Item 1. Financial Statements
LINNCO, LLC (DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(Unaudited)
|
|
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June 30, 2016
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December 31,
2015
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(in thousands, except
share amounts)
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ASSETS
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Current assets:
|
|
|
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Cash
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$
|
847
|
|
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$
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11,023
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Accounts receivable – related party
|
200
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|
|
—
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|
Income taxes receivable
|
6,096
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|
|
7,414
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|
Total current assets
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7,143
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18,437
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|
|
|
|
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Noncurrent assets:
|
|
|
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Deferred income taxes
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—
|
|
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18,971
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|
Investment in Linn Energy, LLC
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10,407
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|
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—
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Total noncurrent assets
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10,407
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|
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18,971
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Total assets
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$
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17,550
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$
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37,408
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
|
200
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|
|
$
|
573
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|
Income taxes payable
|
13,000
|
|
|
29,829
|
|
Total current liabilities
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13,200
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30,402
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Commitments and contingencies (Note 7)
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Shareholders’ equity:
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Voting shares; unlimited shares authorized; 1 share issued and outstanding at June 30, 2016, and December 31, 2015
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1
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1
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Common shares; unlimited shares authorized; 244,246,698 shares and 128,544,174 shares issued and outstanding at June 30, 2016, and December 31, 2015, respectively
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3,911,333
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3,868,322
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Additional paid-in capital
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46,934
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|
|
42,723
|
|
Accumulated deficit
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(3,953,918
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)
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|
(3,904,040
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)
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|
4,350
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|
|
7,006
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Total liabilities and shareholders’ equity
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$
|
17,550
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$
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37,408
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The accompanying notes are an integral part of these financial statements.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2016
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2015
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2016
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2015
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|
(in thousands, except per share amounts)
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|
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|
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Equity loss from investment in Linn Energy, LLC
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$
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(34,625
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)
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$
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(122,052
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)
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$
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(34,625
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)
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$
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(172,544
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)
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General and administrative expenses
|
(1,143
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)
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(901
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)
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(2,076
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)
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(1,877
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)
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Reorganization items
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(200
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)
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—
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(200
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)
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—
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Loss before income taxes
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(35,968
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)
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(122,953
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)
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(36,901
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)
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(174,421
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)
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Income tax (expense) benefit
|
483
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|
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13,127
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(12,977
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)
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31,620
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Net loss
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$
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(35,485
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)
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$
|
(109,826
|
)
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|
$
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(49,878
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)
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$
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(142,801
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)
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|
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Net loss per share, basic and diluted
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$
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(0.17
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)
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$
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(0.85
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)
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$
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(0.30
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)
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$
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(1.11
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)
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Weighted average shares outstanding
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209,405
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128,544
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168,975
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128,544
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Dividends declared per share
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$
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—
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$
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0.313
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|
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$
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—
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$
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0.625
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The accompanying notes are an integral part of these financial statements.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Shares
