LINN ENERGY, LLC
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited pro forma condensed combined balance sheet as of September 30, 2006, is derived from:
· the historical consolidated financial statements of Linn Energy, LLC (“Linn,” or the “Company”); and
· the preliminary purchase price allocation of certain oil and gas properties (referred to as the “Stallion Assets” or “Stallion”) acquired from Cavallo Energy, LP (“Cavallo”), acting through its general partner, Stallion Energy LLC. Cavallo has also previously referred to these properties as the Panhandle properties.
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2005, and the nine months ended September 30, 2006, are derived from:
· the historical consolidated financial statements of Linn;
· the historical statements of direct revenues and direct operating expenses of Cavallo;
· the historical combined financial statements of BlackSand Partners, L.P., Blacksand Brea, LLC, Blacksand GP, LLC and Blacksand Acquisition, LLC (collectively referred to as “Blacksand” or the “Combined Company”);
· the historical statements of revenues and direct operating expenses of certain oil and gas properties acquired from the Kaiser-Francis Oil Company (“Kaiser-Francis Assets”); and
· the historical statements of revenues and direct expenses of certain oil and gas properties acquired from Exploration Partners, LLC (“Exploration Partners”) for the year ended December 31, 2005, as the results of Exploration Partners are included in the results of operations of Linn beginning October 27, 2005.
The unaudited pro forma condensed combined statements of operations present net income (loss) per unit allocated to the Class A units and the Class C units on an equal basis. Under the terms of the Class C Unit and Unit Purchase Agreement, if approved by a vote of the Company’s unitholders, the Class C units will convert to Class A units on a one-for-one basis. Prior to that conversion, the Class C units are entitled to a special quarterly distribution equal to 115% of the distribution on the Class A units. The Company has agreed to hold a special meeting of unitholders to consider the conversion as soon as feasible, but no later than June 30, 2007. Therefore, pro forma net income (loss) per unit assumes that the Class A units and Class C units share equally in the pro forma net income (loss) of the Company.
In all cases, with pro forma adjustments based on assumptions we have deemed appropriate.
The unaudited pro forma condensed combined balance sheet gives effect to the acquisition of the Stallion Assets and the related Class C equity issuance as if the transaction had occurred on September 30, 2006. The unaudited pro forma condensed combined statements of operations give effect to the acquisitions of the Stallion Assets, Blacksand, the Kaiser-Francis Assets and Exploration Partners as if the transactions had
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occurred on January 1, 2005. The transactions and the related adjustments are described in the accompanying notes. In the opinion of Company management, all adjustments have been made that are necessary to present fairly, in accordance with Regulation S-X, the pro forma condensed combined financial statements.
The unaudited pro forma condensed combined balance sheet and statements of operations are presented for illustrative purposes only, and do not purport to be indicative of the financial position or results of operations that would actually have occurred if the transactions described had occurred as presented in such statements or that may be obtained in the future. In addition, future results may vary significantly from the results reflected in such statements due to factors described in “Risk Factors” included in our Quarterly Report on Form 10-Q for the nine months ended September 30, 2006 and elsewhere in the Company’s reports and filings with the Securities and Exchange Commission (“SEC”). The following unaudited pro forma condensed combined balance sheet and statements of
operations should be read in conjunction with our historical consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2006.
The pro forma statements should also be read in conjunction with the statements of direct revenues and direct operating expenses for Cavallo and the notes thereto included elsewhere in this Form 8-K. In addition, the pro forma statements should be read in conjunction with the historical financial statements and the notes thereto of Blacksand, the statements of revenues and direct operating expenses for the Kaiser-Francis Assets and the statements of revenues and direct operating expenses of Exploration Partners and the notes thereto, previously filed by Company with the SEC.
2. Acquisition Dates:
The acquisition of the Stallion Assets was completed on February 1, 2007, effective January 1, 2007. The Company acquired certain oil and gas properties from Cavallo for approximately $412.0 million, subject to customary closing adjustments.
The acquisition of Blacksand was completed and effective on August 1, 2006. Linn acquired the assets of the Combined Company for approximately $301.0 million, subject to customary closing adjustments.
The acquisition of the Kaiser-Francis Assets was completed on August 14, 2006, effective September 1, 2006. The Company acquired certain oil and gas properties from Kaiser-Francis for approximately $126.4 million, subject to customary closing adjustments.
