operating activities | 498,363 |
| | 427,102 |
| | 109,304 |
| | — |
| | 1,034,769 |
| |
Net cash provided by (used in) operating activities | | 351,112 |
| | 468,112 |
| | (18,023 | ) | | — |
| | 801,201 |
|
Cash flow from investing activities: | | | | | | | | | | | | | | | | | | |
Development of oil and natural gas properties | — |
| | (500,130 | ) | | (3,076 | ) | | — |
| | (503,206 | ) | — |
| | (88,205 | ) | | (12,360 | ) | | — |
| | (100,565 | ) |
Purchases of other property and equipment | — |
| | (38,769 | ) | | (12,760 | ) | | — |
| | (51,529 | ) | — |
| | (13,794 | ) | | (7,599 | ) | | — |
| | (21,393 | ) |
Investment in affiliates | (91,455 | ) | | — |
| | — |
| | 91,455 |
| | — |
| |
Decrease in restricted cash | | — |
| | — |
| | 53,418 |
| | — |
| | 53,418 |
|
Change in notes receivable with affiliate | (50,900 | ) | | — |
| | — |
| | 50,900 |
| | — |
| 14,000 |
| | — |
| | — |
| | (14,000 | ) | | — |
|
Settlement of advance to affiliate | — |
| | — |
| | 129,217 |
| | (129,217 | ) | | — |
| |
Proceeds from sale of properties and equipment and other | (2,826 | ) | | 344,535 |
| | 22,486 |
| | — |
| | 364,195 |
| (4,010 | ) | | 1,297 |
| | 142 |
| | — |
| | (2,571 | ) |
Net cash provided by (used in) investing activities | (145,181 | ) | | (194,364 | ) | | 135,867 |
| | 13,138 |
| | (190,540 | ) | 9,990 |
| | (100,702 | ) | | 33,601 |
| | (14,000 | ) | | (71,111 | ) |
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
Cash flow from financing activities: | | | | | | | | | | | | | | | | | | |
Proceeds from sale of units | 233,427 |
| | — |
| | — |
| | — |
| | 233,427 |
| |
Proceeds from borrowings | 1,405,000 |
| | — |
| | — |
| | — |
| | 1,405,000 |
| 978,500 |
| | — |
| | — |
| | — |
| | 978,500 |
|
Repayments of debt | (1,646,491 | ) | | — |
| | (55,418 | ) | | — |
| | (1,701,909 | ) | (913,210 | ) | | — |
| | (1,593 | ) | | — |
| | (914,803 | ) |
Distributions to unitholders | (323,878 | ) | | — |
| | — |
| | — |
| | (323,878 | ) | |
Financing fees and offering costs | (8,771 | ) | | — |
| | (3 | ) | | — |
| | (8,774 | ) | (623 | ) | | — |
| | — |
| | — |
| | (623 | ) |
Change in notes payable with affiliate | — |
| | 50,900 |
| | — |
| | (50,900 | ) | | — |
| — |
| | (14,000 | ) | | — |
| | 14,000 |
| | — |
|
Settlement of advance from affiliate | — |
| | (129,217 | ) | | — |
| | 129,217 |
| | — |
| |
Capital contributions – affiliates | — |
| | — |
| | 91,455 |
| | (91,455 | ) | | — |
| |
Excess tax benefit from unit-based compensation | (9,467 | ) | | — |
| | — |
| | — |
| | (9,467 | ) | |
Other | (3,008 | ) | | (92,637 | ) | | 14 |
| | — |
| | (95,631 | ) | (1,248 | ) | | (19,439 | ) | | — |
| | — |
| | (20,687 | ) |
Net cash provided by (used in) financing activities | (353,188 | ) | | (170,954 | ) | | 36,048 |
| | (13,138 | ) | | (501,232 | ) | 63,419 |
| | (33,439 | ) | | (1,593 | ) | | 14,000 |
| | 42,387 |
|
| | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | (6 | ) | | 61,784 |
| | 281,219 |
| | — |
| | 342,997 |
| |
Net increase in cash and cash equivalents | | 424,521 |
| | 333,971 |
| | 13,985 |
| | — |
| | 772,477 |
|
Cash and cash equivalents: | | | | | | | | | | | | | | | | | | |
Beginning | 38 |
| | 185 |
| | 1,586 |
| | — |
| | 1,809 |
| 1,073 |
| | 72 |
| | 1,023 |
| | — |
| | 2,168 |
|
Ending | $ | 32 |
| | $ | 61,969 |
| | $ | 282,805 |
| | $ | — |
| | $ | 344,806 |
| $ | 425,594 |
| | $ | 334,043 |
| | $ | 15,008 |
| | $ | — |
| | $ | 774,645 |
|
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the NineSix Months Ended SeptemberJune 30, 20142015
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Non- Guarantor VIE | | Eliminations | | Consolidated |
| (in thousands) |
Cash flow from operating activities: | | | | | | | | | | | |
Net income (loss) | $ | (297,307 | ) | | $ | (215,007 | ) | | $ | 273,871 |
| | $ | (5,620 | ) | | $ | (53,244 | ) | | $ | (297,307 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | |
Depreciation, depletion and amortization | — |
| | 595,212 |
| | 226,109 |
| | 11,202 |
| | — |
| | 832,523 |
|
Impairment of long-lived assets | — |
| | 603,250 |
| | — |
| | — |
| | — |
| | 603,250 |
|
Unit-based compensation expenses | — |
| | 43,692 |
| | — |
| | — |
| | — |
| | 43,692 |
|
Amortization and write-off of deferred financing fees | 31,564 |
| | — |
| | (5,174 | ) | | 2,846 |
| | — |
| | 29,236 |
|
(Gains) losses on sale of assets and other, net | — |
| | (81,492 | ) | | 48,357 |
| | — |
| | — |
| | (33,135 | ) |
Equity in earnings from consolidated subsidiaries | (53,244 | ) | | — |
| | — |
| | — |
| | 53,244 |
| | — |
|
Deferred income taxes | — |
| | 2,542 |
| | 77 |
| | — |
| | — |
| | 2,619 |
|
Derivatives activities: | | | | | | | | | | | |
Total (gains) losses | — |
| | 221,472 |
| | (22,893 | ) | | — |
| | — |
| | 198,579 |
|
Cash settlements | — |
| | 5,623 |
| | (18,130 | ) | | — |
| | — |
| | (12,507 | ) |
Changes in assets and liabilities: | | | | | | | | | | | |
Increase in accounts receivable – trade, net | — |
| | (1,343 | ) | | (10,611 | ) | | (44,060 | ) | | — |
| | (56,014 | ) |
Decrease in accounts receivable – affiliates | 469,499 |
| | 16,950 |
| | — |
| | — |
| | (486,449 | ) | | — |
|
(Increase) decrease in other assets | 312 |
| | (10,723 | ) | | 4,551 |
| | 9,144 |
| | — |
| | 3,284 |
|
Increase (decrease) in accounts payable and accrued expenses | 18 |
| | 107,673 |
| | (10,619 | ) | | 15,163 |
| | — |
| | 112,235 |
|
Decrease in accounts payable and accrued expenses – affiliates | — |
| | (468,896 | ) | | (5,722 | ) | | (11,831 | ) | | 486,449 |
| | — |
|
Increase (decrease) in other liabilities | 63,806 |
| | (18,053 | ) | | (36,626 | ) | | 228 |
| | — |
| | 9,355 |
|
Net cash provided by (used in) operating activities | 214,648 |
| | 800,900 |
| | 443,190 |
| | (22,928 | ) | | — |
| | 1,435,810 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) |
Cash flow from operating activities: | | | | | | | | | |
Net loss | $ | (718,287 | ) | | $ | (188,203 | ) | | $ | (351,557 | ) | | $ | 539,760 |
| | $ | (718,287 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | |
Depreciation, depletion and amortization | — |
| | 291,438 |
| | 136,031 |
| | 3,277 |
| | 430,746 |
|
Impairment of long-lived assets | — |
| | 325,417 |
| | 272,000 |
| | (64,800 | ) | | 532,617 |
|
Unit-based compensation expenses | — |
| | 33,711 |
| | — |
| | — |
| | 33,711 |
|
Gain on extinguishment of debt | (8,955 | ) | | — |
| | (6,831 | ) | | — |
| | (15,786 | ) |
Amortization and write-off of deferred financing fees | 16,692 |
| | — |
| | 854 |
| | — |
| | 17,546 |
|
Gains on sale of assets and other, net | — |
| | (22,903 | ) | | (2,991 | ) | | — |
| | (25,894 | ) |
Equity in losses from consolidated subsidiaries | 478,237 |
| | — |
| | — |
| | (478,237 | ) | | — |
|
Deferred income taxes | — |
| | (9,796 | ) | | (61 | ) | | — |
| | (9,857 | ) |
Derivatives activities: | | | | | | | | | |
Total gains | — |
| | (234,800 | ) | | (1,853 | ) | | — |
| | (236,653 | ) |
Cash settlements | — |
| | 533,400 |
| | 32,943 |
| | — |
| | 566,343 |
|
Changes in assets and liabilities: | | | | | | | | | |
Decrease in accounts receivable – trade, net | — |
| | 154,697 |
| | 15,281 |
| | — |
| | 169,978 |
|
(Increase) decrease in accounts receivable – affiliates | 371,275 |
| | (15,425 | ) | | — |
| | (355,850 | ) | | — |
|
Decrease in other assets | — |
| | 8 |
| | 3,515 |
| | — |
| | 3,523 |
|
Decrease in accounts payable and accrued expenses | — |
| | (43,427 | ) | | (4,047 | ) | | — |
| | (47,474 | ) |
Increase (decrease) in accounts payable and accrued expenses – affiliates | — |
| | (371,275 | ) | | 15,425 |
| | 355,850 |
| | — |
|
Decrease in other liabilities | (3,597 | ) | | (13,124 | ) | | (10,310 | ) | | — |
| | (27,031 | ) |
Net cash provided by operating activities | 135,365 |
| | 439,718 |
| | 98,399 |
| | — |
| | 673,482 |
|
Cash flow from investing activities: | | | | | | | | | |
Development of oil and natural gas properties | — |
| | (413,271 | ) | | (3,076 | ) | | — |
| | (416,347 | ) |
Purchases of other property and equipment | — |
| | (26,305 | ) | | (2,982 | ) | | — |
| | (29,287 | ) |
Investment in affiliates | 57,223 |
| | — |
| | — |
| | (57,223 | ) | | — |
|
Change in notes receivable with affiliate | (30,400 | ) | | — |
| | — |
| | 30,400 |
| | — |
|
Proceeds from sale of properties and equipment and other | (2,168 | ) | | 49,580 |
| | 11,302 |
| | — |
| | 58,714 |
|
Net cash provided by (used in) investing activities | 24,655 |
| | (389,996 | ) | | 5,244 |
| | (26,823 | ) | | (386,920 | ) |
| | | | | | | | | |
LINN ENERGY, LLC (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)
| | | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Non- Guarantor VIE | | Eliminations | | Consolidated | Linn Energy, LLC | | Guarantor Subsidiaries | | Non- Guarantor Subsidiary | | Eliminations | | Consolidated |
| (in thousands) | (in thousands) |
Cash flow from investing activities: | | | | | | | | | | | | |
Acquisition of oil and natural gas properties and joint-venture funding | — |
| | (76,627 | ) | | (3,912 | ) | | (2,521,393 | ) | | — |
| | (2,601,932 | ) | |
Development of oil and natural gas properties | — |
| | (750,450 | ) | | (426,028 | ) | | — |
| | — |
| | (1,176,478 | ) | |
Purchases of other property and equipment | — |
| | (41,822 | ) | | (8,316 | ) | | — |
| | — |
| | (50,138 | ) | |
Investment in affiliates | (167,721 | ) | | — |
| | — |
| | — |
| | 167,721 |
| | — |
| |
Change in notes receivable with affiliate | (35,300 | ) | | — |
| | — |
| | — |
| | 35,300 |
| | — |
| |
Advance to related party | (1,285,000 | ) | | (1,285,000 | ) | | — |
| | — |
| | 2,570,000 |
| | — |
| |
Proceeds from sale of properties and equipment and other | (13,188 | ) | | 5,447 |
| | 256 |
| | — |
| | — |
| | (7,485 | ) | |
Net cash used in investing activities | (1,501,209 | ) | | (2,148,452 | ) | | (438,000 | ) | | (2,521,393 | ) | | 2,773,021 |
| | (3,836,033 | ) | |
| | | | | | | | | | | | |
Cash flow from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from sale of units | | 233,427 |
| | — |
| | — |
| | — |
| | 233,427 |
|
Proceeds from borrowings | 4,000,024 |
| | — |
| | — |
| | 1,300,000 |
| | — |
| | 5,300,024 |
| 645,000 |
| | — |
| | — |
| | — |
| | 645,000 |
|
Repayments of debt | (1,950,000 | ) | | — |
| | (206,124 | ) | | — |
| | — |
| | (2,156,124 | ) | (804,698 | ) | | — |
| | (45,353 | ) | | — |
| | (850,051 | ) |
Distributions to unitholders | (721,235 | ) | | — |
| | — |
| | — |
| | — |
| | (721,235 | ) | (212,631 | ) | | — |
| | — |
| | — |
| | (212,631 | ) |
Financing fees and offering costs | (57,968 | ) | | — |
| | (10,646 | ) | | — |
| | — |
| | (68,614 | ) | (8,646 | ) | | — |
| | (3 | ) | | — |
| | (8,649 | ) |
Change in notes payable with affiliate | — |
| | 35,300 |
| | — |
| | — |
| | (35,300 | ) | | — |
| — |
| | 30,400 |
| | — |
| | (30,400 | ) | | — |
|
Advance from related party | — |
| | 1,285,000 |
| | — |
| | 1,285,000 |
| | (2,570,000 | ) | | — |
| |
Capital contributions – affiliates | — |
| | — |
| | 167,721 |
| | — |
| | (167,721 | ) | | — |
| |
Distributions to affiliate | | — |
| | — |
| | (57,223 | ) | | 57,223 |
| | — |
|
Excess tax benefit from unit-based compensation | 4,031 |
| | — |
| | — |
| | — |
| | — |
| | 4,031 |
| (9,467 | ) | | — |
| | — |
| | — |
| | (9,467 | ) |
Other | 11,705 |
| | 38,032 |
| | (606 | ) | | — |
| | — |
| | 49,131 |
| (3,008 | ) | | (79,063 | ) | | 14 |
| | — |
| | (82,057 | ) |
Net cash provided by (used in) financing activities | 1,286,557 |
| | 1,358,332 |
| | (49,655 | ) | | 2,585,000 |
| | (2,773,021 | ) | | 2,407,213 |
| |
Net cash used in financing activities | | (160,023 | ) | | (48,663 | ) | | (102,565 | ) | | 26,823 |
| | (284,428 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | (4 | ) | | 10,780 |
| | (44,465 | ) | | 40,679 |
| | — |
| | 6,990 |
| (3 | ) | | 1,059 |
| | 1,078 |
| | — |
| | 2,134 |
|
Cash and cash equivalents: | | | | | | | | | | | | | | | | | | | | |
Beginning | 52 |
| | 1,078 |
| | 51,041 |
| | — |
| | — |
| | 52,171 |
| 38 |
| | 185 |
| | 1,586 |
| | — |
| | 1,809 |
|
Ending | $ | 48 |
| | $ | 11,858 |
| | $ | 6,576 |
| | $ | 40,679 |
| | $ | — |
| | $ | 59,161 |
| $ | 35 |
| | $ | 1,244 |
| | $ | 2,664 |
| | $ | — |
| | $ | 3,943 |
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the financial statements and related notes included 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, 2015. The following discussion contains forward-looking statements that reflect the Company’s future plans,based on expectations, estimates beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties thatassumptions. Actual results may be outside the Company’s control. The Company’s actual results could differ materially from those discussed in thesethe forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, natural gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” 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, 2014, 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, 2014. 2015, and elsewhere in the Annual Report.
When referring to Linn Energy, LLC (“LINN Energy” or the “Company”), the intent is to refer to LINN Energy and its consolidated subsidiaries as a whole or on an individual basis, depending on the context in which the statements are made. The reference to “Berry” herein refers to Berry Petroleum Company, LLC, which is an indirect 100% wholly owned subsidiary of LINN Energy. The reference to “LinnCo” herein refers to LinnCo, LLC, which is an affiliate of LINN Energy.
The 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’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. LINN Energy is an independent oil and natural gas company that began operations in March 2003 and completed its initial public offering in January 2006. The Company’s properties are located in eight operating regions in the United States (“U.S.”):
Rockies, which includes properties located in Wyoming (Green River, Washakie and Powder River basins), Utah (Uinta Basin), North Dakota (Williston Basin) and Colorado (Piceance Basin);
Hugoton Basin, which includes properties located in Kansas, the Oklahoma Panhandle and the Shallow Texas Panhandle;
California, which includes properties located in the San Joaquin Valley and Los Angeles basins;
Mid-Continent, which includes Oklahoma properties located in the Anadarko and Arkoma basins, as well as waterfloods in the Central Oklahoma Platform;
TexLa, which includes properties located in east Texas and north Louisiana;
Permian Basin, which includes properties located in west Texas and southeast New Mexico;
TexLa, which includes properties located in east Texas and north Louisiana;
South Texas; and
Michigan/Illinois, which includes properties located in the Antrim Shale formation in north Michigan and oil properties in south Illinois.Illinois; and
South Texas.
Results for the three months ended SeptemberJune 30, 2015,2016, included the following:
oil, natural gas and NGL sales of approximately $427$316 million compared to $937$496 million for the third quarter of 2014;three months ended June 30, 2015;
average daily production of approximately 1,1981,079 MMcfe/d compared to 1,2451,219 MMcfe/d for the third quarterthree months ended June 30, 2015;
net income of 2014;
approximately $208 million compared to net loss of approximately $1.6 billion compared to $4$379 million for the third quarter of 2014;three months ended June 30, 2015;
capital expenditures excluding acquisitions, of approximately $113$29 million compared to $369$115 million for the third quarter of 2014;three months ended June 30, 2015; and
4139 wells drilled (38(all successful) compared to 210148 wells drilled (all successful) for the third quarter of 2014.three months ended June 30, 2015.
Results for the ninesix months ended SeptemberJune 30, 2015,2016, included the following:
oil, natural gas and NGL sales of approximately $1.4 billion$600 million compared to $2.8 billion for the nine months ended September 30, 2014;
average daily production of approximately 1,206 MMcfe/d compared to 1,160 MMcfe/d for the nine months ended September 30, 2014;
net loss of approximately $2.3 billion compared to $297$947 million for the ninesix months ended SeptemberJune 30, 2014;2015;
net cash provided by operating activities of approximately $1.0 billion compared to $1.4 billion for the nine months ended September 30, 2014;
capital expenditures, excluding acquisitions, of approximately $424 million compared to $1.2 billion for the nine months ended September 30, 2014; and
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
311average daily production of approximately 1,096 MMcfe/d compared to 1,210 MMcfe/d for the six months ended June 30, 2015;
net loss of approximately $1.1 billion compared to $718 million for the six months ended June 30, 2015;
net cash provided by operating activities of approximately $801 million compared to $673 million for the six months ended June 30, 2015;
capital expenditures of approximately $66 million compared to $312 million for the six months ended June 30, 2015; and
112 wells drilled (308(111 successful) compared to 678344 wells drilled (677(all successful) for the ninesix months ended SeptemberJune 30, 2014.2015.
Reduction and Suspension of DistributionChapter 11 Proceedings
In January 2015,On May 11, 2016 (the “Petition Date”), the Company reducedand certain of its distributiondirect and indirect subsidiaries (collectively with the Company, the “LINN Debtors”), LinnCo and Berry (collectively with the LINN Debtors and LinnCo, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for relief under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Debtors’ Chapter 11 cases are being administered jointly under the caption In re Linn Energy, LLC., et al., Case No. 16‑60040.
The condensed consolidated financial statements have been prepared as if the Company is a going concern and reflect the application of Accounting Standards Codification 852 “Reorganizations” (“ASC 852”). ASC 852 requires that the financial statements, for periods subsequent to $1.25 per unit,the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the previous levelongoing operations of $2.90 per unit,the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on an annualized basis. Monthly distributions were paidthe Company’s condensed consolidated statements of operations. In addition, prepetition unsecured and under-secured obligations that may be impacted by the Company through September 2015. In October 2015, following the recommendation from management,bankruptcy reorganization process have been classified as “liabilities subject to compromise” on the Company’s Boardcondensed consolidated balance sheet at June 30, 2016. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, although they may be settled for less.
The Debtors are operating their businesses as “debtors-in-possession” under the jurisdiction of Directors determinedthe Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted certain relief requested by the Debtors, allowing the Company to suspend paymentuse its cash to fund the Chapter 11 proceedings, pursuant to an agreement with the first lien lenders, and giving the Company the authority to, among other things, continue to pay employee wages and benefits without interruption, to utilize its current cash management system and to make royalty payments. During the pendency of the Chapter 11 proceedings, all transactions outside the ordinary course of the Company’s distributionbusiness require prior approval of the Bankruptcy Court. For goods and reserve any excess cash. services provided following the Petition Date, the Company intends to pay vendors in full under normal terms.
