Item 1. Financial Statements
LINNCO, LLC (DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
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|
|
September 30, 2016
|
|
December 31,
2015
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|
(in thousands, except
share amounts)
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ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
847
|
|
|
$
|
11,023
|
|
Accounts receivable – related party
|
96
|
|
|
—
|
|
Income taxes receivable
|
5,380
|
|
|
7,414
|
|
Total current assets
|
6,323
|
|
|
18,437
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
Deferred income taxes
|
—
|
|
|
18,971
|
|
Investment in Linn Energy, LLC
|
—
|
|
|
—
|
|
Total noncurrent assets
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—
|
|
|
18,971
|
|
Total assets
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$
|
6,323
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|
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$
|
37,408
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|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
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|
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Current liabilities:
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|
|
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Accounts payable
|
$
|
96
|
|
|
$
|
573
|
|
Income taxes payable
|
11,357
|
|
|
29,829
|
|
Total current liabilities
|
11,453
|
|
|
30,402
|
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|
|
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Commitments and contingencies (Note 7)
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|
|
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Shareholders’ equity (deficit):
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Voting shares; unlimited shares authorized; 1 share issued and outstanding at September 30, 2016, and December 31, 2015
|
1
|
|
|
1
|
|
Common shares; unlimited shares authorized; 251,644,889 shares and 128,544,174 shares issued and outstanding at September 30, 2016, and December 31, 2015, respectively
|
3,911,781
|
|
|
3,868,322
|
|
Additional paid-in capital
|
47,933
|
|
|
42,723
|
|
Accumulated deficit
|
(3,964,845
|
)
|
|
(3,904,040
|
)
|
|
(5,130
|
)
|
|
7,006
|
|
Total liabilities and shareholders’ equity (deficit)
|
$
|
6,323
|
|
|
$
|
37,408
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
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Equity loss from investment in Linn Energy, LLC
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$
|
(10,899
|
)
|
|
$
|
(663,276
|
)
|
|
$
|
(45,524
|
)
|
|
$
|
(835,820
|
)
|
General and administrative expenses
|
(855
|
)
|
|
(965
|
)
|
|
(2,931
|
)
|
|
(2,842
|
)
|
Reorganization items
|
(100
|
)
|
|
—
|
|
|
(300
|
)
|
|
—
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|
Loss before income taxes
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(11,854
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)
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|
(664,241
|
)
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|
(48,755
|
)
|
|
(838,662
|
)
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Income tax (expense) benefit
|
927
|
|
|
(3,712
|
)
|
|
(12,050
|
)
|
|
27,908
|
|
Net loss
|
$
|
(10,927
|
)
|
|
$
|
(667,953
|
)
|
|
$
|
(60,805
|
)
|
|
$
|
(810,754
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)
|
|
|
|
|
|
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Net loss per share, basic and diluted
|
$
|
(0.04
|
)
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|
$
|
(5.20
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(6.31
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)
|
|
|
|
|
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Weighted average shares outstanding
|
250,024
|
|
|
128,544
|
|
|
196,188
|
|
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128,544
|
|
|
|
|
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Dividends declared per share
|
$
|
—
|
|
|
$
|
0.313
|
|
|
$
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—
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|
|
$
|
0.938
|
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
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Shares
|
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Share Amount
|
|
Additional Paid-In Capital
|
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Accumulated Deficit
|
|
Total Shareholders’ Equity (Deficit)
|
|
(in thousands)
|
|
|
|
|
|
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|
|
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|
December 31, 2015
|
128,544
|
|
|
$
|
3,868,323
|
|
|
$
|
42,723
|
|
|
$
|
(3,904,040
|
)
|
|
$
|
7,006
|
|
Exchanges of Linn Energy, LLC units for LinnCo shares, net of offering costs of $2,065
|
123,101
|
|
|
43,459
|
|
|
—
|
|
|
—
|
|
|
43,459
|
|