The acquisition of certain oil and gas properties from Exploration Partners was completed and effective on October 27, 2005. The Company acquired certain oil and gas properties for approximately $111.4 million.
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3. Preliminary Purchase Price Allocations:
The following table represents the preliminary purchase prices for the Stallion Assets, Blacksand and the Kaiser-Francis Assets and the preliminary allocations of the purchase prices to the assets acquired and liabilities assumed based on preliminary estimates of fair value:
| | Stallion | | Blacksand | | Kaiser-Francis | | Total | |
| | (in thousands) | |
Cash | | $ | 407,530 | | $ | 298,113 | | $ | 125,085 | | $ | 830,728 | |
Estimated transaction costs | | 3,300 | | 472 | | 925 | | 4,697 | |
Total purchase price | | $ | 410,830 | | $ | 298,585 | | $ | 126,010 | | $ | 835,425 | |
Plus liabilities assumed | | 1,147 | | 2,373 | | 359 | | 3,879 | |
Total purchase price plus liabilities | | $ | 411,977 | | $ | 300,958 | | $ | 126,369 | | $ | 839,304 | |
Preliminary Fair Value Allocation of Assets Acquired | | Stallion | | Blacksand | | Kaiser-Francis | | Total | |
| | (in thousands) | |
Field inventory | | $ | — | | $ | 284 | | $ | — | | $ | 284 | |
Natural gas and oil properties | | 411,496 | | 300,187 | | 126,369 | | 838,052 | |
Vehicles and buildings | | 481 | | 487 | | — | | 968 | |
Total purchase price plus liabilities | | $ | 411,977 | | $ | 300,958 | | $ | 126,369 | | $ | 839,304 | |
The preliminary purchase price allocations used for the purpose of this pro forma financial information are based on preliminary independent appraisals, discounted cash flows, quoted market prices and estimates by management. The purchase price allocations will be completed within one year from the acquisition date.
Amounts related to field compressors and other gathering related equipment are included in oil and gas properties and related equipment.
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4. Pro Forma Adjustments:
The unaudited pro forma combined financial statements have been adjusted to:
a. reflect the purchase price paid by Linn for the purchase of the Stallion Assets, as detailed in the table in Note 3 above
b. reflect the February 1, 2007 private placement of $360.0 million of equity securities to third party investors; the securities include 6,650,144 Class A units and 7,465,946 Class C units; the proceeds from the private placement, together with borrowings under the Company’s credit facility, were used to fund the purchase price of Stallion
c. record incremental depreciation, depletion and amortization expense, using the units-of-production method, related to acquired oil and gas properties, and depreciation using the straight-line method for acquired property, plant and equipment over its estimated useful lives from three to 20 years as follows:
· Stallion — January 1 through December 31, 2005, $19.5 million
· Stallion — January 1 through September 30, 2006, $14.0 million
· Blacksand — January 1 through December 31, 2005, $5.0 million
· Blacksand — January 1 through September 30, 2006, $1.8 million
· Kaiser-Francis Assets — January 1 through December 31, 2005, $4.9 million
· Kaiser-Francis Assets — January 1 through September 30, 2006, $3.1 million
· Exploration Partners — January 1 through September 30, 2005, $4.5 million
d. record accretion expense related to asset retirement obligation on natural oil and gas properties acquired as follows:
· Stallion — January 1 through December 31, 2005, $80,000
· Stallion — January 1 through September 30, 2006, $56,000
· Blacksand — January 1 through December 31, 2005, $195,000
· Blacksand — January 1 through September 30, 2006, $105,000
· Kaiser-Francis Assets — January 1 through December 31, 2005, $26,000
· Kaiser-Francis Assets — January 1 through September 30, 2006, $16,000
· Exploration Partners — January 1 through September 30, 2005, $55,000
e. record interest expense as follows:
· Stallion — associated with debt of approximately $57.0 million incurred to fund the purchase price; the applicable interest rate was 6.635%.
· Blacksand and Kaiser-Francis — associated with debt of approximately $416.0 million incurred to fund the purchase price as follows:
i. an assumed average interest rate of 9.33% on $250.0 million subordinated bridge loan. The interest rate on the subordinated bridge loan is LIBOR plus an applicable margin of 4.00%.
ii. an assumed average interest rate of 7.33% on the outstanding balance of the $166.0 million under the $800.0 million credit facility. The interest rate on the credit facility is LIBOR plus an applicable margin of 2.00%.