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Share Amount
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Additional Paid-In Capital
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Accumulated Deficit
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Total Shareholders’ Equity
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(in thousands)
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December 31, 2015
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128,544
|
|
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$
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3,868,323
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$
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42,723
|
|
|
$
|
(3,904,040
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)
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$
|
7,006
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Exchanges of Linn Energy, LLC units for LinnCo shares, net of offering costs of $2,020
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115,703
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|
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43,011
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|
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—
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—
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43,011
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Capital contributions from Linn Energy, LLC
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|
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—
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4,211
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|
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—
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4,211
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Net loss
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—
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—
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(49,878
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)
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(49,878
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)
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June 30, 2016
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244,247
|
|
|
$
|
3,911,334
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|
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$
|
46,934
|
|
|
$
|
(3,953,918
|
)
|
|
$
|
4,350
|
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
June 30,
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2016
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2015
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(in thousands)
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Cash flow from operating activities:
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|
|
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Net loss
|
$
|
(49,878
|
)
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$
|
(142,801
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)
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
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|
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Equity loss from investment in Linn Energy, LLC
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34,625
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172,544
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Noncash general and administrative expenses paid by Linn Energy, LLC
|
2,076
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|
1,877
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|
Noncash reorganization items paid by Linn Energy, LLC
|
200
|
|
|
—
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Deferred income taxes
|
18,971
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|
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(31,763
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)
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(Increase) decrease in income taxes receivable
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(7,252
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)
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|
436
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Decrease in accounts payable
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(573
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)
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—
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Decrease in income taxes payable
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(8,345
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)
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|
(45
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)
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Cash distributions received
|
—
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|
|
80,366
|
|
Net cash provided by (used in) operating activities
|
(10,176
|
)
|
|
80,614
|
|
|
|
|
|
Cash flow from financing activities:
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|
|
|
Dividends paid to shareholders
|
—
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|
|
(81,129
|
)
|
Net cash used in financing activities
|
—
|
|
|
(81,129
|
)
|
|
|
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Net decrease in cash and cash equivalents
|
(10,176
|
)
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|
(515
|
)
|
Cash and cash equivalents:
|
|
|
|
Beginning
|
11,023
|
|
|
6,544
|
|
Ending
|
$
|
847
|
|
|
$
|
6,029
|
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
Nature of Business
LinnCo, LLC (“LinnCo” or the “Company”) is a Delaware limited liability company formed on April 30, 2012, that completed its initial public offering (“IPO”) in October 2012. After the IPO, LinnCo’s initial sole purpose was to own units representing limited liability company interests (“units”) in its affiliate, Linn Energy, LLC (“LINN Energy”). In connection with the acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of
June 30, 2016
, LinnCo had
no
significant assets or operations other than those related to its interest in LINN Energy. LINN Energy is an independent oil and natural gas company. At
June 30, 2016
, LINN Energy’s last reported sales price was
$0.09
per unit, as reported by OTC Markets Group Inc.’s Pink marketplace, and the Company owned approximately
69%
of LINN Energy’s outstanding units.
Principles of 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 United States (“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, 2015. The results reported in these unaudited financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.
The 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), shareholders’ equity or cash flows.
Bankruptcy Accounting
As discussed further in Note 2, on May 11, 2016 (the “Petition Date”), the Company, LINN Energy and Berry (collectively, 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 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” on the Company’s statements of operations.
The accompanying financial statements do not purport to reflect or provide for the consequences of the Chapter 11 proceedings. In particular, the financial statements do not purport to show: (i) the realizable 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 shareholders’ equity 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 financial statements, subject to the approval of the
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
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 financial statements.
Reimbursement of LinnCo’s Costs and Expenses
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 common shares representing limited liability company interests (“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, LINN Energy 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. Because all general and administrative expenses and certain offering costs are actually paid by LINN Energy on LinnCo’s behalf, no cash is disbursed by LinnCo for these expenses and costs.
For the three months and six months ended
June 30, 2016
, LinnCo incurred total general and administrative expenses, reorganization expenses and offering costs of approximately
$2.5 million
and
$4.2 million
, respectively, including approximately
$603,000
and
$1.2 million
, respectively, related to services provided by LINN Energy. Of the expenses and costs incurred during the six months ended
June 30, 2016
, approximately
$4.0 million
had been paid by LINN Energy on LinnCo’s behalf as of
June 30, 2016
.
For the three months and six months ended
June 30, 2015
, LinnCo incurred total general and administrative expenses and offering costs of approximately
$1.1 million
and
$2.5 million
, respectively, including approximately
$492,000
and
$983,000
, respectively, related to services provided by LINN Energy. Of the expenses and costs incurred during the six months ended
June 30, 2015
, approximately
$2.2 million
had been paid by LINN Energy on LinnCo’s behalf as of June 30, 2015.
Dividends
Within
five
business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income taxes liability (“tax reserve”), if any, as dividends to its shareholders. The amount of the tax reserve is calculated on a quarterly basis and is determined based on the estimated tax liability for the entire year. The current tax reserve can be increased or reduced, at Company management’s discretion, to account for the over/(under) tax reserve previously recorded. Because the tax reserve is an estimate, upon filing the annual tax returns, if the actual amount of tax due is greater or less than the total amount of tax reserved, the subsequent tax reserve, at Company management’s discretion, could be adjusted accordingly. Any such adjustments are subject to approval by the Company’s Board of Directors (“Board”).