Restructuring Support Agreement
Prior to the Petition Date, on May 10, 2016, the Debtors entered into a restructuring support agreement (“Restructuring Support Agreement”) with certain holders (“Consenting Creditors”) collectively holding or controlling at least 66.67% by aggregate outstanding principal amounts under (i) the Company’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) and (ii) Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”).
The Company’s BoardRestructuring Support Agreement sets forth, subject to certain conditions, the commitment of Directors and management believe this suspensionthe Consenting Creditors to support a comprehensive restructuring of the Debtors’ long-term debt (“Restructuring Transactions”). The Restructuring Transactions will be effectuated through one or more plans of reorganization (“Plan”) to be filed in the best long-term interest of all Company stakeholders. The Company’s Board of Directors will continue to evaluate the Company’s ability to reinstate the distribution. For additional information, see “Distribution Practices” below.Chapter 11 proceedings.
Reduction of 2015 Oil and Natural Gas Capital Budget
The Company’s 2015 budget includes a 65% reduction in total capital expenditures to approximately $550 million, from approximately $1.6 billion spent in 2014, and includes approximately $470 million related to its oil and natural gas capital program. The 2015 budget contemplates significantly lower commodity prices as compared to 2014, and the reductionCertain principal terms of the capital budget was intendedPlan are outlined below. See Item 1A. “Risk Factors” for risks relating to solidifyChapter 11 proceedings, including the Company’s financial position.
Alliance with GSO Capital Partners
The Company signed definitive agreements dated June 30, 2015, with affiliates of private capital investor GSO Capital Partners LP (“GSO”), the credit platform of The Blackstone Group L.P., to fund oil and natural gas development (“DrillCo”). Funds managed by GSO and its affiliates have agreed to commit up to $500 million with 5-year availability to fund drilling programs on locations provided by LINN Energy. Subject to adjustments depending on asset characteristics and return expectations of the selected drilling plan, GSO will fund 100% of the costs associated with new wells drilled under the DrillCo agreement and is expected to receive an 85% working interest in these wells until it achieves a 15% internal rate of return on annual groupings of wells, while LINN Energy is expected to receive a 15% carried working interest during this period. Upon reaching the internal rate of return target, GSO’s interest will be reduced to 5%, while LINN Energy’s interest will increase to 95%.
Alliance with Quantum Energy Partners
The Company signed definitive agreements dated June 30, 2015, with affiliates of private capital investor Quantum Energy Partners (“Quantum”) to fund selected future oil and natural gas acquisitions and the development of those acquired assets (“AcqCo”). See the Company’s Current Report on Form 8-K filed on July 7, 2015, for additional details regarding these agreements.
Divestiture – 2015
On August 31, 2015,risk that the Company through certainmay not be able to obtain confirmation of its wholly owned subsidiaries, completed the salea Chapter 11 plan of its remaining position in Howard County in the Permian Basin (the “Howard County Assets Sale”). Cash proceeds received from the sale of these properties were approximately $276 million. The Company used the net proceeds from the sale to repay a portion of the outstanding indebtednessreorganization.
Claims under the LINN Credit Facility which included debt initially incurred to fund the repurchase ofwill receive participation in a portion of its senior notes during 2015 (see Note 6).
Financing Activities
In October 2015,new company $2.2 billion reserve-based and term loan credit facility, as described further below (“New LINN EnergyExit Facility”), and Berry Petroleum Company, LLC (“Berry”) each entered into an amendment to its credit facility. See Note 6 for additional details.
The spring 2015 semi-annual borrowing base redeterminationpayment of the Company’s Credit Facilities, as defined in Note 6, was completed in May 2015, and, as a resultremainder of lower commodity prices, the borrowing baseclaims under the LINN Credit Facility decreased from $4.5 billion(if any) in cash or, to $4.05 billion and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion. The fall 2015 semi-annual redetermination was completed in October 2015 and the borrowing base under the LINN Credit Facility was reaffirmed at $4.05 billion; however, the borrowing base will automatically decrease to $3.6 billionextent not viable, a later-agreed-upon alternative consideration.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
on January 1,The Company’s 12.00% senior secured second lien notes due December 2020 (“Second Lien Notes”) will be allowed as a $2.0 billion unsecured claim consistent with the settlement agreement, dated April 4, 2016, subject to any additional reductions for additional junior lien debt issued since this redetermination, if the following conditions are not met on or before December 31, 2015: (i) the issuance byentered into between the Company of at least $250 million of additional junior lien debt; (ii) repayment and extinguishmentcertain holders of the Berry Credit Facility; and (iii) the guarantee by Berry ofSecond Lien Notes.
Unsecured claims against the LINN Credit Facility or the merger or consolidation of Berry with a guarantorDebtors, including under the Second Lien Notes and the Company’s unsecured notes, will convert to equity in the reorganized Company or reorganized LinnCo (“New LINN Credit Facility. Notwithstanding this, borrowing availabilityCommon Stock”) in to-be-determined allocations.
The Restructuring Support Agreement contemplates that Berry will separate from the LINN Debtors under the LINN Credit Facility will be limited to $3.6 billion (which amount includes the outstanding $500 million term loan) until the earlier of a) January 1, 2016 or b) the date of the actions described in the prior sentence. The borrowing basePlan. Claims under the Berry Credit Facility decreased from $1.2 billionwill receive participation in a new Berry exit facility, if any, and a to-be-determined allocation of equity in reorganized Berry (“New Berry Common Stock”).
Unsecured claims against Berry, including under Berry’s unsecured notes, will receive a to-be-determined allocation of New Berry Common Stock up to $900 million.
Continued low commodity prices, reductionsthe full amount of Berry’s unencumbered collateral and/or collateral value in the Company’s capital budget and the resulting reserve write-downs, along with the maturity scheduleexcess of the Company’s hedges, may impact future redeterminations.
In connection with the reduction in Berry’s borrowing base in October 2015, Berry repaid $300 million of borrowingsamounts outstanding under the Berry Credit Facility. In connection
Cash payments under the Plan may be funded by rights offerings or other new-money investments. The Restructuring Support Agreement contemplates that Berry may undertake a marketing process for the opportunity to sponsor its Plan.
All existing equity interests of the Company, LinnCo and Berry will be extinguished without recovery.
The New LINN Exit Facility will consist of (i) a term loan in the amount of $800 million (“New LINN Term Loan”) and (ii) a revolving loan in the initial amount of $1.4 billion (“New LINN Revolving Loan”). The New LINN Term Loan will mature on the earlier of June 30, 2021, or the day prior to the fourth anniversary of the closing date, with interest payable at LIBOR plus 7.50% and amortized principal payments payable quarterly, beginning March 31, 2017. The New LINN Revolving Loan will be composed of two tranches as follows: (a) a conforming tranche with an initial amount of $1.2 billion subject to the reduction in Berry’s borrowing base in May 2015,(“Conforming Tranche”) and (b) a non-conforming tranche with an initial amount of $200 million (“Non-Conforming Tranche”). The Conforming Tranche will mature on the earlier of June 30, 2021, or the day prior to the fourth anniversary of the closing date, with an interest rate of LIBOR plus 3.50%. The Non-Conforming Tranche will mature on the earlier of December 31, 2020, or the day prior to the date that is three years and six months after the closing date, with an interest rate of LIBOR plus 5.50%. The New LINN Energy borrowed $250 million under the LINN CreditExit Facility which it contributed to Berry to post as restricted cash with Berry’s lenders. As directed by LINN Energy, the $250 million was deposited on Berry’s behalf in a security account with the administrative agent subject to a security control agreement. Berry’s ability to withdraw funds from this account is subject to a concurrent reductionvariety of other terms and conditions including conditions precedent to funding, financial covenants and various other covenants and representations and warranties.
The Plan will provide for the establishment of a customary management incentive plan at the Company and Berry under which no less than 10% of the borrowing baseNew LINN Common Stock and New Berry Common Stock, respectively, will be reserved for grants made from time to time to the officers and other key employees of the respective reorganized entities. The Plan will provide for releases of specified claims held by the Debtors, the Consenting Creditors and certain other specified parties against one another and for customary exculpations and injunctions.
The Restructuring Support Agreement provides that the Consenting Creditors will support the use of the LINN Debtors’ and Berry’s cash collateral under specified terms and conditions, including adequate protection terms. The Restructuring Support Agreement obligates the Berry Credit FacilityDebtors and the Consenting Creditors to, among other things, support and not interfere with consummation of the Restructuring Transactions and, as to the Consenting Creditors, vote their claims in favor of the Plan. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to, among other requirements, the filing, confirmation and consummation of the Plan, and in the event of breaches by the parties of certain provisions of the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 250 days of the Petition Date. There can be no assurance that the Restructuring Transactions will be consummated.
Magnitude of Potential Claims
On July 11, 2016, the Debtors filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. The schedules and statements may be subject to further amendment or lender’s consentmodification after filing. Holders of prepetition claims will be required to file proofs of claims by the applicable deadline for filing certain proofs of claims in the Debtors’ Chapter 11 cases. The court has not yet confirmed the claims deadlines. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with a redetermination of such borrowing base. The $250 million may be used to satisfy obligations under the Berry Credit Facility or, subject to restrictions in the indentures governing Berry’s senior notes, may be returned to LINN Energy in the future.claims resolution process.
During the nine months ended September 30, 2015, the Company, under its equity distribution agreement, sold 3,621,983 units representing limited liability company interests at an average unit price of $12.37 for net proceeds of approximately $44 million (net of approximately $448,000 in commissions). The Company used the net proceeds for general corporate purposes, including the open market repurchases of a portion of its senior notes (see Note 6). At September 30, 2015, units totaling approximately $455 million in aggregate offering price remained available to be sold under the agreement.
In May 2015, the Company sold 16,000,000 units representing limited liability company interests in an underwritten public offering at $11.79 per unit ($11.32 per unit, net of underwriting discount) for net proceeds of approximately $181 million (after underwriting discount and offering costs of approximately $8 million). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurred to fund the open market repurchases of a portion of its senior notes during 2015 (see Note 6).
During the nine months ended September 30, 2015, the Company repurchased, through privately negotiated transactions and on the open market, approximately $783 million of its outstanding senior notes. See Note 6 for additional details.
Commodity Derivatives
During the nine months ended September 30, 2015, the Company entered into commodity derivative contracts consisting of natural gas basis swaps for May 2015 through December 2017 to hedge exposure to differentials in certain producing areas, and oil swaps for April 2015 through December 2015. In addition, the Company entered into natural gas basis swaps for May 2015 through December 2016 to hedge exposure to the differential in California, where it consumes natural gas in its heavy oil development operations.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
ResultsEffect of OperationsFiling on Creditors and Unitholders
Three Months Ended SeptemberSubject to certain exceptions, under the Bankruptcy Code, the filing of Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ prepetition liabilities are subject to settlement under the Bankruptcy Code. Although the filing of Bankruptcy Petitions triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. The Company did not record interest expense on its Second Lien Notes or senior notes for the period from May 12, 2016, through June 30, 2015, Compared2016. For that period, contractual interest on the Second Lien Notes and senior notes was approximately $54 million.
Under the Bankruptcy Code, unless creditors agree otherwise, prepetition liabilities and postpetition liabilities must be satisfied in full before the holders of the Company’s existing common units representing limited liability company interests (“units”) are entitled to Three Months Ended September 30, 2014receive any settlement or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or unitholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 proceedings to each of these constituencies or what types or amounts of settlements, if any, they will receive. A plan of reorganization could result in holders of the Debtors’ liabilities and/or units receiving no settlement on account of their interests and cancellation of their holdings. The Company believes that it is highly likely that its existing units will be canceled in the Chapter 11 proceedings and will be entitled to a limited recovery, if any. Any trading in the Company’s units during the pendency of the Chapter 11 proceedings is highly speculative and poses substantial risks to purchasers of the Company’s units.
Appointment of Creditors Committee
On May 23, 2016, the Bankruptcy Court appointed the official committee for unsecured creditors (the “Creditors Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors.
Rejection of Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and satisfaction of certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with any of the Debtors in this Quarterly Report on Form 10-Q, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the applicable Debtor, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto.
Process for Plan of Reorganization
In order to successfully exit bankruptcy, the Debtors will need to propose, and obtain confirmation by the Bankruptcy Court of, a Plan that satisfies the requirements of the Bankruptcy Code. A Plan would, among other things, resolve the Debtors’ prepetition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to exit from bankruptcy.
The Debtors have an exclusive right to file a Plan within 120 days from the Petition Date, subject to an extension for cause. If the Debtors’ exclusive filing period lapses, any party in interest may file a Plan for any of the Debtors.
In addition to being voted on by holders of impaired claims and equity interests, a Plan must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective. A Plan would be accepted by holders of claims against and equity interests in the Debtors if (i) at least one-half in number and two-thirds in dollar amount of claims actually voting in each class of claims impaired by the Plan have voted to accept the Plan and (ii) at
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| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
| (in thousands) |
Revenues and other: | | | | | |
Natural gas sales | $ | 156,641 |
| | $ | 221,374 |
| | $ | (64,733 | ) |
Oil sales | 241,467 |
| | 614,407 |
| | (372,940 | ) |
NGL sales | 29,137 |
| | 101,677 |
| | (72,540 | ) |
Total oil, natural gas and NGL sales | 427,245 |
| | 937,458 |
| | (510,213 | ) |
Gains on oil and natural gas derivatives | 549,029 |
| | 451,702 |
| | 97,327 |
|
Marketing and other revenues | 22,030 |
| | 45,955 |
| | (23,925 | ) |
| 998,304 |
| | 1,435,115 |
| | (436,811 | ) |
Expenses: | | | | | |
Lease operating expenses | 154,086 |
| | 191,630 |
| | (37,544 | ) |
Transportation expenses | 54,915 |
| | 53,412 |
| | 1,503 |
|
Marketing expenses | 9,359 |
| | 31,574 |
| | (22,215 | ) |
General and administrative expenses (1) | 60,113 |
| | 75,384 |
| | (15,271 | ) |
Exploration costs | 3,072 |
| | 7,850 |
| | (4,778 | ) |
Depreciation, depletion and amortization | 207,218 |
| | 290,287 |
| | (83,069 | ) |
Impairment of long-lived assets | 2,255,080 |
| | 603,250 |
| | 1,651,830 |
|
Taxes, other than income taxes | 46,238 |
| | 66,770 |
| | (20,532 | ) |
Gains on sale of assets and other, net | (166,980 | ) | | (35,803 | ) | | (131,177 | ) |
| 2,623,101 |
| | 1,284,354 |
| | 1,338,747 |
|
Other income and (expenses) | 57,657 |
| | (155,894 | ) | | 213,551 |
|
Loss before income taxes | (1,567,140 | ) | | (5,133 | ) | | (1,562,007 | ) |
Income tax expense (benefit) | 2,177 |
| | (1,033 | ) | | 3,210 |
|
Net loss | $ | (1,569,317 | ) | | $ | (4,100 | ) | | $ | (1,565,217 | ) |
| |
(1)
| General and administrative expenses for the three months ended September 30, 2015, and September 30, 2014, include approximately $13 million and $9 million, respectively, of noncash unit-based compensation expenses. |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
least two-thirds in amount of equity interests impaired by the Plan actually voting has voted to accept the Plan. A class of claims or equity interests that does not receive or retain any property under the Plan on account of such claims or interests is deemed to have voted to reject the Plan.
Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a Plan even if such Plan has not been accepted by all impaired classes of claims and equity interests. The precise requirements and evidentiary showing for confirming a Plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., unsecured or secured claims, subordinated or senior claims). Generally, with respect to units, a Plan may be “crammed down” even if the unitholders receive no recovery if the proponent of the Plan demonstrates that (1) no class junior to the units are receiving or retaining property under the Plan and (2) no class of claims or interests senior to the units are being paid more than in full.
The timing of filing a Plan by the Debtors will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 proceedings. Although the Debtors expect to file a Plan that provides for emergence from bankruptcy as a going concern, there can be no assurance at this time that the Debtors will be able to successfully develop, confirm and consummate one or more plans of reorganization or other alternative restructuring transactions, including a sale of all or substantially all of the Debtors’ assets, that satisfies the conditions of the Bankruptcy Code and is confirmed by the Bankruptcy Court, or that any such Plan will be implemented successfully.
As of August 4, 2016, the Debtors have not yet filed a Plan.
For the duration of the Company’s Chapter 11 proceedings, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Item 1A. “Risk Factors.” As a result of these risks and uncertainties, the number of the Company’s units and unitholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 proceedings, and the description of the Company’s operations, properties and capital plans included in this quarterly report may not accurately reflect its operations, properties and capital plans following the Chapter 11 process.
Ability to Continue as a Going Concern
Continued low commodity prices have resulted in significantly lower levels of cash flow from operating activities and have limited the Company’s ability to access the capital markets. In addition, each of the Company’s Credit Facilities is subject to scheduled redeterminations of its borrowing base, semi-annually in April and October, based primarily on reserve reports using lender commodity price expectations at such time. The lenders under the Credit Facilities agreed to defer the April 2016 borrowing base redeterminations to May 11, 2016. Continued low commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the termination of the Company’s hedges, were expected to adversely impact upcoming redeterminations and have a significant negative impact on the Company’s liquidity. The Company’s filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under its Credit Facilities, its Second Lien Notes and its senior notes.
The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
In order to decrease the Company’s level of indebtedness and maintain the Company’s liquidity at levels sufficient to meet its commitments, the Company undertook a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. Despite taking these actions, the Company did not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Covenant Violations
The Company’s filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under its Credit Facilities, its Second Lien Notes and its senior notes. Additionally, other events of default, including cross-defaults, are present, including the failure to make interest payments on the Company’s Second Lien Notes and certain of its senior notes, as well as the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2015. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 6 for additional details about the Company’s debt.
Credit Facilities
The Company’s Credit Facilities contain a requirement to deliver audited consolidated financial statements without a going concern or like qualification or exception. Consequently, the filing of the Company’s 2015 Annual Report on Form 10-K which included such explanatory paragraph resulted in a default under the LINN Credit Facility as of the filing date, March 15, 2016, subject to a 30 day grace period.
On April 12, 2016, the Company entered into amendments to both the LINN Credit Facility and Berry Credit Facility. The amendments provided for, among other things, an agreement that (i) certain events (the “Specified Events”) would not become defaults or events of default until May 11, 2016, (ii) the borrowing bases would remain constant until May 11, 2016, unless reduced as a result of swap agreement terminations or collateral sales and (iii) the Company, the administrative agent and the lenders would negotiate in good faith the terms of a restructuring support agreement in furtherance of a restructuring of the capital structure of the Company and its subsidiaries. In addition, the amendment to the Berry Credit Facility provided Berry with access to previously restricted cash of $45 million in order to fund ordinary course operations.
Pursuant to the amendments, the Specified Events consisted of:
The receipt of a going concern qualification or explanatory statement in the auditors’ report on the Company’s consolidated financial statements for the year ended December 31, 2015;
The receipt of a going concern qualification or explanatory statement in the auditors’ report on Berry’s financial statements for the year ended December 31, 2015;
The failure of the Company or Berry to make certain interest payments on their unsecured notes;
Any cross-defaults that may arise on account of any of the foregoing, provided that no event of default is continuing under any document giving rise to such cross default; and
Any failure to provide notice of any of the events described above.
The Specified Events listed in the amendment to the Berry Credit Facility also included the failure to maintain the ratio of Adjusted EBITDAX to Interest Expense (as each term is defined in the Berry Credit Facility) (“Interest Coverage Ratio”).
As a condition to closing the amendments, in April 2016, (a) the Company made a $100 million permanent repayment of a portion of the borrowings outstanding under the LINN Credit Facility and (b) the Company and certain of its subsidiaries provided control agreements over certain deposit accounts.
Pursuant to the terms of the amendment to the LINN Credit Facility and as a result of the execution of the Restructuring Support Agreement, in May 2016, the Company made a $350 million permanent repayment of a portion of the borrowings outstanding under the LINN Credit Facility.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Credit Facilities. However, under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of the default.
Second Lien Notes
The indenture governing the Second Lien Notes (“Second Lien Indenture”) required the Company to deliver mortgages by February 18, 2016, subject to a 45 day grace period. The Company elected to exercise its right to the grace period, which resulted in the Company being in default under the Second Lien Indenture.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
On April 4, 2016, the Company entered into a settlement agreement with certain holders of the Second Lien Notes and agreed to deliver, and make arrangements for recordation of, the mortgages. The Company has since delivered and made arrangements for recordation of the mortgages.