Capital contributions from Linn Energy, LLC
|
|
|
—
|
|
|
5,210
|
|
|
—
|
|
|
5,210
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|
Net loss
|
|
|
—
|
|
|
—
|
|
|
(60,805
|
)
|
|
(60,805
|
)
|
September 30, 2016
|
251,645
|
|
|
$
|
3,911,782
|
|
|
$
|
47,933
|
|
|
$
|
(3,964,845
|
)
|
|
$
|
(5,130
|
)
|
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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Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
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(in thousands)
|
Cash flow from operating activities:
|
|
|
|
Net loss
|
$
|
(60,805
|
)
|
|
$
|
(810,754
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
Equity loss from investment in Linn Energy, LLC
|
45,524
|
|
|
835,820
|
|
Noncash general and administrative expenses paid by Linn Energy, LLC
|
2,931
|
|
|
2,842
|
|
Noncash reorganization items paid by Linn Energy, LLC
|
300
|
|
|
—
|
|
Deferred income taxes
|
18,971
|
|
|
(28,106
|
)
|
(Increase) decrease in income taxes receivable
|
(6,535
|
)
|
|
436
|
|
Increase (decrease) in accounts payable
|
(573
|
)
|
|
55
|
|
Decrease in income taxes payable
|
(9,989
|
)
|
|
(4
|
)
|
Cash distributions received
|
—
|
|
|
120,548
|
|
Net cash provided by (used in) operating activities
|
(10,176
|
)
|
|
120,837
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Dividends paid to shareholders
|
—
|
|
|
(120,930
|
)
|
Net cash used in financing activities
|
—
|
|
|
(120,930
|
)
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(10,176
|
)
|
|
(93
|
)
|
Cash and cash equivalents:
|
|
|
|
Beginning
|
11,023
|
|
|
6,544
|
|
Ending
|
$
|
847
|
|
|
$
|
6,451
|
|
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
September 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
September 30, 2016
, LINN Energy’s last reported sales price was
$0.06
per unit, as reported by OTC Markets Group Inc.’s Pink marketplace, and the Company owned approximately
71%
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 (deficit) or cash flows.
Bankruptcy Accounting
As discussed further in Note 2, on May 11, 2016 (the “Petition Date”), the Company, LINN Energy, and certain of LINN Energy’s direct and indirect subsidiaries (collectively with the Company, the “LINN Debtors”) and Berry (collectively with the LINN Debtors, 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 (deficit) accounts of any changes that may be made to the Company’s capitalization; or (iv) the effect on operations of any changes that may be made to the Company’s business. While operating as debtor-in-possession under Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose of or
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
liquidate assets or settle liabilities in amounts other than those reflected on its financial statements, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. Further, a plan of reorganization could materially change the amounts and classifications on the Company’s historical 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 nine months ended
September 30, 2016
, LinnCo incurred total general and administrative expenses, reorganization expenses and offering costs of approximately
$1.0 million
and
$5.2 million
, respectively, including approximately
$603,000
and
$1.8 million
, respectively, related to services provided by LINN Energy. Of the expenses and costs incurred during the nine months ended
September 30, 2016
, approximately
$5.1 million
had been paid by LINN Energy on LinnCo’s behalf as of
September 30, 2016
.
For the three months and nine months ended
September 30, 2015
, LinnCo incurred total general and administrative expenses and certain offering costs of approximately
$965,000
and
$2.8 million
, respectively, including approximately
$491,000
and
$1.5 million
, respectively, related to services provided by LINN Energy. All of the expenses and costs incurred during the nine months ended September 30, 2015, had been paid by LINN Energy on LinnCo’s behalf as of September 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
September 30, 2016
, the Company owned approximately
71%
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
September 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
$1.1 billion
. The difference is attributable to cumulative excess losses of approximately
$592 million
, as well as a basis difference of approximately
$509 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.
No
impairments occurred with respect to the Company’s investment in LINN Energy for the three months ended
September 30, 2016
. 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 of approximately
$181 million
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 statement of operations for the nine months ended
September 30, 2016
. For the nine months ended
September 30, 2015
, the Company recorded an impairment charge of approximately
$326 million
.
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.