Use of Estimates
The preparation of the accompanying 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 income and expenses. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. 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.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
Recently Issued Accounting Standards
In November 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“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 current deferred taxes of approximately
$3 million
to noncurrent on the Company’s balance sheet at December 31, 2015. There was no impact to the 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 financial statements or related disclosures.
Accounting for Investment in Linn Energy, LLC
The Company uses the equity method of accounting for its investment in LINN Energy. The Company’s equity income (loss) consists of its share of LINN Energy’s earnings or losses attributed to the units the Company owns, the amortization of the difference between the Company’s investment in LINN Energy and LINN Energy’s underlying net assets attributable to certain assets and liabilities, and impairments of its investment in LINN Energy. The Company records its share of LINN Energy’s net income (loss) in the period in which it is earned. If the Company’s share of LINN Energy’s losses reduces its investment in LINN Energy to
zero
, the Company temporarily discontinues applying the equity method. At
June 30, 2016
, the Company owned approximately
69%
of LINN Energy’s outstanding units. The Company’s ownership percentage could change if the Company acquires additional units or if LINN Energy issues or repurchases additional units. Changes in the Company’s ownership percentage affect its net income (loss).
At
June 30, 2016
, the carrying amount of the Company’s investment in LINN Energy was greater than the Company’s ownership interest in LINN Energy’s underlying net assets by approximately
$946 million
. The difference is attributable to cumulative excess losses of approximately
$482 million
, as well as a basis difference of approximately
$464 million
related to proved and unproved oil and natural gas properties and senior notes. The difference attributable to oil and natural gas properties and senior notes is amortized over the lives of the related assets and liabilities. Such amortization is included in the equity income (loss) from the Company’s investment in LINN Energy. At December 31, 2015, the carrying amount of the Company’s investment in LINN Energy was greater than the Company’s ownership interest in LINN Energy’s underlying net assets by approximately
$85 million
.
Impairment testing on the Company’s investment in LINN Energy is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of the investment that is other than temporary. At
June 30, 2016
, declines in the quoted market price of LINN Energy units, when considering LINN Energy’s bankruptcy filing, were determined by the Company to be other than temporary. Accordingly, the Company reduced the carrying value of its investment in LINN Energy to fair value by recording a charge in excess of what would otherwise be recognized by application of the equity method. The carrying value was reduced to fair value using LINN Energy’s quoted market price of
$0.09
per unit at June 30, 2016, which is characteristic of a Level 1 fair value measurement. The impairment charge of approximately
$181 million
is included in “equity loss from investment in Linn Energy, LLC” on the statements of operations for the three months and six months ended
June 30, 2016
.
No
impairment had occurred with respect to the Company’s investment in LINN Energy for the six months ended
June 30, 2015
.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern
Chapter 11 Proceedings
On 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 to use its cash to fund the Chapter 11 proceedings. During the pendency of the Chapter 11 proceedings, all transactions outside the ordinary course of the Company’s business require prior approval of the Bankruptcy Court. For goods and services provided following the Petition Date, LINN Energy intends to pay vendors, on LinnCo’s behalf, 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) LINN Energy’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) and (ii) Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”).
The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the 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 Chapter 11 proceedings.
The Restructuring Support Agreement provides that the Consenting Creditors will support the use of LINN Energy’s 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 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 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.
Reorganization Items
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.
For the three months and six months ended
June 30, 2016
, “reorganization items” of
$200,000
on the statements of operations represents legal and other professional advisory fees incurred by LinnCo, none of which had been paid by LINN Energy on LinnCo’s behalf as of
June 30, 2016
.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
Effect of Filing on Creditors and Shareholders
Subject 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.
Under the Bankruptcy Code, unless creditors agree otherwise, prepetition liabilities and post-petition liabilities must be satisfied in full before the holders of the Company’s existing shares are entitled to receive any settlement or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, 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 shares 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.
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 shares, a Plan may be “crammed down” even if the shareholders receive no recovery if the proponent of the Plan demonstrates that (1) no class junior to the shares are receiving or retaining property under the Plan and (2) no class of claims or interests senior to the shares 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.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
As of August 5, 2016, the Debtors have not yet filed a Plan.
Ability to Continue as a Going Concern
The Company’s only significant asset is its interest in LINN Energy units and the Company’s cash flow, which was historically used to pay dividends to the Company’s shareholders, is completely dependent upon the ability of LINN Energy to make distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of June 30, 2016, the Company had income taxes payable of approximately
$13 million
and cash of approximately
$1 million
.