The settlement agreement required the parties to commence good faith negotiations with each other regarding the terms of a potential comprehensive and consensual restructuring, including a potential restructuring under a Chapter 11 plan of reorganization. The settlement agreement provided that in the event the parties were unable to reach agreement on the terms of a consensual restructuring on or before the commencement of such Chapter 11 proceedings (or such later date as mutually agreed to by the parties), the parties would support entry by the Bankruptcy Court of a settlement order that, among other things, (i) approves the issuance of additional notes, in the principal amount of $1.0 billion plus certain accrued interest, on a proportionate basis to existing holders of the Second Lien Notes and (ii) releases the mortgages and other collateral upon the issuance of the additional notes (the “Settlement Order”).
The settlement agreement will terminate upon, among other events, entry by the Bankruptcy Court of a final, non-appealable order denying the Company’s motion seeking entry of the Settlement Order.
The Company failed to make an interest payment of approximately $68 million due June 15, 2016, on the Second Lien Notes.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Second Lien Indenture. However, under the Bankruptcy Code, holders of the Second Lien Notes are stayed from taking any action against the Company as a result of the default.
Senior Notes
The Company deferred making interest payments totaling approximately $60 million due March 15, 2016, including approximately $30 million on LINN Energy’s 7.75% senior notes due February 2021, approximately $12 million on LINN Energy’s 6.50% senior notes due September 2021 and approximately $18 million on Berry’s 6.375% senior notes due September 2022, which resulted in the Company being in default under these senior notes. The indentures governing each of the applicable series of notes provided the Company a 30 day grace period to make the interest payments.
On April 14, 2016, within the 30 day interest payment grace period provided for in the indentures governing the notes, the Company and Berry made interest payments of approximately $60 million in satisfaction of their respective obligations.
The Company failed to make an interest payment of approximately $31 million due April 15, 2016, on LINN Energy’s 8.625% senior notes due April 2020, interest payments due May 1, 2016, of approximately $18 million on LINN Energy’s 6.25% senior notes due November 2019 and approximately $9 million on Berry’s 6.75% senior notes due November 2020, and an interest payment of approximately $18 million due May 15, 2016, on LINN Energy’s 6.50% senior notes due May 2019.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the indentures governing the senior notes. However, under the Bankruptcy Code, holders of the senior notes are stayed from taking any action against the Company as a result of the default.
Commodity Derivatives
In April 2016 and May 2016, in connection with the Company’s restructuring efforts, LINN Energy canceled (prior to the contract settlement dates) all of its derivative contracts for net proceeds of approximately $1.2 billion. The net proceeds were used to make permanent repayments of a portion of the borrowings outstanding under the LINN Credit Facility. Also, in May 2016, as a result of the Chapter 11 proceedings, Berry’s counterparties canceled (prior to the contract settlement dates) all of Berry’s derivative contracts (with the exception of a contract consisting of 1,840 MMMBtu of natural gas basis swaps for 2016) for net proceeds of approximately $2 million. The net proceeds were used to make permanent repayments of a portion of the borrowings outstanding under the Berry Credit Facility. In July 2016, Berry’s remaining derivative contract was canceled by the counterparty.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Offer to Exchange LINN Energy Units for LinnCo Shares
In March 2016, LinnCo filed a Registration Statement on Form S-4 related to an offer to exchange each outstanding unit representing limited liability company interests of LINN Energy for one common share representing limited liability company interests of LinnCo. The initial offer expired on April 25, 2016, and on April 26, 2016, LinnCo commenced a subsequent offering period that expired on August 1, 2016. Through June 30, 2016, 115,702,524 LINN Energy units were exchanged for an equal number of LinnCo shares. As a result of the exchanges of LINN Energy units for LinnCo shares, LinnCo’s ownership of LINN Energy’s outstanding units increased from approximately 36% at March 31, 2016, to approximately 69% at June 30, 2016.
2016 Oil and Natural Gas Capital Budget
For 2016, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $235 million, including approximately $160 million related to its oil and natural gas capital program and approximately $60 million related to its plant and pipeline capital. The 2016 budget contemplates continued low commodity prices and is under continuous review and subject to ongoing adjustments. The Company expects to fund its capital expenditures primarily from net cash provided by operating activities; however, there is uncertainty regarding the Company’s liquidity as discussed above. In addition, at this level of capital spending, the Company expects its total reserves to decline.
Financing Activities
See above for a description of the amendments to the Credit Facilities entered into in April 2016. During the six months ended June 30, 2016, the Company borrowed approximately $979 million under the LINN Credit Facility and made repayments of approximately $1.8 billion of a portion of the borrowings outstanding under the Credit Facilities and term loan. The repayments include approximately $841 million in commodity derivative settlements paid by the counterparties to the lenders under the LINN Credit Facility. As of June 30, 2016, total borrowings outstanding (including outstanding letters of credit) under the LINN Credit Facility and Berry Credit Facility were approximately $1.9 billion and $898 million, respectively, with no remaining availability for either.
Delisting from Stock Exchange
As a result of the Company’s failure to comply with the NASDAQ Global Select Market (“NASDAQ”) continued listing requirements, on May 24, 2016, the Company’s units began trading over the counter on the OTC Markets Group Inc.’s Pink marketplace under the trading symbol “LINEQ.”
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Results of Operations
Three Months Ended June 30, 2016, Compared to Three Months Ended June 30, 2015
|
| | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
Average daily production: | | | | | |
Natural gas (MMcf/d) | 644 |
| | 600 |
| | 7 | % |
Oil (MBbls/d) | 63.1 |
| | 74.0 |
| | (15 | )% |
NGL (MBbls/d) | 29.2 |
| | 33.5 |
| | (13 | )% |
Total (MMcfe/d) | 1,198 |
| | 1,245 |
| | (4 | )% |
| | | | | |
Weighted average prices: (1) | | | | | |
Natural gas (Mcf) | $ | 2.64 |
| | $ | 4.01 |
| | (34 | )% |
Oil (Bbl) | $ | 41.58 |
| | $ | 90.31 |
| | (54 | )% |
NGL (Bbl) | $ | 10.84 |
| | $ | 33.01 |
| | (67 | )% |
| | | | | |
Average NYMEX prices: | | | | | |
Natural gas (MMBtu) | $ | 2.77 |
| | $ | 4.06 |
| | (32 | )% |
Oil (Bbl) | $ | 46.43 |
| | $ | 97.17 |
| | (52 | )% |
| | | | | |
Costs per Mcfe of production: | | | | | |
Lease operating expenses | $ | 1.40 |
| | $ | 1.67 |
| | (16 | )% |
Transportation expenses | $ | 0.50 |
| | $ | 0.47 |
| | 6 | % |
General and administrative expenses (2) | $ | 0.55 |
| | $ | 0.66 |
| | (17 | )% |
Depreciation, depletion and amortization | $ | 1.88 |
| | $ | 2.54 |
| | (26 | )% |
Taxes, other than income taxes | $ | 0.42 |
| | $ | 0.58 |
| | (28 | )% |
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
| (in thousands) |
Revenues and other: | | | | | |
Natural gas sales | $ | 95,380 |
| | $ | 149,908 |
| | $ | (54,528 | ) |
Oil sales | 182,902 |
| | 310,454 |
| | (127,552 | ) |
NGL sales | 37,975 |
| | 36,057 |
| | 1,918 |
|
Total oil, natural gas and NGL sales | 316,257 |
| | 496,419 |
| | (180,162 | ) |
Losses on oil and natural gas derivatives | (182,768 | ) | | (191,188 | ) | | 8,420 |
|
Marketing and other revenues | 21,906 |
| | 16,597 |
| | 5,309 |
|
| 155,395 |
| | 321,828 |
| | (166,433 | ) |
Expenses: | | | | | |
Lease operating expenses | 115,543 |
| | 140,652 |
| | (25,109 | ) |
Transportation expenses | 52,037 |
| | 55,795 |
| | (3,758 | ) |
Marketing expenses | 11,305 |
| | 9,159 |
| | 2,146 |
|
General and administrative expenses (1) | 59,646 |
| | 98,650 |
| | (39,004 | ) |
Exploration costs | 48 |
| | 564 |
| | (516 | ) |
Depreciation, depletion and amortization | 143,171 |
| | 215,732 |
| | (72,561 | ) |
Taxes, other than income taxes | 30,847 |
| | 58,034 |
| | (27,187 | ) |
(Gains) losses on sale of assets and other, net | 2,942 |
| | (17,996 | ) | | 20,938 |
|
| 415,539 |
| | 560,590 |
| | (145,051 | ) |
Other income and (expenses) | (69,736 | ) | | (143,095 | ) | | 73,359 |
|
Reorganization items, net | 534,884 |
| | — |
| | 534,884 |
|
Income (loss) before income taxes | 205,004 |
| | (381,857 | ) | | 586,861 |
|
Income tax benefit | (3,488 | ) | | (2,730 | ) | | (758 | ) |
Net income (loss) | $ | 208,492 |
| | $ | (379,127 | ) | | $ | 587,619 |
|
| |
(1) | General and administrative expenses for the three months ended June 30, 2016, and June 30, 2015, include approximately $5 million and $11 million, respectively, of noncash unit-based compensation expenses. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
|
| | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
Average daily production: | | | | | |
Natural gas (MMcf/d) | 588 |
| | 666 |
| | (12 | )% |
Oil (MBbls/d) | 51.1 |
| | 64.8 |
| | (21 | )% |
NGL (MBbls/d) | 30.8 |
| | 27.4 |
| | 12 | % |
Total (MMcfe/d) | 1,079 |
| | 1,219 |
| | (11 | )% |
| | | | | |
Weighted average prices: (1) | | | | | |
Natural gas (Mcf) | $ | 1.78 |
| | $ | 2.47 |
| | (28 | )% |
Oil (Bbl) | $ | 39.37 |
| | $ | 52.65 |
| | (25 | )% |
NGL (Bbl) | $ | 13.54 |
| | $ | 14.44 |
| | (6 | )% |
| | | | | |
Average NYMEX prices: | | | | | |
Natural gas (MMBtu) | $ | 1.95 |
| | $ | 2.64 |
| | (26 | )% |
Oil (Bbl) | $ | 45.59 |
| | $ | 57.94 |
| | (21 | )% |
| | | | | |
Costs per Mcfe of production: | | | | | |
Lease operating expenses | $ | 1.18 |
| | $ | 1.27 |
| | (7 | )% |
Transportation expenses | $ | 0.53 |
| | $ | 0.50 |
| | 6 | % |
General and administrative expenses (2) | $ | 0.61 |
| | $ | 0.89 |
| | (31 | )% |
Depreciation, depletion and amortization | $ | 1.46 |
| | $ | 1.94 |
| | (25 | )% |
Taxes, other than income taxes | $ | 0.31 |
| | $ | 0.52 |
| | (40 | )% |
| |
(1) | Does not include the effect of gains (losses) on derivatives. |
| |
(2) | General and administrative expenses for the three months ended SeptemberJune 30, 2016, and June 30, 2015, and September 30, 2014, include approximately $13$5 million and $9$11 million, respectively, of noncash unit-based compensation expenses. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately $510$180 million or 54%36% to approximately $427$316 million for the three months ended SeptemberJune 30, 2015,2016, from approximately $937$496 million for the three months ended SeptemberJune 30, 2014,2015, due to lower oil, natural gas and NGL prices and lower production volumes. Lower oil, natural gas and NGL prices resulted in a decrease in revenues of approximately $283$62 million, $81$37 million and $59$3 million, respectively.
Average daily production volumes decreased to approximately 1,1981,079 MMcfe/d for the three months ended SeptemberJune 30, 2015,2016, from 1,2451,219 MMcfe/d for the three months ended SeptemberJune 30, 2014.2015. Lower oil and NGLnatural gas production volumes resulted in a decrease in revenues of approximately $90$65 million and $13$17 million, respectively. Higher natural gasNGL production volumes resulted in an increase in revenues of approximately $16$4 million.
The following table sets forth average daily production by region:
| | | Three Months Ended September 30, | | | | | Three Months Ended June 30, | | | | |
| 2015 | | 2014 | | Variance | 2016 | | 2015 | | Variance |
Average daily production (MMcfe/d): | | | | | | | | | | | | | | |
Rockies | 429 |
| | 333 |
| | 96 |
| | 29 | % | 384 |
| | 445 |
| | (61 | ) | | (14 | )% |
Hugoton Basin | 254 |
| | 201 |
| | 53 |
| | 27 | % | 238 |
| | 255 |
| | (17 | ) | | (6 | )% |
California | 183 |
| | 172 |
| | 11 |
| | 6 | % | 158 |
| | 187 |
| | (29 | ) | | (16 | )% |
Mid-Continent | 105 |
| | 289 |
| | (184 | ) | | (64 | )% | 102 |
| | 100 |
| | 2 |
| | 2 | % |
TexLa | | 79 |
| | 80 |
| | (1 | ) | | (1 | )% |
Permian Basin | 77 |
| | 154 |
| | (77 | ) | | (50 | )% | 58 |
| | 85 |
| | (27 | ) | | (32 | )% |
TexLa | 87 |
| | 51 |
| | 36 |
| | 71 | % | |
Michigan/Illinois | | 31 |
| | 31 |
| | — |
| | — |
|
South Texas | 32 |
| | 12 |
| | 20 |
| | 158 | % | 29 |
| | 36 |
| | (7 | ) | | (20 | )% |
Michigan/Illinois | 31 |
| | 33 |
| | (2 | ) | | (8 | )% | |
| 1,198 |
| | 1,245 |
| | (47 | ) | | (4 | )% | 1,079 |
| | 1,219 |
| | (140 | ) | | (11 | )% |
The increasedecreases in average daily production volumes in the Rockies region primarily reflects the impactreflect lower production volumes as a result of the acquisition of properties from subsidiaries of Devon Energy Corporation (the “Devon Assets Acquisition”) on August 29, 2014, andreduced development capital spending. The increase in average daily production volumes inspending throughout the Hugoton Basin region primarily reflects the impact of the properties received in the exchange with Exxon Mobil Corporation and its affiliates, including its wholly owned subsidiary XTO Energy Inc. (“Exxon XTO”), on August 15, 2014, and the acquisition of properties from Pioneer Natural Resources Company (the “Pioneer Assets Acquisition”) on September 11, 2014. The increase in average daily production volumes in the California region primarily reflects the impact of the properties received in the exchange with Exxon Mobil Corporation (“ExxonMobil”) on November 21, 2014, and development capital spending.Company’s various operating regions, as well as marginal well shut-ins, driven by continued low commodity prices. The decrease in average daily production volumes in California also reflects operational challenges in the Mid-Continent region primarily reflects lower production volumes as a result ofCompany’s Diatomite development program, where the properties soldCompany is pursuing various remedies to privately held institutional affiliates of EnerVest, Ltd.address wells performance and its joint venture partner FourPoint Energy, LLC (the “Granite Wash Assets Sale”) on December 15, 2014, partially offset by the impact of the Devon Assets Acquisition.has temporarily curtailed capital spending in this program. The decrease in average daily production volumes in the Permian Basin region primarilyalso reflects lower production volumes as a result of the properties relinquished in the two exchanges with Exxon XTO and ExxonMobil, the properties sold to Fleur de Lis Energy, LLC (the “Permian Basin Assets Sale”) on November 14, 2014, and the Howard County Assets Saleassets sale on August 31, 2015. The increase in average daily production volumes in the TexLa region primarily reflects the impact of the Devon Assets Acquisition. Average daily production volumes in the South Texas region reflect the impact of the Devon Assets Acquisition. The decrease in average daily production volumes in the Michigan/Illinois region primarily reflects a low-decline asset base and minimal development capital spending.
Gains (Losses)Losses on Oil and Natural Gas Derivatives
GainsLosses on oil and natural gas derivatives were approximately $549$183 million and $452$191 million for the three months ended SeptemberJune 30, 2016, and June 30, 2015, and September 30, 2014, respectively, representing an increasea decrease of approximately $97$8 million. GainsLosses on oil and natural gas derivatives weredecreased primarily due to changes in fair value of the derivative contracts.contracts, and the comparison from period to period was impacted by the declining maturity schedule of the Company’s hedges. The fair value on unsettled derivatives contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.
During the three months ended September 30, 2015, the Company had commodity derivative contracts for approximately 81% of its natural gas production and 87% of its oil production. During the three months ended September 30, 2014, the Company had commodity derivative contracts for approximately 81% of its natural gas production and 93% of its oil production. The Company does not hedge the portion of natural gas production used to economically offset natural gas consumption related to its heavy oil development operations in California.
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional information about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing and other revenues decreased by approximately $24 million or 52% to approximately $22 million for the three months ended September 30, 2015, from approximately $46 million for the three months ended September 30, 2014. The decrease was primarily due to lower revenues generated by the Jayhawk natural gas processing plant in Kansas, lower electricity sales revenues generated by the Company’s California cogeneration facilities and the impact of properties sold during the fourth quarter of 2014, partially offset by higher helium sales revenue in the Hugoton Basin.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $38 million or 20% to approximately $154 million for the three months ended September 30, 2015, from approximately $192 million for the three months ended September 30, 2014. The decrease was primarily due to lower costs as a result of the properties sold during the fourth quarter of 2014, a decrease in steam costs caused by lower prices for natural gas used in steam generation and cost savings initiatives, partially offset by costs associated with properties acquired during the third quarter of 2014. Lease operating expenses per Mcfe also decreased to $1.40 per Mcfe for the three months ended September 30, 2015, from $1.67 per Mcfe for the three months ended September 30, 2014.
Transportation Expenses
Transportation expenses increased by approximately $2 million or 3% to approximately $55 million for the three months ended September 30, 2015, from approximately $53 million for the three months ended September 30, 2014. The increase was primarily due to costs associated with properties acquired during the third quarter of 2014 partially offset by lower costs as a result of the properties sold during the fourth quarter of 2014. Transportation expenses per Mcfe also increased to $0.50 per Mcfe for the three months ended September 30, 2015, from $0.47 per Mcfe for the three months ended September 30, 2014.
Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses decreased by approximately $23 million or 70% to approximately $9 million for the three months ended September 30, 2015, from approximately $32 million for the three months ended September 30, 2014. The decrease was primarily due to lower expenses associated with the Jayhawk natural gas processing plant in Kansas and lower electricity generation expenses incurred by the Company’s California cogeneration facilities.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses decreased by approximately $15 million or 20% to approximately $60 million for the three months ended September 30, 2015, from approximately $75 million for the three months ended September 30, 2014. The decrease was primarily due to lower acquisition expenses and salaries and benefits related expenses. General and administrative expenses per Mcfe also decreased
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
to $0.55 per Mcfe for the three months ended September 30, 2015, from $0.66 per Mcfe for the three months ended September 30, 2014.
Exploration Costs
Exploration costs decreased by approximately $5 million or 61% to approximately $3 for the three months ended September 30, 2015, from approximately $8 million for the three months ended September 30, 2014. The decrease was primarily due to lower leasehold impairment expenses on unproved properties partially offset by higher seismic data expenses.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately $83 million or 29% to approximately $207 million for the three months ended September 30, 2015, from approximately $290 million for the three months ended September 30, 2014. The decrease was primarily due to the divestitures of properties in 2014 with higher rates compared to the rates of properties acquired in 2014, as well as lower rates as a result of the impairments recorded in the prior year and the first quarter of 2015, and lower total production volumes. Depreciation, depletion and amortization per Mcfe also decreased to $1.88 per Mcfe for the three months ended September 30, 2015, from $2.54 per Mcfe for the three months ended September 30, 2014.
Impairment of Long-Lived Assets
The Company recorded the following noncash impairment charges (before and after tax) associated with proved oil and natural gas properties:
|
| | | | | | | |
| Three Months Ended September 30, |
| 2015 | | 2014 |
| (in thousands) |
| | | |
Rockies region | $ | 1,182,337 |
| | $ | — |
|
California region | 330,311 |
| | — |
|
TexLa region | 375,567 |
| | — |
|
Mid-Continent region | 366,865 |
| | — |
|
Permian Basin region | — |
| | 603,250 |
|
| $ | 2,255,080 |
| | $ | 603,250 |
|
The impairment charges in 2015 were due to a decline in commodity prices and the Company’s estimates of proved reserves, and the impairment in 2014 was due to the divestiture of certain high valued unproved properties in the Midland Basin in which the expected cash flows were previously included in the impairment assessment for proved oil and natural gas properties.
Gains on Sale of Assets and Other, Net
During the three months ended September 30, 2015, the Company recorded a net gain of approximately $174 million, including costs to sell of approximately $1 million, on the Howard County Assets Sale. During the three months ended September 30, 2014, the Company recorded a net gain of approximately $45 million, including costs to sell of approximately $3 million, on the noncash exchange of a portion of its Permian Basin properties to Exxon XTO for properties in the Hugoton Basin. See Note 2 for additional details of the divestiture and exchange of properties.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Taxes, Other Than Income Taxes
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
| (in thousands) |
| | | | | |
Severance taxes | $ | 14,621 |
| | $ | 37,986 |
| | $ | (23,365 | ) |
Ad valorem taxes | 26,027 |
| | 24,513 |
| | 1,514 |
|
California carbon allowances | 5,548 |
| | 4,202 |
| | 1,346 |
|
Other | 42 |
| | 69 |
| | (27 | ) |
| $ | 46,238 |
| | $ | 66,770 |
| | $ | (20,532 | ) |
Taxes, other than income taxes decreased by approximately $21 million or 31% for the three months ended September 30, 2015, compared to the three months ended September 30, 2014. Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower oil, natural gas and NGL prices and lower production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, increased primarily due to acquisitions completed during the third quarter of 2014. California carbon allowances increased primarily due to an increase in estimated emissions for which credits are needed and higher costs for acquired allowances.