Bank RSA
Prior to the Petition Date, on May 10, 2016, the Debtors entered into a restructuring support agreement (“Bank RSA”) with certain holders (“Consenting Bank 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 Bank RSA sets forth, subject to certain conditions, the commitment of the Consenting Bank Creditors to support a comprehensive restructuring of the Debtors’ long-term debt. The restructuring transactions contemplated by the Bank RSA will be effectuated through one or more plans of reorganization (“Plan”) filed in the Chapter 11 proceedings.
The Bank RSA provides that the Consenting Bank Creditors will support the use of the LINN Debtors’ and Berry’s cash collateral under specified terms and conditions, including adequate protection terms. The Bank RSA obligates the Debtors and the Consenting Bank Creditors to, among other things, support and not interfere with consummation of the restructuring transactions contemplated by the Bank RSA and, as to the Consenting Bank Creditors, vote their claims in favor of the Plan. The Bank RSA 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 certain breaches by the parties under the Bank RSA. The Bank RSA 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 contemplated by the Bank RSA will be consummated.
Restructuring Support Agreement
On October 7, 2016, the LINN Debtors entered into a restructuring support agreement (“Original LINN RSA”) with (i) certain holders of LINN Energy’s
12.00%
senior secured second lien notes due December 2020 (such notes, the “Second Lien Notes,” and such holders, the “Consenting Second Lien Noteholders”) and (ii) certain holders of LINN Energy’s unsecured notes (such notes, the “Unsecured Notes,” and such holders of the Unsecured Notes, the “Consenting Unsecured Noteholders,” and together such Consenting Unsecured Noteholders with the Consenting Second Lien Noteholders, the “Consenting Noteholders”).
On October 21, 2016, the LINN Debtors entered into the First Amended and Restated Restructuring Support Agreement (“LINN RSA”) with (i) certain Consenting Second Lien Noteholders, (ii) certain Consenting Unsecured Noteholders and (iii) certain lenders (the “Consenting LINN Lenders,” and together with the Consenting Noteholders, the “Consenting LINN Creditors”) under the LINN Credit Facility. The LINN RSA amends and restates the Original LINN RSA and replaces the Bank RSA with respect to the terms of the restructuring of the LINN Debtors. The Bank RSA remains in full force and effect with respect to the restructuring of Berry and Linn Acquisition Company, LLC.
The LINN RSA sets forth, subject to certain conditions, the commitment of the LINN Debtors and the Consenting LINN Creditors to support a comprehensive restructuring of the LINN Debtors’ long-term debt (the “Restructuring”). The LINN RSA obligates the LINN Debtors and the Consenting LINN Creditors to, among other things, support and not interfere with consummation of the Restructuring and, as to the Consenting LINN Creditors, vote their claims in favor of the Plan. The LINN
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
RSA may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to the filing, confirmation and consummation of the Plan, and in the event of certain breaches by the parties under the LINN RSA. The LINN RSA is subject to termination if the effective date of the Plan has not occurred by March 1, 2017. There can be no assurance that the Restructuring 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 are required to file proofs of claims by the applicable deadline for filing certain proofs of claims in the Debtors’ Chapter 11 cases, which was September 16, 2016, for general claims and is November 7, 2016, for governmental claims. 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 nine months ended
September 30, 2016
, “reorganization items” of
$100,000
and
$300,000
, respectively, on the statements of operations represents legal and other professional advisory fees incurred by LinnCo, all of which had been paid by LINN Energy on LinnCo’s behalf as of
September 30, 2016
.
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.
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.
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.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
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.
On October 21, 2016, the Debtors filed a proposed Plan with the Bankruptcy Court.
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
September 30, 2016
, the Company had income taxes payable of approximately
$11 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 in 2017, 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 November 7, 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
September 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. During the exchange period,
123,100,715
LINN Energy units were exchanged for an equal number of LinnCo shares. The shares issued in the exchanges were valued at approximately
$46 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
37%
at December 31, 2015, to approximately
71%
at
September 30, 2016
.