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 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 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.
The Company estimates that the income taxes payable will become due later in 2016, but cannot be certain of the exact timing of payment, or of the final amount that will ultimately be owed. If the income taxes owed are greater than the cash on hand at such time, the payment will require some form of liquidity to satisfy it. As of August 5, 2016, LINN Energy had not agreed to provide any cash contribution to the Company.
Note 3 – Capitalization
LinnCo’s authorized capital structure consists of
two
classes of interests: (1) shares with limited voting rights and (2) voting shares,
100%
of which are currently held by LINN Energy. At
June 30, 2016
, LinnCo’s issued capitalization consisted of approximately
$3.9 billion
in common shares and
$1,000
contributed by LINN Energy in connection with LinnCo’s formation and in exchange for its voting share. LinnCo is authorized to issue an unlimited number of common shares and voting shares. Additional classes of equity interests may be created upon approval by the Board and the holders of a majority of the outstanding common shares and voting shares, voting as separate classes.
Offer to Exchange LINN Energy Units for LinnCo Shares
In March 2016, the Company 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, the Company 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. The shares issued in the exchanges were valued at approximately
$45 million
. 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
.
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 common shares began trading over the counter on the OTC Markets Group Inc.’s Pink marketplace under the trading symbol “LNCOQ.”
Note 4 – Summarized Financial Information for Linn Energy, LLC
Following are summarized statements of operations and balance sheets information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016
, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
Summarized Linn Energy, LLC Statements of Operations Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Revenues and other
|
$
|
155,395
|
|
|
$
|
321,828
|
|
|
$
|
570,162
|
|
|
$
|
1,238,375
|
|
Expenses
|
(415,539
|
)
|
|
(560,590
|
)
|
|
(2,062,723
|
)
|
|
(1,684,745
|
)
|
Other income and (expenses)
|
(69,736
|
)
|
|
(143,095
|
)
|
|
(174,821
|
)
|
|
(281,774
|
)
|
Reorganization items, net
|
534,884
|
|
|
—
|
|
|
534,884
|
|
|
—
|
|
Income tax (expense) benefit
|
3,488
|
|
|
2,730
|
|
|
(6,756
|
)
|
|
9,857
|
|
Net income (loss)
|
$
|
208,492
|
|
|
$
|
(379,127
|
)
|
|
$
|
(1,139,254
|
)
|
|
$
|
(718,287
|
)
|
Summarized Linn Energy, LLC Balance Sheets Information
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
(in thousands)
|
|
|
|
|
Current assets
|
$
|
1,086,321
|
|
|
$
|
1,534,547
|
|
Noncurrent assets
|
6,390,853
|
|
|
8,393,711
|
|
|
7,477,174
|
|
|
9,928,258
|
|
Current liabilities
|
3,209,715
|
|
|
4,291,901
|
|
Noncurrent liabilities
|
588,172
|
|
|
5,905,258
|
|
Liabilities subject to compromise
|
5,069,158
|
|
|
—
|
|
Unitholders’ deficit
|
$
|
(1,389,871
|
)
|
|
$
|
(268,901
|
)
|
Note 5 – Income Taxes
The Company is a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of the Company’s assets and liabilities for financial and tax reporting purposes. At
June 30, 2016
, and December 31, 2015, the majority of the Company’s temporary differences and associated deferred taxes result from its investment in LINN Energy. Based on projections of future taxable income for the periods in which the deferred tax assets are deductible, valuation allowances of approximately
$472 million
and
$468 million
, respectively, were recorded to reduce the net deferred tax assets to an amount that is more likely than not to be realized.
The Company had
no
gross liability for uncertain income tax benefits at
June 30, 2016
. At December 31, 2015, the Company had a gross liability for uncertain income tax benefits of approximately
$15 million
. During the six months ended
June 30, 2016
, the Company reduced the balance of its unrecognized income tax benefits by approximately
$15 million
due to settlements with taxing authorities. The Company had
zero
and approximately
$203,000
of accrued interest related to its uncertain income tax positions as of
June 30, 2016
, and December 31, 2015, respectively. The tax years 2013 – 2015 remain open to examination for federal income tax purposes.
