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LNCO > SEC Filings for LNCO > Form 10-K/A on 5-Nov-2013All Recent SEC Filings

Show all filings for LINNCO, LLC

Form 10-K/A for LINNCO, LLC


5-Nov-2013

Annual Report


Item 7. 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 notes to the financial statements, which are included in this Annual Report on Form 10-K in Item 8. "Financial Statements and Supplementary Data." The following discussion contains forward-looking statements that reflect the Company's future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside the Company's control. The Company's actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. "Risk Factors." In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
A reference to a "Note" herein refers to the accompanying Notes to Financial Statements contained in Item 8. "Financial Statements and Supplementary Data." General
LinnCo, LLC ("LinnCo" or the "Company") is a Delaware limited liability company formed on April 30, 2012, under the Delaware Limited Liability Company Act, that has elected to be treated as a corporation for U.S. federal income tax purposes. Linn Energy, LLC ("LINN Energy"), an independent oil and natural gas company that trades on the NASDAQ Global Select Market under the symbol "LINE," owns LinnCo's sole voting share.
LinnCo's success is dependent upon the operation and management of LINN Energy and its resulting performance. Therefore, LINN Energy's Annual Report on Form 10-K for the year ended December 31, 2012, 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 and as of December 31, 2012, LinnCo's sole purpose was to own units representing limited liability company interests ("units") in LINN Energy and it expected to have no significant assets or operations other than those related to its interest in LINN Energy. In connection with the pending acquisition of Berry Petroleum Company (see Note 8), LinnCo intends to amend its limited liability company agreement to permit the acquisition and subsequent contribution of assets to LINN Energy.
Acquisition - Subsequent Event
On February 21, 2013, LinnCo and Berry Petroleum Company ("Berry") announced they had signed a definitive merger agreement under which LinnCo would acquire all of the outstanding common shares of Berry. The transaction has a preliminary value of approximately $4.3 billion, including the assumption of debt, and is expected to close by June 30, 2013, subject to approvals by Berry and LinnCo shareholders, LINN Energy's unitholders and regulatory agencies. Under the terms of the agreement, Berry's shareholders will receive 1.25 of LinnCo common shares for each Berry common share they own. This transaction, which is expected to be a tax-free exchange to Berry's shareholders, represents value of $46.2375 per common share, based on the closing price of LinnCo common shares on February 20, 2013. Upon completion of the merger, LinnCo will contribute Berry assets to LINN Energy in exchange for LINN Energy units. Results of Operations
Equity Income from Investment in Linn Energy, LLC The Company's results of operations primarily consists of its share of earnings of LINN Energy attributed to the units the Company owns. At December 31, 2012, the Company owned approximately 15% of LINN Energy's outstanding units. The percentage ownership of LINN Energy could change over time due to the Company's ownership of additional units or other issuances or repurchases of units by LINN Energy. The Company uses the equity method of accounting for its investment in LINN Energy and record earnings (losses) as described below.
Following is summarized statement of operations information for LINN Energy. Additional information on LINN Energy's results of operations and financial position are contained in its Annual Report on Form 10-K for the year ended December 31, 2012, included in this filing as Exhibit 99.1 and incorporated herein by reference.


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Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations - Continued



                                Linn Energy, LLC
                             October 17, 2012
                             To December 31,
                                   2012
                              (in thousands)

Revenues and other          $        604,701
Expenses                            (578,170 )
Other income and (expenses)          (85,464 )
Income tax benefit                     1,697
Net loss                    $        (57,236 )