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
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
September 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Revenues and other
|
$
|
385,665
|
|
|
$
|
998,304
|
|
|
$
|
955,827
|
|
|
$
|
2,236,679
|
|
Expenses
|
(430,996
|
)
|
|
(2,623,101
|
)
|
|
(2,493,719
|
)
|
|
(4,307,846
|
)
|
Other income and (expenses)
|
(40,374
|
)
|
|
57,657
|
|
|
(215,195
|
)
|
|
(224,117
|
)
|
Reorganization items, net
|
(116,276
|
)
|
|
—
|
|
|
418,608
|
|
|
—
|
|
Income tax (expense) benefit
|
3,616
|
|
|
(2,177
|
)
|
|
(3,140
|
)
|
|
7,680
|
|
Net loss
|
$
|
(198,365
|
)
|
|
$
|
(1,569,317
|
)
|
|
$
|
(1,337,619
|
)
|
|
$
|
(2,287,604
|
)
|
Summarized Linn Energy, LLC Balance Sheets Information
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
(in thousands)
|
|
|
|
|
Current assets
|
$
|
1,136,154
|
|
|
$
|
1,534,547
|
|
Noncurrent assets
|
6,266,794
|
|
|
8,393,711
|
|
|
7,402,948
|
|
|
9,928,258
|
|
Current liabilities
|
3,239,926
|
|
|
4,291,901
|
|
Noncurrent liabilities
|
572,322
|
|
|
5,905,258
|
|
Liabilities subject to compromise
|
5,173,059
|
|
|
—
|
|
Unitholders’ deficit
|
$
|
(1,582,359
|
)
|
|
$
|
(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
September 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
$448 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
September 30, 2016
. At December 31, 2015, the Company had a gross liability for uncertain income tax benefits of approximately
$15 million
. During the nine months ended
LINNCO, LLC (DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
September 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
September 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 nine months ended
September 30, 2016
, and
September 30, 2015
, LinnCo incurred and recorded approximately
$5.2 million
and
$2.8 million
, respectively, of total general and administrative expenses, reorganization expenses and offering costs. Of the expenses and costs incurred during the nine months ended
September 30, 2016
, approximately
$5.1 million
had been paid by LINN Energy on LinnCo’s behalf as of
September 30, 2016
. All of the expenses and costs incurred during the nine months ended
September 30, 2015
, had been paid by LINN Energy on LinnCo’s behalf as of
September 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.
During the nine months ended
September 30, 2016
, and
September 30, 2015
, the Company made cash payments for income taxes of approximately
$10 million
and
$202,000
, 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 LINN RSA and Bank RSA. 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 September 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 September 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 certain of LINN Energy’s direct and indirect subsidiaries (collectively with the Company, the “LINN Debtors”) and Berry (collectively with the LINN Debtors, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for relief under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Debtors’ Chapter 11 cases are being administered jointly under the caption In re Linn Energy, LLC., et al., Case No. 16‑60040.
The 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
|
Bank RSA
Prior to the Petition Date, on May 10, 2016, the Debtors entered into a restructuring support agreement (“Bank RSA”) with certain holders (“Consenting Bank 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 Bank RSA sets forth, subject to certain conditions, the commitment of the Consenting Bank Creditors to support a comprehensive restructuring of the Debtors’ long-term debt. The restructuring transactions contemplated by the Bank RSA will be effectuated through one or more plans of reorganization (“Plan”) filed in the Chapter 11 proceedings.
The Bank RSA provides that the Consenting Bank Creditors will support the use of the LINN Debtors’ and Berry’s cash collateral under specified terms and conditions, including adequate protection terms. The Bank RSA obligates the Debtors and the Consenting Bank Creditors to, among other things, support and not interfere with consummation of the restructuring transactions contemplated by the Bank RSA and, as to the Consenting Bank Creditors, vote their claims in favor of the Plan. The Bank RSA 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 certain breaches by the parties under the Bank RSA. The Bank RSA 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 contemplated by the Bank RSA will be consummated.
Restructuring Support Agreement
On October 7, 2016, the LINN Debtors entered into a restructuring support agreement (“Original LINN RSA”) with (i) certain holders of LINN Energy’s 12.00% senior secured second lien notes due December 2020 (such notes, the “Second Lien Notes,” and such holders, the “Consenting Second Lien Noteholders”) and (ii) certain holders of LINN Energy’s unsecured notes (such notes, the “Unsecured Notes,” and such holders of the Unsecured Notes, the “Consenting Unsecured Noteholders,” and together such Consenting Unsecured Noteholders with the Consenting Second Lien Noteholders, the “Consenting Noteholders”).