Note 6 – Supplemental Disclosures to the Statements of Cash Flows
For the six months ended
June 30, 2016
, and
June 30, 2015
, LinnCo incurred and recorded approximately
$4.2 million
and
$2.5 million
, respectively, of total general and administrative expenses, reorganization expenses and offering costs. Of the expenses and costs incurred, approximately
$4.0 million
had been paid by LINN Energy on LinnCo’s behalf as of
June 30, 2016
, and approximately
$2.2 million
had been paid by LINN Energy on LinnCo’s behalf as of
June 30, 2015
. All of these expenses and costs are paid by LINN Energy on LinnCo’s behalf, and therefore, are accounted for as capital contributions and reflected as noncash transactions by LinnCo.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
During the six months ended
June 30, 2016
, and
June 30, 2015
, the Company made cash payments for income taxes of approximately
$10 million
and
$186,000
, respectively.
Note 7 - Commitments and Contingencies
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 Note 2 for additional information.
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 based on expectations, estimates and assumptions. Actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” below and in Item 1A. “Risk Factors” 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, and elsewhere in the Annual Report.
The reference to a “Note” herein refers to the accompanying Notes to Financial Statements contained in Item 1. “Financial Statements.”
General
LinnCo, LLC (“LinnCo” or the “Company”) is a Delaware limited liability company formed on April 30, 2012, under the Delaware Limited Liability Company Act, that has elected to be treated as a corporation for United States (“U.S.”) federal income tax purposes. Linn Energy, LLC (“LINN Energy”), an independent oil and natural gas company, owns LinnCo’s sole voting share.
LinnCo’s success is dependent upon the operations and management of LINN Energy and its resulting performance. Therefore, LINN Energy’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, has been included in this filing as Exhibit 99.1 and incorporated herein by reference.
Business
At no time after LinnCo’s formation and prior to the initial public offering (“IPO”) did LinnCo have any operations or own any interest in LINN Energy. After the IPO, LinnCo’s initial sole purpose was to own units representing limited liability company interests (“units”) in its affiliate, LINN Energy. In connection with the acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of June 30, 2016, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy.
Recent Developments
Chapter 11 Proceedings
On May 11, 2016 (the “Petition Date”), the Company, LINN Energy and Berry (collectively, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for relief under Chapter 11 of the United States 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 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” on the Company’s statements of operations.
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 to use its cash to fund the Chapter 11 proceedings. During the pendency of the Chapter 11 proceedings, all transactions outside the ordinary course of the Company’s business require prior approval of the Bankruptcy Court. For goods and services provided following the Petition Date, LINN Energy intends to pay vendors, on LinnCo’s behalf, in full under normal terms.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
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) LINN Energy’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) and (ii) Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”).
The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the 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 Chapter 11 proceedings.
Certain principal terms of the Plan are outlined below. See Item 1A. “Risk Factors” for risks relating to Chapter 11 proceedings, including the risk that the Company may not be able to obtain confirmation of a Chapter 11 plan of reorganization.
|
|
•
|
Claims under the LINN Credit Facility will receive participation in a new company $2.2 billion reserve-based and term loan credit facility, as described further below (“New LINN Exit Facility”), and payment of the remainder of claims under the LINN Credit Facility (if any) in cash or, to the extent not viable, a later-agreed-upon alternative consideration.
|
|
|
•
|
LINN Energy’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, entered into between LINN Energy and certain holders of the Second Lien Notes.
|
|
|
•
|
Unsecured claims against LINN Energy, including under the Second Lien Notes and LINN Energy’s unsecured notes, will convert to equity in the reorganized LINN Energy or reorganized LinnCo (“New LINN Common Stock”) in to-be-determined allocations.
|
|
|
•
|
The Restructuring Support Agreement contemplates that Berry will separate from LINN Energy under the Plan. Claims under the Berry Credit Facility will 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 the full amount of Berry’s unencumbered collateral and/or collateral value in excess of amounts outstanding under the Berry Credit Facility.
|
|
|
•
|
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, LINN Energy 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 borrowing base (“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 Exit Facility is subject to a variety 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 LINN Energy and Berry under which no less than 10% of the New 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 LINN Energy’s 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 interfere with
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
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 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.