Other Income and (Expenses)
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
| (in thousands) |
| | | | | |
Interest expense, net of amounts capitalized | $ | (138,383 | ) | | $ | (154,047 | ) | | $ | 15,664 |
|
Gain on extinguishment of debt | 197,741 |
| | — |
| | 197,741 |
|
Other, net | (1,701 | ) | | (1,847 | ) | | 146 |
|
| $ | 57,657 |
| | $ | (155,894 | ) | | $ | 213,551 |
|
Other income and (expenses) decreased by approximately $214 million for the three months ended September 30, 2015, compared to the three months ended September 30, 2014. Interest expense decreased primarily due to lower outstanding debt during the period and lower amortization of financing fees and expenses primarily related to the bridge loan and term loan that were repaid during 2014, partially offset by a decrease in capitalized interest. In addition, for the three months ended September 30, 2015, the Company recorded a gain on extinguishment of debt of approximately $198 million as a result of the repurchases of a portion of its senior notes. See “Debt” under “Liquidity and Capital Resources” below for additional details.
Income Tax Expense (Benefit)
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, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized income tax expense of approximately $2 million for the three months ended September 30, 2015, compared to an income tax benefit of approximately $1 million for the three months ended September 30, 2014. The income tax expense is primarily due to higher income from the Company’s taxable subsidiaries during the three months ended September 30, 2015, compared to the same period in 2014.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Net Income (Loss)
Net loss increased to approximately $1.6 billion for the three months ended September 30, 2015, from approximately $4 million for the three months ended September 30, 2014. The increase was primarily due to higher impairment charges and lower production revenues, partially offset by lower other expenses and higher gains on oil and natural gas derivatives. See discussions above for explanations of variances.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Results of Operations
Nine Months Ended September 30, 2015, Compared to Nine Months Ended September 30, 2014
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
| (in thousands) |
Revenues and other: | | | | | |
Natural gas sales | $ | 478,645 |
| | $ | 653,113 |
| | $ | (174,468 | ) |
Oil sales | 787,158 |
| | 1,861,561 |
| | (1,074,403 | ) |
NGL sales | 108,430 |
| | 329,511 |
| | (221,081 | ) |
Total oil, natural gas and NGL sales | 1,374,233 |
| | 2,844,185 |
| | (1,469,952 | ) |
Gains (losses) on oil and natural gas derivatives | 782,622 |
| | (198,579 | ) | | 981,201 |
|
Marketing and other revenues | 79,824 |
| | 120,047 |
| | (40,223 | ) |
| 2,236,679 |
| | 2,765,653 |
| | (528,974 | ) |
Expenses: | | | | | |
Lease operating expenses | 467,759 |
| | 570,564 |
| | (102,805 | ) |
Transportation expenses | 164,250 |
| | 143,896 |
| | 20,354 |
|
Marketing expenses | 47,359 |
| | 75,920 |
| | (28,561 | ) |
General and administrative expenses (1) | 237,731 |
| | 221,518 |
| | 16,213 |
|
Exploration costs | 4,032 |
| | 10,492 |
| | (6,460 | ) |
Depreciation, depletion and amortization | 637,964 |
| | 832,523 |
| | (194,559 | ) |
Impairment of long-lived assets | 2,787,697 |
| | 603,250 |
| | 2,184,447 |
|
Taxes, other than income taxes | 158,317 |
| | 201,014 |
| | (42,697 | ) |
Gains on sale of assets and other, net | (197,263 | ) | | (27,750 | ) | | (169,513 | ) |
| 4,307,846 |
| | 2,631,427 |
| | 1,676,419 |
|
Other income and (expenses) | (224,117 | ) | | (428,859 | ) | | 204,742 |
|
Loss before income taxes | (2,295,284 | ) | | (294,633 | ) | | (2,000,651 | ) |
Income tax expense (benefit) | (7,680 | ) | | 2,674 |
| | (10,354 | ) |
Net loss | $ | (2,287,604 | ) | | $ | (297,307 | ) | | $ | (1,990,297 | ) |
| |
(1)
| General and administrative expenses for the nine months ended September 30, 2015, and September 30, 2014, include approximately $41 million and $37 million, respectively, of noncash unit-based compensation expenses. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
|
| | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
Average daily production: | | | | | |
Natural gas (MMcf/d) | 654 |
| | 525 |
| | 25 | % |
Oil (MBbls/d) | 63.6 |
| | 73.2 |
| | (13 | )% |
NGL (MBbls/d) | 28.5 |
| | 32.6 |
| | (13 | )% |
Total (MMcfe/d) | 1,206 |
| | 1,160 |
| | 4 | % |
| | | | | |
Weighted average prices: (1) | | | | | |
Natural gas (Mcf) | $ | 2.68 |
| | $ | 4.56 |
| | (41 | )% |
Oil (Bbl) | $ | 45.36 |
| | $ | 93.10 |
| | (51 | )% |
NGL (Bbl) | $ | 13.94 |
| | $ | 37.01 |
| | (62 | )% |
| | | | | |
Average NYMEX prices: | | | | | |
Natural gas (MMBtu) | $ | 2.80 |
| | $ | 4.55 |
| | (38 | )% |
Oil (Bbl) | $ | 51.00 |
| | $ | 99.61 |
| | (49 | )% |
| | | | | |
Costs per Mcfe of production: | | | | | |
Lease operating expenses | $ | 1.42 |
| | $ | 1.80 |
| | (21 | )% |
Transportation expenses | $ | 0.50 |
| | $ | 0.45 |
| | 11 | % |
General and administrative expenses (2) | $ | 0.72 |
| | $ | 0.70 |
| | 3 | % |
Depreciation, depletion and amortization | $ | 1.94 |
| | $ | 2.63 |
| | (26 | )% |
Taxes, other than income taxes | $ | 0.48 |
| | $ | 0.63 |
| | (24 | )% |
| |
(1)
| Does not include the effect of gains (losses) on derivatives. |
| |
(2)
| General and administrative expenses for the nine months ended September 30, 2015, and September 30, 2014, include approximately $41 million and $37 million, respectively, of noncash unit-based compensation expenses. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately $1.4 billion or 52% to approximately $1.4 billion for the nine months ended September 30, 2015, from approximately $2.8 billion for the nine months ended September 30, 2014, due to lower oil, natural gas and NGL prices partially offset by higher production volumes. Lower oil, natural gas and NGL prices resulted in a decrease in revenues of approximately $829 million, $334 million and $179 million, respectively.
Average daily production volumes increased to approximately 1,206 MMcfe/d for the nine months ended September 30, 2015, from 1,160 MMcfe/d for the nine months ended September 30, 2014. Lower oil and NGL production volumes resulted in a decrease in revenues of approximately $246 million and $42 million, respectively. Higher natural gas production volumes resulted in an increase in revenues of approximately $160 million.
The following table sets forth average daily production by region:
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2015 | | 2014 | | Variance |
Average daily production (MMcfe/d): | | | | | | | |
Rockies | 433 |
| | 295 |
| | 138 |
| | 47 | % |
Hugoton Basin | 252 |
| | 165 |
| | 87 |
| | 52 | % |
California | 187 |
| | 167 |
| | 20 |
| | 12 | % |
Mid-Continent | 102 |
| | 295 |
| | (193 | ) | | (65 | )% |
Permian Basin | 85 |
| | 163 |
| | (78 | ) | | (48 | )% |
TexLa | 82 |
| | 38 |
| | 44 |
| | 115 | % |
South Texas | 34 |
| | 4 |
| | 30 |
| | 724 | % |
Michigan/Illinois | 31 |
| | 33 |
| | (2 | ) | | (6 | )% |
| 1,206 |
| | 1,160 |
| | 46 |
| | 4 | % |
The increase in average daily production volumes in the Rockies region primarily reflects the impact of the Devon Assets Acquisition on August 29, 2014, and development capital spending. The increase in average daily production volumes in the Hugoton Basin region primarily reflects the impact of the properties received in the exchange with Exxon XTO on August 15, 2014, and the Pioneer Assets Acquisition on September 11, 2014. The increase in average daily production volumes in the California region primarily reflects the impact of the properties received in the exchange with ExxonMobil on November 21, 2014, and development capital spending. The decrease in average daily production volumes in the Mid-Continent region primarily reflects lower production volumes as a result of the Granite Wash Assets Sale on December 15, 2014, partially offset by the impact of the Devon Assets Acquisition. The decrease in average daily production volumes in the Permian Basin region primarily reflects lower production volumes as a result of the properties relinquished in the two exchanges with Exxon XTO and ExxonMobil, the properties sold in the Permian Basin Assets Sale on November 14, 2014, and the Howard County Assets Sale on August 31, 2015. The increase in average daily production volumes in the TexLa region primarily reflects the impact of the Devon Assets Acquisition. Average daily production volumes in the South Texas region reflect the impact of the Devon Assets Acquisition. The decrease in average daily production volumes in the Michigan/Illinois region primarily reflects a low-decline asset base and minimal development capital spending.
Gains (Losses) on Oil and Natural Gas Derivatives
Gains on oil and natural gas derivatives were approximately $783 million for the nine months ended September 30, 2015, compared to losses of approximately $199 million for the nine months ended September 30, 2014, representing a variance of approximately $982 million. Gains on oil and natural gas derivatives were primarily due to changes in fair value of the derivative contracts. The fair value on unsettled derivatives contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.
See above under “Executive Overview” for details about the Company’s commodity derivative cancellations in April 2016 and May 2016.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
During the nine months ended September 30, 2015, the Company had commodity derivative contracts for approximately 80% of both its natural gas and oil production. During the nine months ended September 30, 2014, the Company had commodity derivative contracts for approximately 92% of its natural gas production and 93% of its oil production. The Company does not hedge the portion of natural gas production used to economically offset natural gas consumption related to its heavy oil development operations in California.
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional details about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing and other revenues increased by approximately $5 million or 32% to approximately $22 million for the three months ended June 30, 2016, from approximately $17 million for the three months ended June 30, 2015. The increase was primarily due to higher revenues generated by the Jayhawk natural gas processing plant in Kansas and higher helium sales revenue in the Hugoton Basin, partially offset by lower electricity sales revenues generated by the Company’s California cogeneration facilities.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $25 million or 18% to approximately $116 million for the three months ended June 30, 2016, from approximately $141 million for the three months ended June 30, 2015. The decrease was primarily due to cost savings initiatives and lower workover activities, as well as a decrease in steam costs caused by lower prices for natural gas used in steam generation and a decrease in steam injection volumes. Lease operating expenses per Mcfe also decreased to $1.18 per Mcfe for the three months ended June 30, 2016, from $1.27 per Mcfe for the three months ended June 30, 2015.
Transportation Expenses
Transportation expenses decreased by approximately $4 million or 7% to approximately $52 million for the three months ended June 30, 2016, from approximately $56 million for the three months ended June 30, 2015. The decrease was primarily due to lower production volumes and reduced costs as a result of certain contracts terminated in the Chapter 11 proceedings, partially offset by higher costs from nonoperated properties in the Rockies region. Transportation expenses per Mcfe increased to $0.53 per Mcfe for the three months ended June 30, 2016, from $0.50 per Mcfe for the three months ended June 30, 2015.
Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses increased by approximately $2 million or 23% to approximately $11 million for the three months ended June 30, 2016, from approximately $9 million for the three months ended June 30, 2015. The increase was primarily due to higher expenses associated with the Jayhawk natural gas processing plant in Kansas.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses decreased by approximately $39 million or 40% to approximately $60 million for the three months ended June 30, 2016, from approximately $99 million for the three months ended June 30, 2015. The decrease was primarily due to lower professional services expenses, lower salaries and benefits related expenses, and lower acquisition expenses. General and administrative expenses for the three months ended June 30, 2015, was impacted by advisory fees related to alliance agreements entered into with certain private capital investors. General and administrative expenses per Mcfe also decreased to $0.61 per Mcfe for the three months ended June 30, 2016, from $0.89 per Mcfe for the three months ended June 30, 2015.
Professional services expenses of approximately $21 million for the three months ended June 30, 2016, related to the Chapter 11 proceedings that were incurred since the Petition Date, have been recorded in “reorganization items, net” on the condensed consolidated statements of operations.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Exploration Costs
Exploration costs decreased by approximately $516,000 to approximately $48,000 for the three months ended June 30, 2016, from approximately $564,000 for the three months ended June 30, 2015. The decrease was primarily due to lower leasehold impairment expenses on unproved properties.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately $73 million or 34% to approximately $143 million for the three months ended June 30, 2016, from approximately $216 million for the three months ended June 30, 2015. The decrease was primarily due to lower rates as a result of the impairments recorded in the prior year and the first quarter of 2016, as well as lower total production volumes. Depreciation, depletion and amortization per Mcfe also decreased to $1.46 per Mcfe for the three months ended June 30, 2016, from $1.94 per Mcfe for the three months ended June 30, 2015.
Taxes, Other Than Income Taxes
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
| (in thousands) |
| | | | | |
Severance taxes | $ | 9,749 |
| | $ | 20,676 |
| | $ | (10,927 | ) |
Ad valorem taxes | 16,595 |
| | 31,780 |
| | (15,185 | ) |
California carbon allowances | 3,428 |
| | 5,548 |
| | (2,120 | ) |
Other | 1,075 |
| | 30 |
| | 1,045 |
|
| $ | 30,847 |
| | $ | 58,034 |
| | $ | (27,187 | ) |
Taxes, other than income taxes decreased by approximately $27 million or 47% for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower oil, natural gas and NGL prices and lower production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, decreased primarily due to lower estimated valuations on certain of the Company’s properties. California carbon allowances decreased primarily due to lower anticipated emissions compliance obligations as a result of reduced capital spending levels and a decrease in steam injection volumes.
Other Income and (Expenses)
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
| (in thousands) |
| | | | | |
Interest expense, net of amounts capitalized | $ | (68,434 | ) | | $ | (146,100 | ) | | $ | 77,666 |
|
Gain on extinguishment of debt | — |
| | 9,151 |
| | (9,151 | ) |
Other, net | (1,302 | ) | | (6,146 | ) | | 4,844 |
|
| $ | (69,736 | ) | | $ | (143,095 | ) | | $ | 73,359 |
|
Other income and (expenses) decreased by approximately $73 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. Interest expense decreased primarily due to lower outstanding debt during the period principally as a result of the senior notes repurchased and exchanged during 2015, discontinuation of interest expense recognition on the senior notes for the period from May 12, 2016 through June 30, 2016, as a result of the Chapter 11 proceedings and lower amortization of discounts and financing fees. For the period from May 12, 2016, through June 30, 2016, contractual interest, which was not recorded, on the senior notes was approximately $38 million. For the three months ended June 30, 2015, the Company recorded a gain on extinguishment of debt of approximately $9 million as a result of the repurchases of a portion of its senior notes. Other expenses decreased primarily due to lower write-offs of deferred financing
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
fees related to the Credit Facilities and lower bank fees. See “Debt” under “Liquidity and Capital Resources” below for additional details.
The $1.0 billion in aggregate principal amount of Second Lien Notes issued in November 2015 were accounted for as a troubled debt restructuring, which requires that interest payments on the Second Lien Notes reduce the carrying value of the debt with no interest expense recognized. As a result of the Chapter 11 proceedings, the Company did not make the contractual interest payment of approximately $68 million due in June 2016, including approximately $25 million related to the three months ended June 30, 2016.
Reorganization Items, Net
The Company has incurred and is expected to continue to incur significant costs associated with the reorganization. These costs, which are expensed as incurred, are expected to significantly affect the Company’s results of operations. Reorganization items represent costs and income directly associated with the Chapter 11 proceedings since the Petition Date, and also include adjustments to reflect the carrying value of certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are determined.
The following table summarizes the components of reorganization items included on the condensed consolidated statement of operations:
|
| | | |
| Three Months Ended June 30, 2016 |
| (in thousands) |
| |
Legal and other professional advisory fees | $ | (20,510 | ) |
Unamortized deferred financing fees, discounts and premiums | (41,122 | ) |
Gain related to interest payable on the 12.00% senior secured second lien notes due December 2020 (1) | 551,000 |
|
Terminated contracts | 45,109 |
|
Other | 407 |
|
Reorganization items, net | $ | 534,884 |
|
| |
(1) | Represents a noncash gain on the write-off of postpetition contractual interest through maturity, recorded to reflect the carrying value of the liability subject to compromise at its estimated allowed claim amount. |
Income Tax Benefit
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, in which income tax liabilities and/or benefits are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized an income tax benefit of approximately $3 million for both the three months ended June 30, 2016, and June 30, 2015, based on income from the Company’s taxable subsidiaries during the respective period.
Net Income (Loss)
Net income was approximately $208 million for the three months ended June 30, 2016, compared to a net loss of approximately $379 million for the three months ended June 30, 2015. The increase in net income was primarily due to the gain related to the Second Lien Notes and lower expenses, including interest, partially offset by lower production revenues. See discussion above for explanations of variances.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Results of Operations
Six Months Ended June 30, 2016, Compared to Six Months Ended June 30, 2015
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
| (in thousands) |
Revenues and other: | | | | | |
Natural gas sales | $ | 205,777 |
| | $ | 322,004 |
| | $ | (116,227 | ) |
Oil sales | 327,363 |
| | 545,691 |
| | (218,328 | ) |
NGL sales | 66,432 |
| | 79,293 |
| | (12,861 | ) |
Total oil, natural gas and NGL sales | 599,572 |
| | 946,988 |
| | (347,416 | ) |
Gains (losses) on oil and natural gas derivatives | (72,807 | ) | | 233,593 |
| | (306,400 | ) |
Marketing and other revenues | 43,397 |
| | 57,794 |
| | (14,397 | ) |
| 570,162 |
| | 1,238,375 |
| | (668,213 | ) |
Expenses: | | | | | |
Lease operating expenses | 253,188 |
| | 313,673 |
| | (60,485 | ) |
Transportation expenses | 106,960 |
| | 109,335 |
| | (2,375 | ) |
Marketing expenses | 23,593 |
| | 38,000 |
| | (14,407 | ) |
General and administrative expenses (1) | 146,175 |
| | 177,618 |
| | (31,443 | ) |
Exploration costs | 2,741 |
| | 960 |
| | 1,781 |
|
Depreciation, depletion and amortization | 307,229 |
| | 430,746 |
| | (123,517 | ) |
Impairment of long-lived assets | 1,153,904 |
| | 532,617 |
| | 621,287 |
|
Taxes, other than income taxes | 64,914 |
| | 112,079 |
| | (47,165 | ) |
(Gains) losses on sale of assets and other, net | 4,019 |
| | (30,283 | ) | | 34,302 |
|
| 2,062,723 |
| | 1,684,745 |
| | 377,978 |
|
Other income and (expenses) | (174,821 | ) | | (281,774 | ) | | 106,953 |
|
Reorganization items, net | 534,884 |
| | — |
| | 534,884 |
|
Loss before income taxes | (1,132,498 | ) | | (728,144 | ) | | (404,354 | ) |
Income tax expense (benefit) | 6,756 |
| | (9,857 | ) | | 16,613 |
|
Net loss | $ | (1,139,254 | ) | | $ | (718,287 | ) | | $ | (420,967 | ) |
| |
(1) | General and administrative expenses for the six months ended June 30, 2016, and June 30, 2015, include approximately $14 million and $28 million, respectively, of noncash unit-based compensation expenses. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
|
| | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
Average daily production: | | | | | |
Natural gas (MMcf/d) | 602 |
| | 659 |
| | (9 | )% |
Oil (MBbls/d) | 53.1 |
| | 63.8 |
| | (17 | )% |
NGL (MBbls/d) | 29.3 |
| | 28.1 |
| | 4 | % |
Total (MMcfe/d) | 1,096 |
| | 1,210 |
| | (9 | )% |
| | | | | |
Weighted average prices: (1) | | | | | |
Natural gas (Mcf) | $ | 1.88 |
| | $ | 2.70 |
| | (30 | )% |
Oil (Bbl) | $ | 33.90 |
| | $ | 47.27 |
| | (28 | )% |
NGL (Bbl) | $ | 12.44 |
| | $ | 15.58 |
| | (20 | )% |
| | | | | |
Average NYMEX prices: | | | | | |
Natural gas (MMBtu) | $ | 2.02 |
| | $ | 2.81 |
| | (28 | )% |
Oil (Bbl) | $ | 39.52 |
| | $ | 53.29 |
| | (26 | )% |
| | | | | |
Costs per Mcfe of production: | | | | | |
Lease operating expenses | $ | 1.27 |
| | $ | 1.43 |
| | (11 | )% |
Transportation expenses | $ | 0.54 |
| | $ | 0.50 |
| | 8 | % |
General and administrative expenses (2) | $ | 0.73 |
| | $ | 0.81 |
| | (10 | )% |
Depreciation, depletion and amortization | $ | 1.54 |
| | $ | 1.97 |
| | (22 | )% |
Taxes, other than income taxes | $ | 0.33 |
| | $ | 0.51 |
| | (35 | )% |
| |
(1) | Does not include the effect of gains (losses) on derivatives. |
| |
(2) | General and administrative expenses for the six months ended June 30, 2016, and June 30, 2015, include approximately $14 million and $28 million, respectively, of noncash unit-based compensation expenses. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately $347 million or 37% to approximately $600 million for the six months ended June 30, 2016, from approximately $947 million for the six months ended June 30, 2015, due to lower oil, natural gas and NGL prices and lower production volumes. Lower oil, natural gas and NGL prices resulted in a decrease in revenues of approximately $129 million, $90 million and $17 million, respectively.