On October 21, 2016, the LINN Debtors entered into the First Amended and Restated Restructuring Support Agreement (“LINN RSA”) with (i) certain Consenting Second Lien Noteholders, (ii) certain Consenting Unsecured Noteholders and (iii) certain lenders (the “Consenting LINN Lenders,” and together with the Consenting Noteholders, the “Consenting LINN Creditors”) under the LINN Credit Facility. The LINN RSA amends and restates the Original LINN RSA and replaces the Bank RSA with respect to the terms of the restructuring of the LINN Debtors. The Bank RSA remains in full force and effect with respect to the restructuring of Berry and Linn Acquisition Company, LLC.
The LINN RSA sets forth, subject to certain conditions, the commitment of the LINN Debtors and the Consenting LINN Creditors to support a comprehensive restructuring of the LINN Debtors’ long-term debt (the “Restructuring”). On October 21, 2016, the Debtors filed a proposed Plan with the Bankruptcy Court. See “Process for Plan of Reorganization” below for certain principal terms of the proposed Plan.
The LINN RSA obligates the LINN Debtors and the Consenting LINN Creditors to, among other things, support and not interfere with consummation of the Restructuring and, as to the Consenting LINN Creditors, vote their claims in favor of the Plan. The LINN RSA may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to the filing, confirmation and consummation of the Plan, and in the event of certain breaches by the parties under the LINN RSA. The LINN RSA is subject to termination if the effective date of the Plan has not occurred by March 1, 2017. There can be no assurance that the Restructuring will be consummated.
Backstop Commitment Agreement
In connection with the proposed Plan, on October 25, 2016, LINN Energy entered into a backstop commitment agreement (“Backstop Commitment Agreement”) with the parties thereto (collectively, the “Backstop Parties”), pursuant to which the Backstop Parties, which are also Consenting Noteholders under the LINN RSA, have agreed to backstop a $530 million new money investment in the LINN Debtors pursuant to the rights offerings to be conducted in accordance with the Plan.
In accordance with the Plan, the Backstop Commitment Agreement and the rights offerings procedures filed in the Chapter 11 cases, the LINN Debtors will offer eligible creditors, including the Backstop Parties, the right to purchase new common stock
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
or limited liability company interests in the reorganized Company (“New Common Stock”) upon emergence from the Chapter 11 cases for an aggregate purchase price of $530 million. The rights offerings will consist of the following offerings:
|
|
•
|
Holders of Unsecured Notes as of the record date set therefor shall be granted rights entitling each such holder to subscribe to the rights offering in an amount up to its pro rata share of New Common Stock (the “Unsecured Rights Offering,” and such New Common Stock offered for purchase thereunder, the “Unsecured Rights Offering Shares”), which Unsecured Rights Offering Shares, collectively, will reflect an aggregate purchase price of $319,004,408 at the per share price set forth in the Backstop Commitment Agreement.
|
|
|
•
|
Holders of Second Lien Notes as of the record date set therefor shall be granted rights entitling each such holder to subscribe to the rights offering in an amount up to its pro rata share of New Common Stock (the “Secured Rights Offering,” and such New Common Stock offered for purchase thereunder, the “Secured Rights Offering Shares”), which Secured Rights Offering Shares, collectively, will reflect an aggregate purchase price of $210,995,592 at the per share price set forth in the Backstop Commitment Agreement.
|
Under the Backstop Commitment Agreement, certain Backstop Parties have agreed to purchase their pro rata share of the Unsecured Rights Offering Shares and the Secured Rights Offering Shares, as applicable, that are not duly subscribed to pursuant to the Unsecured Rights Offering or the Secured Rights Offering, as applicable, at the discounted per share price set forth in the Backstop Commitment by parties other than Backstop Parties (the “Backstop Commitment”).