Effect of Filing on Creditors and Shareholders
Subject 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.
Under the Bankruptcy Code, unless creditors agree otherwise, prepetition liabilities and post-petition liabilities must be satisfied in full before the holders of the Company’s existing common shares representing limited liability company interests (“shares”) are entitled to receive any settlement or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, 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 shares receiving no settlement on account of their interests and cancellation of their holdings. The Company believes that it is highly likely that its existing shares will be canceled in the Chapter 11 proceedings and will be entitled to a limited recovery, if any. Any trading in the Company’s shares during the pendency of the Chapter 11 proceedings is highly speculative and poses substantial risks to purchasers of the Company’s shares.
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.
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
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
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 shares, a Plan may be “crammed down” even if the shareholders receive no recovery if the proponent of the Plan demonstrates that (1) no class junior to the shares are receiving or retaining property under the Plan and (2) no class of claims or interests senior to the shares 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 5, 2016, the Debtors have not yet filed a Plan.
Ability to Continue as a Going Concern
The Company’s only significant asset is its interest in LINN Energy units and the Company’s cash flow, which was historically used to pay dividends to the Company’s shareholders, is completely dependent upon the ability of LINN Energy to make distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of June 30, 2016, the Company had income taxes payable of approximately $13 million and cash of approximately $1 million.
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 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 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.
The Company estimates that the income taxes payable will become due later in 2016, but cannot be certain of the exact timing of payment, or of the final amount that will ultimately be owed. If the income taxes owed are greater than the cash on hand at such time, the payment will require some form of liquidity to satisfy it. As of August 5, 2016, LINN Energy had not agreed to provide any cash contribution to the Company.
Offer to Exchange LINN Energy Units for LinnCo Shares
In March 2016, the Company 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, the Company 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. The shares issued in the exchanges were valued at approximately $45 million. 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.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
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 common shares began trading over the counter on the OTC Markets Group Inc.’s Pink marketplace under the trading symbol “LNCOQ.”
Results of Operations
Equity Income (Loss) from Investment in Linn Energy, LLC
The Company uses the equity method of accounting for its investment in LINN Energy. The Company’s equity income (loss) consists of its share of LINN Energy’s earnings or losses attributed to the units the Company owns, the amortization of the difference between the Company’s investment in LINN Energy and LINN Energy’s underlying net assets attributable to certain assets and liabilities, and impairments of its investment in LINN Energy. As a result of the exchanges of LINN Energy units for LinnCo shares (see Note 3), LinnCo’s ownership of LINN Energy’s outstanding units increased from approximately 36% at March 31, 2016, to approximately 69% at June 30, 2016. The percentage ownership in LINN Energy could continue to change if the Company acquires additional units or if LINN Energy issues or repurchases additional units.
Impairment testing on the Company’s investment in LINN Energy is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of the investment that is other than temporary. At June 30, 2016, declines in the quoted market price of LINN Energy units, when considering LINN Energy’s bankruptcy filing, were determined by the Company to be other than temporary. Accordingly, the Company reduced the carrying value of its investment in LINN Energy to fair value by recording a charge in excess of what would otherwise be recognized by application of the equity method. The carrying value was reduced to fair value using LINN Energy’s quoted market price of $0.09 per unit at June 30, 2016, which is characteristic of a Level 1 fair value measurement. The impairment charge of approximately $181 million is included in “equity loss from investment in Linn Energy, LLC” on the statements of operations for the three months and six months ended June 30, 2016. No impairment had occurred with respect to the Company’s investment in LINN Energy for the six months ended June 30, 2015.