· Exploration Partners — associated with debt of approximately $115.3 million
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incurred to fund the purchase price; the applicable interest rate was 4.10%
A 1/8 percentage change in the assumed interest rates would result in an adjustment to pro forma net income as follows:
| | Year Ended
December 31,
2006 | | Nine Months Ended
September 30,
2006 | |
| | (in thousands) | |
Stallion | | $ | 71 | | $ | 54 | |
Blacksand and Kaiser-Francis | | 520 | | 390 | |
Exploration Partners | | 144 | | 108 | |
Total | | $ | 735 | | $ | 552 | |
f. record incremental amortization of deferred financing fees associated with credit facility and bridge loan entered into to fund the acquisitions of Stallion, Blacksand and the Kaiser-Francis Assets
g. The Company is treated as a partnership for federal and state income tax purposes. The Company subsidiaries that acquired Stallion, Blacksand, the Kaiser-Francis Assets and Exploration Partners are also treated as partnerships for federal and state income tax purposes. Accordingly, no recognition has been given to federal and state income taxes in the accompanying unaudited pro forma condensed combined financial statements.
We do not expect to incur any significant incremental increase in general and administrative expense as a result of these acquisitions.
5. Blacksand Gain on Sale of Property:
The Blacksand historical combined statement of operations for the nine months ended September 30, 2006 includes a gain on a property sale of $32.7 million. Under Regulation S-X, this gain may not be excluded from the condensed combined pro forma financial statements for the nine months ended September 30, 2006. Had this gain been excluded, pro forma net income for the nine months ended September 30, 2006 would have been reduced by the gain recorded.
6. Oil and Gas Revenue Disclosures:
The following tables set forth certain unaudited pro forma information concerning our proved oil and gas reserves for the year ended December 31, 2005, giving effect to the transactions relating to the acquisition of Stallion, Blacksand, the Kaiser-Francis Assets and Exploration Partners as if they had occurred on January 1, 2005. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact.
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| | Year Ended December 31, 2005 | |
| | Linn
Historical | | Stallion
Historical | | Blacksand
Historical | | Kaiser-
Francis
Historical | | Linn Pro
Forma | |
| | Gas (MMcf) | |
Proved developed and undeveloped reserves: | | | | | | | | | | | |
Beginning of year | | 119,760 | | 74,516 | | 22,562 | | 44,657 | | 261,495 | |
Revisions of previous estimates | | 2,415 | | — | | (1,063 | ) | 1,937 | | 3,289 | |
Extension and discoveries | | 53,976 | | — | | 627 | | 14,144 | | 68,747 | |
Acquisition | | 21,898 | | — | | — | | 9 | | 21,907 | |
Production | | (4,839 | ) | (3,137 | ) | (914 | ) | (2,349 | ) | (11,239 | ) |
End of year | | 193,210 | | 71,379 | | 21,212 | | 58,398 | | 344,199 | |
Proved developed reserves: | | | | | | | | | | | |
Beginning of year | | 74,365 | | 58,386 | | 21,389 | | 30,896 | | 185,036 | |
End of year | | 125,219 | | 55,249 | | 20,069 | | 29,783 | | 230,320 | |
| | Year Ended December 31, 2005 | |
| | Linn
Historical | | Stallion
Historical | | Blacksand
Historical | | Kaiser-
Francis
Historical | | Linn Pro
Forma | |
| | Oil and NGLs (MBbls) | |
Proved developed and undeveloped reserves: | | | | | | | | | | | |
Beginning of year | | — | | 18,464 | | 27,587 | | 1,368 | | 47,419 | |
Revisions of previous estimates | | — | | — | | 285 | | 33 | | 318 | |
Extension and discoveries | | — | | — | | 2,411 | | 276 | | 2,687 | |
Production | | — | | (868 | ) | (728 | ) | (39 | ) | (1,635 | ) |
End of year | | — | | 17,596 | | 29,555 | | 1,638 | | 48,789 | |
Proved developed reserves: | | | | | | | | | | | |
Beginning of year | | — | | 14,389 | | 23,404 | | 1,250 | | 39,043 | |
End of year | | — | | 13,521 | | 25,361 | | 520 | | 39,402 | |
Summarized in the following tables is information for our standardized measure of discounted cash flows relating to proved reserves as of December 31, 2005, giving effect to each of the acquisitions as presented.