Subject to Bankruptcy Court approval, the LINN Debtors will pay the Backstop Parties on the Plan effective date a commitment premium equal to 4.0% of the $530 million committed amount (the “Backstop Commitment Premium”), of which 3.0% will be paid in cash and 1.0% will be paid in the form of New Common Stock at the discounted per share price set forth in the Backstop Commitment Agreement. The Backstop Commitment Premium shall be fully earned and nonrefundable as of the date of the Bankruptcy Court order approving the LINN Debtors’ entry into the Backstop Commitment Agreement. All amounts payable to the Backstop Parties in their capacities as such for the Backstop Commitment Premium shall be paid pro rata based on the amount of their respective Backstop Commitments on the effective date (as compared to the aggregate Backstop Commitment of all Backstop Parties).
The rights to purchase New Common Stock in the rights offerings, any shares issued upon exercise thereof, and all shares issued to the Backstop Parties in respect of their Backstop Commitments pursuant to the Backstop Commitment Premium, will be issued in reliance upon the exemption from the registration requirements of the securities laws pursuant to Section 1145 of the Bankruptcy Code. All shares issued to the Backstop Parties pursuant to the Backstop Commitment Agreement in respect of their Backstop Commitment will be issued in reliance upon the exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 4(a)(2) thereof and/or Regulation D thereunder. As a condition to the closing of the transactions contemplated by the Backstop Commitment Agreement, the Company will enter into a registration rights agreement with the certain Backstop Parties entitling such Backstop Parties to request that the Company register their securities for sale under the Securities Act at various times.
The Backstop Parties’ commitments to backstop the rights offerings, and the other transactions contemplated by the Backstop Commitment Agreement, are conditioned upon the satisfaction of all conditions to the effectiveness of the Plan and other applicable conditions precedent set forth in the Backstop Commitment Agreement. The issuances of New Common Stock pursuant to the rights offerings and the Backstop Commitment Agreement are conditioned upon, among other things, confirmation of the Plan by the Bankruptcy Court, and the Plan’s effectiveness upon the Company’s emergence from its Chapter 11 cases.
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 are required to file proofs of claims by the applicable deadline for filing certain proofs of claims in the Debtors’ Chapter 11 cases, which was September 16, 2016, for general claims and is November 7, 2016, for governmental claims. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
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.
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.
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.
On October 21, 2016, the Debtors filed a proposed Plan with the Bankruptcy Court. Certain principal terms of the proposed Plan, as filed on October 21, 2016, with respect to the LINN Debtors include:
|
|
•
|
One or more new legal entities, in a to-be-determined form, will be formed to directly or indirectly hold all of the assets of the LINN Debtors. Following the Restructuring, the LINN Debtors will be standalone companies, separate from Berry.
|
|
|
•
|
The holders of claims under the LINN Credit Facility will receive their pro rata share of $1.7 billion reserve-based revolving and term loan credit facilities, as described further below (the “New LINN Exit Facility”), and a cash paydown in an amount that has yet to be determined.
|
|
|
•
|
LINN Energy’s Second Lien Notes will be allowed in the aggregate as a $2.0 billion unsecured claim (plus accrued and unpaid interest and reasonable and documented fees and expenses), and the holders of the Second Lien Notes will
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
receive their pro rata share of (i) a to-be-determined percentage of New Common Stock; (ii) certain rights to purchase shares of New Common Stock in the rights offering, as described above; and (iii) $30 million in cash to the extent such holders vote their Second Lien Notes claims to accept the Plan.
|
|
•
|
The holders of LINN Energy’s Unsecured Notes will receive their pro rata share of (i) a to-be-determined percentage of New Common Stock; and (ii) certain rights to purchase shares of New Common Stock in the rights offering.
|
|
|
•
|
The holders of unsecured claims against LINN Energy other than the Unsecured Notes will receive their pro rata share of (i) a to-be-determined percentage of New Common Stock; and (ii) certain rights to purchase shares of New Common Stock, at the same price per share as in the rights offerings, to be issued separate from the rights offerings. Such holders of unsecured claims less than a to-be-determined amount are expected to have the right to elect to receive, in lieu of New Common Stock and rights to purchase shares of New Common Stock, cash in an amount equal to a to-be-determined percentage of such holder’s allowed unsecured claim.
|
|
|
•
|
Cash recoveries will be funded with the proceeds of $530 million from the rights offerings of New Common Stock, which will be fully committed to be backstopped by certain of the Consenting Noteholders, as described above.
|
|
|
•
|
The board of directors shall consist of seven directors, who shall include: (i) the chief executive officer of the Company, (ii) one director selected by the Company and (iii) five directors selected by a selection committee.
|
|
|
•
|
All existing equity interests of the Company and LINN Energy will be extinguished without recovery.