Following are summarized statements of operations information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
Summarized Linn Energy, LLC Statements of Operations Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Revenues and other
|
$
|
155,395
|
|
|
$
|
321,828
|
|
|
$
|
570,162
|
|
|
$
|
1,238,375
|
|
Expenses
|
(415,539
|
)
|
|
(560,590
|
)
|
|
(2,062,723
|
)
|
|
(1,684,745
|
)
|
Other income and (expenses)
|
(69,736
|
)
|
|
(143,095
|
)
|
|
(174,821
|
)
|
|
(281,774
|
)
|
Reorganization items, net
|
534,884
|
|
|
—
|
|
|
534,884
|
|
|
—
|
|
Income tax (expense) benefit
|
3,488
|
|
|
2,730
|
|
|
(6,756
|
)
|
|
9,857
|
|
Net income (loss)
|
$
|
208,492
|
|
|
$
|
(379,127
|
)
|
|
$
|
(1,139,254
|
)
|
|
$
|
(718,287
|
)
|
General and Administrative Expenses
The Company’s general and administrative expenses are associated with managing the business and affairs of LinnCo and include services provided by LINN Energy necessary for the conduct of LinnCo’s business, such as accounting, legal, tax, information technology and other expenses. For the three months and six months ended June 30, 2016, LinnCo incurred total general and administrative expenses of approximately $1.1 million and $2.1 million, respectively, including approximately
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
$603,000 and $1.2 million, respectively, related to services provided by LINN Energy. All general and administrative expenses incurred during the six months ended June 30, 2016, had been paid by LINN Energy on LinnCo’s behalf as of June 30, 2016.
For the three months and six months ended June 30, 2015, LinnCo incurred total general and administrative expenses of approximately $901,000 and $1.9 million, respectively, including approximately $492,000 and $983,000, respectively, related to services provided by LINN Energy. Of the general and administrative expenses incurred during the six months ended June 30, 2015, approximately $1.8 million had been paid by LINN Energy on LinnCo’s behalf as of June 30, 2015.
Because all general and administrative expenses are actually paid by LINN Energy on LinnCo’s behalf, no cash is disbursed by LinnCo for these expenses.
Reorganization Items
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.
For the three months and six months ended June 30, 2016, “reorganization items” of $200,000 on the statements of operations represents legal and other professional advisory fees incurred by LinnCo, none of which had been paid by LINN Energy on LinnCo’s behalf as of June 30, 2016.
Income Tax (Expense) Benefit
The income tax benefit of approximately $483,000 and income tax expense of approximately $13 million for the three months and six months ended June 30, 2016, respectively, are associated with settlements with taxing authorities related to statutory audits of previous tax years, and the income tax benefit of approximately $13 million and $32 million for the three months and six months ended June 30, 2015, respectively, are based on the Company’s losses, primarily associated with the equity losses from its investment in LINN Energy.
Liquidity and Capital Resources
The Company’s authorized capital structure consists of two classes of interests: (1) shares with limited voting rights, which were issued in the IPO, in connection with the Berry acquisition and in connection with the 2016 exchanges of LINN Energy units for LinnCo shares, and (2) voting shares, 100% of which are held by LINN Energy. At June 30, 2016, LinnCo’s issued capitalization consisted of approximately $3.9 billion in common shares and $1,000 contributed by LINN Energy in connection with LinnCo’s formation and in exchange for its voting share. Additional classes of equity interests may be created upon approval by the Board of Directors (“Board”) and the holders of a majority of the outstanding common shares and voting shares, voting as separate classes.
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 LinnCo shares or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses, and registrar and transfer agent fees.
The Company expects neither to generate nor to require significant cash in its ongoing business. Any cash received from the sale of additional shares will be immediately used to purchase LINN Energy units. Accordingly, the Company does not anticipate any other sources or needs for additional liquidity, other than if the Company had a tax obligation. Such tax obligation would require some form of liquidity to satisfy it, including a cash contribution from LINN Energy, which LINN Energy is not required to provide.
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|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
The Company’s only significant asset is its interest in LINN Energy units and the Company’s cash flow, which was historically used to pay dividends to the Company’s shareholders, is completely dependent upon the ability of LINN Energy to make distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of June 30, 2016, the Company had income taxes payable of approximately $13 million and cash of approximately $1 million.
The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described under “Recent Developments” raise substantial doubt about the Company’s ability to continue as a going concern.
The Company estimates that the income taxes payable will become due later in 2016, but cannot be certain of the exact timing of payment, or of the final amount that will ultimately be owed. If the income taxes owed are greater than the cash on hand at such time, the payment will require some form of liquidity to satisfy it. As of August 5, 2016, LINN Energy had not agreed to provide any cash contribution to the Company.
In order to decrease LINN Energy’s level of indebtedness and maintain its liquidity at levels sufficient to meet its commitments, LINN Energy undertook a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. Despite taking these actions, LINN Energy 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.