General and Administrative Expenses
The Company's general and administrative expenses are associated with managing the business and affairs of LinnCo. For the period from April 30, 2012 (inception) to December 31, 2012, LinnCo incurred total general and administrative expenses of approximately $1 million, all of which were paid by LINN Energy on LinnCo's behalf. These expenses included approximately $772,000 related to services provided by LINN Energy necessary for the conduct of LinnCo's business, such as accounting, legal, tax, information technology and other expenses. The remaining expenses were primarily related to professional services rendered by third parties. Because all general and administrative expenses reported by LinnCo on its statement of operations were actually paid by LINN Energy on LinnCo's behalf, no cash was disbursed by LinnCo. Income Tax Expense
Income tax expense of approximately $13 million for the period from April 30, 2012 (inception) to December 31, 2012, is based on the Company's net income for the period, primarily associated with its equity income from its investment in LINN Energy.
Liquidity and Capital Resources
The Company's authorized capital structure consists of two classes of interests:
(1) shares with limited voting rights, which were issued in the IPO and (2) voting shares, 100% of which are held by LINN Energy. At December 31, 2012, LinnCo's issued capitalization consisted of $1.2 billion in common shares representing limited liability company interests ("shares") and $1,000 contributed by LINN Energy in connection with LinnCo's formation and in exchange for its voting share. Additional classes of equity interests may be created upon approval by the Board and the holders of a majority of the outstanding shares and voting shares, voting as separate classes. LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo's behalf, any legal, accounting, tax advisory, financial advisory and engineering fees, printing costs or other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of shares in LinnCo or incurred as a result of being a publicly traded entity, including costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses and registrar and transfer agent fees. The Company expects neither to generate nor to require significant cash in its ongoing business. Any cash received from the sale of additional shares will be immediately used to purchase additional LINN Energy units. Accordingly, the Company does not anticipate any other sources or needs for additional liquidity. LinnCo Initial Public Offering
On October 17, 2012, LinnCo closed its IPO as discussed in Note 3, and used all of the net proceeds, after deducting the underwriting discount and structuring fee, to purchase 34,787,500 units from LINN Energy which equal the number of LinnCo shares issued and sold. LinnCo's limited liability company agreement requires it to maintain a one-to-one ratio


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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

between the number of LinnCo shares outstanding and the number of LINN Energy units it owns. When LINN Energy makes distributions on its units, LinnCo will pay a dividend on its shares equal to the amount of cash received from LINN Energy with respect to the LINN Energy units owned by LinnCo, net of reserves for income taxes payable by LinnCo.
Dividends
Within five (5) business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income tax liability ("tax reserve"), as dividends to its shareholders. The following provides a summary of dividends paid by the Company during the year ended December 31, 2012:
Date Paid Period Covered by Dividend Dividends Per Share Total Dividends

(in millions)

November 2012 July 1 - September 30, 2012 $ 0.71 (1) $ 25

(1) This amount is net of the tax reserve of $0.015 per common share.

On January 24, 2013, LINN Energy's Board declared a cash distribution of $0.725 per unit with respect to the fourth quarter of 2012. The distribution attributable to LinnCo's interest in LINN Energy, totaling approximately $25 million, was paid to LinnCo on February 14, 2013.
On January 24, 2013, the Company's Board declared a cash dividend of $0.71 per common share with respect to the fourth quarter of 2012, which is net of a tax reserve of $0.015 per common share from the LINN Energy distribution of $0.725 per unit. The dividend, totaling approximately $25 million after deducting the estimated income tax reserve of approximately $522,000, was paid on February 15, 2013, to shareholders of record as of the close of business on February 7, 2013. Critical Accounting Policies and Estimates The discussion and analysis of the Company's financial condition and results of operations is based upon the financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management of the Company to make estimates and assumptions 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 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 continuous changes in the economic environment will be reflected in the financial statements in future periods. Accounting for Investment in Linn Energy, LLC The Company uses the equity method of accounting related to its ownership interest in LINN Energy's net income (losses). The Company records its share of LINN Energy's net income (losses) in the period in which it is earned. At December 31, 2012, the Company owned approximately 15% of LINN Energy's outstanding units. The Company's ownership percentage could change as LINN Energy issues or repurchases units. Changes in the Company's ownership percentage affect its net income (losses).
The initial carrying amount of the Company's investment in LINN Energy exceeded the Company's ownership interest in LINN Energy's underlying net assets by approximately $516 million. The difference was attributable to proved and unproved oil and natural gas properties, senior notes and equity method goodwill. These amounts are included in "investment in Linn Energy, LLC" on the balance sheet and are amortized over the lives of the related assets and liabilities. Such amortization is included in the equity income from the Company's investment in LINN Energy. Equity method goodwill is not amortized; however, the investment is reviewed for impairment. Impairment testing is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of an investment that is other than temporary. As of December 31, 2012, no such impairment had occurred with respect to the Company's investment in LINN Energy.


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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

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 December 31, 2012, the majority of the Company's temporary difference and associated deferred tax expense resulted from its investment in LINN Energy. Item 7A. 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 Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of LINN Energy's Annual Report on Form 10-K, 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.


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