Average daily production volumes decreased to approximately 1,096 MMcfe/d for the six months ended June 30, 2016, from 1,210 MMcfe/d for the six months ended June 30, 2015. Lower oil and natural gas production volumes resulted in a decrease in revenues of approximately $89 million and $26 million, respectively. Higher NGL production volumes resulted in an increase in revenues of approximately $4 million.
The following table sets forth average daily production by region:
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2016 | | 2015 | | Variance |
Average daily production (MMcfe/d): | | | | | | | |
Rockies | 393 |
| | 434 |
| | (41 | ) | | (10 | )% |
Hugoton Basin | 240 |
| | 251 |
| | (11 | ) | | (4 | )% |
California | 164 |
| | 189 |
| | (25 | ) | | (13 | )% |
Mid-Continent | 99 |
| | 101 |
| | (2 | ) | | (1 | )% |
TexLa | 80 |
| | 79 |
| | 1 |
| | 1 | % |
Permian Basin | 60 |
| | 90 |
| | (30 | ) | | (33 | )% |
Michigan/Illinois | 31 |
| | 31 |
| | — |
| | — |
|
South Texas | 29 |
| | 35 |
| | (6 | ) | | (18 | )% |
| 1,096 |
| | 1,210 |
| | (114 | ) | | (9 | )% |
The decreases in average daily production volumes primarily reflect lower production volumes as a result of reduced development capital spending throughout the Company’s various operating regions, as well as marginal well shut-ins, driven by continued low commodity prices. The decrease in average daily production volumes in California also reflects operational challenges in the Company’s Diatomite development program, where the Company is pursuing various remedies to address wells performance and has temporarily curtailed capital spending in this program. The decrease in average daily production volumes in the Permian Basin region also reflects lower production volumes as a result of the Howard County assets sale on August 31, 2015.
Gains (Losses) on Oil and Natural Gas Derivatives
Losses on oil and natural gas derivatives were approximately $73 million for the six months ended June 30, 2016, compared to gains of approximately $234 million for the six months ended June 30, 2015, representing a variance of approximately $307 million. Losses on oil and natural gas derivatives were primarily due to changes in fair value of the derivative contracts, and the comparison from period to period was impacted by the declining maturity schedule of the Company’s hedges. The fair value on unsettled derivative contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.
See above under “Executive Overview” for details about the Company’s commodity derivative cancellations in April 2016 and May 2016.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional details about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing and other revenues decreased by approximately $40$15 million or 34%25% to approximately $80$43 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $120$58 million for the ninesix months ended SeptemberJune 30, 2014.2015. The decrease was primarily due to lower revenues generated by the Jayhawk natural gas processing plant in Kansas, principally driven by a change in contract terms, and lower electricity sales revenues generated by the Company’s California cogeneration facilities, and the impact of properties sold during the fourth quarter of 2014, partially offset by higher helium sales revenue in the Hugoton Basin.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $103$61 million or 18%19% to approximately $468$253 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $571$314 million for the ninesix months ended SeptemberJune 30, 2014.2015. The decrease was primarily due to cost savings initiatives and lower costsworkover activities, as a result of the properties sold during the fourth quarter of 2014,well as a decrease in steam costs caused by lower prices for natural gas used in steam generation and cost savings initiatives, partially offset by costs associated with properties acquired during the third quarter of 2014.a decrease in steam injection volumes. Lease operating expenses per Mcfe also decreased to $1.42$1.27 per Mcfe for the ninesix months ended SeptemberJune 30, 2015,2016, from $1.80$1.43 per Mcfe for the ninesix months ended SeptemberJune 30, 2014.2015.
Transportation Expenses
Transportation expenses increaseddecreased by approximately $20$2 million or 14%2% to approximately $164$107 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $144$109 million for the ninesix months ended SeptemberJune 30, 2014.2015. The increasedecrease was primarily due to costs associated with properties acquired during the third quarter of 2014 partially offset by lower production volumes and reduced costs as a result of certain contracts terminated in the Chapter 11 proceedings, partially offset by higher costs from nonoperated properties sold duringin the fourth quarter of 2014.Rockies region. Transportation expenses per Mcfe also increased to $0.54 per Mcfe for the six months ended June 30, 2016, from $0.50 per Mcfe for the ninesix months ended SeptemberJune 30, 2015, from $0.45 per Mcfe for the nine months ended September 30, 2014.2015.
Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses decreased by approximately $29$14 million or 38% to approximately $47$24 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $76$38 million for the ninesix months ended SeptemberJune 30, 2014.2015. The decrease was primarily due to lower expenses associated with the Jayhawk natural gas processing plant in Kansas, principally driven by a change in contract terms, and lower electricity generation expenses incurred by the Company’s California cogeneration facilities.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses increaseddecreased by approximately $16$32 million or 7%18% to approximately $238$146 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $222$178 million for the ninesix months ended SeptemberJune 30, 2014.2015. The increasedecrease was primarily due to higher advisory fees related to the alliance agreements and higherlower salaries and benefits related expenses, principally driven by severance costs, partially offset by lower acquisition expenses and lower professional services expenses. General and administrative expenses for the six months ended June 30, 2015, was impacted by advisory fees related to alliance agreements entered into with certain private capital investors. General and administrative expenses per Mcfe also increaseddecrease to $0.72$0.73 per Mcfe for the ninesix months ended SeptemberJune 30, 2015,2016, from $0.70$0.81 per Mcfe for the ninesix months ended SeptemberJune 30, 2014.2015.
Professional services expenses of approximately $21 million for the six months ended June 30, 2016, related to the Chapter 11 proceedings that were incurred since the Petition Date, have been recorded in “reorganization items, net” on the condensed consolidated statements of operations.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Exploration Costs
Exploration costs decreasedincreased by approximately $6$2 million or 62% to approximately $4$3 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $10$1 million for the ninesix months ended SeptemberJune 30, 2014.2015. The decreaseincrease was primarily due to lower leasehold impairment expenses on unproved properties partially offset by higher seismic data expenses.expenses associated with activities in the Mid-Continent region.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately $195$124 million or 23%29% to approximately $638$307 million for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $833$431 million for the ninesix months ended SeptemberJune 30, 2014.2015. The decrease was primarily due to the divestitures of properties in 2014 with higher rates compared to the rates of properties acquired in 2014, as well as lower rates as a result of the impairments recorded in the prior year and the first quarter of 2015, partially offset by higher2016, as well as lower total production volumes. Depreciation, depletion and amortization per Mcfe also decreased to $1.94$1.54 per Mcfe for the ninesix months ended SeptemberJune 30, 2015,2016, from $2.63$1.97 per Mcfe for the ninesix months ended SeptemberJune 30, 2014.2015.
Impairment of Long-Lived Assets
The Company recorded the following noncash impairment charges (before and after tax) associated with proved and unproved oil and natural gas properties:
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in thousands) | (in thousands) |
| | | | | | |
California region | | $ | 984,288 |
| | $ | 207,200 |
|
Mid-Continent region | | 129,703 |
| | 5,703 |
|
Rockies region | $ | 1,182,337 |
| | $ | — |
| 26,677 |
| | — |
|
California region | 537,511 |
| | — |
| |
Hugoton Basin region | | — |
| | 277,914 |
|
TexLa region | 408,667 |
| | — |
| — |
| | 33,100 |
|
Mid-Continent region | 372,568 |
| | — |
| |
Shallow Texas Panhandle Brown Dolomite formation | 277,914 |
| | — |
| |
South Texas region | 8,700 |
| | — |
| — |
| | 8,700 |
|
Permian Basin region | — |
| | 603,250 |
| |
| $ | 2,787,697 |
| | $ | 603,250 |
| |
Proved oil and natural gas properties | | 1,140,668 |
| | 532,617 |
|
California region unproved oil and natural gas properties | | 13,236 |
| | — |
|
Impairment of long-lived assets | | $ | 1,153,904 |
| | $ | 532,617 |
|
The impairment charges in 2016 were due to a decline in commodity prices, changes in expected capital development and a decline in the Company’s estimates of proved reserves. The impairment charges in 2015 were due to a decline in commodity prices.
Taxes, Other Than Income Taxes
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2016 | | 2015 | | Variance |
| (in thousands) |
| | | | | |
Severance taxes | $ | 18,328 |
| | $ | 34,566 |
| | $ | (16,238 | ) |
Ad valorem taxes | 38,619 |
| | 65,896 |
| | (27,277 | ) |
California carbon allowances | 6,877 |
| | 11,699 |
| | (4,822 | ) |
Other | 1,090 |
| | (82 | ) | | 1,172 |
|
| $ | 64,914 |
| | $ | 112,079 |
| | $ | (47,165 | ) |
Taxes, other than income taxes decreased by approximately $47 million or 42% for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower oil, natural gas and NGL prices and lower production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, decreased primarily due to lower estimated valuations on certain of the Company’s estimates of proved reserves, and the impairment in 2014 wasproperties. California carbon allowances decreased primarily due to the divestiturelower anticipated emissions compliance obligations as a result of certain high valued unproved propertiesreduced capital spending levels and a decrease in the Midland Basin in which the expected cash flows were previously included in the impairment assessment for proved oil and natural gas properties.steam injection volumes.
Gains on Sale of Assets and Other, Net
During the nine months ended September 30, 2015, the Company recorded a net gain of approximately $174 million, including costs to sell of approximately $1 million, on the Howard County Assets Sale. During the nine months ended September 30, 2014, the Company recorded a net gain of approximately $45 million, including costs to sell of approximately $3 million, on the noncash exchange of a portion of its Permian Basin properties to Exxon XTO for properties in the Hugoton Basin. See Note 2 for additional details of the divestiture and exchange of properties.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Taxes, Other Than Income Taxes
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2015 | | 2014 | | Variance |
| (in thousands) |
| | | | | |
Severance taxes | $ | 49,187 |
| | $ | 105,867 |
| | $ | (56,680 | ) |
Ad valorem taxes | 91,923 |
| | 81,635 |
| | 10,288 |
|
California carbon allowances | 17,247 |
| | 13,328 |
| | 3,919 |
|
Other | (40 | ) | | 184 |
| | (224 | ) |
| $ | 158,317 |
| | $ | 201,014 |
| | $ | (42,697 | ) |
Taxes, other than income taxes decreased by approximately $43 million or 21% for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014. Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower oil, natural gas and NGL prices partially offset by higher production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, increased primarily due to acquisitions completed during the third quarter of 2014. California carbon allowances increased primarily due to an increase in estimated emissions for which credits are needed and higher costs for acquired allowances.
Other Income and (Expenses)
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | | |
| 2015 | | 2014 | | Variance | 2016 | | 2015 | | Variance |
| (in thousands) | (in thousands) |
| | | | | | | | | | |
Interest expense, net of amounts capitalized | $ | (427,584 | ) | | $ | (422,160 | ) | | $ | (5,424 | ) | $ | (173,653 | ) | | $ | (289,201 | ) | | $ | 115,548 |
|
Gain on extinguishment of debt | 213,527 |
| | — |
| | 213,527 |
| — |
| | 15,786 |
| | (15,786 | ) |
Other, net | (10,060 | ) | | (6,699 | ) | | (3,361 | ) | (1,168 | ) | | (8,359 | ) | | 7,191 |
|
| $ | (224,117 | ) | | $ | (428,859 | ) | | $ | 204,742 |
| $ | (174,821 | ) | | $ | (281,774 | ) | | $ | 106,953 |
|
Other income and (expenses) decreased by approximately $205$107 million for the ninesix months ended SeptemberJune 30, 2015,2016, compared to the ninesix months ended SeptemberJune 30, 2014.2015. Interest expense increaseddecreased primarily due to higherlower outstanding debt during the period principally as a result of the senior notes repurchased and exchanged during 2015, discontinuation of interest expense recognition on the senior notes for the period from May 12, 2016 through June 30, 2016, as a decrease in capitalized interest, partially offset byresult of the Chapter 11 proceedings and lower amortization of discounts and financing fees and expenses primarily related tofees. For the bridge loan and term loan that were repaid during 2014. In addition, forperiod from May 12, 2016, through June 30, 2016, contractual interest, which was not recorded, on the ninesenior notes was approximately $38 million. For the six months ended SeptemberJune 30, 2015, the Company recorded a gain on extinguishment of debt of approximately $214$16 million as a result of the repurchases of a portion of its senior notes. Other expenses decreased primarily due to lower write-offs of deferred financing fees related to the Credit Facilities and lower bank fees. See “Debt” under “Liquidity and Capital Resources” below for additional details. Other expenses increased during
The $1.0 billion in aggregate principal amount of Second Lien Notes issued in November 2015 primarilywere accounted for as a troubled debt restructuring, which requires that interest payments on the Second Lien Notes reduce the carrying value of the debt with no interest expense recognized. As a result of the Chapter 11 proceedings, the Company did not make the contractual interest payment of approximately $68 million due to write-offs of deferred financing feesin June 2016, including approximately $55 million related to the Credit Facilities.six months ended June 30, 2016.
Reorganization Items, Net
The Company has incurred and is expected to continue to incur significant costs associated with the reorganization. These costs, which are expensed as incurred, are expected to significantly affect the Company’s results of operations. Reorganization items represent costs and income directly associated with the Chapter 11 proceedings since the Petition Date, and also include adjustments to reflect the carrying value of certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are determined.
The following table summarizes the components of reorganization items included on the condensed consolidated statement of operations:
|
| | | |
| Six Months Ended June 30, 2016 |
| (in thousands) |
| |
Legal and other professional advisory fees | $ | (20,510 | ) |
Unamortized deferred financing fees, discounts and premiums | (41,122 | ) |
Gain related to interest payable on the 12.00% senior secured second lien notes due December 2020 (1) | 551,000 |
|
Terminated contracts | 45,109 |
|
Other | 407 |
|
Reorganization items, net | $ | 534,884 |
|
| |
(1) | Represents a non-cash gain on the write-off of postpetition contractual interest through maturity, recorded to reflect the carrying value of the liability subject to compromise at its estimated allowed claim amount. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Income Tax Expense (Benefit)
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, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized income tax expense of approximately $7 million for the six months ended June 30, 2016, compared to an income tax benefit of approximately $8$10 million for the ninesix months ended SeptemberJune 30, 2015, compared to2015. The income tax expense of approximately $3 million for the nine months ended September 30, 2014. The income tax benefit wasis primarily due to lowerhigher income from the Company’s taxable subsidiaries during the ninesix months ended SeptemberJune 30, 2015,2016, compared to the same period in 2014.2015.
Net Income (Loss)Loss
Net loss increased by approximately $2.0 billion$421 million or 669%59% to approximately $2.3$1.1 billion for the ninesix months ended SeptemberJune 30, 2015,2016, from approximately $297$718 million for the ninesix months ended SeptemberJune 30, 2014.2015. The increase was
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
primarily due to higher impairment charges and lower production revenues, partially offset by higheras well as losses compared to gains on oil and natural gas derivatives for the comparative period, partially offset by the gain related to the Second Lien Notes and lower expenses.expenses, including interest. See discussionsdiscussion above for explanations of variances.
Liquidity and Capital Resources
The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described under “Executive Overview” raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under its Credit Facilities, its Second Lien Notes and its senior notes. Additionally, other events of default, including cross-defaults, are present, including the failure to make interest payments on the Company’s Second Lien Notes and certain of its senior notes, as well as the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2015. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company utilizesas a result of an event of default. See above under “Executive Overview – Chapter 11 Proceedings” for a description of these and other developments.
In order to decrease the Company’s level of indebtedness and maintain the Company’s liquidity at levels sufficient to meet its commitments, the Company undertook a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. Despite taking these actions, the Company did not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code.
Although the Company believes its cash flow from operations and cash on hand will be adequate to meet the operating costs of its existing business, there are no assurances that the Company’s cash flow from operations and cash on hand will be sufficient to continue to fund its operations or to allow the Company to continue as a going concern until a Plan is confirmed by the Bankruptcy Court or other alternative restructuring transaction is approved by the Bankruptcy Court and consummated. The Company’s long-term liquidity requirements, the adequacy of its capital resources and its ability to continue as a going concern are difficult to predict at this time and ultimately cannot be determined until a Plan has been confirmed, if at all, by the Bankruptcy Court. See 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, 2015, for risks relating to liquidity and Chapter 11 proceedings.
The Company has utilized funds from debt and equity offerings, borrowings under its Credit Facilities and net cash provided by operating activities for capital resources and liquidity. To date, the primary use of capital has been for acquisitions and the development of oil and natural gas properties. For the ninesix months ended SeptemberJune 30, 2015,2016, the Company’s total capital expenditures excluding acquisitions, were approximately $424$66 million.
See below for details regarding capital expenditures for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in thousands) |
| | | | | | | |
Oil and natural gas | $ | 91,439 |
| | $ | 351,493 |
| | $ | 373,842 |
| | $ | 1,138,006 |
|
Plant and pipeline | 8,887 |
| | 3,882 |
| | 13,889 |
| | 15,545 |
|
Other | 12,526 |
| | 13,451 |
| | 36,701 |
| | 31,228 |
|
Capital expenditures, excluding acquisitions | $ | 112,852 |
| | $ | 368,826 |
| | $ | 424,432 |
| | $ | 1,184,779 |
|
For 2015, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $550 million, including approximately $470 million related to its oil and natural gas capital program and approximately $25 million related to its plant and pipeline capital. This estimate reflects amounts for the development of properties associated with previous acquisitions (see Note 2), is under continuous review and subject to ongoing adjustments. The Company expects to fund the capital expenditures primarily with net cash provided by operating activities. At September 30, 2015, there was approximately $1.2 billion of available borrowing capacity under the LINN Credit Facility but less than $1 million available under the Berry Credit Facility, each as defined in Note 6.
In October 2015, LINN Energy and Berry each entered into an amendment to its credit facility. See Note 6 for additional details.
The spring 2015 semi-annual borrowing base redetermination of the Company’s Credit Facilities was completed in May 2015, and, as a result of lower commodity prices, the borrowing base under the LINN Credit Facility decreased from $4.5 billion to $4.05 billion and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion. The fall 2015 semi-annual redetermination was completed in October 2015 and the borrowing base under the LINN Credit Facility was reaffirmed at $4.05 billion; however, the borrowing base will automatically decrease to $3.6 billion on January 1, 2016, subject to any additional reductions for additional junior lien debt issued since this redetermination, if the following conditions are not met on or before December 31, 2015: (i) the issuance by the Company of at least $250 million of additional junior lien debt; (ii) repayment and extinguishment of the Berry Credit Facility; and (iii) the guarantee by Berry of the LINN Credit Facility or the merger or consolidation of Berry with a guarantor under the LINN Credit Facility. Notwithstanding this, borrowing availability under the LINN Credit Facility will be limited to $3.6 billion (which amount includes the outstanding $500 million term loan) until the earlier of a) January 1, 2016 or b) the date of the actions described in the prior sentence. The borrowing base under the Berry Credit Facility decreased from $1.2 billion to $900 million.
Continued low commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the maturity schedule of the Company’s hedges, may impact future redeterminations.
In connection with the reduction in Berry’s borrowing base in October 2015, Berry repaid $300 million of borrowings outstanding under the Berry Credit Facility. In connection with the reduction in Berry’s borrowing base in May 2015, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders. As directed by LINN Energy, the $250 million was deposited on Berry’s behalf in a security account with the administrative agent subject to a security control agreement. Berry’s ability to withdraw funds from this account is subject to a
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
concurrent reduction ofSee below for details regarding capital expenditures for the borrowing baseperiods presented:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
| (in thousands) |
| | | |
Oil and natural gas | $ | 45,566 |
| | $ | 282,403 |
|
Plant and pipeline | 15,028 |
| | 5,002 |
|
Other | 5,687 |
| | 24,175 |
|
Capital expenditures | $ | 66,281 |
| | $ | 311,580 |
|
For 2016, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $235 million, including approximately $160 million related to its oil and natural gas capital program and approximately $60 million related to its plant and pipeline capital. This estimate is under the Berry Credit Facility or lender’s consent in connection with a redetermination of such borrowing base. The $250 million may be used to satisfy obligations under the Berry Credit Facility or,continuous review and subject to restrictions in the indentures governing Berry’s senior notes, may be returned to LINN Energy in the future.