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The Plan contemplates a New LINN Exit Facility consisting of (i) a term loan in the amount of $300 million (the “New LINN Term Loan”) and (ii) a revolving loan in the initial amount of $1.4 billion (the “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 date of emergence from bankruptcy (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 $1.4 billion subject to the borrowing base (the “Conforming Tranche”), and (b) a non-conforming tranche with an initial amount of $0 (the “Non-Conforming Tranche”). The Conforming Tranche will mature on the earlier of (i) June 30, 2021, or (ii) 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 (i) December 31, 2020, or (ii) 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 will contain a variety of other terms and conditions including annual year-end borrowing base redeterminations beginning April 1, 2018, conditions precedent to funding, financial and other covenants, and certain representations and warranties.
The Plan also provides for the establishment of a customary employee incentive plan at the reorganized Company under which a pool of equity having a value equal to (i) 8% of the equity value of the reorganized LINN Debtors as of the Plan effective date (the “Company Group Emergence Value”) as follows: (A) 2.5% of the Company Group Emergence Value in the form of restricted stock units to be issued at emergence; (B) 1.5% of the Company Group Emergence Value in the form of profits interests that will vest based on time and performance; and (C) the remaining 4% of the Company Group Emergence Value in a form of equity-based awards as determined by the board of directors of the reorganized Company; and (ii) an additional 2.0% of the Company Group Emergence Value, which will be issued at emergence in the form of profits interests that vest once the equity value of the reorganized LINN Debtors (as equitably adjusted for subsequent contributions and distributions) is equal to 1.5 times the Company Group Emergence Value.
Certain principal terms of the proposed Plan, as filed on October 21, 2016, with respect to Berry include:
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•
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The holders of claims under the Berry Credit Facility will receive a full recovery consisting of one or more of the following: (i) a to-be-determined exit financing facility; (ii) a to-be-determined cash paydown; (iii) a to-be-determined percentage of new common stock or limited liability company interests (“New Berry Common Stock”) in the reorganized Berry or its successor in interest (“New Berry”) up to the value of the collateral securing the Berry Credit Facility claims; and (iv) proceeds of any asset sales solely to the extent such assets are the collateral securing the Berry Credit Facility claims.
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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•
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The holders of Berry unsecured notes (the “Berry Unsecured Notes”) will receive one or more of the following: (i) New Berry Common Stock; (ii) rights to purchase New Berry Common Stock or other security in New Berry; and (iii) proceeds of any asset sales, after accounting for proceeds required to satisfy the Berry Credit Facility claims.
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•
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The holders of unsecured claims against Berry other than the Berry Unsecured Notes will receive one or more of the following: (i) New Berry Common Stock; (ii) rights to purchase New Berry Common Stock or other security in New Berry; and (iii) proceeds of any asset sales, after accounting for proceeds required to satisfy the Berry Credit Facility claims.
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•
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Berry will settle all intercompany claims against the LINN Debtors pursuant to a settlement to be approved as part of the Plan, which settlement provides that Berry will have a $25 million general unsecured claim against LINN Energy.
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•
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The governance terms of New Berry, as well as the terms of any employee incentive plan, are to be determined. New Berry will be a standalone company, separate from the Company and the LINN Debtors.
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•
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All existing equity interests of Berry and Linn Acquisition Company, LLC will be extinguished without recovery.
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There can be no assurance at this time that the Debtors will be able to successfully confirm and consummate the 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 September 30, 2016, the Company had income taxes payable of approximately $11 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 in 2017, 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 November 7, 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. During the exchange period, 123,100,715 LINN Energy units were exchanged for an equal number of LinnCo shares. The shares issued in the exchanges were valued at approximately $46 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 37% at December 31, 2015, to approximately 71% at September 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.”