See above under “Chapter 11 Proceedings” for information about the Company’s entry into the Restructuring Support Agreement.
Distributions and Dividends
Within five business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income taxes liability, if any, as dividends to its shareholders. In October 2015, LINN Energy suspended the payment of its distribution. Since LinnCo pays its dividend from the receipt of cash distributions from LINN Energy, LinnCo will not pay a dividend while LINN Energy’s distributions are suspended.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based on the 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, income 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 1.
Accounting for Investment in Linn Energy, LLC
The Company uses the equity method of accounting for its investment in LINN Energy. The Company records its share of LINN Energy’s net income (loss) in the period in which it is earned. If the Company’s share of LINN Energy’s losses reduces its investment in LINN Energy to zero, the Company temporarily discontinues applying the equity method. At June 30, 2016, the Company owned approximately 69% of LINN Energy’s outstanding units. The Company’s ownership percentage could change if the Company acquires additional units or if LINN Energy issues or repurchases additional units. Changes in the Company’s ownership percentage affect its net income (loss).
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|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
At June 30, 2016, the carrying amount of the Company’s investment in LINN Energy was greater than the Company’s ownership interest in LINN Energy’s underlying net assets by approximately $946 million. The difference is attributable to cumulative excess losses of approximately $482 million, as well as a basis difference of approximately $464 million related to proved and unproved oil and natural gas properties and senior notes. The difference attributable to oil and natural gas properties and senior notes is amortized over the lives of the related assets and liabilities. Such amortization is included in the equity income (loss) from the Company’s investment in LINN Energy. At December 31, 2015, the carrying amount of the Company’s investment in LINN Energy was greater than the Company’s ownership interest in LINN Energy’s underlying net assets by approximately $85 million.
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. Because substantially all of LinnCo’s assets consist of its interest in LINN Energy’s units, these risks and uncertainties primarily relate to LINN Energy’s business which include the following:
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|
•
|
risks associated with the Chapter 11 process, including LINN Energy’s inability to develop, confirm and consummate a plan under Chapter 11 or an alternative restructuring transaction;
|
|
|
•
|
inability to maintain relationships with suppliers, customers and other third parties as a result of the Chapter 11 filing;
|
|
|
•
|
failure to satisfy the Company’s short- or long-term liquidity needs;
|
|
|
•
|
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;
|
|
|
•
|
oil, natural gas and NGL reserves;
|
|
|
•
|
realized oil, natural gas and NGL prices;
|
|
|
•
|
economic and competitive advantages;
|
|
|
•
|
credit and capital market conditions;
|
|
|
•
|
lease operating expenses, general and administrative expenses and development costs;
|
|
|
•
|
future operating results, including results of acquired properties;
|
|
|
•
|
plans, objectives, expectations and intentions;
|
|
|
•
|
integration of acquired businesses and operations and commencement of activities in LINN Energy’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 LINN Energy’s business.
|
All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 2. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on LINN Energy and Company expectations, which reflect estimates and assumptions made by LINN Energy and Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
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 Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 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.
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 shares and LINN Energy’s units on NASDAQ; reorganization and related effects on LINN Energy’s outstanding debt and outstanding units, as well as the Company’s outstanding shares; potential effects of the industry downturn on LINN Energy’s business, financial condition and results of operations; potential limitations on the Company’s and LINN Energy’s ability to maintain contracts and other critical business relationships; requirements for adequate liquidity to fund the Company’s and LINN Energy’s operations in the future, including obtaining sufficient financing on acceptable terms; and other matters related to the reorganization and LINN Energy’s indebtedness, including any defaults related thereto.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The nature of the Company’s business and operations is such that no activities or transactions are conducted or entered into by the Company that would require it to have a discussion under this item.
For a discussion of these matters as they pertain to LINN Energy, please read Item 3. “Quantitative and Qualitative Disclosures About Market Risk” of LINN Energy’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, which is included in this filing as Exhibit 99.1 and incorporated herein by reference as activities of LINN Energy have an impact on the Company’s results of operations and financial position.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Audit Committee of the Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 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
Item 4. Controls and Procedures - Continued
provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in the Company’s internal control over financial reporting during the second quarter of 2016 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.