As the Company pursues growth, it continually monitors the capital resources available to meet future financial obligations and planned capital expenditures. The Company’s future success in growing reserves and production volumes will be highly dependent on the capital resources available and its success in drilling for or acquiring additional reserves.ongoing adjustments. The Company actively reviews acquisition opportunities on an ongoing basis. If the Company wereexpects to make significant additional acquisitions forfund its capital expenditures primarily from net cash it would need to borrow additional amounts under its Credit Facilities, if available, or obtain additional debt or equity financing. The Company’s Credit Facilities and indentures governing its senior notes impose certain restrictions onprovided by operating activities; however, there is uncertainty regarding the Company’s ability to obtain additional debt financing. Based upon current expectations, the Company believes its liquidity and capital resources will be sufficient to conduct its business and operations.as discussed above.
Statements of Cash Flows
The following is a comparative cash flow summary:
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | | |
| 2015 | | 2014 | | Variance | 2016 | | 2015 | | Variance |
| (in thousands) | (in thousands) |
Net cash: | | | | | | | | | | |
Provided by operating activities | $ | 1,034,769 |
| | $ | 1,435,810 |
| | $ | (401,041 | ) | $ | 801,201 |
| | $ | 673,482 |
| | $ | 127,719 |
|
Used in investing activities | (190,540 | ) | | (3,836,033 | ) | | 3,645,493 |
| (71,111 | ) | | (386,920 | ) | | 315,809 |
|
Provided by (used in) financing activities | (501,232 | ) | | 2,407,213 |
| | (2,908,445 | ) | 42,387 |
| | (284,428 | ) | | 326,815 |
|
Net increase in cash and cash equivalents | $ | 342,997 |
| | $ | 6,990 |
| | $ | 336,007 |
| $ | 772,477 |
| | $ | 2,134 |
| | $ | 770,343 |
|
Operating Activities
Cash provided by operating activities for the ninesix months ended SeptemberJune 30, 2015,2016, was approximately $1.0 billion,$801 million, compared to approximately $1.4 billion$673 million for the ninesix months ended SeptemberJune 30, 2014.2015. The decreaseincrease was primarily due to higher cash settlements on derivatives and lower expenses, partially offset by lower production related revenues principally due to lower commodity prices partially offset by higher cash settlements on derivatives.and lower production volumes.
Investing Activities
The following provides a comparative summary of cash flow from investing activities:
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in thousands) | (in thousands) |
Cash flow from investing activities: | | | | | | |
Acquisition of oil and natural gas properties and joint-venture funding | $ | — |
| | $ | (2,601,932 | ) | |
Capital expenditures | (554,735 | ) | | (1,226,616 | ) | $ | (121,958 | ) | | $ | (445,634 | ) |
Decrease in restricted cash | | 53,418 |
| | — |
|
Proceeds from sale of properties and equipment and other | 364,195 |
| | (7,485 | ) | (2,571 | ) | | 58,714 |
|
| $ | (190,540 | ) | | $ | (3,836,033 | ) | $ | (71,111 | ) | | $ | (386,920 | ) |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
The primary use of cash in investing activities is for capital spending, including acquisitions and the development of the Company’s oil and natural gas properties. Capital expenditures decreased primarily due to lower spending on development activities throughout the Company’s various operating regions as a result of the Company’s reduced 2015 capital budget. Proceeds from salecontinued low commodity prices. The Company made no acquisitions of properties during the six months ended June 30, 2016, or June 30, 2015. In addition, during the second quarter of 2016, restricted cash was reduced by approximately $53 million as a result of the amendment to the Berry Credit Facility and equipment and otherthe Restructuring Support Agreement. See Note 2 for additional details.
Financing Activities
Cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2015, include2016, was approximately $276$42 million, compared to cash used in financing activities of approximately $284 million for the six months ended June 30, 2015. During the six months ended June 30, 2016, the Company borrowed approximately $979 million under the LINN Credit Facility, including approximately $919 million in February 2016 which represented the remaining undrawn amount that was available. In addition, during the six months ended June 30, 2016, the Company repaid approximately $913 million under the LINN Credit Facility and term loan, and approximately $2 million under the Berry Credit Facility, primarily using the net cash proceeds received from the Howard County Assets Sale in August 2015canceled derivative contracts (see Note 2)7).
The following provides a comparative summary of proceeds from borrowings and repayments of debt:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
| (in thousands) |
Proceeds from borrowings: | | | |
LINN Credit Facility | $ | 978,500 |
| | $ | 645,000 |
|
| $ | 978,500 |
| | $ | 645,000 |
|
Repayments of debt: | | | |
LINN Credit Facility | $ | (814,299 | ) | | $ | (685,000 | ) |
Berry Credit Facility | (1,593 | ) | | — |
|
Term loan | (98,911 | ) | | — |
|
Senior notes | — |
| | (165,051 | ) |
| $ | (914,803 | ) | | $ | (850,051 | ) |
See Note 13 for details about borrowings and repayments of debt that were reflected as noncash transactions by the Company.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Financing Activities
Cash used in financing activities for the nine months ended September 30, 2015, was approximately $501 million, compared to cash provided by financing activities of approximately $2.4 billion for the nine months ended September 30, 2014. The decrease in financing cash flow needs was primarily attributable to decreased capital expenditures and acquisition activity during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The following provides a comparative summary of proceeds from borrowings and repayments of debt:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
| (in thousands) |
Proceeds from borrowings: | | | |
LINN Credit Facility | $ | 1,405,000 |
| | $ | 1,900,000 |
|
Senior notes | — |
| | 1,100,024 |
|
Bridge loan and term loan | — |
| | 2,300,000 |
|
| $ | 1,405,000 |
| | $ | 5,300,024 |
|
Repayments of debt: | | | |
LINN Credit Facility | $ | (1,145,000 | ) | | $ | (950,000 | ) |
Senior notes | (556,909 | ) | | (206,124 | ) |
Bridge loan | — |
| | (1,000,000 | ) |
| $ | (1,701,909 | ) | | $ | (2,156,124 | ) |
In addition, in May 2015, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders (see Note 6).
Debt
The following summarizes the Company’s outstanding debt:
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| (in thousands, except percentages) |
| | | |
LINN credit facility | $ | 2,305,000 |
| | $ | 1,795,000 |
|
Berry credit facility | 1,173,175 |
| | 1,173,175 |
|
Term loan | 500,000 |
| | 500,000 |
|
6.50% senior notes due May 2019 | 1,159,215 |
| | 1,200,000 |
|
6.25% senior notes due November 2019 | 1,483,928 |
| | 1,800,000 |
|
8.625% senior notes due April 2020 | 1,123,483 |
| | 1,300,000 |
|
6.75% Berry senior notes due November 2020 | 261,100 |
| | 299,970 |
|
7.75% senior notes due February 2021 | 963,774 |
| | 1,000,000 |
|
6.50% senior notes due September 2021 | 502,010 |
| | 650,000 |
|
6.375% Berry senior notes due September 2022 | 572,700 |
| | 599,163 |
|
Net unamortized discounts and premiums | (16,109 | ) | | (21,499 | ) |
Total debt, net | $ | 10,028,276 |
| | $ | 10,295,809 |
|
During the nine months ended September 30, 2015, the Company repurchased, through privately negotiated transactions and on the open market, approximately $783 million of its outstanding senior notes as follows:
6.50% senior notes due May 2019 – $41 million;
6.25% senior notes due November 2019 – $316 million;
8.625% senior notes due April 2020 – $177 million;
Table of Contents |
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (in thousands, except percentages) |
| | | |
LINN credit facility | $ | 1,654,745 |
| | $ | 2,215,000 |
|
Berry credit facility | 874,959 |
| | 873,175 |
|
Term loan | 284,241 |
| | 500,000 |
|
6.50% senior notes due May 2019 | 562,234 |
| | 562,234 |
|
6.25% senior notes due November 2019 | 581,402 |
| | 581,402 |
|
8.625% senior notes due April 2020 | 718,596 |
| | 718,596 |
|
6.75% Berry senior notes due November 2020 | 261,100 |
| | 261,100 |
|
12.00% senior secured second lien notes due December 2020 (1) | 1,000,000 |
| | 1,000,000 |
|
Interest payable on senior secured second lien notes due December 2020 (1) | — |
| | 608,333 |
|
7.75% senior notes due February 2021 | 779,474 |
| | 779,474 |
|
6.50% senior notes due September 2021 | 381,423 |
| | 381,423 |
|
6.375% Berry senior notes due September 2022 | 572,700 |
| | 572,700 |
|
Net unamortized discounts and premiums (2) | — |
| | (8,694 | ) |
Net unamortized deferred financing fees (2) | (1,536 | ) | | (37,374 | ) |
Total debt, net | 7,669,338 |
| | 9,007,369 |
|
Less current portion, net (3) | (2,812,409 | ) | | (3,714,693 | ) |
Less liabilities subject to compromise (4) | (4,856,929 | ) | | — |
|
Long-term debt, net | $ | — |
| | $ | 5,292,676 |
|
| |
Item 2.(1) | Management’s Discussion and AnalysisThe issuance of Financial Condition and Resultsthe Second Lien Notes was accounted for as a troubled debt restructuring, which requires that interest payments on the Second Lien Notes reduce the carrying value of Operations - Continuedthe debt with no interest expense recognized. During the three months ended June 30, 2016, $551 million was written off to reorganization items in connection with the filing of the Bankruptcy Petitions. The remaining amount of approximately $57 million was classified as liabilities subject to compromise at June 30, 2016. |
| |
(2) | Approximately $41 million in net discounts, premiums and deferred financing fees were written off to reorganization items in connection with the filing of the Bankruptcy Petitions. |
| |
(3) | Due to existing and anticipated covenant violations, the Company’s Credit Facilities and term loan were classified as current at June 30, 2016, and December 31, 2015. The current portion as of December 31, 2015, also includes approximately $128 million of interest payable on the Second Lien Notes due within one year. |
| |
(4) | The Company’s senior notes and Second Lien Notes were classified as liabilities subject to compromise at June 30, 2016. |
6.75% Berry senior notes due November 2020 – $39 million;
7.75% senior notes due February 2021 – $36 million;
6.50% senior notes due September 2021 – $148 million; and
6.375% Berry senior notes due September 2022 – $26 million.
At SeptemberAs of June 30, 2015,2016, there was approximately $1.2 billion ofno remaining available borrowing capacity under the LINN Credit Facility but less than $1 million available under the Berry Credit Facility.Facilities. For additional information related to the Company’s outstanding debt, see Note 6. The Company plans to file Berry’s stand-alone financial statements with the Securities and Exchange Commission at a later date.
Financial Covenants
The Credit Facilities, as amended in October 2015, contain requirements and financial covenants, among others, to maintain: 1) a ratio of EBITDA to Interest Expense (as each term is defined in the LINN Credit Facility) and Adjusted EBITDAX to Interest Expense (as each term is defined in the Berry Credit Facility) (“Interest Coverage Ratio”) for the preceding four quarters of greater than 2.5 to 1.0 currently, 2.0 to 1.0 from December 31, 2015 through December 31, 2016, 2.25 to 1.0 from March 31, 2017 through June 30, 2017 and returning to 2.5 to 1.0 thereafter, and 2) a ratio of adjusted current assets to adjusted current liabilities (as described in the LINN Credit Facility) and Current Assets to Current Liabilities (as each term is defined in the Berry Credit Facility) (“Current Ratio”) as of the last day of any fiscal quarter of greater than 1.0 to 1.0. The Interest Coverage Ratio is intended as a measure of the Company’s ability to make interest payments on its outstanding indebtedness and the Current Ratio is intended as a measure of the Company’s solvency. The Company is required to demonstrate compliance with each of these ratios on a quarterly basis. The following represents the calculations of the Interest Coverage Ratio and the Current Ratio as presented to the lenders under the Credit Facilities:
|
| | | | | | | | | | | | | | |
| At or for the Quarter Ended | | |
| December 31, 2014 | | March 31, 2015 | | June 30, 2015 | | September 30, 2015 | | Twelve Months Ended September 30, 2015 |
LINN Credit Facility: | | | | | | | | | |
Interest Coverage Ratio | 2.7 |
| | 2.9 |
| | 3.0 |
| | 3.4 |
| | 3.0 |
|
Current Ratio | 2.6 |
| | 3.0 |
| | 2.9 |
| | 2.8 |
| | 2.8 |
|
Berry Credit Facility: | | | | | | | | | |
Interest Coverage Ratio | 6.5 |
| | 1.7 |
| | 2.6 |
| | 2.2 |
| | 3.3 |
|
Current Ratio (1) | 0.6 |
| | 0.6 |
| | 0.5 |
| | 2.0 |
| | 2.0 |
|
Current Ratio (consolidated) (1) | 2.9 |
| | 3.2 |
| | 2.9 |
| | 2.6 |
| | 2.6 |
|
| |
(1)
| The Berry Credit Facility allows Berry to demonstrate its compliance with the Current Ratio financial covenant on a consolidated basis with LINN Energy for up to three quarters of each calendar year. |
The Company has included disclosure of the Interest Coverage Ratio for the twelve months ended September 30, 2015, and the Current Ratio as of September 30, 2015, to demonstrate its compliance for the quarter ended September 30, 2015, as well as the Interest Coverage Ratio for each of the preceding four quarters on an individual basis (rather than on a last twelve months basis) and the Current Ratio as of the end of each of the preceding four quarters to provide investors with trend information about the Company’s ongoing compliance with these financial covenants. If the Company fails to demonstrate compliance with either or both of the Interest Coverage Ratio or the Current Ratio as of the end of the quarter and such failure continues beyond applicable cure periods, an event of default would occur and the Company would be unable to make additional borrowings and outstanding indebtedness may be accelerated. The Company depends, in part, on its Credit Facilities for future capital needs. In addition, the Company has drawn on the LINN Credit Facility to fund or partially fund cash distribution payments. Absent such borrowings, the Company would have at times experienced a shortfall in cash available to pay the declared cash distribution amount. For additional information, see “Distribution Practices” below.
The Company is in compliance with all financial and other covenants of its Credit Facilities and senior notes.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Counterparty Credit Risk
The Company accounts for its commodity derivatives at fair value. The Company’s counterparties are current participants or affiliatesAs a result of participants in its Credit Facilities or were participants or affiliatesthe commodity derivative cancellations during the second quarter of participants in its Credit Facilities at the time it originally entered into the derivatives. The LINN Credit Facility is secured by LINN Energy’s oil, natural gas and NGL reserves and the Berry Credit Facility is secured by Berry’s oil, natural gas and NGL reserves; therefore,2016, the Company is not required to post any collateral.has only one remaining commodity derivative counterparty. The Company does not receive collateral from its counterparties. The Company minimizesminimized the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.
At-the-Market Offering Program
The Company’s Board of Directors has authorized the sale of up to $500 million of units under an at-the-market offering program. SalesSubject to approval by the Bankruptcy Court, sales of units, if any, will be made under an equity distribution agreement by means of ordinary brokers’ transactions, through the facilities of the NASDAQ Global Select Market, any othera national securities exchange or facility thereof, a trading facility of a national securities association or an alternate trading system, to or through a market maker or directly on or through an electronic communication network, a “dark pool” or any similar market venue, at market prices, in block transactions, or as otherwise agreed with a sales agent. The Company expects to use the net proceeds from any sale of units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
During No sales were made under the nine months ended September 30, 2015, the Company, under its equity distribution agreement sold 3,621,983 units representing limited liability company interests at an average unit price of $12.37 for net proceeds of approximately $44 million (net of approximately $448,000 in commissions). In connection withduring the issuance and sale of these units, the Company also incurred professional services expenses of approximately $459,000. The Company used the net proceeds for general corporate purposes, including the open market repurchases of a portion of its senior notes (see Note 6).six months ended June 30, 2016. At SeptemberJune 30, 2015,2016, units totaling approximately $455 million in aggregate offering price remained available to be sold under the agreement.
Public Offering of Units
In May 2015, the Company sold 16,000,000 units representing limited liability company interests in an underwritten public offering at $11.79 per unit ($11.32 per unit, net of underwriting discount) for net proceeds of approximately $181 million (after underwriting discount and offering costs of approximately $8 million). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurred to fund the open market repurchases of a portion of its senior notes during 2015 (see Note 6).
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Distributions
Under the Company’s limited liability company agreement, unitholders are entitled to receive a distribution of available cash, which includes cash on hand plus borrowings less any reserves established by the Company’s Board of Directors to provide for the proper conduct of the Company’s business (including reserves for future capital expenditures, including drilling, acquisitions and anticipated future credit needs) or to fund distributions, if any, over the next four quarters. The following provides a summary of distributions paid by the Company during the nine months ended September 30, 2015:
|
| | | | | | | | |
Date Paid | | Distributions Per Unit | | Total Distributions |
| | | | (in millions) |
| | | | |
September 2015 | | $ | 0.1042 |
| | $ | 37 |
|
August 2015 | | $ | 0.1042 |
| | $ | 37 |
|
July 2015 | | $ | 0.1042 |
| | $ | 37 |
|
June 2015 | | $ | 0.1042 |
| | $ | 37 |
|
May 2015 | | $ | 0.1042 |
| | $ | 35 |
|
April 2015 | | $ | 0.1042 |
| | $ | 35 |
|
March 2015 | | $ | 0.1042 |
| | $ | 35 |
|
February 2015 | | $ | 0.1042 |
| | $ | 35 |
|
January 2015 | | $ | 0.1042 |
| | $ | 35 |
|
In October 2015, the Company’s Board of Directors determined to suspend payment of the Company’s distribution. For additional information, see “Distribution Practices” below.
Off-Balance Sheet Arrangements
The Company does not currently have any off-balance sheet arrangements.
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.
Commitments and Contractual Obligations
The Company has contractual obligations for long-term debt, operating leases and other long-term liabilities that were summarized in the table of contractual obligations in the 20142015 Annual Report on Form 10-K. WithDuring the exceptionsix months ended June 30, 2016, the Company made approximately $774 million in net repayments of a portion of the repurchasesborrowings outstanding under the Credit Facilities. The Company’s filing of approximately $783 millionthe Bankruptcy Petitions constituted an event of its outstandingdefault that accelerated the Company’s obligations under the Credit Facilities, the Second Lien Notes and the senior notes, therenotes. See Note 6 for additional information about the Company’s debt instruments. There have been no other significant changes to the Company’s contractual obligations since December 31, 2014. See Note 6 for additional information about the Company’s debt instruments.2015.
Distribution Practices
The Company’s Board of Directors determines the appropriate level of distributions on a periodic basis in accordance with the provisions of the Company’s limited liability company agreement. Management considers the timing and size of planned capital expenditures and long-term views about expected results in determining the amount of its distributions. Capital spending and resulting production and net cash provided by operating activities do not typically occur evenly throughout the year due to a variety of factors which are difficult to predict, including rig availability, weather, well performance, the timing of completions and the commodity price environment. Consistent with practices common to publicly traded partnerships, the Company’s Board of Directors historically has not varied the distribution it declares from period to period based on uneven net cash provided by operating activities.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
The Company’s Board of Directors reviews historical financial results and forecasts for future periods, including oil and natural gas development activities and the impact of significant acquisitions or dispositions, as well as considers the level of the Company’s indebtedness and its liquidity position in making a determination to increase, decrease or maintain the current level of distribution. If shortfalls are sustained over time and forecasts demonstrate expectations for continued future shortfalls, or the Company’s Board of Directors determines that it is necessary to reserve cash for the future conduct of business, it may determine to reduce, suspend or discontinue paying distributions. For example, in October 2015, following the recommendation from management, the Company’s Board of Directors determined to suspend payment of the Company’s distribution and reserve any excess cash that would otherwise be available for distribution. The Board of Directors will continue to evaluate the Company’s ability to reinstate the distribution using the considerations discussed above.
For 2015, the Company’s Board of Directors approved an oil and natural gas capital budget of approximately $470 million. At this level of capital investment, the Company forecasts a modest decline in production during 2015 while it focuses only on projects that generate an acceptable rate of return in the current low commodity price environment, and plans to balance cash flow and spending. As a result, for 2015, the Company intends to fund interest expense, its total oil and natural gas development costs and distributions to unitholders paid through September 2015 from net cash provided by operating activities, and will present “excess (shortfall) of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors” after deducting total oil and natural gas development costs. Previously, the Company intended to fund interest expense, a portion of its oil and natural gas development costs and distributions to unitholders from net cash provided by operating activities and presented “excess (shortfall) of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors” after deducting only a portion of oil and natural gas development costs.