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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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 37% at December 31, 2015, to approximately 71% at September 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. No impairments occurred with respect to the Company’s investment in LINN Energy for the three months ended September 30, 2016. 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 of approximately $181 million 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 statement of operations for the nine months ended September 30, 2016. For the nine months ended September 30, 2015, the Company recorded an impairment charge of approximately $326 million.
Following are summarized statements of operations information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
Summarized Linn Energy, LLC Statements of Operations Information
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2016
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2015
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2016
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2015
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(in thousands)
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Revenues and other
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$
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385,665
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$
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998,304
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$
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955,827
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$
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2,236,679
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Expenses
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(430,996
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)
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(2,623,101
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)
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(2,493,719
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)
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(4,307,846
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)
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Other income and (expenses)
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(40,374
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)
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57,657
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(215,195
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)
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(224,117
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)
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Reorganization items, net
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(116,276
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)
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—
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418,608
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—
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Income tax (expense) benefit
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3,616
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(2,177
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)
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(3,140
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)
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7,680
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Net loss
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$
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(198,365
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)
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$
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(1,569,317
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)
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$
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(1,337,619
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)
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$
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(2,287,604
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)
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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 nine months ended September 30, 2016, LinnCo incurred total general and administrative expenses of approximately $855,000 and $2.9 million, respectively, including approximately $603,000 and $1.8 million, respectively, related to services provided by LINN Energy. Of the general and administrative expenses incurred during the nine months ended September 30, 2016, approximately $2.8 million had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2016.
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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For the three months and nine months ended September 30, 2015, LinnCo incurred total general and administrative expenses of approximately $965,000 and $2.8 million, respectively, including approximately $491,000 and $1.5 million, respectively, related to services provided by LINN Energy. All general and administrative expenses incurred during the nine months ended September 30, 2015, had been paid by LINN Energy on LinnCo’s behalf as of September 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 nine months ended September 30, 2016, “reorganization items” of $100,000 and $300,000, respectively, on the statements of operations represents legal and other professional advisory fees incurred by LinnCo, all of which had been paid by LINN Energy on LinnCo’s behalf as of September 30, 2016.
Income Tax (Expense) Benefit
The income tax benefit of approximately $927,000 and income tax expense of approximately $12 million for the three months and nine months ended September 30, 2016, respectively, are associated with settlements with taxing authorities related to statutory audits of previous tax years. The income tax expense of approximately $4 million and income tax benefit of approximately $28 million for the three months and nine months ended September 30, 2015, respectively, are based on the Company’s net income (loss) for the periods, primarily associated with the equity income (loss) from its investment in LINN Energy.
Liquidity and Capital Resources
The Company’s authorized capital structure consists of two classes of interests: (1) shares with limited voting rights, which were issued in the IPO, 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 September 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.
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
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of September 30, 2016, the Company had income taxes payable of approximately $11 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 in 2017, 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 November 7, 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 LINN RSA and Bank RSA.
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 September 30, 2016, the Company owned approximately 71% 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 September 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 $1.1 billion. The difference is attributable to cumulative excess losses of approximately $592 million, as well as a basis difference of approximately $509 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
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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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;
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•
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inability to maintain relationships with suppliers, customers and other third parties as a result of the Chapter 11 filing;
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•
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failure to satisfy the Company’s short- or long-term liquidity needs;
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•
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large or multiple customer defaults on contractual obligations, including defaults resulting from actual or potential insolvencies;
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•
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effects of legal proceedings;
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•
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ability to resume payment of distributions in the future or maintain or grow them after such resumption;
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•
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oil, natural gas and NGL reserves;
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•
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realized oil, natural gas and NGL prices;
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•
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economic and competitive advantages;
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•
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credit and capital market conditions;
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•
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lease operating expenses, general and administrative expenses and development costs;
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•
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future operating results, including results of acquired properties;
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•
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plans, objectives, expectations and intentions; and
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All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 2. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on LINN Energy and Company expectations, which reflect estimates and assumptions made by LINN Energy and Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management’s assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the 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,
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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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 September 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 September 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 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 third quarter of 2016 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.