Future cash flows are computed by applying year-end pricing relating to our proved reserves to the year-end quantities of those reserves. Future production, development, site restoration and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. The information should be viewed only as a form of standardized disclosure concerning possible future cash flows that would result
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under the assumptions used, but should not be viewed as indicative of fair market value. Reference is made to our financial statements for the fiscal year ended December 31, 2005 as well as to the historical statements of revenues and direct operating expenses of certain natural gas and oil properties acquired from Cavallo, the historical financial statements of Blacksand related entities, the historical statements of revenues and direct operating expenses of certain oil and gas properties acquired from Kaiser-Francis Oil Company, and the historical statements of revenues and direct operating expenses of certain oil and gas properties acquired from Exploration Partners for a discussion of the assumptions used in preparing the information presented.
| | Year Ended December 31, 2005 | |
| | Linn
Historical | | Stallion
Historical | | Blacksand
Historical | | Kaiser-
Francis
Historical | | Linn Pro
Forma | |
| | (in thousands) | |
Future estimated revenues | | $ | 2,041,930 | | $ | 1,514,250 | | $ | 1,430,537 | | $ | 563,936 | | $ | 5,550,653 | |
Future estimated production costs | | (332,839 | ) | (373,763 | ) | (259,387 | ) | (120,015 | ) | (1,086,004 | ) |
Future estimated development costs | | (96,542 | ) | (26,625 | ) | (11,751 | ) | (77,508 | ) | (212,426 | ) |
Future net cash flows | | 1,612,549 | | 1,113,862 | | 1,159,399 | | 366,413 | | 4,252,223 | |
10% annual discount for estimated timing of cash flows | | (1,060,474 | ) | (609,557 | ) | (879,685 | ) | (222,240 | ) | (2,771,956 | ) |
Standardized measure of discounted future estimated net cash flows | | $ | 552,075 | | $ | 504,305 | | $ | 279,714 | | $ | 144,173 | | $ | 1,480,267 | |
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The following table sets forth unaudited pro forma information for the principal sources of changes in discounted future net cash flows from our proved oil and gas for the year ended December 31, 2005, giving effect to each of the acquisitions as presented:
| | Year Ended December 31, 2005 | |
| | Linn
Historical | | Stallion
Historical | | Blacksand
Historical | | Kaiser-
Francis
Historical | | Linn Pro
Forma | |
| | (in thousands) | |
Sales of natural gas and oil production, net of production costs | | $ | (37,676 | ) | $ | (44,306 | ) | $ | (21,042 | ) | $ | (15,259 | ) | $ | (118,283 | ) |
Change in estimated future development costs | | 55,125 | | — | | — | | — | | 55,125 | |
Extensions and discoveries, net of future production and development costs | | 192,412 | | — | | 11,038 | | 32,547 | | 235,997 | |
Net changes in prices and production costs | | 135,700 | | 348,531 | | 106,475 | | 24,631 | | 615,337 | |
Development cost | | 26,406 | | 2,485 | | 1,397 | | 1,418 | | 31,706 | |
Revisions of quantities | | 1,026 | | — | | — | | — | | 1,026 | |
Change in discount | | (100,313 | ) | 17,471 | | 18,213 | | 9,795 | | (54,834 | ) |
Timing and other | | — | | 5,415 | | (18,492 | ) | (6,949 | ) | (20,026 | ) |
Acquisitions | | 64,361 | | — | | — | | 38 | | 64,399 | |
Net increase in standardized measure | | $ | 337,041 | | $ | 329,596 | | $ | 97,589 | | $ | 46,221 | | $ | 810,447 | |
7. Subsequent Event:
On October 24, 2006, Linn entered into a Class B Unit and Unit Purchase Agreement with certain third party investors whereby it privately placed 9,185,965 Class B units at a unit price of $20.55, and 5,534,687 Class A units at a unit price of $21.00, for aggregate net proceeds of $305.0 million (the “Private Placement”). In January 2007, the Company’s unitholders voted to approve conversion of the Class B units to Class A units on a one-for-one basis and the Class B units were converted to Class A units.
All proceeds from the Private Placement were used to repay in full the Company’s $250.0 million subordinated bridge loan, $53.3 million of borrowings under its credit facility and accrued interest of approximately $2.0 million. In connection with the repayment of the subordinated bridge loan, the Company wrote off approximately $2.7 million of deferred financing fees, which was recognized as expense in the fourth quarter of 2006. As a result of the repayment, the rate on the Company’s remaining credit facility was reduced by 0.25%.
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