The Company funds acquisitions and premiums paid for derivatives, if any, primarily with proceeds from debt or equity offerings, borrowings under the LINN Credit Facility or other external sources of funding. Although it is the Company’s practice to acquire or modify derivative instruments with external sources of funding, any cash settlements on derivatives are reported as net cash provided by operating activities and may be used to fund distributions.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
See below for details regarding the discretionary adjustments considered by the Company’s Board of Directors in assessing the appropriate distribution amount for each period, as well as the extent to which sources of funding have been sufficient for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in thousands) |
| | | | | | | |
Net cash provided by operating activities | $ | 361,287 |
| | $ | 520,175 |
| | $ | 1,034,769 |
| | $ | 1,435,810 |
|
Distributions to unitholders | (111,247 | ) | | (240,652 | ) | | (323,878 | ) | | (721,235 | ) |
Excess of net cash provided by operating activities after distributions to unitholders | 250,040 |
| | 279,523 |
| | 710,891 |
| | 714,575 |
|
Discretionary adjustments considered by the Board of Directors: | | | | | | | |
Discretionary reductions for a portion of oil and natural gas development costs (1) | NM* |
| | (213,252 | ) | | NM* |
| | (606,120 | ) |
Development of oil and natural gas properties (2) | (91,439 | ) | | NM* |
| | (373,842 | ) | | NM* |
|
Cash recoveries of bankruptcy claim (3) | — |
| | — |
| | (2,877 | ) | | (2,913 | ) |
Cash received (paid) for acquisitions or divestitures – revenues less operating expenses (4) | — |
| | 79,555 |
| | (2,712 | ) | | 79,555 |
|
Provision for legal matters (5) | — |
| | — |
| | (1,000 | ) | | 1,598 |
|
Changes in operating assets and liabilities and other, net (6) | (47,265 | ) | | (57,443 | ) | | (184,937 | ) | | (69,249 | ) |
Excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors, including a portion of oil and natural gas development costs (7) | NM* |
| | $ | 88,383 |
| | NM* |
| | $ | 117,446 |
|
Excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors, including total development of oil and natural gas properties (7) | $ | 111,336 |
| | NM* |
| | $ | 145,523 |
| | NM* |
|
| |
*
| Not meaningful due to the 2015 change in presentation. |
| |
(1)
| Represent discretionary reductions for a portion of oil and natural gas development costs, an estimated component of total development costs. The Board of Directors establishes the discretionary reductions with the objective of replacing proved developed producing reserves, current production and cash flow, taking into consideration the Company’s overall commodity mix. Management evaluates all of these objectives as part of the decision-making process to determine the discretionary reductions for a portion of oil and natural gas development costs for the year, although every objective may not be met in each year. Furthermore, there may be certain years in which commodity prices and other economic conditions do not merit capital spending at a level sufficient to accomplish any of these objectives. The 2014 amounts were established by the Board of Directors at the end of the previous year, allocated across four quarters, and were intended to fully offset declines in production and proved developed producing reserves during the year as compared to the prior year. |
The portion of oil and natural gas development costs includes estimated drilling and development costs associated with projects to convert a portion of non-producing reserves to producing status. However, the amounts do not include the historical cost of acquired properties as those amounts have already been spent in prior periods, were financed primarily with external sources of funding and do not affect the Company’s ability to pay distributions in the current period. The Company’s existing reserves, inventory of drilling locations and production levels will decline over time as a result of development and production activities. Consequently, if the Company were to limit its total capital expenditures to this portion of oil and natural gas development costs and not acquire new reserves, total reserves would decrease over time, resulting in an inability to maintain production at current levels, which could adversely affect the Company’s ability to pay a distribution, if and when resumed. However, the Company’s current total reserves do not include reserve additions that may result from converting existing probable and possible resources to additional proved reserves, potential additional discoveries or technological advancements on the Company’s existing acreage position.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
| |
(2)
| Represents total capital expenditures for the development of oil and natural gas properties as presented on an accrual basis. For 2015, the Company intends to fund its total oil and natural gas capital program, in addition to interest expense and distributions to unitholders, from net cash provided by operating activities; however, in October 2015, the Company’s Board of Directors approved the suspension of the Company’s distribution. Previously, the Company intended to fund only a portion of its oil and natural gas capital program, in addition to interest expense and distributions to unitholders, from net cash provided by operating activities. |
| |
(3)
| Represent the recoveries of a bankruptcy claim against Lehman Brothers which was not a transaction occurring in the ordinary course of the Company’s business. |
| |
(4)
| Represents adjustments to the purchase price of acquisitions and divestitures, based on the Company’s contractual right to revenues less operating expenses for periods from the effective date of a transaction to the closing date of a transaction. When the Company is the buyer, it is legally entitled to revenues less operating expenses generated during this period, and the Company’s Board of Directors has historically made a discretionary adjustment to include this cash in the amount available for distribution. Conversely, when the Company is the seller, the Company’s Board of Directors has historically made a discretionary adjustment to reduce this cash from the amount available for distribution during the period. Beginning with the quarter ended June 30, 2015, the Board decided to no longer make this discretionary adjustment. |
| |
(5)
| Represents reserves and settlements related to legal matters. |
| |
(6)
| Represents primarily working capital adjustments. These adjustments may or may not impact cash provided by (used in) operating activities during the respective period, but are included as discretionary adjustments considered by the Company’s Board of Directors as the Board historically has not varied the distribution it declares period to period based on uneven cash flows. The Company’s Board of Directors, when determining the appropriate level of cash distributions, excluded the impact of the timing of cash receipts and payments; as such, this adjustment is necessary to show the historical amounts considered by the Company’s Board of Directors in assessing the appropriate distribution amount for each period. |
| |
(7)
| Represents the excess (shortfall) of net operating cash flow after distributions to unitholders and discretionary adjustments. Any excess was retained by the Company for future operations, future capital expenditures, future debt service or other future obligations. Any shortfall was funded with cash on hand and/or borrowings under the LINN Credit Facility. In a period where no distribution is paid, the Company will retain all excess of net operating cash flow for future operations, future capital expenditures, future debt service or other future obligations. |
Any cash generated by Berry is currently being used by Berry to fund its activities. To the extent that Berry generates cash in excess of its needs and determines to distribute such amounts to LINN Energy, the indentures governing Berry’s senior notes limit the amount it may distribute to LINN Energy to the amount available under a “restricted payments basket,” and Berry may not distribute any such amounts unless it is permitted by the indentures to incur additional debt pursuant to the consolidated coverage ratio test set forth in the Berry indentures. Berry’s restricted payments basket was approximately $563 million at September 30, 2015, and may be increased in accordance with the terms of the Berry indentures by, among other things, 50% of Berry’s future net income, reductions in its indebtedness and restricted investments, and future capital contributions.
A summary of the significant sources and uses of funding for the respective periods is presented below: |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in thousands) |
| | | | | | | |
Net cash provided by operating activities | $ | 361,287 |
| | $ | 520,175 |
| | $ | 1,034,769 |
| | $ | 1,435,810 |
|
Distributions to unitholders | (111,247 | ) | | (240,652 | ) | | (323,878 | ) | | (721,235 | ) |
Excess of net cash provided by operating activities after distributions to unitholders | 250,040 |
| | 279,523 |
| | 710,891 |
| | 714,575 |
|
Plus (less): | | | | | | | |
Net cash provided by (used in) financing activities (excluding distributions to unitholders) | (105,557 | ) | | 2,702,683 |
| | (177,354 | ) | | 3,128,448 |
|
Acquisition of oil and natural gas properties and joint-venture funding | — |
| | (2,576,041 | ) | | — |
| | (2,601,932 | ) |
Development of oil and natural gas properties | (86,859 | ) | | (370,861 | ) | | (503,206 | ) | | (1,176,478 | ) |
Purchases of other property and equipment | (22,242 | ) | | (18,727 | ) | | (51,529 | ) | | (50,138 | ) |
Proceeds from sale of properties and equipment and other | 305,481 |
| | 4,245 |
| | 364,195 |
| | (7,485 | ) |
Net increase in cash and cash equivalents | $ | 340,863 |
| | $ | 20,822 |
| | $ | 342,997 |
| | $ | 6,990 |
|
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and 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.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 11.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Cautionary Statement Regarding Forward-Looking Statements
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. These statements may include discussions about the Company’s:
business strategy;
acquisition strategy;
financial strategy;
risks associated with the Chapter 11 process, including the Company’s inability to develop, confirm and consummate a plan under Chapter 11 or an alternative restructuring transaction;
inability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 filing;
failure to satisfy the Company’s short- or long-term liquidity needs, including its inability to generate sufficient cash flow from operations or to obtain adequate financing to fund its capital expenditures and meet working capital needs and its ability to continue as a going concern;
large or multiple customer defaults on contractual obligations, including defaults resulting from actual or potential insolvencies;
effects of legal proceedings;
ability to resume payment of distributions in the future or maintain or grow them after such resumption;
drilling locations;
oil, natural gas and 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; and
integration of acquired businesses and operations and commencement of activities in the Company’s strategic alliances with GSO Capital Partners LP and Quantum Energy Partners, which may take longer than anticipated, may be more costly than anticipated as a result of unexpected factors or events and may have an unanticipated adverse effect on the Company’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 Company expectations, which reflect estimates and assumptions made by 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 events will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors set forth in Item 1A. “Risk Factors” in this Quarterly
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2014,2015, 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.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued |
The forward-looking statements related to the Plan involve known and unknown risks, uncertainties, assumptions and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by other forward-looking statements contained in this Quarterly Report on Form 10-Q, including but not limited to potential adverse effects related to the following: delisting of the Company’s units on NASDAQ; reorganization and related effects on the Company’s outstanding debt and outstanding units; potential effects of the industry downturn on the Company’s business, financial condition and results of operations; potential limitations on the Company’s ability to maintain contracts and other critical business relationships; requirements for adequate liquidity to fund the Company’s operations in the future, including obtaining sufficient financing on acceptable terms; and other matters related to the reorganization and the Company’s indebtedness, including any defaults related thereto.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company’s primary objective of the following information ismarket risks are attributable to provide forward-looking quantitative and qualitative information about potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changesfluctuations in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures. All ofThese risks can affect the Company’s market risk sensitive instruments were entered intobusiness, financial condition, operating results and cash flows. See below for purposes other than trading.quantitative and qualitative information about these risks.
The following 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 20142015 Annual Report on Form 10-K. The reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. “Financial Statements.”
Commodity Price Risk
The Company’s most significant market risk relates to prices of oil, natural gas and NGL. The Company expects commodity prices to remain volatile and unpredictable. As an important partcommodity prices decline or rise significantly, revenues and cash flows are likewise affected. In addition, future declines in commodity prices may result in noncash write-downs of the Company’s carrying amounts of its business strategy,assets.
Historically, the Company seeks to hedgehas hedged a significant portion of its forecasted production to reduce exposure to fluctuations in the prices of oil and natural gas prices and provide long-term cash flow predictability to manage its business, service debt, and if and when resumed, pay distributions. The current direct NGL hedging market is constrained in terms of price, volume, duration and number of counterparties, which limits the Company’s ability to effectively hedge its NGL production. The Company also hedges its exposure to natural gas differentials in certain operating areas but does not currently hedge exposure to oil differentials. By removing a portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in net cash provided by operating activities due to fluctuations in commodity prices.
The appropriate level of production to be hedged is an ongoing consideration and is based on a variety of factors, including among other things, current and future expected commodity market prices cost and availability of put option contracts, the level of acquisition activity and the Company’s overall risk profile, including leverage and size and scale considerations. In addition, when commodity prices are depressed and forward commodity price curves are flat or in backwardation, the Company may determine that the benefit of hedging its anticipated production at these levels is outweighed by its resultant inability to obtain higher revenues for its production if commodity prices recover during the duration of the contracts. As a result, the appropriate percentage of production volumes to be hedged may change over time.
The Company maintains a substantial portion of its hedges in the form of swap contracts. From time to time, the Company has chosen to purchase put option contracts primarily in connection with acquisition activity to hedge volumes in excess of those already hedged with swap contracts. In addition, as part of the 2013 acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”), the Company assumed certain derivative contracts that Berry had entered into prior to the acquisition date, including swap contracts, collars and three-way collars. The Company does not enter into derivative contracts for trading purposes. There have been no significant changes
In April 2016 and May 2016, in connection with the Company’s restructuring efforts, LINN Energy canceled (prior to the Company’s objectives, general strategies or instrumentscontract settlement dates) all of its derivative contracts for net proceeds of approximately $1.2 billion. The net proceeds were used to managemake permanent repayments of a portion of the borrowings outstanding under the LINN Credit Facility. Also, in May 2016, as a result of the Chapter 11 proceedings, Berry’s counterparties canceled (prior to the contract settlement dates) all of Berry’s derivative contracts (with the exception of a contract consisting of 1,840 MMMBtu of natural gas basis swaps for 2016) for net proceeds of approximately $2 million. The net proceeds were used to make permanent repayments of a portion of the borrowings outstanding under the Berry Credit Facility. In July 2016, Berry’s remaining derivative contract was canceled by the counterparty. LINN Energy and/or Berry may enter into new derivative contracts during the pendency of the Chapter 11 proceedings to the extent: 1) they are permitted by order of the Bankruptcy Court, 2) acceptable agreements with counterparties can be reached and 3) the Company determines that it is appropriate to hedge given its analysis of the factors identified above.
As of June 30, 2016, the Company had 1,840 MMMBtu of natural gas basis swaps for 2016 and no derivative contracts for years subsequent to 2016. See Note 7 for details about the Company’s commodity price risk exposures from the year ended December 31, 2014.derivative instruments.
In certain historical periods,Interest Rate Risk
At June 30, 2016, the Company paid an incremental premium to increase the fixed price floors on existing put options because the Company typically hedges multiple years in advancehad debt outstanding under its credit facilities and in some cases commodity prices had increased significantly beyond the initial hedge prices. As a result, the Company determined that the existing put option strike prices did not provide reasonable downside protection in the context of the current market.
At September 30, 2015, the fair value of fixed price swaps, put option contracts and three-way collars was a net assetterm loan of approximately $1.7 billion.$2.8 billion which incurred interest at floating rates (see Note 6). A 10%1% increase in the index oil and natural gas prices above the September 30, 2015, pricesrespective market rates would result in a net asset of approximately $1.5 billion, which represents a decreasean estimated $28 million increase in the fair value of approximately $250 million;annual interest expense.
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Continued
conversely, a 10% decrease in the index oil and natural gas prices below the September 30, 2015, prices would result in a net asset of approximately $2.0 billion, which represents an increase in the fair value of approximately $249 million.
At December 31, 2014, the fair value of fixed price swaps, put option contracts and three-way collars was a net asset of approximately $1.8 billion. A 10% increase in the index oil and natural gas prices above the December 31, 2014, prices would result in a net asset of approximately $1.4 billion, which represents a decrease in the fair value of approximately $423 million; conversely, a 10% decrease in the index oil and natural gas prices below the December 31, 2014, prices would result in a net asset of approximately $2.2 billion, which represents an increase in the fair value of approximately $421 million.
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those instruments trade in active markets.
The prices of oil, natural gas and NGL have been extremely volatile, and the Company expects this volatility to continue. Prices for these commodities may fluctuate widely in response to relatively minor changes in the supply of and demand for such commodities, market uncertainty and a variety of additional factors that are beyond its control. Actual gains or losses recognized related to the Company’s derivative contracts will likely differ from those estimated at September 30, 2015, and December 31, 2014, and will depend exclusively on the price of the commodities on the specified settlement dates provided by the derivative contracts.
The Company cannot be assured that its counterparties will be able to perform under its derivative contracts. If a counterparty fails to perform and the derivative arrangement is terminated, the Company’s cash flows and ability to pay distributions could be impacted.
Interest Rate Risk
At September 30, 2015, the Company had long-term debt outstanding under its credit facilities and term loan of approximately $4.0 billion which incurred interest at floating rates (see Note 6). A 1% increase in the LIBOR would result in an estimated $40 million increase in annual interest expense.
At December 31, 2014, the Company had long-term debt outstanding under its credit facilities and term loan of approximately $3.5$3.6 billion which incurred interest at floating rates. A 1% increase in the LIBORrespective market rates would result in an estimated $35$36 million increase in annual interest expense.
Counterparty Credit Risk
The Company accounts for its commodity derivatives at fair value on a recurring basis (see Note 8). The fair value of these derivative financial instruments includes the impact of assumed credit risk adjustments, which are based on the Company’s and counterparties’ published credit ratings, public bond yield spreads and credit default swap spreads, as applicable.
At September 30, 2015, the average public bond yield spread utilized to estimate the impact of the Company’s credit risk on derivative liabilities was approximately 2.11%. A 1% increase in the average public bond yield spread would result in an estimated $18,000 increase in net income for the nine months ended September 30, 2015. At September 30, 2015, the credit default swap spreads utilized to estimate the impact of counterparties’ credit risk on derivative assets ranged between 0% and 3.03%. A 1% increase in each of the counterparties’ credit default swap spreads would result in an estimated $17 million decrease in net income for the nine months ended September 30, 2015.
At December 31, 2014, the average public bond yield spread utilized to estimate the impact of the Company’s credit risk on derivative liabilities was approximately 1.85%. A 1% increase in the average public bond yield spread would result in an estimated $18,000 increase in net income for the year ended December 31, 2014. At December 31, 2014, the credit default swap spreads utilized to estimate the impact of counterparties’ credit risk on derivative assets ranged between 0% and 2.15%. A
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Continued
1% increase in each of the counterparties’ credit default swap spreads would result in an estimated $20 million decrease in net income for the year ended December 31, 2014.
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 SeptemberJune 30, 2015.2016.
Changes in the Company’s Internal Control Over Financial Reporting
The Company’s management is also responsible for establishing and maintaining adequate internal control 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 condensed consolidated 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 control over financial reporting during the thirdsecond quarter of 20152016 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – Other Information
For certain statewide class action royalty payment disputes, where a reserve has not yet been established, the Company has deniedfiled notices advising that it has any liability on the claimshad filed for bankruptcy protection and has raised arguments and defenses that, if accepted by the courts, will result in no loss to the Company.seeking a stay, which was granted. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
The commencement of the Chapter 11 proceedings automatically stayed certain actions against the Company, including actions to collect prepetition liabilities or to exercise control over the property of the Company’s bankruptcy estates. The Company intends to seek authority to pay all general claims in the ordinary course of business notwithstanding the commencement of the Chapter 11 proceedings in a manner consistent with the Restructuring Support Agreement. The Plan in the Chapter 11 proceedings, if confirmed, will provide for the treatment of claims against the Company’s bankruptcy estates, including prepetition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 proceedings. See above under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Chapter 11 Proceedings” for information about the Company’s entry into the Restructuring Support Agreement.
Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our units are described in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. Except as set forth below, as of the date of this report, these risk factors have not changed materially. This information should be considered carefully, together with other information in this report and other reports and materials we file with the United States Securities and Exchange Commission.
Our BoardAny plan of Directors has the ability to reserve any or all of our cash on hand at the end of a quarter for purposes other than distribution to unitholders, including reduction of indebtedness.
Althoughreorganization that we may have generated sufficient net cash providedimplement will be based in large part upon assumptions and analyses developed by operating activities during any particular quarter,us. If these assumptions and analyses prove to be incorrect, our Boardplan may be unsuccessful in its execution.
Any plan of Directors hasreorganization that we may implement could affect both our capital structure and the ability under our limited liability company agreement to establish a cash reserve, which could encompass all of the cash otherwise available for distribution, to provide for the proper conduct of our business in both the shortownership, structure and long term. To provide for the proper conduct of our business, the Board of Directors can determine to reserve cash to reduce indebtedness, among other things. For example, in October 2015, our Board of Directors approved a suspension of our distribution. Our decision to reserve all of our cash on hand for such allowed purposes and not distribute it may significantly impact our unitholders, as well as our business and operations. The market value of our units may remain depressed or further decrease unless and until we resume a distribution. In addition, further refinancing or restructuring of our debt may require us to accept covenants that further restrict our ability to reinstate distributions. External perceptions of the healthoperation of our business and will reflect assumptions and analyses based on our liquidity may alsomanagement’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be impacted, which could further limitconsistent with management’s expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to accesschange substantially our capital markets, causestructure; (ii) our vendorsability to tightenobtain adequate liquidity and financing sources; (iii) our credit terms and cause a strainability to maintain customers’ confidence in our relationshipviability as a continuing entity and to attract and retain sufficient business from them; (iv) our ability to retain key employees; and (v) the overall strength and stability of general economic conditions of the financial and oil and natural gas industries, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our business.
In addition, any plan of reorganization will rely upon financial projections, including with landownersrespect to revenues, EBITDA, capital expenditures, debt service and other business partners.
Ifcash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we are unable to generate enough cash flowexpect that our actual financial condition and results of operations will differ, perhaps materially, from operations to service our indebtednesswhat we have anticipated. Consequently, there can be no assurance that the results or are unable to use future borrowings to refinance our indebtedness or fund other capital needs,developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our business or operations. The failure of any such results or developments to undertake alternative financing plans, which may have onerous terms or may be unavailable.materialize as anticipated could materially adversely affect the successful execution of any plan of reorganization.
We cannot assure you that our business will generate sufficient cash flow from operations to service our outstanding indebtedness, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capital needs. If we dohave substantial liquidity needs and may not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as:
refinancing or restructuring all or a portion of our debt;
obtaining alternative financing;
selling assets;
reducing or delaying capital investments;
seeking to raise additional capital; or
revising or delaying our strategic plans.
However, we cannot assure you that we would be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, or that undertaking alternative financing plans, if necessary, would allow usobtain sufficient liquidity to meetconfirm a plan of reorganization and exit bankruptcy.
Although we have lowered our debt obligationscapital budget and capital requirements or that these actions would be permitted underreduced the termsscale of our various debt instruments.
Our inability to generate sufficient cash flow to satisfy our debt obligations or to obtain alternative financing could materially and adversely affectoperations significantly, our business financial condition, results ofremains capital intensive. In addition to the cash requirements necessary to fund ongoing operations, cash flowswe have incurred significant professional fees and prospects. Any failureother costs in connection with our Chapter 11 proceedings and expect that we will continue to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our creditincur significant
Item 1A. Risk Factors - Continued
rating, which could harmprofessional fees and costs throughout the Chapter 11 proceedings. There are no assurances that our abilitycurrent liquidity is sufficient to incurallow us to satisfy our obligations related to the Chapter 11 proceedings, allow us to proceed with the confirmation of a Chapter 11 plan of reorganization and allow us to emerge from bankruptcy. We can provide no assurance that we will be able to secure additional indebtedness on acceptable terms.Further, if for any reason we are unableinterim financing or exit financing sufficient to meet our debt serviceliquidity needs.
In connection with a plan of reorganization, we may, for federal and repayment obligations, we would be in default under the termsstate income tax purposes, trigger an actual or deemed sale of the agreements governing our debt, which would allow our creditors at that time to declare all outstanding indebtedness to be due and payable (which would in turn trigger cross-acceleration or cross-default rights between the relevant agreements), the lenders under our Credit Facilities, as defined in Note 6, could terminate their commitments to loan money, and the lenders could foreclose against our assets securing their borrowings and we could be forced into bankruptcy or liquidation. In addition, the lenders under our Credit Facilities could compel us to apply alla portion of our available cash to repay our borrowings or they could prevent us from making payments on our senior notes. If the amounts outstanding under our Credit Facilities or any of our other indebtedness were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders.
We are currently dependent on our Credit Facilities for liquidity. Any further reduction of the borrowing bases under our Credit Facilities could reduce or eliminate our ability to borrow under the Credit Facilities andproperties which may require us to repay indebtedness under our Credit Facilities earlier than anticipated, which would adversely impact our liquidity.
Subject to amounts reserved in the discretion of our Board of Directors to provide for the proper conduct of our business, our limited liability company agreement provides that we make distributions to our unitholders of available cash. Therefore, we have not historically accumulated cash to preserve liquidity and have been dependent on the capital markets and our Credit Facilities for liquidity. Due to low commodity prices and other factors, the capital markets have been constrained. Although our Board of Directors approved a suspension of our distribution, if these constraints continue, we will continue to be primarily reliant on our Credit Facilities, and to the extent available, the excess of net cash provided by operating activities, for liquidity.
At September 30, 2015, there was approximately $1.2 billion of available borrowing capacity under the LINN Credit Facility but less than $1 million available under the Berry Credit Facility, each as defined in Note 6. Each of our Credit Facilities is subject to scheduled redeterminations, semi-annually in April and October, of its borrowing base, based primarily on reserve reports using lender commodity price expectations at such time. As a result of lower commodity prices, in May 2015, the borrowing base under the LINN Credit Facility decreased from $4.5 billion to $4.05 billion and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion. In October 2015, the borrowing base under the LINN Credit Facility was reaffirmed at $4.05 billion, subject to certain conditions related to the Berry Consolidation, as defined in Note 6, and the borrowing base under the Berry Credit Facility decreased from $1.2 billion to $900 million. Continued low commodity prices, reductions in our capital budget and the resulting reserve write-downs, along with the maturity schedule of our hedges, may impact future redeterminations.
To the extent our borrowing bases are reduced to or below the amount of borrowings outstanding, we would be unable to continue to borrow and any excess borrowings may become due within a short time span. We may not have the financial resources to make mandatory prepaymentsand our liquidity would be significantly impacted.
Unitholders are required to pay taxes on their share of our taxable income, including their share of ordinary income and capital gain upon dispositions of properties by us or cancellation of debt, even if they do not receive any cash distributions from us. A unitholder’s share of our taxable income, gain, loss and deduction, or specific items thereof, may be substantially different than the unitholder’s interest in our economic profits.
Our unitholders are required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive any cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income.
For example, our previously announced repurchases of approximately $783 million of our outstanding senior notes at prices lower than face amount have resulted, and any similar transactions in the future will result in the cancellationunfavorable tax consequences.
In connection with a plan of debt income that will be allocated to our unitholders. Some or all of our unitholdersreorganization, we may, be allocated substantial amounts of such taxable income,for federal and state income tax liabilities arising therefrom may exceed cash distributions. The ultimate effect to each unitholder would depend on the unitholder's individual tax position with respect to the units; however, taxable income allocations from us, including cancelationpurposes, trigger an actual or deemed sale of debt income, increase a unitholder’s tax basis in their units.
Item 1A. Risk Factors - Continued
In addition, we may sellall or a portion of our properties and use the proceeds to pay down debt or acquire other properties rather than distributing the proceeds to our unitholders, and some or all of oursatisfy debt. Our unitholders may be allocated substantial taxable income or loss with respect to that sale. A unitholder’s share ofsuch a sale, and our taxable income upon a disposition of property by us may be ordinary income or capital gain or some combination thereof. Even where we dispose of properties that are capital assets, what otherwise would be capital gains may be recharacterized as ordinary income in order to “recapture” ordinary deductions that were previously allocated to that unitholder related to the same property.
A unitholder’sunitholders’ share of our taxable income and gain (or specific items thereof) from such sale may be substantially greater than, or our tax losses and deductions (or specific items thereof) from such sale may be substantially less than, the unitholder’sour unitholders’ interest in our economic profits. This may occur, for example, inprofits because of allocations under section 704(c) of the case of a unitholder who purchases units at a time whenInternal Revenue Code.
We are subject to the valuerisks and uncertainties associated with Chapter 11 proceedings.
For the duration of our units or of one or more ofChapter 11 proceedings, our properties is relatively low or a unitholder who acquires units directly from us in exchange for property whose fair market value exceeds its tax basis at the time of the exchange. Cash distributions from us decrease a unitholder’s tax basis in its units, and the amount, if any, of excess distributions over a unitholder’s tax basis in its units will, in effect, become taxable income to the unitholder, above and beyond the unitholder’s share of our taxable income and gain (or specific items thereof).
Restrictive covenants in the indentures governing our senior notes and in the LINN Credit Facility could limit our growthoperations and our ability to financedevelop and execute our operations, fundbusiness plan, as well as our capital needs, respondcontinuation as a going concern, are subject to changing conditionsthe risks and engageuncertainties associated with bankruptcy. These risks include the following:
our ability to develop, confirm and consummate a Chapter 11 plan or alternative restructuring transaction;
our ability to obtain court approval with respect to motions filed in Chapter 11 proceedings from time to time;
our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;
our ability to maintain contracts that are critical to our operations;
our ability to execute our business activitiesplan;
the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;
the ability of third parties to seek and obtain court approval to terminate or shorten the exclusivity period for us to propose and confirm a Chapter 11 plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 proceedings to a Chapter 7 proceeding; and
the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our plans.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with our best interests.
The indentures governingChapter 11 proceedings could adversely affect our senior notes impose significant operatingrelationships with our suppliers, service providers, customers, employees, and other third parties, which in turn could adversely affect our operations and financial restrictions on us. These restrictions limit our ability and thatcondition. Also, we need the prior approval of our restricted subsidiaries to, among other things:
make distributions to our unitholders or make other restricted payments;
incur or guarantee additional indebtedness;
create or incur liens;
engage in mergers or consolidations or sell or otherwise dispose of all or substantially all of our assets;
make certain dispositions and transfers of assets;
engage inthe Bankruptcy Court for transactions with affiliates;
make investments; and
refinance certain indebtedness.
In addition,outside the LINN Credit Facility contains a number of significant covenants that, among other things, restrict our ability to:
dispose of assets;
incur or guarantee additional indebtedness;
make distributions to our unitholders;
create liens on our assets;
make investments or acquisitions;
repurchase, redeem or retire our capital stock or senior notes;
merge or consolidate, or transfer all or substantially all of our assets and the assets of our subsidiaries;
engage in specified transactions with subsidiaries and affiliates; and
pursue other corporate activities.
We may be prevented from taking advantageordinary course of business, opportunities that arise because of the limitations imposed on us by the restrictive covenants under the indentures governing our senior notes and under the LINN Credit Facility. The restrictions contained in those indentures and the LINN Credit Facility could:
which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with our Chapter 11 proceedings, we cannot accurately predict or quantify the ultimate impact of events that will occur during our Chapter 11 proceedings that may be inconsistent with our plans.
Operating under Bankruptcy Court protection for a long period of time may harm our business.
Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 proceedings continue, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary for or react to, market conditions, to meet capital needs or otherwise to restrictthe success and growth of our activities or business plan;business. In addition, the longer the Chapter 11 proceedings continue, the more likely it is that our customers and
adversely affect suppliers will lose confidence in our ability to financereorganize our operations, enter into acquisitions orbusiness successfully and will seek to engage inestablish alternative commercial relationships.
Furthermore, so long as the Chapter 11 proceedings continue, we will be required to incur substantial costs for professional fees and other business activities that would be in our interest.expenses associated with the administration of the Chapter 11 proceedings. The Chapter 11 proceedings may also
Also, the LINN Credit Facility requires us to maintain compliance with specified financial ratios and satisfy certain financial condition tests. Our ability to comply with these ratios and financial condition tests may be affected by events beyond our
Item 1A. Risk Factors - Continued
controlrequire us to seek debtor-in-possession financing to fund operations. If we are unable to obtain such financing on favorable terms or at all, our chances of successfully reorganizing our business may be seriously jeopardized, the likelihood that we instead will be required to liquidate our assets may be enhanced, and, as a result, any securities in us could become further devalued or become worthless.
Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from Chapter 11 proceedings.
The Restructuring Support Agreement provides that our common units representing limited liability company interests (“units”) will be canceled in our Chapter 11 proceedings.
We have a significant amount of indebtedness that is senior to our existing units in our capital structure. The Restructuring Support Agreement provides that our existing equity will be canceled in our Chapter 11 proceedings and will be entitled to a limited recovery, if any. Any trading in our units during the pendency of the Chapter 11 proceedings is highly speculative and poses substantial risks to purchasers of our units.
We may not be able to obtain confirmation of a Chapter 11 plan of reorganization.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Plan, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such a plan, which have not occurred to date. The confirmation process is subject to numerous, unanticipated potential delays, including a delay in the Bankruptcy Court’s commencement of the confirmation hearing regarding our Plan.
Prior to the Chapter 11 filing, we entered into the Restructuring Support Agreement with certain of our creditors. The restructuring transactions contemplated by the Restructuring Support Agreement will be effectuated through the Plan. However, we may not receive the requisite acceptances of constituencies in the Chapter 11 proceedings to confirm our Plan. Even if the requisite acceptances of the Plan are received, the Bankruptcy Court may not confirm such a plan. The precise requirements and evidentiary showing for confirming a plan, notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e., unsecured claims or secured claims, subordinated or senior claims).
If a Chapter 11 plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be unableable to reorganize our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims.
The Restructuring Support Agreement is subject to significant conditions and milestones that may be difficult for us to satisfy.
There are certain material conditions we must satisfy under the Restructuring Support Agreement, including the timely satisfaction of milestones in the anticipated Chapter 11 proceedings, such as confirmation of the Plan and effectiveness of the Plan. Our ability to timely complete such milestones is subject to risks and uncertainties that may be beyond our control.
If the Restructuring Support Agreement is terminated, our ability to confirm and consummate the Plan could be materially and adversely affected.
The Restructuring Support Agreement contains a number of termination events, upon the occurrence of which certain parties to the Restructuring Support Agreement may terminate the agreement. If the Restructuring Support Agreement is terminated, each of the parties thereto will be released from their obligations in accordance with the terms of the Restructuring Support Agreement. Such termination may result in the loss of support for the Plan by the parties to the Restructuring Support Agreement, which could adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that any new Plan would be as favorable to holders of claims as the current Plan.
Item 1A. Risk Factors - Continued
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources and have extremely limited, if any, access to additional financing. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 proceedings and expect to continue to incur significant professional fees and costs throughout our Chapter 11 proceedings. We cannot assure you that cash on hand and cash flow from operations will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 proceedings until we are able to emerge from our Chapter 11 proceedings.
Our liquidity, including our ability to meet these ratiosour ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 proceedings, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to develop, confirm and consummate a Chapter 11 plan or other alternative restructuring transaction, and (v) the cost, duration and outcome of the Chapter 11 proceedings.
As a result of the Chapter 11 proceedings, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 proceedings, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial condition tests. These financial ratio restrictions and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to May 12, 2016, or before confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of the Plan. Any claims not ultimately discharged through the Plan could be asserted against the reorganized entities and may have an adverse effect on our financial condition testsand results of operations on a post-reorganization basis.
We may experience increased levels of employee attrition as a result of the Chapter 11 proceedings.
As a result of the Chapter 11 proceedings, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could limit adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incent key employees to remain with us through the pendency of the Chapter 11 proceedings is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 proceedings or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 proceedings.
If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our anticipated Chapter 11 bankruptcy case to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities
Item 1A. Risk Factors - Continued
established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
We have significant exposure to fluctuations in commodity prices since none of our estimated future production is covered by commodity derivatives and we may not be able to enter into commodity derivatives covering our estimated future production on favorable terms or at all.
During the Chapter 11 proceedings, our ability to enter into new commodity derivatives covering estimated future production will be dependent upon either entering into unsecured hedges or obtaining Bankruptcy Court approval to enter into secured hedges. As a result, we may not be able to enter into additional commodity derivatives covering our production in future periods on favorable terms or at all. If we cannot or choose not to enter into commodity derivatives in the future, we could be more affected by changes in commodity prices than our competitors who engage in hedging arrangements. Our inability to hedge the risk of low commodity prices in the future, on favorable terms or at all, could have a material adverse impact on our business, financial condition and results of operations.
Our units are no longer listed on a national securities exchange and are quoted only in over-the-counter markets, which carries substantial risks and could continue to negatively impact our unit price, volatility and liquidity.
As a result of our failure to comply with the NASDAQ Global Select Market (“NASDAQ”) continued listing requirements, on May 24, 2016, our units began trading over the counter on the OTC Markets Group Inc.’s Pink marketplace under the trading symbol “LINEQ.”
Our delisting from the NASDAQ and commencement of trading on the OTC Pink Sheets marketplace has resulted and may continue to result in a reduction in some or all of the following, each of which could have a material adverse effect on our unitholders:
the liquidity of our units;
the market price of our units;
our ability to obtain future financings, make needed capital expenditures, withstand a continued downturnfinancing for the continuation of our operations;
the number of institutional and other investors that will consider investing in our business or a downturn in units;
the economy in general or otherwise conduct necessary corporate activities. Further declines in oil, natural gas and NGL prices, or a prolonged periodnumber of oil, natural gas and NGL prices at current levels, could eventually resultmarket makers in our failing to meet one or moreunits;
the availability of information concerning the financial covenants under the indentures governing our senior notes or the LINN Credit Facility, which could require us to refinance or amend such obligations resulting in the payment of consent fees or higher interest rates, or require us to raise additional capital at an inopportune time or on terms not favorable to us.
A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result in a default under our senior notes or the LINN Credit Facility. A default under the LINN Credit Facility or the indentures governing our senior notes, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder. The accelerated debt would become immediately duetrading prices and payable, which would in turn trigger cross-acceleration and cross-default rights under our other debt. If that should occur, we may be unable to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us. In addition, if an event of default under the LINN Credit Facility occurred, the lenders could foreclose on the collateral and compel us to apply allvolume of our available cashunits; and
the number of broker-dealers willing to repayexecute trades in our borrowings or they could prevent us from making payments on our senior notes. If the amounts outstanding under the LINN Credit Facility, the senior notes or any of our other indebtedness were to be accelerated, our assets may not be sufficient to repay in full the money owed to the lenders or to our other debt holders.units.
Moreover, any new indebtedness we incur may impose financial restrictions and other covenants on us that may be more restrictive than the LINN Credit Facility or the indentures governing our senior notes.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
The Company’s Board of Directors has authorized the repurchase of up to $250 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases. The timing and amounts of any such repurchases are 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. The Company did not repurchase any units during the ninesix months ended SeptemberJune 30, 2015,2016, and as of SeptemberJune 30, 2015,2016, the entire amount remained available for unit repurchase under the program.
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Item 3. | Defaults Upon Senior Securities |
NoneSee Part I. Item 1. Note 2 to the Company’s condensed consolidated financial statements entitled “Chapter 11 Proceedings, Ability to Continue as a Going Concern and Covenant Violations” which is incorporated in this item by reference.
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Item 4. | Mine Safety Disclosures |
Not applicable
None
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Exhibit Number | | Description |
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2.1 | — | Purchase and Sale Agreement by and between Linn Energy Holdings, LLC and Linn Operating, Inc., as seller, and Rock Oil Holdings LLC, as buyer, executed on July 2, 2015 (incorporated herein by reference to Exhibit 2.1 to Quarterly Report on Form 10-Q filed on July 30, 2015) |
3.1 | — | Certificate of Formation of Linn Energy Holdings, LLC (now Linn Energy, LLC) (incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1S‑1 (File No. 333‑125501) filed on June 3, 2005) |
3.2 | — | Certificate of Amendment to Certificate of Formation of Linn Energy Holdings, LLC (now Linn Energy, LLC) (incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S‑1 (File No. 333-125501) filed on June 3, 2005) |
3.3 | — | Third Amended and Restated Limited Liability Company Agreement of Linn Energy, LLC dated September 3, 2010 (incorporated herein by reference to Exhibit 3.1 to Current Report on Form 8-K filed on September 7, 2010) |
3.4 | — | Amendment No. 1, dated April 23, 2013, to Third Amended and Restated LLC Agreement of Linn Energy, LLC, dated September 3, 2010 (incorporated herein by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q filed on April 25, 2013) |
10.1*10.1 | — | SeparationSettlement Agreement, by and between Linn Operating, Inc. and Kolja Rockov, effectivedated as of August 31, 2015April 4, 2016 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 5, 2016) |
10.2 | — | SeventhEighth Amendment to Sixth Amended and Restated Credit Agreement, dated as of October 21, 2015,April 12, 2016, among Linn Energy, LLC, as borrower, the guarantors named therein, Wells Fargo Bank, National Association, as administrative agent and each of the lenders party thereto (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on October 22, 2015)April 15, 2016) |
10.3 | — | EleventhTwelfth Amendment to Second Amended and Borrowing BaseRestated Credit Agreement, dated as of October 21, 2015,April 12, 2016, among Berry Petroleum Company, LLC, as borrower, each of the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent and each of the lenders party thereto (incorporated herein by reference to Exhibit 10.2 to Current Report on Form 8-K filed on OctoberApril 15, 2016) |
10.4 | — | Restructuring Support Agreement, dated as of May 10, 2016, by and among the Debtors and the supporting parties thereto (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 11, 2016) |
10.5 | — | First Amendment to Settlement Agreement, dated as of July 12, 2016 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 18, 2016) |
10.6* | — | First Amendment to Linn Energy, LLC Severance Plan, dated as of July 22, 2015)2016 |
31.1* | — | Section 302 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of Linn Energy, LLC |
31.2* | — | Section 302 Certification of David B. Rottino, Executive Vice President and Chief Financial Officer of Linn Energy, LLC |
32.1* | — | Section 906 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of Linn Energy, LLC |
32.2* | — | Section 906 Certification of David B. Rottino, Executive Vice President and Chief Financial Officer of Linn Energy, LLC |
101.INS** | — | XBRL Instance Document |
101.SCH** | — | XBRL Taxonomy Extension Schema Document |
101.CAL** | — | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF** | — | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB** | — | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE** | — | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| LINN ENERGY, LLC |
| (Registrant) |
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Date: November 5, 2015August 4, 2016 | /s/ Darren R. Schluter |
| Darren R. Schluter |
| Vice President and Controller |
| (Duly Authorized Officer and Principal Accounting Officer) |
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Date: November 5, 2015August 4, 2016 | /s/ David B. Rottino |
| David B. Rottino |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |